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As filed with the Securities and Exchange Commission on September 13, 1999
Registration No. 333-79975
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
HALLIBURTON COMPANY
(Exact name of registrant as specified in its charter)
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Delaware 1389 75-2677995
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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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
(Address, including zip code, and (Name, address, including zip code, and
telephone number, telephone number, Attn: William E. Joor III
including area code, of including area code, of agent for service)
registrant's
principal executive offices)
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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. [_]
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.
1
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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. [_]
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.
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SUBJECT TO COMPLETION DATED __________, 1999
PRELIMINARY OFFER DOCUMENT
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 soliciting an offer to buy those
securities in any state where the offer or sale is not permitted.
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 all your shares of PES
(International) Limited in exchange for shares of Halliburton common stock on
the following basis:
. up to 3.274 shares of Halliburton common stock for each of your PES
shares, of which:
. 1.21138 shares will be issued upon completion of the offer;
. 0.98220 shares will be issued 18 months after completion of the
offer, subject to potential reduction and further delay; and
. 1.08042 shares will be issued up to 36 months after completion of
the offer, subject to potential reduction and further delay.
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 is 3.274 shares per PES share or a total
of3,069,899 shares. The minimum number of shares issuable is 2.03643 shares per
PES share or a total of 1,909,479 shares. The closing sales price per share of
Halliburton common stock on the New York Stock Exchange on __________, 1999 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 ______________,
1999. Please read pages 33 through 35 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 16, 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 ___________, 1999.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE OFFER.............................. iv
SUMMARY............................................................ 1
The Companies................................................... 1
The Offer....................................................... 1
Terms and Conditions of the Offer............................... 3
PES Extraordinary General Meeting............................... 3
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..................................... 6
Regulatory Approvals............................................ 6
Tax Consequences................................................ 7
Risk Factors.................................................... 7
Listing of Halliburton Common Stock............................. 7
Applicable Laws................................................. 7
Currency Information............................................ 8
Accounting Treatment............................................ 8
Responsibility.................................................. 8
SUMMARY SELECTED FINANCIAL DATA.................................... 9
RISK FACTORS....................................................... 16
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................................... 26
THE OFFER.......................................................... 27
General......................................................... 27
No Rights of Withdrawal......................................... 29
Compulsory Acquisition; Appraisal Rights........................ 29
Conditions to the Offer......................................... 30
Interests of PES Directors and Key
Employees....................................................... 31
Acceptance...................................................... 33
Settlement...................................................... 35
Method of Selling Halliburton Common
Stock........................................................... 36
Recapitalization................................................ 36
Fees and Expenses of the Offer.................................. 37
Regulatory Approvals and Legal Matters.......................... 37
THE WARRANTY AGREEMENT............................................. 38
IRREVOCABLE UNDERTAKINGS........................................... 41
SERVICE AGREEMENTS................................................. 42
TAX CONSEQUENCES OF THE OFFER AND COMPULSORY ACQUISITION........... 44
PES EXTRAORDINARY GENERAL MEETING.................................. 49
INFORMATION REGARDING HALLIBURTON COMPANY.......................... 50
HALLIBURTON COMPANY SELECTED FINANCIAL DATA........................ 53
HALLIBURTON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 55
INFORMATION REGARDING PES.......................................... 74
PES SELECTED CONSOLIDATED FINANCIAL DATA........................... 77
SUMMARY OF DIFFERENCES BETWEEN U.K. AND U.S.GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES............................................. 79
PES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 82
MANAGEMENT OF PES.................................................. 86
SECURITY OWNERSHIP AND DEALINGS BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF PES................................................. 88
MANAGEMENT OF HALLIBURTON.......................................... 90
SECURITY OWNERSHIP AND DEALINGS BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF HALLIBURTON......................................... 93
DESCRIPTION OF HALLIBURTON CAPITAL STOCK........................... 96
COMPARATIVE RIGHTS OF SHAREHOLDERS................................. 100
LEGAL MATTERS...................................................... 107
EXPERTS............................................................ 107
WHERE YOU CAN FIND MORE INFORMATION................................ 108
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HALLIBURTON COMPANY
CONSOLIDATED FINANCIAL STATEMENTS...................... 110
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND FINANCIAL
STATEMENTS 31 MARCH 1997............................... 151
PES (INTERNATIONAL) LIMITED
DIRECTORS' REPORT AND FINANCIAL
STATEMENTS 31 MARCH 1998............................... 177
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
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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: WHEN WILL I RECEIVE MY SHARES OF HALLIBURTON COMMON STOCK?
A: You will receive your shares of Halliburton common stock as follows: 37% in
an initial element to be paid upon completion, 30% in a deferred element to
be paid 18 months after completion and 33% in a deferred element to be paid
up to 36 months after completion. The deferred elements are subject to
reduction or delay due to factors beyond your control.
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
________, 1999. 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.
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.
iv
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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 108.
THE COMPANIES (pages 50 through 85)
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 June 30, 1999, we employed approximately 98,000 people. At
_______, 1999, 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. A SCRAMS
allows a well operator to evaluate and control production from individual zones
in a multi-zone producing well without the need for well intervention. PES has
obtained patent and copyright protection for many of the key features of SCRAMS.
In addition to SCRAMS, 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 27 through 37)
GENERAL. We are offering to acquire all your PES shares and any PES shares
that 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 in
the capital of a PES subsidiary held 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 which accompanies this offer
document.
If you accept the offer, you will receive shares of our common stock which
will be distributed in an initial, fixed element and two deferred, partially
contingent elements. The deferred elements are partially subject to two
contingencies, either of which could cause the number of shares that you would
receive in each deferred element to be reduced:
. the first contingency is that two key executives of PES, Laurence Kinch
and Richard Rubbo, have not voluntarily resigned nor has their employment
been terminated for cause on the dates of determination regarding the
deferred elements of the offer; and
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. the second contingency is that Mr. Rubbo has not died or disappeared in
suspicious circumstances on the dates of determination regarding the deferred
elements of the offer.
CONSIDERATION. If you accept the offer, and the offer becomes unconditional,
you will receive up to 3.274 shares of our common stock for each of your PES
shares, of which:
. 1.21138 shares will be issued promptly after completion of the offer;
. 0.98220 shares will be issued 18 months after completion of the offer,
subject to reduction or further delay as described in the next two
subsections; and
. 1.08042 shares will be issued up to 36 months after completion of the
offer, subject to reduction or further delay as described in the next two
subsections.
THE FIRST CONTINGENCY. We will reduce the number of shares of our common stock
to be issued in connection with the two deferred elements in the following
circumstances. If either Mr. Kinch or Mr. Rubbo is not then employed by us as a
result of voluntary resignation or termination for cause, the number of shares
will be reduced as follows: We will reduce the number of shares for each
deferred element by 30% for each of these two employees who is not so employed
by us on the relevant determination date for that deferred element. The
determination date for the first deferred element will occur 18 months after
completion of the offer. The determination date for the second deferred element
will occur up to 36 months after completion of the offer. For example, if
neither of them is employed on the first determination date, we will reduce the
number of shares for each deferred element by 60%.
We will issue the shares of our common stock comprising the second deferred
element promptly after the third anniversary of completion of the offer unless
before that date we have decided, in our sole discretion, that PES has achieved
specific milestones. 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, shares comprising the second deferred
element will be issued promptly following 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.
For the addresses of these offices and a list of the documents displayed
there, please read "Where You Can Find More Information" on page 108.
THE SECOND CONTINGENCY. We will reduce the number of shares of our common
stock to be issued to you 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 determination date for the first deferred element, we will reduce the number
of shares of our common stock comprising the first and second deferred elements
by 30%. If that circumstance should precede the determination date for only the
second deferred element, we will issue the full number of shares comprising the
first element, but we will reduce the number of shares comprising the second
deferred element by 30%. We will eventually issue a number of shares of our
common stock equal to the number of shares by which we reduced the first or
second deferred element or both. 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 27 through 29 and Annex I
to this offer document.
VALUATION. The exchange ratio was fixed as of April 1, 1999. At that date,
the offer valued the entire issued share capital of PES, on a fully diluted
basis, at approximately $___ million or (Pounds)99.526 million. Based on the
closing sales price, as reported on the NYSE Composite Tape, of $____ per share
of our common stock on _________, 1999 and:
. assuming issuance of the maximum number of shares of our common stock, the
offer values each PES share at $____ or (Pounds)____ and the entire issued
share capital of PES, on a fully diluted basis, at $______ or
(Pounds)_____; and
. assuming issuance of the minimum number of shares of our common stock, the
offer values each PES share at $____ or (Pounds)____ and the entire issued
share capital of PES, on a fully diluted basis, at $____ or (Pounds)____.
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
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pages 21 through 25 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. These shares
will rank equally in all respects with the shares of our common stock already
outstanding. You will not, however, 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. The total number of shares to be issued to you will
be rounded down to the next whole share. Unless you are a party to the warranty
agreement, common stock to be issued under the offer will not be subject to any
set-off by us.
If you accept the offer, you will warrant that we will acquire good title to
all PES shares we purchase from you. We will also succeed to all your rights
regarding those shares.
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 ______________, 1999. This procedure is
set out on pages 33 through 35 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 30 through 31)
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.
. 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 _________, 1999, or a longer
period as we may determine. The offer will not, however, be extended beyond
_____, 1999. 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.
PES EXTRAORDINARY GENERAL MEETING (page 49)
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
3
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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 __________, _________, 1999 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 executed 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 31 through 33)
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 interests regarding the offer that are
different from yours. These include the following:
. IRREVOCABLE UNDERTAKINGS. The following PES directors and shareholders
have executed irrevocable undertakings in connection with the offer:
. Directors. Messrs. Michael L. Bowyer, Michael J. Fleming, Steven C.
Owens, Laurence W. Kinch, Richard P. Rubbo, Colin Smith and Drummond W.
Whiteford, who own beneficially 633,570 PES shares or 50.02% of the PES
shares in issue.
. PES Employees. Brett W. Bouldin and Napoleon Arizmendi, both of whom are
key employees of PES, own a total of 31,930 PES shares or 2.52% of the
PES shares in issue.
. PES Trustees Limited. PES Trustees Limited holds 141,130 PES shares,
134,940 of which are subject to PES options. PES Trustees Limited has
given an irrevocable undertaking to accept the offer with respect only
to the 6,190 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
executed irrevocable undertakings. PES Trustees Limited cannot
unconditionally undertake to accept the offer for the remaining 75,110
PES shares because of its obligations under the PES share option
schemes. As a result, its irrevocable undertaking to accept the offer
applies to approximately 5.21% of the issued share capital of PES.
4
<PAGE>
In connection with these irrevocable undertakings, these directors and
employees 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.
. 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.
The irrevocable undertakings have been filed as exhibits to our
registration statement. They will also 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 undertakings,
please read "The Offer-- Interests of PES Directors and Key Employees" on
pages 31 through 33 and "Irrevocable Undertakings" on pages 41 through 42.
. PES SHARE OPTION SCHEMES. The offer applies to any PES shares you acquire
while the offer remains open for acceptance. This includes 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.
. SERVICE AGREEMENTS. Each of the directors of PES, other than Messrs.
McCurley and Renfroe who were nominated by Halliburton Holdings Limited,
has become a party to a service agreement with PES, a PES subsidiary or a
Halliburton subsidiary. The service agreements will become effective upon
the offer becoming unconditional and will supersede any prior service
agreement to which any director is a party. A form of the service
agreements has been filed as an exhibit to our registration statement.
Copies of the executed service agreements 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 service agreements,
please read "The Offer-- Interests of PES Directors and Key Employees" on
pages 31 through 33 and "Service Agreements" on pages 42 and 44.
. WARRANTY AGREEMENT. The following PES directors and 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.
The warranty agreement has been filed as an exhibit to our registration
statement. It will also be on display at the offices of CMS Cameron McKenna
in London and Aberdeen until the end of the offer period. Please read "The
Offer-- Interests of PES Directors and Key Employees" on pages 31 through 33
and "The Warranty Agreement" on pages 38 through 40 for more information
regarding the warranty agreement.
5
<PAGE>
THE RECOMMENDATION OF THE PES BOARD (page 26)
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 29)
You will not be able to withdraw your acceptance once you have validly
accepted the offer. If the offer does not become unconditional prior to its
expiration, we will return your PES shares promptly. 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. We
will not reduce the acceptance condition after the sixth business day before the
scheduled expiration of the offer. Accordingly, if you are unwilling to accept
the offer at a reduced acceptance level, you may wish to delay accepting the
offer until after the sixth business day before the scheduled expiration of the
offer.
