<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1999
Registration No. 333-79975
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________________
HALLIBURTON COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 1389 75-2677995
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
<TABLE>
<S> <C> <C>
Lester L. Coleman Copies to:
Halliburton Company Executive Vice President and General Counsel Vinson & Elkins L.L.P.
3600 Lincoln Plaza Halliburton Company 2300 First City Tower
500 North Akard Street 3600 Lincoln Plaza 1001 Fannin Street
Dallas, Texas 75201-3391 500 North Akard Street Houston, Texas 77002-6760
(214) 978-2600 Dallas, Texas 75201-3391 (713) 758-2582
(214) 978-2600 Attn: William E. Joor III
(Address, including zip code, and (Name, address, including zip code, and
telephone number, telephone number,
including area code, of registrant's including area code, of agent for service)
principal executive offices)
</TABLE>
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================
Title of Each Class Proposed Proposed Proposed Amount of
of Securities to be Maximum Amount Maximum Offering Maximum Registration Fee
Registered of Securities to Price Per Share Aggregate Offering
be Registered Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $2.50 3,069,899 (1) $6.91 (2) $21,224,985 (3) $5,901 (4)
- ----------------------------------------------------------------------------------------------
Rights to Receive
Common Stock 932,180 (5) (5) (5)
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes that all ordinary share of PES (International) Limited ("PES"),
other than those owned indirectly by Halliburton Company ("Halliburton"),
are exchanged for up to a maximum of 3,083,8799 shares of Halliburton
common stock issued directly upon completion of the offer described herein
or pursuant to rights issued upon completion of the offer. The number of
shares of Halliburton common stock registered hereby was determined by
multiplying (i) 937,660, being the number of PES shares issued or to be
issued and not owned by Halliburton, by (ii) the maximum exchange ratio for
the offer disregarding the rights (i.e., 3.27400 shares of Halliburton
common stock per PES share).
(2) There is no market for the PES shares. The proposed maximum offering price
per share of Halliburton common stock was calculated pursuant to Rule
457(f) based on the fully diluted book value per PES share as of December
31, 1998 ((pound)14.044) which was converted to U.S. dollars at the
currency exchange rate in effect at the close of business on June 1, 1999
($1.6118/(pound)1.00) and divided by the maximum exchange ratio per PES
share.
(3) Represents the proposed maximum offering price per share of Halliburton
common stock multiplied by the maximum number of shares of Halliburton
common stock issuable pursuant to the offer and the rights.
(4) Previously paid.
(5) The rights represent the rights to receive a portion of the Halliburton
common stock registered hereby. No additional consideration will be
exchanged by holders of PES shares to receive the rights or to receive the
Halliburton common stock issuable pursuant to the rights. Rule 457(g) is
not applicable. By analogy to Rule 457(i), no additional fee is required.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this offer document is not complete and may be changed. We +
+may not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This offer document is not an+
+offer to sell those securities and it is not a solicitation of an offer to buy+
+those securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED __________, 1999
PRELIMINARY OFFER DOCUMENT
This document is important and requires your immediate attention. If you are
in any doubt about the action you should take, we recommend that you seek
financial advice immediately. If you are in the United Kingdom, you should seek
advice from an independent financial adviser duly authorized under the U.K.
Financial Services Act 1986. If you are elsewhere, you should seek advice from
an authorized independent financial adviser.
PricewaterhouseCoopers, which is authorized to conduct investment business by
the Institute of Chartered Accountants in England and Wales, has approved this
offer document for issue for the purpose of Section 57 of the U.K. Financial
Services Act 1986. PricewaterhouseCoopers is acting on behalf of Halliburton
Company and no one else in connection with the approval of this document.
PricewaterhouseCoopers will not be responsible to anyone other than Halliburton
Company for providing the protection afforded to its customers.
Halliburton Company
Recommended Offer
for the
Ordinary Share Capital
of
PES (International) Limited
Halliburton Company is offering to acquire each of your shares of PES
(International) Limited in exchange for _______ shares of Halliburton common
stock and a right to receive additional shares of Halliburton common stock on a
contingent basis. Under the terms of each right:
. a minimum of _____ shares and, subject to contingencies, a maximum of
_____ shares of our common stock will be issued 12 months after completion
of the offer;
. a minimum of _____ shares and, subject to contingencies, a maximum of
_____ shares of our common stock will be issued up to 36 months after
completion of the offer.
Our offer extends to any PES shares you acquire during the offer period by
exercising options for PES shares or upon PES exercising call options to
exchange PES shares for shares in the capital of a PES subsidiary held by you.
The maximum number of shares of Halliburton common stock issuable to PES
shareholders under the offer, including the rights, is ____ shares per PES share
or a total of ________ shares. The minimum number of shares issuable under the
offer, including the rights, is ____ shares per PES share or a total of ________
shares. The closing sales price per share of Halliburton common stock on the New
York Stock Exchange on ________, 2000 was $ ______.
To accept our offer, you must complete and return the form of acceptance
included with this offer document. Your acceptance must be received by no later
than 3:00 p.m., London time/10:00 a.m., New York City time, on ______________,
2000. Please read pages 34 through 36 of this offer document, which explain the
acceptance procedure.
Before accepting our offer, please carefully read this offer document and,
specifically, "Risk Factors" beginning on page 15, which explain the risks of
investing in Halliburton common stock.
The securities to be issued to you in connection with the offer have not been
approved or disapproved by the Securities and Exchange Commission or the
securities commission of any state of the United States. Neither the Securities
and Exchange Commission nor any state securities commission passed upon the
accuracy or adequacy of this offer document. Any representation to the contrary
is a criminal offense.
This Offer Document is dated ___________, 2000.
<PAGE>
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE OFFER.................................... v
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<S> <C>
SUMMARY.................................................................. 1
The Companies......................................................... 1
The Offer............................................................. 1
Terms and Conditions of the Offer..................................... 3
PES Extraordinary General Meeting..................................... 4
Interests of PES Directors and Key Employees.......................... 4
The Recommendation of the PES Board................................... 6
PES Optionholders..................................................... 6
Absence of Rights of Withdrawal....................................... 6
Appraisal Rights...................................................... 6
Compulsory Acquisition................................................ 6
Halliburton's Plans for PES........................................... 7
Regulatory Approvals.................................................. 7
Tax Consequences...................................................... 7
Risk Factors.......................................................... 7
Listing of Halliburton Common Stock................................... 8
Applicable Laws....................................................... 8
Currency Information.................................................. 8
Accounting Treatment.................................................. 8
Responsibility........................................................ 8
SUMMARY SELECTED FINANCIAL DATA.......................................... 9
Summary Selected Historical Financial
Information of Halliburton.......................................... 9
Summary Selected Historical Financial
Information of PES.................................................. 11
Currency Exchange Information......................................... 12
Summary Unaudited Pro Forma
Combined Financial Information...................................... 13
Comparative Per Share Data............................................ 13
RISK FACTORS............................................................. 15
Risks Relating to the Offer........................................... 15
The amount of consideration you are eligible to receive is based
on a fixed exchange ratio and will not reflect changes in the
market value of our common stock................................ 15
A substantial portion of the deferred consideration you are
eligible to receive is contingent upon factors beyond your
control......................................................... 15
Risks Specific to Halliburton......................................... 15
Demand for our services and products depends on oil and gas
industry activity and expenditure levels that are directly
affected by trends in oil and natural gas prices. A prolonged
downturn in oil and gas prices could have a material adverse
effect on our results of operations and financial condition..... 15
There are risks related to our acquisition strategy. If we are
unable to integrate and manage successfully businesses that we
have acquired and any businesses acquired in the future, our
results of operations and financial condition could be affected. 16
Our business may be affected by our acquisition of Dresser
Industries, Inc. We are in the process of combining the
operations of Dresser with those of Halliburton. This process
could interfere with our existing operations and thus could have
an adverse effect on the combined business...................... 16
A significant portion of our revenue is derived from our non-U.S.
and non-U.K. operations, which exposes us to risks inherent in
doing business in each of the more than 120 other countries
in which we transact business. The occurrence of any of the
risks set forth below could have an adverse effect on our
results of operations and financial condition................... 17
Our ability to compete overseas may be adversely affected by
governmental regulations promulgated in numerous countries in
which we transact business. If these regulations apply to us,
they may require us to engage in business practices that may not
be to our benefit............................................... 17
A sizable portion of our consolidated revenues and consolidated
operating expenses are in foreign currencies. As a result,
we are subject to significant foreign exchange risks that could
adversely affect our operations, as well as limit our ability to
reinvest earnings from operations in one country to fund the
capital needs of our operations in other countries.............. 17
Our businesses are subject to a variety of environmental laws and
regulations including those covering hazardous materials. Any
failure on our part to comply with applicable environmental
laws and regulations could have an adverse effect on our
financial condition............................................. 18
In the United States, environmental laws and regulations
typically impose strict liability. Strict liability means that
in some situations we could be exposed to liability for
cleanup costs and other damages as a result of our conduct
that was lawful at the time it occurred or conduct of prior
operators or other third parties ................................ 18
RECENT DEVELOPMENTS...................................................... 19
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS................................. 19
BACKGROUND OF AND REASONS FOR THE OFFER.................................. 21
THE PES BOARD'S REASONS FOR
RECOMMENDING THE OFFER;
RECOMMENDATION OF THE PES
BOARD................................................................. 28
THE OFFER................................................................ 29
General Terms......................................................... 29
Terms of the Rights.....................................................29
No Rights of Withdrawal............................................... 31
Compulsory Acquisition; Appraisal Rights.............................. 32
Conditions to the Offer............................................... 32
Interests of PES Directors and Key Employees.......................... 33
Acceptance............................................................ 35
Settlement............................................................ 38
Method of Selling Halliburton Common Stock............................ 39
Recapitalization...................................................... 39
Fees and Expenses of the Offer........................................ 39
Regulatory Approvals and Legal Matters................................ 40
THE WARRANTY AGREEMENT................................................... 41
Warranties............................................................ 41
Agreement to Pay...................................................... 41
Restrictive Covenants................................................. 42
Pre-completion Matters................................................ 42
Completion............................................................ 43
Governing Law......................................................... 43
IRREVOCABLE UNDERTAKINGS................................................. 44
Additional Obligations of PES Directors............................... 45
SERVICE AGREEMENTS....................................................... 45
TAX CONSEQUENCES OF THE OFFER AND
COMPULSORY ACQUISITION................................................ 47
United Kingdom Tax Consequences....................................... 47
United States Federal Tax Consequences................................ 48
PES EXTRAORDINARY GENERAL
MEETING............................................................... 52
Date and Time......................................................... 52
Purpose............................................................... 52
Procedure............................................................. 52
INFORMATION REGARDING HALLIBURTON COMPANY................................ 53
HALLIBURTON COMPANY SELECTED FINANCIAL DATA.............................. 56
HALLIBURTON MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 60
INFORMATION REGARDING PES................................................ 82
PES SELECTED CONSOLIDATED FINANCIAL DATA................................. 85
SUMMARY OF DIFFERENCES BETWEEN
U.K. AND U.S. GENERALLY
ACCEPTED ACCOUNTING
PRINCIPLES............................................................ 87
</TABLE>
ii
<PAGE>
<TABLE>
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PES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 90
MANAGEMENT OF PES................................................ 94
SECURITY OWNERSHIP AND DEALINGS
BY CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF PES......................................... 96
MANAGEMENT OF HALLIBURTON........................................ 98
SECURITY OWNERSHIP AND DEALINGS
BY CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF
HALLIBURTON................................................... 101
DESCRIPTION OF HALLIBURTON
CAPITAL STOCK................................................. 104
COMPARATIVE RIGHTS OF
SHAREHOLDERS.................................................. 108
LEGAL MATTERS.................................................... 115
EXPERTS.......................................................... 115
WHERE YOU CAN FIND MORE INFORMATION.............................. 116
HALLIBURTON COMPANY
CONSOLIDATED FINANCIAL
STATEMENTS.................................................... 118
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND
FINANCIAL STATEMENTS
31 MARCH 1997................................................. 164
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND
FINANCIAL STATEMENTS
31 MARCH 1998................................................. 188
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND FINANCIAL
STATEMENTS 31 MARCH 1999...................................... 210
ANNEX I
TERMS OF THE OFFER RELATING TO
CONDITIONS AND CONTINGENT
CONSIDERATION................................................. Annex I-1
ANNEX II
LETTER FROM THE CHAIRMAN OF PES
TO PES SHAREHOLDERS........................................... Annex II-1
ANNEX III
RELEVANT PROVISIONS OF COMPANIES
ACT 1985...................................................... Annex III-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE OFFER
Q: What are the benefits of the transaction?
A: We believe that the business of PES is complementary to ours and that
benefits will result from combining the two. We expect that the combination
will assist us in our objective to become the preferred provider of real
time reservoir solutions worldwide, to the benefit of our stockholders.
Q: What do I need to do now?
A: To accept our offer, please fill out, sign and return the enclosed form of
acceptance along with your stock certificates and any other required
documents to the address shown on page 3.
Q: If I have sold or otherwise transferred all of my PES shares, what should I
do?
A: Please send this offer document and the form of acceptance as soon as
possible to the purchaser or transferee of your shares.
Q: Is my receipt of any of your shares of common stock subject to any
contingencies?
A: Yes. In addition to the ____ shares that you will receive for each PES share
on completion of the offer, you will receive a right. That right will
entitle you to receive a minimum of _____ additional shares and a maximum of
_____ additional shares. Receipt of the latter shares is subject to the
contingencies described in this offer document.
Q: When will I receive my shares of Halliburton common stock and rights?
A: For each of your PES shares, you will receive promptly after completion of
the offer shares of our common stock and a right. The shares will represent
37% of the maximum number of shares issuable to you under the offer. The
right will entitle you to receive additional shares promptly after dates 12
months and up to 36 months following completion of the offer. The maximum
number of shares issuable in the first issuance under the right will
represent 30% of the maximum number of shares issuable under the offer. The
maximum number of shares issuable in the second issuance under the right
will represent 33% of the maximum number of shares issuable under the
offer.
Q: How do I sell my Halliburton shares that I receive in connection with the
offer?
A: The shares of our common stock that you receive by accepting our offer will
be listed on the New York Stock Exchange. Unless you elect to receive a
physical stock certificate, the shares will be registered electronically in
your name on our stock transfer records. You may sell any or all your shares
through a stock brokerage firm or, if your shares are registered
electronically, through the stock transfer agent. If you are a U.K.
shareholder, you should use a stock brokerage firm with a U.S. affiliate to
avoid a second sales commission.
Q: How soon after receiving my Halliburton shares may I sell them?
A: You may sell immediately any shares of our common stock that you receive by
accepting our offer.
Q: Can I withdraw my acceptance of the offer?
A: No. Once you have validly accepted our offer, no withdrawals will be
permitted unless the offer is not declared unconditional on or before
________, 2000. In that event, your PES shares will be returned to you
promptly.
Q: When do you expect the transaction to be completed?
A: We intend to complete the transaction as soon as possible. For this to
occur, the PES shareholders must approve the suspension of two provisions of
the articles of association of PES at an extraordinary general meeting, and
the other conditions to the offer must be satisfied.
Q: What are the tax consequences of the transaction?
A: If you are subject to U.K. taxation, we anticipate that you will be entitled
to receive "roll-over" treatment on the exchange of your PES shares for
shares of our common stock for U.K. capital gains tax purposes. If you are
subject to U.S. federal income tax, you will recognize gain or loss on the
exchange of your PES shares for shares of our common stock. In the United
States, this gain or loss will be measured by the difference between the
fair market value of the shares you are to receive and your U.S. tax basis
in your PES shares to be exchanged. A portion of the gain may be taxed as
ordinary interest income.
Q: Will I have an opportunity to ask questions of management of Halliburton and
PES?
A: Yes. Halliburton and PES intend to hold an information meeting to which all
PES shareholders will be invited by separate invitation.
iv
<PAGE>
Q: Who can help answer my other questions?
A: If you have more questions about the transaction, you should contact Mr.
Michael Bowyer, a director of PES, collect at +44 (0) 1224 793000 or your
own independent financial adviser. Mr. Bowyer will not give you advice on
any matter relating to your decision whether to accept our offer.
v
<PAGE>
SUMMARY
This summary highlights selected information from this offer document and may
not contain all of the information that is important to you. To understand our
offer fully and for a more complete description of the terms of our offer, you
should read carefully this entire document. Please read "Where You Can Find More
Information" on page 115.
The Companies (pages 51 through 88)
Halliburton Company
3600 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201-3391
U.S.A.
General. Halliburton's predecessor was established in 1919. We provide energy
services, engineering and construction services, and manufacture products for
the energy industry. Our revenues for the year ended December 31, 1998 were
$17.4 billion. At September 30, 1999, we employed approximately 103,300 people.
At _______, 2000, our market capitalization was approximately $______.
Description of Services and Products. We have three business segments:
. the Energy Services Group;
. the Engineering and Construction Group; and
. the Dresser Equipment Group.
The Energy Services Group provides a wide range of services, products and
integrated solutions to customers involved in oil and gas exploration and
production.
The Engineering and Construction Group designs, engineers and constructs
facilities for a wide variety of industrial and government customers.
The Dresser Equipment Group designs, manufactures and markets highly
engineered products and systems for oil and gas producers, transporters,
processors, distributors and users throughout the world.
PES (International) Limited
34 Albyn Place
Aberdeen AB10 1FW
United Kingdom
General. PES's predecessor was established in June 1985 to provide well
completion and intervention products, services and solutions to the oil and gas
industry. PES was established as the group holding company in 1993. PES is
headquartered in Aberdeen, Scotland.
Description of Services and Products. PES designs, manufactures and supplies
oil and gas well completion and intervention products, services and solutions.
PES has developed high performance well completion products, including the
Surface Controlled Reservoir Analysis and Management System or SCRAMS(TM). In
addition to SCRAMS(TM), PES has developed other technologies that have had, or
that the management of PES believes are likely to have, a significant impact on
the well completion and intervention products industry.
The Offer (pages 28 through 39)
General. We are offering to acquire each of your PES shares by issuing to
you, promptly after our offer becomes unconditional, also referred to as
"completion:"
. _______ shares of our common stock; and
. one right (a "right") under which we will issue a minimum of ______
additional shares and a maximum of ________ additional shares of our
common stock.
The offer extends to all PES shares that you now own and, if applicable,
any PES shares you acquire while the offer remains open for acceptance:
. upon exercise of any options that you hold under the PES share option
schemes; or
. upon exercise by PES of call options to exchange PES shares for shares of
a PES subsidiary owned by you.
The offer is made on the terms and subject to the conditions described in
this offer document and in the form of acceptance that accompanies this offer
document.
Terms of the Right. The terms of each right require us to issue shares of our
common stock as follows:
. a minimum of ________ shares and a maximum of _______ shares 12 months
after completion of our offer, also referred to as the "first
determination date"; and
. a minimum of ________ shares and a maximum of _______ shares up to 36
months after completion of our offer, also referred to as the "second
determination date."
The rights you receive will vest automatically and you will not be required
to take action in order to receive your additional shares of Halliburton common
stock. The rights are an integral part of the consideration to be paid in
exchange for your PES shares. The rights you receive will not entitle you to any
of the rights enjoyed by holders of Halliburton common stock. The rights will
not be evidenced by a separate certificate and are not transferrable except by
operation of law.
The number of shares to be issued on each of these determination dates will
be determined by reference to two contingencies. The maximum number of shares
issuable following each of the first and second determination dates will be
reduced, but not below the minimum number, if:
. either of two key executives of PES, Laurence Kinch and Richard Rubbo, is
not then employed by us as a result of voluntary resignation or
termination for cause; or
. in the case of Mr. Rubbo only, his death or disappearance in suspicious
circumstances.
The First Contingency. We will reduce the maximum number of shares to be
issued following each determination date by 30% if either Mr. Kinch or Mr. Rubbo
is not then employed by us as a result of voluntary resignation or termination
for cause. For example, if neither of them is so employed by us on the first
determination date, we will reduce the maximum number of shares to be issued
following both the first and second determination dates by 60%.
The second determination date will occur 36 months after completion of the
offer unless before that date we have decided, in our sole discretion, that PES
has achieved specific technological milestones.
1
<PAGE>
Those milestones are specified in an agreed technology transfer and
development plan. If the milestones are reached prior to the third anniversary
of completion of the offer, the second determination date and the related
issuance of shares of our common stock under the rights will be accelerated to
the date 30 months following completion of the offer or, if later, promptly
following the date of achievement of the milestones. The technology transfer and
development plan has been filed as an exhibit to our registration statement and
is on display at the London and Aberdeen offices of the receiving agent, CMS
Cameron McKenna. We will provide a copy of the technology transfer and
development plan to any PES shareholder upon request made in writing or by
telephone to us at the address and telephone number set forth under "Where You
Can Find More Information."
For the addresses of these offices and a list of the documents displayed
there, please read "Where You Can Find More Information" on page 115.
The Second Contingency. We will reduce the maximum number of shares of our
common stock comprising each issuance under a right under another circumstance.
That circumstance will exist if Mr. Rubbo has ceased to be employed by us as a
result of his death or disappearance in suspicious circumstances. If that
circumstance should precede the first determination date, we will reduce the
maximum number of shares issuable following the first and second determination
dates by 30%. If that circumstance should precede only the second determination
date, we will issue the maximum number of shares following the first
determination date, but we will reduce the maximum number of shares following
the second determination by 30%. We will eventually issue a number of shares of
our common stock equal to the number, if any, by which we reduced the shares
issuable but for this contingency. You may not, however, be the recipient of
those shares. For information as to when and to whom those shares will be
issued, please read "The Offer - General" on pages 28 through 30 and Annex I to
this offer document.
Valuation. The exchange ratio was determined by agreement and modifications
of that agreement over an extended period. This agreement and the modifications
to it are described under "Background of and Reasons for the Offer" on page __.
2
<PAGE>
The exchange ratio was fixed on ___________ 2000, the third business day
prior to the date of this offer document. On that date, based on the closing
sales price per share of our common stock on the NYSE ($_____), our offer valued
the entire issued share capital of PES, on a fully diluted basis, at
approximately $ ________ million or (Pounds) _________ million. Based on that
closing sales price and:
. assuming issuance of the maximum number of shares of our common stock
subject to the rights, the offer values each PES share at $ ______ or
(Pounds) ______ and the entire issued share capital of PES, on a fully
diluted basis, at $ _____ million or (Pounds) ______ million; or
. assuming issuance of the minimum number of shares of our common stock
subject to the rights, the offer values each PES share at $ ______ or
(Pounds) ______ and the entire issued share capital of PES, on a fully
diluted basis, at $ _____ million or (Pounds) ______ million.
Each of these implied valuations was based on an exchange rate of (Pounds)1.00
to $______. Halliburton Holdings Limited, a wholly owned subsidiary of our
company, owns 334,360 PES shares, representing approximately 26.40% of the
issued share capital of PES.
The amount of consideration offered for each PES share was determined as a
result of arm's-length negotiations between directors of PES unaffiliated with
our company and officers of a division of our subsidiary, Halliburton Energy
Services, Inc. Please read "Background of and Reasons for the Offer" on pages 21
through 27 for additional information regarding the valuation of PES.
Halliburton Common Stock. All common stock issued to you in exchange for your
PES shares will be validly issued, fully paid and nonassessable. You will not be
eligible to receive dividends on shares of our common stock until shares are
issued to you. Fractional shares of common stock will not be issued.
Acceptance. In order to accept the offer, you must:
. complete and sign the form of acceptance in accordance with the printed
instructions;
. obtain a witness to your signature; and
. return the form of acceptance, along with your share certificate(s) and/or
other documents of title, to the receiving agent:
CMS Cameron McKenna
(Ref: TLP/AJS)
Mitre House
160 Aldersgate Street
London, EC1A 4DD
United Kingdom
Your form of acceptance must be received by no later than 3:00 p.m., London
time/10:00 a.m., New York City time, on ______________, 2000. This procedure is
set out on pages 35 and 36 of this offer document and in the accompanying form
of acceptance.
If you properly sign and return the form of acceptance, you will accept the
offer for all your PES shares, unless you expressly accept the offer for a
lesser number of shares.
You need not take any action in order to reject the offer.
Terms and Conditions of the Offer (pages 32 and 33)
Completion of the offer is subject to the satisfaction or our waiver of
several conditions. These conditions include:
. We must receive valid acceptances representing not less than 90% of the PES
shares subject to the offer. We retain the right to reduce that percentage
to any percentage over 33%.
. The PES shareholders must approve a special resolution authorizing the
suspension of two provisions of the articles of association of PES. Those
provisions would interfere with our ability to purchase PES shares under
the offer.
. The following directors and key employees must continue their employment
through completion of the offer:
. Laurence W. Kinch;
. Michael L. Bowyer;
. Drummond W. Whiteford;
. Richard P. Rubbo;
. Steven C. Owens;
. Michael J. Fleming;
. Colin Smith;
. Brett W. Bouldin; and
. Napoleon Arizmendi.
3
<PAGE>
. No material adverse change in the business, assets or prospects of PES
shall have occurred since the date of this offer document.
The offer will be open for acceptance until _________, 2000, or a longer
period as we may determine. The offer will not, however, be extended beyond
_____, 2000. All conditions to the offer must be satisfied or waived by us
during that period. Upon satisfaction or our waiver of the conditions, the offer
will become unconditional. We will then extend the offer for an additional
period of 10 U.S. business days, during which time PES shareholders who have not
accepted the offer may do so.
To review the entire set of conditions relating to the offer, please refer to
Annex I to this offer document.
PES Extraordinary General Meeting (page 52)
Purpose. We have included with this offer document a notice from PES
convening an extraordinary general meeting of PES. At that meeting, a special
resolution will be proposed to facilitate the offer. The first purpose of the
special resolution is to exclude our acquisition of PES shares under the offer
from preemptive rights of PES shareholders. The second purpose of the special
resolution is to enable us to effect the compulsory acquisition by using shares
of our common stock rather than cash.
Date, Time and Place of the Extraordinary General Meeting. The extraordinary
general meeting will be held on __________, _________, 2000 at ______________,
____________, United Kingdom, commencing at 10:00 a.m., London time.
Shareholders Entitled to Vote; Votes Required. Only persons on the register
of shareholders of PES on the date of the extraordinary general meeting are
entitled to vote at the meeting. On the date of this offer document, there are
1,266,540 PES shares in issue. Unless a poll is requested, each PES shareholder
will be entitled to one vote on the special resolution. If a poll is requested,
each PES shareholder present at the meeting in person or by proxy will be
entitled to one vote for each PES share held.
The special resolution to be put before the extraordinary general meeting must
be passed by a majority of at least three-fourths of the PES shareholders who
vote at the meeting, whether per capita on a show of hands or by shares on a
poll. If a PES shareholder abstains, it will have no effect on the vote on the
special resolution.
It is a condition of the offer that the special resolution be passed. In
order to facilitate the passage of the special resolution:
. A group of 18 individuals, consisting of all the PES directors unaffiliated
with our company, members of their immediate families and two non-director
employees, have agreed to execute irrevocable undertakings with respect to
the offer. Those individuals who are PES shareholders have agreed to vote
the PES shares they own in favor of the special resolution. The PES shares
owned by these individuals represent a total of 50.02% of the issued share
capital of PES.
. We will cause our subsidiary Halliburton Holdings Limited to vote its
shares, which represent approximately 26.40% of the issued share capital of
PES, in favor of the special resolution.
. PES Trustees Limited, a PES company trust holding 11.14% of the issued
share capital of PES, has agreed to vote in favor of the special
resolution.
Those members of this group who are PES shareholders, together with
Halliburton Holdings Limited and PES Trustees Limited, represent 32.73% of the
total number of PES shareholders on the date of this offer document and hold
87.57% of the issued share capital of PES. They have all agreed to vote in favor
of the special resolution. Therefore, if a poll is demanded, the special
resolution will pass. Halliburton Holdings Limited intends, if necessary, to
demand a poll regarding the special resolution.
You may direct all questions concerning the extraordinary general meeting to
Mr. Michael Bowyer, a director of PES, at +44 (0) 1224 793000.
Interests of PES Directors and Key Employees (pages 33 and 34)
The PES board of directors has recommended that you accept the offer. In
determining whether to accept the offer, you should consider that the directors
and key employees of PES may have
4
<PAGE>
interests regarding the offer that are different from yours. These include the
following:
. Service Agreements. As of the date of this offer document, each of the
directors of PES, other than Messrs. McCurley and Renfroe executed a
service agreement with PES, a PES subsidiary or a Halliburton subsidiary.
For information regarding the terms of these service agreements, please
read "The Offer-- Interests of PES Directors and Key Employees" on pages 33
and 34 and "Service Agreements" on pages 45 and 46.
. Warranty Agreement. As of the date of this offer document, the following
PES directors and key employees have entered into a warranty agreement with
us:
. Michael L. Bowyer;
. Michael J. Fleming;
. Steven C. Owens;
. Laurence W. Kinch;
. Richard P. Rubbo;
. Colin Smith;
. Drummond W. Whiteford;
. Napoleon Arizmendi; and
. Brett W. Bouldin.
These individuals, other than Messrs. Arizmendi and Bouldin who are not
directors, have given us numerous representations and warranties regarding
PES and related matters.
In addition, the warranty agreement contains a provision requiring each of
the individual parties, other than Messrs. Kinch, Rubbo and Fleming, to pay
liquidated damages to us if the individual:
. resigns voluntarily from our group of companies; or
. is terminated for cause within three years after completion of the
offer.
Please read "The Offer--Interests of PES Directors and Key Employees" on
pages 33 and 34 and "The Warranty Agreement" on pages 41 through 43 for
more information regarding the warranty agreement.
. Irrevocable Undertakings. A condition to our posting (mailing) of this
offer document is that the following directors and shareholders shall have
executed irrevocable undertakings in connection with the offer. Each of
these individuals has expressed a willingness to do so, but we will not ask
any of them to do so until he or she has had a period of 48 hours after the
effective date of the registration statement to review this offer document.
Once this offer document has been posted to you, you may assume that each
of the following directors or shareholders has executed an irrevocable
undertaking:
. Directors. Messrs. Michael L. Bowyer, Michael J. Fleming,
Steven C. Owens, Laurence W. Kinch, Richard P. Rubbo, Colin Smith
and Drummond W. Whiteford.
. PES Employees. Brett W. Bouldin and Napoleon Arizmendi, both of whom
are key employees of PES.
. PES Trustees Limited. In this case, the irrevocable undertaking will
include an acceptance of the offer with respect only to the 5,166 PES
shares that are not subject to PES options and the 59,830 PES shares
that are subject to PES options held by persons who have agreed to
execute irrevocable undertakings.
In connection with these irrevocable undertakings, these directors and key
employees will have agreed that:
. in the case of those who are PES shareholders, they will:
. accept the offer; and
. vote in favor of the special resolution to be proposed at the
extraordinary general meeting of PES shareholders.
5
<PAGE>
. in the case of those who are PES optionholders:
. they will not exercise their PES options during the offer
period; and
. they will surrender their PES options in exchange for
Halliburton options.
Of the 1,266,540 PES shares in issue, 699,590 shares representing 55.24% of
the issued share capital of PES will be subject to irrevocable undertakings
to accept the offer.
For further information regarding the terms of these irrevocable
undertakings, please read "The Offer--Interests of PES Directors and Key
Employees" on pages 33 and 34 and "Irrevocable Undertakings" on pages
44 and 45.
. PES Share Option Schemes. The offer applies to any PES shares issued on the
exercise of options issued under the PES share option schemes. We will also
offer PES optionholders the opportunity to roll over their PES options into
options for shares of our common stock, subject to the same exercise price
as the existing PES options and on the same exchange ratio as the offer.
The Recommendation of the PES Board (page 28)
The PES board of directors is of the opinion that the offer is fair,
reasonable and in the best interests of PES. The opinion of the PES board of
directors was unanimous except that Messrs. McCurley and Renfroe, as nominees of
Halliburton Holdings Limited, did not participate in the proceedings. The PES
board of directors considered the following factors as the most important to its
opinion:
. the board's view that a business combination of PES with us will permit PES
to develop its oil and gas well completion technology more rapidly;
. the board's view that PES's well completion technology will enhance the
well service capability of the combined group of companies and benefit all
our stockholders;
. the fact that the transaction offers PES shareholders an opportunity to
hold an equity interest in the combined businesses; and
. the fact that completion of the offer will provide liquidity to current PES
shareholders and to persons who acquire PES shares upon exercise of
outstanding options.
The PES board also considered the negative effect of the recently depressed
market for oil and gas on our company and our common stock. In evaluating this
factor, the PES board also noted the likely effect of that market on the
operations and development of PES.
The PES board, other than those directors appointed by Halliburton Holdings
Limited, who did not participate in the deliberations, unanimously recommends
that PES shareholders accept the offer. Please see the PES letter relating to
this offer attached as Annex II to this offer document.
PES Optionholders
The offer extends to any PES shares acquired by PES optionholders upon
exercise of options granted under the PES share option schemes up to the last
date on which the offer remains open for acceptance. If you are a PES
optionholder, you will receive a separate letter explaining the alternative
courses of action open to you.
Absence of Rights of Withdrawal (page 31)
You will not be able to withdraw your acceptance once you have validly
accepted the offer. No withdrawal rights will be granted if we determine to
complete the offer on the basis of a percentage of acceptances of less than 90%
of the PES shares to which the offer relates. If the offer does not become
unconditional prior to its expiration, we will return your PES shares promptly.
Appraisal Rights (page 32)
The laws of Scotland do not provide you with appraisal rights for your PES
shares. Appraisal rights are statutory rights of shareholders under the laws of
some jurisdictions arising in connection with some types of business combination
transactions. Shares subject to appraisal rights would be valued by an
6
<PAGE>
independent appraiser and purchased by the issuer at the appraised value.
Compulsory Acquisition (page 31)
If, by ___________, 1999, we acquire PES shares representing at least 90% of
the PES shares to which the offer relates, we intend to compel you, as a holder
of any remaining PES shares, to sell those shares to us as allowed by U.K. law.
If under those circumstances we fail to take that action, you may, as allowed by
U.K. law, compel us to purchase your PES shares. Any sale and purchase will be
on the same terms as those of our offer.
Halliburton's Plans for PES
If we acquire PES, we plan to combine the operations of PES with those of the
Energy Services Group. We expect that PES's position in intelligent well product
offerings will aid us in our desire to become the leader in providing real time
reservoir solutions.
Regulatory Approvals (page 39)
Neither we nor PES expects that the offer will require any governmental
approval prior to the offer becoming unconditional.
Tax Consequences (pages 46 through 51)
If you are subject to U.K. taxation, we believe that the exchange by you of
PES shares for shares of our common stock will qualify for "roll-over" treatment
for U.K. capital gains tax purposes. Liability to U.K. taxation arising from
your acceptance of the offer will depend on your individual circumstances. For
information on U.K. taxation with regard to the offer and the holding of shares
of our common stock, please read "Tax Consequences of the Offer and Compulsory
Acquisition--United Kingdom Tax Consequences" on pages 46 and 47.
If you are subject to U.S. federal income tax, your exchange of PES shares for
shares of our common stock will be taxable for U.S. federal income tax purposes.
For information on U.S. taxation with regard to the offer and the holding of
shares of our common stock, please read "Tax Consequences of the Offer and
Compulsory Acquisition--United States Federal Tax Consequences" on pages 47
through 50.
The tax consequences of the offer and compulsory acquisition for you may
depend on the facts of your own situation. You should consult your tax adviser
for a full understanding of the tax consequences of our offer for you.
Risk Factors (pages 15 through 18)
There are risks that you should consider in evaluating whether to accept our
offer, including:
. the risk that the market value of shares of our common stock, when issued
to you, may be lower than the market value of our shares at the time the
exchange ratio was established or at the time you accepted our offer;
. the fact that the portion of our common stock to be issued on a deferred
basis may be reduced by up to 60% depending on events beyond your control;
. the fact that your receipt of shares of our common stock issuable under
the rights will be deferred for extended periods of 12 months and up to 36
months;
. the risk that the value of any dividends received or the proceeds of the
sale of your Halliburton common stock may, after the conversion from U.S.
dollars to your local currency, be less than you anticipated;
. the fact that our business is heavily dependent upon the capital budgets of
our customers, many of which are, in turn, heavily dependent upon volatile
oil and gas commodity prices;
. the financial, operational and legal risks related to our acquisition
strategy;
. the risks generally associated with combining the operations of Dresser
Industries, Inc. with those of our company;
. the risks associated with our non-U.S. and non-U.K. operations, including
the risk that events or activities may limit or disrupt markets, restrict
payments or the movement of funds, or result in the deprivation of contract
rights;
7
<PAGE>
. significant currency exchange rate risks arising from our international
operations; and
. environmental risks entailed in our well service operations which routinely
involve the handling of significant amounts of waste materials, some of
which are classified as hazardous substances.
Listing of Halliburton Common Stock
The Halliburton common stock that is issuable under the offer has been listed
on the New York Stock Exchange. The listing will become effective and dealings,
for normal settlement, will commence on the NYSE on the first trading day
following completion of the offer.
Applicable Laws
The offer is subject to the U.K. Financial Services Act 1986, the U.K.
Companies Act 1985, the U.S. Securities Act of 1933 and the antifraud provisions
of the U.S. Securities Exchange Act of 1934.
To review your rights under the U.K. Companies Act 1985, please refer to Annex
III to this offer document. The offer is governed by English law.
We have filed a registration statement relating to the offer, sale and
delivery of the shares of our common stock and the rights issuable in connection
with the offer. That registration statement has become effective under the
Securities Act of 1933. All shares of our common stock received by you under the
offer will be freely transferable in the United States.
Currency Information
The mid-point of the closing spread of the dollar-to-pounds sterling spot
rate, as shown in the Financial Times, U.K. edition, on __________, 2000, the
latest practicable date prior to the posting of this offer document, was
_______. The noon buying rate in New York City for cable transfers in pounds
sterling, as certified for customs purposes by the Federal Reserve Bank of New
York on that date, was ________. This information is provided for your
convenience and may differ from the actual rates in effect during the periods
covered by the PES financial information.
Accounting Treatment
Our acquisition of PES shares is intended to qualify as a purchase transaction
for our accounting and financial reporting purposes. This means that we will
record the assets and liabilities of PES on our books and records at their fair
market value. Any excess of the value of the shares of our common stock issued
in the transaction over the net fair market value of these assets and
liabilities will be recorded as goodwill and amortized over 20 years.
Responsibility
Our directors, chief executive officer, chief financial officer and chief
accounting officer accept responsibility for the information contained in this
offer document. To the best of their knowledge and belief, having taken all
reasonable care to ensure that this is the case, the information contained in
this offer document does not contain any misstatement of a material fact or omit
to state a material fact necessary to make the statements made not misleading.
8
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
Summary Selected Historical Financial Information of Halliburton
The following summary financial information should be read with our
historical financial statements and the related notes contained in this offer
document and in the annual reports and other information that we have previously
filed with the SEC. Please read "Where You Can Find More Information" on page
115. The extracts from our consolidated financial statements and other
information about our company appearing in this offer document are presented in
U.S. dollars ($) and have been prepared in accordance with U.S. generally
accepted accounting principles. U.S. generally accepted accounting principles
and U.K. generally accepted accounting principles differ in significant
respects. Please read "Summary of Differences Between U.K. and U.S. Generally
Accepted Accounting Principles" on pages 87 through 89. We have restated our
prior year information for the merger of Dresser Industries, Inc. Beginning in
1998, we changed Dresser's year end of October 31 to our calendar year end.
Periods through December 1997 contain Dresser's information on a fiscal year-end
basis combined with our information on a calendar year-end basis.
HALLIBURTON
<TABLE>
<CAPTION>
Unaudited
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Revenues:
Energy Services Group..................... $ 4,977.5 $ 5,307.7 $ 6,515.4 $ 8,504.7 $ 9,009.5 $ 6,829.2 $ 5,133.7
Engineering and Construction Group........ 3,562.3 3,736.5 4,720.7 4,992.8 5,494.8 4,164.5 4,153.0
Dresser Equipment Group................... 2,452.0 2,467.4 2,710.5 2,774.1 2,848.8 2,070.4 1,840.7
--------- --------- --------- --------- --------- --------- ---------
Total revenues.......................... $10,991.8 $11,511.6 $13,946.6 $16,271.6 $17,353.1 $13,064.1 11,127.4
========= ========= ========= ========= ========= ========= =========
Operating income:
Energy Services Group..................... $ 405.8 $ 544.5 $ 698.0 $ 1,019.4 $ 971.0 $ 850.0 $ 162.0
Engineering and Construction Group........ 71.0 96.6 134.0 219.0 237.2 187.2 163.0
Dresser Equipment Group................... 198.1 200.7 229.3 248.3 247.8 187.3 140.0
Special charges and credits(a)............ (24.6) (8.4) (85.8) (16.2) (980.1) (945.1) 47.1
General corporate......................... (56.2) (70.8) (72.3) (71.8) (79.4) (59.5) (50.1)
--------- --------- --------- --------- --------- --------- ---------
Total operating income(a)............... 594.1 762.6 903.2 1,398.7 396.5 219.9 462.0
Nonoperating income (expense),
net(b).................................... 323.1 (32.6) (72.2) (85.6) (117.7) (81.5) (64.5)
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations
before income taxes, minority interest
and change in accounting method........... 917.2 730.0 831.0 1,313.1 278.8 138.4 397.5
Provision for income taxes(c)............... (346.9) (247.0) (248.4) (491.4) (244.4) (184.4) (153.1)
Minority interest in net income of
consolidated subsidiaries................. (33.1) (20.7) (24.7) (49.3) (49.1) (34.5) (22.9)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations................................ $ 537.2 $ 462.3 $ 557.9 $ 772.4 $ (14.7) $ (80.5) $ 221.5
========= ========= ========= ========= ========= ========= =========
Basic income (loss) per share:
Continuing operations..................... $ 1.25 $ 1.07 $ 1.30 $ 1.79 $ (0.03) $ (0.18) $ 0.50
Net income (loss)......................... $ 1.26 $ 0.88 $ 1.30 $ 1.79 $ (0.03) $ (0.18) $ 0.46
Diluted income (loss) per share:
Continuing operations..................... $ 1.24 $ 1.07 $ 1.29 $ 1.77 $ (0.03) $ (0.18) $ 0.50
Net income (loss)......................... $ 1.26 $ 0.88 $ 1.29 $ 1.77 $ (0.03) $ (0.18) $ 0.46
Cash dividends per share(d)(e).............. $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.38 $ 0.38
Average common shares outstanding
(basic)(d)................................ 430.6 431.1 429.2 431.1 438.8 438.6 440.2
Average common shares outstanding
(diluted)(d).............................. 431.5 432.3 432.1 436.1 438.8 438.6 443.2
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Unaudited
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Net working capital......................... $ 2,196.7 $ 1,476.7 $ 1,501.0 $ 1,984.8 $ 2,129.6 $ 1,599.2 $ 2,039.0
Total assets................................ 8,521.0 8,569.4 9,586.8 10,704.3 11,065.9 11,655.9 10,584.5
Property, plant and equipment, net.......... 2,047.0 2,285.0 2,554.0 2,766.4 2,895.9 2,971.6 2,817.5
Long-term debt (including current
maturities)............................... 1,119.8 666.8 958.0 1,304.3 1,428.2 1,428.1 1,367.2
Shareholders' equity........................ 3,722.5 3,577.0 3,741.4 4,316.9 4,061.2 4,048.1 4,122.0
Total capitalization........................ 4,905.9 4,377.9 4,830.1 5,671.7 6,004.4 5,913.7 6,431.5
Shareholders' equity per share(d)........... 8.63 8.29 8.78 9.86 9.23 9.21 9.33
</TABLE>
________________
(a) Operating income includes the following special charges and credits:
. 1994: $24.6 million, including merger costs, $27.3 million; restructuring
costs, $6.2 million; and litigation costs, $9.5 million; and credits from
litigation and insurance recoveries, $18.4 million.
. 1995: $8.4 million, including restructuring costs, $4.7 million; and
write-off of acquired in-process research and development costs, $3.7
million.
. 1996: $85.8 million, including merger costs, $12.4 million;
restructuring, merger and severance costs, $62.1 million; and write-off
of acquired in-process research and development costs, $11.3 million.
. 1997: $16.2 million, including acquisition costs, $8.6 million;
restructuring of joint ventures, $18.0 million; write-downs on impaired
assets and early retirement incentives, $18.7 million; and losses from
the sale of assets, $12.6 million; and credits from gain on extension of
joint venture, $41.7 million.
. 1998: $980.1 million, including asset related charges, $509.4 million;
personnel reductions, $234.7 million; facility consolidations, $126.2
million; merger transaction costs, $64.0 million; and other merger
related costs, $45.8 million.
. Nine months 1998: $945.1 million, including asset related charges, $509.4
million; personnel reductions, $204.7 million; facility consolidations,
$121.2 million; merger transaction costs, $64.0 million and other merger
related costs, $45.8 million.
. Nine months 1999: $47.1 million reversal of a portion of the 1998 special
charges for personnel, facility exit charges and merger costs due to
actual costs being less than estimated.
(b) Nonoperating income in 1994 includes a gain of $275.7 million from the sale
of an interest to Western Atlas International, Inc. and a gain of $102.0
million from the sale of our natural gas compression business. Nonoperating
income for the nine months ended September 1999 includes a $26 million loss
for the write-off of our investment in a Mexican construction and
engineering company.
(c) Provision for income taxes in 1996 includes tax benefits of $43.7 million
from recognizing net operating loss carryforwards and settling various
issues with the Internal Revenue Service.
(d) We restated our prior year weighted average shares, cash dividends paid per
share and shareholders' equity per share to reflect the two-for-one common
stock split declared on June 9, 1997 and paid as a stock dividend on July
21, 1997.
(e) Cash dividends per share for 1994 through 1998 represent amounts we paid
prior to the merger with Dresser.
10
<PAGE>
Summary Selected Historical Financial Information of PES
The summary below sets forth selected historical financial data for PES.
You should read this together with the historical financial statements and
related notes of PES contained in this offer document. The extracts from the
consolidated financial statements of, and other information about, PES appearing
in this offer document are presented in pounds sterling ((Pounds)) and have been
prepared in accordance with U.K. generally accepted accounting principles. U.K.
generally accepted accounting principles and U.S. generally accepted accounting
principles differ in significant respects. Please read "Summary of Differences
Between U.K. and U.S. Generally Accepted Accounting Principles" on pages 87
through 89.
<TABLE>
<CAPTION>
Audited
------------------------------------------------------------------------------------------
Year Ended
March 31,
------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------------- --------------- ---------------- ---------------- ----------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Profit and loss account
Turnover.......................... (Pounds) 7,056 (Pounds) 10,581 (Pounds) 15,989 (Pounds) 22,673 (Pounds) 29,600
Cost of sales..................... (2,726) (5,311) (8,541) (12,719) (17,533)
--------------- --------------- ---------------- ---------------- ----------------
Gross profit...................... (Pounds) 4,330 (Pounds) 5,270 (Pounds) 7,448 (Pounds) 9,954 (Pounds) 12,067
Administrative expenses........... (3,431) (5,207) (7,390) (10,191) (10,734)
Other income...................... 108 897 350 279 225
--------------- --------------- ---------------- ---------------- ----------------
Operating profit.................. (Pounds) 1,007 (Pounds) 960 (Pounds) 408 (Pounds) 42 (Pounds) 1,558
Non-operating income
(expense)........................ (82) (210) (562) (1,749) (293)
--------------- --------------- ---------------- ---------------- ----------------
Profit before tax................. 925 750 (154) (1,707) 1,265
Tax............................... (410) (300) (175) (373) (493)
--------------- --------------- ---------------- ---------------- ----------------
Profit after tax.................. (Pounds) 515 (Pounds) 450 (Pounds) (329) (Pounds) (2,080) (Pounds) 772
Minority interests................ 102 565 (174) 0 0
--------------- --------------- ---------------- ---------------- ----------------
Profit for year................... (Pounds) 617 (Pounds) 1,015 (Pounds) (503) (Pounds) (2,080) (Pounds) 772
=============== =============== ================ ================ ================
Profit for period per
share(a)....................... (Pounds) 0.75 (Pounds) 1.25 (Pounds) (0.63) (Pounds) (1.62) (Pounds) 0.62
Dividends declared per
share(a)....................... (Pounds) -- (Pounds) 0.06 (Pounds) 0.06 (Pounds) -- (Pounds) --
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Audited
------------------------------------------------------------------------------------------
Year Ended
March 31,
------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------------- --------------- ---------------- ---------------- ----------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Balance sheet
Intangible fixed assets.............. (Pounds) 0 (Pounds) 900 (Pounds) 2,470 (Pounds) 2,302 (Pounds) 2,001
Tangible fixed assets................ 2,026 2,130 3,247 5,099 7,453
Investments.......................... 0 11 146 3,432 3,370
--------------- --------------- ---------------- ---------------- ----------------
(Pounds) 2,026 (Pounds) 3,041 (Pounds) 5,863 (Pounds) 10,833 (Pounds) 12,824
--------------- --------------- ---------------- ---------------- ----------------
Stock................................ (Pounds) 1,187 (Pounds) 1,855 (Pounds) 2,738 (Pounds) 6,550 (Pounds) 8,092
Debtors.............................. 1,859 4,862 6,412 6,294 7,129
Cash................................. 123 101 259 1,132 1,260
--------------- --------------- ---------------- ---------------- ----------------
(Pounds) 3,169 (Pounds) 6,818 (Pounds) 9,409 (Pounds) 13,976 (Pounds) 16,481
--------------- --------------- ---------------- ---------------- ----------------
Creditors (less than) 1 year......... (Pounds) (3,043) (Pounds) (6,671) (Pounds) (10,122) (Pounds) (5,592) (Pounds) (9,791)
Creditors (greater than) 1 year...... (408) (1,071) (2,041) (1,472) (1,452)
Provisions........................... (112) (74) (54) (852) (422)
--------------- --------------- ---------------- ---------------- ----------------
Net assets........................... (Pounds) 1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds) 16,893 (Pounds) 17,640
=============== =============== ================ ================ ================
Share capital........................ 78 78 85 129 129
Share premium........................ 1,200 1,200 2,459 26,961 26,961
Profit and loss account.............. (408) 569 (21) (2,218) (1,471)
Goodwill reserve..................... (927) (927) (927) (9,768) (9,768)
Other................................ 1,689 1,123 1,459 1,789 1,789
--------------- --------------- ---------------- ---------------- ----------------
Equity............................... (Pounds) 1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds) 16,893 (Pounds) 17,640
=============== =============== ================ ================ ================
Currency Exchange Information
United States dollars to one Pound sterling (b)
Period End........................... 1.6190 1.5262 1.6448 1.6765 1.6140
Average.............................. 1.5650 1.5623 1.5989 1.6463 1.6526
High................................. 1.6350 1.6091 1.7123 1.6885 1.6995
Low.................................. 1.5118 1.5096 1.5050 1.6117 1.6027
</TABLE>
__________________
(a) Per share information based on PES ordinary shares outstanding after giving
effect to the 10-for-1 stock split effected on October 27, 1998.
(b) Based on noon buying rate in New York City for cable transfers in pounds
sterling, as certified for customs purposes by the Federal Reserve Bank of
New York.
(c) In April 1997, Halliburton Holdings Limited, a wholly-owned subsidiary of
Halliburton, acquired a 26% stake in PES.
12
<PAGE>
Summary Unaudited Pro Forma Combined Financial Information
Summary unaudited pro forma combined financial information giving effect to
our proposed acquisition of PES is not presented because of the immaterial
effect of the combination on our consolidated financial statements.
Comparative Per Share Data
Set forth below are the income (loss) from continuing operations, cash
dividends and book value per common share data for Halliburton and PES on an
historical basis. In the case of PES, this data is also presented on a pro
forma equivalent share basis assuming the terms of the current offer were
applied retrospectively. The pro forma effect of completion of the offer on
Halliburton is immaterial from an accounting perspective and is not presented.
The pro forma equivalent share data for PES is presented on alternative bases,
assuming alternatively a maximum and minimum issuance of shares of our common
stock under the offer. Pro forma data per equivalent share for PES was
calculated as follows:
. PES year ended March 31, 1999 was combined with Halliburton's year
ended December 31, 1998.
. Halliburton's existing 26% interest in PES was excluded from the
balance sheets and income statements.
. Goodwill from the acquisition was established on the balance sheets
and amortized on the income statements.
. United States generally accepted accounting principles adjustments to
the balance sheets and income statements were included.
. Dividends on PES shares were deducted from the balance sheets.
The information set forth below for PES is expressed in pounds sterling
and, for convenience, in U.S. dollars. The latter has been obtained by
converting the financial information expressed in pounds sterling, which is
PES's functional and reporting currency, into United States dollars at the
currency exchange rate in effect at March 31, 1999, the date of the most recent
balance sheet of PES included in this offer document. Per share amounts are
based on 1,266,540 PES ordinary shares outstanding at March 31, 1999.
The information set forth below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes of Halliburton and PES that are included in this offer document.
HALLIBURTON
<TABLE>
<CAPTION>
Unaudited
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ ---------
<S> <C> <C>
Historical Data Per Common Share:
Income (loss) from continuing operations:
Basic................................... $(0.03) $ 0.50
Diluted................................. (0.03) 0.50
Cash dividends............................. 0.50 0.375
Book value................................. 9.23 9.33
</TABLE>
13
<PAGE>
PES
<TABLE>
<CAPTION>
Year Ended
March 31,
1999
----------
<S> <C>
Historical Data Per Share:
Income (loss) from continuing operations.................. * 0.62
Cash dividends............................................ --
Book value................................................ 13.54
Pro Forma Data Per Equivalent Share in pounds sterling:
. maximum issuance:
Income (loss) from continuing operations.................. * (0.08)
Cash dividends............................................ 1.02
Book value................................................ 19.39
. minimum issuance:
Income (loss) from continuing operations.................. * (0.05)
Cash dividends............................................ 0.62
Book value................................................ 12.11
Pro Forma Data Per Equivalent Share in U.S. dollars:
. maximum issuance:
Income (loss) from continuing operations.................. $ (0.13)
Cash dividends............................................ 1.64
Book value................................................ 31.23
. minimum issuance:
Income (loss) from continuing operations.................. $ (0.08)
Cash dividends............................................ 1.00
Book value................................................ 19.51
</TABLE>
* Pounds
14
<PAGE>
RISK FACTORS
Risks Relating to the Offer
The amount of consideration you are eligible to receive is based on a fixed
exchange ratio and will not reflect changes in the market value of our common
stock. The number of shares of our common stock you will receive if you accept
the offer will not be adjusted due to any increase or decrease in the market
value of our common stock. This will be true for both the initial and deferred
elements of the offer. Therefore, the market value of shares of our common
stock, when issued to you, may be higher or lower than the market value of our
common stock at the time the offer was negotiated or at the time that you accept
the offer. The market value of our shares may fluctuate significantly due to:
. market perception of the industries in which we are engaged;
. fluctuations in the rate of exchange between the U.S. dollar and your
local currency;
. changes in our business, operations or prospects; and
. general market and economic conditions.
A Substantial portion of the consideration you are eligible to receive is
contingent upon factors beyond your control. A substantial portion of the
consideration you are eligible to receive in exchange for your PES shares is
represented by the rights. The first issuance of shares of our common stock
issuable under the rights will be deferred until 12 months after completion.
These shares represent up to 30% of the maximum number of shares issuable under
the offer. The second issuance of shares of our common stock issuable under the
rights will be deferred until up to 36 months after completion. These shares
represent up to 33% of the maximum number of shares issuable under the offer.
The latter date may be accelerated to a date no earlier than 30 months after
completion. Up to 60% of the shares issuable under the rights is contingent
upon the continued employment of Messrs. Kinch and Rubbo, a matter beyond your
control. We will reduce each issuance of shares under the rights by 30% for
each of these two employees who is not so employed by us on the relevant
determination date. For example, if neither of them is employed on the first
determination date, we will reduce each issuance by 60%.
Risks Specific to Halliburton
Demand for our services and products depends on oil and gas industry
activity and expenditure levels that are directly affected by trends in oil and
natural gas prices. A prolonged downturn in oil and gas prices could have a
material adverse effect on our results of operations and financial condition.
Demand for our products and services is particularly sensitive to the level of
development, production and exploration activity of, and the corresponding
capital spending by, oil and natural gas companies. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of other
factors that are beyond our control. Any prolonged reduction in oil and natural
gas prices will depress the level of exploration, development and production
activity. Lower levels of activity result in a corresponding decline in the
demand for our company's oil and gas well services and products which could have
a material adverse effect on our revenues and profitability. Factors affecting
the prices of oil and natural gas include:
. governmental regulations;
. global weather conditions;
. worldwide political, military and economic conditions, including the
ability of OPEC to set and maintain production levels and prices for
oil and gas;
. the level of production by non-OPEC countries;
. the policies of governments regarding the exploration for and
production and development of their oil and natural gas reserves; and
15
<PAGE>
. the level of demand for oil and natural gas.
Historically, the markets for oil and gas have been volatile and are likely to
continue to be so in the future.
In 1998, declining demand for oil from developing Asian countries and a
warmer than normal winter, coupled with increases in Iraqi oil exports and
increases in other oil and gas supplies, resulted in historically high inventory
levels and lower oil prices. Oil prices that had ranged from $18 to $26 per
barrel in 1997 fell to $15 to $18 per barrel in the first part of 1998. At the
end of 1998, oil prices were trading between $10 and $14 per barrel. In response
to lower oil prices and expectations for continued low oil prices in 1999, oil
companies cut upstream capital spending, particularly in the second half of
1998.
While oil prices improved significantly in the first nine months of 1999,
there is still a great amount of uncertainty as to whether oil prices will
remain at current levels. This uncertainty is due to the concerns that OPEC's
agreement to reduce oil production will not hold and that new reserves coming on
line will further weaken oil prices. Therefore, our customers have been
unwilling to increase their capital spending based on higher oil prices. In
fact, many of our customers reduced spending significantly in the first three
quarters of 1999 as compared to the same period for 1998.
There are risks related to our acquisition strategy. If we are unable to
integrate and manage successfully businesses that we have acquired and any
businesses acquired in the future, our results of operations and financial
condition could be affected. One of our business strategies is to acquire
operations and assets that are complementary to our existing businesses.
Acquiring these operations and assets involves financial, operational and legal
risks, including:
. increased depreciation and amortization expense;
. increased interest expense;
. increased financial leverage or decreased operating income;
. the difficulty of combining operations and personnel of the acquired
businesses with ours; and
. the difficulty of maintaining uniform standards, controls, procedures
and policies.
In addition, other potential buyers compete with us for acquisitions of
businesses. Competition could cause us to pay a higher price for acquisitions
than we otherwise might have to pay or reduce our acquisition opportunities. We
might not be successful in identifying attractive acquisition candidates,
completing and financing additional acquisitions on favorable terms or
integrating the acquired businesses or assets into our operations.
Our business may be affected by our acquisition of Dresser Industries, Inc.
We are in the process of combining the operations of Dresser with those of
Halliburton. This process could interfere with our existing operations and thus
could have an adverse effect on the combined business. On September 29, 1998,
we acquired Dresser Industries, Inc., a large formerly publicly traded company.
Our management has made substantial progress in integrating the operations of
Halliburton and Dresser. The continuing process of integrating the companies
may, however, be disruptive to the businesses and may cause an interruption of,
or a loss of momentum in, the businesses as a result of a number of obstacles,
including:
. loss of key employees or customers;
. possible inconsistencies in standards, controls and procedures among
the companies being combined and the need to implement common company-
wide financial, accounting, information, billing and other systems;
. failure to maintain the quality of customer service that the
companies have historically provided;
16
<PAGE>
. the need to coordinate geographically diverse organizations;
. incompatible technologies and equipment; and
. the resulting diversion of management's attention from our business.
A significant portion of our revenue is derived from our non-U.S. and non-
U.K. operations, which exposes us to risks inherent in doing business in each of
the more than 120 other countries in which we transact business. The occurrence
of any of the risks set forth below could have an adverse effect on our results
of operations and financial condition. Our operations in more than 120
countries other than the United States and the United Kingdom accounted for
approximately 45.8% of our consolidated revenues during 1997 and 51.7% of our
consolidated revenues during 1998. Our operations in countries other than the
U.S. and the U.K. are subject to various risks peculiar to each country. With
respect to any particular country, these risks may include:
. expropriation and nationalization;
. political and economic instability;
. armed conflict and civil disturbance;
. currency fluctuations, devaluations and conversion restrictions;
. confiscatory taxation or other adverse tax policies;
. governmental activities that limit or disrupt markets, restrict
payments or the movement of funds; and
. governmental activities that may result in the deprivation of
contract rights.
Our ability to compete overseas may be adversely affected by governmental
regulations promulgated in numerous countries in which we transact business. If
these regulations apply to us, they may require us to engage in business
practices that may not be to our benefit. Those regulations frequently:
. encourage or mandate the hiring of local contractors; and
. require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction.
In addition, we are subject to taxation in many jurisdictions, and the
final determination of our tax liabilities involves the interpretation of the
statutes and requirements of taxing authorities worldwide. Foreign income tax
returns of foreign subsidiaries, unconsolidated affiliates and related entities
are routinely examined by foreign tax authorities. These tax examinations may
result in assessments of additional taxes or penalties or both.
A sizable portion of our consolidated revenues and consolidated operating
expenses are in foreign currencies. As a result, we are subject to significant
foreign exchange risks that could adversely affect our operations, as well as
limit our ability to reinvest earnings from operations in one country to fund
the capital needs of our operations in other countries. We do business in
countries that have non-traded, or "soft" currencies that have restricted or
limited trading markets. We may accumulate cash in soft currencies which may
significantly limit our ability to convert our profits into U.S. dollars or
repatriate our profits from those countries.
We selectively use hedging transactions to limit our exposure to risks from
doing business in foreign currencies. We have developed risk management
policies that establish guidelines for managing foreign exchange risk. As part
of these policies, we have designed a reporting process to monitor the potential
exposure on an ongoing basis. We use this process to determine the extent of
our foreign currency exposure and to determine whether it is practical or
economical to execute financial hedges. For those currencies that are not
readily
17
<PAGE>
convertible, our ability to hedge exposure is limited because financial hedge
instruments for those currencies are nonexistent or limited and because pricing
of hedging instruments, where they exist, is often volatile and not necessarily
efficient. To the extent that we can match the currency in which our operating
revenues are denominated to that in which our operating expenses in a country
are denominated, we can reduce our vulnerability to exchange rate fluctuations.
Our businesses are subject to a variety of environmental laws and
regulations including those covering hazardous materials. Any failure on our
part to comply with applicable environmental laws and regulations could have an
adverse effect on our financial condition. Our well service operations
routinely involve the handling of significant amounts of waste materials, some
of which are classified as hazardous substances. Our operations and facilities
are subject to numerous environmental laws, rules and regulations of the United
States and other countries, including laws concerning:
. the containment and disposal of hazardous substances, oilfield waste
and other waste materials;
. the use of underground storage tanks; and
. the use of underground injection wells.
Laws protecting the environment are becoming stricter. Sanctions for
failure to comply with these laws, rules and regulations, many of which may be
applied retroactively, may include:
. administrative, civil and criminal penalties;
. revocation of permits; and
. corrective action orders.
In the United States, environmental laws and regulations typically impose
strict liability. Strict liability means that in some situations we could be
exposed to liability for cleanup costs and other damages as a result of our
conduct that was lawful at the time it occurred or conduct of prior operators or
other third parties. Cleanup costs, natural resource damages and other damages
arising as a result of environmental laws, and costs associated with changes in
environmental laws and regulations, could be substantial and could have a
material adverse effect on our consolidated results of operations. From time to
time, claims have been made against us and our subsidiaries under environmental
laws. Changes in environmental regulations may also negatively impact oil and
natural gas exploration and production companies, which in turn could have a
material adverse effect on us.
18
<PAGE>
RECENT DEVELOPMENTS
Dresser Industries, Inc., one of our subsidiaries, is a partner with
Ingersoll-Rand Company in two separate partnerships, Dresser-Rand Company and
Ingersoll-Dresser Pump Company. Dresser-Rand Company manufactures and provides
service for gas turbines, centrifugal, reciprocating and axial compressors,
steam turbines, electric motors and generators. Ingersoll-Dresser Pump Company
manufactures pumps for diversified industrial use and specialty process, power
generation and marine applications. Dresser owns 51% of Dresser-Rand Company
and 49% of Ingersoll-Dresser Pump Company. Ingersoll owns the remaining
partnership interests in the two partnerships. In late August 1999, Dresser
received a notice from Ingersoll in which Ingersoll offered to sell its
interests to, or purchase Dresser's interests from, Dresser. On October 4,
1999, Dresser responded to the notice, as permitted by the partnership
agreements, by advising Ingersoll that Dresser intended to sell its entire
interest in each of Dresser-Rand Company and Ingersoll Dresser Pump Company to
Ingersoll. The transactions related to the sale of Dresser's partnership
interests are expected to close in the fourth quarter of 1999. Dresser expects
to receive $595 million for its interest in Dresser-Rand Company and $515
million for its interest in Ingersoll-Dresser Pump Company. We expect the
transactions to result in an after-tax gain of $380 million, which will be
recognized in the fourth quarter of 1999.
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
In this document, we make forward-looking statements that include
assumptions as to how either our company or PES may perform in the future. You
will find many of these statements in the following sections:
. "Risk Factors" beginning on page 15;
. "The PES Board's Reasons for Recommending the Offer; Recommendation of
the PES Board" beginning on page 28;
. "Information Regarding Halliburton Company" beginning on page 53;
. "Halliburton Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 60; and
. "Information Regarding PES" beginning on page 82.
Also, when we use words like "may," "may not," "believes," "does not
believe," "expects," "does not expect," "anticipates," "does not anticipate" and
similar expressions, we are making forward-looking statements. Forward-looking
statements should be viewed with caution.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution that forward-looking statements
involve risks and uncertainties that may affect our actual results of
operations. Statements in this offer document that are forward-looking and that
provide other than historical information involve those risks and uncertainties.
Our forward-looking information reflects our best judgement based on current
information. Forward-looking information involves, however, a number of risks
and uncertainties and there can be no assurance that other factors will not
affect the accuracy of our forward-looking information. While it is not possible
to identify all these factors, we continue to face many risks and uncertainties
that could cause actual results to differ from those forward-looking statements,
including:
. litigation, including, for example, asbestosis litigation and
environmental litigation;
. trade restrictions and economic embargoes imposed by the United
States and other countries;
. environmental laws, including those that require emission performance
standards for new and existing facilities;
19
<PAGE>
. unsettled political conditions, war, civil unrest, currency controls
and governmental actions in the numerous countries in which we
operate;
. operations in countries with significant amounts of political risk,
including, for example, Russia, Algeria and Nigeria;
. the effects of severe weather conditions, including hurricanes and
tornadoes, on operations and facilities;
. the impact of prolonged mild weather conditions on the demand for and
price of oil and natural gas;
. the magnitude of governmental spending for military and logistical
support of the type that we provide;
. changes in capital spending by customers in the hydrocarbon industry
for exploration, development, production, processing, refining, and
pipeline delivery networks;
. changes in capital spending by governments for infrastructure
projects of the sort that we perform;
. changes in governmental regulations in the numerous countries in which
we operate including, for example, regulations that:
- encourage or mandate the hiring of local contractors; and
- require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction;
. changes in capital spending by customers in the wood pulp and paper
industries for plants and equipment;
. consolidation of customers in the oil and gas industry;
. technological and structural changes in the industries that we serve;
. changes in the price of oil and natural gas, including:
- OPEC's ability to set and maintain production levels and prices for
oil and gas;
- the level of production by non-OPEC countries;
- the policies of governments regarding exploration for and production
and development of their oil and natural gas reserves; and
- the level of demand for oil and natural gas;
. changes in the price of commodity chemicals that we use;
. risks that result from entering into fixed fee engineering,
procurement and construction projects of the types that we provide
where failure to meet schedules, cost estimates or performance targets
could result in non-reimbursable costs which cause the project not to
meet expected profit margins;
. claim negotiations with customers on cost variances on major
projects;
. computer software, hardware and other equipment utilizing computer
technology used by governmental entities, service providers, vendors,
customers and Halliburton that may be impacted by the Year 2000 issue;
. the risk inherent in the use of derivative instruments of the sort
that we use which could cause a change in value of the derivative
instruments as a result of adverse movements in foreign exchange
rates;
. increased competition in the hiring and retention of employees in
competitive areas, for example, accounting, treasury and Year 2000
remediation; and
. integration of acquired businesses, including Dresser Industries,
Inc. and its subsidiaries, into Halliburton, including:
- maintaining uniform standards, controls, procedures and policies;
and
- combining operations and personnel of acquired businesses with
ours.
In addition, future trends for pricing, margins, revenues and profitability
remain difficult to predict in the industries that we serve.
20
<PAGE>
You should consider carefully the forward-looking statements set forth in
"Halliburton Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 59 through 80, and under "Business" and "Legal
Proceedings" in our annual report on Form 10-K for the fiscal year ended
December 31, 1998, which sections are incorporated in this offer document by
reference. Copies of our annual report on Form 10-K for the fiscal year ended
December 31, 1998 are on display at the London and Aberdeen offices of CMS
Cameron McKenna, the receiving agent for the offer. Please read "Where You Can
Find More Information" on page 116.
BACKGROUND OF AND REASONS FOR THE OFFER
On May 23 and 25, 1996, representatives of Halliburton Energy Services
(HES), Halliburton's oilfield services unit, met with representatives of PES at
the PES offices in Aberdeen, Scotland. HES's representatives at the meeting
included James B. Renfroe, then a vice president of HES. PES's representatives
at the meeting included Laurence Kinch, Group Chairman of PES. The purpose of
the meeting was to explore opportunities for the two companies to work together.
During these discussions, the parties perceived that the strengths of the
companies blended well. The strengths of PES included innovation, rapid product
development, focused engineering resources and the intelligent well completion
product offerings. The strengths of HES included a broad range of technology
and services, a global presence and organization, manufacturing capability and
capacity and reservoir engineering support.
Representatives of both HES and PES met at the HES offices in Houston,
Texas on June 25, 1996 to discuss further mutual opportunities. HES personnel
suggested a joint initiative on intelligent well completion products and a
cooperative effort on technology development for completion products. PES
personnel presented other technology initiatives. The parties reached a
tentative agreement to establish a joint marketing effort relating to
intelligent well completion products, for HES to become the operations arm of
PES and for a joint technology development and cross licensing arrangement. The
parties intended to pursue these objectives through an alliance arrangement. HES
agreed to prepare a letter of intent reflecting the arrangement.
On September 16, 1996, HES and PES made a joint press release regarding the
proposed alliance. The decision to make an announcement at that time was driven
by the announcement by two principal competitors of Halliburton and PES
concerning their alliance to offer intelligent well completion products to the
marketplace.
In a meeting held at the HES offices in Houston, Texas on November 7, 1996,
PES personnel advised HES management that the alliance of competitors was
forcing PES to change strategy. In order for PES to be able to enhance its
business and maintain an industry leadership position, PES would require more
than an alliance. The principal alternative was a business combination between
Halliburton and PES. A further meeting was held at the HES offices in Houston,
Texas on November 26, 1996 with key members of the PES management team and HES
personnel to discuss a possible business combination. During this meeting,
financial projections and analyses were reviewed, as well as some net present
value models.
On December 3, 1996, Mr. Renfroe made a presentation to the senior
management of HES regarding a potential acquisition of PES. Senior management
authorized the continuation of the negotiations.
On December 17, 1996, key personnel of PES and HES met to discuss further
the valuation of PES. They also discussed potential business combination
structures that would allow PES shareholders to realize additional future
payments for their equity interest in PES if various operational and financial
objectives were achieved.
Negotiations were conducted in January 1997 near Aberdeen, Scotland for the
acquisition of all outstanding shares of PES. Although terms of an acquisition
could not be reached, a compromise was proposed through which HES would invest
(Pounds)20.8 million for a 26% interest in the equity of PES.
On February 20, 1997, Mr. Renfroe presented a proposal to the Halliburton
board of directors for HES to purchase a 26% interest in PES. The Halliburton
board approved the proposal.
21
<PAGE>
On April 22, 1997, Halliburton Holdings Limited acquired approximately 26%
of the issued share capital of PES. On that same day, HES entered into a
strategic alliance agreement with PES and two of its subsidiaries for the
development and manufacture of "Intelligent Completion Systems."
From April 1997 through October 1997, HES and PES perceived that the
alliance would be unable to realize its full potential unless it confronted and
resolved a number of issues. These included the following:
. the ownership issue, that is, what control each party would exercise
over the operations of the alliance;
. the disclosure issue, that is, the reluctance of both HES and PES to
reveal technical information to each other; and
. the organization issue, that is, the reluctance of both HES and PES
personnel to fully integrate both businesses. A number of
commercialization issues also arose over this same time period.
On October 9, 1997, Messrs. Renfroe and Kinch met in the HES offices in
Houston, Texas to discuss the relationship between PES and HES. Mr. Kinch
expressed the interest of PES shareholders in maximizing the value of their
shareholdings through a business combination of PES with HES.
On December 1, 1997, PES representatives, including Mr. Kinch, made
presentations to Edgar Ortiz, President of HES, and other HES representatives
regarding a business combination of HES and PES. The parties decided to meet
again in January 1998 for further discussions.
PES personnel made a presentation to HES personnel on January 19, 1998,
regarding business prospects, projected revenues and ongoing projects. The
parties also discussed the issues and obstacles preventing the alliance from
realizing its full potential. At the time, management of HES determined that
HES was not ready to move toward a business combination and that the parties
should continue to prepare a joint business plan to overcome the difficulties in
the alliance.
In May of 1998, Mr. Kinch conferred with Mr. Ortiz by telephone to discuss
the current state of the oil and gas business in the U.S. in general, the issues
confronting the alliance in particular and ways of increasing the output of the
alliance. No agreement was achieved regarding the alliance issues other than to
monitor its progress.
Mr. Kinch met with David J. Lesar, President and Chief Operating Officer of
Halliburton, on June 5, 1998 during an operational trip by Mr. Kinch to the
United States. They discussed issues relating to the maximization of the
benefits of the alliance, including marketing strategies and an enhanced working
relationship between PES and HES. They did not, however, discuss a business
combination of HES and PES. During the same trip, Mr. Kinch met with Mr. Ortiz
at the HES offices in Houston, Texas to discuss the alliance further. They
again concluded that more could be achieved in the relationship if the barrier
of the ownership issue were to be resolved and agreed to maintain close contact
and to review the relationship continually.
Other PES personnel met with HES personnel in Aberdeen, Scotland on June
10, 1998 and proposed that HES should provide manufacturing and delivery of
intelligent well completion products for West Africa and South America. They
also proposed that PES should continue to service the North Sea, Gulf of Mexico
and Asia. Although discussions on this proposal continued for several months,
the parties never reached agreement.
At a full meeting of the PES board on September 9, 1998, with both of the
directors of PES who were nominated by Halliburton Holdings Limited, Messrs.
Renfroe and McCurley, in attendance, the issues confronting the alliance were
discussed in depth. After discussing various alternatives, the PES board
concluded that single ownership was the best way to maximize PES's potential.
Mr. Kinch advised that he would be in Houston during October and would meet with
Mr. Ortiz to discuss this issue further. These comments were taken back to HES
management, and a date was set in October for Messrs. Kinch and Ortiz to meet.
22
<PAGE>
Messrs. Ortiz and Kinch met on October 15, 1998 and candidly discussed the
merits of an acquisition by Halliburton of the remaining PES shares. Mr. Ortiz
was advised by Mr. Kinch that he had discussed this suggestion with several of
the major PES shareholders, who were receptive. Mr. Kinch also informed Mr.
Ortiz that:
. PES had been approached by a U.K.-based industrial group which had
expressed interest in acquiring part or all of PES;
. Mr. Kinch's response to this U.K. group was that Halliburton held an
exclusive right to meet any other offer made for PES up to April 22,
1999; and
. the U.K. group had accepted this response but indicated that they
remained very interested in pursuing an acquisition of PES either
before or after that date.
Mr. Ortiz noted this information and advised Mr. Kinch that HES would review its
position with respect to PES ownership. HES then formed a team to study and
evaluate the potential acquisition.
Halliburton, through HES, elected to pursue the possibility of acquiring
the entirety of PES. On November 2, 1998, senior management of both PES and HES
met at the HES offices in Houston, Texas to discuss the optimum structure for a
combined organization and the means of maximizing the strengths of PES. Later
in the day, Messrs. Ortiz and Kinch met separately with others in their
respective organizations to discuss the potential transaction. HES decided to
conduct a due diligence investigation of PES.
After the due diligence investigation was substantially completed, Messrs.
Ortiz and Kinch met again in Houston on November 24, 1998 and discussed further
the prospect of Halliburton or one of its subsidiaries acquiring PES. One of
the issues discussed was the retention and motivation of key employees following
the business combination. Mr. Kinch advised Mr. Ortiz that a PES board meeting
was scheduled for December 9, 1998 and that it would be helpful to provide the
PES board members with a clarification of Halliburton's position regarding a
possible business combination.
Mr. Lesar reviewed the possible acquisition of the remaining shares of PES
with the Halliburton board at its December 3, 1998 meeting. He did not, however,
ask the board to take any action concerning the potential transaction at that
time.
At the PES board meeting in Aberdeen, Scotland on December 9, 1998, the
PES board discussed the subject of Halliburton acquiring total ownership of PES.