APPRAISAL RIGHTS (page 29)
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.
COMPULSORY ACQUISITION (page 29)
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.
We have confirmed to the PES board of directors that the existing employment
rights, including pension rights, of employees of PES will be fully safeguarded.
REGULATORY APPROVALS (page 37)
Neither we nor PES expects that the offer will require any governmental
approval prior to the offer becoming unconditional.
TAX CONSEQUENCES (pages 44 and 48)
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.
6
<PAGE>
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 44 and 45.
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 45
through 48.
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 16 through 19)
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
offer was negotiated 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 the deferred elements will be deferred for
extended periods of 18 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;
. 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 not subject to the U.S. tender offer rules applicable to
securities registered under the U.S. Securities Exchange Act of 1934 or to The
City Code on Takeovers and Mergers in the U.K. The offer is, however, 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 Securities Exchange
Act of 1934.
We have filed a registration statement relating to the offer, sale and
delivery of the shares of our common stock 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.
To review your rights under the U.K. Companies Act 1985, please refer to Annex
III. The offer is governed by English law.
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 __________, 1999, 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,
7
<PAGE>
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 108. 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 79 through 81.
HALLIBURTON(A)
<TABLE>
<CAPTION>
Unaudited
Six Months
Year Ended December 31, Ended June
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 $ 4,665.5 $ 3,433.8
Engineering and
Construction Group........... 3,562.3 3,736.5 4,720.7 4,992.8 5,494.8 2,785.1 2,879.8
Dresser Equipment Group...... 2,452.0 2,467.4 2,710.5 2,779.0 2,848.8 1,389.4 1,279.9
--------- --------- --------- --------- --------- --------- ---------
Total revenues.............. $10,991.8 $11,511.6 $13,946.6 $16,276.5 $17,353.1 $ 8,840.0 $ 7,593.5
========= ========= ========= ========= ========= ========= =========
Operating income:
Energy Services Group........ $ 405.8 $ 544.5 $ 698.0 $ 1,019.4 $ 971.0 $ 587.4 $ 105.7
Engineering and
Construction................. 71.0 96.6 134.0 219.0 237.2 133.3 122.2
Group
Dresser Equipment Group...... 198.1 200.7 229.3 248.3 247.8 116.1 106.4
Special charges and........... (24.6) (8.4) (85.8) (16.2) (980.1) - 47.1
credits(b)
General corporate............. (56.2) (70.8) (72.3) (71.8) (79.4) (39.6) (33.6)
--------- --------- --------- --------- --------- --------- ---------
Total operating income(b)..... 594.1 762.6 903.2 1,398.7 396.5 797.2 347.8
Nonoperating income
(expense),
net(c)....................... 323.1 (32.6) (72.2) (85.6) (117.7) (49.5) (52.9)
--------- --------- --------- --------- --------- --------- ---------
Income from continuing
operations
before income taxes,
minority interest and....... 917.2 730.0 831.0 1,313.1 278.8 747.7 294.9
change in accounting
method
Provision for income
taxes(d)..................... (346.9) (247.0) (248.4) (491.4) (244.4) (280.7) (113.1)
Minority interest in net
income of consolidated
subsidiaries................. (33.1) (20.7) (24.7) (49.3) (49.1) (20.4) (18.2)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from
continuing
operations................... $ 537.2 $ 462.3 $ 557.9 $ 772.4 $ (14.7) $ 446.6 $ 163.6
========= ========= ========= ========= ========= ========= =========
Basic income (loss) per
share:
Continuing operations........ $ 1.25 $ 1.07 $ 1.30 $ 1.79 $ (0.03) $ 1.02 $ 0.37
Net income (loss)............ $ 1.26 $ 0.88 $ 1.30 $ 1.79 $ (0.03) $ 1.02 $ 0.33
Diluted income (loss) per
share:
Continuing operations........ $ 1.24 $ 1.07 $ 1.29 $ 1.77 $ (0.03) $ 1.01 $ 0.37
Net income (loss)............ $ 1.26 $ 0.88 $ 1.29 $ 1.77 $ (0.03) $ 1.01 $ 0.33
Cash dividends per............ $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.25 $ 0.25
share(e)(f)
Average common shares
outstanding (basic)(e)....... 430.6 431.1 429.2 431.1 438.8 438.3 440.0
Average common shares
outstanding (diluted)(e)..... 431.5 432.3 432.1 436.1 438.8 442.7 442.7
CONSOLIDATED BALANCE SHEET
DATA:
Net working capital........... $ 2,196.7 $ 1,476.7 $ 1,501.0 $ 1,982.9 $ 2,079.4 $ 2,001.4 $ 1,894.6
Total assets.................. 8,521.0 8,569.4 9,586.8 10,701.8 11,112.0 11,370.7 10,486.9
Property, plant and........... 2,047.0 2,285.0 2,554.0 2,766.4 2,921.6 2,940.1 2,846.9
equipment, net
Long-term debt (including
current maturities).......... 1,119.8 666.8 958.0 1,304.3 1,428.2 1,293.1 1,427.7
Shareholders' equity.......... 3,722.5 3,577.0 3,741.4 4,316.9 4,061.2 4,614.5 4,090.3
Total capitalization.......... 4,905.9 4,377.9 4,830.1 5,671.7 6,004.4 6,423.5 6,142.9
Shareholders' equity per
share(e)..................... 8.63 8.29 8.78 9.86 9.23 10.51 9.27
</TABLE>
________________
9
<PAGE>
(a) 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.
(b) 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, $21.6 million; and
losses from the sale of assets, $9.7 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.
. Six 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 actual costs being less than estimated.
(c) 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 six months ended June 1999 includes a $26 million loss for
the write-off of our investment in a Mexican construction and engineering
company.
(d) 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.
(e) 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.
(f) 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 79
through 81.
<TABLE>
<CAPTION>
Audited Unaudited
-------------------------------------------------------------------------------------- ---------------
Five
Months to Year Ended Year Ended
March 31, March 31, March 31,
--------------------------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1999
-------------- -------------- --------------- --------------- --------------- ---------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Profit and loss account
Turnover................ (Pounds) 2,808 (Pounds) 7,056 (Pounds) 10,581 (Pounds) 15,989 (Pounds) 22,673 (Pounds) 29,256
Cost of sales........... (1,067) (2,726) (5,311) (8,541) (12,719) (17,122)
-------------- -------------- --------------- --------------- --------------- ---------------
Gross profit............ (Pounds) 1,741 (Pounds) 4,330 (Pounds) 5,270 (Pounds) 7,448 (Pounds) 9,954 (Pounds) 12,134
Administrative expenses. (1,507) (3,431) (5,207) (7,390) (10,191) (10,804)
Other income............ 0 108 897 350 279 242
-------------- -------------- --------------- --------------- --------------- ----------------
Operating profit........ (Pounds) 234 (Pounds) 1,007 (Pounds) 960 (Pounds) 408 (Pounds) 42 (Pounds) 1,572
Non-operating income
(expense).............. 12 (82) (210) (562) (1,749) (289)
-------------- -------------- --------------- --------------- ---------------- ----------------
Profit before tax....... 246 925 750 (154) (1,707) 1,283
Tax..................... (67) (410) (300) (175) (373) (513)
-------------- -------------- --------------- --------------- --------------- ---------------
Profit after tax........ (Pounds) 179 (Pounds) 515 (Pounds) 450 (Pounds) (329) (Pounds) (2,080) (Pounds) 770
Minority interests...... 0 102 565 (174) 0 0
------------- -------------- --------------- --------------- ---------------- ---------------
Profit for year......... (Pounds) 179 (Pounds) 617 (Pounds) 1,015 (Pounds) (503) (Pounds) (2,080) (Pounds) 770
============== ============== ================ =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Audited Unaudited
-------------------------------------------------------------------------------------- ---------------
Year Ended Year Ended
March 31, March 31,
-------------------------------------------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1999
-------------- -------------- --------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet
Intangible fixed assets... (Pounds) 0 (Pounds) 0 (Pounds) 900 (Pounds) 2,470 (Pounds) 2,302 (Pounds) 1,909
Tangible fixed assets..... 1,240 2,026 2,130 3,247 5,099 7,598
Investments............... 0 0 11 146 3,432 3,370
-------------- -------------- --------------- --------------- --------------- -----------------
(Pounds) 1,240 (Pounds) 2,026 (Pounds) 3,041 (Pounds) 5,863 (Pounds) 10,833 (Pounds) 12,877
============== ============== =============== =============== =============== =================
Stock..................... (Pounds) 506 (Pounds) 1,187 (Pounds) 1,855 (Pounds) 2,738 (Pounds) 6,550 (Pounds) 8,211
Debtors................... 1,382 1,859 4,862 6,412 6,294 6,390
Cash...................... 393 123 101 259 1,132 (1,842)
-------------- -------------- --------------- --------------- --------------- -----------------
(Pounds)2,281 (Pounds) 3,169 (Pounds) 6,818 (Pounds) 9,409 (Pounds) 13,976 (Pounds) 12,759
============== ============== =============== =============== =============== =================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Audited Unaudited
-------------------------------------------------------------------------------------- ---------------
Five
Months to Year Ended Year Ended
March 31, March 31, March 31,
--------------------------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1999
-------------- --------------- --------------- --------------- --------------- ---------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Creditors less than 1
year.................... (Pounds)(2,155) (Pounds)(3,043) (Pounds)(6,671) (Pounds)(10,122) (Pounds)(5,592) (Pounds)(6,071)
Creditors more than
1 year.................. (164) (408) (1,071) (2,041) (1,472) (1,462)
Provisions................ (93) (112) (74) (54) (852) (440)
---------------- --------------- -------------- --------------- -------------- --------------
Net Assets................ (Pounds) 1,109 (Pounds) 1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds)16,893 (Pounds)17,663
================ =============== ============== =============== ============== ==============
Share capital............. 78 78 78 85 129 129
Share premium............. 0 1,200 1,200 2,459 26,961 26,961
Profit and loss account... 179 (408) 569 (21) (2,218) (1,448)
Goodwill reserve.......... (927) (927) (927) (927) (9,768) (9,768)
Other..................... 1,779 1,689 1,123 1,459 1,789 1,789
---------------- ------------- -------------- --------------- -------------- --------------
Equity.................... (Pounds) 1,109 (Pounds) 1,632 (Pounds)2,043 (Pounds) 3,055 (Pounds)16,893 (Pounds)17,663
================ ============= ============== =============== ============== ==============
Profit for period per
share(a)................. 0.50 0.75 1.25 (0.63) (1.62) 0.62
Dividends declared per
share(a)................. --- --- 0.06 0.06 --- ---
</TABLE>
Currency Exchange Information
United States dollar to one pound sterling (b)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Period End.............. 1.4880 1.6190 1.5262 1.6448 1.6765 1.6140
Average................. 1.5015 1.5650 1.5623 1.5989 1.6463 1.6526
High.................... 1.5695 1.6350 1.6091 1.7123 1.6885 1.6995
Low..................... 1.4775 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.
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
</TABLE>
_________________
* Calendar quarters. Our fiscal year ends on December 31.
** The closing sales prices 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: April 1, 1999 - $36.625; May 3, 1999 -$45.00; June 1,
1999 - $40.75; July 1, 1999 - $ 43.75; August 2, 1999 - $45.75; and September
1, 1999 - $ 45.94.
On ________, 1999, 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 July
15, 1999, we declared a cash dividend of $0.125 per share of our common stock,
payable on September 23, 1999, to stockholders of record on September 2, 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. Consequently, you will not be entitled to receive this dividend.
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
13
<PAGE>
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.
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, 1998 was combined with Halliburton's year ended
December 31, 1997.
. 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 recorded.
. 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.
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
Year Ended Six Months
December 31, Ended
1998 June 30, 1999
-----------------------------
<S> <C> <C>
Historical Data Per Common Share:
Income (loss) from continuing operations:
Basic........................................ $(0.03) $0.37
Diluted...................................... (0.03) 0.37
Cash dividends................................... 0.50 0.25
Book value....................................... 9.23 9.27
</TABLE>
14
<PAGE>
PES
<TABLE>
<CAPTION>
Unaudited
Year Ended Year Ended
March 31, March 31,
1998 1999
-----------------------------------------
<S> <C> <C>
HistoricaL Data Per Share(a):
Income (loss) from continuing operations................ (Pounds) (1.62) (Pounds) 0.62
Cash dividends.......................................... -- --
Book value.............................................. 12.92 13.54
Pro Forma Data Per Equivalent Share In Pounds Sterling:
. Maximum Issuance:
Income (loss) from continuing operations................ (Pounds) 3.51 (Pounds) (0.08)
Cash dividends.......................................... 1.02 1.02
Book value.............................................. 20.68 19.39
. minimum Issuance:
Income (loss) from continuing operations................ (Pounds) 2.20 (Pounds) (0.05)
Cash dividends.......................................... 0.62 0.62
Book value.............................................. 12.91 12.11
Pro Forma Data Per Equivalent Share In U.S. dollars:
. maximum Issuance:
Income (loss) from continuing operations................ $ 5.66 $ (0.13)
Cash dividends.......................................... 1.64 1.64
Book value.............................................. 33.30 31.23
. Minimum issuance:
Income (loss) from continuing operations................ $ 3.54 $ (0.08)
Cash dividends.......................................... 1.00 1.00
Book value.............................................. 20.79 19.51
</TABLE>
_____________
(a) Based on 1,266,540 PES ordinary shares outstanding at March 31, 1998 and
March 31, 1999 after giving effect to the 10-for-1 stock split effected on
October 27, 1998.
15
<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 deferred consideration you are eligible to
receive is contingent upon factors beyond your control. A substantial portion,
63%, of the shares of our common stock to be issued to you in exchange for your
PES shares is deferred. The first deferred element, consisting of shares
equaling up to 30% of the offer consideration will be issued 18 months after
completion. The second deferred element, consisting of shares equaling up to
33% of the offer consideration will be issued 36 months after completion. The
latter date may be accelerated to a date no earlier than 30 months following
completion. Up to 60% of the deferred consideration you are eligible to receive
is contingent upon the continued employment of Messrs. Kinch and Rubbo, a matter
beyond your control. We will reduce each deferred element by 30% for each of
these two employees who is not so employed by us on the relevant determination
date for that deferred element. For example, if neither of them is employed on
the first determination date, we will reduce each deferred element by 60%.
Risks Specific to Halliburton
Our business is affected by the volatility of oil and gas prices. Demand
for our services and products depends on conditions in the worldwide oil and
natural gas industry. Demand is particularly sensitive to the level of
development, production and exploration activity of, and the corresponding
capital spending by, oil and natural gas companies. Oil and gas industry
activity and expenditure levels are directly affected by trends in oil and
natural gas prices. 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 has 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
16
<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 six 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 two quarters of 1999
as compared to the same period for 1998.
There are risks related to our acquisition strategy. 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.
Any inability on our part to integrate and manage acquired businesses could
have a material adverse effect on our results of operations and financial
condition. 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 the integration of Dresser Industries, Inc.
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 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;
. the need to coordinate geographically diverse organizations;
. incompatible technologies and equipment; and
17
<PAGE>
. the resulting diversion of management's attention from our business.
Our foreign operations are subject to risks inherent in doing business abroad.
Our operations in 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 outside the U.S.
are subject to various risks, including:
. 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 foreign
governmental 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.
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.
Our foreign operations are subject to exchange rate risks. A sizable
portion of our consolidated revenues and consolidated operating expenses are in
foreign currencies, which subjects us to significant foreign exchange risks.
These risks may 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 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, and may be affected by, environmental and
other governmental regulations. 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;
18
<PAGE>
. 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.
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 16;
. "The PES Board's Reasons for Recommending the Offer; Recommendation of
the PES Board" beginning on page 26;
. "Information Regarding Halliburton Company" beginning on page 50;
. "Halliburton Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 55; and
. "Information Regarding PES" beginning on page 72.
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, which are forward-looking and
which provide other than historical information, involve those risks and
uncertainties. Our forward-looking information reflects our best judgement based
on current information. However, forward-looking information involves 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 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;
19
<PAGE>
. environmental laws, including those that require emission performance
standards for new and existing facilities;
. 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,
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 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;
. 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 which 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.
In addition, future trends for pricing, margins, revenues and profitability
remain difficult to predict in the industries that we serve.
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 55 through 71, 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
20
<PAGE>
Cameron McKenna, the receiving agent for the offer. Please read "Where You Can
Find More Information" on page 108.
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.
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:
21
<PAGE>
. 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.
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
22
<PAGE>
. 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;
. 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;
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. 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.
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
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ratio and the total number of shares were reduced on May 31, 1999 to those set
forth in the offer. 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.
On September 9, 1999, Messrs. Kinch and Renfroe, acting on behalf of their
respective parties, agreed to change the allocation of Halliburton 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 recent, unrelated, publicly announced transaction.
Definitive documents, including the warranty agreement, the irrevocable
undertakings and the service agreements, were executed on and as of ________,
1999.
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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.
. The existence of the irrevocable undertakings given by the PES directors
who own PES shares and the principal shareholders, to accept the offer
and to take other actions as are set forth in the irrevocable
undertakings. Those directors and principal shareholders are the holders
of 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 "Summary Selected Financial
Data--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. However, substantial
weight was 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
We are offering to acquire the 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.
Consideration. If you accept our offer, the shares of our common stock you
will receive will be paid in an initial, fixed element and two deferred,
partially contingent elements. The deferred elements are subject to two
contingencies, either of which could cause the number of shares that you would
receive in each deferred element to be reduced:
. the first contingency is that two key executives of PES, Laurence Kinch
and Richard Rubbo, have not voluntarily resigned nor has their
employment been terminated for cause on the dates of determination
regarding the deferred elements of the offer; and
. the second contingency is that Mr. Rubbo has not died or disappeared in
suspicious circumstances on the dates of determination regarding the
deferred elements of the offer.
Upon the offer becoming unconditional, also referred to as "completion,"
you will receive up to 3.274 shares of our common stock for each of your PES
shares, of which:
. 1.21138 shares will be issued promptly after completion of the
offer;
. 0.98220 shares will be issued 18 months after completion of the offer,
also referred to as the "first determination date," subject to potential
reduction or delay. This reduction or delay could occur if either
Laurence Kinch or Richard Rubbo is not employed by us or a member of our
group of companies on the first determination date 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
. 1.08042 shares will be issued up to 36 months after completion of the
offer, also referred to as the "second determination date," subject to
potential reduction or delay. This reduction or delay could occur if
either Mr. Kinch or Mr. Rubbo is not employed by us or a member of our
group of companies on the second determination date 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 number of shares of our common
stock to be issued 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 the number of shares for each deferred element by 30%
for each of these two employees who is not so employed by us on the
determination date for that deferred element. For example, if neither of them
is employed on the first determination date, we will reduce the number of shares
for each deferred element 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.
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
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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 with us 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 Part 2 of Annex I to this offer
document.
The Second Contingency. We will reduce the number of shares of our common
stock comprising the deferred elements 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. 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,
prior to the second determination date.
If Mr. Rubbo should die or disappear in suspicious circumstances before the
determination date for the first deferred element, we will reduce the number of
shares of our common stock comprising the first and second deferred elements by
30%. If that circumstance should precede the determination date for only the
second deferred element, we will issue the full number of shares comprising the
first element, but we will reduce the number of shares comprising the second
deferred element by 30%.
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:
. 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;
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. 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 Parts 2 and 3 of Annex I to this
offer document.
Valuation. The exchange ratio was fixed on April 1, 1999. Our offer valued
the entire issued share capital of PES, on a fully diluted basis, at
approximately $___ million or (Pounds)99.526 million. Based on the closing sales
price as reported on the NYSE Composite Tape of $____ per share of our common
stock on _________, 1999, the latest practicable date prior to the publication
of this offer document:
. assuming issuance of the maximum number of shares of our common stock
subject to the deferred elements of the offer, the offer values each PES
share at $____ or (Pounds)____ and the entire issued share capital of
PES, on a fully diluted basis, at $______ or (Pounds)_____; or
. assuming issuance of the minimum number of shares of our common stock
subject to the deferred elements of the offer, the offer values each PES
share at $____ or (Pounds)____ and the entire issued share capital of
PES, on a fully diluted basis, at $____ or (Pounds)____.
Each of these implied valuations was based on an exchange rate of (Pounds)1.00
to $_____, and none of them takes into account any delay that may affect the
issuance of the shares of our common stock under the terms of the offer.
Halliburton Holdings Limited owns 334,360 PES shares, being 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 pages 29 and
30.
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 __________, 1999, your PES shares will
be returned to you promptly.
We do not now 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.
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.
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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:
. 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;
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. 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 which 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 group of 18 individuals, consisting of the PES
directors unaffiliated with our company, members of the immediate families of
some of those directors and two key employees of PES, have executed irrevocable
undertakings in connection with the offer.
In connection with these irrevocable undertakings, these directors and
shareholders 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 have agreed:
. 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.
PES Trustees Limited has also given an irrevocable undertaking. The
irrevocable undertaking given by PES Trustees Limited obligates 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, 6,190 PES shares representing
0.49% 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.
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The irrevocable undertakings have been filed as exhibits to the
registration statement and 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 41 through 42.
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. Each Halliburton option will
become exercisable for the shares subject to the option proportional to the
delayed elements of the offer at the same times as provided in the offer. The
number of shares of our common stock subject to the delayed elements of the
option will be subject to reduction on the same basis as provided in the offer.
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. Please read "Service
Agreements" on pages 42 through 43 for more information regarding the service
agreements.
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."
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 38 through 40.
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 93 with respect to any PES
shares.
Please read "Background of and Reasons for the Offer" on pages 21 through
25.
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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 93 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;
. 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
and
. deliver the form of acceptance and other documents no later than 3:00
p.m., London time/10:00 a.m., New York City time, on _________, 1999.
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 Boxes 1 and 2 and, if appropriate, Boxes
3 and 4 and, if necessary, Box 5 of the form of acceptance. 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.
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<PAGE>
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 to the
transfer agent;
. 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;
. 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.
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<PAGE>
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.
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 deferred elements of the offer as promptly as practicable but in no
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 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 July 15, 1999, payable to stockholders of record
on September 2, 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
35
<PAGE>
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 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 the payment
of the last deferred element, 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.
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<PAGE>
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 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.
37
<PAGE>
THE WARRANTY AGREEMENT
The material terms of the warranty agreement are summarized below. A copy
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 "voluntarily resigns" or their employment is "terminated for cause,"
they will be obligated to pay Halliburton liquidated damages in an amount equal
to:
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<PAGE>
. 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 30 through 31.
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.
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;
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<PAGE>
. 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 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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<PAGE>
IRREVOCABLE UNDERTAKINGS
General. The following PES shareholders and PES optionholders have entered
into irrevocable undertakings with our company:
<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 entered into the irrevocable undertakings agreed,
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
. 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.
PES Trustees Limited has also given an irrevocable undertaking to vote its
PES ordinary shares in favor of the resolution. 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
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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 given by PES Trustees Limited only obligates 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,
. to accept the offer with respect to those PES shares held by it and
not subject to outstanding options, that is, 6,190 PES shares
representing 0.49% 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.
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 given by these shareholders are governed by English
law. Samples of the irrevocable undertakings have been filed as exhibits to the
registration statement and are on display at the London and Aberdeen offices of
the receiving agent. Please read "Where You Can Find More Information" on pages
108 through 109.
Additional Obligations of PES Directors. The PES directors, other than
Messrs. McCurley and Renfroe, the nominees of Halliburton Holdings Limited, in
their irrevocable undertakings, have additionally and irrevocably
undertaken:
. 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. 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;
. 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.
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<PAGE>
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) 78,000 (Pounds) 0 - 39,000 (Pounds) 4,680
Richard P. Rubbo............... $125,000 $ 0 - 62,500 $5,000
Michael L. Bowyer.............. (Pounds) 75,920 (Pounds) 0 - 37,960 (Pounds) 4,555
Michael J. Fleming............. $125,000 $ 16,667 - 41,667(a) $5,000
Steven C. Owens................ $120,000 $ 0 - 60,000 $4,800
Colin Smith.................... (Pounds) 65,625 (Pounds) 0 - 32,813 (Pounds) 3,938
Drummond W. Whiteford.......... (Pounds) 73,000 (Pounds) 9,733 - 24,333(a) (Pounds) 4,380
</TABLE>
________________
(a) These bonuses will be paid in two installments, subject to achievement of
milestones identified in the applicable bonus plan.
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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.