The PES directors informed Mr. Renfroe that:
. they would consider an offer from Halliburton to acquire the rest of
PES;
. a third party approach had been made for that purpose; and
. if Halliburton did not respond within a given time with a formal
business combination proposal, the PES board would be compelled to
review the desirability of continuing the alliance. The agreement
governing the alliance contains a clause permitting either party to
terminate the alliance upon six months' prior notice.
The PES board reaffirmed that Halliburton was their preferred partner going
forward, as it was felt that the relationship built up since 1996 and the
complementary skills of the two organizations could achieve the desired future
commercial objectives.
On December 18, 1998, Mr. Ortiz proposed, in a letter to Mr. Kinch, that
negotiations contemplating a business combination of PES with HES be commenced
in Aberdeen, Scotland on January 5, 1999 and continue as needed through the
month of January. In the letter, Mr. Ortiz informed Mr. Kinch that HES would,
at the outset of those negotiations, present a definitive proposal to PES which
would incorporate the following major features:
. Halliburton would acquire all PES shares it does not own;
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. the purchase price would be based on a value for all of PES, including
the portion owned by Halliburton Holdings Limited, of not less than
(Pounds)100 million;
. the purchase price would be paid in Halliburton common stock using the
market value of the stock at completion of the transaction;
. the Halliburton common stock to be issued to the PES shareholders in
exchange for their PES shares would be issued one-third upon
completion of the offer and one-third in each of two deferred
elements. Halliburton would issue the deferred elements only if PES
had achieved mutually agreeable, definitive and quantifiable measures
of performance by the expiration of these periods;
. the key executives and managers of PES would enter into three-year
employment agreements with PES which would contain noncompetition and
trade secret covenants; and
. following its acquisition by Halliburton, PES would focus primarily on
technology development and marketing.
Mr. Ortiz also requested that, during the negotiation period, PES not entertain
proposals from any other prospective purchaser of the business and that PES not
solicit any other proposals. Finally, he proposed that, after January 1999,
either PES or HES could terminate negotiations by giving written notice of
termination to the other. Mr. Ortiz noted that any transaction would require the
approval of Halliburton's board of directors. Upon receipt of the letter, Mr.
Kinch advised the other PES board members regarding the proposed negotiating
plan.
On December 21, 1998, Mr. Kinch contacted Mr. Ortiz in Bogota, Colombia and
confirmed that PES was willing to enter into exclusive negotiations with
Halliburton regarding a business combination. They agreed that these
discussions would take place after the Christmas holiday season in early January
1999. Mr. Kinch confirmed his advice by letter dated December 23, 1998.
Commencing on January 6, 1999, HES personnel, led by Mr. Renfroe, met with
PES personnel, led by Mr. Kinch, at the HES offices in Houston, Texas. The
purpose of the meeting was to negotiate the proposed business combination. The
PES negotiating team included Michael Wagstaff of Schroder & Co. Inc., a
financial adviser to PES. During these negotiations, which continued through
January 9, 1999, an agreement was reached on some of the major issues relating
to the proposed combination. The decision was made to begin preparation of the
definitive agreements and to proceed with getting the necessary approvals from
the boards of directors of Halliburton and PES.
Mr. Renfroe presented to the Halliburton board a proposal on February 18,
1999, to acquire all of the outstanding shares of PES not owned by Halliburton
Holdings Limited in exchange for shares of Halliburton common stock. The key
terms of the proposal as presented were:
. the aggregate purchase price for the PES shares would be based on an
equity valuation of PES at (Pounds)101 million;
. the Halliburton shares would be issued in three installments:
approximately one-third at closing, one-third 18 months after closing
and one-third 36 months after closing;
. the number of shares issuable in the second and third installments
would be subject to adjustment based on whether specified key managers
remain with PES; and
. key PES employees would enter into employment agreements with PES.
The Halliburton board approved the acquisition as proposed.
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On March 30, 1999, Mr. Kinch met with Mr. Renfroe, together with
negotiators from both companies. Numerous issues were discussed and resolved,
including changes to the PES board if a business combination were to be effected
and the nature of employment contracts for executives and other staff. The
negotiation of further details of the proposed transaction was delegated to the
negotiating teams of the two companies. These negotiations continued throughout
the following day. At the conclusion of the meetings, the following share price
and currency rates were agreed for the exchange between HES and PES stock: the
PES shares were to be valued at (Pounds)79.4013 per PES share. The consideration
was to be Halliburton common stock, the price per share of which was to be fixed
at $38.437. The currency conversion rate was to be fixed at $1.611/(Pounds)1.00.
This equated to an offer of 3,130,800 shares of Halliburton common stock in
exchange for the 74% of the issued PES shares not owned by Halliburton Holdings
Limited.
On April 1, 1999, Mr. Renfroe agreed, in a telephone conversation with
Colin Smith, that the fixed price of Halliburton common stock for purposes of
the offering formula would be increased from $38.437 to $38.50, yielding a new
total number of shares of Halliburton common stock of 3,125,758 to be included
in the offer. The exchange ratio and the total number of shares to be subject to
the offer were reduced accordingly.
The exchange ratio and the total number of shares were again reduced on May
31, 1999. The reduction in the total value of PES resulted from a determination
as to obsolete inventory and a payment in settlement of an employee's ownership
interest in a subsidiary of PES.
Negotiation of the definitive agreements continued through May 1999.
In compliance with the Securities Act, we filed a registration statement
relating to the offering, sale and delivery of our common stock in connection
with our offer with the U.S. Securities and Exchange Commission on June 4, 1999.
This document described the offer as then negotiated. The staff of the
Commission reviewed the registration statement and issued a letter of comments
to us on July 9, 1999.
In light of the delay involved in preparing our response to the
Commission's letter of comments, we agreed on September 9, 1999 to change the
allocation of our common stock among the initial and two deferred elements. As
revised, the allocation is 37% allocable to the initial element, 30% to the
first deferred element and 33% to the second deferred element. This reallocation
was motivated by the significant lapse of time since agreement on the basic
terms of the offer and by the terms of a then recent, unrelated, publicly
announced transaction.
We responded to the Commission's letter of comments by filing the first
amendment to the registration statement with the Commission on September 13,
1999. This amendment reflected the terms of the offer as revised on September 9,
1999. The staff of the Commission issued further comments regarding the first
amendment on October 1, 1999 and October 18, 1999.
In early November, 1999, the representatives of Halliburton and PES
acknowledged that Halliburton would be required to file a second amendment and
perhaps a third amendment to the registration statement before the Commission
would declare the registration statement, as then amended, to be effective and
before we could commence the offer.
The representatives of Halliburton and PES agreed that the delays in
achieving an effective date for the registration statement under the Securities
Act were extraordinary and were unforeseen by either the board of directors of
PES or the management of Halliburton. As a result, we agreed with the
representatives of PES that we would improve the terms of the offer as a
consequence of the delays we had experienced in initiating the offer.
On November 8, 1999, we agreed that:
. We would issue the first deferred tranche of our common stock 12
months rather than 18 months after completion of the offer;
. we would determine the exchange ratio on the third business day prior
to the effective date of this offer document;
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. if the closing sales price of our common stock on the NYSE on that
day were to be less than $38.50, we would increase the exchange ratio
previously negotiated on April 1, 1999 by the number of shares
necessary to yield $38.50 in market value on that day;
. we would, if we did not initiate the offer prior to specified dates
because the registration statement had not yet been declared
effective, increase the aggregate number of shares of our common stock
to be included in our offer as described below;
. any increase in the aggregate number of shares of our common stock to
be subject to our offer as a result of the latter two additional terms
would be limited to an aggregate of 800,000 shares of our common
stock; and
. we would, if we did not initiate the offer prior to March 31, 2000
because the registration statement had not yet been declared
effective, pay PES a sum of $5.0 million.
With regard to the fourth additional term described above, we agreed that
we would, if we did not initiate the offer before the dates specified below,
increase the exchange ratio by increasing the aggregate number of shares of our
common stock issuable in the offer as follows:
. December 1, 1999 - 100,000 shares of our common stock;
. January 1, 2000 - 125,000 shares in addition to the 100,000
indicated above;
. February 1, 2000 - 150,000 shares in addition to the 225,000
indicated above;
. March 1, 2000 - 175,000 shares in addition to the 375,000 indicated
above.
These additional provisions have been given effect in our offer as
described in this offer document in computing the exchange ratio of shares of
our common stock for each PES share.
Definitive documents, including the warranty agreement and the service
agreements, were executed as of the date of this offer document.
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THE PES BOARD'S REASONS FOR
RECOMMENDING THE OFFER; RECOMMENDATION OF THE PES BOARD
The PES board of directors, excluding Messrs. McCurley and Renfroe, is of
the opinion that the terms of the offer are fair and reasonable to, and in the
best interests of, PES. Accordingly, the PES board recommends that the PES
shareholders accept the offer. Messrs. McCurley and Renfroe, the PES directors
nominated by Halliburton Holdings Limited, did not participate in any
proceedings of the PES board relating to the offer. In making the
determination, the PES board consulted with PES's management and considered a
number of factors, including the following:
. The belief of the PES board that PES's and Halliburton's respective
businesses are complementary and that a range of economic, strategic
and operational benefits could arise from combining them. The PES
board also believed that the combination of PES and Halliburton would
assist them in their aim of becoming the leader in providing
intelligent well completion products.
. The likelihood of the offer becoming unconditional.
. Our requirement of obtaining, as a condition to making the offer, the
irrevocable undertakings as described in this offer document. The
persons from whom the irrevocable undertakings are to be obtained hold
approximately 50.02% of PES's issued share capital.
. The terms of the offer, including the consideration to be paid by
Halliburton, and the terms of the warranty agreement.
. The PES board's knowledge of the business, operations, properties,
assets, earnings and prospects of PES.
. Recent and historical trading prices for Halliburton common stock.
The PES board recognized that the offer should enable the PES
shareholders to obtain a security that provides a market for their
interests yet offers the opportunity of continuing their equity
interest in the combined enterprise. For information regarding the
range of prices of the Halliburton common stock, please read "Market
Price and Dividend Information" on page 13. The PES board also
considered the absence of any trading market for the PES shares.
. Halliburton's historical financial statements for the years ended
December 31, 1997 and December 31, 1998.
In view of the wide variety of factors considered in connection with its
evaluation of the offer, the PES board did not find it practicable to quantify
or otherwise attempt to assign relative weights to specific factors considered
in its decision and did not do so. The PES board did not articulate how each
factor specifically supported its ultimate decision. Substantial weight was,
however, placed on:
. the fact that the principal shareholders, as the owners of
approximately 50.02% of the outstanding PES ordinary shares, were in
favor of the transaction;
. the principal shareholders would execute the irrevocable undertakings
to accept the offer; and
. the principal shareholders will receive the same consideration per
PES ordinary share as other PES shareholders.
The PES board, other than those PES directors appointed by Halliburton
Holdings Limited who did not participate in the deliberations, unanimously
recommends that PES shareholders accept the offer. We urge you to read the
letter from PES relating to the offer and attached as Annex II.
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THE OFFER
General Terms
We hereby offer to acquire each of your PES shares by issuing to you,
promptly after our offer becomes unconditional, also referred to as
"completion:"
. _______ shares of our common stock; and
. one right (a "right") under which we will issue a minimum of ______
additional shares and a maximum of ________ additional shares of our
common stock.
Our offer extends to all PES shares that you now own and, if applicable, any
PES shares you acquire while the offer remains open for acceptance:
. upon exercise of any options that you hold under the PES share option
schemes; or
. upon exercise by PES of call options to exchange PES shares for shares of
a PES subsidiary owned by you.
Terms of the Right
The terms of each right require us to issue shares of our common stock as
follows:
. a minimum of ________ shares and a maximum of _______ shares 12 months
after completion of our offer, also referred to as the "first
determination date"; and
. a minimum of ________ shares and a maximum of _______ shares up to 36
months after completion of our offer, also referred to as the "second
determination date."
The number of shares to be issued on each of these determination dates will
be determined by reference to two contingencies.
. The maximum number of shares issuable following the first determination
date will be reduced, but not below the minimum number, if either of two
key executives of PES, Laurence Kinch and Richard Rubbo, is not then
employed by us or a member of our group of companies as a result of
voluntary resignation or termination for cause or, in the case of Mr.
Rubbo only, his death or disappearance in suspicious circumstances;
and
. The maximum number of shares issuable following the second determination
date will be reduced, but not below the minimum number, if either Mr.
Kinch or Mr. Rubbo is not then employed by us or a member of our group of
companies as a result of voluntary resignation or termination for cause
or, in the case of Mr. Rubbo only, his death or disappearance in
suspicious circumstances.
The Rights. The rights you receive will vest automatically and will not be
required to take action in order to receive your additional shares of
Halliburton common stock. The rights are an integral part of the consideration
to be paid in exchange for your PES share. The rights you receive will not
entitle you to any of the rights enjoyed by holders of Halliburton common stock.
The rights will not be evidenced by a separate certificate and are not
transferrable except by operation of law.
The First Contingency. We will reduce the maximum number of shares of our
common stock to be issued under the rights after the first and second
determination dates if either Mr. Kinch or Mr. Rubbo is not then employed by us
or a member of our group of companies as a result of voluntary resignation or
termination for cause as follows: We will reduce each issuance by 30% for each
of these two employees who is not so employed on the determination date for that
issuance. For example, if neither of them is employed on the first determination
date, we will reduce the number of shares in the issuance following the first
and second determination dates by 60%.
The second determination date will be the third anniversary of completion of
the offer unless before that date we decide, in our sole discretion, that PES
has achieved the milestones specified in an agreed technology transfer and
development plan. In that case, the second determination date will be
accelerated to the date 30 months following completion of the offer or, if
later, the date of such achievement. The technology transfer and development
plan has been filed as an exhibit to our registration statement and is on
display at the London and Aberdeen offices of the receiving agent, CMS Cameron
McKenna. We will provide a copy of the technology transfer and development plan
to any PES shareholder upon request made in writing or by telephone to us at
the address and telephone number set forth under "Where You Can Find More
Information."
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If we terminate the employment of Mr. Kinch or Mr. Rubbo or both prior to a
particular determination date and there is a dispute as to whether they
voluntarily resigned or were terminated for cause, we will reduce the number of
shares of our common stock to be issued by 30% or 60%, as necessary. Any
dispute will be resolved in the manner described in Sections 5.11 and 5.12 of
Annex I to this offer document. Upon resolution of a dispute, we will issue any
shares of our common stock that should have been issued within seven days.
When used with respect to Mr. Kinch or Mr. Rubbo, the phrase "termination
for cause" includes termination of employment for:
. an act of gross misconduct;
. repeated violations of his service agreement;
. conduct causing continued employment to be materially detrimental to
us;
. a serious criminal offense;
. an act of dishonesty materially detrimental to us; or
. a material violation of our code of business conduct.
When used with respect to Mr. Kinch or Mr. Rubbo, the phrase "voluntary
resignation" includes the voluntary termination of his employment other than by
reason of:
. death;
. illness, mental disorder or injury that prevents him from properly
performing his duties as an employee; or
. constructive dismissal.
The contractual provisions governing the issuance of shares of our common stock
in these circumstances are set forth in full in Section 2 of Annex I to this
offer document.
The Second Contingency. We will reduce the maximum number of shares of our
common stock to be issued under the rights after the first and second
determination dates under another circumstance. That circumstance will exist if
Mr. Rubbo has ceased to be employed by us or a member of our group of companies
as a result of his death or disappearance in suspicious circumstances. For this
purpose, the phrase "death or disappearance in suspicious circumstances"
includes:
. his death from other than natural causes or accident; or
. his disappearance for a period of at least four weeks without a
subsequent reappearance,
in either case, prior to the second determination date.
If Mr. Rubbo should die or disappear in suspicious circumstances before the
first determination date, we will reduce the number of shares of our common
stock comprising the first and second issuances under the rights by 30%. If
that circumstance should occur after the first determination date but before the
second determination date, we will not reduce the issuance following the first
determination date but we will reduce the issuance following the second
determination date by 30%. No event that causes a reduction under the second
contingency will also cause a reduction under the first contingency.
While we will eventually issue these shares, you may not be the recipient.
We will issue these shares during or at the end of the two year period following
Mr. Rubbo's death or disappearance to different recipients, depending on the
circumstances. In general, we will issue the shares in accordance with the
following:
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. if a person is criminally convicted by reason of implication in Mr.
Rubbo's death or disappearance but no allegation is made of any
connection with a person to whom our common stock is to be issued
pursuant to the offer, then we will issue the shares to the persons
who are entitled to them under the terms of the offer;
. if a person is criminally convicted by reason of implication in Mr.
Rubbo's death or disappearance and an allegation is made of a
connection with a person who is to receive our common stock pursuant
to the offer, then we will issue the implicated party's shares to
persons designated by Mr. Rubbo's personal representatives and we will
issue all other shares to the persons who are entitled to them under
the terms of the offer; or
. in any other circumstance, we will issue the shares otherwise issuable
to Mr. Rubbo and his family and associates, and we will issue all
other shares to a charity selected by the PES board.
The contractual provisions governing the issuance of shares of our common stock
in this circumstance are set forth in full in Sections 2 and 3 of Annex I to
this offer document.
Valuation. The exchange ratio was determined by agreement on April 1, 1999
and in accordance with modifications to that agreement over the period from that
date through early November 1999. This agreement and the related modifications
are described under "Background of and Reasons for the Offer."
The exchange ratio was fixed on ___________ 2000, the third business day
prior to the date of this offer document. On that date, based on the closing
sales price per share of our common stock on the NYSE ($_____), our offer valued
the entire issued share capital of PES, on a fully diluted basis, at
approximately $ ________ million or (Pounds) _________ million. Based on that
closing sales price and:
. assuming issuance of the maximum number of shares of our common stock
subject to the rights, the offer values each PES share at $ ______ or
(Pounds) ______ and the entire issued share capital of PES, on a fully
diluted basis, at $ _____ million or (Pounds) ______ million; or
. assuming issuance of the minimum number of shares of our common stock
subject to the rights, the offer values each PES share at $ ______ or
(Pounds) ______ and the entire issued share capital of PES, on a fully
diluted basis, at $ _____ million or (Pounds) ______ million.
Each of these implied valuations was based on a currency exchange rate of
(Pounds) 1.00 to $ ____, and none of them takes into account any delay that
affects the issuance of the shares of our common stock subject to the rights.
Halliburton Holdings Limited owns 334,360 PES shares, representing approximately
26.40% of the issued share capital of PES.
If the offer becomes unconditional and we acquire or contract to acquire at
least 90% of the PES shares to which the offer relates, we intend, as we will
then be entitled, to acquire the remaining PES shares on the same terms as the
offer. Please read "--Compulsory Acquisition; Appraisal Rights" on page 32.
No Rights of Withdrawal
You will not be able to withdraw your PES shares once you have validly
accepted the offer or we have waived any defect in your acceptance. If the offer
has not become unconditional on or before __________, 2000, your PES shares will
be returned to you promptly.
We do not currently intend to reduce the acceptance condition below 90%. If
we should do so, however, we will give written notice of that reduction to all
PES shareholders at least five U.S. business days prior to the initial
expiration of the offer. In that case, we will leave the offer open for at least
ten U.S. business days following the giving of our notice by extending the offer
if necessary. You will not be able to withdraw your PES shares during the period
following any reduction of the acceptance condition.
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Compulsory Acquisition; Appraisal Rights
If we acquire PES shares representing at least 90% of the PES shares to
which the offer relates, we intend to effect a compulsory acquisition of the
remainder of the outstanding PES shares. The compulsory acquisition will be on
the same terms as the offer in accordance with sections 428 through 430F of the
U.K. Companies Act 1985.
You do not have appraisal rights as a result of the offer. The laws of
Scotland do not provide you with appraisal rights for your PES shares. Appraisal
rights are statutory rights of shareholders under the laws of some jurisdictions
arising in connection with some types of business combination transactions.
Shares subject to appraisal rights would be valued by an independent appraiser
and purchased by the issuer at the appraised value.
While you do not have appraisal rights, if we acquire PES shares
representing at least 90% of the PES shares to which the offer relates, you will
be entitled to require us to purchase your PES shares. This will be on the same
terms as the offer in accordance with sections 430A and 430B of the U.K.
Companies Act 1985. For the full text of the applicable provisions of the U.K.
Companies Act 1985, please read Annex III to this offer document.
Conditions to the Offer
Our offer is conditional on our receipt of valid acceptances prior to
expiration of the offer of not less than 90% of the PES shares subject to the
offer.
We may reduce the percentage of PES shares required to satisfy this
acceptance condition to any percentage not less than 33% of the PES shares
subject to the offer. In that event, we will announce, at least five U.S.
business days prior to the scheduled expiration of the offer and at least five
U.S. business days prior to the offer being declared unconditional, that we have
reduced the acceptance level under the acceptance condition. We will make this
announcement by written notice to all PES shareholders. We will, following any
announcement of this type, leave the offer open for at least ten U.S. business
days by, if necessary, extending the offer period. No withdrawal rights will,
however, be granted during that ten-day period. If you are not willing to
accept the offer if the acceptance condition is reduced below the 90% level, you
should not accept the offer until the fifth day immediately prior to the
scheduled expiration of the offer.
Our offer is also conditional upon, among other things, the following:
. approval by PES shareholders of a resolution authorizing the
suspension of two specific provisions of the articles of association
of PES that would interfere with our ability to purchase PES shares
under the offer;
. the continued employment through completion of the offer of Messrs.
Kinch, Rubbo, Bowyer, Fleming, Owens, Smith, Whiteford, Arizmendi and
Bouldin;
. approval by the NYSE of our common stock to be issued under the offer
for listing on the NYSE, subject to official notice of issuance;
. no stop order suspending the effectiveness of our registration
statement being issued or threatened by the SEC;
. no governmental, regulatory or other relevant authority having
instituted, implemented or threatened any action that affects the
offer, including any action that would make the offer illegal or would
require us or PES to sell all or any material portion of either
company's assets;
. receipt of all authorizations necessary or appropriate for the offer
from all appropriate governmental and regulatory authorities;
. PES and its subsidiaries not having engaged in activities that are
out of the ordinary course of its business, including:
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. issuing additional shares,
. paying dividends,
. merging with any other person,
. disposing of its assets,
. increasing its indebtedness, and
. entering into contracts or arrangements that are likely to
restrict our business or that of PES;
. there being no material adverse change in the business, assets,
financial or trading position, or profits or prospects of PES;
. there being no continued or new litigation that is or is likely to be
material to PES;
. no information concerning PES disclosed to us under the warranty
agreement being misleading in any material respect; and
. PES complying with all applicable legislation that has a material
impact on PES.
For further information regarding the conditions to the offer, please refer to
Part 1 of Annex I to this offer document.
Interests of PES Directors and Key Employees
The PES board recommends that you accept the offer. You should be aware
that some members of the PES board and key PES employees have some interests
that are different from your interests as a PES shareholder. The PES board
recognized those interests and determined that the interests neither supported
nor detracted from the fairness of the offer to all PES shareholders.
Irrevocable Undertakings. A condition to our posting (mailing) of this
offer is that a group of 18 individuals shall have executed irrevocable
undertakings in connection with the offer. These 18 individuals consist of the
PES directors unaffiliated with our company, members of the immediate families
of some of these directors and two key employees of PES. Each of these
individuals has expressed a willingness to do this, but we will not ask any of
them to do so until he or she has had a period of 48 hours after the effective
date of the registration statement to review this offer document. Once this
offer document has been posted to you, you may assume that each of these
individuals has executed an irrevocable undertaking.
In connection with these irrevocable undertakings, these directors and
shareholders will have agreed that, in the case of those who are PES
shareholders, they will:
. accept the offer; and
. vote in favor of the resolution to be proposed at the extraordinary
general meeting of PES shareholders.
These shareholders own a total of 633,570 PES shares, which represent
50.02% of the PES shares in issue. The irrevocable undertakings will continue to
be binding even if a competing offer is made.
In the case of these shareholders who are also PES optionholders and the
two PES directors who are optionholders but not shareholders, they will have
agreed that:
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. they will not exercise their PES options during the offer period; and
. they will surrender their PES options in exchange for options over
Halliburton common stock.
It is also a condition to our posting of our offer that PES Trustees
Limited shall have executed an irrevocable undertaking subsequent to the
registration statement becoming effective. Once this offer document has been
posted to you, you may assume that PES Trustees Limited has executed the
irrevocable undertaking. The irrevocable undertaking will obligate PES Trustees
Limited to:
. vote all 141,130 PES shares held by it in favor of the special
resolution to be presented to the PES shareholders at an extraordinary
general meeting;
. accept the offer with respect to those PES shares held by it and not
subject to outstanding options, that is, 2,666 PES shares representing
0.21% of the shares in issue; and
. accept the offer with respect to those PES shares held by it and
subject to options held by those optionholders described above who
have given irrevocable undertakings, that is, 59,830 PES shares
representing 4.72% of the shares in issue.
Halliburton Holdings Limited cannot give an irrevocable undertaking to
accept the offer, as its PES ordinary shares are not subject to the offer. We
will, however, cause Halliburton Holdings Limited to vote in favor of the
special resolution to be proposed at the extraordinary general meeting of PES
shareholders.
Samples of the irrevocable undertakings have been filed as exhibits to the
registration statement. Executed copies will be on display at the offices of
CMS Cameron McKenna in London and Aberdeen until the end of the offer period.
For information regarding the terms of these irrevocable agreements, please read
"Irrevocable Undertakings" on pages 43 and 44.
PES Share Option Schemes. If you are a PES optionholder, our offer extends
to any PES shares that you acquire through the exercise of options. We will also
offer you the opportunity to surrender your PES options in exchange for
Halliburton options. The Halliburton options will entitle you to acquire the
same number of shares of our common stock you would have acquired had you
exercised your PES options and accepted the offer. The exercise price provided
in your surrendered PES option will not change. A portion of the shares subject
to each Halliburton option proportional to a fraction equal to the shares
subject to the rights in relation to the maximum number of shares issuable under
the offer will become exercisable at the same times as provided in the rights.
This portion of the shares of our common stock subject to the option will be
subject to reduction on the same basis as provided in the rights. If you are an
employee of PES and you "voluntarily resign" or are "terminated for cause"
before the second determination date and you are holding Halliburton options,
30% of the maximum number of your Halliburton options will lapse. If your
employment is otherwise terminated, your Halliburton options will continue to be
exercisable.
PES has agreed that it will not make any amendments to the PES share option
schemes while the offer is pending. Detailed information regarding the
alternatives available to PES optionholders will be mailed to PES optionholders
with this offer document.
Service Agreements. Each of the seven PES directors who are not affiliated
with us and who are employees of PES or one of its subsidiaries has executed a
service agreement with PES, a subsidiary of PES or with us that will become
effective upon the offer becoming unconditional. Each of these was executed as
of the date of this offer document. Please read "Service Agreements" on pages
44 and 45 for more information regarding the service agreements.
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<PAGE>
Warranty Agreement. Messrs. Kinch, Bowyer, Fleming, Owens, Rubbo,
Whiteford and Smith, each of whom is a PES shareholder or optionholder, have
entered into a warranty agreement with us and are referred to as the "executive
warrantors." The warranty agreement was executed as of the date of this offer
document. In the warranty agreement, each of the executive warrantors has made
various representations and warranties relating to the organization, operations,
financial condition, business, assets and properties of PES. The executive
warrantors have also agreed to cause PES to operate in compliance with the
provisions of the warranty agreement during the offer period. Messrs. Bouldin
and Arizmendi are also parties to the warranty agreements with us. They,
however, have not made representations regarding PES. For further information,
please read "The Warranty Agreement" on pages 41 through 43.
General. Except as otherwise stated in this offer document:
. there have not been any contracts, transactions or negotiations
between Halliburton, any of our subsidiaries or, to the best of our
knowledge, any of our directors or executive officers with PES or any
of its directors, officers or affiliates concerning:
. a merger, consolidation or acquisition, a tender offer or other
acquisition of securities, an election of directors; or
. a sale or other transfer of a material amount of assets; and
. there are no current or proposed material contracts, arrangements,
understandings or relationships between:
. Halliburton;
. our controlling persons or subsidiaries; or
. to the best of our knowledge, any of the persons listed under
"Security Ownership and Dealings by Certain Beneficial Owners and
Management of Halliburton" on page 100 with respect to any PES
shares.
Please read "Background of and Reasons for the Offer" on pages 21 through
27.
Halliburton Designated Directors of PES. In connection with the
acquisition by Halliburton Holdings Limited of approximately 26% of the
outstanding PES shares on April 22, 1997, the PES articles of association were
amended. This amendment provided that so long as a member of the Halliburton
group owns 10% or more of the issued share capital of PES, we will be entitled
to appoint two persons as directors of PES. Halliburton Holdings Limited
appointed Messrs. McCurley and Renfroe to the PES board.
Neither Mr. McCurley nor Mr. Renfroe owns any PES shares, and neither of
them participated in any of the deliberations of the PES board relating to the
offer.
Except for Halliburton Holdings Limited, neither Halliburton nor any of our
controlling persons or subsidiaries or, to the best of our knowledge, any of the
persons listed under "Security Ownership and Dealings by Certain Beneficial
Owners and Management of Halliburton" on page 100 owns of record any PES shares.
Acceptance
General. In order to accept our offer, you must:
. complete and sign the form of acceptance as explained in the printed
instructions;
. obtain a witness to your signature;
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<PAGE>
. return the form of acceptance, along with your share certificate(s)
and/or other documents of title to the receiving agent:
CMS Cameron McKenna
(Ref: TLP/AJS)
Mitre House
160 Aldersgate Street
London, EC1A 4DD
United Kingdom
by no later than 3:00 p.m., London time/10:00 a.m., New York City
time, on _________, 2000.
Completion of Form of Acceptance. In order for your acceptance to be valid,
you must complete the form of acceptance as explained in the printed
instructions. This requires you to sign Box 1 and complete Box 2 and, if
appropriate, Boxes 3 and 4. If you prefer to receive an actual stock certificate
or certificates for your shares of Halliburton common stock, please complete Box
5. In all cases, your signature must be witnessed in accordance with the
instructions.
If you are under 16 years of age, one of your parents or another legal
guardian must sign the form of acceptance on your behalf. In this case, you must
also provide notarized or certified copies of your birth certificate and your
parent's or guardian's passport. By accepting on your behalf, your parent or
guardian warrants that he or she is your legitimate parent or guardian and is
entitled to accept the offer on your behalf.
If you have any questions as to how to complete the form of acceptance,
please telephone either Andrew J. Sheach or Thomas L. Page at the receiving
agent, CMS Cameron McKenna, at +44 (0) 171 367 3000. The receiving agent will
not be able to provide advice to you on any matter relating to the decision as
to whether to accept the offer.
Documents of Title. You must return your share certificate(s) for your PES
shares, together with any other documents of title, with the form of acceptance.
Your selection of the method of delivery of these certificates and any other
required documents is at your election and risk. Delivery will be completed only
when the documents are actually received by the receiving agent. If delivery is
by mail, we recommend that you use properly insured, registered mail with return
receipt requested.
If your share certificate(s) are held by the secretary of PES, by accepting
the offer, you are authorizing him to deliver your certificate(s) on your
behalf.
Effect of Acceptance. By accepting our offer, you:
. irrevocably appoint one of our executive officers as your attorney
with full authority, after the offer becomes unconditional, to do all
those things necessary in the reasonable opinion of your attorney for
us to take title to your PES shares, including the completion and
execution of forms of transfer and the delivery of the forms for
registration;
. authorize that attorney to exercise, after the offer becomes
unconditional, any voting and other rights attaching to your PES
shares, other than any rights the exercise of which would adversely
affect your legal or tax position;
. authorize and request PES to send to us any notice that may otherwise
be required to be sent to you after the offer becomes unconditional;
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<PAGE>
. authorize us, after the offer becomes unconditional, to sign any
consent to short notice of a general meeting on your behalf, to
execute a form of proxy for your PES shares or to have our
representative attend a general meeting of PES on your behalf;
. agree not to execute a proxy for or attend any general meeting of PES
after the offer becomes unconditional;
. agree to grant these powers of attorney as security for the
performance of your obligations and that these powers will be
irrevocable in the United Kingdom in accordance with section 4 of the
U.K. Powers of Attorney Act 1971;
. warrant that, after the offer becomes unconditional, we will acquire
good title to your PES shares, free and clear of all liens, claims and
encumbrances;
. warrant that, after the offer becomes unconditional, we will succeed
to all rights now or hereafter attaching to your PES shares, including
the right to all dividends and distributions paid or made by PES; and
. agree to ratify everything done by your attorney in exercise of his
powers and authorities.
The authority conferred by acceptance of the offer will be irrevocable but
will apply only to those PES shares for which you have accepted the offer.
Any form of acceptance that we receive prior to the PES extraordinary
general meeting will be considered to have been given by you subject to the
passing of the special resolution to be considered at that meeting.
Lost Certificates. If your share certificates or documents of title are
not readily available, you should still complete and return your form of
acceptance. You should then forward the share certificates or other documents as
soon as possible.
If you have lost your share certificates or other title documents, you
should request a letter of indemnity from PES. You may call Mr. Michael Bowyer
at +44 (0) 1224 793000 for this purpose. When you receive the letter of
indemnity, you should complete and return it promptly to the receiving agent. We
will not pay the consideration for your PES shares under the offer until we have
received the share certificates or title documents or a satisfactory letter of
indemnity.
Validity of Acceptance. All questions as to the validity of acceptances of
the offer, including the time of receipt of forms of acceptance, will be
determined by us, in our sole discretion, and our determination will be binding.
We reserve the absolute right to reject any acceptances that are not in proper
form or that are unlawful.
We also reserve the right, in the our sole discretion, to waive any of the
conditions of the offer or any defect or irregularity in any acceptance of the
offer, whether or not similar defects or irregularities are waived in the case
of others.
We will have no obligation to notify you of any defects or irregularities
in your acceptance of the offer. No acceptance of the offer will be valid until
all defects or irregularities have been cured or expressly waived.
Non-U.K. and Non-U.S. Holders. If you are not a citizen or resident of the
U.K. or the U.S., please note that, by accepting the offer, you warrant that
your acceptance does not violate the laws of your jurisdiction.
If you are in doubt as to whether to accept the offer, we recommend that
you seek financial advice immediately. In the U.K., you should seek advice from
a financial adviser duly authorized under the U.K. Financial Services Act 1986.
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<PAGE>
Settlement
Delivery of Halliburton Common Stock. Subject to the offer becoming
unconditional, we will issue the shares of our common stock to which you are
entitled under the initial element of the offer:
. in the case of valid acceptances received by the date on which the
offer becomes unconditional, as promptly as practicable but in no
event later than three U.S. business days after that date; or
. in the case of valid acceptances of the offer received after the date
on which the offer becomes unconditional but while it remains open for
acceptance, as promptly as practicable but in no event later than
three U.S. business days after that receipt.
We will issue the shares of our common stock to which you are entitled
under the rights as promptly as practicable but in any event no later than three
days U.S. business days after each determination date. If the issue of any
portion of the shares of our common stock is delayed as described in "The
Offer--General," the shares will be issued as soon as practicable after
resolution of the dispute.
Return of PES Shares. If:
. the offer does not become unconditional, or
. tendered PES shares are not purchased because of an invalid
acceptance,
we will return your share certificates and other documents of title by mail, as
promptly as practicable but in no event later than three U.S. business days
after the lapsing of the offer. Certificates or documents of title or both will
be returned to you as your name and address appear on the form of acceptance.
Ranking of Halliburton Stock. The Halliburton common stock to be issued to
you will be validly issued, fully paid and nonassessable. The stock will be of
equal rank with the outstanding shares of our common stock, including the right
to receive all dividends and distributions declared with a record date after the
date of issuance of the stock. You will not be entitled to receive the dividend
on our common stock declared on October 28, 1999, payable to stockholders of
record on December 1, 1999, because the date of issue of shares to you will
occur subsequent to the record date. The Halliburton common stock to be issued
to you has been listed on the NYSE, subject to official notice of issuance.
Dealings, for normal settlement, will commence on the NYSE on the first trading
day following the day on which the offer becomes unconditional.
Fractional Shares. We will not issue fractional shares of our common
stock. Rather, we will round down to the next whole share of our common stock to
be issued to you after completion of the offer and each of the first and second
determination dates.
Direct Registration of Halliburton Common Stock. In September and October
1998, we adopted a direct registration or book entry program to record ownership
of Halliburton common stock. Direct registration is a service that allows shares
to be owned, reported and transferred electronically. A physical stock
certificate is not issued. If you exchange your PES shares in connection with
the offer, you will not receive a physical stock certificate, unless you request
one. You can request a physical certificate by marking Box 5 on the form of
acceptance at the time you accept the offer. Unless you request a physical stock
certificate, your shares will be electronically recorded in your name on our
books and records.
Direct registration is intended to avoid problems relating to stolen,
misplaced or lost stock certificates and to reduce the paperwork relating to the
transfer of ownership of Halliburton common stock. Under direct registration,
your voting, dividend and other rights and benefits as a Halliburton stockholder
will remain the same as with holders of actual certificates.
The requirements for transferring book entry shares are the same as for
shares represented by a physical stock certificate, except that there is no
certificate to surrender. If you own Halliburton common stock through the
37
<PAGE>
direct registration program, you may sell your shares through a stock broker or
through our transfer agent, ChaseMellon Shareholder Services, L.L.C.
Method of Selling Halliburton Common Stock
To utilize the services of a stock broker in selling your shares, you must
first add the appropriate stock broker information to your direct registration
account maintained by the transfer agent. After you do this, you can instruct
the transfer agent to transfer Halliburton common stock to your stock brokerage
account. You then may sell or transfer your shares by giving instructions to the
broker.
Alternatively, you may sell your shares of Halliburton common stock
registered electronically in your name through the transfer agent. Sales will be
made when practicable, but at least once each week. The transfer agent cannot
accept instructions to sell shares on a specific day or at a specific price. The
price per share will be the average price per share of all Halliburton common
stock sold during the period by the transfer agent for holders of book-entry
shares.
Sales of Halliburton common stock, whether by a stock broker or through the
transfer agent, will, absent special circumstances, be effected on the NYSE. The
NYSE is the major stock exchange on which the majority of Halliburton shares are
traded. If you are a resident of or located in the United Kingdom, and you would
like to sell your shares of Halliburton common stock through a stock broker, you
should establish a private account at a U.K. stock brokerage firm and place your
sale order through that firm. Upon receipt of an order, the U.K. stock brokerage
firm will contact a U.S. broker/dealer firm that is a member of the NYSE and
place the sell order through that firm. The U.S. broker/dealer will execute the
order through the NYSE. Payment for the shares will be made to the U.S.
broker/dealer in U.S. dollars. After deducting its commission, the U.S.
broker/dealer will purchase pounds sterling with the net sale proceeds at the
currency exchange rate and forward the pounds sterling to the U.K. stock
brokerage firm for your account. If the U.K. stock brokerage firm is affiliated
with the U.S. broker/dealer, the transaction will entail only a single brokerage
commission. If they are not affiliated, you may incur an additional brokerage
commission. If you are in any doubt about how to sell your Halliburton common
stock, U.K. residents should seek advice from an independent financial adviser
duly authorized under the U.K. Financial Services Act 1986. If you reside
elsewhere, you should seek advice from an appropriately qualified financial
adviser.
Recapitalization
If there should occur, during this offer or at any time before issuance of
the shares of our common stock under the rights following the second
determination date, any of the following events affecting our company or our
common stock, the amount and nature of our payments to you will be equitably
adjusted:
. subdivision or consolidation of our common stock;
. stock dividend or similar capitalization of reserves;
. merger or consolidation of our company;
. sale of assets of our company followed by a partial or complete
liquidation; or
. spinoff of part of our business.
For detailed information regarding the nature of the adjustments required by any
of these events, please read Part 4 of Annex I to this offer document.
Fees and Expenses of the Offer
PricewaterhouseCoopers is the authorized person approving this offer
document for the purposes of Section 57 of the U.K. Financial Services Act 1986.
We have agreed to pay PricewaterhouseCoopers fees for its services, which are
estimated to be between (Pounds)75,000 and (Pounds)90,000 and will not exceed
(Pounds)90,000. In addition, we
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<PAGE>
have agreed to limit the liability of PricewaterhouseCoopers to our company and
our subsidiaries for any and all losses, damages and costs we may incur in
connection with this engagement. The limit of liability of
PricewaterhouseCoopers shall be (Pounds)1,000,000, except that the limit would
not apply in the case of losses, damages and costs resulting from fraud or
dishonesty.
We have retained CMS Cameron McKenna, our U.K. solicitors, to act as the
receiving agent for the offer. The receiving agent will receive reasonable
compensation for its services. CMS Cameron McKenna will be reimbursed for
reasonable out-of-pocket expenses and will be indemnified against specified
liabilities, including those under the U.S. federal securities laws, in
connection with their services as the receiving agent. CMS Cameron McKenna has
not been retained to make solicitations or recommendations. We will not pay any
fees or commissions to any broker or dealer or any other person for soliciting
acceptances of the offer from PES shareholders.
We have agreed to pay up to (Pounds)760,000, plus U.K. value added tax, to
discharge the legal, accounting and financial adviser's fees and expenses
incurred by PES in relation to the offer.
Regulatory Approvals and Legal Matters
Neither we nor PES is aware of:
. any license or regulatory permit that appears to be material to the
business of PES and its subsidiaries, taken as a whole, and that might
be adversely affected by our acquisition of PES; or
. any approval or other action by any domestic or foreign governmental,
administrative or regulatory agency or authority that appears to be
material to PES and its subsidiaries, taken as a whole, and that is
required for our acquisition of ownership of PES shares.
PES Incorporated, a wholly owned subsidiary of PES, operates PES's assets
and operations in the United States. These assets and operations are not
sufficiently large to subject the offer to the filing requirements of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976. Our offer does not fall within
the scope of the EC Merger Control Regulation (Regulation 4064/89/EC), as the
relevant turnover threshold conditions are not met.
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<PAGE>
THE WARRANTY AGREEMENT
The material terms of the warranty agreement are summarized below. A form
of the warranty agreement is filed as an exhibit to the registration statement
and copies are on display at the London and Aberdeen offices of the receiving
agent, CMS Cameron McKenna.
Warranties
To induce us to make this offer, Messrs. Kinch, Bowyer, Fleming, Owens,
Rubbo, Whiteford and Smith, each of whom is a PES shareholder or optionholder,
have entered into a warranty agreement with us. These individuals are referred
to as the "executive warrantors."
The warranty agreement contains representations and warranties relating to:
. the organization of PES, its subsidiaries and similar corporate
matters;
. the capitalization of PES and its subsidiaries;
. the audited and unaudited financial statements of PES and its
subsidiaries;
. the absence of specified events since the date of the audited
financial statements;
. various employment matters;
. the status of material contracts to which PES or one of its
subsidiaries is a party;
. the status of loans and financial facilities of PES and its
subsidiaries;
. liabilities of PES and its subsidiaries to the executive warrantors;
. authority of the executive warrantors to enter into the warranty
agreement;
. intellectual property matters relating to PES and its subsidiaries;
. taxes of PES and its subsidiaries;
. various insolvency matters;
. the properties of PES and its subsidiaries; and
. environmental concerns.
The representations and warranties relating to matters other than taxation
expire three months after delivery of PES's audited consolidated financial
statements for the year ending December 31, 2000. The representations and
warranties for taxation matters expire on the sixth anniversary of the warranty
agreement. The maximum liability of the executive warrantors for their
representations and warranties is (Pounds)10,000,000.
Agreement to Pay
Michael L. Bowyer, Drummond W. Whiteford, Steven C. Owens and Colin Smith,
each of whom is a PES director and an executive warrantor, have agreed that they
will continue their employment with PES for at least three years following
completion of the offer. Two key employees, Brett W. Bouldin and Napoleon
Arizmendi, each of whom is a party to the warranty agreement but not an
executive warrantor, have also agreed to continue their employment with PES for
at least three years following completion of the offer. If any of the
individuals
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<PAGE>
"voluntarily resigns" or their employment is "terminated for cause," they will
be obligated to pay Halliburton liquidated damages in an amount equal to:
. 30% of the market value of the maximum number of shares of our common
stock to be issued to him and his immediate family under the offer; or
. $1,000,000, whichever is less.
The covenantor's obligation to pay liquidated damages is further limited by
section 4.1 of the warranty agreement. The termination of employment of any of
these six employees will have no effect on the shares of our common stock to be
issued under the offer to the other PES shareholders.
The definitions of "voluntarily resigns" and "terminated for cause" are
similar to the corresponding terms set forth in Annex I.
The continued employment of these six key employees, together with Messrs.
Kinch, Rubbo and Fleming, through the offer period is also a condition of the
offer. Please read "The Offer--Conditions to the Offer" on pages 31 and 32.
Restrictive Covenants
Each of the executive warrantors has agreed that he will not:
. engage, directly or indirectly, in any activity or business in any
parts of the world in which PES and its subsidiaries operate;
. employ or offer to employ any director or employee of PES or any of
its subsidiaries or Halliburton; or
. solicit away or deal with, in direct competition with the business
conducted by PES, any person who is or has, during the two years
preceding the date of the warranty agreement, been a client, customer
or supplier of PES or Halliburton,
for the longer of:
. three years from completion; or
. one year from the date on which an executive warrantor ceases to be
employed by PES or our company.
Pre-completion Matters
The executive warrantors agreed that pending completion of the offer they
will, so far as they are able, cause PES:
. to provide us with monthly financial statements of PES and its
subsidiaries;
. to operate the business of PES or any PES subsidiary in the ordinary
and usual course and with a view to a profit; and
. not to pass any shareholders resolution except as may be required by
the warranty agreement.
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<PAGE>
The executive warrantors agreed to ensure that, pending completion of the
offer, there will be no:
. sale or any agreement for sale of any part of the business or assets
of PES or any PES subsidiary except in the ordinary course of
business;
. creation or issuance or agreement to create or issue any mortgage or
charge upon any of the assets of PES or any PES subsidiary or
incurrence by PES or any PES subsidiary of any indebtedness, other
than normal trade credit or indebtedness on overdraft to bankers;
. dismissal or change in the terms of employment of any of the directors
or senior employees of PES or any PES subsidiary;
. material litigation or arbitration proceedings commenced by PES or any
PES subsidiary regarding its assets or business;
. material amendment to current insurance policies of PES or any PES
subsidiary and that the policies shall be maintained pending
completion;
. declaration or payment of any dividend or distribution to the
shareholders of PES or any PES subsidiary;
. incurrence, with some exceptions, of any new capital expenditures in
excess of (Pounds)50,000; or
. changes in the authorized or issued share capital of PES or any PES
subsidiary other than on the exercise of the call options.
Completion
Each executive warrantor has agreed to repay, on or prior to completion,
all amounts owing to PES or any PES subsidiary by the particular executive
warrantor or by his associates (other than advances made in the normal course of
business).
The executive warrantors have agreed that as soon as practicable following
completion, they will take a variety of actions necessary or desirable to
accomplish the orderly transfer of ownership of PES to Halliburton.
Governing Law
The warranty agreement is to be governed by and construed in accordance
with the law of Scotland and the parties to the warranty agreement submit to the
jurisdiction of the courts of Scotland.
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IRREVOCABLE UNDERTAKINGS
General
A condition to our posting (mailing) of this offer document is that the
following directors and shareholders shall have executed irrevocable
undertakings in connection with the offer. Each of these individuals has
expressed a willingness to do this, but we will not ask any of them to do so
until he or she has had a period of 48 hours after the effective date of the
registration statement to review this offer document. Once this offer document
has been posted to you, you may assume that each of the following directors or
shareholders has executed an irrevocable undertaking:
<TABLE>
<CAPTION>
Shares
Pes Underlying
Name of Security Holder Shares Held Pes Options Totals Percentage(a)
- ---------------------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C>
L. W. Kinch............... 300,000 -0- 300,000 23.69%
M. L. Bowyer.............. 3,170 21,610 24,780 1.96%
F. A. Bowyer(b)........... 2,290 -0- 2,290 0.18%
P. D. Bowyer(b)........... 1,180 -0- 1,180 0.09%
S. E. Bowyer(b)........... 1,180 -0- 1,180 0.09%
D. W. Whiteford........... 131,620 -0- 131,620 10.39%
J. Whiteford(c)........... 15,290 -0- 15,290 1.21%
R. P. Rubbo............... -0- 15,600 15,600 1.23%
J. M. Rubbo(d)............ 100,750 -0- 100,750 7.95%
S. C. Owens............... 37,570 3,900 41,470 3.27%
M. J. Fleming............. -0- 2,500 2,500 0.20%
C. Smith.................. 1,310 15,220 16,530 1.31%
Anna Smith(e)............. 1,820 -0- 1,820 0.14%
Anne A. Smith(e).......... 1,820 -0- 1,820 0.14%
G. A. Smith(e)............ 1,820 -0- 1,820 0.14%
M. R. Smith(e)............ 1,820 -0- 1,820 0.14%
B. Bouldin................ 18,780 1,000 19,780 1.56%
N. Arizmendi.............. 13,150 -0- 13,150 1.04%
- ------------ -------- -------- -------- --------
Totals 633,570(f) 59,830(g) 693,400 54.73%
</TABLE>
______________
(a) Evidences the percentage of the current issued share capital of PES
representing the aggregate of the PES shares held and the PES shares
underlying the PES options.
(b) Member of the immediate family of Michael L. Bowyer.
(c) Member of the immediate family of Drummond W. Whiteford.
(d) Member of the immediate family of Richard P. Rubbo.
(e) Member of the immediate family of Colin Smith.
(f) Represents 50.02% of the issued share capital of PES.
(g) Represents 4.72% of the issued share capital of PES.
The PES shareholders who have agreed to execute irrevocable undertakings
subsequent to the registration statement becoming effective will agree, among
other things:
. to accept the offer for their PES shares;
. whether conditionally or unconditionally, not to sell, transfer,
charge, pledge or grant any option over or otherwise dispose or permit
the disposition of any of the PES shares they hold prior to the
lapsing or withdrawal of the offer;
. in the case of those who hold PES options, to surrender their PES
options in exchange for new Halliburton options; and
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<PAGE>
. that until the offer closes, lapses or is withdrawn, to vote as
instructed by us on any resolution presented to a PES general meeting
regarding the offer.
It is also a condition to our posting of our offer that PES Trustees
Limited shall, after the registration statement shall have become effective,
have executed an irrevocable undertaking to vote its PES shares in favor of the
resolution. Once this offer document has been posted to you, you may assume that
PES Trustees Limited has executed the irrevocable undertaking. PES Trustees
Limited holds 141,130 PES shares representing 11.14% of the PES shares in issue.
The PES shares held by PES Trustees Limited are subject to the PES share option
schemes. Of the shares held by PES Trustees Limited, 134,940 are subject to
options granted to employees of PES. As a result, PES Trustees Limited cannot
undertake to accept the offer for all of the PES ordinary shares it holds,
because the shares may need to be transferred to holders of PES options upon
exercise of their options. Accordingly, the irrevocable undertaking to be given
by PES Trustees Limited will only obligate it:
. to vote all 141,130 PES shares held by it in favor of the special
resolution to be presented to the PES shareholders at an extraordinary
general meeting,
. to accept the offer with respect to those PES shares held by it and
not subject to outstanding options, that is, 2,666 PES shares
representing 0.21% of the shares in issue; and
. to accept the offer with respect to those PES shares held by it and
subject to options held by optionholders who have given irrevocable
undertakings, that is, 59,830 PES shares representing 4.72% of the
shares in issue.
Once executed, the irrevocable undertakings continue to be binding in the
event of a competing higher offer. They will lapse, however, if we modify the
offer, other than by a reduction of the acceptance condition from 90% to not
less than 33% of the PES shares to which the offer relates, or withdraw the
offer. The irrevocable undertakings to be given by these shareholders are
governed by English law. Samples of the irrevocable undertakings have been filed
as exhibits to the registration statement. Executed copies will be on display at
the London and Aberdeen offices of the receiving agent. Please read "Where You
Can Find More Information" on page 116.
Additional Obligations of PES Directors
The PES directors, other than Messrs. McCurley and Renfroe, the nominees of
Halliburton Holdings Limited, in their irrevocable undertakings, will
additionally and irrevocably undertake:
. to recommend the offer to PES shareholders subject to their fiduciary
duties;
. that until the offer lapses or is withdrawn to refrain from taking
any action to impede, prevent or delay the offer becoming
unconditional; and
. upon the offer becoming unconditional and subject to their fiduciary
duties, to vote in accordance with our instructions on any resolution
in connection with the offer at any meeting of the PES board.
SERVICE AGREEMENTS
Each of the seven PES directors who are not affiliated with us and who are
employees of PES or one of its subsidiaries has executed a service agreement
with PES, a subsidiary of PES or with us that will become effective upon the
offer becoming unconditional. These service agreements were executed as of the
date of this offer document. In general, these service agreements:
. have a three-year term commencing upon completion of the offer and, on
conclusion of the term, are terminable by either party upon three
months' notice;
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<PAGE>
. provide for participation by each key employee/director in the group
life insurance program of the employer and in the health insurance
programs of the employer;
. include covenants by each key employee/director against disclosure of
confidential information;
. include noncompetition covenants by each key employee/director;
. include provisions clarifying the rights of the parties regarding
intellectual property; and
. provide for the right of the employer to terminate the agreement for
specified causes.
In addition, the following directors/key employees will be entitled under
the service agreements to the following annual salary, bonus and pension
benefits:
<TABLE>
<CAPTION>
Name Annual Salary Bonus Pension Benefit
- ---- ---------------- -------------------- ---------------
<S> <C> <C> <C>
Laurence W. Kinch.............. (Pounds) 80,340 (Pounds) 0 - 40,170 (Pounds) 4,821
Richard P. Rubbo............... $ 128,791 $ 0 - 43,396 $ 5,152
Michael L. Bowyer.............. (Pounds) 78,198 (Pounds) 0 - 39,099 (Pounds) 4,692
Michael J. Fleming............. $ 128,750 $ 17,167 - $ 5,150
42,917(a)
Steven C. Owens................ $ 123,600 $ 0 - 61,800 $ 4,944
Colin Smith.................... (Pounds) 77,000 (Pounds) 0 - 38,500 (Pounds) 4,620
Drummond W. Whiteford.......... (Pounds) 75,190 (Pounds) 10,026 - (Pounds) 4,512
25,064(a)
</TABLE>
__________
(a) These bonuses will be paid in two installments, subject to achievement of
milestones identified in the applicable bonus plan.
45
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TAX CONSEQUENCES OF THE OFFER AND COMPULSORY ACQUISITION
United Kingdom Tax Consequences
The following is a discussion of the material U.K. tax consequences of the
offer and the compulsory acquisition to PES shareholders and constitutes the
opinion of CMS Cameron McKenna, Halliburton's U.K. solicitors, to the extent
that is relates to matters of law and legal conclusions. The discussion is based
on current U.K. law and Inland Revenue practice on the date of this document.
This discussion relates only to specific limited aspects of the U.K. taxation
position of PES shareholders:
. who are the beneficial owners of those PES shares; and
. who hold their PES shares as an investment, other than under a
personal equity plan or individual savings account.
This discussion does not address the taxation position of special classes of
taxpayers, including banks, insurance companies and collective investment
schemes. If you are unsure of your taxation position, you should seek
independent professional advice.
Taxation of Chargeable Gains. Liability to U.K. taxation on chargeable
gains or CGT will depend on your individual circumstances as a PES shareholder.
You are not subject to CGT unless you are either resident or ordinarily resident
in the U.K. for U.K. tax purposes or:
. you carry on a trade, profession or vocation in the U.K. through a
branch or agency; and
. the PES shares you hold are used in or held for the purposes of the
branch or agency or are acquired for use by the branch or agency.
A PES shareholder will not be treated as making a disposal or part disposal
for the purposes of the U.K. taxation of chargeable gains when he receives
shares of Halliburton common stock in exchange for his PES shares. Instead, he
will be treated as having acquired those shares of Halliburton common stock at
the same time and for the same consideration as those PES shares.
PES shareholders who receive shares of Halliburton common stock and, either
alone or together with persons connected with them, hold more than 5% of the
share capital of PES are advised that clearance that the transaction is, among
other things, for valid commercial reasons has been obtained from the board of
the Inland Revenue pursuant to section 138 of the Taxation of Chargeable Gains
Act 1992.
Holders of PES shares are also advised clearance has been obtained from the
Inland Revenue under section 707 of the Income and Corporation Taxes Act 1988 in
respect of the offer.
A subsequent disposal of shares of Halliburton common stock may result in a
liability to CGT, depending on individual circumstances.
Taxation of Dividends. U.K. resident individual and corporate holders of
shares of Halliburton common stock who receive dividends on those shares will be
treated as receiving income from overseas possessions equal to the gross amount
of such dividends which is subject to U.K. income tax or, in the case of
companies, corporation tax.
The U.S. currently imposes a dividend withholding tax of 30%. Under an
income tax treaty between the U.S. and the U.K., this withholding is reduced to
15% of the gross amount of the dividends for U.K. resident persons. In order to
obtain the benefit of the treaty, U.K. resident holders of shares of Halliburton
common stock must make a claim which must be certified by the Inland Revenue and
approved by the U.S. tax authorities. Depending upon their individual
circumstances, U.K. resident holders of shares of Halliburton common stock
should have the sums withheld under the treaty treated as a tax credit for
purposes of U.K. taxation.
46
<PAGE>
Stamp Duty and Stamp Duty Reserve Tax. You will not be obligated to pay
stamp duty or stamp duty reserve tax as a result of accepting Halliburton's
offer or as a result of selling or transferring your PES shares. You will not be
obligated to pay stamp duty or stamp duty reserve tax on the transfer or sale
of, or an agreement to transfer, your shares of Halliburton common stock that
you receive under the terms of the offer.
United States Federal Tax Consequences
The following is a discussion of the material United States federal tax
consequences of the offer and the compulsory acquisition to holders of PES
shares. The discussion constitutes the opinion of Vinson & Elkins L.L.P.,
counsel to Halliburton, to the extent it relates to matters of law and legal
conclusions. The discussion is based on:
. the Internal Revenue Code of 1986 or IRC;
. Treasury Regulations adopted and proposed thereunder; and
. administrative and judicial interpretations as of the date of this
offer document,
all of which are subject to change, possibly on a retroactive basis. The
discussion does not address all aspects of United States federal taxation,
including, without limitation, aspects of United States federal income taxation
that may be applicable to particular shareholders, including:
. financial institutions;
. insurance companies;
. tax-exempt organizations;
. dealers in securities; or
. holders of securities held as part of a "straddle," "hedge" or
"conversion transaction."
The discussion also does not address the United States federal income tax
consequences of the offer and the compulsory acquisition to holders of options
to purchase PES shares. In addition, it does not address the state, local or
non-U.S. tax consequences of the offer and the compulsory acquisition, if any.
We urge you to consult your personal tax advisers regarding the federal, state
and local, and non-U.S. income and other tax consequences of the offer and the
compulsory acquisition and of owning and disposing of shares of Halliburton
common stock.
Taxable Nature of Exchange. The exchange of PES shares for shares of
Halliburton common stock will be a taxable transaction for United States federal
income tax purposes. In general, you will recognize gain, or loss, measured by
the difference between your tax basis in your PES shares and the fair market
value of the Halliburton common stock you receive. A portion of the fair market
value may be taxed as ordinary interest income. If you are an individual and you
hold PES shares as a capital asset, your gain, exclusive of the portion taxed as
interest, generally will be subject to tax at a maximum 20% rate if your PES
shares have been held for more than one year.
Installment Reporting. Gain recognized on the exchange of your PES shares
for shares of Halliburton common stock generally is to be reported on the
installment method unless you elect out of installment reporting. Under the
installment method of reporting applicable to contingent payment sales, gain is
taken into account in each of the taxable years in which the taxpayer receives
shares of Halliburton common stock. Regarding the initial issuance of
Halliburton common stock and each issuance of Halliburton common stock under the
rights, your gain would be computed as the excess of the fair market value of
the shares of Halliburton common stock you receive, exclusive of the portion
taxed as ordinary interest income, over an allocable portion of your tax basis
in your PES shares. If the fair market value is less than the basis allocated to
that taxable year, the unrecovered portion of the basis allocated to that year
is carried forward to the next taxable year in which shares of Halliburton
common stock are received. If the fair market value of the shares of Halliburton
common stock issued under the rights following the second determination date,
exclusive of the portion taxed as ordinary
47
<PAGE>
interest income, is less than the basis allocated to that taxable year, a
capital loss would be recognized. A capital loss recognized by an individual
taxpayer may not be carried back to offset capital gain in prior years but can
only offset, except for a small amount of ordinary income, capital gain in the
year in which the capital loss is recognized and in future taxable years. If you
use the installment method of reporting you may be required to pay interest
under section 453A of the IRC on the tax deferred by reason of your use of the
installment method.
Imputed Interest. Because the shares issued under the rights will be
received after the date of completion, they are subject to the imputed interest
rules of either section 483 or section 1274 of the IRC. Under section 483, a
portion of each such issuance will be taxed as ordinary interest income to you.
The balance of such issuance will be treated as the principal component with the
consequences described above. The interest amount for each such issuance will
equal the excess of the fair market value of the shares of our common stock you
receive over the present value of the shares when the offer became
unconditional. The interest amount will be calculated using as the discount rate
the applicable federal rate or AFR. The AFR is a rate reflecting an average of
market yields on Treasury debt obligations for different ranges of maturities
that is published monthly by the Internal Revenue Service. The relevant AFR will
be the lowest AFR in effect during the 3-month period ending with the month that
includes the date of completion. The maturity range of the relevant AFR will
correspond to the period from the date of completion to the date the amount is
received.
The amount of the shares issued under the rights is a function of the fair
market value of Halliburton common stock at the time of receipt. Under section
1274, it is likely that each such issuance will be treated as a contingent debt
instrument in its entirety. This is the case even though a minimum number of
Halliburton shares will be received with each such issuance. If the deferred
issuances are treated as contingent debt instruments, the amount of each such
issuance would be discounted to its present value using the AFR from the date of
payment to the date of completion. The present value of the each such issuance
would be treated as its principal component with the consequences described
above. The amount of each such issuance in excess of its present value would be
taxed as ordinary interest income in the year of payment.
If you are not a citizen or resident of the United States, the amount
treated as interest generally will be subject to the withholding of U.S. income
tax at the rate of 30%. However, the rate of withholding tax may be reduced, or
the tax eliminated, by an applicable income tax treaty, if any. If this is the
case, you will need to file an Internal Revenue Service Form W-8BEN to establish
your eligibility for the benefits of the treaty. The income tax treaty between
the United States and the United Kingdom generally eliminates the withholding
tax in the case of interest derived and beneficially owned by a resident of the
United Kingdom.
If you are subject to United States federal income tax we urge you to
consult your personal tax adviser about:
. how installment reporting will affect you;
. the possible interest charge under section 453A of the IRC on tax
deferred by reason of installment reporting;
. how you could be affected if you do not use installment reporting; and
. how the imputed interest rules of section 483 or 1274 apply to you.
Backup Withholding. Payments you are eligible to receive in connection
with the offer or the compulsory acquisition may be subject to back-up
withholding at a 31% rate. Backup withholding generally applies if you:
. fail to furnish your social security number or other taxpayer
identification number (TIN);
. furnish an incorrect TIN;
. fail properly to report interest or dividends; or
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<PAGE>
. under specified circumstances, fail to provide a certified statement,
signed under penalties of perjury, that the TIN you provided is your
correct number and that you are not subject to backup withholding.
Backup withholding is not an additional tax but merely an advance payment. Any
amounts withheld from a payment you are eligible to receive under the backup
withholding rules will be allowed as a credit against your United States federal
income tax liability, provided that you furnish the required information to the
Internal Revenue Service. Some persons, including corporations, generally are
exempt from backup withholding.
Taxation of Dividends on Halliburton Common Stock. Distributions on
Halliburton common stock paid in cash will be treated as dividends. These
distributions will be taxed as ordinary income to the extent of Halliburton's
current and accumulated earnings and profits, as determined for United States
federal income tax purposes. To the extent that the amount of any distribution
you receive exceeds Halliburton's current and accumulated earnings and profits
allocable to the distribution, the distribution will be treated as a return of
capital. This will reduce your tax basis in your Halliburton common stock. Any
distribution in excess of your tax basis in your Halliburton common stock will
be taxed as capital gain. The gain will be long-term capital gain if you have
held your Halliburton common stock for more than one year. Payment of dividends
may be subject to backup withholding under circumstances similar to those
described above.
Sale or Exchange of Halliburton Common Stock. Upon the sale, exchange, or
other taxable disposition of Halliburton common stock, you will recognize a gain
or a loss. The gain or loss generally will be equal to the difference between
the sum of cash plus the fair market value of any other property received on the
disposition and your tax basis in your Halliburton common stock. Gain or loss
recognized on the disposition of Halliburton common stock generally will be
capital gain or loss. If you are an individual, your capital gain generally will
be subject to tax at a maximum 20% rate if you hold your Halliburton common
stock for more than one year.
Taxation of Non-U.S. Holders of Halliburton Common Stock. The following is
a general discussion of the principal United States federal income and estate
tax consequences of the ownership and disposition of Halliburton common stock
applicable to you if you are a non-U.S. holder. You will be deemed a non-U.S.
holder unless you are:
. an individual who is a citizen or resident of the United States;
. a corporation or partnership created or organized in the United States
or under the laws of the United States or of any state thereof;
. an estate and your income is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
. a trust and you are subject to the jurisdiction of a United States
court and the control of a United States person.
Dividends. Generally, dividends paid to a non-U.S. holder of Halliburton
common stock will be subject to the withholding of U.S. income tax at the rate
of 30% of the amount of the dividend, or at a lower applicable treaty rate.
Dividends paid to a resident of the United Kingdom are generally subject to U.S.
withholding tax at a rate of 15%. Please read "--United Kingdom Tax
Consequences" on page 46. If, however, the dividend is effectively connected
with the conduct of a trade or business within the United States by a non-U.S.
holder, or in the case of an applicable tax treaty is attributable to a
permanent establishment of a non-U.S. holder in the United States, the dividend
will be subject to regular U.S. federal income tax. In the case of a non-U.S.
holder that is a corporation, the dividend also may be subject to a branch
profits tax, at the rate of 30% or a lower applicable treaty rate. This tax
generally is imposed on a foreign corporation's repatriation from the United
States of its effectively connected earnings and profits. Halliburton must
report annually to the Internal Revenue Service and to each non-U.S. holder the
amount of dividends paid to, and the tax withheld from, each non-U.S. holder.
These reporting requirements apply regardless of whether withholding was reduced
by a tax treaty. Copies of these information returns may also be made available
under the provisions of a treaty or information exchange agreement with the tax
authorities in the
49
<PAGE>
country in which the non-U.S. holder resides. U.S. backup withholding tax
generally will not apply to dividends paid on Halliburton common stock to a non-
U.S. holder at an address outside the United States unless Halliburton has
knowledge that the payee is a United States person.
Sale or Exchange. If you are a non-U.S. holder you will not be subject to
U.S. federal income tax on any gain recognized upon the sale or other
disposition of Halliburton common stock unless:
. you conduct a trade or business within the United States and your gain
is effectively connected with your trade or business;
. you are an individual and you have been present in the United States
for at least 183 days during the taxable year of the disposition, the
Halliburton common stock is a capital asset and either:
. your "tax home" for federal income tax purposes is in the United
States; or
. the gain is attributable to an office or other fixed place of
business you maintain in the United States;
. you are an individual who lost your U.S. citizenship to avoid U.S.
tax; or
. Halliburton is or has been a "United States real property holding
corporation" for federal income tax purposes and either:
. the Halliburton common stock is not regularly traded on an
established securities market; or
. you owned, directly or due to specific attribution rules at any
time during the five-year period ending on the date of
disposition, more than 5% of Halliburton's common stock.
Payment of the proceeds from a sale of Halliburton common stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding. You can avoid information reporting and backup withholding
by certifying your status as a non-U.S. holder under penalties of perjury or by
establishing another exemption. Payment of the proceeds from a sale of
Halliburton common stock to or through a non-U.S. office of a broker generally
will not be subject to information reporting or backup withholding. If the
broker is, however:
. a United States person;
. a "controlled foreign corporation" for U.S. tax purposes; or
. a foreign person that derives 50% or more of its gross income from the
conduct of a trade or business in the United States,
the payment will be subject to information reporting, but currently not backup
withholding. This reporting is not required if the broker has documentary
evidence in its records that you are a non-U.S. holder and you meet other
conditions or you establish an exemption. Any amounts withheld under the backup
withholding rules will be credited against your federal income tax liability, if
any or refunded, provided the required information is furnished to the Internal
Revenue Service.
Estate Tax. If you are an individual, the fair market value of the
Halliburton common stock you own, or are treated as owing, at the time of your
death will be includible in your gross estate for U.S. federal estate tax
purposes. Thus unless an applicable estate tax treaty provides otherwise, the
fair market value of the stock may be subject to U.S. estate tax, even though
you, at the time of your death, are neither a citizen of nor domiciled in the
United States.
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Other Jurisdictions
If you are subject to the income or other taxation laws and regulations of
jurisdictions other than the U.K. and the U.S., we urge you to consult your
individual tax advisers as to the tax consequences of the offer and the
compulsory acquisition.
PES EXTRAORDINARY GENERAL MEETING
Date and Time
We have included with this offer document a notice from PES convening an
extraordinary general meeting of PES shareholders. The extraordinary general
meeting of PES shareholders will be held on ____________, _______________, 2000
at ______________________, __________, _________ commencing at ___:00 a.m.,
local time.
Purpose
The PES shareholders will be asked to adopt a special resolution:
. to suspend, for the purposes of the offer, the pre-emption rights of
the PES shareholders on transfers of PES shares that are conferred by
Article 10 of the articles of association of PES; and
. to suspend, for the purposes of the offer, the obligation of a person
who has acquired a majority of the PES shares in issue, to make a cash
offer to acquire the remaining shares.
The first element excludes the acquisition of PES shares under the offer
from preemptive rights of PES shareholders. The second element enables us to
make the compulsory acquisition by using our common stock and rights rather than
cash.
Procedure
Registered shareholders of PES on the date of the extraordinary general
meeting are entitled to vote at the meeting. On the date of this offer document,
there were 1,266,540 PES shares in issue. In order to conduct business at the
meeting, a quorum must be present. Under the articles of association of PES, the
presence of at least two shareholders constitutes a quorum. The resolution must
be passed by a majority of at least three-fourths of the votes of the
shareholders that vote in person or by proxy at the meeting. If a PES
shareholder abstains, it will have no effect on the vote.
It is a condition of the offer that the special resolution is passed. The
principal shareholders have agreed to give irrevocable undertakings to vote in
favor of the special resolution. The principal shareholders beneficially own a
total of 633,570 PES shares representing 50.02% of the issued share capital of
PES. In addition, PES Trustees Limited has agreed to give an irrevocable
undertaking to vote in favor of the special resolution. It holds 141,130 PES
shares, representing 11.14% of the issued share capital of PES. We will cause
Halliburton Holdings Limited to vote in favor of the special resolution.
Halliburton Holdings Limited owns 334,360 PES shares, representing approximately
26.40% of the issued share capital of PES. In total, 87.57% of the issued share
capital of PES will vote in favor of the special resolution.
Unless a poll is requested, each PES shareholder will be entitled to one
vote on the special resolution regardless of the number of shares held by that
shareholder. On a poll each PES shareholder present at the meeting in person or
by proxy will be entitled to one vote for each PES share held. Halliburton
Holdings Limited intends, if necessary, to call for a poll. If this is done, the
resolution will pass.
PES shareholders may direct all questions concerning the extraordinary
general meeting to Michael Bowyer, a director of PES, at +44 (0) 1224 793000.
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INFORMATION REGARDING HALLIBURTON COMPANY
General Development of Business
Halliburton's predecessor was established in 1919 and incorporated under
the laws of the State of Delaware in 1924. We provide energy services,
engineering and construction services and manufacture products primarily for the
energy industry. Information related to acquisitions and dispositions is set
forth in Note 14 to our annual consolidated financial statements included
elsewhere in this offer document.
Financial Information About Business Segments
Our company is comprised of three business segments. Please read Note 2 to
our annual consolidated financial statements for financial information about
these three business segments.
Description of Services and Products
We have three business segments. The Energy Services Group contains
Halliburton Energy Services, Brown & Root Energy Services and Landmark Graphics
Corporation. Halliburton Energy Services provides pressure pumping equipment and
services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services, and well control. Brown & Root Energy Services provides upstream oil
and gas engineering, construction and maintenance services, specialty pipe
coating, insulation, and underwater engineering services. Landmark Graphics
Corporation provides integrated exploration and production information systems
and related professional services to the petroleum industry.
The Engineering and Construction Group includes Kellogg Brown & Root and
Brown & Root Services. This group provides engineering, procurement,
construction, project management, and facilities operation and maintenance for
hydrocarbon processing and other industrial and governmental customers.
The Dresser Equipment Group designs, manufactures and markets highly
engineered products and systems. These include compressors, valves, motors,
engines, pumps, generators, blowers, fuel dispensing systems, and
instrumentation equipment principally for oil and gas producers, transporters,
processors, distributors and petroleum users throughout the world.
Markets and Competition
We are one of the world's largest diversified energy services and
engineering and construction services companies. Our services and products are
sold in a highly competitive environment throughout the world. Competitive
factors affecting sales of our services and products are: price, service,
including the ability to deliver services and products on an "as needed, where
needed" basis, product quality, warranty and technical proficiency. A growing
number of customers prefer integrated services and solutions. These integrated
solutions, in the case of the Energy Services Group, relate to all phases of
exploration, development and production of oil and gas. In the case of the
Engineering and Construction Group, they relate to all phases of design,
procurement, construction project management and maintenance of a facility.
Demand for integrated solutions is based primarily upon quality of service,
technical proficiency and value created.
We conduct business worldwide in over 120 countries. The industries we
serve are highly competitive with many substantial competitors. Since the areas
to which we provide our services and products are so large and cross many
geographic lines, a meaningful estimate of the number of competitors cannot be
made. Generally, our services and products are marketed through our own
servicing and sales organizations. A small percentage of sales of the products
of the Energy Services Group and Dresser Equipment Group is made by supply
stores and third-party representatives.
Unsettled political conditions, expropriation or other governmental
actions, exchange controls and currency devaluations may affect our operations
in some countries. We believe the geographic diversification of our business
activities reduces the risk that loss of our operations in any one country would
be material to our consolidated
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<PAGE>
results of operations. Information regarding our exposure to foreign currency
fluctuations, risk concentration and financial instruments used to minimize risk
is included under "Halliburton Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 15 to our annual consolidated
financial statements.
Customers and Backlog
In 1998, 1997, and 1996, respectively, 85%, 84% and 81% of our revenues
were derived from the sale of products and services to and construction for the
energy industry. Approximately 10% of the total backlog at December 31, 1998 was
for equipment manufacturing contracts. The following schedule summarizes the
backlog of engineering and construction projects and equipment manufacturing
contracts at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Millions of dollars
- -------------------
Firm orders................................................ $10,472 $12,087
Government orders firm but not yet funded, letters of
intent and contracts awarded but not signed............. 705 591
------- -------
Total................................................. $11,177 $12,678
======= =======
</TABLE>
We estimate that 65% of the backlog existing at December 31, 1998 will be
completed during 1999. Our backlog excludes contracts for recurring hardware and
software maintenance and support services. Backlog is not necessarily indicative
of future operating results because backlog figures are subject to substantial
fluctuations. Arrangements included in backlog are in many instances extremely
complex, nonrepetitive in nature and may fluctuate in contract value. Many
contracts do not provide for a fixed amount of work to be performed and are
subject to modification or termination by the customer. Due to the size of some
contracts, the termination or modification of any one or more contracts or the
addition of other contracts may have a substantial and immediate effect on
backlog.
Raw Materials
Raw materials essential to our business are normally readily available.
Where we are dependent on a single supplier for any essential materials, we are
confident that we could make satisfactory alternative arrangements in the event
of an interruption in the supply of the materials.
Research, Development and Patents
We maintain an active research and development program to assist in the
development and improvement of products and processes and the improvement of
engineering standards and practices that serve the changing needs of our
customers. Information relating to expenditures for research and development is
included in Note 1 and Note 2 to our annual consolidated financial statements.
We own a large number of patents and have pending a substantial number of
patent applications covering products and processes. We are also licensed under
patents owned by others. We do not consider a particular patent or group of
patents to be material to our business.
Seasonality
Weather and natural phenomena can temporarily affect the performance of our
services. Winter months in the Northern Hemisphere tend to affect operations
negatively, but the widespread geographical locations of our operations serve to
mitigate the seasonal nature of our business.
Employees
At September 30, 1999, we employed approximately 103,300 people.
53
<PAGE>
Regulation
We are subject to numerous laws and regulations in many jurisdictions.
Compliance with environmental requirements has not substantially increased
capital expenditures, adversely affected our competitive position or materially
affected our earnings. We do not anticipate any material adverse effects in the
foreseeable future as a result of existing environmental laws and regulations.
Note 10 to our annual consolidated financial statements discusses our
involvement as a potentially responsible party in the remedial activities
to clean up several "Superfund" sites.
54
<PAGE>
HALLIBURTON COMPANY
SELECTED FINANCIAL DATA
Millions of dollars and shares except per share and employee data
We have restated our prior year information for the merger of Dresser
Industries, Inc. Beginning in 1998, we changed Dresser's year-end of October 31
to our calendar year-end. Periods through December 1997 contain Dresser's
information on a fiscal year-end basis combined with our information on a
calendar year-end basis.