44
<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 element and each of
the deferred elements, 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 you receive upon payment of the second deferred
element, exclusive of the portion taxed as ordinary interest income, is less
than the basis allocated to that taxable year, a capital loss would be
recognized. A capital loss recognized by
45
<PAGE>
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 deferred elements 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
deferred element will be taxed as ordinary interest income to you. The balance
of the deferred element will be treated as the principal component with the
consequences described above. The interest amount for each deferred element
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 each deferred element 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 deferred element 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 deferred element. If the deferred
elements are treated as contingent debt instruments, the amount of each deferred
element 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 deferred element
would be treated as the principal component of the deferred element, with the
consequences described above. The amount of the deferred element 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
. 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.
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<PAGE>
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 44. 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 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.
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<PAGE>
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.
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.
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<PAGE>
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 ____________, _______________, 1999,
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 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 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 given 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 given 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 results of operations. Information regarding our
exposure to foreign currency fluctuations, risk concentration and financial
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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
-------- --------
(in millions)
------------------
<S> <C> <C>
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 June 30, 1999, we employed approximately 98,000 people.
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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.
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HALLIBURTON COMPANY
SELECTED FINANCIAL DATA(A)
Millions of dollars and shares except per share and employee data
<TABLE>
<CAPTION>
Unaudited
Six Months
Year Ended December 31, Ended June 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 $ 4,665.5 $ 3,433.8
Engineering and Construction Group............ 3,562.3 3,736.5 4,720.7 4,992.8 5,494.8 2,785.1 2,879.8
Dresser Equipment Group....................... 2,452.0 2,467.4 2,710.5 2,779.0 2,848.8 1,389.4 1,279.9
--------- --------- --------- --------- --------- --------- ---------
Total revenues............................. $10,991.8 $11,511.6 $13,946.6 $16,276.5 $17,353.1 $ 8,840.0 $ 7,593.5
========= ========= ========= ========= ========= ========= =========
Operating income:
Energy Services Group......................... $ 405.8 $ 544.5 $ 698.0 $ 1,019.4 $ 971.0 $ 587.4 $ 105.7
Engineering and Construction Group............ 71.0 96.6 134.0 219.0 237.2 133.3 122.2
Dresser Equipment Group....................... 198.1 200.7 229.3 248.3 247.8 116.1 106.4
Special charges and credits(b)................ (24.6) (8.4) (85.8) (16.2) (980.1) - 47.1
General corporate............................. (56.2) (70.8) (72.3) (71.8) (79.4) (39.6) (33.6)
--------- --------- --------- --------- --------- --------- ---------
Total operating income(b).................. 594.1 762.6 903.2 1,398.7 396.5 797.2 347.8
Nonoperating income (expense), net(c)........... 323.1 (32.6) (72.2) (85.6) (117.7) (49.5) (52.9)
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations before
income taxes, minority interest and change in
accounting method............................... 917.2 730.0 831.0 1,313.1 278.8 747.7 294.9
Provision for income taxes(d)................... (346.9) (247.0) (248.4) (491.4) (244.4) (280.7) (113.1)
Minority interest in net income of consolidated
subsidiaries.................................. (33.1) (20.7) (24.7) (49.3) (49.1) (20.4) (18.2)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations........ $ 537.2 $ 462.3 $ 557.9 $ 772.4 $ (14.7) $ 446.6 $ 163.6
========= ========= ========= ========= ========= ========= =========
Basic income (loss) per common share:
Continuing operations......................... $ 1.25 $ 1.07 $ 1.30 $ 1.79 $ (0.03) $ 1.02 $ 0.37
Net income (loss)............................. 1.26 0.88 1.30 1.79 (0.03) 1.02 0.33
Diluted income (loss) per share:
Continuing operations......................... 1.24 1.07 1.29 1.77 (0.03) 1.01 0.37
Net income (loss)............................. 1.26 0.88 1.29 1.77 (0.03) 1.01 0.33
Cash dividends per share(e)(f).................. 0.50 0.50 0.50 0.50 0.50 0.25 0.25
Return on average shareholders' equity.......... 15.47% 10.43% 15.25% 19.17% (0.35%) 10.0% 3.5%
Financial position:
Net working capital............................. $ 2,196.7 $ 1,476.7 $ 1,501.0 $ 1,982.9 $ 2,079.4 $ 2,001.4 $ 1,894.6
Total assets.................................... 8,521.0 8,569.4 9,586.8 10,701.8 11,112.0 11,370.7 10,486.9
Property, plant and equipment, net.............. 2,047.0 2,285.0 2,554.0 2,766.4 2,921.6 2,940.1 2,846.9
Long-term debt (including current maturities)... 1,119.8 666.8 958.0 1,304.3 1,428.2 1,293.1 1,427.7
Shareholders' equity............................ 3,722.5 3,577.0 3,741.4 4,316.9 4,061.2 4,614.5 4,090.3
Total capitalization............................ 4,905.9 4,377.9 4,830.1 5,671.7 6,004.4 6,423.5 6,142.9
Shareholders' equity per share(e)............... 8.63 8.29 8.78 9.86 9.23 10.51 9.27
Average common shares outstanding (basic)(e).... 430.6 431.1 429.2 431.1 438.8 438.3 440.0
Average common shares outstanding (diluted)(e).. 431.5 432.3 432.1 436.1 438.8 442.7 442.7
Other financial data:
Cash flows from operating activities............ $ 793.1 $ 1,094.6 $ 864.2 $ 833.1 $ 454.1 $ 144.4 $ (6.7)
Cash flows from investing activities............ 528.6 (837.0) (759.1) (873.3) (846.1) (453.4) 103.0
Cash flows from financing activities............ (644.5) (721.4) (148.4) (20.6) 253.7 243.7 30.8
Capital expenditures............................ 432.1 591.5 731.1 880.1 914.3 469.9 267.0
Long-term borrowings (repayments), net.......... (120.8) (482.2) 287.4 285.5 123.3 (11.5) (8.3)
Depreciation and amortization expense........... 487.6 466.4 497.7 564.3 587.0 291.1 290.0
Payroll and employee benefits................... 4,222.3 4,188.0 4,674.3 5,478.9 5,880.1 N/A N/A
Number of employees(g).......................... 86,500 89,800 93,000 102,000 107,800 N/A 98,000
</TABLE>
__________________________
53
<PAGE>
(a) 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.
(b) Operating income includes the following special charges and credits:
. 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;
. 1997 - $16.2 million: acquisition costs, $8.6 million; restructuring of
joint ventures, $18.0 million; write-downs on impaired assets and early
retirement incentives, $21.6 million; losses from the sale of assets, $9.7
million; and credits from gain on extension of joint venture, $41.7
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;
. 1995 - $8.4 million: restructuring costs, $4.7 million; and write-off of
acquired in-process research and development costs, $3.7 million;
. 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
. Six 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.
(c) 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 six months ended June 1999 includes a $26
million loss for the write-off of our investment in a Mexican construction
and engineering company.
(d) 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.
(e) 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.
(f) Cash dividends per share for 1994 through 1998 represent amounts we paid
prior to the merger with Dresser.
(g) Does not include employees of 50% or less owned affiliated companies.
54
<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 our company 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. 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 second quarter of 1999, particularly in the areas of exploration and
development of hydrocarbons. The average worldwide rotary rig count in the first
half of 1999 was 34% lower than in the first half of 1998. The average U.S.
rotary rig count in the first quarter of 1999 was 43% lower compared to the
first quarter of 1998 and this decline continued into the second quarter of
1999. The average U.S. rotary rig count in the second quarter of 1999 was nearly
40% lower than the second quarter of 1998. These declines in activity and
reduced capital spending by our customers negatively impacted our results for
the first half of 1999, particularly within the Energy Services Group
segment.
The downstream portion of the oil and gas business is serviced by both the
Engineering and Construction Group and the Dresser Equipment Group. 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. The deferrals of projects and
lack of new awards are expected to affect the segment during the remainder of
the year due to the long-term nature of most projects. The Dresser Equipment
Group also experienced a decline in activity due to industry conditions and
faces increased competition for a reduced level of available business.
Other major changes in the energy industry include the announced mergers of
several major oil companies that have further delayed capital spending programs
by these companies. We have seen some effects of these mergers in the first half
of 1999 result in delayed projects and reduced use of software products. Longer-
term effects will depend on the spending patterns of our customers.
We still believe:
. the long-term fundamentals of the energy industry are
positive;
55
<PAGE>
. 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 remain cautious about the remainder of 1999. Recent encouraging events
include:
. the recent strengthening of oil and gas prices;
. a 20% increase in the U.S. rotary rig count from its April low;
and
. continuing increases in the level of customer inquiries.
However, the timing and extent of any benefits of the above items depend on
customer spending which remains cautious. 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.
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;
56
<PAGE>
. 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.
Results of Operations - 1999 Compared to 1998
Second Quarter of 1999 Compared with the Second Quarter of 1998
<TABLE>
<CAPTION>
Revenues Second Quarter Increase
Millions of dollars 1999 1998 (decrease)
- ---------------------------------- -------- ------- ----------
<S> <C> <C> <C>
Energy Services Group............... $ 1,681 $ 2,381 $ (700)
Engineering and Construction Group.. 1,372 1,438 (66)
Dresser Equipment Group............. 617 766 (149)
-------- ------- ======
Total revenues...................... $ 3,670 $ 4,585 $ (915)
======== ======= ======
</TABLE>
Consolidated revenues decreased 20% to $3,670 million in the second quarter
of 1999 compared with $4,585 million in the same quarter of the prior year.
International revenues for the second quarter of 1999 were 70% of total revenue,
up from 64% in the second quarter of 1998.
57
<PAGE>
Energy Services Group revenues were $1,681 million for the second quarter
of 1999 reflecting a 29% decrease from the same quarter of the prior year, while
drilling activity, as measured by the worldwide rotary rig count, decreased 33%.
International revenues were 73% of total Energy Services Group revenues for the
quarter, compared to 68% 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 25-35% lower compared to the prior year quarter. Halliburton Energy
Services' U.S. revenues were down 45% versus a decrease in the U.S. average
rotary rig count of nearly 40%. Halliburton Energy Services' international
revenues were down 27%, which approximated the related rig count reduction. As
in the first quarter of 1999, the largest declines in revenues were in North
America and Latin America with revenues decreasing by 35-40%. Declines in
revenue reflect reduced unit volume levels and continued pricing pressures,
particularly in North America.
Brown & Root Energy Services, which provides 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. 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, decreased 25% compared to the second quarter of
1998. Decreases in software and hardware sales were partially offset by
increased customer service and maintenance revenues. Many customers for our
information system product lines have put off software purchases due to customer
mergers and lower activity levels.
Engineering and Construction Group revenues decreased slightly to $1,372
million in the second quarter of 1999 compared to $1,438 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 61% for the prior year second
quarter.
Higher revenues from activities at the Devonport Dockyard in the U.K. and
from the contract to provide logistical support services to U.S. military
peacekeeping efforts in the Balkans partially offset revenue declines from
industrial customers due to project delays.
Dresser Equipment Group revenues decreased nearly 20% to $617 million for
the second quarter of 1999, as compared to $766 million for the second quarter
of 1998. International revenues were 64% of total Dresser Equipment Group
revenues. Revenues declined in all product lines reflecting lower spending by
customers due to economic conditions. Revenues from the compression and pumping
line were lower by about 25-30%. Lower complete unit shipments of compression
and pumping products were partially offset by increased product services
volumes. Revenues from the measurement product line were lower by 10-15% from
the prior year second quarter. Flow control and power systems combined had about
10% lower revenues.
<TABLE>
<CAPTION>
Operating Income Second Quarter Increase
Millions of dollars 1999 1998 (decrease)
- --------------------------------------- -------- ------ ----------
<S> <C> <C> <C>
Energy Services Group.................. $ 49 $ 304 $ (255)
Engineering and Construction Group..... 64 74 (10)
Dresser Equipment Group................ 53 77 (24)
Special charge credits................. 47 -- 47
General corporate...................... (17) (19) 2
------ ------ --------
Operating income....................... $ 196 $ 436 $ (240)
====== ====== ========
</TABLE>
Consolidated operating income for the second quarter of 1999 of $196
million declined 55% compared with $436 million in the same quarter of the prior
year.
58
<PAGE>
Energy Services Group operating income decreased 84% to $49 million in the
second quarter of 1999 compared with $304 million in the same quarter of the
prior year. The operating margin for the second quarter of 1999 was 2.9%,
compared to the prior year second quarter operating margin of 12.8%.