<TABLE>
<CAPTION>
Unaudited
Nine Months
Year Ended December 31, Ended September 30,
----------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
----------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating results:
Net revenues:
Energy Services Group............ $ 4,977.5 $ 5,307.7 $ 6,515.4 $ 8,504.7 $ 9,009.5 $ 6,829.2 $ 5,133.7
Engineering and
Construction Group.............. 3,562.3 3,736.5 4,720.7 4,992.8 5,494.8 4,164.5 4,153.0
Dresser Equipment Group.......... 2,452.0 2,467.4 2,710.5 2,774.1 2,848.8 2,070.4 1,840.7
--------- --------- --------- --------- --------- --------- ---------
Total revenues................ $10,991.8 $11,511.6 $13,946.6 $16,271.6 $17,353.1 $13,064.1 $11,127.4
========= ========= ========= ========= ========= ========= =========
Operating income:
Energy Services Group............ $ 405.8 $ 544.5 $ 698.0 $ 1,019.4 $ 971.0 $ 850.0 $ 162.0
Engineering and
Construction Group.............. 71.0 96.6 134.0 219.0 237.2 187.2 163.0
Dresser Equipment Group.......... 198.1 200.7 229.3 248.3 247.8 187.3 140.0
Special charges and
credits(a)...................... (24.6) (8.4) (85.8) (16.2) (980.1) (945.1) 47.1
General corporate................ (56.2) (70.8) (72.3) (71.8) (79.4) (59.5) (50.1)
--------- --------- --------- --------- --------- --------- ---------
Total operating income(a)..... 594.1 762.6 903.2 1,398.7 396.5 219.9 462.0
Nonoperating income
(expense), net(b)................. 323.1 (32.6) (72.2) (85.6) (117.7) (81.5) (64.5)
--------- --------- --------- --------- --------- --------- ---------
Income from continuing
operations before income
taxes, minority interest
and change in accounting
method............................ 917.2 730.0 831.0 1,313.1 278.8 138.4 397.5
Provision for income taxes(c)...... (346.9) (247.0) (248.4) (491.4) (244.4) (184.4) (153.1)
Minority interest in net
income of consolidated
subsidiaries...................... (33.1) (20.7) (24.7) (49.3) (49.1) (34.5) (22.9)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations............. $ 537.2 $ 462.3 $ 557.9 $ 772.4 $ (14.7) $ (80.5) $ 221.5
========= ========= ========= ========= ========= ========= =========
Basic income (loss) per
common share:
Continuing operations............ $ 1.25 $ 1.07 $ 1.30 $ 1.79 $ (0.03) $ (0.18) $ 0.50
Net income (loss)................ 1.26 0.88 1.30 1.79 (0.03) (0.18) 0.46
Diluted income (loss) per
share:
Continuing operations............ 1.24 1.07 1.29 1.77 (0.03) (0.18) 0.50
Net income (loss)................ 1.26 0.88 1.29 1.77 (0.03) (0.18) 0.46
Cash dividends per share(d)(e)..... 0.50 0.50 0.50 0.50 0.50 0.38 0.38
Return on average
shareholders' equity.............. 15.47% 10.43% 15.25% 19.17% (0.35%) (1.98)% 4.95%
Financial position:
Net working capital................ $ 2,196.7 $ 1,476.7 $ 1,501.0 $ 1,984.8 $ 2,129.6 $ 1,599.2 $ 2,039.0
Total assets....................... 8,521.0 8,569.4 9,586.8 10,704.3 11,065.9 11,655.9 10,584.5
Property, plant and
equipment, net.................... 2,047.0 2,285.0 2,554.0 2,766.4 2,895.9 2,971.6 2,817.5
Long-term debt (including
current maturities)............... 1,119.8 666.8 958.0 1,304.3 1,428.2 1,293.3 1,367.2
Shareholders' equity............... 3,722.5 3,577.0 3,741.4 4,316.9 4,061.2 4,048.1 4,122.0
Total capitalization............... 4,905.9 4,377.9 4,830.1 5,671.7 6,004.4 5,913.7 6,431.5
Shareholders' equity per
share(d).......................... 8.63 8.29 8.78 9.86 9.23 9.21 9.33
Average common shares
outstanding (basic)(d)............ 430.6 431.1 429.2 431.1 438.8 438.6 440.2
Average common shares
outstanding (diluted)(d).......... 431.5 432.3 432.1 436.1 438.8 438.6 443.2
Other financial data:
Cash flows from operating
activities........................ $ 793.1 $ 1,094.6 $ 864.2 $ 833.1 $ 454.1 $ 313.6 $ (116.4)
Cash flows from investing
activities........................ 528.6 (837.0) (759.1) (873.3) (846.1) (661.2) (34.7)
Cash flows from financing
activities........................ (644.5) (721.4) (148.4) (20.6) 253.7 235.8 233.9
Capital expenditures............... 432.1 591.5 731.1 880.1 914.3 687.0 433.0
Long-term borrowings
(repayments), net................. (120.8) (482.2) 287.4 285.5 123.3 (11.7) (69.4)
Depreciation and
amortization expense.............. 487.6 466.4 497.7 564.3 587.0 441.5 447.4
Payroll and employee
benefits.......................... 4,222.3 4,188.0 4,674.3 5,478.9 5,880.1 4,487.9 4,234.8
Number of employees(f)............. 86,500 89,800 93,000 102,000 107,800 107,700 103,300
</TABLE>
____________________
55
<PAGE>
(a) Operating income includes the following special charges and credits:
. 1994 - $24.6 million: merger costs, $27.3 million; restructuring
costs, $6.2 million; litigation, $9.5 million; and credits from
litigation and insurance recoveries, $18.4 million; and
. 1995 - $8.4 million: restructuring costs, $4.7 million; and write-
off of acquired in-process research and development costs, $3.7
million;
. 1996 - $85.8 million: merger costs, $12.4 million; restructuring,
merger and severance costs, $62.1 million; and write-off of acquired
in-process research and development costs, $11.3 million;
. 1997 - $16.2 million: merger costs, $8.6 million; restructuring of
joint ventures, $18.0 million; write-downs on impaired assets and
early retirement incentives, $18.7 million; losses from the sale of
assets, $12.6 million; and credits from gain on extension of joint
venture, $41.7 million;
. 1998 - $980.1 million: asset related charges, $509.4 million;
personnel reductions, $234.7 million; facility consolidations, $126.2
million; merger transaction costs, $64.0 million; and other related
costs, $45.8 million;
. Nine months 1998- $945.1 million; asset related charges, $509.4
million; personnel reductions, $204.7 million; facility
consolidations, $121.2 million; merger transaction costs, $64.0
million; and other related costs, $45.8 million.
. Nine months 1999 - $47.1 million credit for reversal of a portion of
the 1998 special charges for personnel, facility exit charges and
merger costs due to the actual costs being less than estimated.
(b) Nonoperating income in 1994 includes a gain of $275.7 million from the sale
of an interest in Western Atlas International, Inc. and a gain of $102.0
million from the sale of the our natural gas compression business.
Nonoperating income for the nine months ended September 1999 includes a $26
million loss for the write-off of our investment in a Mexican construction
and engineering company.
(c) Provision for income taxes in 1996 includes tax benefits of $43.7 million
from recognizing net operating loss carryforwards and settling various
issues with the Internal Revenue Service.
(d) We have restated our prior year weighted average shares, cash dividends
paid per share and shareholders' equity per share to reflect the two-for-
one common stock split declared on June 9, 1997, and paid as a stock
dividend on July 21, 1997.
(e) Cash dividends per share for 1994 through 1998 represent amounts we paid
prior to the merger with Dresser.
(f) Does not include employees of 50% or less owned affiliated companies.
56
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Market Prices
Our common stock is traded on the NYSE under the symbol "HAL." There is no
market for the PES shares, there being only approximately 55 registered holders
of PES shares. The following table sets forth, for the periods indicated, the
range of high and low per share sales prices for shares of our common stock as
reported on the NYSE Composite Tape. Prices for shares of our common stock have
been restated to adjust mathematically for the two-for-one stock split effected
by means of a 100% stock dividend paid on July 21, 1997 to holders of record of
our common stock on June 26, 1997.
<TABLE>
<CAPTION>
HALLIBURTON
---------------
High Low
---------------
<S> <C> <C>
1996*
First Quarter................................. $29.63 $22.38
Second Quarter................................ 29.69 24.75
Third Quarter................................. 28.81 24.75
Fourth Quarter................................ 31.81 25.63
1997*
First Quarter................................. 37.25 29.69
Second Quarter................................ 41.94 31.63
Third Quarter................................. 52.94 39.25
Fourth Quarter................................ 63.25 45.69
1998*
First Quarter................................. 53.88 40.75
Second Quarter................................ 57.25 42.06
Third Quarter................................. 45.69 26.56
Fourth Quarter................................ 39.50 26.19
1999*
First Quarter**............................... 41.88 28.13
Second Quarter**.............................. 48.38 35.00
Third Quarter**............................... 51.75 38.57
Fourth Quarter** (through _________, 1999)....
</TABLE>
____________
* Calendar quarters. Our fiscal year ends on December 31.
** The closing sales prices for shares of our common stock on the first
trading day of each calendar month for the last six months, as reported on
the NYSE Composite Tape, were as follows: July 1, 1999 - $43.75; August 2,
1999 - $45.75; September 1, 1999 - $ 45.94; October 1, 1999 - $41.81;
November 1, 1999 - $38.50; and December 1, 1999 $41.13.
On ________, 2000, the latest practicable trading day prior to the date of
posting this offer document, the closing per share sales price for shares of our
common stock, as reported on the NYSE Composite Tape, was $________.
Following the completion of the offer, our common stock will continue to be
traded on the NYSE.
Dividends
In each of the calendar quarters indicated in the table above, we declared
and paid a cash dividend of $0.125 per share of our common stock. The dividends
have been adjusted mathematically to account for stock splits. On October 28,
1999, we declared a cash dividend of $0.125 per share of our common stock,
payable on December 22, 1999, to stockholders of record on December 1, 1999. If
you receive shares of our common stock as a result of accepting the offer, the
date of issue of these shares will occur subsequent to the record date for this
dividend. If so, you will not be entitled to receive this dividend.
57
<PAGE>
Our board of directors intends to continue to consider the payment of
quarterly dividends on the outstanding shares of our common stock. The
declaration and payment of dividends will depend upon, among other things, our
future earnings, our general financial condition, the success of our business
activities, our capital requirements and general business conditions.
During each of the years ended March 31, 1996, 1997 and 1998, the PES board
of directors declared and PES paid cash dividends on its Class A ordinary
shares. These shares were held by a single PES shareholder. The amounts paid
were (Pounds)45,516, (Pounds)45,000 and, following conversion of the Class A
ordinary shares into PES shares in April 1997, (Pounds)4,521, respectively. PES
did not pay any dividends in those years on the remaining PES shares. PES did
not declare or pay any cash dividends during the year ended March 31, 1999.
If the offer is not completed, the PES board of directors intends to
consider the payment of annual dividends on the issued PES shares. The
declaration and payment of dividends will depend upon, among other things,
future earnings and capital requirements of PES, its general financial
condition, the success of its business activities and general business
conditions. The PES directors who are parties to the warranty agreement have
agreed not to permit PES to declare or pay any dividends on the PES shares
during the offer period.
58
<PAGE>
HALLIBURTON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Halliburton / Dresser Merger
On September 29, 1998, we completed our acquisition of Dresser Industries,
Inc. The merger was accounted for using the pooling of interests method of
accounting for business combinations. Our financial statements have been
restated to include the results of Dresser for all periods presented. See Note
14 to our annual consolidated financial statements. Prior to the merger, Dresser
was a diversified company with operations in three business segments: Petroleum
Products and Services; Engineering Services; and Energy Equipment. Prior to the
merger, we operated in two business segments, the Energy Group and the
Engineering and Construction Group. Following the merger, we are organized
around three business segments: Energy Services Group; Engineering and
Construction Group; and Dresser Equipment Group.
Our management believes the merger provides us with the opportunity to
better meet customer needs, to improve our technology, to strengthen our product
service lines, to cut our costs, and to position us for the future.
Business Environment
We operate in over 120 countries around the world to provide a variety of
energy services, energy equipment and engineering and construction services to
energy, industrial and governmental customers. The industries we serve are
highly competitive with many substantial customers. Unsettled political
conditions, expropriation or other governmental actions, exchange controls and
currency devaluations may affect operations in some countries. We believe the
geographic diversification of our business activities reduces the risk that loss
of our operations in any one country would be material to our consolidated
results of operations.
The majority of our revenues are derived from the sale of services and
products, including construction activities, to the energy industry. We offer a
comprehensive range of integrated and discrete services and products as well as
project management for oil and natural gas activities throughout the world.
Declines in energy industry activities that started in 1998 continued into
the third quarter of 1999, particularly in the areas of exploration and
development of hydrocarbons. During this period the energy industry experienced:
. record low in the U.S. rotary rig count (488 in April 1999),
. six consecutive quarterly declines in international rig counts,
. significant decreases in worldwide rig counts (the average worldwide
rotary rig count in the first nine months of 1999 was 29% lower than
in the first nine months of 1998), and
. a high degree of volatility in crude oil and natural gas prices.
These factors, combined with the announced mergers of several large
multinational energy companies, caused many of our customers to reduce their
capital spending programs. These reductions have negatively impacted our results
for the first nine months of 1999, particularly within the Energy Services
Group.
The Engineering and Construction Group and Dresser Equipment Group, which
provide many services to the downstream oil and gas business, have also been
impacted negatively during the first nine months of 1999. The downturn in
activity in the first quarter of 1999 did not affect these segments as severely
as the Energy Services Group due to the longer term nature of projects and
continuing maintenance requirements. In the second quarter of 1999, however, the
effects of project delays and deferral of new awards began to negatively impact
the Engineering and Construction Group. These factors are expected to effect the
segment during the remainder of the year and into 2000 due to the long-term
nature of most projects. The declines in activity in the Dresser Equipment Group
which began in the second quarter of 1999 continued into the third quarter. The
lower activity levels were due to industry conditions and increased competition
for a reduced level of available business.
59
<PAGE>
During the third quarter of 1999, increases in rig counts and prices of oil
and natural gas provided signs that the energy industry activity was beginning
to improve. Despite these positive signs, pricing pressures and delays in
capital spending on large long-term projects continued to negatively impact our
results. Longer-term effects will depend on the spending patterns of our
customers.
We still believe:
. the long-term fundamentals of the energy industry remain
sound;
. steadily rising population and greater industrialization efforts
will continue to propel global growth, particularly in developing
nations; and
. these factors will cause increasing demand for oil and natural
gas to produce refined products, petrochemicals, fertilizers and
power.
We are encouraged about the remainder of this year and 2000, given:
. the recent strengthening of oil and gas prices;
. the recent increase in the U.S. rotary rig count; and
. continuing increases in the level of customer inquiries.
We look forward to a recovery in 2000 after our customers approve new capital
budgets.
Energy Services Group
During 1998, particularly in the second half of the year, the energy
industry experienced a downturn brought about by a combination of factors that
began in late 1997. Decreased demand in Asia for crude oil, increases in
production from OPEC producers, added production increases from Iraq and
unseasonably warm winters in North America during 1997 and 1998 all contributed
to the industry downturn experienced during 1998. Throughout 1998, crude oil
prices varied from $4 to $8 per barrel lower than 1997. Equally important, oil
prices were less than $15 per barrel for most of 1998, particularly during the
second half of the year, making many drilling programs economically infeasible.
Natural gas prices within the U.S., although significantly lower than 1997
levels, remained above $2 per million BTU until the third quarter of 1998.
During the third quarter of 1998, natural gas prices began a decline which,
combined with additional declines in crude oil prices, resulted in further
reductions in demand for hydrocarbon exploration and development. These factors
negatively impacted the industry and our company. Overall, the industry
fundamentals in 1998 were significantly weaker than 1997.
Integrated business solutions, long term overseas contracts and an
engineering and construction services backlog benefited our revenues throughout
1998 when compared to the industry activity and worldwide rig counts. Continued
interest in deepwater drilling in the Gulf of Mexico and projects in the North
Sea, combined with U.S. natural gas prices above $2 per million BTU benefited
the industry during the first and second quarters of 1998. As industry
indicators began to significantly weaken in the third quarter of 1998, we
started implementing actions to properly adjust our resources to projected
industry conditions.
Although 1998 was a difficult year and 1999 will also be difficult, we
believe that long term industry fundamentals will prevail. Demand for oil and
natural gas worldwide should recover and grow. Over time, the accelerating
depletion of existing production and the need for technologies that make
exploration and production economically feasible in the presence of low oil and
gas prices will provide growth opportunities. We believe that our customers will
continue to seek opportunities to lower the overall cost of exploring,
developing and enhancing the recovery of hydrocarbons. This will be done through
increased utilization of integrated solutions, application of new technology and
partnering and alliance arrangements. We believe that we have good opportunities
to expand our revenues and profits through greater participation in larger
projects that utilize our project management and integrated services
capabilities. However, uncertainty exists within the industry into the
foreseeable future.
60
<PAGE>
Engineering and Construction Group
While we have seen projects delayed and canceled in many of the areas that
we serve, we expect to see demand for our engineering and construction services
continue to increase over the long term. We believe the key to increasing our
revenues and improving our profit margins in the current environment will be our
ability to provide total customer satisfaction. Today's competitive environment
demands flexibility and innovation. To bring more value to our customers, we
must:
. demonstrate our ability to effectively cooperate with other service
and equipment suppliers and customers on larger projects;
. accept more project success risk through total project responsibility
or fixed price contracts;
. broaden our core competencies;
. acquire and fully utilize proprietary technology; and
. manage costs.
The Engineering and Construction Group has determined it will focus on demand in
the liquefied natural gas, fertilizer, petroleum, chemical and forest products
industries worldwide. We also see an expanding demand for our government
services capabilities in the United States and the United Kingdom as
governmental agencies, including local government units, continue to expand
their use of contractors to improve service levels and manage costs.
Dresser Equipment Group
Dresser Equipment Group's business activity is primarily determined by
activity levels within the energy industry. Products and systems of Dresser
Equipment Group include compressors, turbines, generators, electric motors,
pumps, engines and power systems, valves, instruments, meters and pipe
couplings, blowers and fuel dispensing systems. Demand for these products is
directly affected by global economic activity, which influences demand for
transportation fuels, petrochemicals, plastics, fertilizers, chemicals and by-
products of oil and gas. The environment for sales of Dresser Equipment Group
products is highly competitive and its sales and earnings can be affected by
changes in competitive prices, fluctuations in the level of activity in major
industry areas, and general economic conditions. The group strives to be the low
cost provider in this competitive environment.
Because of the impact of economic and political conditions, and uncertainty
in many parts of the world, several initiatives are in place to reduce capacity
costs and improve operating performance. We believe strong demand still exists
for the products and services provided by Dresser Equipment Group. The keys to
achieving favorable operating results over the course of the year, particularly
in light of industry conditions, will be to rely to a great extent on the
ability of the group to:
. increase business with the customers currently served; and
. provide integrated solutions together with other segments of our
company.
In the near term, activity levels remain uncertain. In the long term we
believe the demand for the products and systems provided by Dresser Equipment
Group will increase due to rising population and an expanding industrial base.
61
<PAGE>
Results of Operations - 1999 Compared to 1998
Third Quarter of 1999 Compared with the Third Quarter of 1998
Revenues Third Quarter Increase
Millions Of Dollars 1999 1998 (decrease)
-------------------------------------------- ------ ------ ----------
Energy Services Group....................... $1,700 $2,163 $ (463)
Engineering and Construction Group.......... 1,273 1,380 (107)
Dresser Equipment Group..................... 560 681 (121)
------ ------ ----------
Total revenues.............................. $3,533 $4,224 $ (691)
====== ====== ==========
Consolidated revenues decreased 16% to $3,533 million in the third quarter
of 1999 compared with $4,224 million in the same quarter of the prior year.
International revenues for the third quarter of 1999 were 68% of total revenue,
up from 67% in the third quarter of 1998.
Energy Services Group revenues were $1,700 million for the third quarter
of 1999, up slightly over the second quarter of 1999. These revenues reflect a
21% decrease from the same quarter of the prior year, while drilling activity,
as measured by the worldwide rotary rig count, decreased 15%. International
revenues were 71% of total Energy Services Group revenues for the quarter,
compared to 72% for the prior year quarter. The Energy Services Group includes
Halliburton Energy Services, Brown & Root Energy Services and Landmark Graphics
Corporation.
Revenues for all product service lines within Halliburton Energy Services
were 20-30% lower compared to the prior year quarter. Halliburton Energy
Services' U.S. revenues were down 27% versus a decrease in the U.S. average
rotary rig count of nearly 20%. Halliburton Energy Services' international
revenues were down 24%. Lower activity was experienced in all geographic regions
with the largest declines in revenues in Europe/Africa and Latin America where
revenues decreased approximately 30%. Declines in revenue reflect reduced unit
volume levels and continued pricing pressure, particularly in North
America.
Brown & Root Energy Services, which operates in the upstream oil and gas
engineering and construction services, experienced a decline in revenues of 18%
from the same period of the prior year. The decrease reflects the industry
downturn in activity caused by low oil prices or decisions by customers to delay
projects while reevaluating their needs following merger activity. Reduced
activity levels particularly impacted the U.K. sector of the North Sea. However,
increased activity in Asia Pacific partially offset the decline in the North
Sea.
Revenues from Landmark, which provides integrated exploration and
production information systems, increased 3% compared to the third quarter of
1998. Increased customer service and maintenance revenues and hardware sales
more than offset lower software sales. Many customers for our information system
product lines have put off software purchases due to customers' mergers, lower
activity levels and internal focus on Year 2000 issues.
Engineering and Construction Group revenues decreased slightly to $1,273
million in the third quarter of 1999 compared to $1,380 million in the same
quarter of the prior year. The Engineering and Construction Group is made up of
Kellogg Brown & Root and Brown & Root Services. International revenues were 68%
of total revenues for the group, compared to 65% for the prior year third
quarter.
Revenue declines are primarily due to winding up two major projects in
Algeria which were partially offset by higher revenues from activities on the
contract to provide logistical support services to U.S. military peacekeeping
efforts in the Balkans.
Dresser Equipment Group revenues decreased nearly 20% to $560 million for
the third quarter of 1999, as compared to $681 million for the third quarter
of 1998. International revenues were 60% of total Dresser Equipment Group
revenues. Revenues declined in all product lines reflecting lower spending by
customers.
Revenues from the compression and pumping line were lower by about 25%.
Sales of complete units of compression and pumping products were lower due to a
combination of projects and maintenance delayed to the fourth quarter, and a
small market share loss for Dresser-Rand as they resisted downward pricing
pressures during the quarter. As discussed in Note 12 to our quarterly financial
statements, we will sell our interests in Dresser-Rand Company and Ingersoll-
Dresser Pump Company to Ingersoll-Rand. The sale is expected to close on
December 30, 1999, at which time Dresser Equipment Groups activities in the
compression and pumping product lines will end. We believe the uncertainty
surrounding the ownership of the joint ventures was a contributing factor to
lower sales in the third quarter of 1999.
Revenues from the measurement product line were lower by 5% from the prior
year third quarter. Flow control had about 16% lower revenues while power
systems revenues were 14% lower than the prior year quarter. Excluding the
compression and pumping product line, revenues were down 12% compared to the
third quarter of 1998 and were flat compared to the second quarter of
1999.
Operating Income Third Quarter Increase
Millions of Dollars 1999 1998 (decrease)
------------------------------------------- ------ ------ ----------
Energy Services Group...................... $ 56 $ 263 $ (207)
Engineering and Construction Group......... 41 54 (13)
Dresser Equipment Group.................... 33 71 (38)
Special charges and credits................ -- (945) 945
General corporate.......................... (16) (20) 4
------ ------ ----------
Operating income(loss)..................... $ 114 $ (577) $ 691
====== ====== ==========
62
<PAGE>
Consolidated operating income for the third quarter of 1999 of $114
million declined 69% compared with $368 million of operating income before
special charges in the same quarter of the prior year. See Note 9 for
information updates on our 1998 special charge and restructuring activities.
Energy Services Group operating income decreased nearly 80% to $56 million
in the third quarter of 1999 compared with $263 million in the same quarter of
the prior year. Operating income was up 15% as compared to the previous quarter.
The operating margin for the third quarter of 1999 was 3.3%, compared to the
prior year third quarter of 12.2% and 2.9% in the second quarter of 1999.
In spite of aggressive cost reduction efforts to reduce excess personnel
and facilities, Halliburton Energy Services operating income was down 84%. Lower
activity and higher discounts reduced operating income for all Halliburton
Energy Services' product service lines. Lower rig counts resulted in excess
capacity in the oil field services sector which in turn placed severe pressure
on pricing. As a result of pricing pressures, Halliburton Energy Services'
average discounts in the U.S. increased five to six percentage points over the
third quarter of 1998. In spite of pricing pressures and increased discounting
in the U.S., all product service lines except logging and drilling were able to
maintain positive operating income in the third quarter of 1999. During the
quarter increased activity in some areas of the United States allowed prices to
stabilize and in some instances to increase slightly for the completion
products, stimulation, and drilling fluids product service lines.
Operating income from Brown & Root Energy Services' upstream oil and gas
engineering and construction activities declined 66% and margins declined 58%
from the prior year third quarter. The major factors contributing to this
decrease were lower activity levels in Europe/Africa and North America. Lower
activity levels in the more capital intensive product service lines continue to
hurt margins due to the high fixed costs associated with these lines.
Landmark recorded a small operating income for the quarter. Increased
activity in Europe/Africa more than offset declines in the U.S. and Latin
America.
Engineering and Construction Group operating income decreased 24% to $41
million in the third quarter of 1999 compared to $54 million in the third
quarter of the prior year. Operating margins were 3.2% in the third quarter of
1999 compared to 3.9% in the prior year third quarter.
Increased operating income in the natural gas and operations and
maintenance product service lines and from higher activity related to supporting
U.S. military peacekeeping efforts in the Balkans were offset by declines in
other lines. Depressed industry conditions in the construction and forest
products areas continue to affect these product service lines. In addition,
activities at Kellogg Brown & Root are now being affected due to delayed
projects in the hydrocarbon and chemical industries due to customer
consolidations and uncertainty surrounding energy prices.
Dresser Equipment Group operating income for the third quarter was $33
million, a decrease of 54% from the prior year third quarter of $71 million. All
product lines experienced a decrease in operating income primarily as a result
of lower activity levels and productivity slowdowns stemming from the announced
decision to relocate some manufacturing operations. Excluding the compression
and pumping product line, operating income for the group was 3% lower than the
second quarter of 1999 and 16% lower than the prior year third quarter.
Special Charges in the third quarter of 1998 were recorded for merger
related expenses and the downturn in the energy industry. See Note 9 to our
quarterly financial statements.
General corporate expenses were lower by $4 million from the prior year
third quarter. The reduction of expense is the result of combining two
corporate offices into one office.
NONOPERATING ITEMS
Interest Expense increased by $3 million to $38 million in the third
quarter of 1999 compared to the same quarter of the prior year due primarily to
increased short-term borrowings and additional long-term borrowings under our
medium-term note program. The increased borrowings were used to fund working
capital requirements and special charge costs, including, severance and property
exit costs.
Interest income in the third quarter of 1999 of $32 million increased $25
million compared to $7 million in the third quarter of 1998. The majority of
this increase related to interest on a tax settlement which was resolved during
the quarter.
Foreign currency gains (losses), net was a net $4 million loss for the
third quarter of 1999. This net loss compares to a net loss of $8 million in
the same period of 1998.
The effective income tax rate excluding special charges and credits was
about 39% for the third quarter of 1999, as compared to about 38% for the third
quarter of 1998.
Net income was $58 million, or 13 cents per diluted share compared to a net
loss of $527 million, or $1.20 per diluted share in the third quarter of 1998.
Net loss in the third quarter of 1998 includes an after-tax special charge of
$722 million.
63
<PAGE>
First Nine Months of 1999 Compared with the First Nine Months of 1998
<TABLE>
<CAPTION>
Revenues First Nine Months Increase
Millions of Dollars 1999 1998 (decrease)
- ------------------------------------------ ------ ------ ----------
<S> <C> <C> <C>
Energy Services Group..................... $ 5,134 $ 6,829 $ (1,695)
Engineering and Construction Group........ 4,153 4,165 (12)
Dresser Equipment Group................... 1,840 2,070 (230)
------- ------- ----------
Total revenues............................ $11,127 $13,064 $ (1,937)
======= ======= ==========
</TABLE>
Consolidated revenues decreased 15% to $11,127 million in the first nine
months of 1999 compared with $13,064 million in the first nine months of the
prior year. International revenues for the first nine months of 1999 were 68% of
total revenue, compared to 66% of total revenue in 1998. All groups had lower
revenues in the first nine months of 1999 compared to 1998 resulting from lower
activity in the energy industry due to oil price uncertainty and customer
consolidation in the energy industry.
Energy Services Group revenues were $5,134 million for the first nine
months of 1999, reflecting a 25% decrease from the first nine months of the
prior year, while drilling activity as measured by the worldwide rotary rig
count decreased 29%. International revenues were 72% of total Energy Services
Group revenues for the first nine months compared to 70% for the prior year
first nine months.
Revenues for all Halliburton Energy Services product service lines were
lower than the prior year. The largest percentage declines in revenues were in
North America and Latin America with revenues decreasing about 34%. Halliburton
Energy Services Europe/Africa revenues declined about 27%.
64
<PAGE>
Declines in revenue reflect reduced unit volume levels and continued pricing
pressures, particularly in North America. Halliburton Energy Services' U.S.
revenues were about 35% lower than in the first nine months of 1998, which is
consistent with the reduction in the average rotary rig count in the U.S.
during the same period. Halliburton Energy Services' international revenues were
25% lower through the first nine months of 1999 than in the first nine months of
1998. The international average rotary rig count for the same period was 23%
lower. The completion product service line had the smallest percentage decline
in revenues of about 24% for the first nine-month period of 1999 compared to
1998. Other product service lines within Halliburton Energy Services experienced
a 25-30% decrease from the same time period in the prior year.
Revenues from Brown & Root Energy Services' upstream oil and gas
engineering and construction services decreased about 18% from the same period
of the prior year reflecting the industry downturn in activity caused by low oil
prices. Reduced activity levels particularly impacted the U.K. sector of the
North Sea. Revenues from projects in North America and Asia/Pacific were higher
than in the prior year.
Revenues from Landmark's integrated exploration and production information
systems decreased 12% compared to the first nine months of 1998. Decreases
occurred in all product service lines. Many customers for our information system
product lines have put off software purchases due to customers' mergers, lower
activity levels and internal focus on Year 2000 issues.
Engineering and Construction Group total revenues decreased slightly to
$4,153 million in the first nine months of 1999 compared to $4,165 million in
the first nine months of the prior year. International revenues increased
approximately 11%.
Revenues from Kellogg Brown & Root decreased just under 10% in the first
nine months of 1999 compared to 1998. Europe/Africa was the most active region
with major projects in Algeria, Norway and Nigeria.
Brown & Root Services revenues for the first nine months of 1999 were up
28% over the prior year. The increase in revenues was due to increased
activities at the Devonport Dockyard in the U.K. and from logistics support
services to military peacekeeping efforts in the Balkans.
Dresser Equipment Group revenues decreased 11% to $1,840 million for the
first nine months of 1999 as compared to $2,070 million for the first nine
months of 1998. Revenues declined in all product lines reflecting reduced
demand. The compression and pumping product line had approximately 12% lower
revenues due to lower complete unit sales. The lower volume on complete unit
sales was partially offset by increased product service volume. As discussed in
note 12 to our quarterly financial statements, we will sell our interests in
Dresser-Rand Company and Ingersoll-Dresser Pump Company to Ingersoll-Rand. The
sale is expected to close on December 30, 1999, at which time Dresser Equipment
Group's activities in the compresssion and pumping product line will end. The
measurement product line's revenues were about 11% lower than the prior year due
to lower spending levels and delayed maintenance spending by multinational oil
companies and other customers. Revenues from flow control products were down 10%
compared to 1998 due to low upstream and downstream activity levels. Power
systems' revenues were 11% lower than the first nine months of 1998. The
decrease in power systems' revenues was due to reductions in the original
equipment sales related to lower gas production, higher gas storage levels and
decreased equipment utilization. Excluding the compression and pumping product
line, revenues were down 11% compared to the first nine months of 1998.
<TABLE>
<CAPTION>
Operating Income First Nine Months Increase
Millions of Dollars 1999 1998 (decrease)
- ------------------------------------------- ------ ------ ----------
<S> <C> <C> <C>
Energy Services Group...................... $ 162 $ 850 $ (688)
Engineering and Construction Group......... 163 187 (24)
Dresser Equipment Group.................... 140 187 (47)
Special charges and credits................ 47 (945) 992
General corporate.......................... (50) (59) 9
------ ------ ----------
Operating income........................... $ 462 $ 220 $ 242
====== ====== ==========
</TABLE>
Consolidated operating income excluding special charges and credits for the
first nine months of 1999 of $415 million declined 64% compared with $1,165
million in the first nine months of the prior year. See Note 9 to our quarterly
financial statements for information and updates on our 1998 special charge and
restructuring activities.
<PAGE>
Energy Services Group operating income decreased 81% to $162 million in the
first nine months of 1999 compared with $850 million in the first nine months of
the prior year. The operating margin for the first nine months of 1999 was 3.2%
compared to the prior year's first nine months operating margin of 12.4%.
In spite of significant cost reduction efforts to reduce excess personnel
and consolidate facilities, operating income for all Halliburton Energy Services
product service lines was significantly lower in the first nine months of 1999
due to lower activity and higher discounts. Overall, Halliburton Energy
Services' operating income declined 82% compares to the first nine months of
1998. Except for logging and drilling, all product service lines earned positive
operating income in a very difficult environment.
Operating income from Brown & Root Energy Services' upstream oil and gas
engineering and construction activities declined 73% due to lower levels of
business activity and lower manufacturing activities which carry large fixed
costs. Project losses of $36 million were recorded in the first nine months of
1999 on three large, technically difficult projects. In addition, the prior
year's first nine months benefited from about $40 million of project incentives.
We continue to work on the resolution of outstanding claims on several
technically difficult projects.
Landmark experienced a small loss for the first nine months of 1999. The
loss was caused by lower software sales volumes and severance payments to
employees terminated due to industry conditions.
Engineering and Construction Group operating income decreased 13% to $163
million in the first nine months of 1999 compared to $187 million in the first
nine months of the prior year. Operating margins were 3.9% in the first nine
months of 1999 compared to 4.5% in the prior year first nine months. Included in
the first nine months of 1998 was the settlement on a Middle East construction
project. Excluding this settlement in 1998, margins for 1999 of 3.9% are
slightly lower than the prior year's first nine months margins of 4.1%.
Dresser Equipment Group operating income for the first nine months of 1999
was $140 million, a decrease of 25% from the prior year's first nine months of
$187 million. Operating margins for the group were 7.6% in 1999 compared to
9.0% in the first nine months of 1998. Excluding the compression and pumping
product line, operating income for the first nine months of 1999 was 18% lower
than the prior year period.
Special credits in 1999 are the result of a change in estimate to the 1998
merger special charges for the acquisition of Dresser and industry downturn. We
continuously monitor the actual costs incurred and reexamine our estimates of
future costs. In the second quarter of 1999, we concluded that total costs,
particularly for severance and facility exit costs, were lower than previously
estimated. Therefore, we reversed $47 million of the $980 million that was
originally recorded. See Note 9 to our quarterly financial statements for
additional information on our 1998 special charge and restructuring activities.
General corporate expenses were lower by $9 million from the prior year's
first nine months. The reduction of expense is the result of combining two
corporate offices into one office.
Nonoperating Items
Interest expense increased to $108 million in the first nine months of 1999
compared to $96 million in the first nine months of the prior year due primarily
to increased short-term borrowings and additional long-term borrowings under our
medium-term note program. The increased borrowings were used to fund working
capital requirements and special charge costs, including, severance and property
exit costs.
Interest income in the first nine months of 1999 increased to $70 million
from $21 million in the first nine months of 1998. The increase in interest
income was due primarily to imputed interest income on the note receivable from
the sale of our interest in M-I L.L.C. and interest earned on settlement of
income tax issues in the United States and United Kingdom.
Other nonoperating, net in the first nine months of 1999 includes a $26
million charge we recorded in the second quarter relating to an impairment of
our net investment in Bufete Industriale, S.A. de C.V., a large specialty
engineering, procurement and construction company in Mexico. See Note 11 to our
quarterly financial statements for additional information.
66
<PAGE>
The effective income tax rate excluding special charges and credits was
about 39.3% for the first nine months of 1999 compared to 37.6% for the first
nine months of 1998. The rate for the first nine months was adversely affected
by foreign income taxes and is expected to range between 38% and 40% for the
year of 1999, excluding the special charge credits.
Cumulative effect of change in accounting method of $19 million after tax
or 4 cents per diluted share reflects our adoption of Statement of Position 98-
5. Estimated annual expense for 1999 under Statement of Position 98-5 after
recording the cumulative effect of the change is not expected to be materially
different from amounts expensed under the prior accounting treatment. See Note
10 to our quarterly financial statements for additional information.
Results of Operations - 1998 Compared to 1997 and 1996
<TABLE>
<CAPTION>
Revenues
Millions of dollars 1998 1997 1996
----------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Energy Services Group.................... $ 9,009.5 $ 8,504.7 $ 6,515.4
Engineering and Construction Group....... 5,494.8 4,992.8 4,720.7
Dresser Equipment Group.................. 2,848.8 2,774.1 2,710.5
--------- --------- ---------
Total revenues........................... $17,353.1 $16,271.6 $13,946.6
========= ========= =========
</TABLE>
Revenues for 1998 were $17,353.1 million, an increase of 7% over 1997
revenues of $16,271.6 million and an increase of 24% over 1996 revenues of
$13,946.6 million. Approximately 65% of our consolidated revenues were derived
from international activities in 1998 compared with 60% in 1997 and 59% in 1996.
Energy Services Group revenues were $9,009.5 million for 1998, an increase
of 6% over 1997 revenues of $8,504.7 million and an increase of 38% over 1996
revenues of $6,515.4 million. Revenues in the first half of 1998 were higher
than comparable periods of the prior two years. Revenues in the second half of
1998 were impacted by the steep decline in activity as measured by the worldwide
average rotary rig count. The yearly average worldwide rotary rig count fell 13%
in 1998 compared to 1997, including a third quarter comparative decline of 21%
and a fourth quarter comparative decline of 30%, as customers of the Energy
Services Group reacted to reduced prices for their products. Revenues for
pressure pumping activities in 1998 were about 3% lower than 1997 but increased
compared to 1996. The decrease in pressure pumping activities for 1998 compared
to 1997 occurred in the second half of 1998. Other product and service lines
experienced similar results in this time period. The revenue declines in 1998
compared to 1997 were more pronounced in North America, including the Gulf of
Mexico shelf which declined about 6% and Venezuela which declined about 25%.
Revenues from upstream oil and gas engineering services increased about 35% in
1998 compared to 1997 and 1996, benefiting from activities in subsea product
lines and from large engineering projects. Revenues for integrated exploration
and production information systems reached record high levels in 1998.
Approximately 67% of the Energy Services Group's revenues were derived from
international activities each year in 1998, 1997 and 1996.
Engineering and Construction Group revenues were $5,494.8 million for 1998,
an increase of 10% from 1997 revenues of $4,992.8 million and an increase of 16%
over 1996 revenues of $4,720.7 million. The increase in revenues in 1998
reflects liquefied natural gas activities in Asia and Africa, an enhanced oil
recovery project in Africa, and a major ethylene project in Singapore. There
were also increased revenues in Asia/Pacific from Kinhill, which was acquired in
the third quarter of 1997. See Note 14 to our annual consolidated financial
statements. For 1998 compared to 1997, revenues declined because of the sale of
the environmental services business in December 1997 and lower activity levels
for repair and refitting services for the British Royal Navy's fleet of
submarines and surface ships. For 1997 compared to 1996, revenues were aided by
the consolidation of Devonport Management Limited as a result of our increased
ownership percentage in that subsidiary. See Note 14 to our annual consolidated
financial statements. Revenues were reduced in 1997 compared to 1996 due to
lower levels of
67
<PAGE>
activity under service contracts with the U.S. Department of Defense to provide
technical and logistical support for military peacekeeping operations in Bosnia
by approximately $290.0 million.
Dresser Equipment Group revenues were $2,848.8 million in 1998, an increase
of 3% over 1997 revenues of $2,774.1 million, and an increase of 5% over 1996
revenues of $2,710.5 million. The compression and pumping and flow control
product lines experienced small increases in revenues. The measurement and power
systems product lines reported a slight decline in revenues for 1998 compared to
1997. Most of the increase in 1997 compared to 1996 came from the compressor
joint venture with Ingersoll-Rand and the measurement product lines.
Operating Income
Millions of dollars 1998 1997 1996
---------------------------------------- -------- -------- --------
Energy Services Group................... $ 971.0 $1,019.4 $ 698.0
Engineering and Construction Group...... 237.2 219.0 134.0
Dresser Equipment Group................. 247.8 248.3 229.3
General corporate....................... (79.4) (71.8) (72.3)
Total special charges and credits....... (980.1) (16.2) (85.8)
-------- -------- --------
Operating income........................ $ 396.5 $1,398.7 $ 903.2
======== ======== ========
Operating income was $396.5 million for 1998 compared to $1,398.7 million
for 1997 and $903.2 million for 1996. Excluding special charges of $980.1
million, $16.2 million and $85.8 million during 1998, 1997 and 1996,
respectively, operating income for 1998 decreased by 3% from 1997 and increased
by 39% over 1996. See Note 7 to our annual consolidated financial statements.
Energy Services Group operating income in 1998 was $971.0 million, a
decrease of 5% from 1997 operating income of $1,019.4 million and an increase of
39% over 1996 operating income of $698.0 million. Operating margins were 10.8%
in 1998 compared with 12.0% in 1997 and 10.7% in 1996. Most of the decline in
operating margins in 1998 compared to 1997 can be attributed to declines in the
completion products and pressure pumping lines, to lower activities in North
America and Venezuela, and to additional job loss provisions of $60 million
recorded in the fourth quarter of 1998. Approximately 54%, 59% and 63% of the
Energy Services Group's operating income was derived from international
activities for 1998, 1997 and 1996, respectively. Operating income for pressure
pumping in 1998 was about 10% lower than 1997. Activity levels were reduced in
response to lower oil and gas prices. Other product and service lines were also
affected by reduced activity levels. Only the drilling related lines had
significantly better operating results in 1998 over 1997. Operating income in
1997 for the group benefited from increased activity levels and increased prices
charged to customers, especially for pressure pumping services in North America.
Operating income for drilling fluids increased in 1997 over 1996 due to the
growth of more technically demanding wells being drilled, particularly in the
Gulf of Mexico. Operating income for upstream oil and gas engineering activities
in 1998 was about the same as 1997 results. This occurred even after providing
additional reserves for project losses in the North Sea, North Africa and Latin
America related to variation orders for ongoing projects which we do not believe
will be accepted by the customers due to current industry conditions. Energy
Services Group results for 1996 include $35.0 million of incentive revenue on
its portion of the cost savings realized on the BP Andrew alliance. The alliance
completed the project seven months ahead of the scheduled production of oil and
achieved a $125.0 million savings compared with the targeted cost. Operating
income from pipecoating activities were substantially improved in 1997 compared
to 1996 due to higher activity levels in the Far East, Middle East and the
United States.
Engineering and Construction Group operating income for 1998 of $237.2
million increased 8% over 1997 and 77% over 1996. Operating margins were 4.3% in
1998 compared with 4.4% for 1997 and 2.8% for 1996. Operating income in 1998
includes a favorable settlement of a claim on a Middle Eastern construction
project. Excluding this settlement, operating margins for 1998 were 4.0%.
Operating income and margins in 1998 were negatively affected by losses in the
fourth quarter on existing highway and paving business of $9 million and for
selected projects which were affected by the economic downturn in Asia. The
Engineering and Construction Group has not started any new significant jobs in
Asia. Improvement in operating income in 1997 over 1996 was realized through
overhead reductions, a focus on higher margin business lines and the
consolidation of Devonport Management Limited as a result of our increased
ownership percentage in that subsidiary. See Note 14 to our
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<PAGE>
annual consolidated financial statements. The 1997 operating income improvements
over 1996 were aided by liquefied natural gas activities and oil recovery work
in Africa together with engineering services for the fertilizer industry in
Latin America. Operating income in 1996 included a $17.1 million charge for the
impairment of the Engineering and Construction Group's investment in the Dulles
Greenway toll road extension project.
Dresser Equipment Group operating income in 1998 was $247.8 million or
almost unchanged compared to 1997 operating income of $248.3 million. Operating
income for 1998 increased 8% over 1996 operating income of $229.3 million.
Operating income was negatively impacted in 1998 by $17 million of fourth
quarter merger related expenses. Operating income in 1998 for the compression
and pumping product line increased 30% compared to 1997 due to restructuring
initiatives instituted in late 1997 and increased revenues. Operating income for
the flow control product line improved 20% in 1998 over 1997 from cost
improvements, better product mix, and increased volume. Operating income for the
measurement product line decreased less than 5% in 1998 compared to 1997 due to
weakness in the gas metering business as gas utilities continued to work off
their excess inventory. The power systems product line operating income declined
about 35% in 1998 compared to 1997 due to customers' reduced capital spending
caused by softer demand in the gas compression and refining industries.
Operating income increased in 1997 compared to 1996 primarily from profit
improvement initiatives started in prior years by Ingersoll-Dresser Pump
Company, introduction of new technologies by Wayne fuel dispensing systems, and
improved margins and product mix at Energy Valve.
General corporate expenses for 1998 were $79.4 million and include expenses
for operating Dresser's corporate offices as well as our corporate offices. As a
percent of consolidated revenues, general corporate expenses were 0.5% in 1998
compared to 0.4% in 1997 and 0.5% in 1996.
Nonoperating Items
Interest expense was $136.8 million for 1998 compared to $111.3 million in
1997 and $84.6 million in 1996. The increase in 1998 over 1997 is due to the
increased level of short-term borrowings outstanding during 1998. These
borrowings carry a lower interest rate than our long-term debt. They were used
for working capital, capital expenditures and acquisitions. The increase in 1997
over 1996 is due to the issuance of debt under our medium-term note program in
1997 and a full year's interest on $300.0 million of long-term debentures issued
in August 1996 at a higher interest rate than the previous short-term debt.
Interest income increased to $27.8 million in 1998 compared to $21.9
million in 1997 and $26.9 million in 1996. Interest income is generally related
to the levels of invested cash we maintain.
Foreign currency gains (losses) netted to a loss of $12.4 million in 1998
compared to $0.7 million in 1997 and $19.1 million in 1996. The losses in 1998
occurred mainly in Asia/Pacific currencies. The 1996 losses were primarily due
to devaluations of the Venezuelan bolivar and costs of hedging foreign exchange
exposures of an Italian subsidiary.
Provision for income taxes was $244.4 million in 1998. The provision for
income taxes in 1998 includes a benefit of $234.1 million for special charge
items that are tax deductible. Nondeductible special charge items of $109.0
million include merger transaction costs and nondeductible goodwill which was
determined to be impaired. Excluding the special charge and applicable tax
benefits in 1998, the effective tax rate was 38.0%. The 1997 provision of $491.4
million was higher than the 1996 provision of $248.4 million due in part to
improved earnings. The effective income tax rate was 37.4% in 1997, compared
with 29.9% in 1996. The lower effective income tax rate and provision for 1996
are due to credits of $43.7 million recorded during the third quarter of 1996 to
recognize net operating loss carryforwards and the settlement of various issues
with the Internal Revenue Service. Excluding the tax benefits recorded in 1996,
the effective income tax rate for 1996 was 35.2%. See Note 6 to our annual
consolidated financial statements.
Minority interest in net income of consolidated subsidiaries was $49.1
million in 1998 compared to $49.3 million in 1997 and $24.7 million in 1996. The
increase in 1997 over 1996 is due primarily to Dresser Equipment Group's
ownership interests in Dresser-Rand and the Engineering and Construction Group's
ownership interests in Devonport Management Limited, which increased from
approximately 30% to 51% during March 1997.
69
<PAGE>
Net income (loss) for 1998 was a loss of $14.7 million for a $0.03 diluted
loss per share. In 1997 net income of $772.4 million yielded $1.77 diluted
income per share while 1996 net income of $557.9 million yielded $1.29 diluted
income per share.
Liquidity and Capital Resources
First Nine Months of 1999 Compared With the First Nine Months of 1998
We ended the third quarter of 1999 with cash and equivalents of $295
million, an increase of $92 million from the end of 1998. Beginning in 1998, we
changed Dresser's fiscal year-end to Halliburton's calendar year-end. Dresser's
cash flows in 1998 are measured from December 31, 1997, rather than from the
October 31, 1997 balances as reported on the consolidated balance sheets in our
1998 Annual Report.
Operating activities. Cash flows from operating activities used $116
million in the first nine months of 1999, as compared to $314 million provided
by operating activities in the first nine months of 1998. Working capital items,
which consists of receivables, inventories, accounts payable and other working
capital, net, used $550 million in the current year compared to $741 million in
the prior year period. In 1999 working capital requirements were lower than the
prior year due to lower levels of business activity. Included in these changes
to working capital and other net changes are cash outflows for special charges
for personnel reductions, facility closures and integration costs which required
approximately $190 million of cash in the first nine months of the current year.
Investing activities. Capital expenditures were $433 million for the first
nine months of 1999, a decrease of 37% from the same period of the prior year.
The decrease in capital spending primarily reflects the current operating
environment. Capital spending was mostly for equipment and infrastructure for
the Energy Services Group. We also continued our planned investments in our
enterprise-wide information system. Cash flows from investing activities
includes $254 million of the $265 million receivable from the sale of our 36%
interest in M-I L.L.C. that was collected in the second quarter of 1999.
Imputed interest on this receivable of $11 million is included in operating cash
flows.
Financing activities. Cash flows from financing activities were $234
million in the first nine months of 1999 compared to $236 million in the first
nine months of 1998. We repaid $69 million of our long-term debt
and borrowed $436 million, net of repayments, in short-term funds consisting of
commercial paper and bank loans in the first nine months of 1999. In the same
period of 1998, we borrowed $427 million in short-term funds, net of repayments,
consisting of commercial paper and bank loans. Proceeds from exercises of stock
options provided cash flows of $44 million in the first nine months of 1999
compared to $45 million in the same period of the prior year.
We believe we have sufficient borrowing capacity to fund our cash needs. As
of September 30, 1999, we have committed short-term lines of credit totaling
$650 million available and unused. We also have other short-term lines totaling
$315 million. There were no borrowings outstanding under any of these
facilities. Our combined short-term notes payable and long-term debt was 36% of
total capitalization at September 30, 1999, which remains within our target
range. At December 31, 1998 our debt to total capitalization was 32.4%.
Year ended 1998 Compared to 1997 and 1996
We ended 1998 with cash and equivalents of $202.6 million compared with
$384.1 million in 1997 and $446.0 million in 1996. Beginning in 1998, we
changed Dresser's fiscal year-end to our calendar year-end. Dresser's cash flows
in 1998 are measured from December 31, 1997, rather than from the October 31,
1997 balances as reported on the consolidated balance sheets.
Cash flows from operating activities were $454.1 million for 1998 compared
to $833.1 million for 1997 and $864.2 million for 1996. In 1998, the primary
use of cash for operating activities was to fund increased working capital
requirements.
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<PAGE>
Cash flows used in investing activities were $846.1 million for 1998,
$873.3 million for 1997 and $759.1 million for 1996. The majority of cash used
for investing activities during 1998 was for capital expenditures. Capital
expenditures in 1998 increased slightly over 1997. Our continued investment in
our enterprise-wide information systems initiative offset declines in other
capital spending. Cash used in investing activities in 1997 also includes the
acquisitions of OGC of approximately $118.3 million, and Kinhill of
approximately $34.0 million, and an interest in PES (International) Limited of
approximately $33.6 million. These uses were offset by the sale of our
environmental business for about $32.0 million. In 1996, investing activities
included a $41.3 million expenditure for our share of the purchase price of a
subsidiary acquired by our former 36% owned affiliate, M-I L.L.C. Also in
1996, several other acquisitions were made which used $32.2 million of cash.
Cash flows from financing activities provided $253.7 million in 1998 and
used $20.6 million in 1997 and $148.4 million in 1996. We issued $150.0 million
of long-term debt under our medium-term note program in 1998. Also in 1998, we
had net borrowings of short-term debt of $369.3 million and proceeds from
exercise of stock options of $49.1 million. Dividends to shareholders used
$254.2 million of cash in 1998. During 1997, cash was provided by proceeds from
debt issued under our medium-term note program of $300.0 million plus $3.2
million of other long-term borrowings and proceeds from the exercise of stock
options of $71.5 million. Offsetting these inflows were payments on long-term
debt of $17.7 million, net repayments on short-term borrowings of $85.8 million,
payments to reacquire common stock of $44.1 million, and dividend payments of
$250.3 million. Cash used for financing activities during 1996 consisted
primarily of dividend payments of $239.6 million and payments to reacquire
common stock of $235.2 million. These uses were offset by proceeds from long-
term borrowings of $295.6 million and proceeds from the exercise of stock
options of $42.6 million. Our combined short-term notes payable and long-term
debt was 32%, 24% and 23% of total capitalization at the end of 1998, 1997 and
1996, respectively.
We have the ability to borrow additional short-term and long-term funds if
necessary. See Note 8 to our annual consolidated financial statements regarding
our short-term lines of credit, notes payable and long-term debt.
Financial Instrument Market Risk
We are exposed to market risk from changes in foreign currency exchange
rates, and to a lesser extent, to changes in interest rates. To mitigate market
risk, we selectively hedged our foreign currency exposure through the use of
currency derivative instruments. The objective of our hedging is to protect our
cash flows related to sales or purchases of goods or services from fluctuations
in currency rates. The use of derivative instruments include the following
types of market risk:
. volatility of the currency rates;
. tenor or time horizon of the derivative instruments;
. market cycles; and
. the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We use a statistical
model to estimate the potential loss related to derivative instruments used to
hedge the market risk of our foreign exchange exposure. The model utilizes
historical price and volatility patterns to estimate the change in value of the
derivative instruments. Changes in value could occur from adverse movement in
foreign exchange rates for a specified time period at a specified confidence
interval. The model is an undiversified calculation based on the variance-
covariance statistical modeling technique and includes all foreign exchange
derivative instruments outstanding at September 30, 1999. The resulting value at
risk of $2 million estimates, with a 95% confidence interval, the potential loss
we could incur in a one-day period from foreign exchange derivative instruments
due to adverse foreign exchange rate changes.
Our interest rate exposures at September 30, 1999 were not materially
changed from December 31, 1998.
Foreign exchange
We operate in over 120 countries. However, we hedge only foreign
currencies that are highly liquid and select derivative instruments or a
combination of instruments whose fluctuation in value is offset by the
fluctuation in value to the underlying exposure. These hedges generally have
expiration dates that do not exceed two years. We manage our foreign exchange
hedging activities through a control system which includes monitoring of cash
balances in traded currencies and use analytical techniques which include value
at risk estimations, and other procedures.
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Interest rates
We have exposure to interest rate risk from our long-term debt with
interest based on LIBOR for the U.K. pound sterling plus 0.75% which was
incurred to acquire the Royal Dockyard in Plymouth, England. This risk is
partially offset by a compensating balance of approximately one-half of the
outstanding debt amount which earns interest at the same rate. Our use of the
compensating balance is restricted and the balance is included in other assets
on our consolidated balance sheets. See Note 8 to our annual consolidated
financial statements for additional discussion of the Dockyard loans.
Value at risk. We use a statistical model to estimate the potential loss
related to derivative instruments used to hedge the market risk of our foreign
exchange exposure. The model utilizes historical price and volatility patterns
to estimate the change in value of the derivative instruments. Changes in value
could occur from adverse movements in foreign exchange rates for a specified
time period at a specified confidence interval. The model is an undiversified
calculation based on the variance-covariance statistical modeling technique and
includes all foreign exchange derivative instruments outstanding at September
30, 1999. The resulting value at risk of $2.0 million estimates, with a 95%
confidence interval, the potential loss we could incur in a one-day period from
foreign exchange derivative instruments due to adverse foreign exchange rate
changes.
Interest rate exposures. The following table represents principal amounts
at December 31, 1998, and related weighted average interest rates by year of
maturity for our restricted cash and long-term debt obligations. Other notes
with varying interest rates of $10.2 million as shown in Note 8 to our annual
consolidated financial statements are excluded from the following table. Our
interest rate exposures at September 30, 1999 were not materially changed from
December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------------------
Later Fair
Millions of dollars 1999 2000 2001 2002 2003 Years Total Value
------ ------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
- -------
Restricted cash - British pound
sterling 4.1 4.1 4.1 2.6 -- -- 14.9 14.9
Average variable rate 6.38% 6.17% 6.04% 5.93% -- -- 6.22%
Long-term debt:
US dollar 50.0 300.0 -- 75.0 138.6 825.0 1,388.6 1,538.0
Average fixed rate 6.27% 6.25% -- 6.30% 8.0% 7.58% 7.56%
British pound sterling
(Dockyard loans) 8.1 8.1 8.1 5.1 -- -- 29.4 29.4
Average variable rate 6.38% 6.17% 6.04% 5.93% -- -- 6.22%
</TABLE>
Weighted average variable rates are based on implied forward rates in the
yield curve at December 31, 1998. These implied forward rates should not be
viewed as predictions of actual future interest rates. Restricted cash and the
Dockyard loans earn interest at LIBOR for U.K. pounds sterling plus 0.75%.
Instruments that are denominated in currencies other than the U.S. dollar
reporting currency are subject to foreign exchange rate risk as well as interest
rate risk.
Restructuring Activities
During the third and fourth quarters of 1998 we incurred special charges
totaling $980 million related to the Dresser merger and industry downturn.
The charges included amounts for asset, personnel, facility, merger transaction
and other related charges. The 1998 special charges included actions necessary
to more efficiently meet the needs of our customers, to eliminate duplicate
capabilities and excess capacity and to position us for the future. These
actions were also taken to integrate our operations into three business
segments, supported by a shared services organization across the entire
company.
All business segments, shared services and corporate offices have been
impacted since the Dresser merger by the restructuring activities, including:
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. integration of two corporate offices;
. integration of operational and shared services officers and
management teams;
. personnel reductions necessary to match the new business
structure and industry environment;
. integration of businesses and product service lines, including:
- Halliburton Energy Services' drilling operations into Sperry
Sun,
- Dresser Oil Tools into Halliburton Energy Services completion
products,
- SubSea, Rockwater and Wellstream within Brown & Root Energy
Services, and
- M.W. Kellogg and Brown & Root Engineering and Construction into
Kellogg Brown & Root,
. integration of facilities across business units and the entire
company;
. impairments or write-offs of intangible assets and software;
. impairments or write-offs of excess or duplicate machinery, equipment,
and inventory; and
. integration of shared service support functions.
We believe the management and employees have remained focused on the needs
of our customers during this transitional period, although transitional demands
have required considerable amounts of time, energy and resources. At the time
of the merger, our senior management was selected from the aggregate senior
officers of Dresser and Halliburton. Operational and shared service managers
were then similarly selected. By the end of the second quarter of 1999, merger
integration activities were substantially complete.
We expect most restructuring activities accrued for in the 1998 special
charges to be completed and expended by the end of 1999. The exceptions are
reserves for losses on the disposal of facilities held for sale and any actions,
which may require negotiations with outside parties extending past the end of
the year. Through September 30, 1999, we used $302 million in cash for items
associated with the 1998 special charges. We estimate that the unutilized
special charge reserve balance at September 30, 1999 will result in future cash
outlays of approximately $93 million over the remainder of 1999 and possibly
into 2000.
During the second quarter of 1999, we concluded that the total estimated
costs of items included in the special charges, particularly severance and
facility exit costs, were lower than previously estimated. Therefore, we
reversed $47 million of the 1998 special charges.
We have in process a program to exit approximately 500 properties including
service, administrative and manufacturing facilities. Approximately 400 of the
properties were accrued for in the 1998 special charges. Most of these
properties are within the Energy Services Group. Through September 30, 1999 we
have vacated 408 of the approximate 500 total facilities. We have sold or
returned to the owner 272 of the vacated properties.
Since July 1998, approximately 18,500 employees, consultants and contract
personnel have left Halliburton, while approximately 11,400 new personnel have
been hired, resulting in net total personnel reductions of approximately 7,100
through September 30, 1999. A majority of the new personnel were related to
projects, the largest being expansion of the contract to support U.S. military
peacekeeping activities in the Balkans. Approximately 9,300 of the total
personnel reductions through the third quarter of 1999 are associated with the
1998 special charge.
We believe the benefits of the Dresser merger and other restructuring
activities are evidenced by our ability to operate profitably in spite of
depressed oil and gas industry conditions that have existed since the second
half of 1998. As a result of the initiatives discussed above, we believe we will
ultimately reduce our costs by an estimated $500 million
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on an annual basis. We are accomplishing these reductions primarily through
reduced personnel and facility requirements, enhanced technologies and the
efficiencies of common shared services, for example, procurement, treasury,
legal, tax, and accounting.
The 1998 charges included $509.4 million of asset related write-offs,
write-downs and charges; $234.7 million of personnel related charges; $126.2
million of facility consolidation charges; $64.0 million of merger transaction
costs; and $45.8 million of other related charges.
Asset Related Charges. The $509.4 million of asset related charges related
to impairments created by both the merger with Dresser and market conditions.
We reviewed our assets by product service line to determine if impairments
existed due to these major events as required by SFAS No. 121.
The overall market assumptions on which the impairment computations were
made assumed that drilling activity for calendar year 1999, as measured by
worldwide rig count, would be 1,900 rigs, an increase from the 1,700 level in
the third quarter of 1998. Rig count for calendar year 2000 and beyond was
assumed to increase about 3% per year based upon estimated long-term growth in
worldwide demand for oil and gas. These assumptions represented our best
estimates and were based on market data available at the time of the merger.
Approximately $325.9 million of the asset related charges related to two
product service lines, drilling and logging.
Our pre-merger drilling business consisted of logging-while-drilling,
measurement-while-drilling and directional drilling services. The majority of
our pre-merger logging-while-drilling business and a portion of the pre-merger
measurement-while-drilling business ("Pathfinder") were required to be sold
under a Department of Justice Consent Decree. We plan to integrate the
remaining drilling business with the Sperry Sun operations of Dresser. Our
strategy will focus generally on operating under the Sperry Sun name and using
Sperry Sun's superior technology, tools and industry reputation. Our remaining
pre-merger drilling assets and technology are to be de-emphasized as they wear
out or become obsolete. These tools will not be replaced resulting in
significant decreases in future cash flows and an impairment of the excess of
cost over net assets and related long-lived assets.
Significant forecast assumptions included a revenue decline in the
remaining pre-merger drilling business due to the Pathfinder sale in the first
year. Related revenue and operating income over the following 10 years were
projected to decline due to reduced business opportunities resulting from our
shift in focus toward Sperry Sun's tools and technologies. In addition to the
$125.2 million impairment of excess of cost over net assets acquired, related
long-lived asset impairments consisted of $61.0 million of property and
equipment and $13.7 million of related spare parts, the value of which was
estimated using the held for use model during the forecast period. In addition,
an impairment of $ 3.0 million was recorded related to property and equipment
and $18.0 million of spare parts sold in the Pathfinder sale using the held for
sale model.
The merger of Halliburton and Dresser enabled the acceleration of a
formation evaluation strategy. This strategy takes advantage of Sperry Sun's
logging-while-drilling competitive position and reputation for reliability
combined with our Magnetic Resonance Imaging Logging ("MRIL") technology
acquired with the acquisition of NUMAR Corporation in 1997. Prior to the merger,
we were focused on growing the traditional logging business while working toward
development of new systems to maximize the MRIL technology. The merger allows us
to implement the new strategy and place the traditional logging business in a
sustaining mode. This change in focus and strategy will result in a shift of
operating cash flows away from our traditional logging business creating an
impairment of the excess of cost over net assets and related long-lived assets
related to our logging business.
Significant forecast assumptions included revenues decreasing slowly over
the 10-year period, reflecting the decline in the traditional logging markets.
Operating income initially was forecasted to increase due to cost cutting
activity, and then to decline as revenue decreased due to the significant fixed
costs in this product service line. In addition to the $51.2 million impairment
of the excess of cost over net assets acquired, related long-lived asset
impairments consisted of $22.0 million of property and equipment and $31.8
million of spare parts which management estimated using the held for use model
during the forecast period.
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Other significant Energy Services Group product service lines included in
asset related charges were Mono Pumps of approximately $43.6 million and AVA of
$37.0 million. See Note 7 to our annual consolidated financial statements for
further information.
See Note 9 to our quarterly consolidated financial statements for
information and updates on accrued special charges incurred in 1998.
Other Merger Related Activities
We expect to incur total merger related incremental costs of approximately
$122 million that do not qualify as special charges. These expenses include $24
million incurred in the fourth quarter of 1998 and approximately $66 million
incurred during the first nine months of 1999. These costs include:
. additional reductions in personnel;
. additional disposal of properties;
. relocating personnel, inventory and equipment as part of facility
consolidation efforts;
. implementing a company-wide common information technology
infrastructure;
. merging engineering work practices;
. harmonizing employee benefit programs; and
. developing common policies and procedures to provide best practices.
Environmental Matters
Some of our subsidiaries are involved as a potentially responsible party in
remedial activities to clean up several "Superfund" sites under federal law.
Federal law imposes joint and several liability, if the harm is indivisible, on
certain persons without regard to fault, the legality of the original disposal
or ownership of the site. It is very difficult to estimate a value for the
potential impact of compliance with environmental protection laws. However, our
management believes, that any liability of our subsidiaries for all but one site
will not have a material adverse effect on our results of operations. See Note
10 to our annual consolidated financial statements and Note 6 to our quarterly
consolidated financial statements for the quarter ended September 30, 1999 for
additional information on the one site.
Year 2000 Issues
The Year 2000 or Y2K issue is the risk that systems, products and equipment
utilizing date-sensitive software or computer chips with two-digit date fields
will fail to recognize properly the Year 2000. The Year 2000 issue is a problem
for most companies due to the pervasive use of computer systems. Failures by
our software and hardware or that of government entities, service providers,
suppliers and customers could result in interruptions of our business which
could have a material adverse impact on the results of our operations.
Failure to address Year 2000 issues could result in business disruption
that could materially affect our operations. In an effort to minimize potential
business interruptions we continue to develop and refine our Year 2000
contingency plans. Our Year 2000 program is designed to:
. prevent or minimize the occurrence of Year 2000 problems; and
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. limit our exposure to potential third party legal actions to the
extent reasonably possible.
Our Year 2000 program. In response to the Year 2000 issue we have
implemented an enterprise-wide Year 2000 program. The program was expanded
after the merger to include Dresser, which had a similar program. The program is
designed to identify, assess and address significant Year 2000 issues in our key
business operations, including among other things:
. products;
. services;
. suppliers;
. business applications;
. engineering applications;
. information technology systems;
. non-information technology systems including systems embedded in
delivery tools and devices and in equipment that controls or monitors
other systems;
. facilities;
. infrastructure; and
. joint venture projects.
Systems. We operate in over 120 countries worldwide, and in over 1,000
locations including offices, manufacturing facilities, warehouses and field
camps. We maintain a Year 2000 database of over 15,000 individual information
technology and non-information technology systems. Non-information technology
items tracked in the database include systems embedded in tools and devices used
to deliver our services, and in equipment that controls or monitors other
systems. We believe that approximately 90 out of the more than 15,000 systems
in our database are significant based upon discussions with managers and our
wide use of the systems. These significant systems are all being addressed
through our Year 2000 program.
Year 2000 progress. For reporting purposes, we have divided our Year 2000
progress into four phases. The assessment phase includes inventory and
identification of all of our systems and the assessment of the criticality of
each system. The remediation phase includes strategy, planning, and execution
for remediating, upgrading or replacing all of our systems that are not Year
2000 ready. The testing phase includes both unit testing and system testing
where applicable. The deployment and certification phase includes delivery of
systems to our locations and certification of the readiness of the systems as
deployed in each location. As of September 30, 1999 we have completed
approximately:
. 99% of the assessment phase;
. 99% of the remediation phase;
. 97% of the testing phase; and
. 93% of the deployment and certification phase.
As of September 30, 1999 we assess our overall completion of Year 2000
related tasks at approximately 96%.
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The assessment and phase remediation were substantially complete on
September 30, 1999 and the testing phase was substantially completed as of
October 31, 1999. We had substantially completed the deployment and
certification phases of our Year 2000 program by November 30, 1999.
Year 2000 issue budget and costs. Our Year 2000 program does not depend
upon the allocation of Year 2000 budget funds that could limit necessary
spending. Instead, our management is required to spend the funds necessary to
achieve Year 2000 readiness. We expect to spend between 10% and 15% of our
annual information technology budget on Year 2000 remediation and deployment
costs.
All Year 2000 expenditures are funded from operations and expensed in the
year incurred.
As of September 30, 1999, approximately $40 million has been spent on our
Year 2000 program. That amount does not include costs (1) associated with
initiatives that are independent of Year 2000 issues or (2) associated with our
global implementation of an enterprise-wide business information system which
will replace many of our key finance, administrative, and marketing software
systems during 1999 and 2000. Also not included are any costs associated with
our replacement and standardization of desktop computing equipment and
information technology infrastructure.
We do not maintain precise breakdowns of costs for remediation of software
and remediation of non-information technology systems. Of the approximately $40
million, pre-tax, spent through September 30, 1999, we estimate the cost of
remediation of software and non-information technology systems as follows:
. remediation of software systems - $28 million;
. remediation of non-software information technology items - $7
million; and
. remediation of non-information technology systems - $5 million.
We estimate that by January 1, 2000 we will have spent approximately $45
million on Year 2000 issues.
Third party liability. After reviewing our third party liability exposure
related to Year 2000 issues, including:
. an overall assessment of our Year 2000 program performance to date;
. the nature and duration of the warranties and other limitations on
liability traditionally offered, excluded and received by
Halliburton's business units; and
. Year 2000 standards adopted by our business units for new contracts,
we believe that our Year 2000 liability to third parties will not be
material to our business, results of operations or financial
condition.
International exposure. Our potential Year 2000 exposure in international
operations is being addressed in two primary ways:
. our international locations are being specifically evaluated for Year
2000 readiness as part of our overall Year 2000 program; and
. through our continuing process of business continuity planning by
location, we are specifically addressing the higher risks associated
with infrastructure providers in less developed countries.
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Our goal is to prevent any material failure of internal systems or, to the
extent commercially reasonable, of third parties' systems through preemptive
measures. Many of the goods and services that we provide are delivered at remote
locations not directly tied to basic local infrastructure. We believe that our
business continuity planning process will allow us to provide our customers at
remote locations with goods and services without material adverse impact on our
results of operations.
Suppliers. We utilize more than 20,000 suppliers worldwide. To date, we
have mailed Year 2000 readiness questionnaires to approximately 8,300 suppliers.
We will continue to mail questionnaires through the fourth quarter of 1999.
As of September 30, 1999 the overall rate of response to worldwide supplier
inquiries is approximately 35%. Most suppliers respond with a standard response
providing some insight into the nature of the supplier's Year 2000 efforts but
providing no assurances of readiness.
We have identified approximately 600 significant suppliers as being
suppliers that meet one or more of the following criteria:
. the supplier represents over $1 million annually in sales volume to
us;
. the supplier is the source of a commodity or product deemed
essential; or
. the supplier is deemed critical to our operations.
Questionnaires regarding Year 2000 readiness have been or will be sent to
each significant supplier. To date approximately 80% of our significant
suppliers have responded to our questionnaire. Follow-up attempts are made to
solicit responses from every significant supplier. Approximately 450 of the 600
significant suppliers have been requested to participate in our Year 2000
supplier meetings. Significant suppliers that participate in our Year 2000
meetings are required to meet with our personnel and to present details of their
worldwide Year 2000 readiness effort. Our personnel who are qualified to
evaluate the quality and appropriateness of significant suppliers' Year 2000
efforts attend each meeting. Through September 30, 1999, approximately 350
significant suppliers have attended our Year 2000 meetings.
Approximately 50 of our most critical suppliers have been visited by our
personnel. Those visits include audits related to the supplier's progress toward
Year 2000 readiness. We expect to conduct additional audits in the remainder of
the year.
For any supplier who we believe has a high risk of not being Year 2000
ready, our businesses are required to take appropriate action and to include
risk mitigation steps in their business continuity plans. Our actions may
include the selection of alternate suppliers or the stockpiling of products or
commodities supplied by high risk suppliers.
Customers. We have more than 7,000 customers in over 120 countries. No
customer outside of our top twenty customers represents more than 1% of our
annual revenue. In 1998 none of our customers exceeded 7% of our annual revenue.
Accordingly, we believe that our top twenty customers are our significant
customers.
Approximately half of our top twenty customers are major oil companies with
operations in numerous countries. The other half is made up primarily of large
national oil companies, governments and a large international chemical company.
Through a combination of face-to-face meetings and review of available public
and web site information, we have not identified any top twenty customer whose
Year 2000 readiness, based upon public disclosures or disclosures made to our
personnel, appears to be in substantial jeopardy. However, we have not, been
able to obtain as much information from governmental customers and national oil
companies as we have from other customers. We have not identified any top twenty
customer that is expected to suffer Year 2000 disruptions that would have a
material impact on our business, results of operations or financial
condition.
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Worst case scenario for Year 2000 issues. With operations in over 120
countries, we recognize that some Year 2000 risk is inherent in operating in
less developed countries. Based on our reviews and experience we believe our
most reasonably likely worst case Year 2000 scenario to be failure of basic
local infrastructure providers in less developed areas of the world. We do not
believe that Year 2000 readiness of infrastructure providers, including
electricity, gas, water, and communications, in some less developed parts of the
world can be determined with any precision. We believe increased risk to be most
likely in less developed areas of Africa, Asia, and Latin America where, without
regard to Year 2000 issues, periodic infrastructure failures are relatively
common. No one country has been identified as being particularly likely to
suffer increased Year 2000 risk.
Our management believes that our overall Year 2000 risk is reduced by our
widely dispersed operations since an infrastructure failure in one country is
not likely to directly impact operations in another country. It is possible that
some of our significant suppliers might not be able to meet their supply
obligations to us in the face of widespread failures of infrastructure providers
in less developed countries. Our results of operations could be materially
harmed in the event of widespread or cascading infrastructure failures.
Business continuity planning. We are preparing to handle our most
reasonably likely worst-case scenario, and lesser disruptions, as well as any
failure within our company, through business continuity plans. These plans are
designed to provide for development of plans and actions prior to the end of the
year to provide for the continuity of operations, without material disruptions.
Business continuity plans have been or are being prepared by each physical
location worldwide. Our business continuity planning process is expected to be a
continuing process through the end of the year.
Our business continuity planning process includes the possibility that
significant suppliers may not be able to meet supply obligations to us.
Alternative sources of supply have been or are being identified. In addition,
the option of maintaining larger-than-usual inventories of supplies in late 1999
and being correspondingly less dependent on January 2000 deliveries was taken
where appropriate as part of our business continuity planning process.
Forward-looking statements relating to the Year 2000. Our discussion
related to the Year 2000 issue includes a number of forward-looking statements
that are based on our best assumptions and estimates as of today. Assumptions
and estimates, which are not necessarily all of the assumptions and estimates,
include our statements concerning:
. estimated timetables for completing the phases of our Year 2000
project;
. estimates of the percentages of work that remains to be performed in
each phase;
. estimates of costs for work that remains to be performed;
. assessments as to which systems are significant;
. identification of potential failures related to Year 2000 issues;
. assessments of the risk of our relationships with third parties; and
. implementation of our business continuity plans.
Year 2000 risk factors. The work that we are doing under our Year 2000
program is focused on risk identification and mitigation, most likely worst case
analyses, and business continuity plans involving significant systems and
relationships with third parties. There are, however, an almost infinite number
of additional risks which are simply not assessable and for which contingency
plans cannot be established. There are risks of failure, for Year 2000 reasons,
of one or more systems or third party relationships which we do not judge to be
individually significant. These failures could cause a cascade of other
failures, which could have a material impact on our results of operation.
Actual results of our Year 2000 effort could differ materially from the
estimates expressed in
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our forward-looking statements, due to a number of factors. Factors, which are
not necessarily all of the factors that could cause different results, include:
. our failure to accurately judge which of our systems and
relationships are significant;
. our ability to obtain and retain staff and third party assistance
required to complete work that remains to be performed;
. our ability to complete the work that remains to be performed within
the timetables that we established;
. our ability to locate and correct or replace computer code and
systems embedded in equipment that controls or monitors our operating
assets;
. our inability or failure to identify significant Year 2000 issues not
now contemplated or understood; and
. the failure, including infrastructure failures, of third parties to
achieve Year 2000 readiness.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and for Hedging Activities. This standard requires entities to recognize all
derivatives on the statement of financial position as assets or liabilities and
to measure the instruments at fair value. Accounting for gains and losses from
changes in those fair values are specified in the standard depending on the
intended use of the derivative and other criteria. In June 1999, the FASB
deferred the effective date of Standard No. 133 for one year. Standard No. 133
will become effective for Halliburton beginning January 1, 2001. We are
currently evaluating Standard No. 133 to identify implementation and compliance
methods and have not yet determined the effect, if any, on our results of
operations or financial position.
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INFORMATION REGARDING PES
General Development of Business
Petroleum Engineering Services Limited was formed in June 1985, in
Aberdeen, Scotland, to provide well completion and intervention products,
services and solutions to the oil and gas industry. Since that time, PES has
established a strong reputation for innovation in the field of sub-surface oil
and gas well engineering.
PES's success has resulted largely from its focus on the design of well
completion and well intervention products to improve well life cycle economics.
In 1993, to assist in the group's international expansion plans, PES
(International) Limited was established as the PES Group holding company. The
PES client base consists of almost all of the major international oil companies.
PES continues to be headquartered in Aberdeen, Scotland.
Description of Products and Services
PES's core business is the design, manufacture and supply of oil and gas
well completion and intervention products, services and solutions.
Well completion products form part of the well bore through which the oil
and gas flows from the reservoir to the surface and assist with the control of
flow and the safety of the well. Well intervention products are normally
installed in the well bore after the well has been completed to perform specific
functions during remedial well operations. Well intervention products are
normally used for a limited period of time. PES's well intervention product
line has contributed most to PES's growth. For many years this product line has
been firmly established in the North Sea and is now gaining acceptance in other
key international areas.
Industry demand for annular safety valves allowed PES to participate in
providing this product along with the major suppliers at the time, Baker Oil
Tools, Camco International, Halliburton and AVA/Guiberson. The first PES system
was installed in early 1992 for Elf Enterprise and its success led to repeat
orders from Elf and subsequent orders from other customers. Since 1992, PES has
made significant gains and is now a leading supplier of annular safety values,
although demand for this product has been declining.
In addition to its well intervention and annular safety valve business, PES
has developed high performance well completion products to capitalize on
opportunities not being addressed by other equipment suppliers.
One of PES's most notable innovations is the Surface Controlled Reservoir
Analysis and Management System or SCRAMS(TM). SCRAMS(TM) allows a well operator
to evaluate and control production from individual zones in a multi-zone
producing well without the need for well intervention. The potential benefits
from real time production management using SCRAMS(TM) are significant. They
include reduced operating expenditure, reduced production downtime and enhanced
ultimate hydrocarbon recovery.
The main application for SCRAMS(TM) is high value wells. Horizontal, multi-
lateral, remote and sub-sea wells fall in this category. PES has obtained patent
and copyright protection for many of the key features of SCRAMS(TM).
Over the past five years, PES has made a substantial investment in
SCRAMS(TM). Eleven SCRAMS(TM) systems have been installed in production wells
and demand is growing. PES is currently developing, in conjunction with
Halliburton, a new SCRAMS(TM) Interval Control Valve which has infinitely
variable control capability and which represents a major advance in the area of
production optimization. To speed up worldwide use of SCRAMS(TM), PES formed a
strategic alliance with Halliburton Energy Services in April 1997 to develop and
manufacture intelligent well completion products. Through the alliance, PES has
effectively gained access to global distribution for SCRAMS(TM). It should be
noted that a number of problems were encountered on early installations. These
problems have been addressed and the system has evolved to create a more robust
and enhanced design.
While the SCRAMS(TM) product line is likely to have the largest impact both
on the industry and on PES's growth plans, PES has developed other technologies
which PES's management believes have had, or are likely to
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<PAGE>
have, significant future impact on the industry. PES has a growing portfolio of
new products that are finding application in locations as diverse as Colombia
and Brunei. These include:
. high performance and HP/HT packers;
. hydraulically controlled completion systems, including mini-
hydraulics, direct hydraulics and digital hydraulics;
. ANVIL disappearing plug;
. downhole lubricator valve for intervention operations;
. Insert Gas Lift System to retrofit the production string without the
need for a full workover;
. first generation downhole robot, a smart shifting tool;
. E-Line Tractor, a tool used to transport downhole tools in a
horizontal or highly deviated well; and
. open hole packer.
Acquisition of Well-Equip Limited
In July 1996, PES acquired Well-Equip, an Aberdeen based company which
designed and manufactured special wireline, coiled tubing and flow control
products for the oil and gas industry. At the time of the acquisition, Well-
Equip's annual turnover was approximately (Pounds)1.7 million. Subsequent to the
acquisition, the assets and resources of Well-Equip were integrated into
Petroleum Engineering Services Limited, the PES U.K. subsidiary. PES later sold
the Well-Equip wireline and coiled tubing product lines to Kendle Engineering in
September 1998.
Acquisition of Approximately 26% of PES by Halliburton Holdings Limited
In April 1997, Halliburton Holdings Limited acquired approximately 26% of
the issued share capital of PES for (Pounds)20.8 million. This acquisition
coincided with the signing of the strategic alliance between Halliburton Energy
Services and PES to develop and manufacture intelligent well completion
products.
Markets and Competition
Due to its geographic location, PES initially concentrated on servicing the
North Sea and Europe. PES developed a strong reputation for innovation and
responsiveness with target customers. PES then began to investigate
opportunities further afield with the international oil companies.
More than 50% of PES's turnover is now derived from export. PES has
established bases in Norway, Denmark, France, Italy, Australia, and the U.S.
PES currently provides products and services to operators in the U.K., Norway,
Denmark, Italy, Nigeria, Angola, Gabon, U.S., Colombia, Argentina, Brunei,
Malaysia, Australia, Papua New Guinea, New Zealand, Indonesia, Oman, Qatar, and
Abu Dhabi.
While sales are generally coordinated directly by PES, in some countries
PES operates with the support of third party agents. These agents provide
additional contact with the customers and provide assistance with the in-country
logistics.
PES's competitors vary according to product lines. These competitors
include Baker Oil Tools, Camco International, Petroline, and Maritime Well
Service. The direct competition between Halliburton Energy Services and PES is
very limited.
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<PAGE>
PES's business in some countries may be adversely affected by unsettled
political conditions, expropriation or other governmental actions, exchange
control and currency problems. PES believes that the geographic diversification
of its business activities reduces the risk that loss of business in any one
country would be material to the conduct of its operations taken as a whole.
Technology Transfer and Development Plan
The PES Technology Transfer Development Plan also referred to as the
"plan," will become effective upon completion of the offer. The plan describes
various project objectives to be achieved by PES during the three-year period
following completion of the offer.
Depending upon PES's success in achieving the project objectives identified
in the plan and those agreed upon later by PES and HES management, selected PES
employees will be entitled to bonus compensation in addition to their regular
salaries. In addition, if all of the project objectives are achieved in a
timely manner, the second determination date will be accelerated to the date 30
months following completion of the offer, or if later, the date of achievement
of the project objectives.
A total of 30 project objectives have been identified for completion during
the first 18-month period. The amount of bonus compensation to be paid to the
PES employees will depend upon the number and type of project objectives
achieved.
The number of project objectives to be completed during the second 18-month
period will be determined later by the PES management team subject to approval
by HES management. A total of 16 project objectives have been tentatively
identified for consideration during the second 18-month period. The amount of
bonus compensation to be paid to the PES employees for the second 18-month
period will depend upon the number and type of project objectives achieved.
Details of the plan may be changed upon agreement by PES and HES
management.
The technology transfer and development plan has been filed as an exhibit
to our registration statement and is on display at the London and Aberdeen
offices of the receiving agent, CMS Cameron McKenna. We will provide a copy of
the technology transfer and development plan to any PES shareholder upon request
made in writing or by telephone to us at the address and telephone number set
forth under "Where You Can Find More Information."
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PES SELECTED CONSOLIDATED FINANCIAL DATA
The summary below sets forth selected historical financial data for PES.
You should read this together with the historical financial statements and
related notes of PES contained in this offer document. The profit and loss
account and balance sheet information at 31 March 1995, 1996, 1997, 1998 and
1999 is extracted from the audited consolidated accounts of PES. The extracts
from the consolidated financial statements of, and other information about, PES
appearing in this offer document are presented in pounds sterling (Pounds) and
have been prepared in accordance with U.K. generally accepted accounting
principles. U.K. generally accepted accounting principles and U.S. generally
accepted accounting principles differ in significant respects. Please read
"Summary of Differences Between U.K. and U.S. Generally accepted Accounting
Principles" on pages 86 through 88.
<TABLE>
<CAPTION>
Audited
---------------------------------------------------------------------------------
Year Ended March 31
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- -------------- -------------- -------------- --------------
(in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Profit and loss account
Turnover............................. (Pounds)7,056 (Pounds)10,581 (Pounds)15,989 (Pounds)22,673 (Pounds)29,600
Cost of sales........................ (2,726) (5,311) (8,541) (12,719) (17,533)
------------- -------------- -------------- -------------- --------------
Gross profit......................... (Pounds)4,330 (Pounds) 5,270 (Pounds) 7,448 (Pounds) 9,954 (Pounds)12,067
Administrative expenses.............. (3,431) (5,207) (7,390) (10,191) (10,734)
Other income......................... 108 897 350 279 225
------------- -------------- -------------- -------------- --------------
Operating profit..................... (Pounds)1,007 (Pounds) 960 (Pounds) 408 (Pounds) 42 (Pounds) 1,558
Exceptional items.................... 0 0 (154) (1,659) 0
Interest (net)....................... (82) (221) (428) (138) (293)
Income from associates............... 0 11 20 48 0
------------- -------------- -------------- -------------- --------------
Profit before tax.................... 925 750 (154) (1,707) 1,265
Tax.................................. (410) (300) (175) (373) (493)
------------- -------------- -------------- -------------- --------------
Profit after tax..................... (Pounds) 515 (Pounds) 450 (Pounds) (329) (Pounds)(2,080) (Pounds) 772
Minority interests................... 102 565 (174) 0 0
------------- -------------- -------------- -------------- --------------
Profit for year...................... 617 1,015 (503) (2,080) 772
Dividends (paid)..................... 0 (45) (45) (4) 0
------------- -------------- -------------- -------------- --------------
Retained Profit...................... (Pounds) 617 (Pounds) 970 (Pounds) (548) (Pounds)(2,084) (Pounds) 772
============= ============== ============== ============== ==============
Profit for period per share(a)....... (Pounds) 0.75 (Pounds) 1.25 (Pounds) (0.63) (Pounds) (1.62) (Pounds) (0.62)
Dividends declare per share(a)....... (Pounds) -- (Pounds) 0.06 (Pounds) 0.06 -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Audited
---------------------------------------------------------------------------------
Year Ended March 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance sheet
Intangible fixed assets........... (Pounds) 0 (Pounds) 900 (Pounds) 2,470 (Pounds) 2,302 (Pounds) 2,001
Tangible fixed assets............. 2,026 2,130 3,247 5,099 7,453
Investments....................... 0 11 146 3,432 3,370
------------- -------------- -------------- -------------- --------------
(Pounds)2,026 (Pounds) 3,041 (Pounds)5,863 (Pounds)10,833 (Pounds)12,824
------------- -------------- -------------- -------------- --------------
Stock............................. 1,187 1,855 2,738 6,550 8,092
Debtors........................... 1,859 4,862 6,412 6,294 7,129
Cash.............................. 123 101 259 1,132 1,260
------------- -------------- -------------- -------------- --------------
3,169 6,818 9,409 13,976 16,481
------------- -------------- -------------- -------------- --------------
Creditors less than 1 year........ (3,043) (6,671) (10,122) (5,592) (9,791)
Creditors greater than 1 year..... (408) (1,071) (2,041) (1,472) (1,452)
Provisions........................ (112) (74) (54) (852) (422)
------------- -------------- -------------- -------------- --------------
Net assets........................ (Pounds)1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds)16,893 (Pounds)17,640
============= ============== ============== ============== ==============
Share capital..................... 78 78 85 129 129
Share premium..................... 1,200 1,200 2,459 26,961 26,961
Capital redemption reserve........ 10 10 10 10 10
Profit & loss account............. (408) 569 (21) (2,218) (1,471)
Goodwill reserve.................. (927) (927) (927) (9,768) (9,768)
Acquisition reserve............... 1,779 1,779 1,779 1,779 1,779
Minority interests................ (100) (666) (330) 0 0
------------- -------------- -------------- -------------- --------------
Equity............................ (Pounds)1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds)16,893 (Pounds)17,640
============= ============== ============== ============== ==============
Currency Exchange Information
United States dollars to one Pound sterling (b)
Period End........................ 1.6190 1.5262 1.6448 1.6765 1.6140
Average........................... 1.5650 1.5623 1.5989 1.6463 1.6526
High.............................. 1.6350 1.6091 1.7123 1.6885 1.6995
Low............................... 1.5118 1.5096 1.5050 1.6117 1.6027
</TABLE>
___________________
(a) Per share information based on PES ordinary shares outstanding after giving
effect to the 10-for-1 stock split effected on October 27, 1998.
(b) Based on noon buying rate in New York City for cable transfers in pounds
sterling, as certified for customs purposes by the Federal Reserve Bank of
New York.
(c) In April 1997, Halliburton Holdings Limited, a wholly-owned subsidiary of
Halliburton, acquired a 26% stake in PES.
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<PAGE>
SUMMARY OF DIFFERENCES BETWEEN U.K. AND U.S.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
To the Board of Directors
of PES (International) Limited
Our audits of the consolidated financial statements of PES (International)
Limited referred to in our reports dated 11 August 1997, 5 February 1999 and 30
September 1999 appearing on pages 164, 188 and 210, respectively, of the
Registration Statement on Form S-4 also included an audit of the accompanying
reconciliation of significant differences between U.S. and U.K. Generally
Accepted Accounting Principles. In our opinion, this reconciliation presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers
Aberdeen, UK
____________, 1999
Financial statements
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United Kingdom. These principles differ in
some respects from U.S. GAAP. A summary of the most significant differences
applicable to the Group is set out below.
a) Statement of Operations Differences
<TABLE>
<CAPTION>
Audited Year Ended
31 March
-------------------------------------------
1997 1998 1999
(Pounds)'000 (Pounds)'000 (Pounds)'000
<S> <C> <C> <C>
Net income (loss) reported under
U.K. GAAP (503) (2,080) 772
U.S. GAAP adjustments:
Amortization of goodwill -- (442) (442)
Expense development costs as
incurred 7 28 49
------- -------- --------
Total U.S. GAAP adjustments 7 (414) (393)
------- -------- --------
Net income (loss) under U.S. GAAP (496) (2,494) 379
======= ======== ========
</TABLE>
86
<PAGE>
b) Equity Reconciliation
<TABLE>
<CAPTION>
Audited Year Ended
31 March
-------------------------------------------
1997 1998 1999
(Pounds)'000 (Pounds)'000 (Pounds)'000
<S> <C> <C> <C>
Equity under U.K. GAAP 3,055 16,893 17,640
U.S. GAAP adjustments:
Capitalization of goodwill -- 8,399 7,957
Expense development costs as
incurred (698) (670) (621)
Apply "pooling of interests"
accounting to acquisition of
subsidiary 578 578 578
------- -------- --------
Total U.S. GAAP adjustments (120) 8,307 7,914
------- -------- --------
Equity under U.S. GAAP 2,935 25,200 25,554
======= ======== ========
</TABLE>
(i) Capitalization and amortization of goodwill
Prior to the introduction of U.K. Financial Reporting Standard No 10
("FRS10") which became effective for financial periods ending on or after 23
December 1998, under U.K. GAAP companies had the option to either write off
goodwill on acquisition directly to reserves or to capitalize and amortize the
amounts. For the period to 31 March 1998, in accordance with U.K. GAAP prior to
the introduction of FRS10, the Group elected to write off goodwill on
acquisition amounting to (Pounds)8,841,000 direct to reserves. (Refer to Note 19
to the financial statements for the year ended 31 March 1998.)
Under U.S. GAAP goodwill on acquisition must be capitalized and amortized
systematically to income over the estimated period of benefit but not in excess
of 40 years. Goodwill on acquisition previously written off directly to reserves
in the financial statements has been reinstated and amortized over 20 years.
(Refer to Note 10 to the financial statements for the year ended 31 March 1997.)
(ii) Expense development costs as incurred
Under U.K. GAAP, the capitalization and amortization of product
development costs is permissible subject to specific criteria being satisfied.
Deferred costs must be amortized systematically over the expected life of the
product and the unamortized balance must be reviewed annually for impairment and
written down to the extent necessary. During the year ended 31 March 1996, the
PES Group capitalized a total of (Pounds)730,000 for development costs and is
amortizing this amount over the estimated production and commercial life of the
product.
Under U.S. GAAP, deferral of product development costs is not permitted
and such costs must be expensed to income as incurred. Accordingly, development
costs capitalized by the company during the year ended 31 March 1996 have been
expensed and the related amortization charged during the periods 31 March 1996 -
1999 reversed.
(iii) Apply "pooling of interests" accounting to acquisition of subsidiary
Under U.K. GAAP, acquisitions of subsidiaries are generally accounted for
using the "purchase" or "acquisition" accounting method unless the specific
criteria for merger ("pooling of interests") accounting are met. During the
period ended 31 March 1993, PES acquired as a wholly owned subsidiary, Petroleum
Engineering Services Limited or PESL, a company also controlled by the principal
shareholders of PES. Under U.K. GAAP, PES adopted purchase accounting for the
acquisition of PESL, which resulted in the write off of (Pounds)927,000 of
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<PAGE>
goodwill on acquisition direct to reserves and the creation of an acquisition
reserve of (Pounds)1.8 million in the consolidated financial statements. (Refer
to Note 19 to the Financial Statements for the year ended 31 March 1998.)
Under U.S. GAAP, transactions involving the transfer of net assets or
exchanges of shares between companies under common control must be accounted for
at historical cost in a manner similar to "pooling of interests." Had the
company adopted pooling of interests accounting for the acquisition of PESL, the
net assets of PESL would have been consolidated at historical cost and the
goodwill on consolidation and the acquisition reserve would not have arisen. In
addition, the retained earnings of PESL at the date of acquisition would have
been consolidated by the Group rather than forming part of the goodwill
calculation.
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<PAGE>
PES MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Environment
A key part of PES's business strategy is to focus on the major
international oil companies who appreciate the role that PES has played in
bringing new technology to their operations.
Since its creation in 1986, PES concentrated predominantly on the North
Sea. PES identified demand for well intervention tools with the international
oil companies operating in the North Sea. Having created a stable client base
and a sound reputation, PES started to develop high performance well completion
products. PES then invested heavily in the development of SCRAMS. This system
results in reduced production downtime and operating expenditure and may also
lead to enhanced hydrocarbon recovery. PES is now recognized as a leader in
smart well technology.
PES formed an alliance with Halliburton Energy Services in April 1997. The
alliance has helped PES gain access to international customers through the HES
worldwide network and allowed HES to offer their customers PES products and
technology which compliment HES's own product lines. This alliance and other
marketing initiatives have allowed PES to sustain exceptional annual growth.
The decline in oil and gas prices in the latter half of 1998 caused a
reduction in the demand for some of PES's products and services. PES has
responded by implementing plans to reduce overhead in areas where activity
levels have declined and is currently examining other areas of cost reduction.
Despite current reduction in activity, the improving oil prices suggest that
activity will return. The technology of PES and its focus on offering reduced
operating costs and enhanced hydrocarbon recovery, places PES in a position to
maximize growth as the worldwide oil and gas economy recovers.
Results of Operations - 1999 Compared to 1998 and 1997
Revenues
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------
1999 1998 1997
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
PES Group revenues 29,600 22,673 15,989
====== ====== ======
</TABLE>
Revenues for 1999 were (Pounds)29.60m, an increase of 30% over 1998
revenues of (Pounds)22.67m, and an increase of 85% over 1997 revenues of
(Pounds)15.99m. The growth in revenues resulted from the setting up of overseas
local offices in Australia, U.S., Norway, France, Italy and Denmark in the
period between 1994 and 1997 with the result that new areas were opened up to
the PES Group. PES has been particularly successful in Norway. The PES group's
revenues from customers outside of the UK has increased from 25% in 1996 to over
50% in the year ended 31 March 1999.
A further reason for the growth in revenues has been the large investment
made by the PES Group in new technology between 1995 and 1998 particularly in
the area of smart well applications. This investment started to be realized in
terms of orders for product in the year ended 31 March 1999.
Operating income
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------
1999 1998 1997
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Operating income 1,558 42 408
====== ====== ======
</TABLE>
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<PAGE>
Operating income was (Pounds)1.56m in the year ended 31 March 1999 compared
to (Pounds)0.04m in the year ended 31 March 1998 and (Pounds)0.408m for the year
ended 31 March 1997. The reason for this increase in operating income in 1999 is
largely due to the realization of customer orders for products which had been
developed between 1995 and 1998, particularly those for intelligent well
completion applications.
The gross margin on sales revenues was 40.8% for the year ended 31 March
1999 compared to 43.9% for the year ended 31 March 1998 and 46.5% for the year
ended 31 March 1997. This reduction in gross margin reflects the fact that in
the year ended 31 March 1999 many of the products sold were new high technology
products which had not been made before. The PES Group had to incur a
substantial set up cost in manufacturing and testing equipment which were fully
expensed in the period. The key products that were developed in the period from
1995 through 1998 were in the area of smart completions with several million
pounds invested in developing this product line. Apart from (Pounds)0.73m of
development costs which were capitalized in 1996, all development costs have
been expensed through cost of sales. During 1997 PES set up a manufacturing
plant in Livingston, Scotland as the primary manufacturing center. The initial
setting up of this facility had a short-term detrimental effect on
profitability.
General operating expenses were (Pounds)10.70m in the year ended 31 March
1999 compared to (Pounds)10.19m in the year ended 31 March 1998 and
(Pounds)7.39m in the year ended 31 March 1997. The slight increase in general
operating expenses reflects the growth in the business both in overseas
locations and to support the general expected growth in the business as a result
of new product development.
Although the profit margins were reduced as a result of increased
manufacturing costs, operating profit was improved because of the higher sales
volumes.
Nonoperating items
There were exceptional charges in 1998 of (Pounds)1.66m as a result of
group restructuring and an acquisition of a 26% stake in PES by Halliburton
Holdings Limited. The restructuring included a reorganization of subsidiary
shareholding structures and the granting of share options to key personnel.
Since these share options are exercisable at a price below market value, the
carrying value of the PES shares held by the ESOP was written down by
(Pounds)1.66 million, in accordance with the requirements of U.K. accounting
regulations. In 1997 there was an exceptional charge of (Pounds)0.15m as a
result of the sale of minority holdings in subsidiary companies to local
management at less than book value.
Interest expense was (Pounds)0.34m in 1999 compared to (Pounds)0.31m in
1998 and (Pounds)0.44m in 1997. The movement simply reflects PES's borrowings
over the period which increased in 1997 due to the growth of PES but reduced in
1998 due to the investment by Halliburton Holdings Limited.
Provision for taxes was (Pounds)0.492m in 1999 compared to (Pounds)0.373m
in 1998 and (Pounds)0.175m in 1997. The increase in tax payable in 1999 and 1998
reflects losses incurred in the U.K. and U.S.A. not being offset by profits in
other overseas operations.
Minority interests in the profit or loss on ordinary activities was nil in
1999 and 1998 but amounted to (Pounds)0.174m in 1997. The minority interests in
the results for the years ended 31 March 1999 and 31 March 1998 were nil due to
the fact that all minority shareholdings were bought out as part of the PES
Group restructuring referred to above.
No dividends were paid in 1999. Dividends amounted to (Pounds)0.004m in
1998 compared to (Pounds)0.045m in 1997. The dividends were wholly payable on
the 'A' ordinary shares held by 3i plc which were converted to ordinary shares
in April 1997.
Liquidity and Capital Resources
Net cash inflow from operating activities amounted to (Pounds)1.13m in 1999
compared with a net cash outflow of (Pounds)2.00m in 1998 and an inflow of
(Pounds)0.79m in 1997. In 1999 the primary source of cash was from the results
of
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<PAGE>
operations. PES had an operating profit from continuing operations of
(Pounds)1.56m for the year ended 31 March 1999 versus (Pounds)0.04m and
(Pounds)0.41m for the years ended 31 March 1998 and 1997, respectively. In 1999,
1998 and 1997 the primary use of cash was to fund increased working capital
requirements due to the expansion and growth of the PES Group.
Net cash outflow for capital expenditure and financial investment was
(Pounds)2.74m in 1999, (Pounds)6.81m in 1998 and (Pounds)0.43m in 1997. The 1999
outflow is due to an expansion of the PES Group's Houston operations totaling
(Pounds)1.46m as well as machinery additions at all PES Group facilities. The
expenditure in 1998 comprises net investment in plant and machinery of
(Pounds)1.90m principally in the PES Group's manufacturing facility in
Livingston. In addition there was an investment of (Pounds)4.91m into an
employee share ownership plan to act as a mechanism to incentivize key
personnel.
Net cash inflow from acquisition and disposals in 1999 was (Pounds)0.14m
due to the sale of the PES Group's 26% interest in Cairntoul Well Equipment
Services Limited. Net cash outflow from acquisitions was nil in 1998 but
amounted to (Pounds)0.48m in 1997 as a result of the acquisition of WellEquip
Limited. The total consideration was (Pounds)2.03m satisfied partly by cash,
loan notes and share exchange.
Cash flow from financing activities was an outflow of (Pounds)0.36m in 1999
versus an inflow of (Pounds)14.38m in 1998 and an outflow of (Pounds)0.68m in
1997. The 1999 outflow is primarily due to capital lease payments of
(Pounds)0.96m offset by net receipt of borrowings of (Pounds)0.60m. The inflow
of (Pounds)14.38m in 1998 arose as a result of the issue of (Pounds)16.04m of
new shares to Halliburton Holdings Limited as part of their acquiring a 26%
stake net of repayment of borrowings of (Pounds)0.91m and capital lease payments
of (Pounds)0.75m. The outflow in 1997 is primarily due to capital lease payments
of (Pounds)0.55m.
PES has the ability to borrow funds through a multioption credit facility
with the Bank of Scotland. In addition loans are taken out to fund specific
assets in addition to small local loans in certain overseas entities.
Financial Instrument Market Risk
PES is currently exposed to market risk from changes in foreign currency
exchange rates. This risk is mitigated through the operation of foreign currency
bank accounts and maximizing exposure to the pound sterling and the U.S. dollar
where most of the PES's expenditures are made.
The PES Group is exposed to variations in U.K. interest rates due to the
fact that most of the PES Group borrowings are U.K. sourced in pounds sterling.
Year 2000 Issue
As is well known, many computer and digital storage systems express dates
using only the last two digits of the year and will thus require modification or
replacement to accommodate the year 2000 and beyond in order to avoid
malfunctions and resulting widespread commercial disruption. This is a complex
and pervasive issue. The operation of the business depends not only on computer
systems, but also to some degree on those of suppliers and customers. This could
expose the company to further risk in the event that there is a failure by
external parties to remedy their year 2000 issues.
A significant risk analysis has been performed to determine the impact of
the issue on all activities. From this, prioritised action plans have been
developed which are designed to address the key risks in advance of critical
dates and without disruption to the underlying business activities. Priority is
given to those systems which could cause a significant financial or legal impact
on the company business if they were to fail. The plan also includes a
requirement for the testing of systems changes, involving the participation of
users. The risk analysis also considers the impact of year 2000 related failures
by significant suppliers and customers. In appropriate cases formal
communication has been initiated with these other parties.
Given the complexity of the problem, it is not possible for any
organisation to guarantee that no year 2000 problems will remain, because at
least some level of failure may still occur. However, the directors believe that
it
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<PAGE>
will achieve an acceptable state of readiness and have also provided resources
to deal promptly with significant subsequent failures or issues that might
arise.
Much of the cost of implementing the action plans will be subsumed into the
recurring activities of the departments involved. The total cost of
modifications to computer hardware and software has been included in
administrative expenses.
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<PAGE>
MANAGEMENT OF PES
The names and offices with PES of its directors, except for the nominees of
Halliburton Holdings Limited, and executive officers are set forth below:
Michael L. Bowyer Director
Michael J. Fleming Director
Steven C. Owens Director
Lawrence W. Kinch Chairman, Director and Chief Executive
Richard P. Rubbo Director
Colin Smith Director
Drummond W. Whiteford Director
The principal occupations of these directors of PES are as follows:
Lawrence W. Kinch, 46, Chairman and Chief Executive, PES (International)
Ltd., Field Engineer, Schlumberger Group, 1974-1976; Well Completions Engineer,
Shell International Petroleum, 1976-1978; Petroleum Engineer BP Qatar, 1978-
1982; Senior Petroleum Engineer, BP Qatar, 1982-1986; joint founder PES, 1986;
Group Chairman and Chief Executive, 1986 to present.
Michael L. Bowyer, 48, Managing Director, PES (International) Ltd. and
Managing Director, Petroleum Engineering Services, Ltd.; Mechanical Design
Engineer, Baker Oil Tools, 1975-1982; Engineering Manager, Baker Oil Tools (UK),
1982-1986; Regional Manager Europe and Africa, Baker Oil Tools, 1986-1988;
Managing Director, Baker Oil Tools Asia Pacific, 1988-1993; Project Manager,
Integrated Services, Baker Hughes Inteq, 1993-1994; Managing Director, PES
(International) Ltd. and Managing Director, Petroleum Engineering Services,
Ltd., 1994 to present.
Drummond W. Whiteford, 47, Director, PES (International) Ltd. and Chief
Engineer, Petroleum Engineering Services, Ltd.; Senior Project Engineer, Baker
Oil Tools (UK), 1975-1986; Petroleum Engineering Services, Ltd., 1986 to
present.
Colin Smith, 44, Marketing Director, PES (International) Ltd.; Roughneck,
ODECO, 1975-1977; Sales Service Technician, Hydril UK, 1977-1978; Service
Technician, Baker Oil Tools, 1978-1980; District Sales Engineer, Baker Oil
Tools, 1980-1982; Service Supervisor, Baker Oil Tools, 1982-1985; Sales Manager
(UK region) Baker Oil Tools, 1985-1989; District Manager (Holland) Baker Oil
Tools, 1989-1991; Regional Manager, Mediterranean and Africa, Baker Oil Tools,
1991-1992; Regional Manager (CIS), Baker Oil Tools, 1992-1993; International
Marketing Manager, Petroleum Engineering Services, Ltd., 1993 to 1996; Marketing
Director, PES (International) Ltd., 1993 to present.
Richard P. Rubbo, 40, Smart Well Engineering Manager and Technology
Director, PES (International) Ltd.; Mechanical Design Engineer, Baker Oil Tools,
Houston, Texas, 1981-1990; Engineering Manager Product Engineering/Development,
Baker Oil Tools (UK), 1990-1993; Engineering Manager, Petroleum Engineering
Services, Ltd., 1994-1998; Technology Director, PES (International) Ltd., 1993
to present.
Michael J. Fleming, 41, Director, PES (International) Ltd., and President,
PES, Inc., Houston, Texas; Geophysicist, George Wimpey PLC, 1981-1984; Senior
Geophysicist, Geoteam (UK) Ltd., 1984-1988; Business Development Executive,
Scottish Development Agency, 1988-1990; Head of Oil and Gas Division, Scottish
Enterprise, 1990-1994; Business Development Director, Grampian Enterprise,
1994-1996; Commercial Director, Petroleum Engineering Services, Ltd., 1996-1999;
President, PES, Inc., 1999 to present.
93
<PAGE>
Steven C. Owens, 38, Director, PES (International) Ltd.; Electronics
Engineer, Exlog Inc., Houston, Texas, 1985-1988; Senior Electronics Engineer,
Research and Development, Exlog Inc., Houston, Texas, 1988-1990; Engineering
Manager, Product Engineering, Baker Hughes MWD, Houston, Texas, 1990-1991;
Engineering Projects Supervisor, Baker Oil Tools, 1991-1994; Consultant for
Petroleum Engineering Services, Ltd., 1994-1995; President, PES, Inc., 1995-
1999; Technical advisor, PES, Inc., 1999 to present.
94
<PAGE>
SECURITY OWNERSHIP AND DEALINGS BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
PES
The following table sets forth information with respect to persons or
groups who, to PES's knowledge, own or have the right to acquire more than five
percent of the issued ordinary share capital of PES as of December 31, 1998. The
table excludes Messrs. Kinch, Whiteford and Rubbo whose holdings are set forth
below. PES is not aware of any subsequent ownership changes that would affect
the information in this table.
<TABLE>
<CAPTION>
Amount and Nature Percent
of Beneficial of
Name and Address of Beneficial Owner Ownership Class
- -------------------------------------------------- ----------------- -------
<S> <C> <C>
Halliburton Holdings Limited...................... 334,360(1) 24.60%
150 The Broadway
Wimbledon
London SW19 1RX
England
PES Trustees Limited.............................. 141,130(2) 11.14%
34 Albyn Place
Aberdeen
AB10 1FW
Scotland
</TABLE>
__________
(1) Halliburton Holdings Limited is a wholly-owned subsidiary of Halliburton
Company.
(2) PES Trustees Limited holds shares for transfer to PES optionholders who
exercise their options under PES share option schemes.
The following table sets forth, as of ___________, 1999, the number of PES
shares owned beneficially by each director of PES, each of the five mostly
highly compensated executive officers of PES and all directors and executive
officers of PES as a group.
<TABLE>
<CAPTION>
Name and Beneficial Owner Amount and Nature of Beneficial Ownership
- ------------------------------------- -----------------------------------------
Sole Voting
and Shared Voting
Investment or Investment Percent of
Power Power Class
---------- ------------- ----------
<S> <C> <C> <C>
Michael L. Bowyer(1)................. 24,780 5,910 2.32%
Lawrence W. Kinch.................... 300,000 -- 23.69%
Colin Smith(2)....................... 16,530 7,280 1.88%
Drummond W. Whiteford(3)............. 131,620 15,290 11.60%
Richard P. Rubbo(4).................. 15,600 100,750 9.19%
Michael J. Fleming(5)................ 2,500 -- 1.23%
Steven C. Owens(6)................... 41,470 -- 3.27%
All directors as a group (7 persons). 532,500 127,970 52.15%
</TABLE>
__________
(1) Includes 21,610 PES shares subject to options held by Mr. Bowyer and the
following PES shares held by members of Mr. Bowyer's immediate family: F.
A. Bowyer - 2,290; P. D. Bowyer - 1,180; S. E. Bowyer -1,180.
(2) Includes 15,220 PES shares subject to options held by Mr. Smith and the
following PES shares held by members of Mr. Smith's immediate family: Anna
Smith - 1,820; Anne A. Smith - 1,820; G. A. Smith -1,820; M. R. Smith -
1,820.
95
<PAGE>
(3) Includes 15,290 PES shares held by J. Whiteford, a member of Mr.
Whiteford's immediate family.
(4) Includes 15,600 PES shares subject to options held by Mr. Rubbo and 100,750
PES shares held by J. M. Rubbo, a member of Mr. Rubbo's immediate family.
(5) Represents PES shares subject to options held by Mr. Fleming.
(6) Includes 3,900 PES shares subject to options held by Mr. Owens.
96
<PAGE>
MANAGEMENT OF HALLIBURTON
The names and offices with Halliburton of its directors and executive
officers are set forth below:
William E. Bradford Chairman of the Board and Director
Richard B. Cheney Chief Executive Officer and Director
David J. Lesar President and Chief Operating Officer
Donald C. Vaughn Vice Chairman
Lester L. Coleman Executive Vice President and General Counsel
Gary V. Morris Executive Vice President and Chief Financial Officer
Lewis W. Powers Senior Vice President - Strategic Account Management
David A. Reamer Shared Services Senior Vice President
Jerry H. Blurton Vice President and Treasurer
Louis A. Raspino Shared Services Vice President - Finance
R. Charles Muchmore, Jr. Vice President and Controller
Anne L. Armstrong Director
Lord Clitheroe Director
Robert L. Crandall Director
Charles J. DiBona Director
Lawrence S. Eagleburger Director
W. R. Howell Director
Ray L. Hunt Director
J. Landis Martin Director
Jay A. Precourt Director
C. J. Silas Director
Richard J. Stegemeier Director
The principal occupations of the directors of Halliburton are as follows:
Anne L. Armstrong, 71, Regent, Texas A&M University System; Member, Board
of Trustees, Center for Strategic and International Studies; Member, National
Security Advisory Board, Department of Defense; former Chairman of the
President's Foreign Intelligence Advisory Board, 1981-1990; former Ambassador to
Great Britain; joined Halliburton Company Board in 1977; member of the Audit,
the Management Oversight, and the Nominating and Corporate Governance
Committees; Director of American Express Company and Boise Cascade Corporation.
William E. Bradford, 64, Chairman of the Board of Halliburton; Chairman of
the Board of Dresser Industries, Inc., 1996-1998; Chief Executive Officer of
Dresser
97
<PAGE>
Industries, Inc., 1995-1998; President of Dresser Industries, Inc., 1992-1996;
Chief Operating Officer of Dresser Industries, Inc., 1992-1995; President and
Chief Executive Officer of Dresser-Rand Company, a 51% joint venture
partnership, 1988-1992; Senior Vice President - Operations of Dresser
Industries, Inc., 1984-1992; joined Halliburton Company Board in 1998; Director
of Ultramar Diamond Shamrock Corporation and Kerr-McGee Corporation.
Richard B. (Dick) Cheney, 58, Chief Executive Officer, Halliburton;
Chairman of the Board and Chief Executive Officer of Halliburton, 1997-1998;
Chairman of the Board, President and Chief Executive Officer of Halliburton,
1996-1997; President and Chief Executive Officer of Halliburton, 1995; Senior
Fellow, American Enterprise Institute for Public Policy Research, 1993-1995;
United States Secretary of Defense, 1989-1993; Member, United States House of
Representatives, 1979-1989; joined Halliburton Company Board in 1995; Director
of Union Pacific Corporation, The Procter & Gamble Company and Electronic Data
Systems Corporation; Member of the Board of Trustees, American Enterprise
Institute for Public Policy Research.
Lord Clitheroe, 69, Chairman, The Yorkshire Bank, PLC; Deputy Chief
Executive, The RTZ Corporation PLC, 1987-1989; Executive Director, The RTZ
Corporation PLC, 1968-1987; joined Halliburton Company Board in 1987; Chairman
of the Health, Safety and Environment Committee; member of the Management
Oversight, and the Nominating and Corporate Governance Committees.
Robert L. Crandall, 63, Chairman Emeritus, AMR Corporation/American
Airlines, Inc. (engaged primarily in the air transportation business); Chairman,
President and Chief Executive Officer, AMR Corporation and Chairman and Chief
Executive Officer, American Airlines, Inc., 1985-1998; President, American
Airlines, Inc., 1985-1995; joined Halliburton Company Board in 1986; Chairman of
the Nominating and Corporate Governance Committee; member of the Audit, and the
Management Oversight Committees; Director of MediaOne Group, Inc. and Director
and non-executive Chairman of Celestica, Inc.
Charles J. DiBona, 67, President and Chief Executive Officer (retired),
American Petroleum Institute (a major petroleum industry trade association),
1979-1997; joined Halliburton Company Board in 1997; member of the Compensation,
the Health, Safety and Environment, and the Management Oversight Committees;
Chairman of the Board of Trustees, Logistics Management Institute.
Lawrence S. Eagleburger, 69, Senior Foreign Policy Advisor, Baker,
Donelson, Bearman & Caldwell (a Washington, D.C. law firm); Chairman,
International Commission on Holocaust Era Insurance Claims; United States
Secretary of State, Department of State, 1992-1993; Acting Secretary of State,
1992; Deputy Secretary of State, 1989-1992; joined Halliburton Company Board in
1998; member of the Audit, the Management Oversight, and the Nominating and
Corporate Governance Committees; Director of Phillips Petroleum Company,
Stimsonite, Universal Corporation and COMSAT.
W. R. Howell, 63, Chairman Emeritus, J. C. Penney Company, Inc. (a major
retailer); Chairman of the Board, J. C. Penney Company, Inc., 1983-1996; Chief
Executive Officer, J. C. Penney Company, Inc., 1983-1995; joined Halliburton
Company Board in 1991; Chairman of the Management Oversight Committee; member of
the Audit, and the Compensation Committees; Director of Exxon Corporation,
Warner-Lambert Company, Bankers Trust Company, Bankers Trust New York
Corporation, The Williams Companies, Inc. and Central and South West
Corporation.
Ray L. Hunt, 56, For more than five years, Chairman of the Board and Chief
Executive Officer, Hunt Oil Company (oil and gas exploration and development);
Chairman of the Board, Chief Executive Officer and President, Hunt Consolidated,
Inc. and Chairman of the Board, Chief Executive Officer and President, RRH
Corporation; joined Halliburton Company Board in 1998; Chairman of the
Compensation Committee; member of the Audit and the Management Oversight
Committees; Director of Electronic Data Systems Corporation, PepsiCo, Inc., Ergo
Science Incorporated, Security Capital Group Incorporated and Federal Reserve
Bank of Dallas.
98
<PAGE>
J. Landis Martin, 53, For more than five years, President and Chief
Executive Officer, NL Industries, Inc. (a manufacturer and marketer of titanium
dioxide pigments) and Chairman, Titanium Metals Corporation (an integrated
producer of titanium metals); Chief Executive Officer, Titanium Metals
Corporation, since 1995; Chairman of the Board and Chief Executive Officer of
Baroid Corporation (and its predecessor), acquired by Dresser Industries, Inc.
in 1994, 1990-1994; joined Halliburton Board in 1998; member of the Health,
Safety and Environment, the Management Oversight, and the Nominating and
Corporate Governance Committees; Director of NL Industries, Inc., Titanium
Metals Corporation, Tremont Corporation and Apartment Investment and Management
Corporation.
Jay A. Precourt, 62, Chairman of the Board, Wyoming Refining Company; Vice
Chairman and Chief Executive Officer, Tejas Gas Corporation, 1986-1998;
President, Tejas Gas Corporation, 1996-1998; joined Halliburton Company Board in
1998; member of the Compensation, the Health, Safety and Environment, and the
Management Oversight Committees; Chairman of the Board of Founders Funds, Inc.
and Director of the Timken Company.
C. J. Silas, 67, Chairman of the Board and Chief Executive Officer
(retired), Phillips Petroleum Company (engaged in exploration and production of
crude oil, natural gas and natural gas liquids on a worldwide basis, the
manufacture of plastics and petrochemicals and other activities), 1985-1994;
joined Halliburton Company Board in 1993; Chairman of the Audit Committee;
member of the Compensation, and the Management Oversight Committees; Director of
Reader's Digest Association, Inc.
Richard J. Stegemeier, 71, Chairman Emeritus, Unocal Corporation (an
integrated petroleum company); Chairman of the Board, Unocal Corporation, 1989-
1995; Chief Executive Officer, Unocal Corporation, 1988-1994; President, Unocal
Corporation, 1985-1992; Chief Operating Officer, Unocal Corporation, 1985-1988;
joined Halliburton Company Board in 1994; member of the Health, Safety and
Environment, the Management Oversight, and the Nominating and Corporate
Governance Committees; Director of Foundation Health Corporation, Northrop
Grumman Corporation, Sempra Energy and Montgomery Watson, Inc.
99
<PAGE>
SECURITY OWNERSHIP AND DEALINGS BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF HALLIBURTON
The following table sets forth information about persons or groups who, to
Halliburton's knowledge, own or have the right to acquire more than five percent
of the outstanding Halliburton common stock as of December 31, 1998. This
information was taken from Schedules 13G filed with the SEC. Halliburton is not
aware of any subsequent ownership changes that would affect the information in
this table.
<TABLE>
<CAPTION>
Amount And Nature Percent
Of Beneficial Of
Name And Address Of Beneficial Owner Ownership Class
- -------------------------------------------- ----------------- -------
<S> <C> <C>
FMR Corp.................................... 46,213,273 (1) 10.511%
82 Devonshire Street
Boston, MA 02109
Barrow, Hanley, Mewhinney & Strauss, Inc.... 22,045,960 (2) 5.00%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, TX 75204-2429
</TABLE>
_______________
(1) The number of shares reported includes 40,906,307 shares beneficially
owned by Fidelity Management & Research Company, 4,628,866 shares owned
by Fidelity Management Trust Company and 678,100 shares held by Fidelity
International Limited. FMR Corp., through control of Fidelity Management
& Research Company and Fidelity Management Trust Company, has sole
dispositive power over the shares with the exception of those held
beneficially by Fidelity International Limited. FMR Corp. has sole power
to vote or to direct the vote of 3,193,666 shares of Halliburton common
stock.
(2) Barrow, Hanley, Mewhinney & Strauss, Inc. has sole power to dispose of
all these shares, sole power to vote or to direct the vote of 4,169,700
shares and shared power to vote or to direct the vote of 17,876,260
shares.
100
<PAGE>
The following table sets forth, as of March 22, 1999, the number of shares
of Halliburton common stock owned beneficially by each director of Halliburton,
each of the five mostly highly compensated executive officers of Halliburton and
all directors and executive officers of Halliburton as a group.
<TABLE>
<CAPTION>
Name and Beneficial Owner Amount and Nature of Beneficial Ownership
- ------------------------------------------------ ----------------------------------------------
Sole Voting
and Shared Voting
Investment or Investment Percent of
Power Power(1) Class
----------- ---------------- ----------
<S> <C> <C> <C>
Anne L. Armstrong................................ 4,400 *
William E. Bradford (3).......................... 472,033 *
Richard B. Cheney (3)............................ 969,667 *
Lord Clitheroe................................... 3,000 *
Lester L. Coleman (3)............................ 177,104 *
Robert L. Crandall............................... 3,400 *
Charles J. DiBona................................ 400 *
Lawrence S. Eagleburger (3)...................... 9,756 *
William R. Howell................................ 2,300 *
Ray L. Hunt (3).................................. 70,446 52,284 (2) *
David J. Lesar (3)............................... 391,782 *
Delano E. Lewis.................................. 1,500 *
J. Landis Martin (3)............................. 91,145 *
Jay A. Precourt (3).............................. 7,809 *
C.J. Silas....................................... 2,400 *
Richard J. Stegemeier............................ 2,000 2,000 (2) *
Donald C. Vaughn (3)............................. 193,527 *
All Directors and executive officers as a group
(22 persons) (3).............................. 2,865,467 54,284 *
</TABLE>
____________________
* Less than 1% of the outstanding.
(1) The Halliburton Stock Fund, an investment fund established under the
Halliburton Company Employee Benefit Master Trust to hold Halliburton
common stock for some of Halliburton's profit sharing, retirement and
saving plans, held 3,286,282 shares of Halliburton common stock at March
12, 1999. Two executive officers not named in the table have beneficial
interests in the Halliburton Stock Fund. Shares of Halliburton common
stock held in the Halliburton Stock Fund are not allocated to any
individual's account. As a result, a total of 2,218 shares which might be
deemed to be beneficially owned as of March 12, 1999 by the two unnamed
executive officers are not included in the table. Shares held in the
Halliburton Stock Fund are voted by the Trustee, State Street Bank and
Trust Company, in accordance with voting instructions from the
participants. Under the terms of the Plans, a participant has the right to
determine whether up to 15% of his account is invested in the Halliburton
Stock Fund or in alternative investments permitted by the Plans. The
Trustee, however, determines when sales or purchases are made by the Trust.
Mr. Martin has a beneficial interest in the NL Industries, Inc. Savings
Plan. Shares of Halliburton common stock held by that plan are not
allocated to any individual's account. Accordingly, 2,373 shares which
might be deemed to be beneficially owned by Mr. Martin as of February 18,
1999 are not included in the table.
(2) Mr. Hunt holds 52,284 shares as the trustee of trusts established for the
benefit of his children. Mr. Hunt disclaims beneficial ownership of 17,428
shares owned by another trust established for one of his children as to
which he is not a trustee. Mr. Stegemeier and his wife hold 2,000 shares as
co-trustees of a family trust and share voting and investment power for the
shares.
(3) Included in the table are shares of Halliburton common stock that may be
purchased by exercising outstanding stock options within 60 days of March
22, 1999. In the case of Messrs. Bradford and Vaughn,
101
<PAGE>
the table includes related restricted incentive stock awards under Dresser
Industries, Inc. stock compensation plans. Amounts included are:
. Mr. Bradford - 270,605;
. Mr. Cheney - 726,667;
. Mr. Coleman - 139,334;
. Mr. Eagleburger - 499;
. Mr. Hunt - 499;
. Mr. Lesar - 185,336;
. Mr. Martin - 499;
. Mr. Precourt - 499;
. Mr. Vaughn - 112,429; and
. five unnamed executive officers - 282,168.
Until the options are exercised, these individuals will neither have voting
nor investment power for the underlying shares of Halliburton common stock.
They only have the right to acquire beneficial ownership of the stock
through exercise of their options.
None of Halliburton, Holdings or any director or executive officer of
Halliburton has purchased or sold any PES shares since March 1, 1998. None of
PES, the PES directors or the other principal shareholders of PES has purchased
or sold any PES shares or Halliburton common stock since March 1, 1998.
None of the above directors and executive officers of Halliburton has
purchased or sold Halliburton common stock since July 1, 1998 except under a
stock compensation plan and except for Mr. Coleman who sold 10,001 shares of
Halliburton common stock in the market on February 4, 1999. All the following
transactions, which occurred since July 1, 1998, were effected between the named
individual, who acquired Halliburton common stock as an award under a stock
compensation plan or surrendered the Halliburton common stock to Halliburton to
discharge withholding tax liability:
. Mrs. Armstrong - acquired 800 shares;
. Mr. Bradford - acquired 50,000 shares and surrendered 17,998
shares;
. Mr. Cheney - acquired 50,000 shares;
. Lord Clitheroe - acquired 800 shares;
. Mr. Crandall - acquired 800 shares;
. Mr. DiBona - acquired 800 shares;
. Mr. Eagleburger - acquired 7,278 shares;
. Mr. Howell - acquired 800 shares;
. Mr. Hunt - acquired 400 shares;
. Mr. Lewis - acquired 800 shares;
. Mr. Martin - acquired 400 shares;
. Mr. Precourt - acquired 2,181 shares;
. Mr. Silas - acquired 800 shares;
. Mr. Stegemeier - acquired 800 shares;
. Mr. Lesar - acquired 50,000 shares and surrendered 7,408 shares;
. Mr. Vaughn - acquired 50,000 shares and surrendered 9,452 shares; and
. Mr. Coleman - acquired 15,000 shares and surrendered 3,738 shares
(exclusive to the 10,001 shares referenced above).
This information does not include stock options granted during the period.
102
<PAGE>
DESCRIPTION OF HALLIBURTON CAPITAL STOCK
General
The following is a general description of some of the provisions of the
restated certificate of incorporation and by-laws of Halliburton. The
description is qualified by reference to those documents, which are filed as
exhibits to our registration statement.
Halliburton Common Stock
Halliburton is authorized to issue 600,000,000 shares of Halliburton common
stock, par value $2.50. As of December 1, 1999, there were 441,902,795 shares of
Halliburton common stock issued and outstanding and approximately 33,000 holders
of record of Halliburton common stock. The holders of Halliburton common stock
are entitled to one vote for each share on all matters submitted to a vote of
stockholders. The holders of Halliburton common stock do not have cumulative
voting rights in the election of directors. Subject to the rights of the holders
of Halliburton preferred stock, the holders of Halliburton common stock are
entitled to receive ratably the dividends, if any, declared by the board of
directors of Halliburton out of legally available funds. In the event of
liquidation, dissolution or winding up of Halliburton, the holders of
outstanding Halliburton preferred stock, if any, shall to the extent assets are
available, be paid amounts owed to them. Holders of Halliburton common stock are
then entitled to share ratably in all remaining assets of Halliburton. The
holders of Halliburton common stock have no preemptive, subscription, redemptive
or conversion rights. The outstanding shares are fully paid and nonassessable.
The rights, preferences and privileges of holders of Halliburton common stock
are subject to those of holders of Halliburton preferred stock.
Rights to Purchase Preferred Stock
Halliburton is a party to the restated rights agreement dated as of
December 1, 1996. Under the restated rights agreement, one preferred share
purchase right has been distributed as a dividend for each share of Halliburton
common stock outstanding or issued prior to the distribution date or termination
of the restated rights agreement. Each share of Halliburton common stock issued
upon completion of the offer will be accompanied by one purchase right. Each
purchase right entitles the registered holder to purchase from Halliburton one
two-hundredth of a share of series A junior participating preferred stock,
without par value ("Halliburton series A preferred stock"), of Halliburton, at a
purchase price of $75.00 per one two-hundredth of a share, subject to further
adjustment. Until the occurrence of the events described below, the purchase
rights are not exercisable, will be evidenced by the certificates for
Halliburton common stock and will not be transferable apart from the Halliburton
common stock.
Detachment of Purchase Rights; Exercise. The purchase rights are
currently attached to all certificates representing outstanding shares of
Halliburton common stock and no separate purchase right certificates have been
distributed. The purchase rights will separate from the Halliburton common stock
and a distribution date will occur upon the earlier of:
. ten business days following a public announcement that a person or
group of affiliated or associated persons (an "acquiring person") has
acquired beneficial ownership of 15% or more of the outstanding voting
shares, as defined in the restated rights agreement, of Halliburton;
and
. the tenth business day following the commencement or announcement of
an intention to commence a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a
person or group of 15% or more of the outstanding voting shares.
The purchase rights are not exercisable until the distribution date. As
soon as practicable following the distribution date, purchase rights
certificates evidencing the purchase rights will be mailed to holders of record
of Halliburton common stock as of the close of business on the distribution date
and separate purchase rights certificates alone will evidence the purchase
rights.
If a person or group acquires 15% or more of the voting shares of
Halliburton, each purchase right then outstanding, other than purchase rights
beneficially owned by the acquiring person which would become null and void,
would become a purchase right to buy:
103
<PAGE>
. that number of shares of Halliburton common stock; or
. under specific circumstances, the equivalent number of one two-
hundredths of a share of Halliburton series A preferred stock,
that at the time of the acquisition would have a market value of two times the
purchase price of the purchase right.
If:
. Halliburton is acquired in a merger or other business combination
transaction; or
. more than 50% of its consolidated assets or earning power were sold,
proper provision is required to be made so that each holder of a purchase right
will then have the purchase right to receive the number of shares of common
stock of the acquiring company which at the time of the transaction would have a
market value of two times the purchase price of the purchase right. The shares
would be acquired upon the exercise of the purchase right at the then current
purchase price of the purchase right.
Antidilution and Other Adjustments. The number of shares or fractions of
shares of Halliburton series A preferred stock or other securities or property
issuable upon exercise of the purchase right, and the purchase price payable,
are subject to customary adjustments to prevent dilution. The number of
outstanding purchase rights and the number of shares or fractions of shares of
Halliburton series A preferred stock issuable upon exercise of each purchase
right are also subject to adjustment if prior to the distribution date there is:
. a stock split of the Halliburton common stock;
. a stock dividend on the Halliburton common stock payable in
Halliburton common stock; or
. subdivisions, consolidations or combinations of the Halliburton
common stock.
Exchange Option. At any time after the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 15% or more of the
outstanding voting shares of Halliburton and before the acquisition by a person
or group of 50% or more of the outstanding voting shares of Halliburton, the
Halliburton board of directors may redeem the purchase rights. A redemption of
purchase rights under those circumstances would require Halliburton to issue
Halliburton common stock in mandatory redemption of all or part of the
outstanding purchase rights, other than purchase rights owned by the acquiring
person or group which would become null and void. The stock issuance will be at
an exchange ratio of one share of Halliburton common stock, or one two-hundredth
of a share of Halliburton series A preferred stock, for each two shares of
Halliburton common stock for which each purchase right is then exercisable. The
redemption exchange rate is subject to adjustment upon the occurrence of any of
the events causing an adjustment in the number of outstanding purchase
rights.
Redemption of Purchase Rights. At any time prior to the first public
announcement that a person or group has become the beneficial owner of 15% or
more of the outstanding voting shares, the Halliburton board of directors may
redeem all but not less than all the then outstanding purchase rights at a
redemption price of $.01 per purchase right. The Halliburton board of directors,
in its sole discretion, may establish the time, basis and conditions for the
redemption of the purchase rights. After redemption of the purchase rights, the
only right of the holders of purchase rights will be to receive the redemption
price.
Expiration; Amendment of Purchase Rights. The purchase rights will
expire on December 15, 2005, unless earlier redeemed or exchanged. The terms of
the purchase rights may be amended by the Halliburton board of directors without
the consent of the holders of the purchase rights, including an amendment to
extend the expiration date of the purchase right. Provided a distribution date
has not occurred, the amendment provides for the extension of the period during
which the purchase rights may be redeemed. However, after the first public
announcement that a person or group has become the beneficial owner of 15% or
more of the outstanding voting shares, no amendment may materially and adversely
affect the interests of the holders of the purchase rights.
104
<PAGE>
The purchase rights have anti-takeover effects. The purchase rights will
cause substantial dilution to a person or group that attempts to acquire
Halliburton without the approval of the Halliburton board of directors. The
purchase rights should not, however, interfere with any merger or other business
combination that is approved by the Halliburton board of directors.
The foregoing description of the purchase rights is qualified by reference
to the restated rights agreement, a copy of which is filed as an exhibit to our
registration statement.
Halliburton Preferred Stock
General. Halliburton is authorized to issue 5,000,000 shares of preferred
stock, without par value, of which 3,000,000 shares have been designated as
Halliburton series A preferred stock. No shares of Halliburton preferred stock
were outstanding at ________, 2000. The Halliburton board of directors has
authority, without stockholder approval, to issue shares of Halliburton
preferred stock in one or more series and to determine the number of shares,
designations, dividend rights, conversion rights, voting power, redemption
rights, liquidation preferences and other terms of the series. The issuance of
Halliburton preferred stock, while providing desired flexibility in connection
with possible acquisitions and other corporate purposes, could adversely affect
the voting power of holders of Halliburton common stock. The issuance of
Halliburton's preferred stock could also increase the likelihood that holders of
Halliburton common stock will receive dividend payments and payments upon
liquidation. Issuance of Halliburton preferred stock also could have the effect
of delaying, deferring or preventing a change in control of Halliburton.
Halliburton has no present plans to issue any Halliburton preferred stock.
Halliburton Series A Preferred Stock. The terms of the Halliburton series
A preferred stock are designed so that the value of each one-hundredth of a
share purchasable upon exercise of a purchase right will approximate the value
of one share of Halliburton common stock. The Halliburton series A preferred
stock is nonredeemable and will rank junior to all other series of Halliburton
preferred stock. Each whole share of Halliburton series A preferred stock is
entitled to receive a cumulative quarterly preferential dividend in an amount
per share equal to the greater of:
. $1.00 in cash; or
. in the aggregate, 100 times the dividend declared on the Halliburton
common stock.
In the event of liquidation, the holders of the Halliburton series A
preferred stock are entitled to receive a preferential liquidation payment equal
to the greater of:
. $100.00 per share; or
. in the aggregate, 100 times the payment made on the Halliburton
common stock,
plus, in either case, the accrued and unpaid dividends and distributions.
In the event of any merger, consolidation or other transaction in which the
Halliburton common stock is exchanged for or changed into other stock or
securities, cash or property, each whole share of Halliburton series A preferred
stock is entitled to receive 100 times the amount received per share of
Halliburton common stock. Each whole share of Halliburton series A preferred
stock is entitled to 100 votes on all matters submitted to a vote of the
stockholders of Halliburton. Holders of Halliburton series A preferred stock
will generally vote together as one class with the holders of Halliburton common
stock and any other capital stock on all matters submitted to a vote of
stockholders of Halliburton.
Specific Provisions of Halliburton Charter and By-laws
The Halliburton certificate of incorporation authorizes the indemnification
of any person who becomes a party to any threatened, pending or completed
action, suit or proceeding because of that person's position as a director,
officer, employee or agent of Halliburton. This includes any individual who is
or was serving at the
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request of Halliburton as a director, officer, employee or agent of another
corporation or enterprise. These individuals are indemnified against expenses
and damages incurred in that litigation. The Halliburton certificate of
incorporation also contains provisions that, in accordance with Delaware law,
limit the liability of directors of Halliburton for breach of fiduciary duty.
Under these provisions, directors of Halliburton may be liable for breach of
fiduciary duty only:
. under Section 174 of the Delaware General Corporation Law, relating
to the payment of unlawful dividends and unlawful purchases of stock
of the corporation; or
. if, in addition to any and all other requirements for liability, any
director:
. shall have breached the duty of loyalty to Halliburton;
. in acting or failing to act, shall not have acted in good faith
or shall have acted in a manner involving intentional misconduct
or a knowing violation of law; or
. shall have derived an improper personal benefit.
The provisions of the Halliburton certificate of incorporation may be amended or
repealed by the vote of holders of a majority of the outstanding capital stock
of Halliburton entitled to vote.
Except in the case of nominations by or at the direction of the Halliburton
board of directors, written notice must be given of any nomination of a
director:
. with respect to an election to be held at an annual meeting of
stockholders, not later than ninety days prior to the first
anniversary of the immediately preceding annual meeting; and
. with respect to an election to be held at a special meeting of
stockholders, not later than the close of business on the tenth day
following the day of notice of the meeting.
Except in the case of a national emergency, all actions taken by the
Halliburton board of directors require the affirmative vote of a majority of the
directors present at a meeting at which a quorum is present. The Halliburton
by-laws provide that the number of directors on the Halliburton board of
directors may be increased or decreased with the approval of a majority of the
then authorized number of directors. Also, newly created directorships
resulting from any increase in the authorized number of directors and any vacant
directorships may be filled by the affirmative vote of a majority of the
directors then in office.
The Halliburton by-laws may be adopted, amended or rescinded by the vote of
a majority of the Halliburton board of directors or by the majority of the
outstanding shares of capital stock entitled to vote.
Transfer Agent and Registrar
The transfer agent and registrar for the Halliburton common stock is
ChaseMellon Shareholders Services, L.L.C.
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COMPARATIVE RIGHTS OF SHAREHOLDERS
General
PES is a private limited company incorporated in Scotland. Halliburton is a
corporation incorporated under the laws of the state of Delaware. As a result of
completion of the offer, PES shareholders will become owners of Halliburton
common stock. The following is a summary of material differences between the
rights of PES shareholders and the rights of Halliburton stockholders and of the
differences between the corporate laws of Delaware and Scotland and the
companies' respective charter documents or constitutional documents. Some
differences between the rights of holders of Halliburton common stock under
Delaware law and the rights of holders of PES shares under the laws of Scotland
are not discussed below where rights afforded under Delaware law are more
favorable to stockholders than under Scots law.
Voting Rights
Under Delaware law, each stockholder is entitled to one vote per share
unless the certificate of incorporation provides otherwise. In addition, the
certificate of incorporation or by-laws may provide for cumulative voting at all
elections of directors of the corporation. Under the Halliburton by-laws,
holders of Halliburton common stock are entitled to one vote per share on all
matters, and cumulative voting is not permitted. A quorum consists of a majority
of the outstanding shares of common stock entitled to vote, present in person or
represented by proxy, unless otherwise required by law or the Halliburton by-
laws.
Under Scots law, the voting rights of shareholders are governed by a
company's articles of association, subject to the statutory right of
shareholders to demand a poll, that is, a vote by shares, at a general meeting.
Cumulative voting is essentially unknown under Scots law. Two members entitled
to vote and present in person constitute a quorum for the purposes of a general
meeting, unless the company's articles of association specify otherwise. The PES
articles specify that two persons entitled to vote upon the business to be
transacted shall be a quorum. Those persons may be a member, a proxy for a
member or a duly authorized representative of a corporation which is a member.
Actions by Written Consent
Under Delaware law, unless the certificate of incorporation provides
otherwise, any action required or permitted to be taken at any meeting of
stockholders may instead be taken without a meeting, without prior notice or
without a vote. To do this, a written consent to the action must be signed by
the stockholders representing the number of shares necessary to take the action
at a meeting at which all shares entitled to vote were present and voted. The
Halliburton certificate of incorporation does not restrict action being taken by
written consent in lieu of a meeting.
Under Scots law, anything that in the case of a private company may be done
by resolution of the company in general meeting may be done without a meeting by
a resolution in writing executed by or on behalf of each member who would have
been entitled to vote upon it if it had been proposed at a general meeting at
which he was present. This is true even though a company's articles of
association may contain a contrary provision. PES is a private company. There
are also statutory provisions that allow for a written resolution of a company
to be executed by or on behalf of all the members who would be entitled to
attend and vote at a general meeting. There are, however, some actions for
which a statutory written resolution cannot be used.
Special Meeting of Shareholders
Under Delaware law, a special meeting of shareholders may be called by the
board of directors and by other persons as may be authorized to do so by the
certificate of incorporation or by-laws. The Halliburton by-laws provide that a
special meeting of common stockholders may be called by:
. the chief executive officer;
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. the Halliburton board of directors;
. the chairman of the board; or
. stockholders owning a majority of the outstanding Halliburton common
stock.
Under Scots law, an extraordinary general meeting of shareholders may be
called by the board of directors or requisitioned by a request from shareholders
holding not less than one-tenth of the paid-up capital of the company carrying
voting rights at general meetings. The latter is true even though a company's
articles of association may contain a contrary provision. An ordinary resolution
requires 14 clear days notice, and requires a majority vote of those present and
entitled to vote. An ordinary resolution to appoint a director, however, in the
case of PES requires 21 days. An extraordinary resolution requires 14 clear
days notice and a 75% majority vote of those present and entitled to vote. A
special resolution requires 21 clear days notice and requires a 75% majority
vote of those present and entitled to vote. An annual general meeting requires
21 clear days notice regardless of the type of resolution to be proposed at the
meeting.
"Extraordinary resolutions" are relatively unusual and are confined to
matters out of the ordinary course of business. A proposal to wind up the
affairs of the company is an example of an extraordinary resolution. Proposals
that are the normal subject of "special resolutions" generally involve
proposals:
. to change the name of the company;
. to alter its capital structure in some respect;
. to change or amend the right of shareholders;
. to permit the company to issue new shares for cash without applying
the shareholders' pre-emptive rights;
. to amend the company's objects, or purpose clause, and articles of
association; and
. to carry out other matters where either the company's articles of
association or the U.K. Companies Act 1985 prescribes that a "special
resolution" is required.
All other proposals relating to the ordinary course of the company's business,
including the election of directors, would be subject to an "ordinary
resolution."
Sources and Payment of Dividends
Delaware law permits the payment of dividends in cash, property or common
stock out of surplus or if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
This is subject to any restrictions contained in the certificate of
incorporation. This is also subject to the exception that payment of dividends
from net profits is prohibited when capital represented by common stock having a
preference on distribution of assets would be impaired. The Halliburton
certificate of incorporation and by-laws do not restrict the payment of
dividends.
Under Scots law, a company may pay dividends on its ordinary shares,
subject to the prior rights of holders of any preferred shares in issue, only
out of distributable profits. These are its accumulated, realized profits less
accumulated, realized losses. Dividends may not be paid out of share capital,
which includes share premiums. The share premium account represents the excess
of the consideration for the issue of outstanding shares over the aggregate par
value of the shares. Amounts credited to the share premium account may not be
paid out as cash dividends but may be used, among other things, to pay up
unissued shares which may then be distributed to shareholders in proportion to
their holdings.
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Rights of Purchase and Redemption
Under Delaware law, a corporation may purchase or redeem its own shares out
of surplus, provided generally that no repurchase or redemption shall occur:
. when the capital is or would thereby become impaired;
. at a price higher than the redemption price in the case of common
stock redeemable at the option of the corporation; or
. where, in the case of redemption, the redemption is not authorized by
other provisions of Delaware law or the certificate of incorporation.
The Halliburton certificate of incorporation does not restrict Halliburton's
rights to repurchase or redeem shares.
Under Scots law, a company may issue redeemable shares if authorized to do
so by its articles of association and subject to the conditions stated in the
articles and the U.K. Companies Acts. The shares may be redeemed only if fully
paid. In addition, any amount payable on redemption of any redeemable shares in
excess of the par value must be paid out of distributable profits unless the
shares were issued at a premium. In that case, any amount payable in excess of
the par value may be paid out of the proceeds of a fresh issue of shares up to
an amount equal to the lesser of:
. the aggregate of the premiums received by the company on the issue of those
shares; or
. the amount of the company's share premium account as at the time of the
redemption, including any sum transferred to that account for premiums on
the new issue.
A company may purchase its own shares including any redeemable shares, if
authorized by its articles of association and if the purchase has been approved
by an ordinary resolution of its shareholders in the case of an on-market
purchase or a special resolution in other cases. The above provisions that apply
to redemption of redeemable shares apply also to purchases of shares.
Rights of Appraisal
Under Delaware law, holders of common stock of a Delaware corporation who
follow prescribed statutory procedures are entitled to dissent from a merger or
consolidation of the corporation and instead demand payment of the fair value of
their shares. Unless the certificate of incorporation provides otherwise,
dissenters do not have rights of appraisal with respect to their shares in the
case of:
(a) a merger or consolidation of a corporation, the shares of which are:
. listed on a national securities exchange; or
. held by more than 2000 shareholders; or
(b) a merger or consolidation of a corporation if the shareholders of the
constituent corporation are required to accept anything in exchange
for their shares other than:
. shares in the surviving corporation;
. shares of another corporation that are publicly listed or held by
more than 2000 shareholders;
. cash in lieu of fractional shares; or
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. any combination of the above; or
(c) a merger in which the corporation in which they own shares is the
corporation that survives the merger if no vote of its shareholders is
required to approve the merger.
Scots law does not generally provide for appraisal rights. The U.K.
Companies Act 1985, however, does allow a shareholder to apply to the court for
an order on the grounds of unfair prejudice. Also, if a shareholder applies to a
court as described under "Shareholders' Votes on Reorganizations" below, the
court may specify the terms for the acquisition as it considers appropriate.
Pre-emptive Rights
Unless the certificate of incorporation expressly provides otherwise,
stockholders of a Delaware corporation do not have pre-emptive rights. The
Halliburton certificate of incorporation does not provide for pre-emptive
rights.
Under Scots law, there are statutory pre-emption provisions. Unless the
company's articles of association specifically exclude the pre-emption
provisions, new issues of ordinary shares shall be offered to existing members
first, in proportion to each member's shareholding in the company. The PES
articles, however, specifically exclude these provisions and replace them with
their own pre-emption provisions. In the case of PES, the directors are bound to
offer to each member of the company a proportion of a new issue of shares equal
to that member's proportion of the existing shares.
In the case of PES, the directors are required under the PES articles of
association to refuse to register a transfer of shares unless it is:
. a transfer to a spouse, children, a family trust, an employee
benefits trust, or a few other specified recipients;
. a transfer made with the prior written consent of the holders of 95%
of the ordinary shares; or
. a transfer made in accordance with the pre-emption provisions
contained in the articles.
These transfer restrictions require that shares proposed to be transferred
in other than an exempt transaction must be offered first to existing
shareholders. If there is a proposed transferee, the price at which the shares
are offered is the proposed consideration or the cash equivalent. If there is no
intended transferee, the price is fair value as agreed between the parties or as
determined by an independent valuer. Only after the shares have been offered to
and not bought by existing shareholders may the proposed transfer to a third
party be registered.
Amendment of Governing Instruments
Under Delaware law, the affirmative vote of a majority of the "outstanding
common stock" entitled to vote and of the shares of each class entitled to vote
on the amendment as a class is required to amend the certificate of
incorporation. In addition, the affirmative vote of a majority of the shares of
a class is required with respect to amendments that would as to the class:
. increase or decrease the aggregate number of authorized shares;
. increase or decrease the par value of shares; or
. alter or change the powers, preferences, or special rights of shares
so as to affect them adversely.
In addition, under the Halliburton certificate of incorporation, the
corporation may amend, alter, change or repeal any provision contained in the
Halliburton certificate of incorporation in the manner prescribed by statute.
All rights and powers conferred upon common stockholders and directors are
granted subject to the power. Under
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Delaware law, the by-laws of a corporation may be amended or repealed by
shareholders entitled to vote, and the certificate of incorporation may confer
this power on the board of directors. The fact that such power has been
conferred upon the directors does not divest the shareholders of their power to
amend or repeal by-laws.
The Halliburton certificate of incorporation provides that the Halliburton
board of directors is expressly authorized to make, alter or repeal the by-laws.
Under Scots law, the shareholders have the authority to alter most
provisions of a company's memorandum and all provisions of its articles of
association by special resolution, subject (in the case of an amendment to the
memorandum of association) to the right of dissenting shareholders holding at
least 15% of a company's share capital or any class of shares to apply to the
courts to cancel the alterations. Under Scots law, the board of directors is not
authorized to change the memorandum or the articles of association.
Shareholders' Votes on Reorganizations
Delaware law requires a majority vote of the shares entitled to vote in
order to effect a merger between two Delaware corporations or between a Delaware
corporation and a corporation organized under the laws of another state, also
referred to as a "foreign corporation". Delaware law does not, however, unless
otherwise provided in the certificate of incorporation, require a vote of the
shareholders of a constituent corporation surviving the merger if:
. the merger agreement does not amend that corporation's certificate of
incorporation; and
. each share of that corporation's common stock outstanding immediately
prior to the effective date of the merger is identical to an
outstanding or treasury share of the surviving corporation after the
merger.
Any sale, lease or exchange of all or "substantially all" of a
corporation's assets requires authorization by a majority vote of the
outstanding common stock entitled to vote.
Scots law provides for schemes of arrangement, which are arrangements or
compromises between a company and any class of its shareholders or any class of
its creditors and are used for some types of reconstructions, amalgamations,
capital reorganizations or takeovers. They require the approval at a special
meeting of the company of a majority in number of the shareholders representing
75% of the relevant class of shares voting, either in person or by proxy, and
the sanction of the courts. Once so approved and sanctioned, all shareholders of
the relevant class are bound by the terms of the scheme. A dissenting
shareholder would have no rights comparable to the appraisal rights described
above.
Provisions Relating to Share Acquisitions
Delaware law generally prevents a corporation from entering into business
combinations including mergers, consolidations and sales of assets, with an
interested common stockholder or its affiliates for a period of three years
after the common stockholder became an interested common stockholder. An
interested stockholders is defined generally as any person or entity that is the
beneficial owner of at least 15% of a corporation's voting common stock. This
provision is subject to the following exceptions:
. the business combination or the transaction in which the person
becomes an interested common stockholder is timely approved by the
board of directors of the corporation prior to the person becoming an
interested common stockholder;
. the interested common stockholder acquired 85% of the corporation's
voting common stock in the same transaction in which it exceeded 15%;
or
. the business combination is approved by the board of directors and by
a vote of 66 2/3% of the outstanding voting common stock not owned by
the interested common stockholder.
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A corporation can provide in an amendment to its certificate of
incorporation or by-laws adopted by a majority of its outstanding shares that
this statute does not apply. If the stockholders adopted that amendment, it
would not become effective for 12 months following its adoption and would not
apply to persons who were already interested common stockholders at the time of
the amendment. The Halliburton certificate of incorporation does not contain a
provision of this type.
In the U.K., takeovers of public companies are regulated by the City Code.
PES, as a private company, is not subject to the City Code.
Scots law provides that where a takeover offer is made for the shares of a
company incorporated in the U.K., the offeror may under specified conditions
acquire any shares not acquired in the takeover through compulsory acquisition.
These conditions are that:
. within four months of the date of the offer the offeror has, by
virtue of acceptances of the offer, acquired or contracted to acquire
not less than nine-tenths in value of the shares to which the offer
relates; and
. within two months of reaching the nine-tenths level, the offeror
gives notice of compulsory acquisition to shareholders who do not
accept the offer to transfer their shares on the terms of the offer.
A dissenting shareholder may apply to the court within six weeks of the
date on which the notice was given objecting to the transfer or its proposed
terms. The court is unlikely, unless there is evidence of unfairness, fraud or
oppression, to exercise its discretion to order that the acquisition not take
effect. It may, however, specify terms of the transfer as it finds appropriate.
A minority shareholder is also entitled in these circumstances to require the
offeror to acquire his shares on the terms of the offer. This is the compulsory
acquisition procedure referred to in this offer document.
Disclosure of Interests
There is no requirement under Delaware law relating to the disclosure of
interests of shares held by a corporation's shareholders. Shareholders of PES,
as a private company, are not subject to those requirements imposed by Scots law
on shareholders of public companies requiring notification of share holdings
that exceed specified magnitudes.
Classification of the Halliburton Board of Directors
Under Delaware law, the certificate of incorporation or initial by-law or a
by-law adopted by a vote of the shareholders may provide for the classification
of the board of directors for the terms for which directors severally hold
office. The term "classified board" generally means the specification of
selected board seats for a term of more than one year, but not more than three
years, with different classes of board seats coming up for election each year.
The Halliburton certificate of incorporation does not provide for classification
of the Halliburton board of directors.
PES directors are not required to retire by rotation and hold office until
they resign or are removed from office in accordance with the PES articles.
Under the PES articles, new directors may be appointed by the existing directors
either to fill a casual vacancy or as additional directors. The members of PES
may also appoint a new director by ordinary resolution.
Removal of Directors
Under Delaware law, any director or the entire board of directors generally
may be removed, with or without cause by a majority vote of the shares then
entitled to vote at an election of directors. A director of a corporation with a
classified board of directors may, however, be removed only for cause unless the
certificate of incorporation otherwise provides. The Halliburton certificate of
incorporation is silent as to removal of directors.
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Under Scots law, shareholders have the right to remove a director by
ordinary resolution of which 28 clear days notice, also referred to as "special
notice," has been given to the company. In addition to the power of removal
conferred by Scots law, the PES articles provide for a number of circumstances
in which a director is required to vacate office, including that in which all
other directors unanimously resolve that he should do so.
Liability of Directors
Delaware law permits a Delaware corporation to include in its certificate
of incorporation a provision that limits or eliminates a director's monetary
liability for specified violations of his fiduciary duty of care in a lawsuit by
or on behalf of the corporation or in an action by shareholders of the
corporation. The Halliburton certificate of incorporation contains this type of
provision.