In spite of aggressive cost reduction efforts to reduce excess personnel
and facilities, Halliburton Energy Services operating income was down 87%. Lower
activity and higher discounts reduced operating income for all Halliburton
Energy Services' product service lines. Decreased margins for Halliburton Energy
Services were caused by the lowest rig count since 1944 in the U.S. and
decreased activity levels outside the U.S. Lower rig counts led to excess
capacity in the oil field services sector. This excess capacity continued
through the second quarter especially within the U.S. As a result of pricing
pressures, Halliburton Energy Services' average discounts in the U.S. increased
six to eight percentage points over the second quarter of 1998 when pricing
first started to soften. 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 second quarter of 1999.
Operating income and margins from Brown & Root Energy Services' upstream
oil and gas engineering and construction activities declined 65% from the prior
year second quarter. The major factors contributing to this decrease were lower
activity levels and performance issues related to two technically difficult
projects on which losses of $23 million were recorded.
Landmark experienced a small loss for the quarter. The loss was caused by
declines in software sales volumes and severance payments to employees
terminated due to industry conditions.
Engineering and Construction Group operating income decreased 14% to $64
million in the second quarter of 1999 compared to $74 million in the second
quarter of the prior year. Operating margins were 4.7% in the second quarter of
1999 compared to 5.1% in the prior year second quarter. Included in the second
quarter of 1998 was the settlement on a Middle East construction project.
Excluding this settlement in 1998, margins for the current year of 4.7% are
higher than the prior year's margins of 4.1%. The second quarter benefited from
higher activity related to supporting U.S. military peacekeeping efforts in the
Balkans and income recognition on U.K. toll road projects.
Dresser Equipment Group operating income for the second quarter was $53
million, a decrease of 31% from the prior year second quarter of $77 million.
All product lines experienced a decrease in operating income primarily as a
result of lower activity levels and increased discounting in some product
lines.
Special charge credits of $47 million are the result of a change in
estimate to the 1998 merger special charges for the acquisition of Dresser and
industry downturns recorded in 1998. We have been monitoring the actual costs
incurred and have re-examined our estimates of future costs. In the second
quarter of 1999, we concluded that these costs, particularly for severance and
facility exit costs, were lower than previously estimated. Therefore, we
reversed a portion of the $980 million that was originally recorded.
General corporate expenses were lower by $2 million from the prior year
second 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 $34 million in the second
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 second quarter of 1999 decreased slightly to $6
million from $7 million in the second quarter of 1998.
Foreign currency gains (losses), net was a net $4 million gain for the
second quarter of 1999. This net gain compares to a net loss of $2 million in
the same period of 1998. The gain in 1999 is primarily attributable to
devaluation of the Euro.
59
<PAGE>
Other nonoperating, net in the second quarter of 1999 includes a $26
million charge for the write-off 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 the quarterly consolidated financial
statements for additional information on Bufete.
The effective income tax rate excluding special charge credits was about
39% for the second quarter of 1999, as compared to about 37% for the second
quarter of 1998. The rate for the quarter 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.
Net income was $83 million, or 19 cents per diluted share, a decrease of
66% from net income of $243 million, or 55 cents per diluted share in the second
quarter of 1998.
First Six Months of 1999 Compared with the First Six Months of 1998
<TABLE>
<CAPTION>
Revenues First Six Months Increase
Millions of dollars 1999 1998 (decrease)
- ------------------------------------- ---------- ------- ---------
<S> <C> <C> <C>
Energy Services Group................ $3,434 $4,666 $(1,232)
Engineering and Construction Group... 2,880 2,785 95
Dresser Equipment Group.............. 1,280 1,389 (109)
------ ------ -------
Total revenues....................... $7,594 $8,840 $(1,246)
====== ====== =======
</TABLE>
Consolidated revenues decreased 14% to $7,594 million in the first six
months of 1999 compared with $8,840 million in the first six months of the prior
year. International revenues for the first six months of 1999 were 69% of total
revenue, compared to 65% of total revenue in 1998. Only the Engineering and
Construction Group had higher revenues in the first six months of 1999 compared
to 1998.
Energy Services Group revenues were $3,434 million for the first six months
of 1999, reflecting a 26% decrease from the first six months of the prior year,
while drilling activity as measured by the worldwide rotary rig count decreased
34%. International revenues were 72% of total Energy Services Group revenues for
the first six months compared to 69% for the prior year first six months.
Revenues for all Halliburton Energy Services product service lines were
lower than the prior year. The largest declines in revenues were in North
America and Latin America with revenues decreasing about 37%. Declines in
revenue reflect reduced unit volume levels and continued pricing pressures,
particularly in North America. Halliburton Energy Services' U.S. revenues were
about 40% lower than in the first six 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 in
1999 than in the first half of 1998. The international average rotary rig count
for the same time period was 28% lower. The completion product service line had
the smallest percentage decline in revenues of about 20% for the first six-month
period of 1999 compared to 1998. Other product service lines within Halliburton
Energy Services experienced a 28-33% 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 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 19% compared to the first six months of 1998. Decreases in
software and hardware sales were partially offset by increased customer service
revenues. Many customers for our information system product lines have put off
software purchases due to lower activity levels. Customer mergers have also
resulted in purchase delays.
60
<PAGE>
Engineering and Construction Group total revenues increased 3% to $2,880
million in the first six months of 1999 compared to $2,785 million in the first
six months of the prior year. International revenues increased approximately
20%.
Revenues from Kellogg Brown & Root were flat in the first half 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 six months of 1999 were up 15%
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 8% to $1,280 million for the
first six months of 1999 as compared to $1,389 million for the first six months
of 1998. Revenues declined in all product lines reflecting reduced demand. The
compression and pumping product line had approximately 5% lower revenues due to
lower complete unit sales. The lower volume on complete unit sales was
partially offset by increased product service volume. The measurement product
line's revenues were about 14% 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 7% compared to 1998
due to low upstream and downstream activity levels. Power systems' revenues
were 10% lower than the first six months of 1998. The decrease in power
systems' revenues was due to reductions in the original equipment and
aftermarket sales related to lower gas production, higher gas storage levels and
decreased equipment utilization.
<TABLE>
<CAPTION>
Operating Income First Six Months Increase
Millions of dollars 1999 1998 (decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Energy Services Group $ 106 $ 587 $ (481)
Engineering and Construction Group 122 133 (11)
Dresser Equipment Group 107 116 (9)
Special charge credits 47 - 47
General corporate (34) (39) 5
---------- --------- ----------
Operating Income $ 348 $ 797 $ (449)
========== ========= ==========
</TABLE>
Consolidated operating income for the first six months of 1999 of $348
million declined 56% compared with $797 million in the first six months of the
prior year.
Energy Services Group operating income decreased 82% to $106 million in the
first six months of 1999 compared with $587 million in the first six months of
the prior year. The operating margin for the first six months of 1999 was 3.1%
compared to the prior year's first six months operating margin of 12.6%.
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 six months of 1999
due to lower activity and higher discounts. Overall, Halliburton Energy
Services' operating income declined 82% from the first half 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 77% due to lower levels of
business activity and lower manufacturing activities which carry large fixed
costs. Major project losses of $27 million were recorded in the first six
months of 1999 on two technically difficult projects. In addition, the prior
year's first six months benefited from about $40 million of project incentives.
Brown & Root Energy Services continues to address challenges on some fixed fee
contracts for which we recorded losses in the fourth quarter of 1998. Claims
discussions with customers should bring these jobs to resolution in the second
half of the year.
Landmark experienced a small loss for the first six 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 8% to $122
million in the first six months of 1999 compared to $133 million in the first
six months of the prior year. Operating margins were 4.2% in the first six
months of 1999 compared to 4.8% in the prior year first six months. Included in
the first six months of 1998 was the settlement on a Middle East construction
project. Excluding this settlement in 1998, margins for 1999 of 4.2% are the
same as the prior year's first six months.
Dresser Equipment Group operating income for the first six months of 1999
was $107 million, a decrease of 8% from the prior year's first six months of
$116 million. Cost reduction initiatives allowed us to maintain operating
margins at about 8.4% in the first six months of both 1999 and 1998 in spite of
lower sales volumes in 1999.
Special charge credits are the result of a change in estimate to the 1998
merger special charges for the acquisition of Dresser and industry downturns.
We have been monitoring the actual costs incurred and have re-examined our
estimates of future costs. In the second quarter of 1999, we concluded that
these 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.
General corporate expenses were lower by $5 million from the prior year's
first six months. The reduction of expense is the result of combining two
corporate offices into one office.
Nonoperating Items
Interest expense increased to $70 million in the first six months of 1999
compared to $61 million in the first six 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 six months of 1999 increased to $38 million
from $14 million in the first six 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 U.S. and U.K.
Other nonoperating, net in the first six months of 1999 includes a $26
million charge for the write-off 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 the quarterly consolidated financial
statements for additional information on Bufete.
The effective income tax rate excluding special charge credits was about
39.5% for the first six months of 1999 compared to 37.6% for the first six
months of 1998. The rate for the first six 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 the quarterly consolidated 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 2,779.0 2,710.5
--------- --------- ---------
Total revenues.............................. $17,353.1 $16,276.5 $13,946.6
========= ========= =========
</TABLE>
Revenues for 1998 were $17,353.1 million, an increase of 7% over 1997
revenues of $16,276.5 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
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Africa, and a major ethylene project in Singapore. There are 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.
Revenue reductions of approximately $290.0 million in 1997 compared to 1996 were
due to lower levels of activity under service contracts with the U.S. Department
of Defense to provide technical and logistical support for military peacekeeping
operations in Bosnia.
Dresser Equipment Group revenues were $2,848.8 million in 1998, an increase
of 3% over 1997 revenues of $2,779.0 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.
<TABLE>
<CAPTION>
Operating Income
Millions of dollars 1998 1997 1996
- ---------------------------------------------- ------- -------- -------
<S> <C> <C> <C>
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
======= ======== ======
</TABLE>
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 reserves 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 think will be accepted by the customer 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.
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<PAGE>
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 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 company's 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
63
<PAGE>
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.
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 Six Months of 1999 Compared with the First Six Months of 1998
We ended the second quarter of 1999 with cash and equivalents of $336
million, an increase of $133 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 $7 million
in the first six months of 1999, as compared to $144 million provided by
operating activities in the first six months of 1998. Working capital items,
which consists of receivables, inventories, accounts payable and other working
capital, net, used $201 million in the current year compared to $507 million in
the prior year period. In 1999 working capital requirements were lower than the
prior year due to lower levels of business activity. Other, net, which includes
noncurrent assets and liabilities, used $161 million of operating cash in the
first six months of 1999. Included in these changes to working capital and
other, net, are cash outflows for special charges for personnel reductions,
facility closures and integration costs which required approximately $168
million of cash in the first six months of the current year.
Investing activities. Capital expenditures were $267 million for the first
six months of 1999, a decrease of 43% 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 $31
million in the first six months of 1999 compared to $244 million in the first
six months of 1998. We borrowed $119 million, net of repayments, in short-term
funds consisting of commercial paper and bank loans in the first six months of
1999. In the same period of 1998, we borrowed $370 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 $33 million in the first six
months of 1999 compared to $40 million in the same period of the prior year.
We believe we have sufficient borrowing capacity to fund our cash needs.
As of June 1999, we have committed short-term lines of credit totaling $650
million available and unused, an increase of $100 million from the prior
quarter. 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 33.4% of total capitalization at June
30, 1999 compared to 32.4% at December 31, 1998.
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.
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<PAGE>
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.
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.
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 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;
. time horizon of the derivative instruments;
. market cycles; and
. the type of derivative instruments used.
We do not use derivative instruments for trading purposes. See Note 1 to our
annual consolidated financial statements for additional information on our
accounting policies on derivative instruments. See Note 15 to our annual
consolidated financial statements for additional disclosures related to
derivative instruments.
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
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<PAGE>
two years. We manage our foreign exchange hedging activities through a control
system which includes monitoring of cash balances in traded currencies and
analytical techniques which include value at risk estimations, and other
procedures.
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 June 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 June 30, 1999 were not materially changed from
December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------
Millions of dollars 1999 2000 2001 2002 2003 Later Years Total Fair 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 include 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:
. integration of two corporate offices;
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<PAGE>
. 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 named. Operational and shared service
managers were named quickly thereafter. 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 June 30, 1999, we used $278 million in cash for items
associated with the 1998 special charges. We estimate that the unutilized
special charge reserve balance at June 30, 1999 will result in future cash
outlays of approximately $130 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 service,
administrative and manufacturing facilities, including approximately 400 accrued
for in the 1998 special charges. Most of these properties are within the Energy
Services Group.
Since July 1998, approximately 16,200 employees, consultants and contract
personnel have left Halliburton, while approximately 4,100 new personnel have
been hired, resulting in net total personnel reductions of approximately 12,100
through June 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 8,800 of the total
personnel reductions through the second quarter of 1999 are associated with the
special charge.