Except under the limited circumstances described below under
"Indemnification of Officers and Directors," Scots law provides that:
. any provision of a Scottish company's articles of association; or
. any contract with the company,
exempting an officer or director of the company from or indemnifying him or her
against any liability for any negligence, default, breach of duty or breach of
trust of which he or she may be guilty in relation to the company is void. A
company is permitted to purchase and maintain insurance against these types of
liabilities for its officers and directors. The existence of this insurance
must be disclosed in the directors' report for each financial year of the
company for as long as the insurance continues in effect. Under the PES
articles, the PES directors have the power to obtain, and have obtained, this
insurance.
Indemnification of Officers and Directors
Delaware law provides that a corporation may, and in some circumstances
must indemnify its officers, directors, employees or agents for expenses,
judgments or settlements actually and reasonably incurred by them in connection
with suits and other legal proceedings. To avail themselves of this
indemnification these individuals must:
. have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation; and
. with respect to any criminal action or proceedings, had no reasonable
cause to believe their conduct was unlawful.
Delaware corporations must indemnify these individuals in connection with
successful defenses of these actions. The Halliburton certificate of
incorporation and by-laws provide that directors and officers of Halliburton
will be entitled to indemnification as permitted by the statute. Delaware law
permits a corporation to advance expenses to directors and officers, so long as,
in the case of officers and directors, they provide an undertaking to repay the
amounts advanced if it is ultimately determined that the officer or director was
not entitled to be indemnified. The Halliburton certificate of incorporation
provides for advancing expenses in the manner provided for in the Delaware law.
Under Scots law, a company may only indemnify its officers and directors
against any liability they may incur in defending any proceedings, whether civil
or criminal:
. in which judgment is given in his or her favor; or
. in which he or she is acquitted; or
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. in connection with any application in which relief is granted to him
or her by the court from liability for any amount otherwise payable as
a result of an acquisition of shares by a nominee of the company or
for negligence, default, breach of duty or breach of trust in relation
to the affairs of the company where he or she acted honestly and
reasonably.
The PES articles provide that the directors, other officers and auditors of
PES will be entitled to the benefit of this indemnification.
Shareholder and Class Action Suits
Under Delaware law, a common stockholder may institute a lawsuit on behalf
of the corporation. An individual shareholder also may commence a class action
suit on behalf of himself or herself and other similarly situated shareholders
where the requirements for maintaining a class action under the procedural rules
of the court in which the suit has been brought have been met.
Under Scots law, a shareholder generally has no right to sue in the name of
the company. The proper plaintiff when a wrong has been done to the company is
normally the company itself. There are exceptions to this general rule in the
case of fraud on minority shareholders or where the act complained of is illegal
or ultra vires. Scots law permits an individual shareholder to apply for a court
order where the company's affairs are being or have been conducted in a manner
unfairly prejudicial to the interests of one or more of the shareholders or that
any actual or proposed act or omission is or would be so prejudicial. A court
when granting relief has wide discretion, including the ability to authorize
civil proceedings to be brought in the name and on behalf of the company by a
shareholder on terms decided by the court. Scots law generally does not provide
for class action lawsuits.
LEGAL MATTERS
On behalf of Halliburton, Vinson & Elkins L.L.P., Houston, Texas has issued
an opinion with regard to the validity of the Halliburton common stock to be
issued under the offer. On behalf of Halliburton, Vinson & Elkins L.L.P. has
also given an opinion with regard to specific United States income tax
consequences of the offer contained in this offer document. On behalf of
Halliburton, CMS Cameron McKenna, London, England has given an opinion with
regard to specific United Kingdom income and capital gains tax consequences of
the offer contained in this offer document.
EXPERTS
The annual consolidated financial statements of Halliburton included in the
registration statement on Form S-4 of which this offer document constitutes a
part have been audited by Arthur Andersen LLP, independent public accountants.
The annual consolidated financial statements are included in this offer document
in reliance upon the authority of Arthur Andersen LLP as experts in accounting
and auditing in giving these reports. In its report, Arthur Andersen LLP states
that regarding Dresser Industries, Inc., for each of the two years in the period
ended December 31, 1997, its opinion is based on the reports of other
independent public accountants, namely PricewaterhouseCoopers whose report
appears in this offer document. The annual consolidated financial statements of
Dresser Industries, Inc., for the period ended October 31, 1997 have been
included in this offer document in reliance on the report of
PricewaterhouseCoopers given on the authority of PricewaterhouseCoopers as
experts in auditing and accounting.
The consolidated financial statements of PES as of March 31, 1999, 1998 and
1997 and for the years then ended, as well as the reconciliation of significant
differences between U.S. and U.K. generally accepted accounting principles, have
been included in this offer document in reliance on the reports of
PricewaterhouseCoopers, independent chartered accountants, given on the
authority of that firm as experts in auditing and accounting.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 regarding
the offering of our common stock to be issued under the offer. This offer
document constitutes a part of the registration statement. In accordance with
the rules of the SEC, it omits some of the information contained in the
registration statement. For the omitted information, please review the
registration statement and the exhibits filed along with it.
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information that we have filed at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our
public filings are also available to the public from commercial document
retrieval services and at the Internet web site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information concerning
us also may be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" information into this offer
document. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this offer document, except
for any information superseded by information contained directly in the offer
document. This offer document incorporates by reference the documents set forth
below. These documents contain important information about us and our financial
condition.
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Halliburton Filings (File No. 1-3492) Period
- -------------------------------------- ------
<S> <C>
Annual Report on Form 10-K Year Ended December 31, 1998
Quarterly Reports on Form 10-Q Quarter Ended March 31, 1999;
June 30, 1999 and September 30,1999
Proxy Statements Annual Meeting of Stockholders - 1999
Current Reports on Form 8-K January 27, 1999; January 28, 1999;
February 25, 1999; March 24, 1999;
March 24, 1999; March 24, 1999;
April 6, 1999; April 21, 1999;
April 28, 1999; April 28, 1999;
May 20, 1999; June 9, 1999;
June 9, 1999; June 29, 1999;
July 19, 1999; July 26, 1999;
August 13, 1999; October 1, 1999;
October 1, 1999; October 6, 1999;
October 25, 1999; October 28, 1999;
October 28, 1999; November 2, 1999;
and November 2, 1999.
</TABLE>
We also incorporate by reference additional documents that we may file with
the SEC between the date of this offer document and the expiration of the offer.
These include periodic reports, for example, annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, as well as proxy
statements. Any statement contained in this offer document or in any document
incorporated or deemed to be incorporated by reference in this offer document
shall be deemed to be modified or superseded for purposes of this offer document
to the extent that a statement contained in this offer document or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference in this offer document, modifies or supersedes that statement. Any
statement so modified or superseded shall not be deemed to constitute a part of
this offer document except as so modified or superseded.
We have supplied all information contained or incorporated by reference in
this offer document relating to us, and PES has supplied all information
relating to PES.
You may obtain any of these documents through the SEC or the SEC's Internet
web site. Documents incorporated by reference are available from us without
charge, excluding all exhibits unless specifically incorporated by reference as
an exhibit in this offer document. PES shareholders may obtain documents
incorporated by reference in this offer document by requesting them in writing
or by telephone from us at the following address:
115
<PAGE>
HALLIBURTON COMPANY
3600 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201-3391
Attention: Investor Relations
Tel: (214) 978-2600
If you would like to request documents, please do so by ________________,
2000 to receive them before the expiration of the offer. If you request any
incorporated documents, we will mail them to you by first-class mail, or other
equally prompt means, within one business day of receipt of your request.
Copies of the following documents that are either incorporated by reference
in this offer document or filed as exhibits to the registration statement are
available for inspection at the offices of the receiving agent, CMS Cameron
McKenna. These documents are on display at the receiving agent's offices in
Aberdeen at Migvie House, North Silver Street, Aberdeen AB1O 1RJ, United
Kingdom, and in London at Mitre House, 160 Aldersgate Street, London EC1A 4DD,
United Kingdom. You may inspect these documents during normal business hours on
any weekday, public holidays excepted, up to and including ________, 2000:
. Annual report of Halliburton Company on Form 10-K for the fiscal year
ended December 31, 1998.
. Quarterly reports of Halliburton Company on Form 10-Q for the quarters
ended March 31, 1999; June 30, 1999, and September 30, 1999.
. Current reports of Halliburton Company on Form 8-K dated January 25,
1999; January 28, 1999; February 25, 1999; March 24, 1999; March 24,
1999; March 24, 1999; April 6, 1999; April 21, 1999; April 28, 1999;
April 28, 1999; May 20, 1999; June 9, 1999; June 9, 1999; June 29,
1999; July 19, 1999; July 26, 1999; August 13, 1999; October 1,
1999; October 1, 1999; October 6, 1999; October 25, 1999;
October 28, 1999; October 28, 1999; November 2, 1999; and November 2,
1999.
. The Warranty Agreement.
. The Irrevocable Undertakings.
. The relevant Service Agreements for the PES Directors and two key
employees.
. The PES Technology Transfer and Development Plan.
You should rely only on the information contained or incorporated by
reference in this offer document in determining whether or not to accept our
offer. We have not authorized anyone to provide you with information that is
different from that which is contained in this offer document. This offer
document is dated ____________, 2000.
116
<PAGE>
HALLIBURTON COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants
To the Shareholders and Board of Directors
Halliburton Company:
We have audited the accompanying consolidated balance sheets of Halliburton
Company (a Delaware corporation) and subsidiary companies as of December 31,
1998 and 1997, and the related consolidated statements of income, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1998. We did not audit the consolidated balance sheet of Dresser Industries,
Inc., a company acquired during 1998 in a transaction accounted for as a pooling
of interests, as of December 31, 1997, and the related consolidated statements
of income, cash flows and shareholders' equity for each of the two years in the
period ended December 31, 1997, as discussed in Note 14. Such statements are
included in the consolidated financial statements of Halliburton Company and
reflect total assets of 48% for the year ended December 31, 1997, and total
revenue of 46% and 47% for the years ended December 31, 1997 and 1996,
respectively, of the related consolidated totals. These statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to amounts included for Dresser Industries, Inc. is based
solely upon the report of the other auditors. These financial statements are
the responsibility of Halliburton 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Halliburton Company and subsidiary
companies as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1999
117
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion the balance sheet, the statements of income, of cash flows and of
shareholders' equity of Dresser Industries, Inc. and subsidiaries (not
presented separately herein) present fairly in all material respects its
financial position at October 31, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended October 31, 1997,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Dresser Industries, Inc. management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
November 26, 1997
118
<PAGE>
Responsibility for Financial Reporting
Halliburton Company is responsible for the preparation and integrity of its
published financial statements. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and, as such, include amounts based on judgments and estimates made by
management. Halliburton also prepared the other information included in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
The financial statements have been audited by the independent accounting
firm, Arthur Andersen LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders, the
board of directors and committees of the board.
Halliburton maintains a system of internal control over financial
reporting, which is intended to provide reasonable assurance to Halliburton's
management and board of directors regarding the preparation of financial
statements. The system includes a documented organizational structure and
division of responsibility, established policies and procedures, including a
code of conduct to foster a strong ethical climate which is communicated
throughout Halliburton, and the careful selection, training and development of
our people. Internal auditors monitor the operation of the internal control
system and report findings and recommendations to management and the board of
directors. Corrective actions are taken to address control deficiencies and
other opportunities for improving the system as they are identified. The board,
operating through its Audit Committee, which is composed entirely of Directors
who are not current or former officers or employees of Halliburton, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of an internal control system may
change over time.
Halliburton assessed its internal control system in relation to criteria
for effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon that assessment,
Halliburton believes that, as of December 31, 1998, its system of internal
control over financial reporting met those criteria.
HALLIBURTON COMPANY
By:___________________________ ____________________________
Richard B. Cheney Gary V. Morris
Chief Executive Officer Executive Vice President and
Chief Financial Officer
119
<PAGE>
HALLIBURTON COMPANY
Consolidated Statements of Income
(Millions of dollars except per share data)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
Years Ended December 31 September 30
----------------------------------- ---------------------
1998 1997 1996 1999 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Services.......................................... $12,089.4 $11,256.3 $ 9,461.1 $ 8,186.2 $ 9,204.3
Sales............................................. 5,069.9 4,857.0 4,351.7 2,850.3 3,692.5
Equity in earnings of unconsolidated affiliates... 193.8 158.3 133.8 90.9 167.3
--------- --------- --------- --------- ---------
Total revenues................................. $17,353.1 $16,271.6 $13,946.6 $11,127.4 $13,064.1
--------- --------- --------- --------- ---------
Operating costs and expenses:
Cost of services.................................. $11,127.0 $10,163.9 $ 8,708.0 $ 7,842.3 $ 8,429.5
Cost of sales..................................... 4,342.0 4,037.8 3,628.3 2,497.3 3,126.9
General and administrative........................ 600.1 665.0 621.3 372.9 435.4
Special charges and credits....................... 887.5 6.2 85.8 (47.1) 852.4
--------- --------- --------- --------- ---------
Total operating costs and expenses............. $16,956.6 $14,872.9 $13,043.4 $10,665.4 $12,844.2
--------- --------- --------- --------- ---------
Operating income.................................... 396.5 1,398.7 903.2 462.0 219.9
Interest expense.................................... (136.8) (111.3) (84.6) (108.2) (95.9)
Interest income..................................... 27.8 21.9 26.9 69.6 21.4
Foreign currency gains (losses), net................ (12.4) (0.7) (19.1) (0.8) (9.7)
Other nonoperating income, net...................... 3.7 4.5 4.6 (25.1) 2.7
--------- --------- --------- --------- ---------
Income before incomes taxes, minority interest,
and change in accounting method.................... 278.8 1,313.1 831.0 397.5 138.4
Provision for income taxes.......................... (244.4) (491.4) (248.4) (153.1) (184.4)
Minority interest in net income of consolidated
subsidiaries....................................... (49.1) (49.3) (24.7) (22.9) (34.5)
--------- --------- --------- --------- ---------
Income before accounting change..................... (14.7) 772.4 557.9 221.5 (80.5)
Cumulative effect of change
in accounting method, net......................... - - - (19.0) -
--------- --------- --------- --------- ---------
Net income (loss)................................... $ (14.7) $ 772.4 $ 557.9 $ 202.5 $ (80.5)
========= ========= ========= ========= =========
Basic income (loss) per common share:
Before change in accounting method............. $ (0.03) $ 1.79 $ 1.30 $ 0.50 $ (0.18)
Change in accounting method.................... - - - (0.04) -
--------- --------- --------- --------- ---------
Net income..................................... $ (0.03) $ 1.79 $ 1.30 $ 0.46 $ (0.18)
========= ========= ========= ========= =========
Diluted income per share:
Before change in accounting method............. $ (0.03) $ 1.77 $ 1.29 $ 0.50 $ (0.18)
Change in accounting method.................... - - - (0.04) -
--------- --------- --------- --------- ---------
Net income..................................... $ (0.03) $ 1.77 $ 1.29 $ 0.46 $ (0.18)
========= ========= ========= ========= =========
Weighted average common shares outstanding:
Basic.......................................... 438.8 431.1 429.2 440.2 438.6
Diluted........................................ 438.8 436.1 432.1 443.2 438.6
</TABLE>
___________________________
See notes to annual and quarterly financial statements.
120
<PAGE>
HALLIBURTON COMPANY
Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
<TABLE>
<CAPTION>
Unaudited
December 31 September 30
---------------------- ----------------------
1998 1997 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and equivalents.............................................. $ 202.6 $ 384.1 $ 294.5 $ 228.5
Receivables:
Notes and accounts receivable.................................. 3,422.1 3,039.0 3,204.1 3,565.2
Accounts receivable allowance.................................. (76.6) (58.6) (106.1) (67.2)
Unbilled work on uncompleted contracts......................... 514.9 407.2 608.1 497.1
--------- --------- --------- ---------
Total receivables.............................................. 3,860.4 3,387.6 3,706.1 3,995.1
Inventories....................................................... 1,284.7 1,294.1 1,251.2 1,432.0
Deferred income taxes, current.................................... 432.2 202.6 298.8 435.3
Other current assets.............................................. 286.1 169.7 209.9 201.0
--------- --------- --------- ---------
Total current assets........................................... 6,066.0 5,438.1 5,760.5 6,291.9
Property, plant and equipment:
At cost........................................................... 6,824.4 6,646.0 6,864.9 6,966.8
Less accumulated depreciation..................................... 3,928.5 3,879.6 4,047.4 3,995.2
--------- --------- --------- ---------
Net property, plant and equipment.............................. 2,895.9 2,766.4 2,817.5 2,971.6
Equity in and net advances to related companies..................... 587.0 761.2 520.1 521.6
Excess of cost over net assets acquired............................. 764.6 1,024.6 777.6 1,131.2
Deferred income taxes, noncurrent................................... 336.9 273.0 366.4 250.0
Other assets........................................................ 415.5 441.0 342.4 489.6
--------- --------- --------- ---------
Total assets...................................................... $11,065.9 $10,704.3 $10,584.5 $11,655.9
========= ========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable and current maturities of long-term debt. $ 573.5 $ 57.9 $ 1,250.4 $ 580.7
Accounts payable.................................................. 1,008.5 1,132.4 1,039.4 1,122.6
Accrued employee compensation and benefits........................ 402.2 516.1 280.1 494.9
Advance billings on uncompleted contracts......................... 513.3 638.3 262.7 523.2
Income taxes payable.............................................. 245.6 335.2 109.5 264.5
Accrued special charges........................................... 359.1 6.1 92.7 915.1
Other current liabilities......................................... 834.2 767.3 686.7 791.7
--------- --------- --------- ---------
Total current liabilities...................................... 3,936.4 3,453.3 3,721.5 4,692.7
Long-term debt...................................................... 1,369.7 1,296.9 1,059.1 1,284.9
Employee compensation and benefits.................................. 1,006.6 1,013.7 994.7 984.9
Other liabilities................................................... 521.8 460.1 548.3 471.4
Minority interest in consolidated subsidiaries...................... 170.2 163.4 138.9 173.9
--------- --------- --------- ---------
Total liabilities.............................................. 7,004.7 6,387.4 6,462.5 7,607.8
--------- --------- --------- ---------
Shareholders' equity:
Common shares, par value $2.50 per share -
authorized 600.0 shares (a).................................... 1,114.7 1,134.3 1,118.8 1,114.2
Paid-in capital in excess of par value............................ 8.2 168.2 59.1 --
Deferred compensation............................................. (50.6) (44.3) (50.3) --
Accumulated other comprehensive income............................ (148.8) (131.1) (182.1) (146.1)
Retained earnings................................................. 3,236.0 3,563.4 3,273.0 3,183.6
--------- --------- --------- ---------
4,159.5 4,690.5 4,218.5 4,151.7
Less treasury stock, at cost (b).................................. 98.3 373.6 96.5 103.6
--------- --------- --------- ---------
Total shareholders' equity..................................... 4,061.2 4,316.9 4,122.0 4,048.1
--------- --------- --------- ---------
Total liabilities and shareholders' equity..................... $11,065.9 $10,704.3 $10,584.5 $11,655.9
========= ========= ========= =========
__________________________
(a) Issued shares.............................................. 445.9 453.7 447.5 445.9
(b) Treasury stock............................................. 5.9 15.8 5.8 6.3
</TABLE>
See notes to annual and quarterly financial statements.
121
<PAGE>
HALLIBURTON COMPANY
Consolidated Statements of Cash Flows
(Millions of dollars)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
Years Ended December 31 September 30
------------------------------- -------------------
1998 1997 1996 1999 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (14.7) $ 772.4 $ 557.9 $ 202.5 $ (80.5)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization................................. 587.0 564.3 497.7 447.4 441.5
Provision (benefit) for deferred income taxes................. (293.4) 2.6 (13.4) 104.0 (201.8)
Change in accounting methods.................................. - - - 19.0 -
Distributions from (advances to) related companies, net of
equity in (earnings) or losses............................... (22.5) (84.6) (57.2) (5.8) (76.4)
Change in accrued special charges............................. 329.7 (51.6) 57.7 (266.4) 383.3
Other non-cash items.......................................... 355.8 66.2 33.1 59.4 581.9
Other changes, net of non-cash items:
Receivables................................................. (279.9) (408.8) (363.5) (52.9) (380.8)
Inventories................................................. (66.3) (117.1) (147.5) 54.0 (125.1)
Accounts payable............................................ (45.3) (49.7) 98.8 (45.3) 12.0
Other working capital, net.................................. (142.5) 39.9 286.9 (506.0) (246.9)
Other, net.................................................. 46.2 99.5 (86.3) (126.3) 6.4
------- ------- ------- ------- -------
Total cash flows from operating activities....................... $ 454.1 $ 833.1 $ 864.2 $(116.4) $ 313.6
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures............................................. (914.3) (880.1) (731.1) (433.0) (687.0)
Sales of property, plant and equipment........................... 100.0 180.6 64.4 116.0 61.4
Acquisitions of businesses, net of cash acquired................. (40.4) (161.5) (60.5) (12.6) (39.9)
Dispositions of businesses, net of cash disposed................. 7.7 37.6 21.6 291.0 7.7
Other investing activities....................................... 0.9 (49.9) (53.5) 3.9 (3.4)
------- ------- ------- ------- -------
Total cash flows from investing activities....................... $(846.1) $(873.3) $(759.1) $ (34.7) $(661.2)
------- ------- ------- ------- -------
Cash flows from financing activities:
Borrowings of long-term debt..................................... 150.0 303.2 295.6 - 1.4
Payments on long-term debt....................................... (26.7) (17.7) (8.2) (69.4) (13.1)
Net borrowings (payments) of short-term debt..................... 369.3 (85.8) (7.3) 436.2 426.7
Payments of dividends to shareholders............................ (254.2) (250.3) (239.6) (165.5) (199.3)
Proceeds from exercises of stock options......................... 49.1 71.5 42.6 43.6 45.0
Payments to reacquire common stock............................... (19.9) (44.1) (235.2) (4.3) (18.5)
Other financing activities....................................... (13.9) 2.6 3.7 (6.7) (6.4)
------- ------- ------- ------- -------
Total cash flows from financing activities....................... 253.7 (20.6) (148.4) 233.9 235.8
------- ------- ------- ------- -------
Effect of exchange rate changes on cash............................ (5.4) (1.1) 1.0 9.1 (5.6)
------- ------- ------- ------- -------
Increase (decrease) in cash and equivalents........................ (143.7) (61.9) (42.3) 91.9 (117.4)
Cash and equivalents at beginning of period *..................... 346.3 446.0 488.3 202.6 345.9
------- ------- ------- ------- -------
Cash and equivalents at end of period.............................. $ 202.6 $ 384.1 $ 446.0 $ 294.5 $ 228.5
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest...................................................... $ 137.0 $ 106.1 $ 76.1 $ 113.5 $ 109.5
Income taxes.................................................. 534.8 307.4 191.1 185.0 395.9
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses............. $ 5.4 $ 337.1 $ 39.4 $ 89.7 $ 34.1
Liabilities disposed of in dispositions of businesses......... 23.6 205.5 9.8 16.2 0.2
</TABLE>
_________________________________
* Cash balance at the beginning of 1998 does not agree to the prior year
ending cash balance in order to change Dresser's fiscal year to
Halliburton's calendar year.
See notes to annual and quarterly financial statements.
122
<PAGE>
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(Millions of dollars and shares except per share data)
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Common stock (number of shares)
Balance at beginning of year 453.7 221.7 221.3
Shares issued under incentive stock plans, net of forfeitures 1.1 1.3 0.3
Cancellation of treasury stock (8.9) -- (0.1)
Shares issued in connection with acquisition -- 8.2 --
Two-for-one common stock split -- 222.5 --
Shares issued pursuant to stock warrant agreement -- -- 0.2
-------- -------- -------
Balance at end of year 445.9 453.7 221.7
======== ======== =======
Common stock (dollars)
Balance at beginning of year $1,134.3 $ 554.3 $ 553.3
Shares issued under incentive stock plans, net of forfeitures 2.7 3.2 0.9
Cancellation of treasury stock (22.3) -- (0.3)
Shares issued in connection with acquisition -- 20.5 --
Two-for-one common stock split -- 556.3 --
Shares issued pursuant to stock warrant agreement -- -- 0.4
-------- -------- -------
Balance at end of year $1,114.7 $1,134.3 $ 554.3
======== ======== =======
Paid-in capital in excess of par value
Balance at beginning of year $ 168.2 $ 615.1 $ 593.9
Shares issued under incentive stock plans, net of forfeitures 43.0 51.4 18.3
Cancellation of treasury stock (209.3) -- (3.6)
Shares issued in connection with employee compensation plans 6.3 21.4 (1.0)
Shares issued in connection with acquisition -- 36.6 --
Two-for-one common stock split -- (556.3) --
Shares issued pursuant to stock warrant agreement -- -- 7.5
-------- -------- -------
Balance at end of year $ 8.2 $ 168.2 $ 615.1
======== ======== =======
Deferred compensation
Balance at beginning of year $ (44.3) $ (22.9) $ (23.9)
Current year awards, net (6.3) (21.4) 1.0
-------- -------- -------
Balance at end of year $ (50.6) $ (44.3) $ (22.9)
======== ======== =======
Accumulated other comprehensive income
Cumulative translation adjustment $ (141.4) $ (127.2) $ (93.9)
Pension liability adjustment (7.4) (3.9) (6.9)
-------- -------- -------
Balance at end of year $ (148.8) $ (131.1) $(100.8)
======== ======== =======
Cumulative translation adjustment
Balance at beginning of year $ (127.2) $ (93.9) $(104.7)
Conforming fiscal years (14.8) -- --
Sale of M-I L.L.C. 9.4 -- --
Current year changes, net of tax (8.8) (33.3) 10.8
-------- -------- -------
Balance at end of year $ (141.4) $ (127.2) $ (93.9)
======== ======== =======
</TABLE>
See notes to annual financial statements.
123
<PAGE>
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(continued)
(Millions of dollars and shares except per share data)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pension liability adjustment
Balance at beginning of year $ (3.9) $ (6.9) $ (7.0)
Current year adjustment (3.5) 3.0 0.1
-------- -------- --------
Balance at end of year $ (7.4) $ (3.9) $ (6.9)
======== ======== ========
Retained earnings
Balance at beginning of year $3,563.4 $3,077.1 $2,758.8
Net income (loss) (14.7) 772.4 557.9
Cash dividends paid (254.2) (250.3) (239.6)
Cancellation of treasury stock (61.1) -- --
Pooling of interests acquisition -- (35.8) --
Conforming fiscal years 2.6 -- --
-------- -------- --------
Balance at end of year $3,236.0 $3,563.4 $3,077.1
======== ======== ========
Treasury stock (number of shares)
Beginning of year 15.8 8.6 5.6
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (1.1) (1.5) (1.2)
Shares purchased 0.1 0.7 4.3
Cancellation of treasury stock (8.9) -- (0.1)
Two-for-one common stock split -- 8.0 --
-------- -------- --------
Balance at end of year 5.9 15.8 8.6
======== ======== ========
Treasury stock (dollars)
Beginning of year $ 373.6 $ 381.4 $ 193.4
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (8.5) (51.9) (43.3)
Shares purchased 3.5 44.1 235.2
Cancellation of treasury stock (270.3) -- (3.9)
-------- -------- --------
Balance at end of year $ 98.3 $ 373.6 $ 381.4
======== ======== ========
Comprehensive income
Net income (loss) $ (14.7) $ 772.4 $ 557.9
Translation rate changes, net of tax (8.8) (33.3) 10.8
Current year adjustment to minimum pension liability (3.5) 3.0 0.1
-------- -------- --------
Total comprehensive income $ (27.0) $ 742.1 $ 568.8
======== ======== ========
</TABLE>
See notes to annual financial statements.
124
<PAGE>
HALLIBURTON COMPANY
Notes to Annual Consolidated Financial Statements
Note 1. Significant Accounting Policies
Halliburton employs accounting policies that are in accordance with
generally accepted accounting principles in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires Halliburton management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
Basis of presentation. On September 29, 1998, Halliburton completed
the acquisition of Dresser Industries, Inc. (Dresser) pursuant to the Agreement
and Plan of Merger (the Merger) dated as of February 25, 1998. The Merger was
accounted for using the pooling of interests method of accounting for business
combinations. Accordingly, Halliburton's financial statements have been restated
to include the accounts of Dresser for all periods presented. Prior to the
Merger, Dresser had a fiscal year-end of October 31. Beginning in 1998,
Dresser's fiscal year-end of October 31 has been conformed to Halliburton's
calendar year-end. Periods through December 31, 1997 contain Dresser's
information on a fiscal year-end basis combined with Halliburton's information
on a calendar year-end basis. Dresser's operating results for November and
December of 1997 are presented within the consolidated statements of
shareholders' equity as "conforming fiscal years."
Principles of Consolidation. The consolidated financial statements
include the accounts of Halliburton and all majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
other companies in which Halliburton owns between 20-50% are accounted for on
the equity method. Certain prior year amounts have been reclassified to conform
with the current year presentation.
Revenues and Income Recognition. Halliburton recognizes revenues as
services are rendered or products are shipped. The distinction between services
and product sales is based upon the overall activity of the particular business
operation. Revenues from engineering and construction contracts are reported on
the percentage of completion method of accounting using measurements of progress
towards completion appropriate for the work performed. All known or anticipated
losses on contracts are provided for currently. Post-contract customer support
agreements are recorded as deferred revenues and recognized as revenue ratably
over the contract periods of generally one year's duration. Training and
consulting service revenues are recognized as the services are performed.
Research and Development. Research and development expenses are
charged to income as incurred. Such charges were $308.1 million in 1998, $259.2
million in 1997 and $218.0 million in 1996.
Software Development Costs. Costs of developing software for sale are
charged to expense when incurred, as research and development, until
technological feasibility has been established for the product. Thereafter,
software development costs are capitalized until the software is ready for
general release to customers. Halliburton capitalized costs of $13.4 million in
1998, $14.5 million in 1997 and $12.9 million in 1996 related to software
developed for resale. Amortization expense related to these costs was $17.5
million for 1998, $15.0 million for 1997 and $12.5 million for 1996. Once the
software is ready for release, amortization of the software development costs
begins. Capitalized software development costs are amortized over periods which
do not exceed three years.
Income Per Share. Basic income per share amounts are based on the
weighted average number of common shares outstanding during the year. Diluted
income per share includes additional common shares that would have been
outstanding if potential common shares with a dilutive effect had been issued.
See Note 11 for a reconciliation of basic and diluted income per share from
continuing operations. Prior year amounts have been adjusted for the two-for-one
common stock split declared on June 9, 1997, and effected in the form of a stock
dividend paid on July 21, 1997.
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<PAGE>
Cash Equivalents. Halliburton considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Receivables. Halliburton's receivables are generally not
collateralized. Notes and accounts receivable at December 31, 1998 include $33.2
million ($30.8 million at December 31, 1997) due from customers in accordance
with applicable retainage provisions of engineering and construction contracts,
which will become billable upon future deliveries or completion of such
contracts. This amount is expected to be collected during 1999. Additionally,
other noncurrent assets include $7.1 million ($7.3 million at December 31, 1997)
of such retainage which is expected to be collected in years subsequent to 1999.
Unbilled work on uncompleted contracts generally represents work currently
billable and such work is usually billed during normal billing processes in the
next month. At December 31, 1998, notes of $295.9 million ($34.4 million at
December 31, 1997) with varying interest rates are included in notes and
accounts receivable. See Note 5 for information on the note receivable generated
by the sale of M-I L.L.C. (M-I).
Inventories. Inventories are stated at the lower of cost or market.
Cost represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. The cost of most
inventories is determined using either the first-in, first-out (FIFO) method or
the average cost method although the cost of U.S. manufacturing and U.S. field
service inventories is determined using the last-in, first-out (LIFO) method.
Inventories of sales items owned by foreign subsidiaries and inventories of
operating supplies and parts are generally valued at average cost.
Property, Plant and Equipment. Property, plant and equipment is
reported at cost less accumulated depreciation, which is generally provided on
the straight-line method over the estimated useful lives of the assets. Certain
assets are depreciated on accelerated methods. Accelerated depreciation methods
are also used for tax purposes, wherever permitted. Expenditures for maintenance
and repairs are expensed; expenditures for renewals and improvements are
generally capitalized. Upon sale or retirement of an asset, the related costs
and accumulated depreciation are removed from the accounts and any gain or loss
is recognized. When events or changes in circumstances indicate that assets may
be impaired, an evaluation is performed comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. Halliburton follows the successful efforts method of accounting for
oil and gas properties. At December 31, 1998, there were no significant oil and
gas properties in the production stage of development. Halliburton is
implementing an enterprise-wide information system. External direct costs of
materials and services and payroll-related costs of employees working solely on
development of the software system portion of the project are capitalized.
Capitalized costs of the project will be amortized over periods of three to ten
years beginning when the system is placed in service. Training costs and costs
to reengineer business processes are expensed as incurred.
Excess of Cost Over Net Assets Acquired. The excess of cost over net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. The excess of cost over net assets acquired is continually monitored
for potential impairment. When negative conditions such as significant current
or projected operating losses exist, a review is performed to determine if the
projected undiscounted future cash flows indicate that an impairment exists. If
an impairment exists, the excess of cost over net assets acquired, and, if
appropriate, the associated assets are reduced to reflect the estimated
discounted cash flows to be generated by the underlying business, similar to
methodologies in Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of."
Income Taxes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before
Halliburton is able to realize their benefit, or that future deductibility is
uncertain. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been realized in the financial
statements or tax returns.
Derivative Instruments. Halliburton primarily enters into derivative
financial transactions to hedge existing or projected exposures to changing
foreign exchange rates and from time to time enters into derivatives to hedge
exposures to interest rates or commodity prices. Halliburton does not enter into
derivative transactions for speculative or trading purposes. Derivative
financial instruments to hedge exposure with an indeterminable maturity
126
<PAGE>
date are generally carried at fair value with the resulting gains and losses
reflected in the results of operations. Gains or losses on hedges of
identifiable commitments are deferred and recognized when the offsetting gains
or losses on the related hedged items are recognized. Deferred gains or losses
for hedges which are terminated prior to the transaction date are recognized
when the underlying hedged transactions are recognized. In the event an
identifiable commitment is no longer expected to be realized, any deferred gains
or losses on hedges associated with the commitment are recognized currently.
Costs associated with entering into such contracts are presented in other
assets, while deferred gains or losses are included in other liabilities or
other assets, respectively, on the consolidated balance sheets. Recognized gains
or losses on derivatives entered into to manage foreign exchange risk are
included in foreign currency gains and losses on the consolidated statements of
income, while gains or losses on interest rate derivatives and commodity
derivatives are included in interest expense and operating income, respectively.
During the years ended December 31, 1998, 1997 and 1996, Halliburton did not
enter into any significant transactions to hedge interest rates or commodity
prices.
Foreign Currency Translation. Foreign entities whose functional
currency is the U.S. dollar translate monetary assets and liabilities at year-
end exchange rates and non-monetary items are translated at historical rates.
Income and expense accounts are translated at the average rates in effect during
the year, except for depreciation and cost of product sales which are translated
at historical rates. Gains or losses from changes in exchange rates are
recognized in consolidated income in the year of occurrence. Foreign entities
whose functional currency is the local currency translate net assets at year-end
rates and income and expense accounts at average exchange rates. Adjustments
resulting from these translations are reflected in the consolidated statements
of shareholders' equity titled "cumulative translation adjustment."
Note 2. Business Segment Information
Halliburton has three business segments. These segments are organized
around the products and services provided to the customers they serve. The
business units within each segment are evaluated on operating income, operating
margins and cash value added.
The Energy Services Group segment provides pressure pumping equipment
and services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services and well control. Also included in the Energy Services Group are
upstream oil and gas engineering, construction and maintenance services,
specialty pipe coating, insulation, underwater engineering services, integrated
exploration and production information systems and professional services to the
petroleum industry. The Energy Services Group has four business units:
Halliburton Energy Services, Brown & Root Energy Services, Landmark Graphics,
and Halliburton Energy Development. (In March 1999, Halliburton Energy
Development became a part of Halliburton Energy Services.) The long term
performance for these business units is linked to the long term demand for
hydrocarbons. The products and services the group provides are designed to help
discover, develop and produce hydrocarbons. The customers for this segment are
major oil companies, national oil companies and independent oil and gas
companies.
The Engineering and Construction Group segment provides engineering,
procurement, construction, project management, and facilities operation and
maintenance for hydrocarbon processing and other industrial and governmental
customers. The Engineering and Construction Group has two business units:
Kellogg Brown & Root and Brown & Root Services. Both business units are engaged
in the delivery of engineering and construction services.
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and petroleum users throughout the world. Dresser
Equipment Group operates as one business unit.
Halliburton's equity in pretax income or losses of related companies
is included in revenues and operating income of the applicable segment.
Intersegment revenues included in the revenues of the other business segments
and sales between geographic areas are immaterial. General corporate assets not
included in a business segment are primarily comprised of receivables, deferred
tax assets, and certain other investments including the investment in
Halliburton's enterprise-wide information system.
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<PAGE>
The tables below represent Halliburton's adoption of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
<TABLE>
<CAPTION>
Operations by Business Segment
Years Ended December 31
-----------------------------------
Millions of dollars 1998 1997 1996
---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues:
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4
Engineering and Construction Group 5,494.8 4,992.8 4,720.7
Dresser Equipment Group 2,848.8 2,774.1 2,710.5
--------- --------- ---------
Total $17,353.1 $16,271.6 $13,946.6
========= ========= =========
Operating income:
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0
Engineering and Construction Group 237.2 219.0 134.0
Dresser Equipment Group 247.8 248.3 229.3
Special charges and credits (980.1) (16.2) (85.8)
General corporate (79.4) (71.8) (72.3)
--------- --------- ---------
Total $ 396.5 $ 1,398.7 $ 903.2
========= ========= =========
Capital expenditures:
Energy Services Group $ 707.6 $ 682.9 $ 493.9
Engineering and Construction Group 33.5 61.5 105.6
Dresser Equipment Group 72.9 76.4 119.0
General corporate 100.3 59.3 12.6
--------- --------- ---------
Total $ 914.3 $ 880.1 $ 731.1
========= ========= =========
Depreciation and amortization:
Energy Services Group $ 405.4 $ 395.0 $ 338.5
Engineering and Construction Group 48.8 63.3 58.7
Dresser Equipment Group 86.8 98.6 92.8
General corporate 46.0 7.4 7.7
--------- --------- ---------
Total $ 587.0 $ 564.3 $ 497.7
========= ========= =========
Total assets:
Energy Services Group $ 6,618.1 $ 6,050.5 $ 4,999.2
Engineering and Construction Group 1,404.7 1,645.8 1,490.7
Dresser Equipment Group 1,944.2 2,115.3 2,126.8
General corporate 1,098.9 892.7 970.1
--------- --------- ---------
Total $11,065.9 $10,704.3 $ 9,586.8
========= ========= =========
Research and development:
Energy Services Group $ 220.0 $ 173.8 $ 150.1
Engineering and Construction Group 3.9 2.1 4.0
Dresser Equipment Group 84.2 83.3 63.9
--------- --------- ---------
Total $ 308.1 $ 259.2 $ 218.0
========= ========= =========
Special charges and credits:
Energy Services Group $ 721.1 $ (13.8) $ 43.1
Engineering and Construction Group 39.6 2.8 42.7
Dresser Equipment Group 21.1 27.2 --
General corporate 198.3 -- --
--------- --------- ---------
Total $ 980.1 $ 16.2 $ 85.8
========= ========= =========
</TABLE>
128
<PAGE>
Operations By Geographic Area
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
Millions of dollars 1998 1997 1996
----------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues:
United States $ 6,132.2 $ 6,506.5 $ 5,730.0
United Kingdom 2,246.7 2,315.0 1,504.6
Other areas (over 120 countries) 8,974.2 7,450.1 6,712.0
--------- --------- ---------
Total $17,353.1 $16,271.6 $13,946.6
========= ========= =========
Long-lived assets:
United States $ 2,400.5 $ 2,518.9 $ 2,432.9
United Kingdom 594.5 775.0 626.9
Other areas (numerous countries) 1,053.1 980.9 956.6
--------- --------- ---------
Total $ 4,048.1 $ 4,274.8 $ 4,016.4
========= ========= =========
</TABLE>
Note 3. Inventories
Inventories at December 31, 1998 and 1997 are comprised of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
----------------------------------- --------- ---------
<S> <C> <C>
Finished products and parts $ 621.2 $ 665.8
Raw materials and supplies 250.3 213.7
Work in process 561.4 535.8
Progress payments (148.2) (121.2)
--------- ---------
Total $ 1,284.7 $ 1,294.1
========= =========
</TABLE>
Inventories on the last-in, first-out (LIFO) method were $167.9 million and
$195.9 million at December 31, 1998 and December 31, 1997, respectively. If the
average cost or FIFO methods had been in use for inventories on the LIFO basis,
total inventories would have been about $110.6 million and $100.8 million higher
than reported at December 31, 1998 and 1997, respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment at December 31, 1998 and 1997 is comprised of
the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
----------------------------------- --------- ---------
<S> <C> <C>
Land $ 142.2 $ 136.0
Buildings and property improvements 1,131.6 1,055.9
Machinery, equipment and other 5,550.6 5,454.1
--------- ---------
Total $ 6,824.4 $ 6,646.0
========= =========
</TABLE>
At December 31, 1998 and 1997, machinery, equipment and other property
includes oil and gas investments of approximately $223.7 million and $101.7
million, respectively and software developed for Halliburton's enterprise wide
information system of $132.7 million and $59.5 million, respectively.
Note 5. Related Companies
Halliburton conducts some of its operations through various joint ventures
which are in partnership, corporate and other business forms, which are
principally accounted for using the equity method.
The larger unconsolidated entities include European Marine Contractors,
Limited (EMC), Bredero-Shaw and Ingersoll-Dresser Pump (IDP). EMC which is 50%
owned by a subsidiary of Halliburton and part of the Energy Services Group,
specializes in engineering, procurement and construction of marine pipelines.
Bredero-Shaw, which is 50% owned by a subsidiary of Halliburton and part of the
Energy Services Group, specializes in
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<PAGE>
pipe coating. Effective February 29, 1996, a subsidiary of Halliburton entered
into an agreement to form Bredero-Shaw, a strategic pipe-coating joint venture,
with Shaw Industries Ltd. (Shaw) by contributing its Bredero Price assets and
Shaw contributing its Shaw Pipe Protection assets on a worldwide basis. From
formation until the fourth quarter of 1997, Halliburton fully consolidated
Bredero-Shaw as its ownership interest in this joint venture exceeded 50%.
During the fourth quarter of 1997, Halliburton and Shaw agreed to a long-term
extension of the joint venture and decreased Halliburton's interest to 50%. In
connection with the new agreement, Shaw agreed to pay a subsidiary of
Halliburton $50 million over a four-year period. This transaction resulted in a
fourth quarter pretax gain of $41.7 million which is reported in the
consolidated statements of income in the caption "special charges and credits."
For balance sheet purposes, at year-end 1997 the subsidiary of Halliburton
deconsolidated Bredero-Shaw and accounted for its 50% interest in the joint
venture as an equity investment. The subsidiary of Halliburton includes its
share of equity earnings in the results of operations beginning January 1, 1998
under the equity method. IDP which is 49% owned by a subsidiary of Halliburton
and part of the Dresser Equipment Group, manufactures a broad range of pump
products and services.
In the second quarter of 1996, M-I, formerly a 36% owned joint venture,
purchased Anchor Drilling Fluids. Halliburton's share of the purchase price was
$41.3 million and is included in cash flows from other investing activities.
Halliburton sold its 36% ownership interest in M-I to Smith International, Inc.
(Smith) on August 31, 1998. This transaction completed Halliburton's commitment
to the U.S. Department of Justice to sell its M-I interest in connection with
its merger with Dresser. The purchase price of $265 million was paid by Smith
in the form of a non-interest bearing promissory note due April 1999. This
receivable is included in "Notes and accounts receivable" on the consolidated
balance sheets. All of M-I's debt remains an obligation of M-I.
Summarized financial statements for all combined jointly-owned operations
which are not consolidated are as follows:
<TABLE>
<CAPTION>
Combined Operating Results
Millions of dollars 1998 1997 1996
----------------------------- -------- -------- --------
<S> <C> <C> <C>
Revenues $5,244.0 $3,958.9 $3,505.5
======== ======== ========
Operating income $ 478.3 $ 407.3 $ 325.7
======== ======== ========
Net income $ 341.0 $ 316.2 $ 236.3
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Combined Financial Position
Millions of dollars 1998 1997
----------------------------- -------- --------
<S> <C> <C>
Current assets $1,854.2 $1,779.5
Noncurrent assets 322.3 576.0
-------- --------
Total $2,176.5 $2,355.5
======== ========
Current liabilities $1,074.6 $ 859.6
Noncurrent liabilities 118.2 245.3
Minority interests 3.9 8.1
Shareholders' equity 979.8 1,242.5
-------- --------
Total $2,176.5 $2,355.5
======== ========
</TABLE>
130
<PAGE>
Note 6. Income Taxes
The components of the (provision) benefit for income taxes are:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Current income taxes:
Federal $ (301.8) $ (167.2) $ (82.0)
Foreign (228.5) (306.1) (169.8)
State (7.5) (15.5) (10.0)
-------- -------- --------
Total (537.8) (488.8) (261.8)
-------- -------- --------
Deferred income taxes:
Federal 291.8 5.4 61.2
Foreign and state 1.6 (8.0) (47.8)
-------- -------- --------
Total 293.4 (2.6) 13.4
-------- -------- --------
Total $ (244.4) $ (491.4) $ (248.4)
======== ======== ========
</TABLE>
Included in federal income taxes are foreign tax credits of $182.2 million
in 1998, $154.0 million in 1997 and $109.2 million in 1996. The United States
and foreign components of income (loss) before income taxes and minority
interests are as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
United States $ (306.4) $ 736.8 $ 484.2
Foreign 585.2 576.3 346.8
-------- -------- --------
Total $ 278.8 $1,313.1 $ 831.0
======== ======== ========
</TABLE>
The primary components of Halliburton's deferred tax assets and liabilities
and the related valuation allowances are as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
-------------------------------------------- -------- --------
<S> <C> <C>
Gross deferred tax assets
Employee benefit plans $ 314.9 $ 334.4
Special charges 135.3 --
Accrued liabilities 93.5 79.4
Insurance accruals 74.8 71.5
Construction contract accounting methods 93.0 70.6
Inventory 59.8 37.4
Intercompany profit 38.5 39.3
Net operating loss carryforwards 38.5 46.7
Intangibles 30.5 --
Foreign tax credits -- 21.2
Alternative minimum tax carryforward 15.1 15.1
All other 125.7 80.1
-------- --------
Total 1,019.6 795.7
-------- --------
Gross deferred tax liabilities
Depreciation and amortization 85.0 124.5
Unrepatriated foreign earnings 25.5 35.6
Safe harbor leases 10.4 11.0
All other 99.6 85.0
-------- --------
Total 220.5 256.1
-------- --------
Valuation allowances
Net operating loss carry forwards 26.3 30.7
All other 3.7 33.3
-------- --------
Total 30.0 64.0
-------- --------
Net deferred income tax asset $ 769.1 $ 475.6
======== ========
</TABLE>
131
<PAGE>
Halliburton has provided for the potential repatriation of certain
undistributed earnings of its foreign subsidiaries and considers earnings above
the amounts on which tax has been provided to be permanently reinvested. While
these additional earnings could become subject to additional tax if repatriated,
such a repatriation is not anticipated. Any additional amount of tax is not
practicable to estimate.
Halliburton has net operating loss carryforwards which expire as
follows: 1999 through 2003, $49.3 million; 2004 through 2008, $18.8 million;
2009 through 2010, $1.9 million. Halliburton also has net operating loss
carryforwards of $43.6 million with indefinite expiration dates. Reconciliations
between the actual provision for income taxes and that computed by applying the
U.S. statutory rate to income from continuing operations before income taxes and
minority interest are as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
- ---------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Provision computed at statutory rate $ (97.6) $(459.6) $(290.9)
Reductions (increases) in taxes resulting from:
Tax differentials on foreign earnings (19.8) (4.3) 14.2
State income taxes, net of federal
income tax benefit (7.8) (12.0) (7.0)
Net operating losses -- -- 22.7
Special charges (109.0) (3.0) (3.0)
Federal income tax settlement -- -- 16.1
Nondeductible goodwill (12.2) (12.5) (8.9)
Other items, net 2.0 -- 8.4
------- ------- -------
Total $(244.4) $(491.4) $(248.4)
======= ======= =======
</TABLE>
Halliburton has received statutory notices of deficiency for the 1990
and 1991 tax years from the Internal Revenue Service (IRS) of $92.9 million and
$16.8 million, respectively, excluding any penalties or interest. Halliburton
believes it has meritorious defenses and does not expect that any liability
resulting from the 1990 or 1991 tax years will result in a material adverse
effect on its results of operations or financial position. In 1996, Halliburton
reached settlements with the IRS for certain matters including the 1989 taxable
year. As a result of the settlement for the 1989 taxable year, Halliburton
recognized tax benefits and net income was increased by $16.1 million in 1996.
Note 7. Special Charges and Credits
Halliburton has incurred various non-recurring transactions resulting
from acquisitions, profit initiatives, and industry downturns as summarized
below:
Asset Related Charges. Asset related charges include impairments and
write-offs of intangible assets and excess and/or duplicate machinery,
equipment, inventory and capitalized software. Charges also include write-offs
and lease cancellation costs related to acquired information technology
equipment replaced with Halliburton's standard common office equipment and exit
costs on other leased assets.
Personnel Charges. Personnel charges include severance and related
costs incurred to action announced employee reductions and personnel costs
related to change of control.
Facility Consolidation Charges. Facility consolidation charges
include costs to dispose of owned properties or exit leased facilities.
Merger Transaction Charges. Merger transaction costs include
investment banking, filing fees, legal and professional fees and other merger
related costs.
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<PAGE>
Other Charges. Other charges include eliminating duplicate agents,
contract cancellation costs and eliminating other duplicate capabilities.
1998 Special Charges
<TABLE>
<CAPTION>
Asset Facility Merger
Related Personnel Consolidation Transaction Other
Millions Of Dollars Charges Charges Charges Charges Charges Total
- --------------------------------- ------- --------- ------------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1998 Charges to Expense by
Business Segment
Energy Services Group $ 452.7 $ 156.7 $ 93.3 $ -- $ 18.4 $ 721.1
Engineering & Construction Group 7.9 19.1 7.9 -- 4.7 39.6
Dresser Equipment Group 18.1 1.4 1.6 -- -- 21.1
General corporate 30.7 57.5 23.4 64.0 22.7 198.3
------- --------- ------------- ----------- ------- -------
Total $ 509.4 $ 234.7 $ 126.2 $ 64.0 $ 45.8 $ 980.1
Utilized $(509.4) $ (44.5) $ (3.4) $ (59.5) $ (4.2) $(621.0)
------- --------- ------------- ----------- ------- -------
Balance - December 31, 1998 $ -- $ 190.2 $ 122.8 $ 4.5 $ 41.6 $ 359.1
======= ========= ============= =========== ======= =======
</TABLE>
The third quarter of 1998 financial results include a pretax charge of
$945.1 million ($722.0 million after tax) to provide for costs associated with
the Merger and industry downturn due to declining oil and gas prices. During the
fourth quarter, an additional charge of $35.0 million ($24.0 million after tax)
was taken to provide $30.0 million for additional personnel reduction costs
covering approximately 2,750 employees within the Energy Services Group and $5.0
million for additional facility consolidations within the Energy Services Group.
The above charges were reflected in the following captions of the
consolidated statements of income:
Twelve months ended
Millions of dollars December 31, 1998
- ----------------------------- -------------------
Cost of services $ 68.2
Cost of sales 24.4
Special charges and credits 887.5
------
Total $980.1
Most restructuring activities accrued for in the 1998 special charges
are expected to be completed and expended by the end of 1999. The exceptions are
reserves for losses on facilities to be disposed of and any other actions, which
may require negotiations with outside parties extending past the end of the
year. Through December 31, 1998 Halliburton used $111.5 million in cash for
items associated with the 1998 special charges. The unutilized special charge
reserve balance at December 31, 1998 is expected to result in future cash
outlays of approximately $330.0 million during 1999 and possibly into 2000.
Asset Related Charges
As a result of the Merger, Halliburton and Dresser's completion
products operations and its formation evaluation businesses have been combined,
excluding Halliburton's logging-while-drilling (LWD) business and a portion of
its measurement-while-drilling (MWD) business which were required to be disposed
of in connection with a Department of Justice Consent Decree. See Note 14. Based
on the change in strategic direction, the outlook for the industry, the decision
to standardize equipment product offerings and the expected loss on the
disposition of the LWD business, Halliburton recorded impairments based upon
anticipated future cash flows in accordance with SFAS 121. This resulted in
write-downs of excess of cost over net assets acquired and associated long-lived
assets associated to the directional drilling and formation evaluation
businesses acquired in 1993 from Smith International Inc., the formation
evaluation business acquired in the 1988 acquisition of Gearhart Industries,
Inc., and Mono Pumps and AVA acquired in 1990 and 1992 as follows:
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<PAGE>
<TABLE>
<CAPTION>
Excess of Cost Over Related Long-
Millions of dollars Net Assets Lived Assets Total
- ----------------------------------------------------- ------------------- ------------- -------
<S> <C> <C> <C>
Drilling operations of pre-merger Halliburton Energy
Services $ 125.2 $ 95.7 $ 220.9
Logging operations of pre-merger Halliburton Energy
Services 51.2 53.8 105.0
Mono industrial and oilfield pump operations of
Dresser 43.6 -- 43.6
AVA completion products business of Dresser Oil Tools 33.5 3.5 37.0
Abandonment of a trademark 0.7 -- 0.7
------------------- ------------- -------
Total $ 254.2 $ 153.0 $ 407.2
=================== ============= =======
</TABLE>
As discussed below, the merger caused Halliburton to reevaluate the
realizability of excess cost over net assets acquired and related long-lived
assets of these product service lines. Each business was considered to be
impaired under SFAS No. 121 guidance.
The overall market assumptions on which the impairment computations
were made assumed that 1999 calendar year drilling activity as measured by
worldwide rig count would be 1900 rigs which was up from the 1700 level in the
third quarter of 1998. Rig count for calendar year 2000 and beyond was assumed
to increase approximately 3% per year based upon estimated long-term growth in
worldwide demand for oil and gas. These assumptions were based on market data
available at the time of the merger.
In addition to these assumptions, management utilized a 10 year
timeframe for future projected cash flows, a discount rate that approximates its
average cost of capital, and specific assumptions for the future performance of
each product service line, the most significant of which are discussed below. In
each case, these analyses represented management's best estimate of future
results for these product service lines.
Drilling Operations of pre-merger Halliburton Energy Services. Our
pre-merger drilling business consisted of logging-while-drilling ("LWD"),
measurement-while-drilling ("MWD") and directional drilling services. The
majority of the pre-merger LWD business and a portion of the pre-merger MWD
business ("Pathfinder") were required to be sold under the Department of Justice
Consent Decree. We plan to integrate the remaining drilling business with the
Sperry Sun operations of Dresser. Our strategy will focus generally on operating
under the Sperry Sun name and using Sperry Sun's superior technology, tools and
industry reputation. Our remaining pre-merger drilling assets and technology are
to be de-emphasized as they wear out or become obsolete. These tools will not be
replaced resulting in significant decreases in future cash flows and an
impairment of the excess of cost over net assets and related long-lived assets.
Significant forecast assumptions included a revenue decline in the
remaining pre-merger drilling business due to the Pathfinder sale in the first
year. Related revenue and operating income over the following 10 years were
expected to decline due to reduced business opportunities resulting from our
shift in focus toward Sperry Sun's tools and technologies. In addition to the
$125.2 million impairment of excess of cost over net assets acquired, related
long-lived asset impairments consisted of $61.0 million of property and
equipment and $13.7 million of related spare parts, the value of which was
estimated using the held for use model during the forecast period. In addition,
an impairment of $3.0 million was recorded related to property and equipment and
$18.0 million of spare parts sold in the Pathfinder sale using the held for sale
model.
Logging Operations of pre-merger Halliburton Energy Services. The
merger of Halliburton and Dresser enabled the acceleration of a formation
evaluation strategy. This strategy takes advantage of Sperry Sun's LWD
competitive position and reputation for reliability combined with our Magnetic
Resonance Imaging Logging ("MRIL") technology acquired with the NUMAR
Corporation acquisition in 1997. Prior to the merger, we were focused on growing
the traditional logging business while working toward development of new systems
to maximize the MRIL technology. The merger allows us to implement the new
strategy and place the traditional logging business in a sustaining mode. This
change in focus and strategy will result in a shift of operating cash flows away
from our traditional logging business creating an impairment of the excess of
cost over net assets and related long-lived assets related to our logging
business.
Significant forecast assumptions included revenues decreasing slowly
over the 10-year period, reflecting the decline in the traditional logging
markets. Operating income initially was forecasted to increase due to cost
cutting activity, and then decline as revenue decreased due to the significant
fixed costs in this product service line. In addition to the $51.2 million
impairment of the excess of cost over net assets acquired, related long-lived
asset
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<PAGE>
impairments consisted of $22.0 million of property and equipment and $31.8
million of spare parts which management estimated using the held for use model
during the forecast period.
Mono Pump operations of pre-merger Dresser. The amount of the
impairment is $43.6 million, all of which represents excess of cost over net
assets acquired associated with the business.
Our strategy for Mono Pump going forward from the merger is to focus
primarily on the oilfield business including manufacturing power sections for
drilling motors. The prior strategy included emphasis on non-oilfield related
applications of their pumping technology and the majority of Mono Pump revenues
were related to non-oilfield sales. The change in strategy will result in
reduced future cash flows resulting in an impairment of the excess of costs over
net assets acquired.
Significant forecast assumptions included stable revenue for several
years and then slowly declining due to decreasing emphasis of industrial market
applications. Operating income was forecasted to initially be even with current
levels but then decline over the period as revenues declined and fixed costs per
unit increased.
AVA Operations of Dresser Oil Tools. The amount of the impairment is
$37.0 million of which $33.5 million relates to excess of costs over net assets
acquired.
The plan for Dresser's AVA business line (which supplies subsurface
safety valves and other completion equipment) is to rationalize product lines
which overlap with Halliburton's pre-existing completion equipment business
line. The vast majority of the AVA product lines will be de-emphasized except
for supporting the installed base of AVA equipment and specific special order
requests from customers. AVA products are generally aimed at the high-end custom
completion products market. Our strategy will be to focus on standardized high-
end products based upon pre-merger Halliburton designs thus reducing future AVA
cash flows and impairing its assets and related excess of costs over net assets
acquired.
Additional Asset Related Charges. Additional asset related charges
include:
. $37.3 million for various excess fixed assets as a result of
merging similar product lines. Halliburton has no future use for
these assets and plans to scrap them in the near future.
. $33.7 million for other assets related to capitalized software,
which became redundant with the merger. Major components included
redundant computer aided design systems and capitalized costs
related to a portion of Halliburton's enterprise-wide information
system abandoned due to changed requirements of the post merger
company. The redundant computer aided design systems were in both
the energy services group and the engineering and construction
group and were immediately abandoned and replaced by superior
systems required to meet the needs of the merged company.
. $25.6 million for the inventory charge relates to excess
inventory as a result of merging similar product lines and/or
industry downturn. This included approximately $16.7 million
related to overlapping product lines and excess inventory in the
completion products business and $8.9 million related to various
Dresser Equipment Group divisions due to excess inventory related
to industry downturn. Inventory that was overlapping due to the
merger was segregated and has been scrapped. Inventory reserves
were increased to cover the estimated write-down to market for
inventory determined to be excess as a result of the industry
downturn. The inventory will be used in the future. Any future
sales are expected to approximate the new lower carrying value of
the inventory.
. $4.6 million for the impairment of excess of cost over net assets
acquired related to well construction technology that became
redundant once the merger was complete due to similar but
superior technology offered by Sperry Sun. This technology will
no longer be used as part of our Integrated Service offerings,
thus reducing future cash flows. Halliburton will, however,
continue to market this technology individually to third parties.
An impairment based on a "held for use"
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<PAGE>
model was calculated using a ten year discounted cash flow model
with a discount rate which approximates our average cost of
capital.
. $1.0 million write-off of excess cost over net assets acquired
related to the Steamford product line in the Dresser Equipment
Group Valve & Control Division. Management made the strategic
decision to exit this product line.
Personnel Charges
Personnel charges in 1998 reflect announced headcount reductions of
10,850 affecting all segments, corporate and shared service functions. In total,
approximately 75% of the reductions will occur within the Energy Services Group.
During 1998, Halliburton reduced employment levels, primarily operations
personnel by approximately 5,000 (approximately 3,000 within North America and
1,100 within Latin America), including 4,700 within the Energy Services Group.
The remainder will be incurred over the balance of 1999, primarily during the
first and second quarter of the year.
Facility Consolidation Charge
As a result of the Merger and the industry downturn, Halliburton plans
to vacate, sell or close over 400 service, manufacturing and administrative
facilities throughout the world. Until the properties included in the facility
consolidation charges are vacated, Halliburton plans to continue its normal
depreciation, lease costs and operating expenses which will be charged against
Halliburton's results of operations. The majority of these facilities are within
the Energy Services Group. The liability accrual of $126.2 million
included:
. $85.5 million write-down of owned facilities for anticipated
losses on planned disposals based upon the difference between the
assets' net book value and anticipated future net realizable
value based upon the to be disposed of method.
. $37.2 million lease buyout costs or early lease termination cost
including:
. estimated costs to buy out leases;
. facility refurbishment/restoration expenses as required by
the lease in order to exit property;
. sublease differentials, as applicable; and
. related broker/agent fees to negotiate and close
buyouts.
. $3.5 million facility maintenance costs to maintain vacated
facilities between the abandonment date and the expected
disposition date. Maintenance costs include lease expense,
depreciation, maintenance, utilities, and third party
administrative costs.
During the fourth quarter of 1998, Halliburton sold or returned 33
service and administrative facilities. As of December 31, 1998, Halliburton had
an additional 100 vacated properties which it is in the process of selling,
subleasing or returning to the owner.
Merger Transaction Charges
Halliburton and Dresser merger transaction costs amounted to $64.0
million. At December 31, 1998, $4.5 million in estimated merger transaction
costs remain to be paid.
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<PAGE>
Other Charges
Other charges of $45.8 million include the estimated contract exit
costs associated with the elimination of duplicate agents and suppliers in
various countries throughout the world. These costs will occur during 1999 in
connection with, Halliburton's renegotiation of these contractual
agreements.
At December 31, 1998, no adjustments or reversals to the remaining
accrued special charges are planned.
1997 Special Charges and Credits
During 1997, Halliburton's results of operations reflect various non-
recurring transactions resulting from acquisitions and restructuring activities
incurred by Halliburton, Dresser, NUMAR and Landmark, as follows:
<TABLE>
<CAPTION>
Merger
Personnel Facility Transaction
Millions of Dollars Asset Charges Charges Charges Costs Other Total
- ------------------- ------------- --------- -------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Charges $ 32.7 $ 5.6 $11.0 $ 8.6 $(41.7) $ 16.2
Utilized (32.7) (5.6) (4.9) (8.6) 41.7 (10.1)
12/31/97 $ 0.0 $ 0.0 $ 6.1 $ 0.0 $ 0.0 $ 6.1
Utilized -- -- (6.1) -- -- (6.1)
------ ----- ----- ----- ------ ------
12/31/98 $ -- $ -- $ -- $ -- $ -- $ --
====== ===== ===== ===== ====== ======
</TABLE>
The above charges were reflected in the following captions of the
consolidated statements of income:
Twelve months ended
Millions of dollars December 31, 1997
- ------------------------------------------------- ------------------
Equity in earnings of unconsolidated affiliates $ 4.9
Cost of sales 5.1
Special charges and credits 6.2
-----
Total $16.2
Net special charges for 1997 of $16.2 million related to various
acquisition and restructuring activities consisted of the following:
. other credits include a $41.7 million pretax gain paid to Dresser
by Shaw Industries as consideration to terminate a call option
provision held by Dresser under the Bredero-Shaw pipe-coating
joint venture agreement,
. $13.1 million for restructuring activities at Dresser-Rand to
close a European manufacturing facility and discontinue a product
line along with associated support locations. The total includes
$7.0 million of asset related charges and $6.1 million in
facility related charges,
. facility charges include $4.9 million for our 49% share of a
facility restructuring at Ingersoll-Dresser Pump, a joint venture
accounted for on the equity basis,
. asset charges, including:
- $6.7 million write-off of an investment in an oil and gas
field in the former Soviet Union which was deemed worthless,
- $6.4 million write-off of excess of cost over net assets
acquired associated with a UK manufacturing operation which
was substantially reduced in scope, and
- $12.6 million loss on the sale of certain assets of
Dresser's SubSea operation to Global Industries, Ltd.,
. merger transaction costs include $8.6 million of professional
fees associated with the acquisition of NUMAR Corporation,
and
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<PAGE>
. personnel charges include a $5.6 million charge for negotiated
early retirement incentives for two Dresser executives.
Additionally, Halliburton recorded its share of personnel reduction
charges of $30.2 million during the two-month period ended December 31, 1997 to
reduce employment levels by approximately 1,000 at Dresser-Rand and Ingersoll-
Dresser Pump. The $30.2 million of personnel reduction charges is comprised of
$23.3 million for Dresser-Rand and $6.9 million for Ingersoll-Dresser Pump.
These costs have been recorded in the consolidated statements of shareholders'
equity as part of conforming the fiscal year of Dresser to Halliburton's
calendar year. See Note 1.
1996 Special Charges
1996 Special Charges of $85.8 million consisted of the following
categories:
<TABLE>
<CAPTION>
Restructuring -
Engineering & Landmark Acquisition
Construction and Landmark of Assets from Western
Millions of Dollars Shared Services Acquisition Costs Atlas International Inc. Total
- --------------------- ---------------- ----------------- ------------------------ ------
<S> <C> <C> <C> <C>
Charges $ 61.2 $ 12.4 $ 12.2 $ 85.8
Utilized (3.5) (12.4) (12.2) (28.1)
12/31/96 57.7 -- -- 57.7
Utilized (32.3) -- -- (32.3)
Transferred to other
accounts (1) (25.4) -- -- (25.4)
---------------- ----------------- ------------------------ ------
12/31/97 $ -- $ -- $ -- $ --
================ ================= ======================== ======
</TABLE>
____________
(1) Items of a longer-term nature were reclassified to other liabilities
at the end of 1997.
Components of the charge were as follows:
. $61.2 million in relation to reorganization of the Engineering
and Construction Group and implementation of Shared Services
across Halliburton, including:
- $41.0 million related to 1,200 planned personnel reductions
to reorganize the Engineering and Construction Group and
combine administrative functions into a shared service
organization. This amount includes estimated severance,
vesting of restricted stock, outplacement services and
employee legal claims,
- Asset related charges of $7.5 million for lease exit costs
on excess space,
- Asset related charges of $9.6 million to exit Engineering
and Construction Group businesses as follows:
. $2.5 million to write-down fixed assets to estimated
realizable value in a product line being exited, and
. $7.1 million write-off of investment in and receivables
from an eastern European engineering joint venture
which was terminated, and
- $3.1 million write-off of capitalized costs associated with
an abandoned system,
. merger transaction costs of $12.4 million for professional fees
incurred in relation to the merger with Landmark Graphics
Corporation, including investment banking, legal and other
professional fees, and
. $12.2 million charge related to Landmark's acquisition of certain
assets and liabilities from Western Atlas International, Inc. in
the first quarter of 1996:
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<PAGE>
- Other charges of $11.3 million for the write-off of acquired
in-process research and development activities that had not
reached technological feasibility or were deemed to have no
alternative future use, and
- Asset charges of $0.9 million recorded by Landmark to write-
off redundant assets.
The special charges to net income in the third quarter of 1996 were
offset by tax credits during the same quarter of $43.7 million due to the
recognition of net operating loss carryforwards and the settlement during the
quarter of various issues with the Internal Revenue Service (IRS). Halliburton
reached agreement with the IRS and recognized net operating loss carryforwards
of $62.5 million ($22.5 million in tax benefits) from the 1989 tax year. The net
operating loss carryforwards were utilized in the 1996 tax year. In addition,
Halliburton also reached agreement with the IRS on issues related to
intercompany pricing of goods and services for the tax years 1989 through 1992
and entered into an advanced pricing agreement for the tax years 1993 through
1998. As a result of these agreements with the IRS, Halliburton recognized tax
benefits of $16.1 million. Halliburton also recognized net operating loss
carryforwards of $14.0 million ($5.1 million in tax benefits) in certain foreign
areas due to improving profitability and restructuring of foreign operations.
Note 8. Lines of Credit, Notes Payable and Long-Term Debt
Short-term notes payable and current maturities consist of:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- --------------------------------------- ---- ----
<S> <C> <C>
Short-term notes payable $515.0 $50.5
Current maturities of long-term debt 58.5 7.4
------ -----
Total $573.5 $57.9
====== =====
</TABLE>
At year-end 1998, Halliburton had committed short-term lines of credit
totaling $550.0 million available and unused, and other short-term lines of
credit totaling $315.0 million. There were no borrowings outstanding under these
facilities. The remaining short-term debt consists primarily of $462.9 million
in commercial paper with an effective interest rate of 5.30% and $52.1 million
in foreign bank loans and overdraft facilities with varying rates of interest.
Long-term debt at the end of 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- ------------------------------------------------------------------------ -------- --------
<S> <C> <C>
6.25% notes due June 2000 $ 300.0 $ 300.0
7.6% debentures due August 2096 300.0 300.0
8.75% debentures due February 2021 200.0 200.0
8% senior notes due April 2003 138.6 149.5
Medium-term notes due 1999 through 2027 450.0 300.0
Term loans at LIBOR (GBP) plus 0.75% payable in semi-annual installments 29.4 45.9
through March 2002
Other notes with varying interest rates 10.2 8.9
-------- --------
1,428.2 1,304.3
Less current portion 58.5 7.4
-------- --------
Total long-term debt $1,369.7 $1,296.9
======== ========
</TABLE>
Halliburton has issued notes under its medium-term note program as
follows:
<TABLE>
<CAPTION>
Amount Issue Date Due Rate Prices Yield
- -------------- ---------- ---------- ---- ------ -----
<S> <C> <C> <C> <C> <C>
$ 125 million 02/11/97 02/01/2027 6.75% 99.78% 6.78%
$ 50 million 05/12/97 05/12/2017 7.53% Par 7.53%
$ 50 million 07/08/97 07/08/1999 6.27% Par 6.27%
$ 75 million 08/05/97 08/05/2002 6.30% Par 6.30%
$ 150 million 11/24/98 12/01/2008 5.63% 99.97% 5.63%
</TABLE>
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<PAGE>
Halliburton's 8.75% debentures due February 2021 do not have sinking fund
requirements and are not redeemable prior to maturity. The medium-term notes may
not be redeemed at the option of Halliburton prior to maturity. There is no
sinking fund applicable to the notes. Each holder of the 6.75% medium-term notes
has the right to require Halliburton to repay such holder's notes, in whole or
in part, on February 1, 2007. The net proceeds from the sale of the notes were
used for general corporate purposes.
During March 1997, a subsidiary of Halliburton incurred $56.3 million of
term loans in connection with the acquisition of the Royal Dockyard in Plymouth,
England (the Dockyard Loans). The Dockyard Loans are denominated in pounds
sterling and bear interest at LIBOR (GBP) plus 0.75% payable in semi-annual
installments through March 2002. Pursuant to certain terms of the Dockyard
Loans, a subsidiary of Halliburton was initially required to provide a
compensating balance of $28.7 million which is restricted as to use by the
subsidiary. The compensating balance amount decreases in proportion to the
outstanding debt related to the Dockyard Loans and earns interest at a rate
equal to that of the Dockyard Loans. At December 31, 1998, the compensating
balance of $14.9 million is included in other assets in the consolidated balance
sheets.
Long-term debt matures over the next five years as follows: $58.5 million
in 1999; $308.3 million in 2000; $8.3 million in 2001; $85.3 million in 2002;
and $138.8 million in 2003.
Note 9. Dresser Financial Information
Since becoming a wholly-owned subsidiary of Halliburton Company, Dresser
Industries Inc. has ceased filing periodic reports with the Securities and
Exchange Commission. Dresser's 8% senior notes (the Notes) remain outstanding
and the Notes are fully and unconditionally guaranteed by Halliburton. See Note
8. As long as the Notes remain outstanding, summarized financial information of
Dresser will be presented in periodic reports filed by Halliburton on Form 10-K
and Form 10-Q. Halliburton has not presented separate financial statements and
other disclosures concerning Dresser because management has determined such
information is not material to holders of the Notes.
In January 1999, as part of the legal reorganization associated with the
Merger, Halliburton Delaware, Inc., a first tier holding company subsidiary, was
merged into Dresser Industries, Inc. As a result of this action, the majority of
the operating assets and activities of the combined company in 1999 will be
included within the legal structure of Dresser Industries, Inc.
<TABLE>
<CAPTION>
Dresser Industries, Inc.
Financial Position December 31 October 31
----------- ----------
Millions of dollars 1998 1997
--------------------------- ----------- ----------
<S> <C> <C>
Current assets $ 2,417.2 $ 2,471.6
Noncurrent assets 2,613.7 2,627.2
----------- ----------
Total $ 5,030.9 $ 5,098.8
=========== ==========
Current liabilities $ 1,388.6 $ 1,687.4
Noncurrent liabilities 1,544.4 1,535.5
Minority interest 153.5 143.7
Shareholders' equity 1,944.4 1,732.2
----------- ----------
Total $ 5,030.9 $ 5,098.8
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Dresser Industries, Inc. Twelve months ended
-----------------------------------
Operating Results December 31 October 31 October 31
----------- ---------- ----------
Millions of dollars 1998 1997 1996
--------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 8,135.7 $ 7,453.0 $ 6,561.5
=========== ========== ==========
Operating income $ 677.1 $ 600.6 $ 485.3
=========== ========== ==========
Net income $ 343.8 $ 318.0 $ 257.5
=========== ========== ==========
</TABLE>
Note 10. Commitments and Contingencies
Leases. At year end 1998, Halliburton and its subsidiaries were obligated
under noncancelable operating leases, expiring on various dates through 2021,
principally for the use of land, offices, equipment, field facilities,
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<PAGE>
and warehouses. Aggregate rentals charged to operations for such leases totaled
$207.1 million in 1998, $202.8 million in 1997 and $177.8 million in 1996.
Future aggregate rentals on noncancelable operating leases are as follows: 1999,
$147.3 million; 2000, $121.0 million; 2001, $96.6 million; 2002, $83.1 million;
2003, $60.9 million; and thereafter, $150.7 million.
Asbestosis Litigation. Since 1976, Dresser and its former divisions or
subsidiaries have been involved in litigation resulting from allegations that
third parties had sustained injuries and damage from the inhalation of asbestos
fibers contained in certain products manufactured by Dresser and its former
divisions or subsidiaries or companies acquired by Dresser. In addition, the
Engineering and Construction Group businesses are involved in litigation
resulting from allegations that third parties sustained injuries and damage from
the inhalation of asbestos fibers contained in certain materials which were used
in various construction and renovation projects in the past.
Dresser and its former divisions or subsidiaries have entered into
agreements with insurance carriers which cover, in whole or in part, indemnity
payments, legal fees and expenses for certain categories of claims. Dresser and
its former divisions or subsidiaries are in negotiation with carriers over
coverage for the remaining categories of claims. Because these agreements are
governed by exposure dates, payment type and the product involved, the covered
amount varies by individual claim. In addition, lawsuits are pending against
several carriers seeking to recover additional amounts related to these claims.
Engineering and Construction Group businesses are also involved in negotiations
with carriers over coverage of their claims.
Since 1976, approximately 190,000 claims have been filed against various
current and former divisions and subsidiaries of Halliburton. Most of these
claims relate to Dresser and its former divisions or subsidiaries. Approximately
120,000 of these claims have been settled or disposed of at a gross cost of
approximately $89 million with insurance carriers responsible for all but
approximately $30 million. Claims continue to be filed with 36,400 new claims
filed in 1998. Provision has been made for the estimated exposure, based on
historical experience and settlements and expected recoveries from insurance
carriers based upon the agreements in place with the carriers or estimated
recoveries where agreements are still under negotiation. Management has no
reason to believe that the insurance carriers will not be able to meet their
share of future obligations under the agreements. At the end of 1998, there were
70,500 open claims including 14,000 for which settlements are pending. This
compares with 66,300 open claims at the end of 1997. The accrued liabilities
for these claims and corresponding receivables from carriers were as
follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
--------------------------------------- -------- --------
<S> <C> <C>
Accrued liability $ 48 $ 32
Receivables from Insurance Companies (34) (22)
-------- --------
Net asbestos liability $ 14 $ 10
======== ========
</TABLE>
Management recognizes the uncertainties of litigation and the possibility
that a series of adverse rulings could materially impact operating results.
However, based upon Halliburton's historical experience with similar claims, the
time elapsed since Dresser and its former divisions or subsidiaries discontinued
sale of products containing asbestos, and management's understanding of the
facts and circumstances that gave rise to such claims, management believes that
the pending asbestos claims will be resolved without material effect on
Halliburton's financial position or results of operations.
Dispute with Global Industrial Technologies, Inc. Pursuant to an agreement
entered into at the time of the spin-off, Global Industrial Technologies, Inc.
("Global" formerly INDRESCO, Inc.) assumed liability for asbestos related claims
filed against Dresser after July 31, 1992 relating to refractory products
manufactured or marketed by the Harbison-Walker Refractories Division of Dresser
Industries, Inc. These asbestos claims are subject to certain agreements with
insurance carriers that cover expense and indemnity payments. However, the
insurance coverage is incomplete and Global has to date paid any uncovered
portion of those asbestos claims with its own funds. Global now disputes that it
assumed liability for any of these asbestos claims based upon Dresser's
negligence, the acts of Harbison-Walker prior to its merger with Dresser in
1967, or punitive damages. In order to resolve these assertions, Global has
invoked the dispute resolution provisions of the 1992 agreement, which require
binding arbitration. We expect that Global's claim for reimbursement will be in
excess of $40 million. In addition, Global is seeking relief from responsibility
for pending claims based upon Dresser's negligence, the acts of
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<PAGE>
Harbison-Walker prior to its merger with Dresser in 1967, punitive damages, and
for all similar future claims. Halliburton believes that these new assertions by
Global are without merit and intends to vigorously defend itself against
them.
Environmental. Halliburton is involved through its subsidiaries as a
potential responsible party (PRP) in remedial activities to clean up various
"Superfund" sites under applicable federal law which imposes joint and several
liability, if the harm is indivisible, on certain persons without regard to
fault, the legality of the original disposal, or ownership of the site. Although
it is very difficult to quantify the potential impact of compliance with
environmental protection laws, management of Halliburton believes that any
liability of Halliburton with respect to all but one of such sites will not have
a material adverse effect on the results of operations of Halliburton.
With respect to a site in Jasper County, Missouri (Jasper County Superfund
Site), sufficient information that would enable management to quantify
Halliburton's potential liability has not been developed and management believes
the process of determining the nature and extent of remediation at this site and
the total costs thereof will be lengthy. Brown & Root, Inc., now Kellogg Brown &
Root, Inc. (KBR), a subsidiary of Halliburton, has been named as a PRP with
respect to the Jasper County Superfund Site by the Environmental Protection
Agency (EPA). The Jasper County Superfund Site includes areas of mining activity
that occurred from the 1800s through the mid 1950s in the southwestern portion
of Missouri. The site contains lead and zinc mine tailings produced from mining
activities. KBR is one of nine participating PRPs that have agreed to perform a
Remedial Investigation/Feasibility Study (RI/FS), which, due to various delays,
is not expected to be completed until late 1999. Although the entire Jasper
County Superfund Site comprises 237 square miles as listed on the National
Priorities List, in the RI/FS scope of work, the EPA has only identified seven
areas, or subsites, within this area that need to be studied and then possibly
remediated by the PRPs. Additionally, the Administrative Order on Consent for
the RI/FS only requires KBR to perform RI/FS work at one of the subsites within
the site, the Neck/Alba subsite, which only comprises 3.95 square miles. KBR's
share of the cost of such a study is not expected to be material. In addition to
the Superfund issues, the State of Missouri has indicated that it may pursue
natural resource damage claims against the PRPs. At the present time KBR cannot
determine the extent of its liability, if any, for remediation costs or natural
resource damages on any reasonably practicable basis.
The accrued liabilities for environmental liabilities were $28.9 million as
of December 31, 1998 and $32.2 million as of December 31, 1997. Amounts accrued
in 1998 were $2.8 million and amounts paid out were $6.1 million.
General Litigation. The purchasers of Dresser's former hand tool division
sued Dresser for fraud in connection with the October 1983 transaction. In May
1994, the jury returned a verdict awarding the plaintiffs $4.0 million in
compensatory damages and $50.0 million in punitive damages. On October 13, 1994,
the Court ordered a reduction of damages from $54.0 to $12.0 million. On October
15, 1996, the Court of Appeals issued its decision reversing the trial court's
decision as to compensatory and punitive damages and remanding the case for a
new trial on damages. On remand, the trial court ordered that the new trial
contemplated by the appellate decision be limited to compensatory damages only,
despite the express statement that punitive damages were also reversed, and
decided that the court would review the original punitive damages verdict after
the retrial on compensatory damages.
As of October, 1998 the trial was held on compensatory damages and
concluded with a jury award of $1. Following that, a hearing was held in
January, at which the judge reduced the punitive damage award from $50 million
to $650,000. The sum of $650,001 was paid during the first week of February
1999, and this case is now concluded.
Merger. In connection with the Merger, Dresser and its directors have been
named as defendants in three lawsuits filed in late February of 1998 and early
March of 1998 in the Delaware Court of Chancery. The lawsuits each purport to be
a class action filed on behalf of Dresser's stockholders and alleges that the
consideration to be paid to Dresser's stockholders in the Merger is inadequate
and does not reflect the true value of Dresser. Each complaint also alleges that
the directors of Dresser have breached their fiduciary duties in approving the
Merger. One of the actions further alleges self-dealing on the part of the
individual defendants and asserts that the directors are obliged to conduct an
auction to assure that stockholders receive the maximum realizable value for
their shares. All three actions seek preliminary and permanent injunctive relief
as well as damages. On June 10, 1998 the court issued an order consolidating the
three lawsuits which requires the plaintiffs to file an amended
consolidated
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<PAGE>
complaint "as soon as practicable." To date, plaintiffs have not filed an
amended complaint. Halliburton believes that the lawsuits are without merit and
intends to defend the lawsuits vigorously.
Other. Halliburton and its subsidiaries are parties to various other legal
proceedings. Although the ultimate dispositions of such proceedings are not
presently determinable, in the opinion of Halliburton any liability that may
ensue will not be material in relation to the consolidated financial position
and results of operations of Halliburton.
Note 11. Income Per Share
<TABLE>
<CAPTION>
Millions of dollars and shares
except per share data 1998 1997 1996
------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ (14.7) $ 772.4 $ 557.9
======== ======== ========
Basic weighted average shares 438.8 431.1 429.2
Effect of common stock equivalents -- 5.0 2.9
-------- -------- --------
Diluted weighted average shares 438.8 436.1 432.1
======== ======== ========
Income (loss) per common share:
Basic $ (0.03) $ 1.79 $ 1.30
======== ======== ========
Diluted $ (0.03) $ 1.77 $ 1.29
======== ======== ========
</TABLE>
Basic income per share amounts are based on the weighted average number of
common shares outstanding during the period. Diluted income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. Diluted earnings per share for
1998 excludes 3.3 million potential common shares which were antidilutive for
earnings per share purposes. Also excluded from the computation of diluted
earnings per share are options to purchase 1.4 million shares of common stock in
1998; 1.1 million shares in 1997; and 2.6 million shares in 1996. These options
were outstanding during these respective years, but were excluded because the
option exercise price was greater than the average market price of the common
shares.
Note 12. Common Stock
On June 25, 1998, Halliburton's shareholders voted to increase
Halliburton's number of authorized shares from 400.0 million to 600.0
million.
On May 20, 1997, Halliburton's shareholders voted to increase Halliburton's
number of authorized shares from 200.0 million shares to 400.0 million shares.
On June 9, 1997, Halliburton's board of directors approved a two-for-one stock
split effected in the form of a stock dividend distributed on July 21, 1997 to
shareholders of record on June 26, 1997. The par value of Halliburton's common
stock of $2.50 per share remained unchanged. As a result of the stock split,
$556.3 million was transferred from paid-in capital in excess of par value to
common stock. Historical share and per share amounts presented on the
supplemental consolidated statements of income and in the discussion below
concerning stock options and restricted stock have been restated to reflect the
stock split.
Halliburton's 1993 Stock and Long-Term Incentive Plan (1993 Plan) provides
for the grant of any or all of the following types of awards: (1) stock options,
including incentive stock options and non-qualified stock options; (2) stock
appreciation rights, in tandem with stock options or freestanding; (3)
restricted stock; (4) performance share awards; and (5) stock value equivalent
awards. Under the terms of the 1993 Plan as amended, 27 million shares of
Halliburton's Common Stock have been reserved for issuance to key employees. At
December 31, 1998, 14.6 million shares were available for future grants under
the 1993 Plan.
In connection with the acquisitions of Dresser, Landmark Graphics
Corporation (Landmark) and NUMAR Corporation (NUMAR) (see Note 14), outstanding
stock options under the stock option plans maintained by Dresser, Landmark and
NUMAR were assumed by Halliburton. Stock option transactions summarized below
include amounts for the 1993 Plan, the Dresser plans using the acquisition
exchange rate of 1 share for each Dresser
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<PAGE>
share, the Landmark plans using the acquisition exchange rate of 1.148 shares
for each Landmark share, and the NUMAR plans using the acquisition exchange rate
of .9664 shares for each NUMAR share. The period from December 1997 to December
1998 includes Dresser's activities from its fiscal year-end of October 1997 to
December 1997 in order to conform Dresser's fiscal year-end to Halliburton's
calendar year-end.
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Number of Price per Price
Stock Options Shares Share per Share
- --------------------------------------- ----------- ------------ ---------
<S> <C> <C> <C>
Outstanding at December 31, 1995 12,289,650 $ 2.90-29.73 $ 18.53
Granted 4,295,409 14.48-29.57 27.49
Exercised (2,722,828) 2.90-23.88 16.72
Forfeited (445,660) 8.71-28.09 18.81
-----------
Outstanding at December 31, 1996 13,416,571 3.49-29.73 21.77
Options assumed in acquisition 854,050 3.10-22.12 12.22
Granted 2,194,972 30.69-61.50 46.18
Exercised (3,684,923) 3.10-29.56 17.95
Forfeited (395,833) 9.15-39.88 22.69
-----------
Outstanding at December 31, 1997 12,384,837 3.10-61.50 26.55
Granted 4,273,368 26.19-46.50 33.07
Exercised (2,435,393) 3.10-37.88 20.84
Forfeited (397,610) 5.40-54.50 33.64
-----------
Outstanding at December 31, 1998 13,825,202 $ 3.10-61.50 $ 29.37
===========
</TABLE>
Options outstanding at December 31, 1998 are composed of the following:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- ----------------------
Weighted
Number of Average Weighted Number of Weighted
Shares at Remaining Average Shares at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
--------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 3.10-14.38 354,189 3.81 $ 10.36 354,189 $ 10.36
14.48-18.13 1,806,304 6.12 16.68 1,660,940 16.71
18.24-29.19 5,519,919 7.88 25.28 2,943,534 23.11
29.56-61.50 6,144,790 8.30 37.87 2,885,151 35.46
------------ ------------
$ 3.10-61.50 13,825,202 7.73 $ 29.37 7,843,814 $ 25.72
============ ============
</TABLE>
There were 6.9 million options exercisable with a weighted average exercise
price of $21.17 at December 31, 1997, and 6.5 million options exercisable with a
weighted average exercise price of $18.57 at December 31, 1996.
All stock options under the 1993 Plan, including options granted to
employees of Dresser, Landmark and NUMAR since the acquisition of such
companies, are granted at the fair market value of the Common Stock at the grant
date. Landmark, prior to its acquisition by Halliburton, had provisions in its
plans that allowed Landmark to set option exercise prices at a defined
percentage below fair market value.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. The weighted average assumptions and
resulting fair values of options granted are as follows:
144
<PAGE>
<TABLE>
<CAPTION>
Weighted
Assumptions Average
-------------------------------------------------------------- -------------
Fair Value of
Risk-free Expected Expected Expected Options
Year Interest Rate Dividend Yield Life (In Years) Volatility Granted
------ ------------- -------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1998 4.3 - 5.3% 1.2 - 2.7% 5 - 6.5 20.1 - 38.0% $ 11.63
1997 6.0 - 6.4% 1.0 - 2.7% 5 - 6.5 22.8 - 43.3% $ 17.29
1996 5.8 - 5.9% 1.6 - 2.7% 5 - 6.5 23.1 - 39.7% $ 9.44
</TABLE>
Stock options generally expire ten years from the grant date. Stock options
vest over a three-year period, with one-third of the shares becoming exercisable
on each of the first, second and third anniversaries of the grant date.
Halliburton accounts for its option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for Halliburton's
stock option programs been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SAS
123), Halliburton's pro forma net income (loss) for 1998, 1997 and 1996 would
have been $(42.6) million, $750.3 million and $547.1 million, respectively,
resulting in diluted earnings (loss) per share of $(0.10), $1.72 and $1.27,
respectively.
Restricted shares awarded under the 1993 Plan for 1998, 1997 and 1996 were
414,510; 515,650; and 363,800, respectively. The shares awarded are net of
forfeitures of 136,540; 34,900; and 34,600 shares in 1998, 1997 and 1996,
respectively. The weighted average fair market value per share at the date of
grant of shares granted in 1998, 1997 and 1996 was $34.77, $45.29 and $28.24,
respectively.
Halliburton's Restricted Stock Plan for Non-Employee Directors (Restricted
Stock Plan) allows for each non-employee director to receive an annual award of
400 restricted shares of Common Stock as a part of compensation. Halliburton
reserved 100,000 shares of Common Stock for issuance to non-employee directors.
Halliburton issued 3,200; 3,200 and 3,600 restricted shares in 1998, 1997 and
1996, respectively, under this plan. At December 31, 1998, 20,400 shares have
been issued to non-employee directors under this plan. The weighted average fair
market value per share at the date of grant of shares granted in 1998, 1997 and
1996 was $36.31, $46.06 and $26.57, respectively.
Halliburton's Employees' Restricted Stock Plan was established for
employees who are not officers, for which 200,000 shares of Common Stock have
been reserved. At December 31, 1998, 170,300 shares (net of 26,700 shares
forfeited) have been issued. Forfeitures were 1,900; 14,600 and 8,400 in 1998,
1997 and 1996, respectively, and no further grants are being made under this
plan.
Under the terms of Halliburton's Career Executive Incentive Stock Plan, 15
million shares of Halliburton's Common Stock were reserved for issuance to
officers and key employees at a purchase price not to exceed par value of $2.50
per share. At December 31, 1998, 11.7 million shares (net of 2.2 million shares
forfeited) have been issued under the plan. No further grants will be made under
the Career Executive Incentive Stock Plan.
Restricted shares issued under the 1993 Plan, Restricted Stock Plan,
Employees' Restricted Stock Plan and the Career Executive Incentive Stock Plan
are limited as to sale or disposition with such restrictions lapsing
periodically over an extended period of time not exceeding ten years. The fair
market value of the stock, on the date of issuance, is being amortized and
charged to income (with similar credits to paid-in capital in excess of par
value) generally over the average period during which the restrictions lapse.
Compensation costs recognized in income for 1998, 1997 and 1996 were $7.6
million, $7.1 million and $6.9 million, respectively. At December 31, 1998, the
unamortized amount is $50.6 million.
Note 13. Series A Junior Participating Preferred Stock
Halliburton has previously declared a dividend of one preferred stock
purchase right (a right) on each outstanding share of its common stock. This
dividend is also applicable to each share of Halliburton common stock
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<PAGE>
that was issued subsequent to adoption of the Rights Agreement entered into with
ChaseMellon Shareholder Services, L.L.C. (the Rights Agent). Each right entitles
its holder to buy one two-hundredth of a share of Halliburton's Series A Junior
Participating Preferred Stock, without par value, at an exercise price of $75.
These rights are subject to certain antidilution adjustments, which have been
set out in the Rights Agreement entered into with the Rights Agent. The rights
do not have any voting rights and are not entitled to dividends.
The rights become exercisable in certain limited circumstances involving a
potential business combination. After the rights become exercisable, each right
will entitle its holder to an amount of common stock of Halliburton, or in
certain circumstances, securities of the acquirer, having in the aggregate, a
market value equal to two times the exercise price of the right. The rights are
redeemable at Halliburton's option at any time before they become exercisable.
The rights expire on December 15, 2005. No event during 1998 made the rights
exercisable.
Note 14. Acquisitions and Dispositions
Dresser Merger. On September 29, 1998 Halliburton completed the acquisition
of Dresser Industries, Inc. (the Merger), by converting the outstanding Dresser
common stock into an aggregate of approximately 176 million shares of common
stock of Halliburton. Halliburton has also reserved approximately 7.3 million
shares of common stock for outstanding Dresser stock options and other employee
and directors plans. The Merger qualified as a tax-free exchange to Dresser's
shareholders for U.S. federal income tax purposes and was accounted for using
the pooling of interests method of accounting for business combinations.
Accordingly, Halliburton's financial statements have been restated to include
the results of Dresser for all periods presented. Beginning in 1998, Dresser's
year-end of October 31 has been conformed to Halliburton's calendar year-end.
Periods through December 1997 contain Dresser's information on a fiscal year-end
basis combined with Halliburton's information on a calendar year-end basis. For
the two months ended December 31, 1997, Dresser had revenues of $1,110.2
million, operating income of $53.2 million, and net income of $35.8 million.
Operating income for the two-month period includes a pretax special charge of
$30.2 million ($12.0 million after tax and minority interest) related to
Dresser's share of profit improvement initiatives at the Dresser-Rand and
Ingersoll-Dresser Pump joint ventures.
The $30.2 million pre-tax special charge is comprised of $23.3 million for
Dresser-Rand and $6.9 million for Ingersoll-Dresser Pump.
Results for the two-month period have been included in retained earnings,
and dividends of $33.2 million paid in December 1997 have been deducted from
retained earnings in the consolidated statements of shareholders' equity at
December 31, 1998 as conforming fiscal years. The change to Dresser's cumulative
translation adjustment account for the period between October 31, 1997 and
December 31, 1997 of $14.8 million is also included in the consolidated
statements of shareholders' equity as conforming fiscal years. There were no
material transactions between Halliburton and Dresser prior to the Merger.
Combined and separate companies results of Halliburton and Dresser for the
periods preceding the merger are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended
September 30 December 31
------------ ------------------------
Millions of dollars 1998 1997 1996
------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Halliburton $ 7,044.5 $ 8,818.6 $ 7,385.1
Dresser 6,019.5 7,453.0 6,561.5
------------ ----------- -----------
Combined $ 13,064.0 $ 16,271.6 $ 13,946.6
============ =========== ===========
Net income (loss):
Halliburton $ 359.3 $ 454.4 $ 300.4
Dresser 282.3 318.0 257.5
1998 Special charge, net of tax (722.0) -- --
------------ ----------- -----------
Combined $ (80.4) $ 772.4 $ 557.9
============ =========== ===========
</TABLE>
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<PAGE>
LWD Divestiture. In January 1999, in accordance with the consent decree
Halliburton entered into with the U.S. Department of Justice on September 29,
1998, an agreement was reached with W-H Energy Services, Inc. (W-H) for the sale
of Halliburton's logging-while-drilling (LWD) and related measurement-while-
drilling (MWD) business known as PathFinder and currently a part of the Energy
Services Group.
Completion of the sale of the PathFinder business was approved by the
Department of Justice on March 3, 1999. Halliburton expects to incur a loss on
the sale which is expected to be completed in March 1999. Halliburton will
provide separate LWD services through its Sperry Sun business unit, which was
acquired as part of the merger with Dresser and is now a part of Halliburton
Energy Services. In addition, Halliburton will continue to provide sonic LWD
serv ices using its existing technologies, which it will share with PathFinder.
M-I L.L.C. Drilling Divestiture. In August 1998, Halliburton sold its 36%
interest in M-I L.L.C. (M-I) with no significant effect on net income for the
year. M-I was previously a part of the Energy Services Group. See Note 5.
Acquisition of Devonport Royal Dockyard. During March 1997, the Devonport
management consortium, Devonport Management Limited (DML), which is 51% owned by
a subsidiary of Halliburton, completed the acquisition of Devonport Royal
Dockyard plc, which owns and operates the Government of the United Kingdom's
Royal Dockyard in Plymouth, England, for approximately $64.9 million. Concurrent
with the acquisition of the Royal Dockyard, Halliburton's ownership interest in
DML increased from about 30% to 51% and DML borrowed $56.3 million under term
loans. The dockyard principally provides repair and refitting services for the
British Royal Navy's fleet of submarines and surface ships. DML is a part of the
Engineering and Construction Group.
Acquisition of OGC International and Kinhill. During April 1997,
Halliburton completed its acquisition of the outstanding common stock of OGC
International plc (OGC) for approximately $118.3 million. OGC is engaged in
providing a variety of engineering, operations and maintenance services,
primarily to the North Sea oil and gas production industry and is a part of the
Energy Services Group.
During July 1997, Halliburton acquired all of the outstanding common stock
and convertible debentures of Kinhill Holdings Limited (Kinhill) for
approximately $34 million. Kinhill, headquartered in Australia, provides
engineering in mining and minerals processing, petroleum and chemicals, water
and wastewater, transportation and commercial and civil infrastructure. Kinhill
markets its services primarily in Australia, Indonesia, Thailand, Singapore,
India and the Philippines. Kinhill is a part of the Engineering and Construction
Group.
In 1997, Halliburton recorded approximately $99.1 million excess of cost
over net assets acquired primarily related to the purchase acquisitions of OGC
and Kinhill.
Acquisition of NUMAR. On September 30, 1997, Halliburton completed its
acquisition of NUMAR through the merger of a subsidiary of Halliburton with and
into NUMAR, the conversion of the outstanding NUMAR common stock into an
aggregate of approximately 8.2 million shares of common stock of Halliburton and
the assumption by Halliburton of the outstanding NUMAR stock options (for the
exercise of which Halliburton has reserved an aggregate of approximately 0.9
million shares of common stock of Halliburton). The merger qualified as a tax-
free exchange and was accounted for using the pooling of interests method of
accounting for business combinations. Halliburton has not restated its
financial statements to include NUMAR's historical operating results because
they were not material to Halliburton.
NUMAR's assets and liabilities on September 30, 1997 were included in
Halliburton's accounts of the same date, resulting in an increase in net assets
of $21.3 million. Headquartered in Malvern, Pennsylvania, NUMAR designs,
manufactures and markets the Magnetic Resonance Imaging Logging (MRIL(R)) tool
which utilizes magnetic resonance imaging technology to evaluate subsurface rock
formations in newly drilled oil and gas wells. NUMAR is a part of the Energy
Services Group.
Subsea Asset Sale. In June 1997, a subsidiary of Halliburton sold certain
assets of its subsea operations to Global Industries, Ltd. for $102.0 million
and recognized a loss of $6.3 million (net of tax of $3.4 million) on the sale.
SubSea is a part of the Energy Services Group.
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<PAGE>
Environmental Services Divestiture. On December 31, 1997, a subsidiary of
Halliburton sold its environmental services business to Tetra Tech, Inc. for
approximately $32 million. The sale was prompted by Halliburton's desire to
divest non-core businesses and had no significant effect on the net income for
the year. The environmental services business was previously a part of the
Engineering and Construction Group.
Landmark Graphics. In October 1996, Halliburton completed its acquisition
of Landmark through the merger of Landmark with and into a subsidiary of
Halliburton, the conversion of the outstanding Landmark common stock into an
aggregate of approximately 20.4 million shares of common stock of Halliburton
(after giving effect to Halliburton's two-for-one stock split) and the
assumption by Halliburton of the outstanding Landmark stock options. The merger
qualified as a tax-free exchange and was accounted for using the pooling of
interests method of accounting for business combinations. Halliburton's
financial statements have been restated to include the results of Landmark for
all periods presented prior to the date of completion. Landmark is now a part of
the Energy Services Group.
Prior to its acquisition by Halliburton, Landmark had a fiscal year-end of
June 30. Landmark's results have been restated to conform with Halliburton's
calendar year-end. Combined and separate results of Halliburton and Landmark for
the periods preceding the merger are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
Millions Of Dollars 1996
--------------------------------------------------------------- -------------
<S> <C>
Revenues:
Halliburton $5,251.5
Landmark 143.9
--------
Combined $5,395.4
========
Net income (loss):
Halliburton $ 201.2
Landmark (8.4)
--------
Combined $ 192.8
========
</TABLE>
Halliburton acquired other businesses in 1998, 1997 and 1996 for $42.0
million, $3.6 million and $32.2 million, respectively. These businesses did not
have a significant effect on revenues or earnings.
Note 15. Financial Instruments and Risk Management
Foreign Exchange Risk. Techniques in managing foreign exchange risk
include, but are not limited to, foreign currency borrowing and investing and
the use of currency derivative instruments. Halliburton selectively hedges
significant exposures to potential foreign exchange losses considering current
market conditions, future operating activities and the cost of hedging the
exposure in relation to the perceived risk of loss. The purpose of Halliburton's
foreign currency hedging activities is to protect Halliburton from the risk that
the eventual dollar cash flows resulting from the sale and purchase of products
in foreign currencies will be adversely affected by changes in exchange rates.
Halliburton does not hold or issue derivative financial instruments for trading
or speculative purposes.
Halliburton hedges its currency exposure through the use of currency
derivative instruments. Such contracts generally have an expiration date of two
years or less. Forward exchange contracts (commitments to buy or sell a
specified amount of a foreign currency at a specified price and time) are
generally used to hedge identifiable foreign currency commitments. Losses of
$1.4 million for identifiable foreign currency commitments were deferred at
December 31, 1998. Forward exchange contracts and foreign exchange option
contracts (which convey the right, but not the obligation, to sell or buy a
specified amount of foreign currency at a specified price) are generally used to
hedge foreign currency commitments with an indeterminable maturity date. None of
the forward or option contracts are exchange traded.
While hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures being
hedged. The use of some contracts may limit Halliburton's ability to
148
<PAGE>
benefit from favorable fluctuations in foreign exchange rates. The notional
amounts of open forward contracts and options were $595.9 million and $697.2
million at year-end 1998 and 1997, respectively. The notional amounts of
Halliburton's foreign exchange contracts do not generally represent amounts
exchanged by the parties, and thus, are not a measure of the exposure of
Halliburton or of the cash requirements relating to these contracts. The amounts
exchanged are calculated by reference to the notional amounts and by other terms
of the derivatives, such as exchange rates. Halliburton actively monitors its
foreign currency exposure and adjusts the amounts hedged as appropriate.
Exposures to certain currencies are generally not hedged due primarily to
the lack of available markets or cost considerations (non-traded currencies).
Halliburton attempts to manage its working capital position to minimize foreign
currency commitments in non-traded currencies and recognizes that pricing for
the services and products offered in such countries should cover the cost of
exchange rate devaluations. Halliburton has historically incurred transaction
losses in non-traded currencies.
Credit Risk. Financial instruments that potentially subject Halliburton to
concentrations of credit risk are primarily cash equivalents, investments and
trade receivables. It is Halliburton's practice to place its cash equivalents
and investments in high quality securities with various investment institutions.
Halliburton derives the majority of its revenues from sales and services to,
including engineering and construction for, the energy industry. Within the
energy industry, trade receivables are generated from a broad and diverse group
of customers. There are concentrations of receivables in the United States and
the United Kingdom. Halliburton maintains an allowance for losses based upon the
expected collectibility of all trade accounts receivable.
There are no significant concentrations of credit risk with any individual
counterparty or groups of counterparties related to Halliburton's derivative
contracts. Counterparties are selected by Halliburton based on creditworthiness,
which Halliburton continually monitors, and on the counterparties' ability to
perform their obligations under the terms of the transactions. Halliburton does
not expect any counterparties to fail to meet their obligations under these
contracts given their high credit ratings and, as such, considers the credit
risk associated with its derivative contracts to be minimal.
Fair Value of Financial Instruments. The estimated fair value of long-term
debt at year-end 1998 and 1997 was $1,577.6 million and $1,380.8 million,
respectively, as compared to the carrying amount of $1,428.2 million at year-end
1998 and $1,304.3 million at year-end 1997. The fair value of fixed rate long-
term debt is based on quoted market prices for those or similar instruments. The
carrying amount of variable rate long-term debt and restricted cash (see Note 8)
approximates fair value because such instruments reflect market changes to
interest rates. The carrying amount of short-term financial instruments (cash
and equivalents, receivables, short-term notes payable and accounts payable) as
reflected in the consolidated balance sheets approximates fair value due to the
short maturities of these instruments. The fair value of currency derivative
instruments which generally approximates their carrying amount based upon third
party quotes was $4.4 million receivable and $4.7 million payable at December
31, 1998.
Note 16. Retirement Plans
Halliburton and its subsidiaries have various plans which cover a
significant number of their employees. These plans include defined contribution
plans, which provide retirement contributions in return for services rendered,
provide an individual account for each participant and have terms that specify
how contributions to the participant's account are to be determined rather than
the amount of pension benefits the participant is to receive. Contributions to
these plans are based on pre-tax income and/or discretionary amounts determined
on an annual basis. Halliburton's expense for the defined contribution plans
totaled $151.8 million, $213.2 million, and $156.0 million in 1998, 1997 and
1996. Other retirement plans include defined benefit plans, which define an
amount of pension benefit to be provided, usually as a function of age, years of
service or compensation. These plans are funded to operate on an actuarially
sound basis. Plan assets are primarily invested in cash, short-term investments,
real estate, equity and fixed income securities of entities domiciled in the
country of the plan's operation.
149
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Millions of Dollars U.S. International U.S. International
-------------------------------------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 377.6 $1,569.9 $386.6 $1,361.8
Service cost 5.4 57.3 8.1 44.6
Interest cost 27.3 111.2 29.1 102.7
Plan participants' contributions -- 14.0 -- 12.7
Effect of business combinations -- 20.7 -- --
Amendments 13.6 -- (16.6) --
Settlements/curtailments (2.3) (9.2) -- (1.9)
Currency fluctuations -- (1.7) -- (1.6)
Actuarial gain/(loss) 37.8 (5.2) 1.9 88.0
Benefits paid (29.1) (41.2) (31.5) (36.4)
-------- -------- -------- --------
Benefit obligation at end of year $ 430.3 $1,715.8 $ 377.6 $1,569.9
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 421.4 $1,775.4 $ 351.0 $1,617.6
Actual return on plan assets 38.8 28.4 81.8 158.6
Employer contribution 17.4 25.2 20.1 25.5
Settlements (3.0) -- -- (1.9)
Plan participants' contributions -- 14.0 -- 12.7
Effect of business combinations -- 20.7 -- --
Currency fluctuations -- (5.1) -- (0.7)
Benefits paid (29.1) (41.2) (31.5) (36.4)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 445.5 $1,817.4 $ 421.4 $1,775.4
======== ======== ======== ========
Funded status: $ 15.2 $ 101.6 $ 43.8 $ 205.5
Unrecognized transition obligation 3.0 (8.1) 0.9 (10.2)
Unrecognized actuarial (gain)/loss 5.1 (59.2) (34.9) (162.7)
Unrecognized prior service cost 1.1 1.5 (17.0) 4.1
-------- -------- -------- --------
Net amount recognized $ 24.4 $ 35.8 $ (7.2) $ 36.7
======== ======== ======== ========
</TABLE>
Halliburton recognized an additional minimum pension liability for
underfunded defined benefit plans. The additional minimum liability is equal to
the excess of the accumulated benefit obligation over plan assets and accrued
liabilities. A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders' equity.
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Millions of Dollars U.S. International U.S. International
- -------------------------------------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid benefit cost $ 30.9 $ 67.4 $ 21.2 $ 73.7
Accrued benefit liability (33.7) (33.1) (38.2) (38.3)
Intangible asset 17.0 0.4 4.4 0.7
Deferred tax asset 3.7 0.2 1.9 0.2
Accumulated other comprehensive income 6.5 0.9 3.5 0.4
-------- -------- -------- --------
Net amount recognized $ 24.4 $ 35.8 $ (7.2) $ 36.7
======== ======== ======== ========
</TABLE>
Assumed long-term rates of return on plan assets, discount rates for
estimating benefit obligations and rates of compensation increases vary for the
different plans according to the local economic conditions. The rates used are
as follows:
150
<PAGE>
<TABLE>
<CAPTION>
Weighted-average assumptions as of December 31 1998 1997 1996
----------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Expected return on plan assets:
United States plans 8.5% to 9.0% 8.5% to 9.0% 8.0% to 9.0%
International plans 7.0% to 11.0% 7.0% to 13.5% 7.0% to 13.5%
Discount rate:
United States plans 7.25% to 8.0% 7.25% to 8.0% 7.0% to 8.0%
International plans 2.0% to 12.5% 7.0% to 12.5% 7.0% to 12.5%
Rate of compensation increase:
United States plans 4.5% to 5.0% 4.0% to 5.5% 4.0% to 5.5%
International plans 2.0% to 11.0% 4.0% to 11.0% 4.0% to 11.0%
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Millions of Dollars U.S. International U.S. International
--------------------------------------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 5.4 $ 57.3 $ 8.1 $ 44.6
Interest cost 27.3 111.2 29.1 102.7
Expected return on plan assets (30.0) (123.0) (31.4) (127.6)
Transition amount 0.6 (1.9) (0.7) (1.8)
Amortization of prior service cost (4.0) (7.1) (1.1) (7.1)
Settlements/curtailments loss/(gain) (3.9) (2.1) 0.4 --
Recognized actuarial (gain)/loss 0.2 0.1 (0.5) (1.8)
------ ------- ------ -------
Net periodic benefit cost $ (4.4) $ 34.5 $ 3.9 $ 9.0
====== ======= ====== =======
</TABLE>
In 1996 the pension plans had a net service cost of $31.3 million; a net
interest cost of $73.5 million; a net actual return on plan assets of ($109.8
million); and net amortization and deferral of $10.0 million, resulting in net
periodic pension cost of $5 million.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $201 million, $193 million, and $123 million,
respectively, as of December 31, 1998, and $103 million, $97 million, and $51
million, respectively, as of December 31, 1997.
Postretirement Medical Plan. Halliburton offers postretirement medical
plans to certain eligible employees. In some plans Halliburton's liability is
limited to a fixed contribution amount for each participant or dependent. The
plan participants share the total cost for all benefits provided above the fixed
Company contribution and participants' contributions are adjusted as required to
cover benefit payments. Halliburton has made no commitment to adjust the amount
of its contributions; therefore, the computed accumulated postretirement benefit
obligation amount is not affected by the expected future health care cost
inflation rate.
Other postretirement medical plans are contributory but Halliburton
generally absorbs the majority of the costs. In these plans Halliburton may
elect to adjust the amount of its contributions. As a result the computed
accumulated postretirement benefit obligation amount is affected by the expected
future health care cost inflation rate. These plans have assumed health care
trend rates (weighted based on the current year benefit obligation) for 1998 of
7% which are expected to decline to 5% by 2002.
151
<PAGE>
During 1997, Halliburton adopted amendments to eliminate certain
postretirement medical benefit programs. These amendments resulted in a
curtailment gain of $11.2 million.
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
---------------------------------------------- ----------- ------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 373.0 $ 394.6
Service cost 3.9 4.5
Interest cost 28.4 29.3
Plan participants' contributions 12.0 13.8
Amendments (4.4) 3.0
Settlements/curtailments (6.3) --
Actuarial gain/(loss) 36.8 (30.1)
Benefits paid (40.3) (42.1)
----------- ------------
Benefit obligation at end of year $ 403.1 $ 373.0
=========== ============
Change in plan assets
Fair value of plan assets at beginning of year $ -- $ --
Employer contribution 28.3 28.3
Plan participants' contributions 12.0 13.8
Benefits paid (40.3) (42.1)
----------- ------------
Fair value of plan assets at end of year $ -- $ --
=========== ============
Funded status $ (403.1) $ (373.0)
Unrecognized actuarial (gain)/loss (66.0) (98.7)
Unrecognized prior service cost (5.4) (6.3)
Unamortized gains from plan amendments (140.2) (155.5)
----------- ------------
Net amount recognized $ (614.7) $ (633.5)
=========== ============
<CAPTION>
Millions of dollars 1998 1997
---------------------------------------------- ----------- ------------
<S> <C> <C>
Amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit liability $ (614.7) $ (633.5)
----------- ------------
Net amount recognized $ (614.7) $ (633.5)
=========== ============
<CAPTION>
Weighted-average assumptions as of December 31 1998 1997
---------------------------------------------- ----------- ------------
<S> <C> <C>
Discount rate 7.0% to 8.0% 7.25% to 8.0%
Expected return on plan assets N/A N/A
Rate of compensation increase 5.0% 5.0%
<CAPTION>
Millions of dollars 1998 1997
---------------------------------------------- ----------- ------------
<S> <C> <C>
Components of net periodic benefit cost
Service cost $ 3.9 $ 4.5
Interest cost 28.4 29.3
Amortization of prior service cost (10.3) (10.2)
Settlements/curtailments loss/(gain) -- (11.2)
Recognized actuarial (gain)/loss (7.8) (8.8)
----------- ------------
Net periodic benefit cost $ 14.2 $ 3.6
=========== ============
</TABLE>
In 1996, the postretirement medical plans had net service cost of $4.7
million; net interest cost of $30.9 million; and net amortization and deferral
of ($20.4 million), resulting in net periodic postretirement medical cost of
$15.2 million.
152
<PAGE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the total of the healthcare plans. A one-percentage-point
change in assumed health care cost trend rates would have the following
effects:
<TABLE>
<CAPTION>
1 - Percentage Point
-----------------------------------
Millions of dollars Increase Decrease
---------------------------------------------------------- ------------- -------------
<S> <C> <C>
Effect on total of service and interest cost components $ 2.7 $ (2.5)
Effect on the postretirement benefit obligation 28.5 (26.9)
</TABLE>
Note 17. Sale of Joint Ventures (unaudited) Subsequent to the Date of
Independent Public Accountant's Report
On October 4, 1999, we announced we will sell our interests in Dresser-Rand
Company and Ingersoll-Dresser Pump Company to Ingersoll-Rand Company for total
cash consideration of approximately $1.1 billion. The transaction will result in
an after-tax gain of approximately $380 million or $0.84 per diluted share. The
sale is being made based upon elections triggered by Ingersoll-Rand. We expect
to close the sale on December 30, 1999. After paying off intercompany accounts
with the joint ventures, we expect to receive net cash of approximately $630
million. This cash will initially be used to reduce short-term borrowings and
for other general corporate purposes.
Revenues, operating income and net income from Dresser-Rand Company and
Ingersoll-Dresser Pump Company included in our results for the first nine months
of 1999 and for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended Ended
---------------------------------------------
Millions of dollars September 30, 1999 December 31, 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 792.1 $ 1,287.5
--------------------------------------------------------------------------------
Operating income $ 46.6 $ 120.6
--------------------------------------------------------------------------------
Net income $ 18.1 $ 49.4
--------------------------------------------------------------------------------
</TABLE>
153
<PAGE>
HALLIBURTON COMPANY
Notes to September 30, 1999 Quarterly Financial Statements
(Unaudited)
Note 1. Management Representations
We employ accounting policies that are in accordance with generally
accepted accounting principles in the United States. In preparing financial
statements in conformity with generally accepted accounting principles our
management must make estimates and assumptions that affect:
. the reported amounts of assets and liabilities,
. the disclosure of contingent assets and liabilities at the date of
the financial statements, and
. the reported amounts of revenues and expenses during the reporting
period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed financial statements were prepared
using generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and applicable rules of Regulation S-X.
Accordingly, these financial statements do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with our 1998 Annual
Report on Form 10-KA.
In our opinion, the condensed consolidated financial statements present
fairly our financial position as of September 30, 1999 and 1998, and the results
of our operations for the nine months ended September 30, 1999 and 1998 and our
cash flows for the nine months then ended. The results of operations for the
nine months ended September 30, 1999 and 1998 may not be indicative of results
for the full year.
We have revised our presentation of the amounts recorded in our 1998
special charge. Inventory related special charges of $93 million are now
presented in cost of services or cost of sales in our condensed consolidated
income statements for the three and nine months ended September 30, 1998. We
have also reclassified amounts related to inventories, property plant and
equipment, excess of cost over assets acquired, and other assets from accrued
special charges in our 1999 and 1998 condensed consolidated balance sheets. See
Note 9.
Note 2. Business Segment Information
We have three business segments. The Energy Services Group contains
Halliburton Energy Services, Brown & Root Energy Services and Landmark Graphics
Corporation. Halliburton Energy Services provides pressure pumping equipment
and services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services, and well control. Brown & Root Energy Services provides upstream oil
and gas engineering, construction and maintenance services, specialty pipe
coating, insulation, and underwater engineering services. Landmark Graphics
Corporation provides integrated exploration and production information systems
and related professional services to the petroleum industry.
The Engineering and Construction Group includes Kellogg Brown & Root and
Brown & Root Services. This group provides engineering, procurement,
construction, project management, and facilities operation and maintenance for
hydrocarbon processing and other industrial and governmental customers.
The Dresser Equipment Group designs, manufactures and markets highly
engineered products and systems. These include compressors, valves, motors,
engines, pumps, generators, blowers, fuel dispensing systems, and
instrumentation equipment principally for oil and gas producers, transporters,
processors, distributors and petroleum users throughout the world.
Our equity in pretax income or losses of related companies is included in
revenues and operating income of each applicable segment. Intersegment revenues
included in the revenues of the other business segments are immaterial.
154
<PAGE>
The table below presents revenues and operating income by segment.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ----------------------
Millions of dollars 1999 1998 1999 1998
------------------------------------------- ----- ------- ----- ------
<S> <C> <C> <C> <C>
Revenues:
Energy Services Group $1,700 $2,163 $ 5,134 $ 6,829
Engineering and Construction Group 1,273 1,380 4,153 4,165
Dresser Equipment Group 560 681 1,840 2,070
------ ------- ------- -------
Total $3,533 $4,224 $11,127 $13,064
====== ======= ======= =======
Operating income:
Energy Services Group 56 263 162 850
Engineering and Construction Group 41 54 163 187
Dresser Equipment Group 33 71 140 187
Special charges and credits -- (945) 47 (945)
General corporate (16) (20) (50) (59)
------ ------- ------- -------
TOTAL $ 114 $ (577) $ 462 $ 220
====== ======= ======= =======
</TABLE>
Note 3. Acquisitions and Dispositions
On September 29, 1998, we completed the acquisition of Dresser Industries,
Inc. The outstanding Dresser common stock was converted into our common stock.
The merger qualified as a tax-free exchange to Dresser's shareholders for U.S.
federal income tax purposes and was accounted for using the pooling of interests
method of accounting for business combinations. Accordingly, our financial
statements have been restated to include the results of Dresser for all periods
presented. Beginning in 1998, Dresser's year-end of October 31 was changed to
Halliburton's calendar year-end.
The results of operations for Halliburton and Dresser prior to the merger
and the combined amounts are presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
Millions Of Dollars 1998 1998
- -------------------- ------------------ ------------------
<S> <C> <C>
Revenues:
Halliburton $2,214 $ 7,045
Dresser 2,010 6,019
------ -------
Combined $4,224 $13,064
====== =======
Net income:
Halliburton $ 105 $ 359
Dresser 90 282
1998 special charges, net of tax (722) (722)
------ -------
Combined $ (527) $ (81)
====== =======
</TABLE>
In connection with the Dresser merger, we sold our worldwide logging-while-
drilling business and related measurement-while-drilling business in March 1999.
The sale was in compliance with a consent decree with the United States
Department of Justice. The financial impact of the sale was reflected in the
third quarter 1998 special charge. This business was previously a part of the
Energy Services Group.
We sold our 36% interest in M-I L.L.C. in August, 1998. This sale completed
our commitment to the U.S. Department of Justice to sell our interest in M-I in
connection with the merger with Dresser. The sales price of $265 million was
paid to us with a non-interest bearing promissory note which was due and
collected in April, 1999. M-I was previously a part of the Energy Services Group
and was accounted for using the equity method.
On October 4, 1999, we announced that Dresser will sell its joint venture
interests in Ingersoll Dresser Pump Company (49% owned) and Dresser-Rand Company
(51% owned) to Ingersoll-Rand Company. The sales are expected to close on
December 30, 1999. See Note 12.
155
<PAGE>
Note 4. Inventories
September 30 December 31,
Millions of dollars 1999 1998
- ----------------------------- ------------ ------------
Finished products and parts $ 646 $ 621
Raw materials and supplies 278 250
Work in process 487 562
Progress payments (160) (148)
------ ------
Total $1,251 $1,285
====== ======
The cost of U.S. manufacturing and U.S. field service inventories is
determined using the last-in, first-out method. If the last-in, first-out method
had not been used, the cost of total inventories would have been about $109
million higher than reported at September 30, 1999, and $111 million higher than
reported at December 31, 1998.
Note 5. Dresser Financial Information
Since becoming a wholly-owned subsidiary, Dresser has ceased filing
periodic reports with the Securities and Exchange Commission. Dresser's 8%
senior notes remain outstanding and are fully and unconditionally guaranteed by
Halliburton. As long as these notes remain outstanding, summarized financial
information of Dresser will be presented in our periodic reports filed on Form
10-K and Form 10-Q. We have not presented separate financial statements and
other disclosures concerning Dresser because management has determined this
information is not material to holders of these notes.
In January 1999, as part of a reorganization associated with the merger,
Halliburton Delaware, Inc., a first tier holding company subsidiary, was merged
into Dresser. The majority of our operating assets and activities are now
included within Dresser Industries, Inc. and its subsidiaries.
Dresser Industries, Inc.
Financial Position September 30 December 31
Millions Of Dollars 1999 1998
----------------------- ------------ ------------
Current assets $ 5,484 $2,417
Noncurrent assets 7,179 2,614
------------ ------
Total $12,663 $5,031
============ ======
Current liabilities 2,795 1,389
Noncurrent liabilities 1,956 1,544
Minority interest 143 154
Shareholders' equity 7,769 1,944
------------ ---------
Total $12,663 $5,031
============ =========
<TABLE>
<CAPTION>
Dresser Industries, Inc. Three Months Nine Months
Operating Results Ended September 30 Ended September 30
Millions of dollars 1999 1998 1999 1998
- ----------------------------------------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenues $3,533 $ 2,010 $ 11,127 $6,019
====== ====== ========= ======
Operating income $ 119 $ 177 $ 430 $ 532
====== ====== ========= ======
Income before taxes and minority interest $ 82 $ 158 $ 297 $ 478
Income taxes (33) (57) (120) (172)
Minority interest (5) (11) (23) (24)
Change in accounting method -- -- (19) --
------ ------ ------ ------
Net income $ 44 $ 90 $ 135 $ 282
====== ====== ====== ======
</TABLE>
156
<PAGE>
Note 6. Commitments and Contingencies
Asbestosis Litigation. Since 1976, Dresser has been involved in litigation
with people who allege that they have sustained injuries and damage from the
inhalation of asbestos fibers. The injuries and damages are alleged to arise
from products manufactured by Dresser and its former divisions or subsidiaries
or companies acquired by Dresser. We also have asbestos claims which have arisen
as a result of construction and renovation work performed by the Engineering and
Construction Group segment.
At September 30, 1999, we have approximately 92,600 pending claims.
Settlements, previously reported, covering approximately 8,000 claims, are
carried as pending until releases are signed. During the first nine months of
1999, approximately 28,500 claims were filed and approximately 7,900 claims
against us were settled or otherwise resolved. The settlements reached during
the first nine months of 1999 were consistent with our historical experience.
Based on our experience, we continue to believe that provisions recorded are
adequate to cover the estimated loss from asbestosis litigation.
We have entered into agreements with insurance carriers to cover portions
of the expenses associated with asbestos litigation arising from products
manufactured by Dresser and its former divisions or subsidiaries. These
agreements are governed by exposure dates, payment type or product involved.
The covered amount varies by individual claim. We have filed lawsuits against
several insurance carriers to recover additional amounts related to these
claims. The Engineering and Construction Group segment is also involved in
negotiations with carriers over coverage of its claims.
The accrued liability for asbestos claims against us and the corresponding
receivable from the carriers are as follows:
September 30, December 31,
Millions of dollars 1999 1998
- ------------------------- ------------- -----------
Accrued liability $ 44 $ 48
Receivables from insurance carriers (31) (34)
----- -----
Net Asbestos Liability $ 13 $ 14
===== =====
Dispute with Global Industrial Technologies, Inc. An agreement was entered
into at the time of the spin-off of Global Industrial Technologies, Inc.,
formerly INDRESCO, Inc., with Dresser. Under the agreement, Global assumed
liability for all asbestos related claims filed against Dresser after July 31,
1992 relating to refractory products manufactured or marketed by the former
Harbison-Walker Refractories Division of Dresser. Those business operations were
transferred to Global in the spin-off. These asbestos claims are subject to
agreements with Dresser's insurance carriers that cover expense and indemnity
payments. However, the insurance coverage is incomplete and Global has to date
paid any uncovered portion of those asbestos claims with its own funds.
Global now disputes that it assumed liability for any of these asbestos
claims based on Dresser's negligence, the acts of Harbison-Walker prior to its
merger with Dresser in 1967, or punitive damages.
In order to resolve this dispute, Global invoked the dispute resolution
provisions of the 1992 agreement, which require binding arbitration. Global has
not claimed a specific amount of damages. We expect that Global's claim for
reimbursement will be in excess of $40 million. In addition, Global is seeking
relief from responsibility for pending claims based on Dresser's negligence, the
pre-1967 acts of Harbison-Walker, punitive damages, and for all similar future
claims. The arbitration process has begun, and the parties have met with the
arbitrator. Dates, however, have not been set. We believe that the assertions by
Global are without merit and Dresser intends to vigorously defend against them.
Separately Dresser learned that Global had threatened to sue Continental
Insurance Company, one of Dresser's insurers, over insurance proceeds. Dresser
filed a lawsuit in Texas state court on April 9, 1999 seeking an injunction to
prevent Global from suing Continental. The Texas court granted a temporary
injunction on April 29, 1999. Global appealed the temporary injunction on
September 21, 1999, and we are awaiting a decision. A trial date of December 6,
1999 has been set to hear arguments regarding a permanent injunction.
157
<PAGE>
Environmental. Some of our subsidiaries are involved as potentially
responsible parties in remedial activities to clean up various Superfund sites
under federal law. Federal law imposes joint and several liability, if the harm
is indivisible, without regard to fault, the legality of the original disposal,
or ownership of the site. Although it is very difficult to quantify the
potential impact of compliance with environmental protection laws, our
management believes that any liability of our subsidiaries for all but one site
will not have a material adverse effect on the results of operations. The
Environmental Protection Agency has named our subsidiary Kellogg Brown & Root,
Inc. as a potentially responsible party for the Jasper County Superfund Site.
Sufficient information regarding this site has not been developed to permit our
management to make a liability determination. Management believes the process of
determining the nature and extent of remediation at the Jasper County Superfund
Site and the total costs will be lengthy. In addition to the Superfund issues,
the State of Missouri has indicated that it may claim natural resource damage
against the potentially responsible parties at the Jasper County Superfund Site.
We cannot determine the extent of Kellogg Brown & Root's liability, if any, for
remediation costs or natural resource damages on any reasonably practicable
basis.
The accrued liabilities for environmental contingencies were $31 million at
September 30, 1999 and $29 million at December 31, 1998.
Other. We, along with our subsidiaries, are parties to various other legal
proceedings. We believe any liabilities we may owe will not be material to our
consolidated financial position and results of operations.
158
<PAGE>
Note 7. Income Per Share
Basic income per share amounts are based on the weighted average number of
common shares outstanding during the period. Diluted income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. Options to purchase 2.3 million
shares of common stock which were outstanding during the nine months ended
September 30, 1999 were not included in the computation of diluted net income
per share because the option exercise price was greater than the average market
price of the common shares.
<TABLE>
<CAPTION>
Millions of dollars and shares Three Months Nine Months
except per share data Ended September 30 Ended September 30
----------------------------------------- ------------------- -------------------
1999 1998 1999 1998
----- ------ ------ ------
<S> <C> <C> <C> <C>
Income (loss) before accounting change: $ 58 $ (527) $ 222 $ (81)
===== ====== ====== ======
Basic weighted average shares 441 439 440 439
Effect of common stock equivalents 4 - 3 -
----- ------ ------ ------
Diluted weighted average shares 445 439 443 439
===== ====== ====== ======
Income (loss) per common share before change
in accounting method:
Basic $0.13 $(1.20) $ 0.50 $(0.18)
===== ====== ====== ======
Diluted $0.13 $(1.20) $ 0.50 $(0.18)
===== ====== ====== ======
</TABLE>
Note 8. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------ ------ ----- ----- -----
<S> <C> <C> <C> <C>
Net income (loss): $ 58 $(527) $ 203 $ (81)
Cumulative translation
adjustment, net of tax 13 16 (26) --
Minimum pension liability adjustment -- -- (7) --
----- ----- ----- -----
Total comprehensive income (loss) $ 71 $(511) $ 170 $ (81)
===== ===== ===== =====
</TABLE>
The cumulative translation adjustment of certain foreign entities and
minimum pension liability adjustment are the only comprehensive income
adjustments recorded.
Accumulated other comprehensive income at September 30, 1999 and December
31, 1998 consisted of the following:
September 30, December 31,
Millions of dollars 1999 1998
----------------------------------- ------------- ------------
Cumulative translation adjustment $ (168) $ (142)
Minimum pension liability (14) (7)
------------- ------------
Total accumulated other comprehensive income: $ (182) $ (149)
============= ============
Note 9. Special Charges
During the third and fourth quarters of 1998, we incurred special charges
totaling $980 million to provide for costs associated with the merger and
industry downturn due to declining oil and gas prices. During the second quarter
of 1999, we reversed $47 million of the 1998 charge based on the most recent
assessment of total costs to be incurred to complete the actions covered in our
special charges.
These charges were reflected in the following capitions of the condensed
consolidated statements of income:
Nine Months Three Months Twelve Months
Ended Ended Ended
Millions of Dollars September 30, 1998 December 31, 1998 December 31, 1998
- -------------------- ------------------ ----------------- -----------------
Cost of Services $ 69 $ -- $ 69
Cost of Sales $ 24 $ -- $ 24
Special charges
and credits $ 852 $ 35 $ 887
--------- -------- -------
Total $ 945 $ 35 $ 980
The table below includes the components of the pretax special charge and
the amounts utilized and adjusted through September 30, 1999.
159
<PAGE>
<TABLE>
<CAPTION>
Asset Facility Merger
Related Personnel Consolidation Transaction Other
Millions of dollars Charges Charges Charges Charges Charges Total
- ---------------------------------- --------- ---------- ------------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
1998 Charges to Expense by
Business Segment:
Energy Services Group $ 453 $ 157 $ 93 $ -- $ 18 $ 721
Engineering & Construction Group 8 19 8 -- 5 40
Dresser Equipment Group 18 1 2 -- -- 21
General corporate 30 58 23 64 23 198
------- ------ ------ ------ ------ ------
Total 509 235 126 64 46 980
Utilized in 1998 (509) (45) (3) (60) (4) (621)
------- ------ ------ ------ ------ ------
Balance December 31, 1998 -- 190 123 4 42 359
Utilized in 1999 -- (141) (61) (3) (14) (219)
Adjustments to 1998 charges -- (30) (16) (1) -- (47)
------- ------ ------ ------ ------ ------
Balance September 30, 1999 $ -- $ 19 $ 46 $ -- $ 28 $ 93
======= ====== ====== ====== ====== ======
</TABLE>
Asset related charges have been reflected as direct reductions of the
associated asset balances.
The following summarizes reductions of employees, consultants and contract
personnel related to the 1998 special charge through September 30, 1999:
. 1998 4,400 including 3,800 within the Energy Services Group
. 1999 4,400 including 3,900 within the Energy Services Group
We now estimate 10,100 personnel reductions will occur as accrued for in
the 1998 special charge. Of this amount, 800 have not yet taken place. The
remaining reductions will mostly occur in the fourth quarter of 1999 as projects
are completed and facilities are closed. During the second quarter we reversed
$30 million in personnel charges primarily due to a reduction in estimated legal
costs associated with employee layoffs, lower than anticipated average severance
per person and fewer than expected terminations due to voluntary employee
resignations.
Through September 30, 1999, we have sold or returned to the owner 195
properties including service and administrative facilities related to the 1998
special charge. As of September 30, 1999, we had vacated an additional 109
properties which we are in the process of selling, subleasing or returning to
the owner. The majority of the sold, returned or vacated properties are located
within North America. The majority of these facilities are within the Energy
Services Group. We have scheduled these properties to be vacated by the end of
this year. Our most recent assessment of facilities consolidation activities
indicates that fewer facilities than initially estimated will be exited in
conjunction with the 1998 special charge resulting in an estimated $7 million
reduction in facilities consolidation costs. This revised estimate combined with
other factors including more favorable exit costs than anticipated resulted in a
$16 million adjustment to facility consolidation charges during the second
quarter.
Halliburton and Dresser merger transaction costs were estimated to be $64
million. During the second quarter, we determined that $1 million of the
estimated merger transaction costs would not be utilized, primarily as a result
of lower than previously estimated legal and other professional costs. We
included this amount in our second quarter special charge adjustments.
During the first nine months of 1999, we utilized $14 million in other
special charge costs. The balance will be utilized during 1999 and possibly into
2000 in connection with our renegotiation of agency agreements, supplier and
other contracts and elimination of other duplicate capabilities.
Most restructuring activities accrued for in the 1998 special charges are
expected to be completed and expended by the end of 1999. The exceptions are
sales of facilities to be disposed of and any other actions, which may require
negotiations with outside parties extending past the end of the year. From
inception through September 30, 1999 Halliburton used $302 million in cash for
items associated with the 1998 special charges. The unutilized special charge
reserve balance at September 30, 1999 is expected to result in future cash
outlays of approximately $93 million during 1999 and possibly into 2000.
160
<PAGE>
Note 10. Change in Accounting Method
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." This Statement requires costs of start-up activities and
organization costs to be expensed as incurred. We adopted Statement of Position
98-5 effective January 1, 1999 and recorded expense of $30 million pretax or $19
million after tax or $0.04 per diluted share. The components of the $30 million
pretax cost, all contained within the Energy Services Group, that were
previously deferred include:
. $23 million for mobilization costs associated with specific contracts
and for installation of offshore cementing equipment onto third party
marine drilling rights or vessels; and
. $7 million for costs incurred opening a new manufacturing facility in
the United Kingdom.
Note 11. Investment in Bufete
Kellogg Brown & Root, Inc., a subsidiary within the Engineering and
Construction Group, has a net investment of $26 million in Bufete Industriale,
S.A. de C.V., a large firm in Mexico specializing in engineering, procurement
and construction. This investment is accounted for using the cost method and
reported on the "equity in and advances to related companies" line of our
consolidated balance sheets. Bufete's financial condition deteriorated in 1999.
On July 13, 1999, Bufete announced it would default on $100 million in Eurobonds
due July 15, 1999. We believe our investment is impaired and consequently wrote
off the entire amount in the second quarter of 1999. The expense for Bufete was
reported on the "Other nonoperating, net" line of the consolidated income
statement.
Note 12. Sale of Joint Ventures
On October 4, 1999, we announced we will sell our interests in Dresser-Rand
and Ingersoll-Dresser Pump to Ingersoll-Rand Company for total cash
consideration of approximately $1.1 billion. The transaction will result in an
after-tax gain of approximately $380 million or $0.84 per diluted share. The
sale is being made based upon elections in the joint venture agreements
triggered by Ingersoll-Rand. We expect to close the sale on December 30, 1999.
After paying off intercompany accounts with the joint ventures, we expect to
receive net cash of approximately $630 million. This cash will initially be
used to reduce short-term borrowings and for other general corporate purposes.
Revenues, operating income and net income from Dresser-Rand and Ingersoll-
Dresser Pump included in our results for the third quarter and first nine months
of 1999 and 1998 as follows:
Three Months Nine Months
Ended September 30 Ended September 30
-------------------- --------------------
Millions of dollars 1999 1998 1999 1998
------- -------- ------- --------
Revenues $ 215 $ 288 $ 792 $ 895
Operating income $ 4 $ 36 $ 47 $ 73
Net income $ 2 $ 13 $ 18 $ 28
161
<PAGE>
HALLIBURTON COMPANY
Quarterly Data and Market Price Information
(Unaudited)
(Millions of dollars except per share data)
<TABLE>
<CAPTION>
Quarter
-------------------------------------------
First Second Third Fourth Year
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1998 (1)
Revenues $4,254.8 $4,585.2 $4,224.0 $4,289.1 $17,353.1
Operating income (loss) 361.1 436.1 (577.5) 176.8 396.5
Net income (loss) (7), (8) 203.4 243.2 (527.0) 65.7 (14.7)
Earnings per share:
Basic net income (loss) per share (7), (8) 0.46 0.55 (1.20) 0.15 (0.03)
Diluted net income (loss) per share (7), (8) 0.46 0.55 (1.20) 0.15 (0.03)
Cash dividends paid per share (3) 0.125 0.125 0.125 0.125 0.50
Common stock prices (3), (4)
High 52.44 56.63 45.00 38.56 56.63
Low 42.38 42.06 26.25 26.19 26.19
1997 (1)
Revenues $3,602.0 $4,002.4 $4,177.0 $4,490.2 $16,271.6
Operating income (5), (6) 242.5 321.6 372.2 462.4 1,398.7
Net income (5), (6) 135.1 176.7 202.6 258.0 772.4
Earnings per share: (2)
Basic net income per share (5), (6) 0.32 0.41 0.47 0.59 1.79
Diluted net income per share (5), (6) 0.31 0.41 0.47 0.58 1.77
Cash dividends paid per share (3) 0.125 0.125 0.125 0.125 0.50
Common stock prices (2), (3), (4)
High 36.69 41.00 52.88 62.69 62.69
Low 30.00 32.06 42.00 47.25 30.00
</TABLE>
(1) Amounts for revenues, operating income, net income, and earnings per share
have been restated to reflect the merger with Dresser which was accounted
for using the pooling of interests method of accounting for business
combinations.
(2) Amounts presented reflect the two-for-one common stock split declared on
June 9, 1997, and effected in the form of a stock dividend paid on July 21,
1997.
(3) Represents Halliburton amounts prior to the merger with Dresser.
(4) New York Stock Exchange - composite transactions high and low closing stock
price.
(5) Includes pretax special charge $18.3 million ($14.9 million after tax or
$0.03 per diluted share) in the third quarter of 1997.
(6) Includes pretax special charge net gain of $2.1 million ($5.6 million after
tax and minority interest or $0.01 per diluted share) in the fourth quarter
of 1997.
(7) Includes pretax special charge of $945.1 million ($722.0 million after tax
or $1.64 per diluted share) in the third quarter of 1998.
(8) Includes pretax special charge of $35.0 million ($24.0 million after tax or
$0.05 per diluted share) million in the fourth quarter of 1998.
162
<PAGE>
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
31 MARCH 1997
DIRECTORS' REPORT FOR THE YEAR ENDED 31 MARCH 1997
The directors present their report and audited financial statements for the
year ended 31 March 1997.
PRINCIPAL ACTIVITY AND REVIEW OF THE BUSINESS
The principal activity of the company is that of a parent company. The
group has been heavily focused on product development and expect to start to see
the benefit of this investment in the coming year. Additional emphasis has been
placed on setting up and developing systems to equip the group for its continued
growth.
The results of the company's subsidiary undertakings are reflected in the
group profit and loss account. During the year the company acquired the whole of
the issued share capital of Well Equip Limited in order to strengthen the
group's market position (Note 24).
RESULT AND DIVIDEND
The group's loss for the year amounted to (Pounds)503,145 (1996 - profit
(Pounds)1,015,198) which will be transferred from reserves. The company's profit
for the year amounted to (Pounds)614,903 (1996 - profit (Pounds)301,813). A
dividend of (Pounds)45,000 has been paid during the year and no further dividend
is proposed and the balance has been transferred to reserves.
DIRECTORS AND THEIR INTERESTS
The directors who held office during the year were as follows:
L. W. Kinch
S. J. Littleford (Resigned 19 March 1997)
D. W. Whiteford
M. L. Bowyer
G. M. McLellan (Resigned 5 April 1997)
P. Kirton (Appointed 31 July 1996, Resigned 31 March 1997)
D. Rubbo (Appointed 21 August 1996)
C. Smith (Appointed 21 August 1996)
M. Fleming (Appointed 14 November 1996)
S. Owens (Appointed 21 April 1997)
J. Renfroe (Appointed 22 April 1997)
M. McCurley (Appointed 22 April 1997)
The interests of the directors, together with connected persons, at the
beginning and the end of the year in the issued share capital of the company was
as follows:
<TABLE>
<CAPTION>
ORDINARY SHARES OF (Pounds)1 EACH
-----------------------------------------------
31 MARCH 1997 31 MARCH 1996 UNDER OPTION
31 MARCH 1997
AND 31 MARCH 1996
<S> <C> <C> <C>
L. W. Kinch 35,379 35,379 --
S. J. Littleford 3,900 3,900 --
D. W. Whiteford 17,721 17,721 --
M. L. Bowyer 870 780 1,560
D. Rubbo 974 880 1,560
C. Smith 1,109 1,000 400
S. Owens -- -- 390
</TABLE>
163
<PAGE>
No share options were granted to or exercised by any director during the
year.
FIXED ASSETS
Details of movements in tangible fixed assets are shown in Note 11 of the
financial statements.
POST BALANCE SHEET EVENTS
During April 1997 the group was reorganized in order that all trading
subsidiary undertakings became 100% owned or call options were put in place such
that PES (International) Limited could exchange the minority shareholdings in
subsidiaries for its own shares at its discretion. Details are set out in Note
12.
On 22 April 1997, Halliburton Holdings Limited acquired 26% of the
company's ordinary share capital. As part of the transaction, 20,572 additional
shares were issued to Halliburton Holdings Limited for a consideration of
(Pounds)16.04 million. This resulted in a capital injection into the business
which significantly improved the financial strength of the Group.
On the same date the company granted 6,673 further share options and
sufficient funds were made available to the employee share option plan (ESOP) to
enable it to acquire shares to meet the obligations of all share options
outstanding. This allowed the company to further enhance the incentivization
programme for key members of staff.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and group and of the profit or loss of the group for that period. In
preparing those financial statements, the directors are required to:
. select suitable accounting policies and then apply them consistently;
. make judgements and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements;
. prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in
business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
AUDITORS
The auditors, Price Waterhouse, have indicated their willingness to
continue in office and a resolution concerning their reappointment will be
proposed at the Annual General Meeting.
By Order of the Board
Stronachs
SECRETARIES 11 August 1997
164
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
PES (INTERNATIONAL) LIMITED
We have audited the financial statements on pages 167 through 187 which
have been prepared under the historical cost convention and the accounting
policies set out on pages 171 and 172.
Respective responsibilities of directors and auditors
As described on page 163 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board, which are substantially similar to U.S. Generally
Accepted Auditing Standards. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of the group and company's affairs as at 31 March 1997 and of the loss and
cashflows of the group for the year then ended and have been properly prepared
in accordance with the Companies Act 1985.
PRICE WATERHOUSE
Chartered Accountants
and Registered Auditors 11 August 1997
Aberdeen, U.K.
165
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MARCH 1997
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
TURNOVER (Note 2)
Continuing operations 14,971,608 10,580,699
Acquisitions 1,017,000 --
---------- ----------
15,988,608 10,580,699
Cost of sales (8,541,187) (5,311,261)
---------- ----------
GROSS PROFIT
Continuing operations 6,927,421 5,269,438
Acquisitions 520,000 --
---------- ----------
7,447,421 5,269,438
Administrative expenses (7,389,948) (5,206,968)
Other operating income 229,189 897,225
Other income 121,483 --
---------- ----------
OPERATING PROFIT (Note 3) 408,145 959,695
Loss on partial disposal of subsidiary undertakings (Note 6) (153,978) --
Interest receivable and similar income 11,766 4,480
Income from interests in associated undertakings 20,002 11,477
Interest payable and similar charges (Note 5) (440,219) (225,458)
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (154,284) 750,194
Tax on (loss)/profit on ordinary activities (Note 7) (175,292) (300,140)
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAX (329,576) 450,054
Minority Interests - equity (173,569) 565,144
---------- ----------
(LOSS)/PROFIT FOR THE FINANCIAL YEAR (503,145) 1,015,198
Dividends (Note 9) (45,000) (45,516)
---------- ----------
AMOUNT TRANSFERRED (FROM)/TO RESERVES (Note 19) (548,145) 969,682
========== ==========
</TABLE>
The group had no recognized gains or losses other than those shown in the
profit and loss account above.
There is no difference between the profit on ordinary activities before
taxation and the amount transferred (from)/to reserves stated above, and their
historical cost equivalents.
No indication can be given of the contribution to operating profit from the
acquisition during the year. This is because the business and assets were
integrated into the group's operations and it is not now possible to identify
the separate contribution to operating profit of each part of the business.
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
166
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP BALANCE SHEET - 31 MARCH 1997
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets (Note 10) 2,470,337 900,372
Tangible assets (Note 11) 3,246,630 2,129,524
Investments (Note 12) 146,498 11,322
---------- ----------
5,863,465 3,041,218
CURRENT ASSETS
Stock (Note 13) 2,737,967 1,854,941
Debtors (Note 14) 6,412,388 4,861,780
Cash at bank and in hand (including cash
held by ESOP) 258,665 101,406
----------- ----------
CREDITORS - Amounts falling due
within one year (Note 15) 9,409,020 6,818,127
(10,122,582) (6,670,912)
----------- ----------
NET CURRENT (LIABILITIES)/ (713,562) 147,215
ASSETS --------- ----------
TOTAL ASSETS LESS CURRENT
LIABILITIES 5,149,903 3,188,433
CREDITORS - Amounts falling due after
more than one year (Note 16) (2,040,719) (1,071,067)
PROVISIONS FOR LIABILITIES AND
CHARGES (Note 17) (54,239) (73,947)
---------- ---------
3,054,945 2,043,419
========== ==========
CAPITAL AND RESERVES
Called up share capital (Note 18) 84,664 78,078
Share premium account (Note 19) 2,459,350 1,200,336
Capital redemption reserve (Note 19) 9,505 9,505
Profit and loss account (Note 19) (20,821) 569,214
Reserves arising on consolidation (Note 19) (927,461) (927,461)
Acquisition reserve (Note 19) 1,779,190 1,779,190
---------- ----------
TOTAL SHAREHOLDERS' FUNDS 3,384,427 2,708,862
Equity minority interests (329,482) (665,443)
---------- ----------
3,054,945 2,043,419
========== ==========
</TABLE>
The full amounts of shareholders' funds and minority interests are attributable
to equity interests.
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
167
<PAGE>
PES (INTERNATIONAL) LIMITED
COMPANY BALANCE SHEET - 31 MARCH 1997
<TABLE>
<CAPTION>
1997 1996
------------------------- -----------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
FIXED ASSETS
Investments (Note 12) 2,767,579 610,600
CURRENT ASSETS
Debtors (Note 14) 2,645,763 1,554,394
Cash (including cash held by ESOP) 820 --
---------- ---------
2,646,583 1,554,394
CREDITORS - Amounts falling due within one
year (Note 15) (1,719,429) (584,764)
----------- ---------
NET CURRENT ASSETS 927,154 969,630
--------- ---------
TOTAL ASSETS LESS CURRENT 3,694,733 1,580,230
LIABILITIES
CREDITORS - Amounts falling due after more (234,000) --
than one year (Note 16) --------- ---------
3,460,733 1,580,230
========= =========
CAPITAL AND RESERVES
Called up share capital (Note 18) 84,664 78,078
Share premium account (Note 19) 2,459,350 1,200,336
Capital redemption reserves (Note 19) 9,505 9,505
Profit and loss account (Note 19) 907,214 292,311
--------- ---------
TOTAL SHAREHOLDERS' FUNDS (Note 20) 3,460,733 1,580,230
========= =========
</TABLE>
The full amount of shareholders' funds is attributable to equity interests.
APPROVED BY THE BOARD
ON 11 AUGUST 1997
M L Bowyer
DIRECTOR
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
168
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 1997
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
NET CASH INFLOW/(OUTFLOW) FROM OPERATING 789,434 (767,853)
ACTIVITIES (Note 22)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 11,766 4,480
Interest paid (375,045) (181,436)
Interest element of finance lease rental and hire purchase payments (65,174) (44,022)
-------- --------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE (428,453) (220,978)
TAXATION (87,679) (482,749)
CAPITAL EXPENDITURE AND
FINANCIAL INVESTMENT
Purchase of tangible fixed assets (902,248) (493,172)
Receipts from sale of tangible fixed assets 594,638 167,841
Development expenditure capitalized -- (730,000)
Investment in ESOP (120,663) --
-------- --------
NET CASH OUTFLOW FOR CAPITAL
EXPENDITURE AND FINANCIAL INVESTMENT (428,273) (1,055,331)
ACQUISITIONS AND DISPOSALS
Acquisition of subsidiary (Note 24) (299,650) (109,023)
Net overdraft acquired with subsidiary (192,430) --
Investment in associated undertaking -- (5,417)
Partial disposal of subsidiaries 8,408 --
-------- --------
NET CASH OUTFLOW FROM
ACQUISITIONS AND DISPOSALS (483,672) (114,440)
EQUITY DIVIDENDS PAID (45,000) (45,516)
---------- ----------
NET CASH OUTFLOW BEFORE FINANCING (683,643) (2,686,867)
FINANCING
Loan from pension fund -- 385,333
Loan from directors (71,084) 248,503
Capital element of finance lease rental and hire purchase payments (554,169) (286,264)
Repayment of bank loans (50,792) --
-------- --------
NET CASH (OUTFLOW)/INFLOW FROM FINANCING (676,045) 347,572
---------- ----------
DECREASE IN CASH IN THE PERIOD (Note 25) (1,359,688) (2,339,295)
========== ==========
</TABLE>
169
<PAGE>
PES (INTERNATIONAL) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - 31 MARCH 1997
1 ACCOUNTING POLICIES
(1) Accounting convention
The financial statements have been prepared under the historical cost
convention and in accordance with applicable accounting standards.
(2) Consolidation
The financial statements consolidate the results of the company and its
subsidiary undertakings. The group eliminates goodwill arising on consolidation
from the consolidated financial statements on different acquisitions either
directly by immediate write off against reserves, or by capitalization and
amortization through the consolidated profit and loss account by equal annual
instalments over the estimated useful economic life of the consolidation
goodwill.
(3) Associated undertakings
The group's share of profits and tax of associated undertakings is included
in the consolidated profit & loss account, and the group's share of their net
assets is included in the consolidated balance sheet.
(4) Fixed assets and depreciation
All tangible fixed assets are stated at cost less depreciation.
Depreciation has been provided on the straight line basis at rates which
amortize fixed assets over their estimated useful lives. The depreciation rates
are as follows:
Plant and machinery 10% to 25%
Office equipment 25%
Motor vehicles 25%
Buildings 5%
Intangible assets are written off on a straight line basis over their
estimated useful lives. Details are given in Note 10 to the financial
statements.
(5) Deferred taxation
Provision is made for deferred taxation using the liability method where
there is a reasonable probability that a liability will arise in the foreseeable
future.
(6) Foreign currencies
Assets and liabilities denominated in foreign currencies are expressed in
sterling at the rate of exchange ruling at the balance sheet date. Exchange
gains and losses arising on trading transactions are dealt with through the
profit and loss account.
The profit and loss accounts of overseas subsidiary undertakings are
translated into sterling at an average exchange rate for the year. The balance
sheets are translated at the closing rate. Exchange differences arising on
these transactions are taken to reserves.
(7) Stocks
Stocks and work in progress are stated at the lower of cost and net
realizable value.
170
<PAGE>
(8) Finance leases and hire purchase agreements
Assets purchased under finance leases or hire purchase agreements are
capitalized in the balance sheet and are depreciated over their useful lives.
The interest element of the rental obligations is charged to the profit and loss
account over the period of the contract on a straight line basis.
(9) Operating leases
Expenditure on operating leases is charged to the profit and loss account
on a basis representative of the benefit derived from the asset, normally on a
straight line basis over the lease period.
(10) Pension costs
Contributions to the company's defined contribution pension scheme are
charged to the profit and loss account as incurred.
(11) Government grants
Government and local authority grants of a capital nature are credited to a
deferred income account in the balance sheet and an amount released to profit
and loss account each year over the life of the asset to which the grant
relates. Revenue grants are credited to the profit and loss account in the
period in which they are received.
(12) Research and development expenditure
Development expenditure relating to specific projects intended for
commercial exploitation is carried forward. Such expenditure is amortized over
the period expected to benefit. Expenditure on pure and applied research is
written off as incurred.
(13) Employee Share Ownership (ESOP) Plan
As recommended in UITF Abstract 13, the company's and group's accounts
include the employee share ownership plan. The plan holds shares for the
employee share option scheme and the directors consider that the company has
control of the shares held by the plan and bears the benefits and risks. Shares
held by the plan are shown as "own shares" within fixed asset investments. The
main features of the plan are detailed in Note 12 to the financial
statements.
2 TURNOVER
Turnover represents the total invoiced value of goods supplied and services
provided excluding value added tax.
The geographical analysis of the group's turnover, which is derived from
the supply of oil and gas well subsurface engineering, is as follows:
1997 1996
(Pounds) (Pounds)
United Kingdom 9,120,608 7,976,117
Norway 2,421,000 805,006
Other Europe 1,934,000 1,093,050
Africa 558,000 8,000
Middle East 390,000 130,964
Far East & Australia 999,000 187,000
North & South America 566,000 380,562
---------- ----------
15,988,608 10,580,699
========== ==========
171
<PAGE>
3 OPERATING PROFIT
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Operating profit is stated after charging/(crediting):
Depreciation on owned assets 668,766 418,499
Depreciation on assets held under finance lease and hire 319,205 216,162
purchase agreements
Amortization of goodwill and intangible assets 101,129 35,283
Auditors' remuneration:
audit fees 31,500 20,040
non audit fees 75,120 90,675
Hire of plant and equipment 93,943 38,458
Release of local authority grants (Note 17) (1,400) (1,400)
Grant income (229,189) (252,453)
Research and development grant -- (625,000)
Non recurring legal and professional fees 293,139 --
(Gain)/loss on disposal of fixed assets (165,236) 6,576
Other income - employee share ownership plan (Note 12) (121,483) --
======== ========
</TABLE>
Auditors' remuneration in respect of the company amounted to (Pounds)6,000
(1996 - (Pounds)5,000).