We feel the benefits of the Dresser merger and restructuring activities are
evidenced by our ability to profitably operate in spite of oil and gas industry
conditions that have existed since the second half of 1998. As a result of the
initiatives discussed above, we feel we will ultimately reduce our costs by an
estimated $500 million 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.
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<PAGE>
See Note 9 to the quarterly consolidated financial statements for
information on accrued special charges incurred in 1998.
Other Merger Related Activities
We expect to incur total merger related incremental costs of approximately
$125 million that do not qualify as special charges. These expenses include $24
million incurred in the fourth quarter of 1998 and approximately $42 million
incurred during the first six 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.
During the second quarter of 1999, both Halliburton Energy Services and
Landmark made additional reductions in personnel outside the 1998 special charge
plan.
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,
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 June 30, 1999 for additional
information on the one site.
Year 2000 Issue
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 properly recognize 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. Halliburton's Year 2000 program is designed to:
. prevent or minimize the occurrence of Year 2000 problems; and
. limit Halliburton's 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.
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<PAGE>
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 the purposes of this report 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 June 30, 1999 we have completed approximately:
. 99% of the assessment phase;
. 92% of the remediation phase;
. 88% of the testing phase; and
. 71% of the deployment and certification phase.
As of June 30, 1999 we assess our overall completion of Year 2000 related
tasks at approximately 84%.
The assessment phase was substantially complete on June 30, 1998. We
estimate the dates of substantial completion of the remaining phases of our Year
2000 program as follows:
. Remediation phase - September 30, 1999
. Testing phase - October 31, 1999
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<PAGE>
. Deployment and certification phase - 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 June 30, 1999, approximately $35 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 $35
million, pre-tax, spent through June 30, 1999, we estimate the cost of
remediation of software and non-information technology systems as follows:
. remediation of software systems - $25 million;
. remediation of non-software information technology items - $6 million;
and
. remediation of non-information technology systems - $4 million.
We estimate that by January 1, 2000 we will have spent approximately $48
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 Halliburton's 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.
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.
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<PAGE>
Suppliers. We utilize more than 20,000 suppliers worldwide. To date, we
have mailed Year 2000 readiness questionnaires to approximately 8,000 suppliers.
We will continue to mail questionnaires through the third and fourth quarters of
1999.
As of June 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 75% 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 June 30, 1999, approximately 230
significant suppliers have attended our Year 2000 meetings.
Approximately 20 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 feel 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.
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.
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<PAGE>
Our management believes that Halliburton's overall Year 2000 risk is
reduced by our widely dispersed operations since an infrastructure failure in
one country is not likely to directly impact 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 the 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 is being
considered 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 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;
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<PAGE>
. 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
is now 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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<PAGE>
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 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
74
<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.
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
75
<PAGE>
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.
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<PAGE>
PES SELECTED CONSOLIDATED FINANCIAL DATA
Set out below is selected consolidated financial information for PES. The
profit and loss account and balance sheet information at 31 March 1994, 1995,
1996, 1997 and 1998 is extracted from the audited consolidated accounts of PES.
The information as of March 31, 1999 and for the period then ended is
unaudited.
<TABLE>
<CAPTION>
Audited
--------------------------------------------------------------------------------------
Five
Months to
March 31, Year Ended March 31
------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Profit and loss account
Turnover...................... (Pounds) 2,808 (Pounds) 7,056 (Pounds) 10,581 (Pounds) 15,989 (Pounds) 22,673
Cost of sales................. (1,067) (2,726) (5,311) (8,541) (12,719)
-------------- -------------- --------------- ---------------- ---------------
Gross profit.................. (Pounds) 1,741 (Pounds) 4,330 (Pounds) 5,270 (Pounds) 7,448 (Pounds) 9,954
Administrative expenses....... (1,507) (3,431) (5,207) (7,390) (10,191)
Other income.................. 0 108 897 350 279
-------------- -------------- --------------- ---------------- ---------------
Operating profit.............. (Pounds) 234 (Pounds) 1,007 (Pounds) 960 (Pounds) 408 (Pounds) 42
Exceptional items............. 0 0 0 (154) (1,659)
Interest (net)................ 12 (82) (221) (428) (138)
Income from associates........ 0 0 11 20 48
-------------- -------------- --------------- ---------------- ---------------
Profit before tax............. 246 925 750 (154) (1,707)
Tax........................... (67) (410) (300) (175) (373)
-------------- -------------- --------------- ---------------- ---------------
Profit after tax.............. (Pounds) 179 (Pounds) 515 (Pounds) 450 (Pounds) (329) (Pounds) (2,080)
Minority interests............ 0 102 565 (174) 0
-------------- -------------- --------------- ---------------- ---------------
Profit for year............... 179 617 1,015 (503) (2,080)
Dividends (paid).............. 0 0 (45) (45) (4)
-------------- -------------- --------------- ---------------- ---------------
Retained Profit............... (Pounds) 179 (Pounds) 617 (Pounds) 970 (Pounds) (548) (Pounds)(2,084)
============== ============== =============== ================ ================
<CAPTION>
Unaudited
---------------
Year Ended
March 31
---------------
1999
---------------
<S> <C>
Profit and loss account
Turnover........................ (Pounds) 29,256
Cost of sales................... (17,122)
---------------
Gross profit.................... (Pounds) 12,134
Administrative expenses......... (10,804)
Other income.................... 242
---------------
Operating profit................ (Pounds) 1,572
Exceptional items............... 0
Interest (net).................. (289)
Income from associates.......... 0
---------------
Profit before tax............... 1,283
Tax............................. (513)
---------------
Profit after tax................ (Pounds) 770
Minority interests.............. 0
---------------
Profit for year................. 770
Dividends (paid)................ 0
---------------
Retained Profit................. (Pounds) 770
===============
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Audited
---------------------------------------------------------------------------------------------
Year Ended March 31,
---------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance sheet (in thousands)
Intangible fixed assets.......... (Pounds) 0 (Pounds) 0 (Pounds) 900 (Pounds) 2,470 (Pounds) 2,302
Tangible fixed assets............ 1,240 2,026 2,130 3,247 5,099
Investments...................... 0 0 11 146 3,432
-------------- -------------- -------------- -------------- ---------------
(Pounds) 1,240 (Pounds) 2,026 (Pounds) 3,041 (Pounds) 5,863 (Pounds) 10,833
-------------- -------------- -------------- -------------- ---------------
Stock............................ 506 1,187 1,855 2,738 6,550
Debtors.......................... 1,382 1,859 4,862 6,412 6,294
Cash............................. 393 123 101 259 1,132
-------------- -------------- -------------- -------------- ---------------
2,281 3,169 6,818 9,409 13,976
-------------- -------------- -------------- -------------- ---------------
Creditors less than 1 year....... (2,155) (3,043) (6,671) (10,122) (5,592)
Creditors more than 1 year....... (164) (408) (1,071) (2,041) (1,472)
Provisions....................... (93) (112) (74) (54) (852)
-------------- -------------- -------------- -------------- ---------------
NET ASSETS....................... (Pounds) 1,109 (Pounds) 1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds) 16,893
============== ============== ============== ============== ===============
Share capital.................... 78 78 78 85 129
Share premium.................... 0 1,200 1,200 2,459 26,961
Capital redemption reserve....... 0 10 10 10 10
Profit & loss account............ 179 (408) 569 (21) (2,218)
Goodwill reserve................. (927) (927) (927) (927) (9,768)
Acquisition reserve.............. 1,779 1,779 1,779 1,779 1,779
Minority interests............... 0 (100) (666) (330) 0
-------------- -------------- -------------- -------------- ---------------
EQUITY........................... (Pounds) 1,109 (Pounds) 1,632 (Pounds) 2,043 (Pounds) 3,055 (Pounds) 16,893
============== ============== ============== ============== ===============
Profit for period per share (a).. 0.50 0.75 1.25 (0.63) (1.62)
Dividend declared per share (a).. -- -- 0.06 0.06 --
Currency Exchange Information
United States dollar to one
pound sterling (b)
Period End....................... 1.4880 1.6190 1.5262 1.6448 1.6765
Average.......................... 1.5015 1.5650 1.5623 1.5989 1.6463
High............................. 1.5695 1.6350 1.6091 1.7123 1.6885
Low.............................. 1.4775 1.5118 1.5096 1.5050 1.6117
<CAPTION>
Unaudited
--------------
Year Ended
March 31
--------------
1999
---------------
<S> <C>
Balance sheet
Intangible fixed assets.......... (Pounds) 1,909
Tangible fixed assets............ 7,598
Investments...................... 3,370
--------------
(Pounds) 12,877
--------------
Stock............................ 8,211
Debtors.......................... 6,390
Cash............................. (1,842)
--------------
12,759
--------------
Creditors less than 1 year....... (6,071)
Creditors more than 1 year....... (1,462)
Provisions....................... (440)
--------------
NET ASSETS....................... (Pounds) 17,663
===============
Share capital.................... 129
Share premium.................... 26,961
Capital redemption reserve....... 10
Profit & loss account............ (1,448)
Goodwill reserve................. (9,768)
Acquisition reserve.............. 1,779
Minority interests............... 0
--------------
EQUITY........................... (Pounds) 17,663
===============
Profit for period per share (a).. 0.62
Dividend declared per share (a).. --
Currency Exchange Information
United States dollar to one
pound sterling (b)
Period End....................... 1.6140
Average.......................... 1.6526
High............................. 1.6995
Low.............................. 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.
78
<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 22 November 1996, 11 August 1997 and 5
February 1999 appearing on pages 153, 154 and 179, 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 Unaudited
Year ended Year ended
31 March 31 March
------------------------------------------ ------------
1996 1997 1998 1999
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) reported under
U.K. GAAP 1,015 (503) (2,080) 770
U.S. GAAP adjustments:
Amortization of goodwill -- -- (442) (442)
Expense development costs as incurred (705) 7 28 49
------------ ------------ ------------ ------------
Total U.S. GAAP adjustments (705) 7 (414) (393)
------------ ------------ ------------ ------------
Net income (loss) under U.S. GAAP 310 (496) (2,494) 377
============ ============ ============ ============
</TABLE>
79
<PAGE>
b) Equity Reconciliation
<TABLE>
<CAPTION>
Unaudited
Audited Year Ended Year Ended
31 March 31 March
------------------------------------------ ------------
1996 1997 1998 1999
(Pounds)'000 (Pounds)'000 (Pounds)'000 (Pounds)'000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equity under U.K. GAAP 2,043 3,055 16,893 17,663
U.S. GAAP adjustments:
Capitalization of goodwill -- -- 8,399 7,957
Expense development costs as incurred (705) (698) (670) (621)
Apply "pooling of interests" accounting to
acquisition of subsidiary 578 578 578 578
------------ ------------ ------------ ------------
Total U.S. GAAP adjustments (127) (120) 8,307 7,914
------------ ------------ ------------ ------------
Equity under U.S. GAAP 1,916 2,935 25,200 25,577
============ ============ ============ ============
</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
80
<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.
81
<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
Revenues
<TABLE>
<CAPTION>
Year Ended 31 March
-----------------------------------------
Unaudited
1999 1998
(Pounds)000 (Pounds)000
<S> <C> <C>
PES Group revenues 29,256 22,673
====== ======
</TABLE>
Revenues for the year ended 31 March 1999 were (Pounds)29.25m an increase
of 29% over the revenues for the year ended 31 March 1998 of (Pounds)22.67m. 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 31 March
-----------------------------------------
Unaudited
<S> <C> <C>
1999 1998
(Pounds)000 (Pounds)000
Operating profit 1,572 42
===== ====
</TABLE>
82
<PAGE>
Operating profit was (Pounds)1.57m in the year ended 31 March 1999 compared
to (Pounds)0.04m in the year ended 31 March 1998. The reason for this increase
in operating income is largely due to the realization of customer orders for
products which had been developed between 1995 and 1997, particularly those for
intelligent well completion applications.
The gross margin on sales revenues was 41.5% for the year ended 31 March
1999 and 43.9% for the year ended 31 March 1998. 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.
General operating expenses were (Pounds)10.80m in the year ended 31 March
1999 compared to (Pounds)10.19m in the year ended 31 March 1998. 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.
Profit (loss) before taxation
<TABLE>
<CAPTION>
Year Ended 31 March
----------------------------------
Unaudited
1999 1998
(Pounds)000 (Pounds)000
<S> <C> <C>
Profit (loss) before taxation 1,283 (1,707)
===== ======
</TABLE>
Profit before taxation was (Pounds)1.28m for the year ended 31 March 1999
compared to a loss of (Pounds)1.71m in the year ended 31 March 1998. In the
period to March 1998 there were exceptional costs of (Pounds)1.66m as a result
of PES Group restructuring related to the acquisition of a 26% stake in the PES
Group by Halliburton Holdings Limited in April 1997. The PES Group restructuring
included a reorganization of subsidiary shareholding structures and the granting
of share options to key personnel.
Results of Operations - 1998 Compared to 1997 and 1996
Revenues
<TABLE>
<CAPTION>
Year Ended March 31
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
(Pounds)000 (Pounds)000 (Pounds)000
PES Group revenues 22,673 15,989 10,581
====== ====== ======
</TABLE>
Revenues for 1998 were (Pounds)22.67m, an increase of 41% over 1997
revenues of (Pounds)15.99m and an increase of 114% over 1996 revenues of
(Pounds)10.58m. The 1997 revenues include (Pounds)1.02m of revenue resulting
from the acquisition of Well Equip Limited on 31 July 1996. Approximately 54% of
PES Group revenue for 1998 was derived from international activities compared
with 43% in 1997 and 25% in 1996.
The growth in revenues resulted from setting up local offices in Australia,
U.S., Norway, France, Italy and Denmark over this period allowing for greater
sales in those locations. In addition PES's new products, and in particular
Smart Well products, started to generate customer orders and revenue.
83
<PAGE>
Operating income
<TABLE>
<CAPTION>
Year Ended March 31
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
(Pounds)000 (Pounds)000 (Pounds)000
Operating income 42 408 960
==== ==== ====
</TABLE>
Operating income was (Pounds)0.04m in 1998 compared to (Pounds)0.408m in
1997 and (Pounds)0.96m in 1996. The reduction in operating income arose because
of the expansion of the business into other international locations and the
heavy investment in developing new products.
The gross margin on sales revenue decreased from 49.8% on revenue for the
year to 31 March 1996 to 46.5% for the year to 31 March 1997 and 43.9% for the
year to 31 March 1998. Gross margin on sales for the nine months to 31 December
1998 was 40.5% compared to 44.5% for the nine months to 31 December 1997. The
principal reason for this reduction was the investment made in new product
development over this period and the set up costs associated with manufacturing
new high technology products for the first time. The key products that were
developed over this period 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 also
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 for 1998 were (Pounds)10.19m compared to
(Pounds)7.39m in 1997 and (Pounds)5.21m in 1996. The main reason for this
increase has been the expansion by PES into other international locations and
hiring additional people and expenditures for infrastructure to allow for the
anticipated continued growth and development.
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)0.31m in 1998 compared to (Pounds)0.44m in
1997 and (Pounds)0.23m in 1996. The movement simply reflects PES's borrowings
over the period which increased in 1997 due to the growth of the PES but reduced
in 1998 due to the investment by Halliburton Holdings Limited.
Provision for taxes was (Pounds)0.373m in 1998 compared to (Pounds)0.175m
in 1997 and (Pounds)0.30m in 1996. The increase in tax payable in 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
1998 but amounted to (Pounds)0.174m in 1997 and a credit of (Pounds)0.57m in
1996. The credit in 1996 arose due to the losses incurred by subsidiaries with
minority interests. The minority interests in the results for the year ended 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.
Dividends amounted to (Pounds)0.004m in 1998 compared to (Pounds)0.045m in
1997 and (Pounds)0.045m in 1996. The dividends were wholly payable on the 'A'
ordinary shares held by 3i plc which were converted to ordinary shares in April
1997.
84
<PAGE>
Liquidity and Capital Resources
Net cash outflow from operating activities amounted to (Pounds)2.0m in 1998
with an inflow of (Pounds)0.79m in 1997 and an outflow of (Pounds)0.77m in 1996.
In 1998 the primary use of cash was to fund increased working capital
requirements due to the expansion and growth of the PES Group.
Net cash flow from capital expenditure and financial investment was
(Pounds)6.8m in 1998, (Pounds)0.43m in 1997 and (Pounds)1.06m in 1996. The
expenditure in 1998 comprises net investment in plant and machinery of
(Pounds)1.9m 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 incentivize key personnel.
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 inflow of (Pounds)14.4m in 1998
compared to an outflow of (Pounds)0.68m in 1997 and an inflow of (Pounds)0.35m
in 1996. The inflow of (Pounds)14.4m in 1998 arose as a result of the issue of
(Pounds)16.04m of new shares issued to Halliburton Holdings Limited as part of
it acquiring a 26% stake net of repayment of borrowings of (Pounds)0.91m and
capital lease payments of (Pounds)0.75m.
PES has the ability to borrow funds through a multi-option credit facility
with the Bank of Scotland. In addition loans are taken out to fund specific
assets in addition to small local loans in some 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
Also known as the Millennium Bug, this is a problem which may affect not
only the obvious computer systems, but any system which incorporates microchip
processors where there is a date function which stores or processes the year as
a two digit number and so cannot properly handle the transition from 99 to 00.
The systems may also fail to recognize that the year 2000 is a leap year.
In response to the Y2K problem, PES has a programme in place to identify,
assess and address any risks in systems, equipment and products. The scope of
this program includes an assessment of steps being taken by equipment and
service suppliers to ensure continuity of their business.
It is expected that PES will have completed all required remedial action by
the end of September 1999.
85
<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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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.
86
<PAGE>
Brett W. Bouldin, 39, Project Engineer, PES, Inc., Houston, Texas; Project
Engineer, Baker Oil Tools, 1983-1994; Project Engineer, PES, Inc., 1994 to
present.
Napoleon Arizmendi, 39, Project Engineer, PES, Inc., Houston, Texas;
Project Designer, Baker Oil Tools, 1981-1995; Project Engineer Test Laboratory
Supervisor, PES, Inc., 1995 to present.
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.
87
<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. 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.
88
<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.
89
<PAGE>
MANAGEMENT OF HALLIBURTON
The names and offices with Halliburton of its directors and executive
officers are set forth below:
<TABLE>
<CAPTION>
<S> <C>
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
Delano E. Lewis Director
J. Landis Martin Director
Jay A. Precourt Director
C. J. Silas Director
Richard J. Stegemeier Director
</TABLE>
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 Industries, Inc., 1995-1998; President of Dresser
90
<PAGE>
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.
Delano E. Lewis, 60, President and Chief Executive Officer (retired),
National Public Radio (produces and distributes original programming and
provides support to member stations) 1994-1998; President and Chief Executive
Officer, C&P Telephone Company, a subsidiary of Bell Atlantic Corporation, 1990-
1993; joined Halliburton Company Board in 1996; member of the Compensation, the
Health, Safety and Environment, and the
91
<PAGE>
Management Oversight Committees; Director of Colgate-Palmolive Company, Eastman
Kodak Company, BET Holdings, Inc. and the Poynter Institute.
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.
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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.
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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 (23
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,
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<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 13,998
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 5,452 shares;
and
. Mr. Coleman - acquired 15,000 shares and surrendered 3,143 shares
(exclusive to the 10,001 shares referenced above).
This information does not include stock options granted during the
period.
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<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 July 31, 1999, there were 441,220,000 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 right. Each 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 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 Rights; Exercise. The rights are currently attached to all
certificates representing outstanding shares of Halliburton common stock and no
separate right certificates have been distributed. The 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 rights are not exercisable until the distribution date. As soon as
practicable following the distribution date, rights certificates evidencing the
rights will be mailed to holders of record of Halliburton common stock as of the
close of business on the distribution date and separate rights certificates
alone will evidence the rights.
If a person or group acquires 15% or more of the voting shares of
Halliburton, each right then outstanding, other than rights beneficially owned
by the acquiring person which would become null and void, would become a right
to buy:
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<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 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 right will then
have the 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 right. The shares would be acquired upon the
exercise of the right at the then current purchase price of the 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 right, and the purchase price payable, are subject
to customary adjustments to prevent dilution. The number of outstanding rights
and the number of shares or fractions of shares of Halliburton series A
preferred stock issuable upon exercise of each 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 rights. A redemption of rights
under those circumstances would require Halliburton to issue Halliburton common
stock in mandatory redemption of all or part of the outstanding rights, other
than 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 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 rights.
Redemption of 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 rights at a redemption price of $.01 per
right. The Halliburton board of directors, in its sole discretion, may establish
the time, basis and conditions for the redemption of the rights. After
redemption of the rights, the only right of the holders of rights will be to
receive the redemption price.
Expiration; Amendment of Rights. The rights will expire on December 15,
2005, unless earlier redeemed or exchanged. The terms of the rights may be
amended by the Halliburton board of directors without the consent of the holders
of the rights, including an amendment to extend the expiration date of the
right. Provided a distribution date has not occurred, the amendment provides for
the extension of the period during which the 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
rights.
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<PAGE>
The rights have anti-takeover effects. The 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 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 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 ________, 1999. 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 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 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
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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;
. the Halliburton board of directors;
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. 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.
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:
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. 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
. 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.
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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 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.
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<PAGE>
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 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.
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.
104
<PAGE>
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.
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
105
<PAGE>
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
. 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.
106
<PAGE>
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, 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.
107
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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.
Halliburton Filings (File No. 1-3492) Period
- -------------------------------------- ------
<TABLE>
<CAPTION>
<S> <C>
Annual Report on Form 10-K Year Ended December 31, 1998
Quarterly Reports on Form 10-Q Quarter Ended March 31, 1999 and June 30, 1999
Proxy Statement Annual Meeting of Stockholders - 1999
Current Reports on Form 8-K January 22, 1999; January 25, 1999; February 18, 1999;
February 19, 1999; March 4, 1999; March 11, 1999; March 29,
1999; April 13, 1999; April 21, 1999; April 26, 1999; May 18,
1999; June 9, 1999; June 9, 1999; June 29, 1999; July 19, 1999;
July 26, 1999; and August 12, 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:
108
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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 ________________,
1999 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 ________, 1999:
. 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 and June 30, 1999.
. Current reports of Halliburton Company on Form 8-K dated January 22,
1999; January 25, 1999; February 18, 1999; February 19, 1999; March 4,
1999; March 11, 1999; March 29, 1999; April 13, 1999; April 21, 1999;
April 26, 1999; May 18, 1999; June 9, 1999; June 9, 1999; June 29,
1999; July 19, 1999; July 26, 1999; and August 12, 1999.
. The Warranty Agreement.
. The Irrevocable Undertakings.
. The relevant Service Agreements for the PES Directors and two key
employees.
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 ____________, 1999.
109
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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
110
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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 Company's 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
111
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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
112
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HALLIBURTON COMPANY
Consolidated Statements of Income
(Millions of dollars except per share data)
<TABLE>
<CAPTION>
Unaudited
Six Months ended
Years Ended December 31 June 30
----------------------------------- --------------------
1998 1997 1996 1999 1998
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Services........................................... $12,089.4 $11,256.3 $ 9,461.1 $5,565.0 $6,265.9
Sales.............................................. 5,069.9 4,857.0 4,351.7 1,957.0 2,461.3
Equity in earnings of unconsolidated affiliates.... 193.8 163.2 133.8 71.5 112.8
--------- --------- --------- -------- --------
Total revenues............................... $17,353.1 $16,276.5 $13,946.6 $7,593.5 $8,840.0
--------- --------- --------- -------- --------
Operating costs and expenses:
Cost of services................................... $11,058.8 $10,163.9 $ 8,708.0 $5,348.5 $5,598.6
Cost of sales...................................... 4,317.6 4,032.7 3,628.3 1,707.6 2,118.8
General and administrative......................... 600.1 665.0 621.3 236.7 325.4
Special charges and credits........................ 980.1 16.2 85.8 (47.1) -
--------- --------- --------- -------- --------
Total operating costs and expenses........... $16,956.6 $14,877.8 $13,043.4 $7,245.7 $8,042.8
--------- --------- --------- -------- --------
Operating income..................................... 396.5 1,398.7 903.2 347.8 797.2
Interest expense..................................... (136.8) (111.3) (84.6) (70.0) (61.3)
Interest income...................................... 27.8 21.9 26.9 37.9 14.2
Foreign currency gains (losses), net................. (12.4) (0.7) (19.1) 3.2 (1.8)
Other nonoperating income, net....................... 3.7 4.5 4.6 (24.0) (0.6)
--------- --------- --------- -------- --------
Income before incomes taxes, minority interest,
and change in accounting method..................... 278.8 1,313.1 831.0 294.9 747.7
Provision for income taxes........................... (244.4) (491.4) (248.4) (113.1) (280.7)
Minority interest in net income of consolidated
subsidiaries........................................ (49.1) (49.3) (24.7) (18.2) (20.4)
--------- --------- --------- -------- --------
Income before accounting change...................... (14.7) 772.4 557.9 163.6 446.6
Cumulative effect of change in accounting method,
net................................................. - - - (19.0) -
--------- --------- --------- -------- --------
Net income (loss).................................... $ (14.7) $ 772.4 $ 557.9 $ 144.6 $ 446.6
========= ========= ========= ======== ========
Basic income (loss) per common share:
Before change in accounting method........... $ (0.03) $ 1.79 $ 1.30 $ 0.37 $ 1.02
Change in accounting method.................. - - - (0.04) -
--------- --------- --------- -------- --------
Net income................................... $ (0.03) $ 1.79 $ 1.30 $ 0.33 $ 1.02
========= ========= ========= ======== ========
Diluted income per share:
Before change in accounting method........... $ (0.03) $ 1.77 $ 1.29 $ 0.37 $ 1.01
Change in accounting method.................. - - - (0.04) -
--------- --------- --------- -------- --------
Net income................................... $ (0.03) $ 1.77 $ 1.29 $ 0.33 $ 1.01
========= ========= ========= ======== ========
Weighted average common shares outstanding:
Basic........................................ 438.8 431.1 429.2 440.0 438.3
Diluted...................................... 438.8 436.1 432.1 442.7 442.7
</TABLE>
__________________________________________
See notes to annual and quarterly financial statements.
113
<PAGE>
HALLIBURTON COMPANY
Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
<TABLE>
<CAPTION>
Unaudited
December 31 June 30
------------------------------------------------
1998 1997 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and equivalents.............................................. $ 202.6 $ 384.1 $ 336.4 $ 281.4
Receivables:
Notes and accounts receivable (a).............................. 3,345.5 2,980.4 2,939.1 3,203.8
Unbilled work on uncompleted contracts......................... 514.9 407.2 537.8 514.6
--------- --------- --------- ---------
Total receivables.............................................. 3,860.4 3,387.6 3,476.9 3,718.4
Inventories....................................................... 1,301.8 1,299.2 1,222.7 1,456.2
Deferred income taxes, current.................................... 432.2 202.6 323.6 225.3
Other current assets.............................................. 286.1 169.7 231.3 177.4
--------- --------- --------- ---------
Total current assets........................................... 6,083.1 5,443.2 5,590.9 5,858.7
Property, plant and equipment:
At cost........................................................... 6,850.1 6,646.0 6,803.3 6,952.2
Less accumulated depreciation..................................... 3,928.5 3,879.6 3,956.4 4,012.1
--------- --------- --------- ---------
Net property, plant and equipment.............................. 2,921.6 2,766.4 2,846.9 2,940.1
Equity in and net advances to related companies..................... 587.0 761.2 552.1 731.2
Excess of cost over net assets acquired............................. 770.2 1,024.6 760.2 1,140.1
Deferred income taxes, noncurrent................................... 336.9 273.0 362.6 259.5
Other assets........................................................ 413.2 433.4 374.2 441.1
--------- --------- --------- ---------
Total assets...................................................... $11,112.0 $10,701.8 $10,486.9 $11,370.7
========= ========= ========= =========
Liabilities And Shareholders' Equity
Current Liabilities:
Short-term notes payable and current maturities of long-term debt. $ 573.5 $ 57.9 $ 988.6 $ 524.3
Accounts payable.................................................. 1,008.5 1,132.4 1,178.7 1,199.7
Accrued employee compensation and benefits........................ 402.2 516.1 204.3 480.4
Advance billings on uncompleted contracts......................... 513.3 638.3 291.9 545.0
Income taxes payable.............................................. 245.6 335.2 167.0 290.9
Accrued special charges........................................... 426.4 13.1 166.4 30.0
Other current liabilities......................................... 834.2 767.3 699.4 787.0
--------- --------- --------- ---------
Total current liabilities...................................... 4,003.7 3,460.3 3,696.3 3,857.3
Long-term debt...................................................... 1,369.7 1,296.9 1,064.0 1,284.7
Employee compensation and benefits.................................. 1,006.6 1,013.7 970.3 993.1
Other liabilities................................................... 500.6 450.6 504.2 458.9
Minority interest in consolidated subsidiaries...................... 170.2 163.4 161.8 162.2
--------- --------- --------- ---------
Total liabilities.............................................. 7,050.8 6,384.9 6,396.6 6,756.2
--------- --------- --------- ---------
Shareholders' equity:
Common shares, par value $2.50 per share -
authorized 600.0 shares (b)..................................... 1,114.7 1,134.3 1,117.9 1,136.0
Paid-in capital in excess of par value........................... 8.2 168.2 43.4 176.6
Deferred compensation............................................ (50.6) (44.3) (46.5) (41.4)
Accumulated other comprehensive income........................... (148.8) (131.1) (195.0) (161.9)
Retained earnings................................................ 3,236.0 3,563.4 3,270.5 3,879.7
--------- --------- --------- ---------
4,159.5 4,690.5 4,190.3 4,989.0
Less treasury stock, at cost (c)................................. 98.3 373.6 100.0 374.5
--------- --------- --------- ---------
Total shareholders' equity................................... 4,061.2 4,316.9 4,090.3 4,614.5
--------- --------- --------- ---------
Total liabilities and shareholders' equity................... $11,112.0 $10,701.8 $10,486.9 $11,370.7
========= ========= ========= =========
</TABLE>
______________
(a) Accounts receivable allowance for the year ended 1998 and 1997 and six
months ended June 30, 1999 and June 30, 1998 equaled $76.6 million,
$58.6 million, $99.6 million and $62.3 million, respectively.
(b) Issued shares for the year ended 1998 and 1997 and six months ended
June 30, 1999 and June 30, 1998 equaled 445.9 million shares, 453.7
million shares, 447.1 million shares and 454.4 million shares,
respectively.
(c) Treasury stock for the year ended 1998 and 1997 and six months ended
June 30, 1999 and June 30, 1998 equaled 5.9 million shares, 15.8
million shares, 6.0 million shares and 15.2 million shares,
respectively.
See notes to annual and quarterly financial statements.
114
<PAGE>
HALLIBURTON COMPANY
Consolidated Statements of Cash Flows
(Millions of dollars)
<TABLE>
<CAPTION>
Unaudited
Six months ended
Years ended December 31 June 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 $ 144.6 $ 446.6
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization........................ 587.0 564.3 497.7 290.0 291.1
Provision (benefit) for deferred income taxes........ (293.4) 2.6 (13.4) 82.8 (8.3)
Change in accounting methods......................... - - - 19.0 -
Distributions from (advances to) related............. (22.5) (84.6) (57.2) (13.8) (133.2)
companies, net of equity in (earnings) or losses
Change in accrued special charges.................... 413.3 (44.6) 57.7 (260.0) (13.3)
Other non-cash items................................. 272.2 59.2 33.1 92.6 25.2
Other changes, net of non-cash items:
Receivables........................................ (279.9) (408.8) (363.5) 102.7 (365.8)
Inventories........................................ (66.3) (117.1) (147.5) 77.7 (149.1)
Accounts payable................................... (45.3) (49.7) 98.8 140.3 178.2
Other working capital, net......................... (142.5) 39.9 286.9 (521.4) (169.8)
Other, net......................................... 46.2 99.5 (86.3) (161.2) 42.8
------- ------- ------- ------- -------
Total cash flows from operating activities.............. $ 454.1 $ 833.1 $ 864.2 $ (6.7) $ 144.4
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures.................................... (914.3) (880.1) (731.1) (267.0) (469.9)
Sales of property, plant and equipment.................. 100.0 180.6 64.4 99.7 54.4
Acquisitions of businesses, net of cash acquired........ (40.4) (161.5) (60.5) (17.6) (44.1)
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) (3.1) (1.5)
------- ------- ------- ------- -------
Total cash flows from investing activities.............. $(846.1) $(873.3) $(759.1) $ 103.0 $(453.4)
------- ------- ------- ------- -------
Cash flows from financing activities:
Borrowings of long-term debt............................ 150.0 303.2 295.6 - 1.2
Payments on long-term debt.............................. (26.7) (17.7) (8.2) (8.3) (12.7)
Net borrowings (payments) of short-term debt............ 369.3 (85.8) (7.3) 118.9 370.4
Payments of dividends to shareholders................... (254.2) (250.3) (239.6) (110.1) (132.9)
Proceeds from exercises of stock options................ 49.1 71.5 42.6 33.0 40.3
Payments to reacquire common stock...................... (19.9) (44.1) (235.2) (3.3) (17.8)
Other financing activities.............................. (13.9) 2.6 3.7 0.6 (4.8)
------- ------- ------- ------- -------
Total cash flows from financing activities.............. 253.7 (20.6) (148.4) 30.8 243.7
------- ------- ------- ------- -------
Effect of exchange rate changes on cash................... (5.4) (1.1) 1.0 6.7 0.4
------- ------- ------- ------- -------
Increase (decrease) in cash and equivalents............... (143.7) (61.9) (42.3) 133.8 (64.9)
Cash and equivalents at beginning of period *............ 346.3 446.0 488.3 202.6 346.3
------- ------- ------- ------- -------
Cash and equivalents at end of period..................... $ 202.6 $ 384.1 $ 446.0 $ 336.4 $ 281.4
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest............................................. $ 137.0 $ 106.1 $ 76.1 $ 70.0 $ 51.4
Income taxes......................................... 534.8 307.4 191.1 106.4 194.6
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses.... $ 5.4 $ 337.1 $ 39.4 $ 0.3 $ 33.2
Liabilities disposed of in dispositions of........... 23.6 205.5 9.8 - 13.4
businesses
</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.
115
<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.
116
<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 (1.1) (1.5) (1.2)
incentive stock plans, net
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 (8.5) (51.9) (43.3)
incentive stock plans, net
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.
117
<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
affiliated companies in which Halliburton has at least 20% ownership and does
not have management control 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.
118
<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. Excess of cost over net assets acquired that is identified with
impaired assets, if any, will be evaluated using undiscounted future cash flows
as the basis for determining if impairment exists. To the extent impairment is
indicated to exist, an impairment loss will be recognized based on fair value.
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 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 currently. In the event
an identifiable commitment is no longer expected to be
119
<PAGE>
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.
The tables below represent Halliburton's adoption of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
120
<PAGE>
Operations by Business Segment
<TABLE>
<CAPTION>
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 2,779.0 2,710.5
---------- ---------- ----------
Total $ 17,353.1 $ 16,276.5 $ 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 1,145.0 890.2 970.1
---------- ---------- ----------
Total $ 11,112.0 $ 10,701.8 $ 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>
121
<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 7,455.0 6,712.0
---------- ---------- ----------
Total $ 17,353.1 $ 16,276.5 $ 13,946.6
========== ========== ==========
Long-lived assets:
United States $ 2,433.4 $ 2,518.9 $ 2,432.9
United Kingdom 609.9 775.0 626.9
Other areas (numerous countries) 1,055.0 982.8 956.6
---------- ---------- ----------
Total $ 4,098.3 $ 4,276.7 $ 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 $ 638.3 $ 670.9
Raw materials and supplies 250.3 213.7
Work in process 561.4 535.8
Progress payments (148.2) (121.2)
---------- ----------
Total $ 1,301.8 $ 1,299.2
========== ==========
</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 5,576.3 5,454.1
---------- ----------
Total $ 6,850.1 $ 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 pipe coating.
122
<PAGE>
Effective February 29, 1996, a subsidiary of Halliburton entered into an
agreement to form a 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. During the fourth quarter of 1997,
Halliburton and Shaw agreed to a long-term extension of their strategic pipe
coating alliance, Bredero-Shaw. 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:
Combined Operating Results
<TABLE>
<CAPTION>
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>
Combined Financial Position
<TABLE>
<CAPTION>
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>
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)
---------- ---------- ----------
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
---------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
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>
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
124
<PAGE>
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.
Other Charges. Other charges include eliminating duplicate agents, contract
cancellation costs and eliminating other duplicate capabilities.
<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
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
</TABLE>
125
<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>
Utilized $ (442.3) $ (44.3) $ (3.4) $ (59.5) $ (4.2) $ (553.7)
-------- --------- ------------- ----------- ------- --------
Balance -- December 31, 1998 $ 67.1 $ 190.4 $