4 STAFF COSTS
(1)
1997 1996
(Pounds) (Pounds)
Wages and salaries 5,458,897 3,955,619
Social security costs 685,818 417,520
Other pensions costs (Note 27) 230,096 206,907
--------- ---------
6,374,811 4,580,046
========= =========
During the year (Pounds)Nil (1996 - (Pounds)1,000) was paid into an
employee share ownership plan and is included in wages and salaries above.
(2) The average number of employees of the group during the year was as
follows:
1997 1996
Number Number
Production 176 112
Distribution and marketing 27 25
Administration 18 17
--------- ---------
221 154
========= =========
172
<PAGE>
(3) Details of directors' emoluments are as follows:
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Aggregate emoluments 500,717 271,160
Group pension contributions to money purchase schemes 54,217 63,075
------- -------
554,934 334,235
Sums paid to third parties for directors'
services (Note 30) 15,200 9,600
======= =======
Highest paid director
Aggregate emoluments 94,563 87,151
======= =======
</TABLE>
In addition, pension contributions of (Pounds)17,500 were paid to money
purchase schemes on behalf of the highest paid director.
5 INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Bank overdraft and other bank borrowings 283,901 165,942
Directors' loans 91,144 15,494
Finance lease and hire purchase interest 65,174 44,022
------- -------
440,219 225,458
======= =======
</TABLE>
6 LOSS ON PARTIAL DISPOSAL OF SUBSIDIARY UNDERTAKINGS
During the year the group sold or gifted minority stakes in certain
subsidiary undertakings to local management. This resulted in a loss on
disposal. The group still holds a majority stake in all of the undertakings
concerned. Details of the partial disposals are as follows:
<TABLE>
<CAPTION>
Net assets
disposed Proceeds Loss on disposal
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
PES Norge A/S
13% gifted 1 April 1996 16,615 -- (16,615)
6% gifted 31 January 1997 33,495 -- (33,495)
PES de France
30% sold at 31 December 1996 112,276 8,408 (103,868)
--------
(153,978)
========
</TABLE>
Subsequent to the year end the group was reorganized as set out in Note 12.
173
<PAGE>
7 TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
1997 1996
The tax charge/(credit) for the year comprises the (Pounds) (Pounds)
following:
UK corporation tax at 33%
- current year (92,190) 314,628
- prior year 16,166 (172)
Overseas tax 275,737 19,603
Deferred tax at 33% (Note 17) (27,424) (34,522)
Overseas deferred tax (Note 17) (2,487) (2,151)
------- -------
169,802 297,386
Associated undertaking 5,490 2,754
------- -------
175,292 300,140
======= =======
8 PROFIT FOR THE FINANCIAL YEAR
As permitted by section 230 of the Companies Act 1985, the parent company's
profit and loss account has not been included in these financial statements. The
parent company's profit for the financial year was (Pounds)614,903 (1996 -profit
(Pounds)301,813).
9 DIVIDENDS
1997 1996
(Pounds) (Pounds)
Dividends on equity shares
'A' ordinary shares paid of (Pounds)384.22 per share 45,000 45,516
====== ======
10 INTANGIBLE FIXED ASSETS
The company has no intangible fixed assets. Details relating to the group
are as follows:
Goodwill
Development arising on Purchased
costs Patents consolidation goodwill Total
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
Cost
At 1 April
1997 730,000 167,095 -- 38,560 935,655
Exchange -- (26,858) -- (6,198) (33,056)
Additions -- -- 1,667,861 -- 1,667,861
Acquisitions -- 161,528 -- -- 161,528
(Note 24)
------- ------- --------- ------ ---------
At 31 March
1997 730,000 301,765 1,667,861 32,362 2,731,988
======= ======= ========= ====== =========
Amortization
At 1 April
1996 25,000 8,355 -- 1,928 35,283
Charge for
year 7,488 30,334 55,595 7,712 101,129
Acquisitions
(Note 24) -- 125,239 -- -- 125,239
------- ------- --------- ------ ---------
174
<PAGE>
<TABLE>
<CAPTION>
Goodwill
Development arising on Purchased
costs Patents consolidation goodwill Total
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
At 31 March
1997 32,488 163,928 55,595 9,640 261,651
======= ======= ========= ====== =========
Net book value
At 31 March
1997 697,512 137,837 1,612,266 22,722 2,470,337
======= ======= ========= ====== =========
At 31 March
1996 705,000 158,740 -- 36,632 900,372
======= ======= ========= ====== =========
</TABLE>
Development costs relate to a specific project undertaken by the group.
Sales of the product commenced at the end of 1995/96 and the related development
expenditure is being amortized over the estimated production and commercial life
of the product. The directors consider that the product is commercially viable
and that it will remain so over its estimated production life. Accordingly, they
are of the opinion that this provides sufficient justification to defer costs
and match them against future revenue.
Purchased goodwill arose on the acquisition of assets by a subsidiary
company, PES France SA. The goodwill in respect of this acquisition is being
amortized over five years.
Goodwill arising on consolidation represents the goodwill arising on the
acquisition of Well-Equip Limited (Note 24). The goodwill is being amortized
over a period of 20 years being the directors' estimate of the estimated useful
economic life.
Patents acquired during the year represent patent costs incurred to protect
intellectual property and were transferred to the group upon the acquisition of
Well-Equip Limited (Note 24). The costs are being written off over periods not
exceeding two years. Other patents are amortized over their estimated useful
life of eight years.
175
<PAGE>
11 TANGIBLE ASSETS
The company has no tangible fixed assets. Details relating to the group are
as follows:
<TABLE>
<CAPTION>
Long Assets in the
leasehold Office Plant and Motor course of
buildings equipment machinery vehicles construction Total
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C> <C>
Cost
At 1 April 1996 247,800 710,647 2,240,032 540,092 76,115 3,814,686
Exchange -- (2,396) (8,203) -- -- (10,599)
Additions 11,823 195,195 1,859,570 267,181 -- 2,333,769
Acquisitions
(Note 24) -- 157,038 569,244 36,565 -- 762,847
Disposals -- -- (752,855) (146,924) (76,115) (975,894)
------- --------- --------- -------- ------------- ---------
At 31 March 1997 259,623 1,060,484 3,907,788 696,914 -- 5,924,809
======= ========= ========= ======== ============= =========
Depreciation
At 1 April 1996 54,523 359,557 1,075,190 195,892 -- 1,685,162
Exchange -- (391) (2,712) -- -- (3,103)
Charge for the year 14,955 193,926 587,248 191,842 -- 987,971
Acquisitions (Note 24) -- 95,979 366,627 20,951 -- 483,557
Disposals -- -- (381,025) (94,383) -- (475,408)
------- --------- --------- -------- ------------- ---------
At 31 March 1997 69,478 649,071 1,645,328 314,302 -- 2,678,179
======= ========= ========= ======== ============= =========
Net book amount
At 31 March 1997 190,145 411,413 2,262,460 382,612 -- 3,246,630
======= ========= ========= ======== ============= =========
At 31 March 1996 193,277 351,090 1,164,842 344,200 76,115 2,129,524
======= ========= ========= ======== ============= =========
</TABLE>
The net book amount of plant and machinery includes (Pounds)1,781,901 (1996
- - (Pounds)860,887) in respect of assets held under finance and hire purchase
lease agreements.
12 INVESTMENTS
The Group The Company
(Pounds) (Pounds)
At 31 March 1997
Shares in subsidiary undertakings (1) -- 2,644,316
Associated undertaking (2) 25,835 2,600
Own shares in ESOP (3) 120,663 120,663
------- ---------
146,498 2,767,579
======= =========
176
<PAGE>
(1) Shares at cost in subsidiary undertakings
Company
(Pounds)
At 1 April 1996 605,183
Additions during the period 2,039,133
---------
At 31 March 1997 2,644,316
=========
(2) Investment in associated undertaking
Group Company
(Pounds) (Pounds)
At 1 April 1996 11,322 5,417
Share of profit of associated undertaking 14,513 --
Loan repaid during year -- (2,817)
--------- ---------
At 31 March 1997 25,835 2,600
========= =========
Associated Undertaking
----------------------
The group and the company hold a 26% interest in the ordinary shares of
Cairntoul Well Equipment Services Limited, a company registered in Scotland
which provides well equipment services.
(3) Own shares in ESOP
Group and
Company
(Pounds)
Own shares held by employee share ownership plan 120,663
=========
The ESOP is funded by payments from group companies and these funds are
used to acquire shares which have been conditionally granted to certain
employees under the share option scheme. Proceeds from the disposal of such
shares on exercising of the options will be charged to revenue as incurred by
the ESOP in future years.
At 31 March 1997, the ESOP held 1,107 shares acquired at market value over
various dates. At 31 March 1997, the shares remained subject to option at
(Pounds)109 per share. The investment in own shares has been recorded at this
amount representing estimated realizable value.
177
<PAGE>
The company's principal subsidiary undertakings at 31 March 1997 were as
follows:
<TABLE>
<CAPTION>
Percentage
of nominal
Country of share capital
Nature of registration/ and voting
Name of Business incorporation rights
----------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Petroleum Engineering Services Limited Oil Services Scotland 100%
PES (Netherlands) Limited Dormant Scotland 75%
PES (USA) Incorporated Oil Services USA 50%
PES Norge A/S Oil Services Norway 70%
PES Italia SRL Oil Services Italy 70%
Petroleum Engineering Services Asia Pty Limited Oil Services Australia 70%
PES de France Oil Services France 70%
PES France Oil Services France 70%
PES Trustees Limited Trustee Company Scotland 100%
PES Petroquip Limited Dormant Scotland 100%
PES Petroserv Limited Dormant Scotland 100%
PES Petrospec Limited Dormant Scotland 100%
PES Petrotorq Limited Dormant Scotland 100%
PES Petroturn Limited Dormant Scotland 76%
PES Petroseal Limited Dormant Scotland 100%
Well Equip Limited Dormant Scotland 100%
</TABLE>
PES (USA) Incorporated has been consolidated on the basis of dominant
influence.
Well Equip Limited was acquired on 31 July 1996 and its trade, assets and
liabilities were transferred to a fellow subsidiary, Petroleum Engineering
Services Limited on the same date. Full details are provided in Note 24.
A further investment of (Pounds)5,883 in PES de France was made during the
year which when combined with additional investment by the minority
shareholders, resulted in the company's investment in PES de France remaining at
70%.
Subsequent to the year end the group was reorganized. PES (USA)
Incorporated, PES Italia SRL, PES de France and PES France became 100%
subsidiaries. PES Norge A/S and Petroleum Engineering Services Asia Pty Limited
became fully under the control of PES (International) Limited because call
options were put in place over the minority shareholdings. All changes to
shareholdings were transacted by way of a share exchange for shares in the
parent company, PES (International) Limited.
13 STOCK
Group
------------------------
1997 1996
(Pounds) (Pounds)
Raw material 171,811 138,928
Work in progress 939,257 226,265
Finished goods 1,626,899 1,489,748
--------- ---------
2,737,967 1,854,941
========= =========
The company had no stock at either 31 March 1997 or 1996.
178
<PAGE>
14 DEBTORS
<TABLE>
<CAPTION>
1997 1996
---------------------- -----------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Trade debtors 6,194,620 -- 4,772,135 --
Amounts owed by subsidiary undertakings -- 1,994,015 -- 1,372,316
Amounts owed by associated undertakings -- -- 2,817 --
Other debtors 175,359 78 21,128 78
Prepayments and accrued income 42,409 -- 65,700 --
Dividend receivable -- 651,670 -- 182,000
--------- --------- --------- ---------
6,412,388 2,645,763 4,861,780 1,554,394
========= ========= ========= =========
</TABLE>
Amounts owed by subsidiary undertakings relate to a loan made to Petroleum
Engineering Services Limited on 24 March 1995. The loan is non interest bearing
and is repayable on demand.
15 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Bank overdraft (secured) 4,592,370 1,081,400 3,075,423 500,000
Bank loan (Note 16) 15,412 -- 15,412 --
Trade creditors 1,835,603 -- 1,065,320 --
Amounts owing to subsidiary undertakings -- 750 -- 14,713
Corporation tax 381,107 98,890 248,827 70,051
Other taxation and social security 671,586 -- 371,529 --
Accruals and deferred income 1,698,856 293,139 1,330,158 --
Finance lease and hire purchase obligations (Note 504,979 -- 315,740 --
21)
Loans from directors 177,419 -- 248,503 --
ACT payable 11,250 11,250 -- --
Loan notes (Note 16) 234,000 234,000 -- --
---------- --------- --------- --------
10,122,582 1,719,429 6,670,912 584,764
========== ========= ========= ========
</TABLE>
The bank overdraft is secured by a Bond and Floating Charge over the assets
of the group. The loans from the directors have no formal repayment terms,
however, the loans were repaid in full subsequent to the year end. Interest is
charged at 3% over base rates.
16 CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Finance lease and hire purchase obligations (Note 1,200,416 -- 413,972 --
21)
Loan from pension fund 490,000 -- 490,000 --
Bank loan 116,303 -- 167,095 --
Loan notes 234,000 234,000 -- --
--------- ------- --------- -------
2,040,719 234,000 1,071,067 --
========= ======= ========= =======
</TABLE>
179
<PAGE>
The loan from the pension fund is repayable after more than one year but
thereafter has no formal repayment terms. Interest is charged at 3% over base
rate.
The loan notes were issued on 31 July 1996 as partial consideration for the
Well-Equip acquisition (Note 24). The loan notes are charged interest at 2% over
base rates. The first tranche of (Pounds)234,000 is repayable on 31 July 1997
but was repaid early subsequent to the year end. The Second tranche of
(Pounds)234,000 is repayable on 6 April 1998.
The bank loan is repayable as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Less than one year 15,412 -- -- --
Between one and two years 16,358 -- 18,317 --
Between two and five years 55,347 -- 65,819 --
Five years or more 44,598 -- 82,959 --
------- ------- ------- -------
131,715 -- 167,095 --
======= ======= ======= =======
</TABLE>
17 PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
1997 1996
Group Group
(Pounds) (Pounds)
<S> <C> <C>
Deferred tax 34,639 52,947
Deferred income 19,600 21,000
------ ------
54,239 73,947
====== ======
Deferred tax
</TABLE>
The full potential liability for deferred tax calculated at a rate of 33%,
all of which has been provided, is as follows:
<TABLE>
<CAPTION>
1997 1996
Group Group
(Pounds) (Pounds)
<S> <C> <C>
Capital allowances 27,116 31,722
Other timing differences 7,523 21,225
------- -------
34,639 52,947
======= =======
Balance at 1 April 52,947 89,620
Acquisitions (Note 24) 11,603 --
Current year credit (Note 7) (29,911) (36,673)
------- -------
Balance at 31 March 34,639 52,947
======= =======
</TABLE>
180
<PAGE>
Deferred income
<TABLE>
<CAPTION>
1997 1996
Group Group
(Pounds) (Pounds)
<S> <C> <C>
Balance at 1 April 21,000 22,400
Release during year (Note 3) (1,400) (1,400)
------ ------
Balance at 31 March 19,600 21,000
====== ======
</TABLE>
18 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
Group and Company
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Authorized:
88,288 Ordinary Shares of (Pounds)1 each (1996 - 88,288) 88,288 88,288
11,712 'A' ordinary shares of (Pounds)1 each (1996 - 11,712) 11,712 11,712
------- -------
100,000 100,000
======= =======
Allotted called up and fully paid:
72,952 Ordinary Shares of (Pounds)1 each (1996 - 66,366) 72,952 66,366
11,712 'A' Ordinary Shares of (Pounds)1 each (1996 - 11,712) 11,712 11,712
------- -------
84,664 78,078
======= =======
</TABLE>
The 'A' ordinary shares have the following rights:
. A fixed cumulative preferential net cash dividend based on the
Relevant Percentage of (Pounds)128.0738 -the Relevant Percentage being
defined in the company's New Articles of Association.
. A further cumulative preferential net cash dividend which, when added
to the first dividend above, is a set percentage of Net Profit, the
percentage and Net Profit being defined in the New Articles of
Association.
. A final cumulative preferential net cash dividend which, when added to
the dividends described above, equals the aggregate of any Initial
Ordinary Dividend and Excess Remuneration, these terms being defined
in the New Articles of Association.
On a return of assets on liquidation, capital reduction or otherwise, the
assets of the company after payment of its liabilities shall be applied as
follows:
(1) To the holders of 'A' ordinary shares - (Pounds)128.0738 per share
plus any arrears or accruals of dividend.
(2) To the holders of the ordinary shares, (Pounds)128.0738 per share.
(3) Any remaining assets distributed pari passu to all shareholders.
Conversion rights
-----------------
The holders of the 'A' ordinary shares may at any time convert the whole of
their shares into ordinary shares on a one for one basis.
181
<PAGE>
Voting rights
-------------
Every issued share has one voting right.
On 31 July 1996 the company issued a further 6,586 ordinary shares as
partial consideration for the acquisition of Well-Equip Limited (Note 24).
On 22 April 1997 the company's issued share capital was increased to
126,654 ordinary shares of (Pounds)1 each with the 'A' ordinary shares being
converted into ordinary shares. This was done as a result of the group
reorganization and acquisition by Halliburton Holdings Limited of 26% of the
issued share capital.
6,745 options were granted in August 1995 to certain employees exercisable
in August 1998 at an exercise price of (Pounds)109 per share. 1,107 shares were
held in the ESOP at 31 March 1997 (Note 12). Subsequent to the year end as part
of the group reorganization, the exercise date was changed such that the options
could be exercised at any time. In addition, a further tranche of 6,673 options
were granted and sufficient funds were paid into the ESOP to meet all
outstanding share options.
19 RESERVES
Group
<TABLE>
<CAPTION>
Share Capital Profit Reserves
premium redemption and loss arising on acquisition
account reserve account consolidation reserve
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
At 1 April 1996 1,200,336 9,505 569,214 (927,461) 1,779,190
Amount transferred from reserves -- -- (548,145) -- --
Issue of new shares (Note 24) 1,259,014 -- -- -- --
Exchange movement -- -- (41,890) -- --
--------- ---------- ---------- ---------- ---------
At 31 March 1997 2,459,350 9,505 (20,821) (927,461) 1,779,190
========== ========== ========== ========== =========
</TABLE>
The balance on acquisition reserve represents the excess of fair value of
shares acquired in Petroleum Engineering Services Limited over the nominal value
of the consideration.
<TABLE>
<CAPTION>
Share Profit and Capital
premium profit and redemption
account loss account reserve
Company (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
At 1 April 1996 1,200,336 292,311 9,505
Amount transferred to reserves -- 614,903 --
Premium on share issue 1,259,014 -- --
--------- ------- -----
At 31 March 1997 2,459,350 907,214 9,505
========= ======= =====
</TABLE>
182
<PAGE>
20 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
(Loss) profit for the financial year (503,145) 659,903 1,015,198 347,329
Dividends (45,000) (45,000) (45,516) (45,516)
Share capital issued at par 6,586 6,586 -- --
Premium on share issue 1,259,014 1,259,014 -- --
Exchange movement (41,890) -- 7,032 --
--------- --------- --------- --------
Net addition to shareholders' funds 675,565 1,880,503 976,714 301,813
Opening shareholders' funds 2,708,862 1,580,230 1,732,148 1,278,417
--------- --------- --------- ---------
Closing shareholders' funds 3,384,427 3,460,733 2,708,862 1,580,230
========= ========= ========= =========
</TABLE>
21 FINANCE LEASE AND HIRE PURCHASE OBLIGATIONS
<TABLE>
<CAPTION>
1997 1996
Group Group
(Pounds) (Pounds)
<S> <C> <C>
Amounts payable within one year 661,402 338,433
In Second to fifth years inclusive 1,435,919 517,155
--------- --------
2,097,321 855,588
Finance charges allocated to future periods (391,926) (125,876)
--------- --------
1,705,395 729,712
========= ========
Falling due within one year (Note 15) 504,979 315,740
Falling due after more than one year (Note 16) 1,200,416 413,972
--------- --------
1,705,395 729,712
========= ========
</TABLE>
The amounts are secured over the assets to which they relate.
22 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Operating profit 408,145 959,695
(Gain) loss on disposal of fixed assets (94,152) 6,576
Depreciation 987,971 634,661
Amortization of intangible assets 101,129 35,283
Release of local authority grants (1,400) (1,400)
Increase in stock (595,154) (527,136)
Increase in debtors (862,481) (3,097,423)
Increase in creditors 846,709 1,214,859
Exchange movement (1,333) 7,032
-------- ----------
Net cash inflow/(outflow) from operating activities 789,434 (767,853)
======== ==========
</TABLE>
183
<PAGE>
23 ANALYSIS OF NET DEBT
(1) Reconciliation of net cash flow to movement in net debt
<TABLE>
<CAPTION>
(Pounds)
<S> <C>
Decrease in cash in the period (Note 25) (1,359,688)
Decrease in debt and lease financing 676,045
-------------
Change in net debt resulting from cash flows (683,643)
HP and finance leases acquired with subsidiary (98,331)
New HP and finance leases (1,431,521)
Loan notes issued to finance acquisition (468,000)
-------------
Movement in net debt in the period (2,681,495)
Net debt at 1 April 1996 (4,624,739)
-------------
Net debt at 31 March 1997 (7,306,234)
=============
</TABLE>
(2) Analysis of net debt
<TABLE>
<CAPTION>
Acquisition
(excluding Other At 31
At 1 April cash and non-cash March
1996 Cash flow overdrafts) changes 1997
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Cash in hand, at bank 101,406 157,259 258,665
Overdrafts (3,075,423) (1,516,947) (4,592,370)
Obligations under finance leases (729,712) 554,169 (98,331) (1,431,521) (1,705,395)
Debt due within one year (263,915) 71,084 (234,000) (426,831)
Debt due after one year (657,095) 50,792 (234,000) (840,303)
---------- ---------- -------- ---------- ----------
(4,624,739) (683,643) (566,331) (1,431,521) (7,306,234)
========== ========== ======== ========== ==========
</TABLE>
During the year the group entered into HP and finance lease arrangements in
respect of assets with a capital value at inception of the leases of
(Pounds)1,431,521. These arrangements are described above as "other non-cash
changes."
24 ACQUISITIONS
On 31 July 1996, the company acquired the whole of the issued share capital
of Well-Equip Limited for a total consideration of (Pounds)2,033,250. The
consideration was satisfied by the issue of 6,586 ordinary shares of (Pounds)1
each having a value of (Pounds)192.17, the issue of (Pounds)468,000 of loan
stock and the payment of (Pounds)266,400 in cash. (Pounds)300,000 was also
loaned by the company to enable (Pounds)300,000 of 8% redeemable preference
shares at par to be redeemed immediately prior to the acquisition. On the same
date the trade, assets and liabilities of Well-Equip Limited were transferred to
a fellow subsidiary company, Petroleum Engineering Services Limited.
184
<PAGE>
The assets and liabilities acquired are as follows:
<TABLE>
<CAPTION>
(Pounds)
<S> <C>
Fixed assets:
at cost 762,847
accumulated depreciation (483,557)
Intangible assets - patents at net book value 36,289
Cash 194
Bank overdraft (192,624)
Trade debtors 654,794
Other debtors 33,333
Stock and work in progress 287,872
Trade creditors (145,922)
Corporation tax (31,496)
Hire purchase and finance lease obligations (98,331)
Other creditors (146,407)
Due to PES (International) Limited (300,000)
Deferred taxation (11,603)
-----------
Net assets 365,389
Goodwill (Note 10) 1,667,861
-----------
Total consideration 2,033,250
===========
Satisfied by:
Shares allotted 1,265,600
Cash 266,400
Loan notes 468,000
Acquisition expenses 33,250
-----------
2,033,250
===========
</TABLE>
Goodwill arising on consolidation has been capitalized and is being written
off over a 20 year period being the directors' estimate of expected useful
life.
In calculating the goodwill arising on acquisition, the directors have
reviewed the book values of the net assets acquired and consider that they are a
close approximation to the fair values of the net assets. Accordingly, no
adjustment has been made to the book values.
In the period from 1 July 1996, the beginning of the subsidiary's financial
year, to the date of acquisition Well Equip Limited incurred a loss of
(Pounds)8,623 and in its previous financial year, it earned a profit of
(Pounds)11,996. Well Equip Limited had no other recognized gains and losses in
either period.
25 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS AS SHOWN IN BALANCE SHEET
<TABLE>
<CAPTION>
1997 1996 Change in
Period
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Cash at bank and in hand 258,665 101,406 157,259
Bank overdraft (4,592,370) (3,075,423) (1,516,947)
---------- ---------- ----------
(4,333,705) (2,974,017) (1,359,688)
========== ========== ==========
</TABLE>
185
<PAGE>
26 OPERATING LEASE COMMITMENTS
The group has commitments under operating leases to make payments in the
following year as set out below:
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Plant and machinery and motor vehicles:
Operating leases which expire:
Within 1 year 1,117 --
2-5 years 19,768 3,799
========= ========
</TABLE>
27 PENSION COMMITMENTS
The group operates a defined contribution pension scheme for the directors
and contributes to personal schemes on behalf of certain employees. The schemes
are administered independently of the company and are funded through policies of
assurance of annuity. The total pension cost which is charged against profit
represents contributions payable by the group and amounted to (Pounds)230,096
(1996 - (Pounds)206,907).
28 CAPITAL COMMITMENTS
At 31 March 1997, the group was committed to entering into a long term
lease for land and buildings at an annual rental of (Pounds)53,500 per annum.
The company was also committed to making a capital contribution toward the cost
of the building of (Pounds)102,000 which was paid subsequent to the year end.
29 CONTINGENT LIABILITIES
During the year an amount of (Pounds)11,471 has been credited to the profit
and loss account. This relates to grant income from Scottish Enterprise in
respect of a research and development project, the costs of which have been
expensed. In the event the project becomes commercially viable, the amounts will
become repayable by the company. Accordingly an amount of (Pounds)11,471 has
been accrued. In addition, the company will be liable to pay a 2.5% royalty on
all sales. As this future liability cannot be estimated with any degree of
precision, no provision has been made.
During 1994/95 a competitor company commenced a legal action against two
group companies and five individuals employed by PES (USA) Inc. The case is
ongoing and the directors, after taking legal advice, are confident that neither
company nor the individuals concerned will suffer any significant liability.
30 RELATED PARTY TRANSACTIONS
During the year the group incurred (Pounds)10,554 in respect of purchased
well services from Cairntoul Well Equipment Services Limited, its associated
undertaking. The balance with Cairntoul Well Equipment Services Limited at the
balance sheet date is set out in Note 14 to the financial statements.
In addition, (Pounds)15,200 was paid to Margens Business Consultancy
Limited in respect of services provided by G.M. McLellan as a director of the
company.
31 POST BALANCE SHEET EVENTS
Details of post balance sheet events are given in the directors'
report.
186
<PAGE>
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
31 MARCH 1998
DIRECTORS' REPORT FOR THE YEAR ENDED 31 MARCH 1998
The directors present their report and audited financial statements for the
year ended 31 March 1998.
PRINCIPAL ACTIVITY AND REVIEW OF THE BUSINESS
The principal activity of the company is that of a parent company. The
results of the company's subsidiary undertakings are reflected in the group
profit and loss account.
During April 1997 the group was reorganized in order that all trading
subsidiary undertakings became 100% owned or call options were put in place such
that PES (International) Limited could exchange the minority shareholdings in
subsidiaries for its own shares at its discretion. Details are set out in Notes
5 and 12.
On 22 April 1997, Halliburton Holdings Limited acquired 26% of the
company's ordinary share capital. As part of the transaction, 20,572 additional
shares were issued to Halliburton Holdings Limited for a consideration of
(Pounds)16.04 million. This resulted in a capital injection into the business
which significantly improved the financial strength of the Group.
On the same date the company granted 6,673 further share options and
sufficient funds were made available to the employee share option plan (ESOP) to
enable it to acquire shares to meet the obligations of all share options
outstanding. This allowed the company to further enhance the incentivization
programme for key members of staff.
As a result of the issue of share options through the above restructuring
exercise, in accordance with the applicable U.K. accounting requirements, the
value of the company's shares held by the ESOP was written down to the amount
receivable on exercise of the outstanding options at the specified exercise
prices. As a consequence, during the year the company charged to profit an
amount of (Pounds)1,659,472.
RESULT AND DIVIDEND
The group's loss for the year amounted to (Pounds)2,079,479 (1997 - loss
(Pounds)503,145) which will be transferred from reserves. The company's loss for
the year amounted to (Pounds)2,379,108 (1997 - profit (Pounds)614,903). A
dividend of (Pounds)4,521 has been paid during the year and no further dividend
is proposed and the balance has been transferred to reserves.
DIRECTORS AND THEIR INTERESTS
The directors who held office during the year were as follows:
L. W. Kinch
D. W. Whiteford
M. L. Bowyer
G. M. McLellan (Resigned 5 April 1997)
D. Rubbo (Appointed 21 August 1997)
C. Smith (Appointed 21 August 1997)
M. Fleming (Appointed 14 November 1997)
S. Owens (Appointed 21 April 1998)
J. Renfroe (Appointed 22 April 1998)
M. McCurley (Appointed 22 April 1998)
187
<PAGE>
The interests of the directors, together with connected persons, at the
beginning and the end of the year in the issued share capital of the company was
as follows:
Ordinary shares of (Pounds)0.10 each (1998 -(Pounds)1 each)
-----------------------------------------------------------
Under option Under option
31 March 31 March 31 March 31 March
1999 1998 1999 1998
L. W. Kinch 300,000 30,000 -- --
D. W. Whiteford 146,910 14,691 -- --
M. L. Bowyer 7,820 782 21,610 2,161
D. Rubbo 100,750 10,075 15,600 1,560
C. Smith 8,690 1,624 15,220 1,522
S. Owens 37,570 3,757 3,900 390
M. Fleming 2,500
During the year the company undertook a share split exercise, issuing 10
shares of (Pounds)0.10 each for every (Pound)1 share previously held. No share
options were exercised by any director during the year.
FIXED ASSETS
Details of movements in tangible fixed assets are shown in Note 11 of the
financial statements.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and group and of the profit or loss of the group for that period. In
preparing those financial statements, the directors are required to:
. select suitable accounting policies and then apply them consistently;
. make judgements and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements;
. prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
PES (INTERNATIONAL) LIMITED
188
<PAGE>
DIRECTORS' REPORT FOR THE YEAR ENDED 31 MARCH 1998 (CONTINUED)
AUDITORS
Our auditors, Price Waterhouse, have merged with Coopers & Lybrand on 1
July 1998 and accordingly Price Waterhouse have resigned as auditors. A
resolution to appoint the new firm, PricewaterhouseCoopers, as auditors to the
company will be proposed at the Annual General Meeting.
By Order of the Board
Stronachs
SECRETARIES 5 February 1999
189
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
PES (INTERNATIONAL) LIMITED
We have audited the financial statements on pages 192 through 209 which
have been prepared under the historical cost convention and the accounting
policies set out on pages 196 through 197.
Respective responsibilities of directors and auditors
As described on page 164, the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board, which are substantially similar to U.S. Generally
Accepted Auditing Standards. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of the group and company's affairs as at 31 March 1998 and of the loss and
cashflows of the group for the year then ended and have been properly prepared
in accordance with the Companies Act 1985.
PricewaterhouseCoopers
Chartered Accountants
and Registered Auditors
Aberdeen, U.K. 5 February 1999
190
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MARCH 1998
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
TURNOVER (Note 2)
Continuing operations 22,672,857 14,971,608
Acquisitions -- 1,017,000
-------------- -------------
22,672,857 15,988,608
Cost of sales (12,719,157) (8,541,187)
-------------- -------------
GROSS PROFIT
Continuing operations 9,953,700 6,927,421
Acquisitions -- 520,000
-------------- -------------
9,953,700 7,447,421
Administrative expenses (10,191,140) (7,389,948)
Other operating income 279,388 229,189
Other income -- 121,483
-------------- -------------
OPERATING PROFIT (Note 3) 41,948 408,145
Continuing operations:
- Fundamental group restructuring (Note 5) (1,659,472) --
Discontinued operations:
- Loss on partial disposal of subsidiary undertakings -- (153,978)
-------------- -------------
(LOSS)/PROFIT BEFORE INTEREST (1,617,524) 254,167
Interest receivable and similar income 172,482 11,766
Income from interests in associated undertakings 48,314 20,002
Interest payable and similar charges (Note 6) (309,719) (440,219)
-------------- -------------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (1,706,447) (154,284)
Tax on loss on ordinary activities (Note 7) (373,032) (175,292)
-------------- -------------
LOSS ON ORDINARY ACTIVITIES AFTER TAX (2,079,479) (329,576)
Minority Interests - equity -- (173,569)
-------------- -------------
LOSS FOR THE FINANCIAL YEAR (2,079,479) (503,145)
Dividends (Note 9) (4,521) (45,000)
-------------- -------------
AMOUNT TRANSFERRED FROM RESERVES (Note 19) (2,084,000) (548,145)
============== =============
</TABLE>
The group had no recognized gains or losses other than those shown in the
profit and loss account above.
There is no difference between the loss on ordinary activities before
taxation and the amount transferred from reserves stated above, and their
historical cost equivalents.
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
191
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP BALANCE SHEET - 31 MARCH 1998
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets (Note 10) 2,301,594 2,470,337
Tangible assets (Note 11) 5,098,931 3,246,630
Investments (Note 12) 3,431,950 146,498
------------ ------------
10,832,475 5,863,465
CURRENT ASSETS
Stock (Note 13) 6,549,627 2,737,967
Debtors (Note 14) 6,294,354 6,412,388
Cash at bank and in hand (including cash
held by ESOP) 1,131,984 258,665
------------ -------------
13,975,965 9,409,020
CREDITORS - Amounts falling due
within one year (Note 15) (5,592,339) (10,122,582)
------------ -------------
NET CURRENT ASSETS/
(LIABILITIES) 8,383,626 (713,562)
------------ ------------
TOTAL ASSETS LESS CURRENT
LIABILITIES 19,216,101 5,149,903
CREDITORS - Amounts falling due after
more than one year (Note 16) (1,471,406) (2,040,719)
PROVISIONS FOR LIABILITIES
AND CHARGES (Note 17) (851,831) (54,239)
------------ ------------
16,892,864 3,054,945
============ ============
CAPITAL AND RESERVES
Called up share capital (Note 18) 128,601 84,664
Share premium account (Note 19) 26,961,449 2,459,350
Capital redemption reserve (Note 19) 9,505 9,505
Profit and loss account (Note 19) (2,217,748) (20,821)
Reserves arising on consolidation (Note 19) (9,768,383) (927,461)
Acquisition reserve (Note 19) 1,779,190 1,779,190
------------ ------------
TOTAL SHAREHOLDERS' FUNDS
(Note 20) 16,892,614 3,384,427
Equity minority interests 250 (329,482)
------------ ------------
16,892,864 3,054,945
============ ============
</TABLE>
The full amounts of shareholders' funds and minority interests are attributable
to equity interests.
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
192
<PAGE>
PES (INTERNATIONAL) LIMITED
COMPANY BALANCE SHEET - 31 MARCH 1998
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
FIXED ASSETS
Investments (Note 12) 14,527,788 2,767,579
CURRENT ASSETS
Debtors (Note 14) 11,405,249 2,645,763
Cash (including cash held by ESOP) -- 820
------------- -------------
11,405,249 2,646,583
CREDITORS - Amounts falling due
within one
year (Note 15) (305,376) (1,719,429)
------------- -------------
NET CURRENT ASSETS 11,099,873 927,154
------------- ------------
TOTAL ASSETS LESS CURRENT 25,627,661 3,694,733
LIABILITIES
CREDITORS - Amounts falling due after
more than one year (Note 16) -- (234,000)
------------- ------------
25,627,661 3,460,733
============= ============
CAPITAL AND RESERVES
Called up share capital (Note 18) 128,601 84,664
Share premium account (Note 19) 26,961,449 2,459,350
Capital redemption reserves (Note 19) 9,505 9,505
Profit and loss account (Note 19) (1,471,894) 907,214
------------- ------------
TOTAL SHAREHOLDERS' FUNDS
(Note 20) 25,627,661 3,460,733
============= ============
</TABLE>
The full amount of shareholders' funds is attributable to equity interests.
APPROVED BY THE BOARD
ON 5 FEBRUARY 1999
M. L. Bowyer
DIRECTOR
193
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 1998
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
NET CASH (OUTFLOW)/INFLOW) FROM (2,000,571) 789,434
OPERATING ACTIVITIES (Note 22)
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 172,482 11,766
Interest paid (158,433) (375,045)
Interest element of finance lease
rental and hire purchase payments (151,286) (65,174)
------------ -----------
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF
FINANCE (137,237) (428,453)
TAXATION (522,992) (87,679)
CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT
Purchase of tangible fixed assets (2,607,684) (902,248)
Receipts from sale of tangible fixed assets 707,359 594,638
Investment in ESOP (4,908,491) (120,663)
------------ -----------
NET CASH OUTFLOW FOR CAPITAL
EXPENDITURE AND FINANCIAL
INVESTMENT (6,808,816) (428,273)
ACQUISITIONS AND DISPOSALS
Acquisition of subsidiary -- (299,650)
Net overdraft acquired with subsidiary -- (192,430)
Partial disposal of subsidiaries -- 8,408
------------ -----------
NET CASH OUTFLOW FROM -- (483,672)
ACQUISITIONS AND DISPOSALS
EQUITY DIVIDENDS PAID (4,521) (45,000)
------------ ------------
NET CASH OUTFLOW BEFORE FINANCING (9,474,137) (683,643)
FINANCING
Issue of new shares 16,037,846 --
Loan from directors (667,419) (71,084)
Capital element of finance lease rental and hire
purchase payments (753,009) (554,169)
Repayment of other loans (236,711) (50,792)
------------ -----------
NET CASH INFLOW/(OUTFLOW)
FROM FINANCING 14,380,707 (676,045)
------------ ------------
INCREASE/(DECREASE) IN CASH IN
THE PERIOD (Note 24) 4,906,570 (1,359,688)
============ ============
</TABLE>
194
<PAGE>
PES (INTERNATIONAL) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - 31 MARCH 1998
1 ACCOUNTING POLICIES
(1) Accounting convention
The financial statements have been prepared under the historical cost
convention and in accordance with applicable accounting standards.
(2) Consolidation
The financial statements consolidate the results of the company and its
subsidiary undertakings. The group eliminates goodwill arising on consolidation
from the consolidated financial statements on different acquisitions either
directly by immediate write off against reserves, or by capitalization and
amortization through the consolidated profit and loss account by equal annual
instalments over the estimated useful economic life of the consolidation
goodwill.
(3) Associated undertakings
The group's share of profits and tax of associated undertakings is included
in the consolidated profit & loss account, and the group's share of their net
assets is included in the consolidated balance sheet.
(4) Fixed assets and depreciation
All tangible fixed assets are stated at cost less depreciation.
Depreciation has been provided on the straight line basis at rates which
amortize fixed assets over their estimated useful lives. The depreciation rates
are as follows:
Plant and machinery 10% to 25%
Office equipment 25%
Motor vehicles 25%
Buildings 5%
Intangible assets are written off on a straight line basis over their estimated
useful lives. Details are given in Note 10 to the financial statements.
(5) Deferred taxation
Provision is made for deferred taxation using the liability method where
there is a reasonable probability that a liability will arise in the foreseeable
future.
(6) Foreign currencies
Assets and liabilities denominated in foreign currencies are expressed in
sterling at the rate of exchange ruling at the balance sheet date. Exchange
gains and losses arising on trading transactions are dealt with through the
profit and loss account.
The profit and loss accounts of overseas subsidiary undertakings are
translated into sterling at an average exchange rate for the year. The balance
sheets are translated at the closing rate. Exchange differences arising on these
transactions are taken to reserves.
195
<PAGE>
(7) Stocks
Stocks and work in progress are stated at the lower of cost and net
realizable value.
(8) Finance leases and hire purchase agreements
Assets purchased under finance leases or hire purchase agreements are
capitalized in the balance sheet and are depreciated over their useful lives.
The interest element of the rental obligations is charged to the profit and loss
account over the period of the contract on a straight line basis.
(9) Operating leases
Expenditure on operating leases is charged to the profit and loss account
on a basis representative of the benefit derived from the asset, normally on a
straight line basis over the lease period.
(10) Pension costs
Contributions to the company's defined contribution pension scheme are
charged to the profit and loss account as incurred.
(11) Government grants
Government and local authority grants of a capital nature are credited to a
deferred income account in the balance sheet and an amount released to profit
and loss account each year over the life of the asset to which the grant
relates. Revenue grants are credited to the profit and loss account in the
period in which they are received.
(12) Research and development expenditure
Development expenditure relating to specific projects intended for
commercial exploitation is carried forward. Such expenditure is amortized over
the period expected to benefit. Expenditure on pure and applied research is
written off as incurred.
(13) Employee Share Ownership Plan (ESOP)
As recommended in UITF Abstract 13, the company's and group's accounts
include the employee share ownership plan. The plan holds shares for the
employee share option scheme and the directors consider that the company has
control of the shares held by the plan and bears the benefits and risks. Shares
held by the plan are shown as "own shares" within fixed asset investments. The
main features of the plan are detailed in Note 12 to the financial
statements.
2 TURNOVER
Turnover represents the total invoiced value of goods supplied and services
provided excluding value added tax.
196
<PAGE>
The geographical analysis of the group's turnover, which is derived from
the supply of oil and gas well subsurface engineering, is as follows:
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
United Kingdom 10,374,413 9,120,608
Norway 4,394,148 2,421,000
Other Europe 3,780,459 1,934,000
Africa 330,000 558,000
Middle East 907,045 390,000
Far East & Australia 1,687,663 999,000
North & South America 1,199,129 566,000
------------ ------------
22,672,857 15,988,608
============ ============
</TABLE>
3 OPERATING PROFIT
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Operating profit is stated after charging/(crediting):
Depreciation on owned assets 834,358 668,766
Depreciation on assets held under finance lease and hire purchase
agreements 569,290 319,205
Amortization of goodwill and intangible assets 154,456 101,129
Auditors' remuneration:
audit fees 40,536 31,500
non audit fees 70,091 75,120
Hire of plant and equipment 146,781 93,943
Release of local authority grants (Note 17) (1,400) (1,400)
Grant income (279,388) (229,189)
Non recurring legal and professional fees 108,394 293,139
Gain on disposal of fixed assets (86,252) (165,236)
Other income - employee share ownership plan -- (121,483)
============ ============
</TABLE>
Auditors' remuneration in respect of the company amounted to (Pounds)6,000
(1997 - (Pounds)6,000).
4 STAFF COSTS
(1)
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Wages and salaries 8,920,653 5,458,897
Social security costs 1,047,919 685,818
Other pensions costs (Note 26) 306,643 230,096
------------ ------------
10,275,215 6,374,811
============ ============
</TABLE>
197
<PAGE>
(2) The average number of employees of the group during the year was as
follows:
<TABLE>
<CAPTION>
1998 1997
Number Number
<S> <C> <C>
Production 242 176
Distribution and marketing 38 27
Administration 35 18
--------- ---------
315 221
========= =========
</TABLE>
(3) Details of directors' emoluments are as follows:
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Aggregate emoluments 656,337 500,717
Group pension contributions to money purchase schemes 55,052 54,217
--------- ---------
711,389 554,934
========= =========
Sums paid to third parties for directors' services -- 15,200
========= =========
Highest paid director
Aggregate emoluments 106,146 94,563
========= =========
</TABLE>
In addition, pension contributions of (Pounds)17,500 were paid to money
purchase schemes on behalf of the highest paid director.
5 EXCEPTIONAL ITEM
During April 1997, the group underwent a fundamental restructuring exercise
under which the company bought out all minority interests in its subsidiary
undertakings and Halliburton Holdings Limited acquired a 26% interest in the
ordinary shares of the company.
As part of this restructuring exercise, a number of additional options over
the company's shares were issued by the company's Employee Share Ownership Plan
(ESOP). In accordance with the requirements of UITF Abstract 13, the value of
the company's shares held by the ESOP is shown on the company and group balance
sheets as part of "investments." As result of the issue of share options in
connection with the restructuring during the year, the carrying value of the
company's shares held by ESOP was written down by (Pounds)1,659,472 in
accordance with the requirements of UITF Abstract 13.
6 INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Bank overdraft and other bank borrowings 140,686 283,901
Directors' loans 2,900 91,144
Finance lease and hire purchase interest 151,286 65,174
Other interest 14,847 --
--------- ---------
309,719 440,219
========= =========
</TABLE>
198
<PAGE>
7 TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
The tax charge/(credit) for the year comprises the following: (Pounds) (Pounds)
<S> <C> <C>
UK corporation tax at 31% (1997 - 33%)
- current year -- (92,190)
- prior year (53,678) 16,166
Overseas tax 359,051 275,737
Deferred tax at 31% (1997 - 33%) (Note 17) 58,710 (27,424)
Overseas deferred tax (Note 17) (2,932) (2,487)
---------- ----------
361,151 169,802
Associated undertaking 11,881 5,490
---------- ----------
373,032 175,292
========== ==========
</TABLE>
8 PROFIT FOR THE FINANCIAL YEAR
As permitted by section 230 of the Companies Act 1985, the parent company's
profit and loss account has not been included in these financial statements.
The parent company's loss for the financial year was (Pounds)2,379,108 (1997 -
profit (Pounds)614,903).
9 DIVIDENDS
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Dividends on equity shares
`A' ordinary shares paid of (Pounds)384.22 per share 4,521 45,000
========== ==========
</TABLE>
10 INTANGIBLE FIXED ASSETS
The company has no intangible fixed assets. Details relating to the group
are as follows:
<TABLE>
<CAPTION>
Goodwill
Development arising on Purchased
costs Patents consolidation goodwill Total
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Cost
At 1 April 1997 730,000 301,765 1,667,861 32,362 2,731,988
Exchange -- (11,222) -- (3,065) (14,287)
Additions -- -- -- -- --
---------- --------- ------------- --------- -----------
At 31 March 1998 730,000 290,543 1,667,861 29,297 2,717,701
========== ========= ============= ========= ===========
Amortization
At 1 April 1997 32,488 163,928 55,595 9,640 261,651
Charge for year 27,947 35,404 83,393 7,712 154,456
---------- --------- ------------- --------- -----------
At 31 March 1998 60,435 199,332 138,988 17,352 416,107
========== ========= ============= ========= ===========
Net book value
At 31 March 1998 669,565 91,211 1,528,873 11,945 2,301,594
========== ========= ============= ========= ===========
At 31 March 1997 697,512 137,837 1,612,266 22,722 2,470,337
========== ========= ============= ========= ===========
</TABLE>
Development costs relate to a specific project undertaken by the group.
Sales of the product commenced at the end of 1995/96 and the related development
expenditure is being amortized over the estimated production and
199
<PAGE>
commercial life of the product. The directors consider that the product is
commercially viable and that it will remain so over its estimated production
life. Accordingly, they are of the opinion that this provides sufficient
justification to defer costs and match them against future revenue.
Purchased goodwill arose on the acquisition of assets by a subsidiary
company, PES France SA. The goodwill in respect of this acquisition is being
amortized over five years.
Goodwill arising on consolidation represents the goodwill arising on the
acquisition of Well-Equip Limited. The goodwill is being amortized over a period
of 20 years being the directors' estimate of the estimated useful economic
life.
Patent costs are amortized over their estimated useful life of two to eight
years.
11 TANGIBLE ASSETS
The company has no tangible fixed assets. Details relating to the group are
as follows:
<TABLE>
<CAPTION>
Long
leasehold Office Plant And Motor
buildings equipment machinery vehicles Total
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Cost
At 1 April 1997 259,623 1,060,484 3,907,788 696,914 5,924,809
Exchange -- (8,150) (31,123) -- (39,273)
Additions 264,075 449,091 3,040,676 148,823 3,902,665
Disposals (5,843) (18,032) (679,451) (453,077) (1,156,403)
---------- ----------- ----------- ---------- -------------
At 31 March 1998 517,855 1,483,393 6,237,890 392,660 8,631,798
========== =========== =========== ========== =============
Depreciation
At 1 April 1997 69,478 649,071 1,645,328 314,302 2,678,179
Exchange -- (2,351) (11,313) -- (13,664)
Charge for the year 23,645 231,580 1,011,659 136,764 1,403,648
Disposals (449) (4,708) (245,977) (284,162) (535,296)
---------- ----------- ----------- ---------- -------------
At 31 March 1998 92,674 873,592 2,399,697 166,904 3,532,867
========== =========== =========== ========== =============
Net book amount
At 31 March 1998 425,181 609,801 3,838,193 225,756 5,098,931
========== =========== =========== ========== =============
At 31 March 1997 190,145 411,413 2,262,460 382,612 3,246,630
========== =========== =========== ========== =============
</TABLE>
The net book amount of plant and machinery includes (Pounds)2,467,973
(1997 - (Pounds)1,781,901) in respect of assets held under finance and hire
purchase lease agreements.
200
<PAGE>
12 INVESTMENTS
<TABLE>
<CAPTION>
The
The Group Company
(Pounds) (Pounds)
<S> <C> <C>
At 31 March 1998
Shares in subsidiary undertakings (1) -- 11,155,506
Associated undertaking (2) 62,268 2,600
Own shares in ESOP (3) 3,369,682 3,369,682
------------ -------------
3,431,950 14,527,788
============ =============
</TABLE>
(1) Shares at cost in subsidiary undertakings
<TABLE>
<CAPTION>
Company
(Pounds)
<S> <C>
At 1 April 1997 2,644,316
Additions during the period 8,511,190
-------------
At 31 March 1998 11,155,506
=============
</TABLE>
(2) Investment in associated undertaking
<TABLE>
<CAPTION>
Group Company
(Pounds) (Pounds)
<S> <C> <C>
At 1 April 1997 25,835 2,600
Share of profit of associated undertaking 36,433 --
------------ -------------
At 31 March 1998 62,268 2,600
============ =============
</TABLE>
Associated Undertaking
----------------------
The group and the company hold a 26% interest in the ordinary shares of
Cairntoul Well Equipment Services Limited, a company registered in Scotland
which provides well equipment services.
(3) Own shares in ESOP
<TABLE>
<CAPTION>
Group and
Company
(Pounds)
<S> <C>
Own shares held by employee share ownership plan 3,369,682
=============
</TABLE>
Own shares held by the ESOP are stated at the lower of cost and the
exercise price of the various options outstanding over those shares at the
balance sheet date.
The ESOP is funded by payments from group companies and these funds are
used to acquire shares which have been conditionally granted to certain
employees under the share option scheme. Proceeds from the disposal of such
shares on exercising of the options will be charged to profit when distributed
by the ESOP in future years.
201
<PAGE>
12 INVESTMENTS (CONTINUED)
The company's principal subsidiary undertakings at 31 March 1998 were as
follows:
<TABLE>
<CAPTION>
Percentage
of nominal
Country of share capital
Nature registration/ and voting
Name of Business incorporation rights
------------------------------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Petroleum Engineering Services Limited Oil Services Scotland 100%
PES (Netherlands) Limited Dormant Scotland 75%
PES (USA) Incorporated Oil Services USA 100%
PES Norge A/S Oil Services Norway 100%
PES Italia SRL Oil Services Italy 100%
Petroleum Engineering Services Asia Pty Limited Oil Services Australia 100%
PES de France Oil Services France 100%
PES France Oil Services France 100%
PES Trustees Limited Trustee Scotland 100%
Company
PES Petroquip Limited Dormant Scotland 100%
PES Petroserv Limited Dormant Scotland 100%
PES Petrospec Limited Dormant Scotland 100%
PES Petrotorq Limited Dormant Scotland 100%
PES Petroturn Limited Dormant Scotland 76%
PES Petroseal Limited Dormant Scotland 100%
Well Equip Limited Dormant Scotland 100%
</TABLE>
Well Equip Limited was acquired on 31 July 1996 and its trade, assets and
liabilities were transferred to a fellow subsidiary, Petroleum Engineering
Services Limited on the same date.
In April 1997 the group was reorganized. PES (USA) Incorporated, PES Italia
SRL, PES de France and PES France became 100% subsidiaries. PES Norge A/S and
Petroleum Engineering Services Asia Pty Limited became fully under the control
of PES (International) Limited because call options were put in place over the
minority shareholdings. All changes to shareholdings were transacted by way of a
share exchange for shares in the parent company, PES (International) Limited.
13 STOCK
<TABLE>
<CAPTION>
Group
---------------------------
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Raw material 131,674 171,811
Work in progress 2,011,843 939,257
Finished goods 4,406,110 1,626,899
------------ ------------
6,549,627 2,737,967
============ ============
</TABLE>
The company had no stock at either 31 March 1998 or 1997.
202
<PAGE>
14 DEBTORS
<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Trade debtors 5,857,883 -- 6,194,620 --
Amounts owed by subsidiary undertakings -- 11,405,171 -- 1,994,015
Other debtors 274,287 78 175,359 78
Prepayments and accrued income 162,184 -- 42,409 --
Dividend receivable -- -- -- 651,670
--------- ---------- --------- ---------
6,294,354 11,405,249 6,412,388 2,645,763
========= ========== ========= =========
</TABLE>
Amounts owed by subsidiary undertakings relate to loans made to Petroleum
Engineering Services Limited. The loans are non interest bearing and are
repayable on demand.
15 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1998 1997
---------------------- -------------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Bank overdraft (secured) 559,119 -- 4,592,370 1,081,400
Bank loan (Note 16) 46,875 -- 15,412 --
Trade creditors 1,911,967 -- 1,835,603 --
Amounts owing to subsidiary undertakings -- -- -- 750
Corporation tax payable 174,738 10,136 381,107 98,890
Other taxation and social security 451,244 43,403 671,586 --
Accruals and deferred income 1,356,306 17,837 1,698,856 293,139
Finance lease and hire purchase obligations (Note 21) 858,090 -- 504,979 --
Loans from directors -- -- 177,419 --
ACT payable -- -- 11,250 11,250
Loan notes (Note 16) 234,000 234,000 234,000 234,000
---------- --------- ----------- ----------
5,592,339 305,376 10,122,582 1,719,429
========== ========= =========== ==========
</TABLE>
The bank overdraft is secured by a Bond and Floating Charge over the assets
of the group.
16 CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Finance lease and hire purchase obligations (Note
21) 1,389,277 -- 1,200,416 --
Loan from pension fund -- -- 490,000 --
Bank loan 82,129 -- 116,303 --
Loan notes -- -- 234,000 234,000
--------- ---------- ---------- ---------
1,471,406 -- 2,040,719 234,000
========== ========== ========== =========
</TABLE>
The loan notes were issued on 31 July 1996 as partial consideration for the
Well-Equip acquisition. The loan notes are charged interest at 2% over base
rates. The second tranche of (Pounds)234,000 was repaid on 6 April 1998.
203
<PAGE>
The bank loan is repayable as follows:
1998 1997
Group Company Group Company
------------------ ------------------
(Pounds) (Pounds) (Pounds) (Pounds)
Less than one year 46,875 -- 15,412 --
Between one and two years 33,043 -- 16,358 --
Between two and five years 49,086 -- 55,347 --
Five years or more -- -- 44,598 --
------- ------- ------- -------
129,004 -- 131,715 --
======= ======= ======= =======
17 PROVISIONS FOR LIABILITIES AND CHARGES
1998 1997
Group Group
(Pounds) (Pounds)
Deferred tax 90,417 34,639
Deferred income 761,414 19,600
------- -------
851,831 54,239
======= =======
Deferred tax
The full potential liability for deferred tax calculated at a rate of 31%
(1997 - 33%), all of which has been provided, is as follows:
1998 1997
Group Group
(Pounds) (Pounds)
Capital allowances 90,417 27,116
Other timing differences -- 7,523
------- -------
90,417 34,639
======= =======
Balance at 1 April 34,639 52,947
Acquisitions -- 11,603
Current year charge/(credit) 30,692 (29,911)
Prior year charge 25,086 --
------- -------
Balance at 31 March 90,417 34,639
======= =======
Deferred income
1998 1997
Group Group
(Pounds) (Pounds)
Balance at 1 April 19,600 21,000
Additions 743,214 --
Release during year (Note 3) (1,400) (1,400)
------- -------
Balance at 31 March 761,414 19,600
======= =======
204
<PAGE>
18 CALLED UP SHARE CAPITAL
Group and Company
1998 1997
(Pounds) (Pounds)
Authorized:
Ordinary Shares of (Pounds)1 each 150,000 88,288
'A' ordinary shares of (Pounds)1 each -- 11,712
------- -------
150,000 100,000
======= =======
Allotted called up and fully paid:
Ordinary Shares of (Pounds)1 each 126,654 72,952
'A' Ordinary Shares of (Pounds)1 each -- 11,712
------- -------
126,654 84,664
Called up share capital not paid:
Ordinary shares of (Pounds)1 each 1,947 --
------- -------
128,601 84,664
======= =======
On 22 April 1998 the company's issued share capital was increased to
126,654 ordinary shares of (Pounds)1 each with the 'A' ordinary shares being
converted into ordinary shares. This was done as a result of the group
reorganization and acquisition by Halliburton Holdings Limited of 26% of the
issued share capital.
Subsequent to the year end, on 27 October 1998, the company undertook a
share split exercise, issuing 10 shares of (Pounds)1 each for every share held.
19 RESERVES
Group
<TABLE>
<CAPTION>
Share Capital Profit Reserves
premium redemption and loss arising on Acquisition
account reserve account consolidation reserve
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
At 1 April 1997 2,459,350 9,505 (20,821) (927,461) 1,779,190
Amount transferred from reserves -- -- (2,084,000) -- --
Issue of new shares 24,502,099 -- -- -- --
Exchange movement -- -- (112,927) -- --
Goodwill written off -- -- -- (8,840,922) --
---------- ---------- ---------- ------------- -----------
At 31 March 1998 26,961,449 9,505 (2,217,748) (9,768,383) 1,779,190
========== ========== ========== ============= ===========
</TABLE>
During April 1997 the group was restructured in order that all trading
subsidiary undertakings became 100% owned. As part of this restructuring shares
in the company were issued to minority shareholders in subsidiary undertakings
which resulted in the write off of goodwill on consolidation of approximately
(Pounds)8.8 million and the creation of additional share premium of
approximately (Pounds)8.5 million.
Also in April 1997, Halliburton Holdings Limited acquired 26% of the
company's ordinary share capital. As part of this transaction, 20,572 additional
ordinary shares were issued to Halliburton Holdings Limited for a consideration
of (Pounds)16.04 million, creating additional share premium of approximately
(Pounds)16.0 million.
The balance on acquisition reserve represents the excess of fair value of
shares acquired in Petroleum Engineering Services Limited over the nominal value
of the consideration.
205
<PAGE>
Company
Share Profit and Capital
premium Loss redemption
account account reserve
(Pounds) (Pounds) (Pounds)
At 1 April 1997 2,459,350 907,214 9,505
Amount transferred to reserves -- (2,379,108) --
Premium on share issue 24,502,099 -- --
---------- ---------- ---------
At 31 March 1998 26,961,449 (1,471,894) 9,505
========== ========== =========
20 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1998 1997
----------------------- ---------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
(Loss)/profit for the financial year (2,079,479) (2,374,587) (503,145) 659,903
Dividends (4,521) (4,521) (45,000) (45,000)
Share capital issued at par 43,937 43,937 6,586 6,586
Premium on share issue 24,502,099 24,502,099 1,259,014 1,259,014
Exchange movement (112,927) -- (41,890) --
Goodwill written off (8,840,922) -- -- --
---------- ---------- --------- ---------
Net addition to shareholders' funds 13,508,187 22,166,928 675,565 1,880,503
Opening shareholders' funds 3,384,427 3,460,733 2,708,862 1,580,230
---------- ---------- --------- ---------
Closing shareholders' funds 16,892,614 25,627,661 3,384,427 3,460,733
========== ========== ========= =========
</TABLE>
21 FINANCE LEASE AND HIRE PURCHASE OBLIGATIONS
1998 1997
Group Group
(Pounds) (Pounds)
Amounts payable within one year 962,236 661,402
In second to fifth years inclusive 1,706,577 1,435,919
--------- ---------
2,668,813 2,097,321
Finance charges allocated to future periods (421,446) (391,926)
--------- ---------
2,247,367 1,705,395
========= =========
Falling due within one year (Note 15) 858,090 504,979
Falling due after more than one year (Note 16) 1,389,277 1,200,416
--------- ---------
2,247,367 1,705,395
========= =========
The amounts are secured over the assets to which they relate.
206
<PAGE>
22 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
1998 1997
(Pounds) (Pounds)
Operating profit 41,948 408,145
Gain on disposal of fixed assets (86,252) (94,152)
Depreciation 1,403,648 987,971
Amortization of intangible assets 154,456 101,129
Receipt of local authority grants 743,213 --
Release of local authority grants (1,400) (1,400)
Increase in stock (3,811,660) (595,154)
Decrease/(increase) in debtors 118,034 (862,481)
(Decrease)/increase in creditors (489,527) 846,709
Exchange movement (73,031) (1,333)
---------- ----------
Net cash (outflow)/inflow from operating
activities (2,000,571) 789,434
========== ==========
23 ANALYSIS OF NET DEBT
(1) Reconciliation of net cash flow to movement in net debt
(Pounds)
Increase in cash in the period (Note 24) 4,906,570
Decrease in debt and lease financing 1,657,139
----------
Change in net debt resulting from cash flows 6,563,709
New HP and finance leases (1,294,981)
----------
Movement in net debt in the period 5,268,728
Net debt at 1 April 1997 (7,306,234)
----------
Net debt at 31 March 1998 (2,037,506)
==========
(2) Analysis of net debt
<TABLE>
<CAPTION>
Other At 31
At 1 April Cash non-cash March
1997 flow changes 1998
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Cash in hand, at bank 258,665 873,319 -- 1,131,984
Overdrafts (4,592,370) 4,033,251 -- (559,119)
Obligations under finance leases (1,705,395) 753,009 (1,294,981) (2,247,367)
Debt due within one year (426,831) 145,956 -- (280,875)
Debt due after one year (840,303) 758,174 -- (82,129)
---------- --------- ---------- ----------
(7,306,234) 6,563,709 (1,294,981) (2,037,506)
========== ========= ========== ==========
</TABLE>
During the year the group entered into HP and finance lease arrangements in
respect of assets with a capital value at inception of the leases of
(Pounds)1,294,981. These arrangements are described above as "other non-cash
changes."
207
<PAGE>
24 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS AS SHOWN IN BALANCE SHEET
Change in
1998 1997 period
(Pounds) (Pounds) (Pounds)
Cash at bank and in hand 1,131,984 258,665 873,319
Bank overdraft (559,119) (4,592,370) 4,033,251
--------- ---------- ---------
572,865 (4,333,705) 4,906,570
========= ========== =========
25 OPERATING LEASE COMMITMENTS
The group has commitments under operating leases to make payments in the
following year as set out below:
1998 1997
(Pounds) (Pounds)
Plant and machinery and motor vehicles:
Operating leases which expire:
Within 1 year 6,050 1,117
2-5 years 59,804 19,768
========== =========
26 PENSION COMMITMENTS
The group operates a defined contribution pension scheme for the directors
and contributes to personal schemes on behalf of certain employees. The schemes
are administered independently of the company and are funded through policies of
assurance of annuity. The total pension cost which is charged against profit
represents contributions payable by the group and amounted to (Pounds)306,643
(1997 - (Pounds)230,096).
27 CONTINGENT LIABILITIES
During the year an amount of (Pounds)11,471 has been credited to the profit
and loss account. This relates to grant income from Scottish Enterprise in
respect of a research and development project, the costs of which have been
expensed. In the event the project becomes commercially viable, the amounts will
become repayable by the company. Accordingly an amount of (Pounds)11,471 has
been accrued. In addition, the company will be liable to pay a 2.5% royalty on
all sales. As this future liability cannot be estimated with any degree of
precision, no provision has been made.
28 RELATED PARTY TRANSACTIONS
During the year the group incurred (Pounds)10,542 in respect of purchased
well services from Cairntoul Well Equipment Services Limited, its associated
undertaking.
29 POST BALANCE SHEET EVENTS
Details of post balance sheet events are given in the directors'
report.
208
<PAGE>
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND FINANCIAL STATEMENTS
31 MARCH 1999
DIRECTORS' REPORT FOR THE YEAR ENDED 31 MARCH 1999
The directors present their report and audited financial statements for the
year ended 31 March 1999.
PRINCIPAL ACTIVITY AND REVIEW OF THE BUSINESS
The principal activity of the company is that of a parent company. The
results of the company's subsidiary undertakings are reflected in the group
profit and loss account.
RESULT AND DIVIDEND
The group's profit for the year amounted to (Pounds)772,186 (1998 - loss
(Pounds)2,079,479) which will be transferred from reserves. The company's profit
for the year amounted to (Pounds)271,954 (1998 - loss (Pounds)2,379,108). No
dividend has been paid during the year (1998 (Pounds)4,521), no dividend is
proposed and the balance has been transferred to reserves.
DIRECTORS AND THEIR INTERESTS
The directors who held office during the year were as follows:
L W Kinch
D W Whiteford
M L Bowyer
R Rubbo
C Smith
M Fleming
S Owens (Appointed 21 April 1997)
J Renfroe (Appointed 22 April 1997)
M McCurley (Appointed 22 April 1997)
The interests of the directors, together with connected persons, at the
beginning and the end of the year in the issued share capital of the company was
as follows:
<TABLE>
<CAPTION>
Ordinary shares of (Pounds)0.10 each (1998 - (Pounds)1 each
-----------------------------------------------------------
Under Under
Option Option
31 March 31 March 31 March 31 March
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
L W Kinch 300,000 30,000 -- --
D W Whiteford 146,910 14,691 -- --
M L Bowyer 7,820 782 21,610 2,161
R Rubbo 100,750 10,075 15,600 1,560
C Smith 8,690 1,624 15,220 1,522
S Owens 37,570 3,757 3,900 390
M Fleming -- -- 2,500 --
======= ======= ======= =======
</TABLE>
During the year the company undertook a share split exercise, issuing 10
shares of (Pounds)0.10 each for every (Pounds)1 share previously held. No share
options were exercised by any director during the year.
FIXED ASSETS
Details of movements in tangible fixed assets are shown in Note 11 of the
financial statements.
209
<PAGE>
YEAR 2000 COMPLIANCE
As is well known, many computer and digital storage systems express dates
using only the last two digits of the year and will thus require modification or
replacement to accommodate the year 2000 and beyond in order to avoid
malfunctions and resulting widespread commercial disruption. This is a complex
and pervasive issue. The operation of the business depends not only on computer
systems, but also to some degree on those of suppliers and customers. This could
expose the company to further risk in the event that there is a failure by
external parties to remedy their year 2000 issues.
A significant risk analysis has been performed to determine the impact of
the issue on all activities. From this, prioritised action plans have been
developed which are designed to address the key risks in advance of critical
dates and without disruption to the underlying business activities. Priority is
given to those systems which could cause a significant financial or legal impact
on the company business if they were to fail. The plan also includes a
requirement for the testing of systems changes, involving the participation of
users. The risk analysis also considers the impact of year 2000 related failures
by significant suppliers and customers. In appropriate cases formal
communication has been initiated with these other parties.
Given the complexity of the problem, it is not possible for any
organization to guarantee that no year 2000 problems will remain, because at
least some level of failure may still occur. However, the directors believe that
it will achieve an acceptable state of readiness and have also provided
resources to deal promptly with significant subsequent failures or issues that
might arise.
Much of the cost of implementing the action plans will be subsumed into the
recurring activities of the departments involved. The total cost of
modifications to computer hardware and software has been included in
administrative expenses.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and group and of the profit or loss of the group for that period. In
preparing those financial statements, the directors are required to:
. select suitable accounting policies and then apply them consistently;
. make judgements and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements;
. prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
AUDITORS
A resolution to reappoint PricewaterhouseCoopers as auditors to the company
will be proposed at the Annual General Meeting.
By Order of the Board
Stronachs
SECRETARIES 30 September 1999
210
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
PES (INTERNATIONAL) LIMITED
We have audited the financial statements on pages 213 through 231 which
have been prepared under the historical cost convention and the accounting
policies set out on pages 217 through 218.
Respective responsibilities of directors and auditors
The directors are responsible for preparing the Directors' Report,
including as described on page __ the financial statements. Our
responsibilities, as independent auditors, are established by statute, the
Auditing Practices Board and our profession's ethical guidance.
We report to you our opinion as to whether the financial statements give a
true and fair view and are properly prepared in accordance with the Companies
Act. We also report to you if, in our opinion, the directors' report is not
consistent with the financial statements, if the company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if information specified by law regarding
directors' remuneration and transactions is not disclosed.
We read the other information contained in the Directors' Report and
consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial statements.
Basis of audit opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of affairs of the company and the group at 31 March 1999 and of the profit
and cash flows of the group for the year then ended and have been properly
prepared in accordance with the Companies Act 1985.
PricewaterhouseCoopers
Chartered Accountants
and Registered Auditors 30 September 1999
211
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MARCH 1999
1999 1998
(Pounds) (Pounds)
----------- -----------
TURNOVER - Continuing operations (Note 2) 29,599,581 22,672,857
Cost of sales (17,532,853) (12,719,157)
----------- -----------
GROSS PROFIT - Continuing operations 12,066,728 9,953,700
Administrative expenses (10,733,562) (10,191,140)
Other operating income 224,604 279,388
----------- -----------
OPERATING PROFIT - Continuing operations (Note 3) 1,557,770 41,948
- Fundamental group restructuring (Note 5) -- (1,659,472)
----------- -----------
PROFIT/(LOSS) BEFORE INTEREST 1,557,770 (1,617,524)
Interest receivable and similar income 43,838 172,482
Income from interests in associated undertakings -- 48,314
Interest payable and similar charges (Note 6) (336,953) (309,719)
----------- -----------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE
TAXATION 1,264,655 (1,706,447)
Tax on profit/(loss) on ordinary activities (Note 7) (492,469) (373,032)
----------- -----------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES AFTER TAX 772,186 (2,079,479)
Dividends (Note 9) -- (4,521)
----------- -----------
AMOUNT TRANSFERRED TO/(FROM) RESERVES (Note 19) 772,186 (2,084,000)
=========== ===========
The group had no recognised gains or losses other than those shown in the
profit and loss account above.
There is no difference between the loss on ordinary activities before
taxation and the amount transferred from reserves stated above, and their
historical cost equivalents.
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
212
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP BALANCE SHEET - 31 MARCH 1999
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets (Note 10) 2,000,833 2,301,594
Tangible assets (Note 11) 7,453,590 5,098,931
Investments (Note 12) 3,369,682 3,431,950
---------- ----------
12,824,105 10,832,475
CURRENT ASSETS
Stock (Note 13) 8,091,941 6,549,627
Debtors (Note 14) 7,128,503 6,294,354
Cash at bank and in hand
(including cash held by ESOP) 1,260,339 1,131,984
---------- ----------
16,480,783 13,975,965
CREDITORS - Amounts falling due
within one year (Note 15) (9,791,251) (5,592,339)
---------- ----------
NET CURRENT ASSETS 6,689,532 8,383,626
---------- ----------
TOTAL ASSETS LESS CURRENT
LIABILITIES 19,513,637 19,216,101
CREDITORS - Amounts falling due
after more than one year (Note 16) (1,451,891) (1,471,406)
PROVISIONS FOR LIABILITIES
AND CHARGES (Note 17) (422,415) (851,831)
---------- ----------
17,639,331 16,892,864
========== ==========
CAPITAL AND RESERVES
Called up share capital (Note 18) 128,601 128,601
Share premium account (Note 19) 26,961,449 26,961,449
Capital redemption reserve (Note 19) 9,505 9,505
Profit and loss account (Note 19) (1,471,281) (2,217,748)
Reserves arising on consolidation (Note 19) (9,768,383) (9,768,383)
Acquisition reserve (Note 19) 1,779,190 1,779,190
---------- ----------
TOTAL SHAREHOLDERS' FUNDS
(Note 20) 17,639,081 16,892,614
Equity minority interests 250 250
---------- ----------
17,639,331 16,892,864
========== ==========
</TABLE>
The full amounts of shareholders' funds and minority interests are
attributable to equity interests.
(These statements were prepared in accordance with generally accepted accounting
principles of the United Kingdom. Please see pages 86 through 88 of the S-4 for
reconciliation between generally accepted accounting principles of the United
Kingdom and United States for these statements.)
213
<PAGE>
PES (INTERNATIONAL) LIMITED
COMPANY BALANCE SHEET - 31 MARCH 1999
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
FIXED ASSETS
Investments (Note 12) 14,525,188 14,527,788
CURRENT ASSETS
Debtors (Note 14) 11,438,914 11,405,249
----------
11,438,914 11,405,249
CREDITORS - Amounts falling due
within one year (Note 15) (64,487) (305,376)
---------- ----------
NET CURRENT ASSETS 11,374,427 11,099,873
---------- ----------
TOTAL ASSETS LESS CURRENT
LIABILITIES 25,899,615 25,627,661
========== ==========
CAPITAL AND RESERVES
Called up share capital (Note 18) 128,601 128,601
Share premium account (Note 19) 26,961,449 26,961,449
Capital redemption reserves (Note 19) 9,505 9,505
Profit and loss account (Note 19) (1,199,940) (1,471,894)
---------- ----------
TOTAL SHAREHOLDERS' FUNDS
(Note 20) 25,899,615 25,627,661
========== ==========
</TABLE>
The full amount of shareholders' funds is attributable to equity interests.
APPROVED BY THE BOARD
ON 30 SEPTEMBER 1999
M. L. Bowyer
DIRECTOR
214
<PAGE>
PES (INTERNATIONAL) LIMITED
GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 1999
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
NET CASH INFLOW/(OUTFLOW) FROM 1,130,232 (2,000,571)
OPERATING ACTIVITIES (Note 22)
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 43,838 172,482
Interest paid (213,154) (158,433)
Interest element of finance lease
rental and hire purchase payments (123,799) (151,286)
--------- ----------
NET CASH OUTFLOW FROM RETURNS
ON INVESTMENTS AND SERVICING OF
FINANCE (293,115) (137,237)
TAXATION (291,470) (522,992)
CAPITAL EXPENDITURE AND
FINANCIAL INVESTMENT
Purchase of fixed assets (3,520,397) (2,607,684)
Receipts from sale of tangible 581,550 707,359
fixed assets
Receipts from sale of intangible assets 202,588
Investment in ESOP -- (4,908,491)
---------- ----------
NET CASH OUTFLOW FOR CAPITAL
EXPENDITURE AND FINANCIAL
INVESTMENT (2,736,259) (6,808,816)
ACQUISITIONS AND DISPOSALS
Sale of investment in associated undertaking 140,000 --
---------- ----------
NET CASH INFLOW FROM
ACQUISITIONS AND DISPOSALS 140,000 --
EQUITY DIVIDENDS PAID -- (4,521)
---------- ----------
NET CASH OUTFLOW BEFORE
FINANCING (2,050,612) (9,474,137)
FINANCING
Issue of new shares -- 16,037,846
Loan from directors -- (667,419)
Capital element of finance lease
rental and hire purchase payments (961,607) (753,009)
New bank loans 832,552 --
Repayment of other loans (234,000) (236,711)
---------- ----------
NET CASH (OUTFLOW)/INFLOW FROM
FINANCING (363,055) 14,380,707
---------- ----------
(DECREASE)/INCREASE IN CASH IN THE
PERIOD (Note 24) (2,413,667) 4,906,570
========== ==========
</TABLE>
215
<PAGE>
PES (INTERNATIONAL) LIMITED
NOTES TO THE FINANCIAL STATEMENTS - 31 MARCH 1999
1 ACCOUNTING POLICIES
(1) Accounting convention
The financial statements have been prepared under the historical cost
convention and in accordance with applicable accounting standards.
(2) Consolidation
The financial statements consolidate the results of the company and its
subsidiary undertakings. The group eliminates goodwill arising on
consolidation from the consolidated financial statements on different
acquisitions either directly by immediate write off against reserves, or by
capitalisation and amortisation through the consolidated profit and loss
account by equal annual instalments over the estimated useful economic life of
the consolidation goodwill.
(3) Associated undertakings
The group's share of profits and tax of associated undertakings is
included in the consolidated profit & loss account, and the group's share of
their net assets is included in the consolidated balance sheet.
(4) Fixed assets and depreciation
All tangible fixed assets are stated at cost less depreciation.
Depreciation has been provided on the straight line basis at rates which
amortise fixed assets over their estimated useful lives. The depreciation
rates are as follows:
Plant and machinery 10% to 25%
Office equipment 25%
Motor vehicles 25%
Buildings 5%
Intangible assets are written off on a straight line basis over their
estimated useful lives. Details are given in Note 10 to the financial
statements.
(5) Deferred taxation
Provision is made for deferred taxation using the liability method where
there is a reasonable probability that a liability will arise in the
foreseeable future.
(6) Foreign currencies
Assets and liabilities denominated in foreign currencies are expressed in
sterling at the rate of exchange ruling at the balance sheet date. Exchange
gains and losses arising on trading transactions are dealt with through the
profit and loss account.
The profit and loss accounts of overseas subsidiary undertakings are
translated into sterling at an average exchange rate for the year. The balance
sheets are translated at the closing rate. Exchange differences arising on
these transactions are taken to reserves.
216
<PAGE>
(7) Stocks
Stocks and work in progress are stated at the lower of cost and net
realisable value.
(8) Finance leases and hire purchase agreements
Assets purchased under finance leases or hire purchase agreements are
capitalised in the balance sheet and are depreciated over their useful lives.
The interest element of the rental obligations is charged to the profit and
loss account over the period of the contract on a straight line basis.
(9) Operating leases
Expenditure on operating leases is charged to the profit and loss account
on a basis representative of the benefit derived from the asset, normally on a
straight line basis over the lease period.
(10) Pension costs
Contributions to the company's defined contribution pension scheme are
charged to the profit and loss account as incurred.
(11) Government grants
Government and local authority grants of a capital nature are credited to
a deferred income account in the balance sheet and an amount released to
profit and loss account each year over the life of the asset to which the
grant relates. Revenue grants are credited to the profit and loss account in
the period in which they are received.
(12) Research and development expenditure
Development expenditure relating to specific projects intended for
commercial exploitation is carried forward. Such expenditure is amortised
over the period expected to benefit. Expenditure on pure and applied research
is written off as incurred.
(13) Employee Share Ownership Plan (ESOP)
As recommended in UITF Abstract 13, the company's and group's accounts
include the employee share ownership plan. The plan holds shares for the
employee share option scheme and the directors consider that the company has
control of the shares held by the plan and bears the benefits and risks.
Shares held by the plan are shown as "own shares" within fixed asset
investments. The main features of the plan are detailed in Note 12 to the
financial statements.
217
<PAGE>
2 TURNOVER
Turnover represents the total invoiced value of goods supplied and
services provided excluding value added tax.
The geographical analysis of the group's turnover, which is derived from
the supply of oil and gas well subsurface engineering, is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
United Kingdom 9,559,383 10,374,413
Norway 10,959,066 4,394,148
Other Europe 1,808,795 3,780,459
Africa 724,822 330,000
Middle East 583,532 907,045
Far East & Australia 3,043,509 1,687,663
North & South America 2,920,474 1,199,129
---------- ----------
29,599,581 22,672,857
========== ==========
</TABLE>
3 OPERATING PROFIT
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Operating profit is stated after charging/(crediting):
Depreciation on owned assets 1,072,799 834,358
Depreciation on assets held under finance lease and hire
purchase agreements 578,621 569,290
Amortisation of goodwill and intangible assets 233,622 154,456
Auditors' remuneration:
audit fees 54,820 40,536
non audit fees 168,124 70,091
Hire of plant and equipment 341,272 146,781
Release of local authority grant (1,400) (1,400)
Grant income (23,292) (279,388)
Non recurring legal and professional fees -- 108,394
Loss/(gain) on disposal of fixed assets 1,848 (86,252)
========= ========
</TABLE>
Auditors' remuneration in respect of the company amounted to (Pounds)6,000
(1998 - (Pounds)6,000).
218
<PAGE>
4 STAFF COSTS
(1)
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Wages and salaries 10,691,736 8,920,653
Social security costs 1,059,330 1,047,919
Other pensions costs (Note 26) 344,134 306,643
---------- ----------
12,095,200 10,275,215
========== ==========
</TABLE>
(2) The average number of employees of the group during the year was as
follows:
<TABLE>
<CAPTION>
1999 1998
Number Number
------ ------
<S> <C> <C>
Production 263 242
Distribution and marketing 39 38
Administration 54 35
---- ----
356 315
==== ====
</TABLE>
(3) Details of directors' emoluments are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Aggregate emoluments 665,594 656,337
Group pension contributions to money purchase
schemes 13,299 55,052
------- -------
678,893 711,389
======= =======
Highest paid director
Aggregate emoluments 123,269 106,146
======= =======
</TABLE>
5 EXCEPTIONAL ITEM
During April 1997, the group underwent a fundamental restructuring
exercise under which the company bought out all minority interests in its
subsidiary undertakings and Halliburton Holdings Limited acquired a 26%
interest in the ordinary shares of the company.
As part of this restructuring exercise, a number of additional options
over the company's shares were issued by the company's Employee Share
Ownership Plan (ESOP). In accordance with the requirements of UITF Abstract
13, the value of the company's shares held by the ESOP is shown on the company
and group balance sheets as part of "investments". As result of the issue of
share options in connection with the restructuring during 1997/98, the
carrying value of the company's shares held by ESOP was written down by
(Pounds)1,659,472 in accordance with the requirements of UITF Abstract
13.
219
<PAGE>
6 INTEREST PAYABLE AND SIMILAR CHARGES
1999 1998
(Pounds) (Pounds)
Bank overdraft and other bank borrowings 182,906 140,686
Directors' loans -- 2,900
Finance lease and hire purchase interest 123,799 151,286
Other interest 30,248 14,847
------- -------
336,953 309,719
======= =======
7 TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1999 1998
-------- -------
The tax charge/(credit) for the year comprises the following: (Pounds) (Pounds)
<S> <C> <C>
UK corporation tax at 30% (1998 - 31%)
- current year -- --
- prior year (3,187) (53,678)
Overseas tax 650,836 359,051
Deferred tax at 30% (1998 - 31%) (Note 17) (150,930) 58,710
Overseas deferred tax (Note 17) (4,250) (2,932)
-------- -------
492,469 361,151
Associated undertaking -- 11,881
-------- -------
492,469 373,032
======== =======
</TABLE>
8 PROFIT FOR THE FINANCIAL YEAR
As permitted by section 230 of the Companies Act 1985, the parent company's
profit and loss account has not been included in these financial statements.
The parent company's profit/(loss) for the financial year was (Pounds)271,954
(1998 - loss (Pounds)2,379,108) .
9 DIVIDENDS
1999 1998
----- -----
(Pounds) (Pounds)
Dividends on equity shares - 4,521
===== =====
220
<PAGE>
10 INTANGIBLE FIXED ASSETS
The company has no intangible fixed assets. Details relating to the group
are as follows:
<TABLE>
<CAPTION>
Goodwill
Development Arising On Purchased
Costs Patents Consolidation Goodwill Total
----------- ------- ------------- --------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Cost
At 1 April 1998 730,000 290,543 1,667,861 29,297 2,717,701
Exchange -- 3,233 -- 1,221 4,454
Additions -- 130,424 -- -- 130,424
Disposals -- -- (202,588) -- (202,588)
------- ------- --------- ------ ---------
At 31 March 1999 730,000 424,200 1,465,273 30,518 2,649,991
======= ======= ========= ====== =========
Amortisation
At 1 April 1998 60,435 199,332 138,988 17,352 416,107
Exchange -- (571) -- -- (571)
Charge for year 48,827 24,196 152,887 7,712 233,622
------- ------- --------- ------ ---------
At 31 March 1999 109,262 222,957 291,875 25,064 649,158
======= ======= ========= ====== =========
Net book value
At 31 March 1999 620,738 201,243 1,173,398 5,454 2,000,833
======= ======= ========= ====== =========
At 31 March 1998 669,565 91,211 1,528,873 11,945 2,301,594
======= ======= ========= ====== =========
</TABLE>
Development costs relate to a specific project undertaken by the group.
Sales of the product commenced at the end of 1995/96 and the related development
expenditure is being amortised over the estimated production and commercial life
of the product. The directors consider that the product is commercially viable
and that it will remain so over its estimated production life. Accordingly,
they are of the opinion that this provides sufficient justification to defer
costs and match them against future revenue.
Purchased goodwill arose on the acquisition of assets by a subsidiary
company, PES France SA. The goodwill in respect of this acquisition is being
amortised over five years.
Goodwill arising on consolidation represents the goodwill arising on the
acquisition of Well-Equip Limited. The goodwill is being amortised over a
period of 10 years being the directors' estimate of the estimated useful
economic life.
Patent costs are amortised over their estimated useful life of two to eight
years.
221
<PAGE>
11 TANGIBLE ASSETS
The company has no tangible fixed assets. Details relating to the group are
as follows:
<TABLE>
<CAPTION>
Long
Leasehold Office Plant And Motor
Buildings Equipment Machinery Vehicles Total
--------- --------- --------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Cost
At 1 April 1998 517,855 1,483,393 6,237,890 392,660 8,631,798
Exchange -- 2,863 1,764 (381) 4,246
Additions 1,463,781 243,990 2,710,904 77,393 4,496,068
Disposals (35,043) (24,271) (522,559) (111,659) (693,532)
--------- --------- --------- -------- ----------
At 31 March 1999 1,946,593 1,705,975 8,427,999 358,013 12,438,580
========= ========= ========= ======== ==========
Depreciation
At 1 April 1998 92,674 873,592 2,399,697 166,904 3,532,867
Exchange -- 888 360 (165) 1,083
Charge for the year 46,302 281,080 1,191,991 132,047 1,651,420
Disposals (2,258) (5,366) (107,583) (85,173) (200,380)
--------- --------- --------- -------- ----------
At 31 March 1999 136,718 1,150,194 3,484,465 213,613 4,984,990
========= ========= ========= ======== ==========
Net book amount
At 31 March 1999 1,809,875 555,781 4,943,534 144,400 7,453,590
========= ========= ========= ======== ==========
At 31 March 1998 425,181 609,801 3,838,193 225,756 5,098,931
========= ========= ========= ======== ==========
</TABLE>
The net book amount of plant and machinery includes (Pounds) 2,464,275
(1998 - (Pounds)2,467,973) in respect of assets held under finance and hire
purchase lease agreements.
222
<PAGE>
12 INVESTMENTS
Group Company
--------- ----------
(Pounds) (Pounds)
At 31 March 1999
Shares in subsidiary undertakings (1) -- 11,155,506
Associated undertaking (2) -- --
Own shares in ESOP (3) 3,369,682 3,369,682
--------- ----------
3,369,682 14,525,188
========= ==========
Company
----------
(Pounds)
(1) Shares at cost in subsidiary undertakings
At 1 April 1998 and 31 March 1999 11,155,506
==========
Group Company
--------- ----------
(Pounds) (Pounds)
(2) Investment in associated undertaking
At 1 April 1998 62,268 2,600
Disposal (62,268) (2,600)
------- ------
At 31 March 1999 -- --
======= ======
Associated Undertaking
----------------------
The group and the company sold their 26% interest in Cairntoul Well
Equipment Services Limited during the year.
(3) Own Shares in ESOP
Group and
Company
-------------
(Pounds)
Own shares held by employee share ownership plan 3,369,682
=========
Own shares held by the ESOP are stated at the lower of cost and the
exercise price of the various options outstanding over those shares at the
balance sheet date.
The ESOP is funded by payments from group companies and these funds are
used to acquire shares which have been conditionally granted to certain
employees under the share option scheme. Proceeds from the disposal of such
shares on exercising of the options will be charged to profit when distributed
by the ESOP in future years.
223
<PAGE>
12 INVESTMENTS (CONTINUED)
The company's principal subsidiary undertakings at 31 March 1998 were as
follows:
<TABLE>
<CAPTION>
Percentage
of nominal
Country of share capital
Nature registration/ and voting
Name of Business incorporation rights
----------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Petroleum Engineering Services Limited Oil Services Scotland 100%
PES (Netherlands) Limited Dormant Scotland 75%
PES (USA) Incorporated Oil Services USA 100%
PES Norge A/S Oil Services Norway 100%
PES Italia SRL Oil Services Italy 100%
Petroleum Engineering Services Asia Pty Limited Oil Services Australia 100%
PES de France Oil Services France 100%
PES France Oil Services France 100%
PES Trustees Limited Trustee Company Scotland 100%
PES Petroquip Limited Dormant Scotland 100%
PES Petroserv Limited Dormant Scotland 100%
PES Petrospec Limited Dormant Scotland 100%
PES Petrotorq Limited Dormant Scotland 100%
PES Petroturn Limited Dormant Scotland 76%
PES Petroseal Limited Dormant Scotland 100%
Well Equip Limited Dormant Scotland 100%
</TABLE>
13 STOCK
Group
---------------------
1999 1998
--------- ---------
(Pounds) (Pounds)
Raw materials 1,154,159 131,674
Work in progress 3,033,399 2,011,843
Finished goods 3,904,383 4,406,110
--------- ---------
8,091,941 6,549,627
========= =========
The company had no stock at either 31 March 1999 or 1998.
14 DEBTORS
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Group Company Group Company
--------- ---------- --------- ----------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Trade debtors 6,676,752 -- 5,857,883 --
Amounts owed by subsidiary
undertakings -- 11,113,614 -- 11,405,171
Corporation tax recoverable -- 325,222 -- --
Other debtors 322,497 78 274,287 78
Prepayments and accrued income 129,254 -- 162,184 --
--------- ---------- --------- ----------
7,128,503 11,438,914 6,294,354 11,405,249
========= ========== ========= ==========
</TABLE>
224
<PAGE>
Amounts owed by subsidiary undertakings relate to loans made to Petroleum
Engineering Services Limited. The loans are non interest bearing and are
repayable on demand.
225
<PAGE>
15 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
1999 1998
----------------- -----------------
Group Company Group Company
--------- ------- --------- -------
(Pounds) (Pounds) (Pounds) (Pounds)
Bank overdraft (secured) 3,101,141 -- 559,119 --
Bank loans (Note 16) 910,183 -- 46,875 --
Trade creditors 2,521,895 -- 1,911,967 --
Corporation tax payable 507,112 -- 174,738 10,136
Other taxation and social security 547,508 -- 451,244 43,403
Accruals and deferred income 1,212,075 64,487 1,356,306 17,837
Finance lease and hire purchase
obligations (Note 21) 991,337 -- 858,090 --
Loan notes -- -- 234,000 234,000
--------- ------- --------- -------
9,791,251 64,487 5,592,339 305,376
========= ======= ========= =======
The bank overdraft is secured by a Bond and Floating Charge over the assets
of the group.
16 CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1999 1998
----------------- -----------------
Group Company Group Company
--------- ------- --------- -------
(Pounds) (Pounds) (Pounds) (Pounds)
Finance lease and hire purchase
obligations (Note 21) 1,400,518 -- 1,389,277 --
Bank loans (Note 16) 51,373 -- 82,129 --
--------- ------- --------- -------
1,451,891 -- 1,471,406 --
========= ======= ========= =======
The bank loans are repayable as follows:
Less than one year 910,183 - 46,875 -
Between one and two years 17,701 - 33,043 -
Between two and five years 33,672 - 49,086 -
Five years or more -- - -- -
--------- ------- --------- -------
961,556 - 129,004 -
========= ======= ========= =======
226
<PAGE>
17 PROVISIONS FOR LIABILITIES AND CHARGES
1999 1998
Group Group
-------- -------
(Pounds) (Pounds)
Deferred tax (40,958) 90,417
Deferred income 463,373 761,414
-------- -------
422,415 851,831
======== =======
Deferred tax
The full potential (asset)/liability for deferred tax calculated at a
rate of 30% (1998 - 31%), all of which has been recognised/provided, is as
follows:
1999 1998
Group Group
-------- -------
(Pounds) (Pounds)
Capital allowances (99,222) 90,417
Other timing differences 58,264 --
-------- -------
(40,958) 90,417
======== =======
Balance at 1 April 90,417 34,639
Reclassification 19,555 --
Current year charge 135,903 30,692
Prior year (credit)/charge (286,833) 25,086
-------- -------
Balance at 31 March (40,958) 90,417
======== =======
Deferred income
1999 1998
Group Group
-------- -------
(Pounds) (Pounds)
Balance at 1 April 761,414 19,600
Additions 275,839 743,214
Release during year (573,880) (1,400)
-------- -------
Balance at 31 March 463,373 761,414
======== =======
227
<PAGE>
18 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
Group and Company
-------------------
1999 1998
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Authorised:
Ordinary Shares of (Pounds)0.10 each (1998 - (Pounds)1 each) 150,000 150,000
======== ========
Allotted called up and fully paid:
Ordinary Shares of (Pounds)0.10 each (1998 - (Pounds)1 each) 126,654 126,654
Called up share capital not paid:
Ordinary shares of (Pounds)0.10 each (1998 - (Pounds)1 each) 1,947 1,947
-------- --------
128,601 128,601
======== ========
</TABLE>
On 27 October 1998 the company undertook a share split exercise,
issuing 10 shares of (Pounds)0.10 each for every (Pounds)1 share previously
held.
19 RESERVES
Group
<TABLE>
<CAPTION>
Share Capital Profit Reserves
premium redemption and loss arising on Acquisition
account reserve account consolidation reserve
---------- ---------- ---------- ------------- -----------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
At 1 April 1998 26,961,449 9,505 (2,217,748) (9,768,383) 1,779,190
Amount transferred
to reserves -- -- 772,186 -- --
Exchange
movement -- -- (25,719) -- --
---------- ---------- ---------- ------------- -----------
At 31 March 1999 26,961,449 9,505 (1,471,281) (9,768,383) 1,779,190
========== ========== ========== ============ ===========
</TABLE>
Reserves arising on consolidation represents the cumulative amount of
goodwill on consolidation written off direct to reserves in prior years.
The balance on acquisition reserve represents the excess of fair value of
shares acquired in Petroleum Engineering Services Limited over the nominal
value of the consideration.
Company
Share Capital
premium Profit and redemption
account Loss account reserve
---------- ------------ ----------
(Pounds) (Pounds) (Pounds)
At 1 April 1998 26,961,449 (1,471,894) 9,505
Amount transferred to reserves -- 271,954 --
---------- ------------ ----------
At 31 March 1999 26,961,449 (1,199,940) 9,505
========== ============ ==========
228
<PAGE>
20 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Group Company Group Company
---------- ---------- ---------- ----------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Profit/(loss) for the financial year 772,186 271,954 (2,079,479) (2,374,587)
Dividends -- -- (4,521) (4,521)
Share capital issued at par -- -- 43,937 43,937
Premium on share issue -- -- 24,502,099 24,502,099
Exchange movement (25,719) -- (112,927) --
Goodwill written off -- -- (8,840,922) --
---------- ---------- ---------- ----------
Net addition to shareholders' funds 746,467 271,954 13,508,187 22,166,928
Opening shareholders' funds 16,892,614 25,627,661 3,384,427 3,460,733
---------- ---------- ---------- ----------
Closing shareholders' funds 17,639,081 25,899,615 16,892,614 25,627,661
========== ========== ========== ==========
</TABLE>
21 FINANCE LEASE AND HIRE PURCHASE OBLIGATIONS
1999 1998
--------- ---------
Group Group
--------- ---------
(Pounds) (Pounds)
Amounts payable within one year 1,092,608 962,236
In second to fifth years inclusive 1,674,716 1,706,577
--------- ---------
2,767,324 2,668,813
Finance charges allocated to future periods (375,469) (421,446)
--------- ---------
2,391,855 2,247,367
========= =========
Falling due within one year (Note 15) 991,337 858,090
Falling due after more than one year (Note 16) 1,400,518 1,389,277
--------- ---------
2,391,855 2,247,367
========= =========
The amounts are secured over the assets to which they relate.
229
<PAGE>
22 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
1999 1998
---------- ----------
(Pounds) (Pounds)
Operating profit 1,557,770 41,948
Loss/(gain) on disposal of fixed assets 1,848 (86,252)
(Gain) on sale of investment (77,732) --
Depreciation 1,561,174 1,403,648
Amortisation of intangible assets 233,622 154,456
(Decrease)/increase in deferred income (296,641) 743,213
Release of local authority grants (1,400) (1,400)
Increase in stock (1,542,314) (3,811,660)
(Increase)/decrease in debtors (834,149) 118,034
Increase/(decrease) in creditors 561,961 (489,527)
Exchange movement (33,907) (73,031)
---------- ----------
Net cash inflow/(outflow) from operating
activities 1,130,232 (2,000,571)
========== ==========
23 ANALYSIS OF NET DEBT
(1) Reconciliation of net cash flow to movement in net debt
(Pounds)
Decrease in cash in the period (Note 24) (2,413,667)
Increase in debt and lease financing (1,849,135)
----------
Change in net debt resulting from cash flows (4,262,802)
New HP and finance leases (1,106,095)
----------
Movement in net debt in the period (3,156,707)
Net debt at 1 April 1998 (2,037,506)
----------
Net debt at 31 March 1999 (5,194,213)
==========
230
<PAGE>
23 ANALYSIS OF NET DEBT (CONTINUED)
(2) Analysis of net debt
<TABLE>
<CAPTION>
Other
At 1 April non-cash At 31 March
1998 Cash Flow Changes 1999
---------- ---------- ---------- -----------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Cash in hand, at bank 1,131,984 128,355 -- 1,260,339
Overdrafts (559,119) (2,542,022) -- (3,101,141)
Obligations under finance leases (2,247,367) 961,607 (1,106,095) (2,391,855)
Debt due within one year (280,875) (629,308) -- (910,183)
Debt due after one year (82,129) 30,756 -- (51,373)
---------- ---------- ---------- -----------
(2,037,506) (2,050,612) (1,106,095) (5,194,213)
========== ========== ========== ===========
</TABLE>
During the year the group entered into HP and finance lease
arrangements in respect of assets with a capital value at inception of the
leases of (Pounds)1,106,095. These arrangements are described above as
"other non-cash changes".
24 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS AS SHOWN IN BALANCE SHEET
Change
1999 1998 in period
---------- --------- ----------
(Pounds) (Pounds) (Pounds)
Cash at bank and in hand 1,260,339 1,131,984 128,355
Bank overdraft (3,101,141) (559,119) (2,542,022)
---------- --------- ----------
(1,840,802) 572,865 (2,413,667)
========== ========= ==========
25 OPERATING LEASE COMMITMENTS
The group has commitments under operating leases to make payments in
the following year as set out below:
1999 1998
--------- ----------
(Pounds) (Pounds)
Plant and machinery and motor vehicles:
Operating leases which expire:
Within 1 year 160,133 6,050
2-5 years 267,672 59,804
========= ==========
231
<PAGE>
26 PENSION COMMITMENTS
The group operates a defined contribution pension scheme for the
directors and contributes to personal schemes on behalf of certain
employees. The schemes are administered independently of the company and
are funded through policies of assurance of annuity. The total pension cost
which is charged against profit represents contributions payable by the
group and amounted to (Pounds)344,134 (1998 - (Pounds)306,643).
232
<PAGE>
ANNEX I
TERMS OF THE OFFER RELATING TO
CONDITIONS AND CONTINGENT CONSIDERATION
The following terms (the "Terms") relate to that certain offer (the
"Offer") by Halliburton Company, a Delaware corporation ("Halliburton") dated
__________, 2000 to exchange shares of its common stock for all the issued
ordinary shares of PES (International) Limited, a limited company incorporated
under the laws of Scotland ("PES"), not already owned by it. The Offer is
contained in Halliburton's Offer Document which constitutes a part of its
Registration Statement on Form S-4 (File No. 333-79975) (the "Registration
Statement") filed by it with the U.S. Securities and Exchange Commission (the
"Commission") pursuant to the U.S. Securities Act of 1933. The Terms are an
integral part of and shall be construed as one with the Offer. In the event of
any conflict between the Terms and the remainder of the Offer Document, the
Terms shall prevail. The Offer and all acceptances are governed by and shall be
construed in accordance with English law.
1. Conditions to the Offer
1.1 The Offer is conditional upon:
1.1.1 valid acceptances having been received by the time of
expiration of the initial offer period at 3:00 p.m. (London
time) or 10:00 a.m. (New York City time) on . . 2000 (or
such later time(s) and/or date(s) as Halliburton may decide)
in respect of not less than 90% of the PES Shares to which
the Offer relates (within the meaning of sections 428 to
430F of the UK Companies Act 1985), or such lesser
percentage above 33% as Halliburton may decide, prior to the
time the Offer becomes or is declared unconditional. If this
threshold is satisfied before the Offer becomes or is
declared unconditional in all respects, this condition
(subject to any permitted reduction in the acceptance
threshold) must continue to be satisfied on the actual date
the Offer becomes or is declared unconditional in all
respects, by reference to the facts then subsisting;
1.1.2 the Halliburton shares to be issued pursuant to the Offer
being approved for listing on the New York Stock Exchange,
subject to official notice of issuance;
1.1.3 no stop order suspending the effectiveness of the
Registration Statement being issued or threatened by the
Commission;
1.1.4 no order having been made or, as the case may be, obtained
or action or proceeding having been commenced or, by written
notice to Halliburton or PES, threatened by any government
authority, court, competent regulatory body or agency which
has or could have the effect of:
(a) making the Offer illegal;
(b) prohibiting the acquisition of the PES ordinary shares by
Halliburton or a subsidiary of Halliburton pursuant to the
Offer;
(c) in any material respect, prohibiting the normal conduct by
PES of its business or any material part of it; or
(d) requiring Halliburton or PES to sell all or any material
portion of its assets;
1.1.5 all authorizations necessary or appropriate for the Offer
being obtained from all appropriate governmental and
regulatory authorities;
Annex I-1
<PAGE>
1.1.6 other than by disclosure in the disclosure letter as defined
in the Warranty Agreement, no fact, matter or the occurrence
of any event (whether existing or occurring on or before the
date of the Offer or arising or occurring thereafter) coming
to the notice of Halliburton at any time prior to completion
(whether by reason of any disclosure made pursuant to Clause
5 of the Warranty Agreement or otherwise) which:
(a) constitutes a material breach of any warranty contained in
the Warranty Agreement (a "warranty") by reference to the
facts and circumstances then subsisting or if the warranties
were to be repeated on or at any time before the Offer being
declared unconditional by reference to the facts and
circumstances then subsisting or constitutes a breach by a
party other than Halliburton of clause 5 of the Warranty
Agreement;
(b) affects or is likely to affect in a material adverse manner
the business, assets, trading or financial position or
profits or prospects of PES (whether or not the same would
constitute a material breach of any warranty);
(c) renders or makes the business, trading or financial
(including tax) information concerning PES provided by PES
or any of its employees, agents, or advisers to Halliburton,
in the reasonable opinion of Halliburton, materially
misleading or shows, in the reasonable opinion of
Halliburton, such information to contain any material
misrepresentation(s) or omissions; or
(d) constitutes a matter referred to in clause 5.4 of the
Warranty Agreement or a breach of clause 5.2 thereof;
1.1.7 no breach having occurred of any of the terms of any of the
irrevocable undertakings;
1.1.8 PES not, prior to completion (except pursuant to obligations
existing on the date hereof and disclosed to Halliburton or
to the extent previously agreed in writing by Halliburton)
having issued or allotted or agreed to issue or allot any
shares in its capital, having granted or agreed to grant any
options over any shares (issued or unissued) in its capital
and having issued or agreed to issue any debt or other
securities convertible into shares in its capital;
1.1.9 neither PES nor any of its subsidiary undertakings engaging
in any activity that is out of the ordinary course of its
business, including PES and its subsidiary undertakings not
issuing additional shares or shares of its subsidiary
undertakings, paying dividends, merging with any other
person, disposing of its assets, increasing its
indebtedness, or entering into contracts or arrangements
that are likely to restrict the business of Halliburton or
the PES Group;
1.1.10 there not being instituted or continued any litigation the
effect of which is or is likely to be material to PES or any
of its subsidiary undertakings but excluding any disclosure
made in the disclosure letter as defined in the Warranty
Agreement;
1.1.11 the passing at an extraordinary general meeting of a special
resolution in a form approved by Halliburton suspending the
pre-emption rights on transfer in the articles of
association of PES and suspending the requirement that a
person who has acquired a majority of PES's shares in issue
must make a cash offer to acquire the remaining shares;
1.1.12 no member of the PES Group being insolvent as defined by
section 123 Insolvency Act 1986 or having entered into any
scheme of arrangement or voluntary or other arrangement with
any of its creditors other than as disclosed in the
disclosure letter as defined in the Warranty Agreement;
Annex I-2
<PAGE>
1.1.13 no order having been made or resolution passed for the
winding up of any member of the PES Group and there not
being outstanding any petition for the winding up of a
member of the PES Group or any petition applying for an
administration order to be made in relation to a member of
the PES Group or any receivership of the whole or any part
of the undertaking or assets of a member of the PES Group or
the equivalent of any of the fo foregoing in any
jurisdiction outside the United Kingdom;
1.1.14 none of the executive warrantors (as defined in the Warranty
Agreement) having been declared bankrupt, having made any
composition or entered into any deed of arrangement with his
creditors, or having had a petition for bankruptcy presented
against any of them;
1.1.15 none of the executive warrantors and neither B. Bouldin nor
N. Arizmendi (the "Key Employees") having ceased to be
employed by the PES Group and neither a member of the PES
Group nor any such executive warrantor nor any such Key
Employee having issued any notice terminating or purporting
to terminate any such employment; and
1.1.16 PES having exercised the outstanding Call Options in
accordance with their terms.
1.2 The Offer will lapse unless these conditions are fulfilled or waived,
by Halliburton, on or before the latest time for acceptance of the
Offer, being . . 2000 or such later date as Halliburton may determine
being not later than . . 2000. Halliburton reserves the right to
waive, in whole or in part, only conditions 1.1.6, 1.1.7, 1.1.8,
1.1.9, 1.1.10, 1.1.12, 1.1.13, 1.1.14, 1.1.15 and 1.1.16 above. Upon
the satisfaction or waiver of the conditions, the Offer will be
declared unconditional. The Offer will then be extended for a
subsequent period of 10 days, during which time PES shareholders will
be able to continue to accept the Offer.
2. Contingent and Delayed Issuance:
2.1 The consideration payable pursuant to the Offer comprises an initial,
fixed element of shares of Halliburton common stock and two deferred,
contingent elements of Halliburton common stock ("Deferred Elements")
issuable pursuant to rights.
2.2 Upon Completion of the Offer, Halliburton will issue up to ________
shares of Halliburton common stock for each PES ordinary share as to
which the Offer has been accepted. These shares of Halliburton common
stock will be issued as follows:
2.2.1 ________ shares will be issued promptly after Completion of to
the Offer; and
2.2.2 ________ shares (the "First Deferred Element") will be issued
promptly after a date 12 months after Completion of the Offer
("First Determination Date"), subject to potential reduction or
delay, or both, as provided herein; and
2.2.3 ________ shares (the "Second Deferred Element") will be issued
promptly after a date up to 36 months after Completion of the
Offer ("Second Determination Date"), subject to potential
reduction or delay, or both, as provided herein.
2.3 The First Deferred Element and the Second Deferred Element are subject
to two contingencies as provided in sections 2.4 and 2.5 below, either
of which could cause a reduction in the number of shares of
Halliburton common stock to be issued pursuant to the First or Second
Deferred Element or both.
2.4 The shares of Halliburton common stock comprising the First and Second
Deferred Elements will be reduced as provided below if either
Laurence Kinch or Richard Rubbo, or both, are not then employed by the
Halliburton Group as a result of Voluntary Resignation or Termination
for Cause:
2.4.1 if neither of them is so employed on the First Determination
Date as a result of Voluntary Resignation or Termination for
Cause, the numbers of shares comprising the First
Annex I-3
<PAGE>
Deferred Element and the Second Deferred Element, as set
forth in section 2.2, will be reduced by 60%;
2.4.2 if either one of them is not so employed on the First
Determination Date as a result of Voluntary Resignation or
Termination for Cause but the other is so employed on the
First and Second Determination Dates, the numbers of shares
comprising the First Deferred Element and the Second
Deferred Element, as set forth in section 2.2, will be
reduced by 30%;
2.4.3 if either one of them is not so employed on the First
Determination Date as a result of Voluntary Resignation or
Termination for Cause but neither is so employed on the
Second Determination Dates as a result of Voluntary
Resignation or Termination for Cause, the number of shares
comprising the First Deferred Element, as set forth in
section 2.2, will be reduced by 30% and the number of shares
comprising the Second Deferred Element, as set forth in
section 2.2, will be reduced by 60%;
2.4.4 if both of them are so employed on the First Determination
Date but, as a result of Voluntary Resignation or
Termination for Cause, either one of them is not so employed
on the Second Determination Date, the First Deferred
Element, as set forth in section 2.2, will comprise the full
number of shares but the number of shares comprising the
Second Deferred Element, as set forth in section 2.2, will
be reduced by 30%; or
2.4.5 if both of them are so employed on the First Determination
Date but neither of them is so employed on the Second
Determination Date as a result of Voluntary Resignation or
Termination for Cause, the First Deferred Element, as set
forth in section 2.2, will comprise the full number of
shares but the number of shares comprising the Second
Deferred Element, as set forth in section 2.2, will be
reduced by 60%.
2.4.6 The Second Determination Date will be the third anniversary
of Completion of the Offer unless before that date
Halliburton decides (in its sole discretion) that PES has
achieved the milestones specified in the technology transfer
and development plan, in which event the Second
Determination Date will be accelerated to the date 30 months
following Completion of the Offer or, if later, the date of
such achievement.
2.4.7 If the employment of Mr. Kinch or Mr. Rubbo or both with
Halliburton shall have been terminated prior to a particular
Determination Date but as at that Determination Date there
is an unresolved dispute as to whether such termination
constituted a Voluntary Resignation or a Termination for
Cause, then the number of shares of Halliburton common stock
to be issued on that Determination Date shall be reduced by
30% (or 60%, as appropriate) with any further Halliburton
common stock that should have been issued on that
Determination Date pursuant to the Offer being issued within
seven days of that dispute being finally resolved in
accordance with the procedures set out in sections 5.11 and
5.12 of these Terms.
2.5 The shares of Halliburton common stock comprising the First and Second
Deferred Elements will be reduced as provided below if Richard Rubbo
shall not be employed by a member of the Halliburton Group on the
First or Second Determination Date, or both, as a result of his Death
or Disappearance in Suspicious Circumstances:
2.5.1 if Mr. Rubbo shall not be so employed on the First
Determination Date as a result of his Death or Disappearance
in Suspicious Circumstances, the number of shares comprising
the First Deferred Element and the Second Deferred Element,
as set forth in section 2.2, will be reduced by 30%;
2.5.2 if Mr. Rubbo shall be so employed on the First Determination
Date but shall not be employed on the Second Determination
Date as a result of his Death or Disappearance in
Annex I-4
<PAGE>
Suspicious Circumstances, the First Deferred Element, as set
forth in section 2.2, will comprise the full number of
shares, but the number of shares comprising the Second
Deferred Element, as set forth in section 2.2, will be
reduced by 30%; and
2.5.3 if the full number of shares of Halliburton common stock
comprising either or both of the First and Second Deferred
Elements, as set forth in section 2.2, is reduced because
the employment by Halliburton of Mr. Rubbo has been
terminated because of his Death or Disappearance in
Suspicious Circumstances, a number of shares of Halliburton
common stock equal to the reduction shall be issued by
Halliburton in accordance with the provisions of section 3
of these Terms.
2.6 Each of the PES shareholders who accepts the Offer thereby waives any
claims such shareholder may have (at the date of such acceptance or at
any time thereafter) against either of Mr. Kinch and Mr. Rubbo as a
consequence of the loss of any part of the consideration due to them
hereunder as a result of the Voluntary Resignation or Termination for
Cause of Mr. Kinch or Mr. Rubbo or the Death or Disappearance in
Suspicious Circumstances of Mr. Rubbo and agrees that each of Mr.
Kinch and Mr. Rubbo may rely upon and enforce such waiver as though
they were party to the contract constituted by this Offer and such
acceptance.
3. Delayed Issuance of Halliburton Common Stock
3.1 If the issue of Halliburton common stock in terms of the Offer is
delayed as a consequence of the Death or Disappearance in Suspicious
Circumstances of Mr. Rubbo and at any time in the Holding Period any
person is brought to trial and subsequently criminally convicted in
connection with such Death or Disappearance in Suspicious
Circumstances and during the Holding Period or during such trial no
Allegation of Connection is made, then all of the shares of
Halliburton common stock which would but for the Death or
Disappearance in Suspicious Circumstances have been issued in terms of
this Offer shall be issued as soon as practicable following such
conviction to the persons entitled thereto in terms of the Offer;
provided, however, that, if the Holding Period shall have expired
prior to the Second Determination Date, those shares that would
otherwise have been included in the Second Deferred Element shall be
issued following the Second Determination Date.
3.2 If the issue of Halliburton common stock in terms of the Offer is
delayed as a consequence of the Death or Disappearance in Suspicious
Circumstances of Mr. Rubbo and at any time in the Holding Period any
person is brought to trial and subsequently criminally convicted in
connection with such Death or Disappearance in Suspicious
Circumstances and any Allegation of Connection is made at such trial,
then:
3.2.1 all of the shares of Halliburton common stock that would,
but for the said Death or Disappearance in Suspicious
Circumstances, have been issued to the Implicated Person
and/or his Associates shall be issued by Halliburton to such
person or persons as may be nominated by Mr. Rubbo's
personal representatives and shall not be issued to that
Implicated Person or his Associates; and
3.2.2 the remainder of such shares of Halliburton common stock
shall be issued to the persons entitled thereto in terms of
the Offer,
provided, however, that, if the Holding Period shall have expired
prior to the Second Determination Date, those shares that would
otherwise have been included in the Second Deferred Element, but for
Mr. Rubbo's Death or Disappearance in Suspicious Circumstances, shall
be issued following the Second Determination Date in the same manner
as though issued in respect of the First Deferred Element by virtue of
this Section 3.2.
3.3 If the number of shares of Halliburton common stock to be issued in
terms of the Offer is delayed as a consequence of the Death or
Disappearance in Suspicious Circumstances of Mr. Rubbo and by the
Annex I-5
<PAGE>
end of the Holding Period neither of the events specified in paragraph
3.1 or 3.2 above has occurred, then:
3.3.1 all of the shares of Halliburton common stock that would,
but for the said Death or Disappearance in Suspicious
Circumstances, have been issued to Mr. Rubbo, his
Associates, or a limited partnership in which Mr. Rubbo and
his spouse are limited partners shall be so issued; and
3.3.2 all such remaining shares of Halliburton common stock shall
be issued to such charity as shall be nominated by the board
for the time being of PES,
provided, however, that, if the Holding Period shall have expired
prior to the Second Determination Date, those shares that would
otherwise have been included in the Second Deferred Element, but for
Mr. Rubbo's Death or Disappearance in Suspicious Circumstances, shall
be issued following the Second Determination Date in the same manner
as though issued in respect of the First Deferred Element by virtue of
this Section 3.3.
3.4 Mr. Rubbo has, by irrevocable undertaking issued to Halliburton on the
date of the Offer, authorized Halliburton to obtain copies of all
documents and other information under the control of Mr. Rubbo's
personal representatives necessary in the opinion of Halliburton to
enable Halliburton to determine to whom Halliburton is obliged to
issue shares in terms of this section 3.
3.5 Any decision taken by Halliburton pursuant to this section 3 shall be
taken in Halliburton's sole discretion and shall be conclusive and
binding on all persons for the purposes of the Offer.
4. Recapitalization and Similar Events.
4.1 If there is, at any time on or after the date of this Offer, any
subdivision or consolidation of all or any of the common stock of
Halliburton, or the number of shares of common stock of Halliburton in
issue increases as a result of the making of a stock dividend or
similar capitalization of reserves, the number of shares of
Halliburton common stock to be issued in terms of this Offer (and not
issued as at the date of such subdivision, consolidation, stock
dividend or similar capitalization) shall be adjusted so as to ensure
that the proportion of the entire issued common stock of Halliburton
to be issued in terms of this Offer (and then remaining unissued)
shall be the same as it would have been but for such subdivision,
consolidation, stock dividend or similar capitalization.
4.2 If there shall be at any time after the date of this Offer (i) any
merger of any corporation with Halliburton in which the outstanding
Halliburton common stock is converted into shares or securities of any
other corporation or into cash, property or rights, (ii) any
consolidation of Halliburton with one or more other corporations or
(iii) any sale of all or substantially all of the assets of
Halliburton in a single transaction or a series of transactions
followed by a distribution in complete liquidation and dissolution of
Halliburton, then, from and after the declaration of the Offer as
unconditional, the rights of a PES Shareholder to receive shares of
Halliburton common stock pursuant to the Offer (to the extent not
theretofore received) shall be converted into rights to receive the
same consideration (to the extent not theretofore received), subject
to the conditions imposed with respect to receipt of the specified
consideration after the First and Second Determination Dates, that
such a shareholder would have received if such shareholder held, on
the day such merger, consolidation or sale was completed, the number
of shares of Halliburton common stock that such shareholder would have
received on Completion of the Offer or on such Determination Date
pursuant to the Offer.
4.3 If there shall be at any time after the date of this Offer (i) any
sale of all or substantially all of the assets of Halliburton in a
single transaction or a series of transactions followed by a
distribution in partial liquidation of Halliburton or (ii) any spinoff
of a part of the business of Halliburton where, as part of the spinoff
transaction, stock or other securities of any other corporation, cash
or other property is distributed to the holders of Halliburton common
stock, then, from and after the
Annex I-6
<PAGE>
declaration of the Offer as unconditional, the rights of a
PES Shareholder to receive at any time after the effective
date of such sale or spinoff shares of Halliburton common
stock pursuant to the Offer shall (to the extent such shares
have not theretofore been received) be increased by the
addition of rights to receive the same consideration,
subject to the conditions imposed with respect to receipt of
the specified consideration after the First and Second
Determination Dates, that such a shareholder would have
received if such shareholder held, on the day such sale or
spinoff was completed, the number of shares of Halliburton
common stock that such shareholder would have received on
Completion of the Offer or on such Determination Date
pursuant to the Offer.
5. Definitions. As used in these Terms, the following terms shall have
the following meanings:
5.1 "Allegation of Connection" shall mean the making of any
allegation, whether or not proven (in a court of law,
coroner's inquiry or like forum), that a named person (in
the Offer, an "Implicated Person") entitled to receive
shares in terms of this Offer or options in terms of the
Halliburton stock option plan to be established for PES
optionholders or an Associate of such person was responsible
for or otherwise implicated in the unlawful death of
Mr. Rubbo.
5.2 "Associates" shall mean, when used in connection with any
individual, any spouse, dependent or beneficiary to the
estate of such individual.
5.3 "Call Options" shall mean the option agreements between PES
and minority shareholders of Petroleum Engineering Services
Asia Pty Limited, a subsidiary of PES, pursuant to which PES
may call for the transfer to itself of shares in that
subsidiary in exchange for the issuance to such minority
shareholders of 5,480 PES Shares.
5.4 "Completion" shall mean the circumstance of the Offer
becoming unconditional.
5.5 "Death or Disappearance in Suspicious Circumstances" shall
mean
(a) the death of Mr. Rubbo resulting from anything other
than:
(i) natural causes; or
(ii) accident (unless any report into that accident
suggests the possibility of foul play) as
evidenced by the relevant death certificate,
coroner's report, police report or other written
evidence acceptable to Halliburton; or
(b) the disappearance (without a subsequent reappearance
during the Holding Period) of Mr. Rubbo for a continuous
period in excess of four weeks,
in each case at any time in the period prior to the Second
Determination Date; provided, however, that the question
whether Mr. Rubbo has ceased to be employed by reason of his
Death or Disappearance in Suspicious Circumstances shall be
decided by Halliburton in its sole discretion and such
decision shall be conclusive and binding on all persons for
the purposes of the Offer.
5.6 "Halliburton Group" shall mean Halliburton and all its
subsidiaries.
5.7 "Holding Period" shall mean the period of two years commencing on
the date of death of Mr. Rubbo or, in the event of his
disappearance, the period of two years commencing on the date
upon which he last attended any office of the Halliburton Group.
5.8 "Implicated Person" shall have the meaning set out in the
definition of "Allegation of Connection" above.
5.9 "PES" shall mean PES (International) Limited.
Annex I-7
<PAGE>
5.10 "PES Group" shall mean PES and its subsidiaries.
5.11 "Termination for Cause" (or like expressions) shall mean termination
of employment (either summarily or on notice) of a person where the
ground for such termination is that the relevant person:
(i) has committed any act of gross misconduct or repeated or
continued any other material breach of his obligations under his
service agreement;
(ii) has engaged in any conduct which, in the reasonable opinion of
the PES Board, is causing his continued employment to be detrimental
to a material extent to the interests of the Halliburton Group;
(iii) has been convicted of any criminal offense that is punishable
with six months or more imprisonment (save for any motoring offense,
unless that motoring offense has been punished with a term of actual
(not suspended) imprisonment);
(iv) has committed any deliberate and material act of dishonesty,
whether or not relating to his employment which is detrimental to a
material extent to the interests of the Halliburton Group;
(v) is, in the reasonable opinion of the PES Board, incompetent in
the performance of his duties (provided that failure to meet any
business plan shall not, of itself, be the sole determinant when
assessing competency); or
(vi) has committed any act (amounting to gross misconduct) which
materially violates the "Halliburton Company Code of Business Conduct"
(as in force at May 18, 1999),
provided always that such termination shall have been agreed in
writing with the relevant employee or approved in writing as
constituting Termination for Cause in accordance with this definition
by an arbiter appointed in accordance with his service agreement. The
agreement of the relevant employee or the approval of such an arbiter
appointed in accordance with such service agreement shall be
conclusive and binding on all persons that such person has been
Terminated for Cause for the purposes of the Offer.
5.12 "Voluntary Resignation" or "Voluntarily Resigns" shall mean (in the
context of the termination of employment of any person) any
circumstance in which that person (the "Relevant Employee") terminates
his employment with a member of the Halliburton Group (other than by
reason of his death) either summarily or by the giving of notice
without remaining employed by another member of the Halliburton Group
for any reason whatsoever other than (a) in circumstances where his
employing company has agreed his service agreement is terminable by
the Relevant Employee without notice by reason of the conduct of his
employing company or the arbiter appointed in accordance with the
service agreement of the Relevant Employee has decided that the
relevant service agreement is terminable by the Relevant Employee
without notice by reason of the conduct of his employing company; or
(b) where the Relevant Employee resigns as a consequence of illness,
mental disorder or injury which prevents him from properly performing
his duties under his service agreement (as certified by the
independent medical practitioner appointed in accordance with his
service agreement). In the case of the Relevant Employee resigning or
wishing to resign as a consequence of illness, mental disorder or
injury Halliburton shall procure the appointment of such a
practitioner and make his report available to the Relevant Employee.
The written agreement of the Relevant Employee that he has Voluntarily
Resigned or the written decision of the arbiter appointed in
accordance with his service agreement that he has Voluntarily Resigned
shall, in either case, be conclusive and binding on all persons that
the Relevant Employee shall have ceased to be employed by the
Halliburton Group as a result of his Voluntary Resignation for the
purposes of the Offer. The certificate of an independent medical
practitioner appointed in accordance with the service agreement of the
Relevant Employee shall be conclusive and binding on all persons as to
whether or
Annex I-8
<PAGE>
not such Relevant Employee had resigned on grounds of illness, mental
disorder or injury for the purposes of the Offer.
5.13 "Warranty Agreement" shall mean that certain agreement dated _______,
2000 between Halliburton and the PES directors and key employees named
therein.
Annex I-9
<PAGE>
ANNEX II
LETTER FROM THE CHAIRMAN OF PES TO PES SHAREHOLDERS
[PES LOGO]
Directors: Registered Office:
L. W. Kinch 34 Albyn Place
M. L. Bowyer Aberdeen
M. J. Fleming Aberdeenshire
S. C. Owens AB10 1FW
R. P. Rubbo
C. Smith
D. W. Whiteford
R. M. McCurley
J. B. Renfroe
To PES shareholders
and, for information only,
to the PES optionholders
. . 2000
Dear Sir or Madam,
Recommended Offer by Halliburton for the fully diluted
ordinary share capital of PES not already owned by it or its subsidiaries
1. Introduction
It was announced today that the PES board has reached an agreement with
the Directors of Halliburton on the terms of an offer to be made by
Halliburton for all the issued share capital of PES not already held by
its subsidiary, Halliburton Holdings Limited.
The terms of the offer and further information on PES and Halliburton and
their respective financial positions are set out in the offer document of
which this letter forms an Annex.
I am writing to explain the reasons for and background to the offer and
why the PES board considers the terms of the offer to be fair and
reasonable and is recommending that PES shareholders should accept the
offer.
The offer is conditional upon, amongst other things, the approval of a
special resolution, as described in paragraph 3 below, facilitating the
offer by the PES shareholders at the extraordinary general meeting.
2. Background of and Reasons for the Offer
For the background to the offer, see "Background of and Reasons for the
Offer" in the offer document.
The PES board (excluding Messrs. McCurley and Renfroe, being the members
of the PES board nominated by Halliburton Holdings Limited and who did not
participate in any proceedings of the PES board relating to the offer) is
of the opinion that the terms of the offer are fair and reasonable to, and
in the best interests of, PES. In making this determination, the PES board
consulted with PES's management, as well as its legal advisers, and
considered a number of factors, including the following:
Annex II-1
<PAGE>
- - The belief of the PES board that PES's and Halliburton's respective
businesses are complementary and that a range of economic, strategic and
operational benefits could arise from combining them. The PES board also
believes that the combination of PES and Halliburton would assist in the
aim of becoming the leader in the provision of intelligent well completion
products.
- - The likelihood of the offer becoming unconditional, as well as the
irrevocable undertakings given by the principal shareholders, as the
holders of approximately 50.02% of PES's issued share capital, to accept
the offer and to take such other actions as are set forth in the
irrevocable undertakings.
- - The terms of the offer, including the consideration and the terms of the
warranty agreement and related documents.
- - The PES board's knowledge of the business, operations, properties, assets,
earnings and prospects of PES.
- - Recent and historical trading prices for Halliburton shares. The PES board
recognises that the offer will enable the PES shareholders to obtain
shares that are tradeable on a recognised stock exchange yet offers the
opportunity of continuing their equity interest in the combined
enterprise. For information regarding the range of prices of the
Halliburton Shares, see "Market Price and Dividend Information" on page
___ of the offer document. The PES board also considered the absence of
any formal market for the PES shares.
- - Halliburton's historical financial statements for the years ended December
31, 1997 and December 31, 1998.
In view of the wide variety of factors considered in connection with its
evaluation of the offer, the PES board did not find it practicable to, and did
not, quantify or otherwise attempt to assign relative weights to specific
factors considered in its decision. Furthermore, the PES board did not
articulate how each factor specifically supported its ultimate decision, except
that substantial weight was placed on the fact that the principal shareholders,
as the owners of approximately 50.02% of the outstanding PES Shares, will
receive the same consideration per PES share as other PES Shareholders and that
they were in favor of and executed the irrevocable undertakings to accept the
offer.
3. Extraordinary General Meeting of PES
Accompanying this document there is a notice convening the extraordinary
general meeting at which will be proposed a special resolution, to
suspend, for the purposes of the offer, the pre-emption rights of the PES
shareholders on transfers of PES shares which are conferred by article 10
of the articles of association of PES and to suspend the obligation of a
person who has acquired a majority of the PES shares in issue, to make a
cash offer to acquire the remaining PES shares. It is a condition of the
offer that this resolution is passed. The principal shareholders and PES
Trustees Limited have given irrevocable undertakings to vote, and
Halliburton Holdings Limited will vote, in favor of such resolution in
respect of their holdings of PES shares representing, in aggregate, 87.57%
of the issued share capital of PES.
4. Action to be taken
PES shareholders' attention is drawn to the further information in the
offer document and the form of acceptance. PES shareholders who wish to
accept the offer should follow the procedure set out in the offer document
and in the form of acceptance.
PES optionholders are referred to the separate letter addressed to PES
optionholders which sets out the procedure that they must follow and the
alternative courses of action available to them.
Annex II-2
<PAGE>
5. Recommendation
The PES directors (other than Mark McCurley and James Renfroe who being
PES directors appointed by Halliburton Holdings Limited have taken no part
in the PES board's deliberations on this matter) consider that the offer
is in the best interests of PES for the reasons set out in paragraph 2
above.
The PES directors (other than Mark McCurley and James Renfroe who being
PES Directors appointed by Halliburton Holdings Limited have taken no part
in the PES board's deliberations on this matter) unanimously recommend
that PES shareholders accept the offer by Halliburton to purchase their
PES shares. Those PES directors (other than Mark McCurley and James
Renfroe), who are PES shareholders have irrevocably undertaken to
Halliburton to accept the offer in respect of their own beneficial
holdings of PES shares, representing, in aggregate, approximately 37.4% of
the issued share capital of PES at the date of this offer document.
6. Presentation to PES Shareholders
PES will be giving a presentation to its shareholders to explain the terms
of the offer. This meeting will be attended and given by certain PES
directors along with representatives from Halliburton and
PricewaterhouseCoopers and will be held at _____________________ at ____
am/pm on _______ 2000. All PES shareholders are welcome to attend and you
will be able to put your questions in relation to the offer and the offer
document to the PES directors and representatives present. You should
note, however, that neither the PES directors nor any of the
representatives will be able to give any investment advice or any
assistance or advice as to whether or not you should accept the offer.
Yours faithfully,
-------------------------------------
Laurence Kinch
Chairman
Annex II-3
<PAGE>
ANNEX III
RELEVANT PROVISIONS OF COMPANIES ACT 1985
PART XIII A
TAKEOVER OFFERS
428. TAKEOVER OFFERS
(1) In this Part of this Act "takeover offer" means an offer to acquire
all the shares, or all the shares of any class or classes, in a
company (other than shares which at the date of the offer are already
held by the offeror), being an offer on terms which are the same in
relation to all the shares to which the offer relates or, where those
shares include shares of different classes, in relation to all the
shares of each class.
(2) In subsection (1) "shares" means shares which have been allotted on
the date of the offer but a takeover offer may include among the
shares to which it relates all or any shares that are subsequently
allotted before a date specified in or determined in accordance with
the terms of the offer.
(3) The terms offered in relation to any shares shall for the purposes of
this section be treated as being the same in relation to all the
shares or, as the case may be, all the shares of a class to which the
offers relates notwithstanding any variation permitted by subsection
(4).
(4) A variation is permitted by this subsection where :
(a) The law of a country or territory outside the United Kingdom
precludes an offer of consideration in the form or any of the
forms specified in the terms in question or precludes it except
after compliance by the offeror with conditions with which he is
unable to comply or which he regards as unduly onerous; and
(b) the variation is such that the persons to whom an offer of
consideration in that form is precluded are able to receive
consideration otherwise than in that form but of substantially
equivalent value.
(5) The reference in subsection (1) to shares already held by the offeror
includes a reference to shares which he has contracted to acquire but
that shall not be construed as including shares which are the subject
of a contract binding the holder to accept the offer when it is made,
being a contract entered into by the holder either for no
consideration and under seal or for no consideration other than a
promise by the offeror to make the offer.
(6) In the application of subsection (5) to Scotland the words "and under
seal" shall be omitted.
(7) Where the terms of an offer make provision for their revision and for
acceptances on the previous terms to be treated as acceptances on the
revised terms, the revision shall not be regarded for the purposes of
this Part of this Act as the making of a fresh offer and references
in this Part of this Act to the date of the offer shall accordingly
be construed as references to the date on which the original offer
was made.
(8) In this Part of this Act "the offeror" means, subject to section
430D, the person making a takeover offer and "the company" means the
company whose shares are the subject of the offer.
Annex III-1
<PAGE>
429. RIGHT OF OFFEROR TO BUY OUT MINORITY SHAREHOLDERS
(1) If, in a case in which a takeover offer does not relate to shares of
different classes, the offeror has by virtue of acceptances of the
offer acquired or contracted to acquire not less than nine-tenths in
value of the shares to which the offer relates he may give notice to
the holder of any shares to which the offer relates which the offeror
has not acquired or contracted to acquire that he desires to acquire
those shares.
(2) If, in a case in which a takeover offer relates to shares of
different classes, the offeror has by virtue of acceptances of the
offer acquired or contracted to acquire not less than nine-tenths in
value of the shares of any class to which the offer relates, he may
give notice to the holder of any shares of that class which the
offeror has not acquired or contracted to acquire that he desires to
acquire those shares.
(3) No notice shall be given under subsection (1) or (2) unless the
offeror has acquired or contracted to acquire the shares necessary to
satisfy the minimum specified in that subsection before the end of
the period of four months beginning with the date of the offer; and
no such notice shall be given after the end of the period of two
months beginning with the date on which he has acquired or contracted
to acquire shares which satisfy that minimum.
(4) Any notice under this section shall be given in the prescribed
manner; and when the offeror gives the first notice in relation to an
offer he shall send a copy of it to the company together with a
statutory declaration by him in the prescribed form stating that the
conditions for the giving of the notice are satisfied.
(5) Where the offeror is a company (whether or not a company within the
meaning of this Act) the statutory declaration shall be signed by a
director.
(6) Any person who fails to send a copy of a notice or a statutory
declaration as required by subsection (4) or makes such a declaration
for the purposes of that subsection knowing it to be false or without
having reasonable grounds for believing it to be true shall be liable
to imprisonment or a fine, or both, and for continued failure to send
the copy or declaration, to a daily default fine.
(7) If any person is charged with an offence for failing to send a copy
of a notice as required by subsection (4) it is a defense for him to
prove that he took reasonable steps for securing compliance with that
subsection.
(8) When during the period within which a takeover offer can be accepted
the offeror acquires or contracts to acquire any of the shares to
which the offer relates but otherwise than by virtue of acceptances
of the offer, then, if:
(a) the value of the consideration for which they are acquired or
contracted to be acquired ("the acquisition consideration") does
not at that time exceed the value of the consideration specified
in the terms of the offer; or
(b) those terms are subsequently revised so that when the revision
is announced the value of the acquisition consideration, at the
time mentioned in paragraph (a) above, no longer exceeds the
value of the consideration specified in those terms,
the offeror shall be treated for the purposes of this section as
having acquired or contracted to acquire those shares by virtue of
acceptances of the offer; but in any other case those shares shall be
treated as excluded from those to which the offer relates.
Annex III-2
<PAGE>
430. EFFECT OF NOTICE UNDER SECTION 429
(1) The following provisions shall, subject to section 430C, have effect
where a notice is given in respect of any shares under section 429.
(2) The offeror shall be entitled and bound to acquire those shares on
the terms of the offer.
(3) Where the terms of an offer are such as to give the holder of any
shares a choice of consideration the notice shall give particulars of
the choice and state:
(a) that the holder of the shares may within six weeks from the date
of the notice indicate his choice by a written communication
sent to the offeror at an address specified in the notice; and
(b) which consideration specified in the offer is to be taken as
applying in default of his indicating a choice as aforesaid; and
the terms of the offer mentioned in subsection (2) shall be
determined accordingly.
(4) Subsection (3) applies whether or not any time-limit or other
conditions applicable to the choice under the terms of the offer can
still be complied with; and if the consideration chosen by the holder
of the shares:
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer
bound or able to provide it, the consideration shall be taken to
consist of an amount of cash payable by the offeror which at the
date of the notice is equivalent to the chosen consideration.
(5) At the end of six weeks from the date of the notice the offeror shall
forthwith:
(a) send a copy of the notice to the company; and
(b) pay or transfer to the company the consideration for the shares
to which the notice relates.
(6) If the shares to which the notice relates are registered the copy of
the notice sent to the company under subsection (5)(a) shall be
accompanied by an instrument of transfer executed on behalf of the
shareholder by a person appointed by the offeror; and on receipt of
that instrument the company shall register the offeror as the holder
of those shares.
(7) If the shares to which the notice relates are transferable by the
delivery of warrants or other instruments the copy of the notice sent
to the company under subsection (5)(a) shall be accompanied by a
statement to that effect; and the company shall on receipt of the
statement issue the offeror with warrants or other instruments in
respect of the shares and those already in issue in respect of the
shares shall become void.
(8) Where the consideration referred to in paragraph (b) of subsection
(5) consists of shares or securities to be allotted by the offeror
the reference in that paragraph to the transfer or the consideration
shall be construed as a reference to the allotment of the shares or
securities to the company.
(9) Any sum received by a company under paragraph (b) of subsection (5)
and any other consideration received under that paragraph shall be
held by the company on trust for the person entitled to the shares in
respect of which the sum or other consideration was received.
Annex III-3
<PAGE>
(10) Any sum received by a company under paragraph (b) of subsection (5),
and any dividend or other sum accruing from any other consideration
received by a company under that paragraph, shall be paid into a
separate bank account, being an account the balance on which bears
interest at an appropriate rate and can be withdrawn by such notice
(if any) as is appropriate.
(11) Where after reasonable enquiry made at such intervals as are
reasonable the person entitled to any consideration held on trust by
virtue of subsection (9) cannot be found and twelve years have
elapsed since the consideration was received or the company is wound
up the consideration (together with any interest, dividend or other
benefit that has accrued from it) shall be paid into court.
(12) In relation to a company registered in Scotland, subsections (13) and
(14) shall apply in place of subsection (11).
(13) Where after reasonable enquiry made at such intervals as are
reasonable the person entitled to any consideration held on trust by
virtue of subsection (9) cannot be found and twelve years have
elapsed since the consideration was received or the company is wound
up:
(a) the trust shall terminate;
(b) the company or, as the case may be, the liquidator shall sell
any consideration other than cash and any benefit other than
cash that has accrued from the consideration; and
(c) a sum representing:
(i) the consideration so far as it is cash;
(ii) the proceeds of any sale under paragraph (b) above; and
(iii) any interest, dividend or other benefit that has accrued
from the consideration, shall be deposited in the name of
the Accountant of Court in a bank account such as is
referred to in subsection (10) and the receipt for the
deposit shall be transmitted to the Accountant of Court.
(14) Section 58 of the Bankruptcy (Scotland) Act 1985 (so far as
consistent with this Act) shall apply with any necessary
modifications to sums deposited under subsection (13) as that section
applies to sums deposited under section 57(1)(a) of that Act.
(15) The expenses of any such enquiry as is mentioned in subsection (11)
or(13) may be defrayed out of the money or other property held on
trust for the person or persons to whom the enquiry relates.
430A. RIGHT OF MINORITY SHAREHOLDER TO BE BOUGHT OUT BY OFFEROR
(1) If a takeover offer relates to all the shares in a company and at any
time before the end of the period within which the offer can be
accepted:
(a) the offeror has by virtue of acceptances of the offer acquired
or contracted to acquire some (but not all) of the shares to
which the offer relates; and
(b) those shares, with or without any other shares in the company
which he has acquired or contracted to acquire, amount to not
less than nine-tenths in value of all the shares in the company,
the holder of any shares to which the offer relates who has not
accepted the offer may by a written communication addressed to
the offeror require him to acquire those shares.
Annex III-4
<PAGE>
(2) If a takeover offer relates to shares of any class or classes and at
any time before the end of the period within which the offer can be
accepted:
(a) the offeror has by virtue of acceptances of the offer acquired
or contracted to acquire some (but not all) of the shares of any
class to which the offer relates; and
(b) those shares, with or without any other shares of that class
which he has acquired or contracted to acquire, amount to not
less than nine-tenths in value of all the shares of that class,
the holder of any shares of that class who has not accepted the
offer may by a written communication addressed to the offeror
require him to acquire those shares.
(3) Within one month of the time specified in subsection (1) or, as the
case may be, subsection (2) the offeror shall give any shareholder
who has not accepted the offer notice in the prescribed manner of the
rights that are exercisable by him under that subsection; and if the
notice is given before the end of the period mentioned in that
subsection it shall state that the offer is still open for
acceptance.
(4) A notice under subsection (3) may specify a period for the exercise
of the rights conferred by this section and in that event the rights
shall not be exercisable after the end of that period; but no such
period shall end less than three months after the end of the period
within which the offer can be accepted.
(5) Subsection (3) does not apply if the offeror has given the
shareholder a notice in respect of the shares in question under
section 429.
(6) If the offeror fails to comply with subsection (3) he and, if the
offeror is a company, every officer of the company who is in default
or to whose neglect the failure is attributable, shall be liable to a
fine and for continued contravention, to a daily default fine.
(7) If an offeror other than a company is charged with an offence for
failing to comply with subsection (3) it is a defense for him to
prove that he took all reasonable steps for securing compliance with
that subsection.
430B. EFFECT OF REQUIREMENT UNDER SECTION 430A
(1) The following provisions shall, subject to section 430C, have effect
where a shareholder exercises his rights in respect of any shares
under section 430A.
(2) The offeror shall be entitled and bound to acquire those shares on
the terms of the offer or on such other terms as may be agreed.
(3) Where the terms of an offer are such as to give the holder of shares
a choice of consideration the holder of the shares may indicate his
choice when requiring the offeror to acquire them and the notice
given to the holder under section 430A(3):
(a) shall give particulars of the choice and of the rights conferred
by this subsection; and
(b) may state which consideration specified in the offer is to be
taken as applying in default of his indicating a choice; and the
terms of the offer mentioned in subsection (2) shall be
determined accordingly.
(4) Subsection (3) applies whether or not any time-limit or other
conditions applicable to the choice under the terms of the offer can
still be complied with; and if the consideration chosen by the holder
of the shares:
Annex III-5
<PAGE>
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer
bound or able to provide it, the consideration shall be taken to
consist of an amount of cash payable by the offeror which at the
date when the holder of the shares requires the offeror to
acquire them is equivalent to the chosen consideration.
430C. APPLICATIONS TO THE COURT
(1) Where a notice is given under section 429 to the holder of any shares
the court may, on an application made by him within six weeks from
the date on which the notice was given:
(a) order that the offeror shall not be entitled and bound to
acquire the shares; or
(b) specify terms of acquisition different from those of the offer.
(2) If an application to the court under subsection (1) is pending at the
end of the period mentioned in subsection (5) of section 430 that
subsection shall not have effect until the application has been
disposed of.
(3) Where the holder of any shares exercises his rights under section
430A the court may, on an application made by him or the offeror,
order that the terms on which the offeror is entitled and bound to
acquire the shares shall be such as the court thinks fit.
(4) No order for costs or expenses shall be made against a shareholder
making an application under subsection (1) or (3) unless the court
considers:
(a) that the application was unnecessary, improper or vexatious; or
(b) that there has been unreasonable delay in making the application
or unreasonable conduct on his part in conducting the
proceedings on the application.
(5) Where a takeover offer has not been accepted to the extent necessary
for entitling the offeror to give notices under subsection (1) or (2)
of section 429 the court may, on the application of the offeror, make
an order authorizing him to give notices under that subsection if
satisfied:
(a) that the offeror has after reasonable enquiry been unable to
trace one or more of the persons holding shares to which the
offer relates;
(b) that the shares which the offeror has acquired or contracted to
acquire by virtue of acceptances of the offer, together with the
shares held by the person or persons mentioned in paragraph (a),
amount to not less than the minimum specified in that
subsection; and
(c) that the consideration offered is fair and reasonable; but the
court shall not make an order under this subsection unless it
considers that it is just and equitable to do so having regard,
in particular, to the number of shareholders who have been
traced but who have not accepted the offer.
430D. JOINT OFFERS
(1) A takeover offer may be made by two or more persons jointly and in
that event this Part of this Act has effect with the following
modifications.
(2) The conditions for the exercise of the rights conferred by sections
429 and 430A shall be satisfied by the joint offerors acquiring or
contracting to acquire the necessary shares jointly
Annex III-6
<PAGE>
(as respects acquisitions by virtue of acceptances of the offer) and
either jointly or separately (in other cases); and, subject to the
following provisions, the rights and obligations of the offeror under
those sections and sections 430 and 430B shall be respectively joint
rights and joint and several obligations of the joint offerors.
(3) It shall be a sufficient compliance with any provisions of those
sections requiring or authorizing a notice or other document to be
given or sent by or to the joint offerors that it is given or sent by
or to any of them; but the statutory declaration required by section
429(4) shall be made by all of them and, in the case of a joint
offeror being a company, signed by a director of that company.
(4) In sections 428, 430(8) and 430(E) references to the offeror shall be
construed as references to the joint offerors or any of them.
(5) In section 430(6) and (7) references to the offeror shall be
construed as references to the joint offerors or such of them as they
may determine.
(6) In sections 430(4)(a) and 430B(4)(a) references to the offeror being
no longer able to provide the relevant consideration shall be
construed as references to none of the joint offerors being able to
do so.
(7) In Section 430C references to the offeror shall be construed as
references to the joint offerors except that any application under
subsection (3) or (5) may be made by any of them and the reference in
subsection (5)(a) to the offeror having been unable to trace one or
more of the persons holding shares shall be construed as a reference
to none of the offerors having been able to do so.
430E. ASSOCIATES
(1) The requirement in section 428(1) that a takeover offer must extend
to all the shares, or all the shares of any class or classes, in a
company shall be regarded as satisfied notwithstanding that the offer
does not extend to shares which associates of the offeror hold or
have contracted to acquire; but, subject to subsection (2), shares
which any such associate holds or has contracted to acquire, whether
at the time when the offer is made or subsequently, shall be
disregarded for the purposes of any reference in this Part of this
Act to the shares to which takeover offer relates.
(2) Where during the period within which a takeover offer can be accepted
any associate of the offeror acquires or contracts to acquire any of
the shares to which the offer relates, then, if the condition
specified in subsection(8)(a) or (b) of section 429 is satisfied as
respects those shares they shall be treated for the purposes of that
section as shares to which the offer relates.
(3) In section 430A(1)(b) and (2)(b) the reference to shares which the
offeror has acquired or contracted to acquire shall include a
reference to shares which any associate of his has acquired or
contracted to acquire.
(4) In this section "associate," in relation to an offeror means:
(a) a nominee of the offeror;
(b) a holding company, subsidiary or fellow subsidiary of the
offeror or a nominee of such a holding company, subsidiary or
fellow subsidiary ;
(c) a body corporate in which the offeror is substantially
interested; or
Annex III-7
<PAGE>
(d) any person who is, or is a nominee of, a party to an agreement
with the offeror for the acquisition of, or of an interest in,
the shares which are the subject of the takeover offer, being an
agreement which includes provisions imposing obligations or
restrictions such as are mentioned in section 204(2)(a).
(5) For the purposes of subsection (4)(b) a company is a fellow
subsidiary of another body corporate if both are subsidiaries of the
same body corporate but neither is a subsidiary of the other.
(6) For the purposes of subsection (4)(c) an offeror has a substantial
interest in a body corporate if:
(a) that body or its directors are accustomed to act in accordance
with his directions or instructions; or
(b) he is entitled to exercise or control the exercise of one-third
or more of the voting power at general meetings of that body.
(7) Subsections (5) and (6) of section 204 shall apply to subsection
(4)(d) above as they apply to that section and subsections (3) and
(4) of section 203 shall apply for the purposes of subsection (6)
above as they apply for the purposes of subsection (2)(b) of that
section.
(8) Where the offeror is an individual his associates shall also include
his spouse and any minor child or step-child of his.
430F. CONVERTIBLE SECURITIES
(1) For the purposes of this Part of this Act securities of a company
shall be treated as shares in the company if they are convertible
into or entitle the holder to subscribe for such shares; and
references to the holder of shares or a shareholder shall be
construed accordingly.
(2) Subsection (1) shall not be construed as requiring any securities to
be treated:
(a) as shares of the same class as those into which they are
convertible or for which the holder is entitled to subscribe; or
(b) as shares of the same class as other securities by reason only
that the shares into which they are convertible or for which the
holder is entitled to subscribe are of the same class.
Annex III-8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware or
DGCL, provides that a Delaware corporation has the power, under specified
circumstances, to indemnify its directors, officers, employees, and agents.
Indemnification is allowed in connection with threatened, pending, or completed
actions, suits, or proceedings, whether civil, criminal, administrative, or
investigative, other than an action by or in right of the corporation, brought
against them by reason of the fact that they were or are directors, officers,
employees, or agents, for:
. expenses, judgments, fines; and
. amounts paid in settlement actually and reasonably incurred in
the action, suit, or proceeding.
Article X of the Registrant's restated certificate of incorporation together
with Section 39 of its by-laws provide for indemnification of each person who is
or was made a party to any actual or threatened civil, criminal, administrative,
or investigative action, suit, or proceeding because:
. the person is or was an officer or director of the Registrant; or
. is a person who is or was serving at the request of the
Registrant as a director, officer, employee, or agent of another
corporation or of a partnership, joint venture trust, or other
enterprise, including service relating to employee benefit plans,
to the fullest extent permitted by the DGCL as it existed at the time the
indemnification provisions of the Registrant's restated certificate of
incorporation and the by-laws were adopted or as may be later amended. Section
39 of the Registrant's by-laws and Article X of its restated certificate of
incorporation expressly provide that they are not the exclusive methods of
indemnification.
Section 39 of the by-laws provides that the Registrant may maintain
insurance, at its own expense, to protect itself and any director, officer,
employee, or agent of the Registrant or of another entity against any expense,
liability, or loss. This insurance coverage may be maintained regardless of
whether the Registrant would have the power to indemnify those persons against
any expense, liability, or loss under the DGCL.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. However, that provision
shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the
corporation or its stockholders;
. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
. under Section 174 of the DGCL (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on,
capital stock); or
. for any transaction from which the director derived an improper
personal benefit.
Article XV of the Registrant's restated certificate of incorporation contains
such a provision.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
Exhibit
Number Description of Exhibits
- ------ -----------------------
1.1* Form of Warranty Agreement dated _________, 1999 between the
Registrant and directors and key employees of PES (International)
Limited.
1.2* Form of Irrevocable Undertakings dated ________, 1999.
1.3* Form of Service Agreement between a member of the PES Group and
directors of PES (International) Limited (U.K. form).
1.4** Form of Service Agreement between a subsidiary of the Registrant and
directors of PES (International) Limited (U.S. form).
1.6+++ PES Technology Transfer and Development Plan.
1.7++ Halliburton Stock Option Plan for PES Employees.
5.1* Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities offered.
8.1** Opinion of CMS Cameron McKenna as to U.K. taxation matters.
8.2** Opinion of Vinson & Elkins L.L.P. as to U.S. taxation matters.
23.1+ Consent of Arthur Andersen LLP.
23.2+ Consent of PricewaterhouseCoopers (PES (International) Limited).
23.3+ Consent of PricewaterhouseCoopers (Dresser Industries, Inc.)
23.4* Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1).
23.5** Consent of CMS Cameron McKenna (contained in Exhibit 8.1).
______________
* Filed as an exhibit to Halliburton's registration statement on Form S-4
(SEC File No. 333-79975), dated June 4, 1999.
** Filed September 10, 1999, as an amendment to Halliburton's registration
statement on Form S-4 (SEC File No. 333-79975), dated June 4, 1999.
+ Filed as of the date hereof.
++ To be filed by amendment.
+++ The PES Technology Transfer and Development Plan has been omitted from
this filing and filed with the SEC pursuant to Rule 406 of the Securities
Act of 1933.
Financial Statement Schedules:
The financial statement schedules have previously been filed as part of
Halliburton's annual report on Form 10-K for the fiscal year ended December 31,
1998.
II-2
<PAGE>
Item 22. Undertakings
The Registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required in Section 10(a)(3) of
the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (1)(a) and (1)(b) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering;
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of
this Form, within one business day of the receipt of such request, and
to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement
through the date of responding to the request;
(6) That, prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the
applicable form;
(7) That every prospectus (a) that is filed pursuant to paragraph
(6) immediately preceding, or (b) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of
1933, each such post-effective
II-3
<PAGE>
amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof; and
(8) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the provisions
described under Item 20 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 22 day of December, 1999.
HALLIBURTON COMPANY
By: /s/ Richard B. Cheney
-------------------------------
Richard B. Cheney
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on the 22 day of December, 1999:
Signature Title
--------- -----
/s/ Richard B. Cheney Chief Executive Officer
------------------------------
Richard B. Cheney and Director
/s/ Gary v. Morris Executive Vice President
------------------------------
Gary V. Morris and Chief Financial Officer
/s/ R. Charles Muchmore, Jr. Vice President, Controller
------------------------------
R. Charles Muchmore, Jr. and Chief Accounting Officer
/s/ Anne L. Armstrong * Director
------------------------------
Anne L. Armstrong
/s/ William E. Bradford * Chairman of the Board and
------------------------------
William E. Bradford Director
/s/ Lord Clitheroe * Director
------------------------------
Lord Clitheroe
/s/ Robert L. Crandall * Director
------------------------------
Robert L. Crandall
/s/ Charles J. DiBona * Director
------------------------------
Charles J. DiBona
/s/ Lawrence S. Eagleburger * Director
------------------------------
II-5
<PAGE>
Lawrence S. Eagleburger
/s/ W. R. Howell * Director
- --------------------------------------
W. R. Howell
/s/ Ray L. Hunt * Director
- --------------------------------------
Ray L. Hunt
/s/ J. Landis Martin * Director
- --------------------------------------
J. Landis Martin
/s/ Jay A. Precourt * Director
- --------------------------------------
Jay A. Precourt
/s/ C. J. Silas * Director
- --------------------------------------
C. J. Silas
/s/ Richard J. Stegemeier * Director
- --------------------------------------
Richard J. Stegemeier
*By: /s/ Susan S. Keith
------------------------------
Susan S. Keith,
pursuant to powers of attorney
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included or made a part of this
Amendment No. 3 to Registration Statement File No. 333-79975.
/s/ Arthur Andersen LLP
- --------------------------
Arthur Andersen LLP
Dallas, Texas
December 22, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the inclusion in this registration statement of Halliburton
Company on Form S-4 (File No 333-79975) of our reports on our audits of the
consolidated financial statements of PES (International) Limited ("The
Company") in respect of each of the three years ended 31 March 1999 and our
report on the reconciliation of significant differences between US and UK
Generally Accepted Accounting Principles. We also consent to the references to
our firm under the captions "Experts" and "Selected Historical Consolidated
Financial Data."
/s/ PRICEWATERHOUSECOOPERS
- --------------------------
PricewaterhouseCoopers
Aberdeen, Scotland
December 22, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Amendment No. 3 to the registration
statement on Form S-4 of Halliburton Company of our report dated November 26,
1997 relating to the financial statements of Dresser Industries, Inc. and its
subsidiaries (not presented separately herein), which appears in such
registration statement. We also consent to the reference to us under the heading
"Experts" in such registration statement.
/s/ PRICEWATERHOUSECOOPERS
- --------------------------
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
December 22, 1999
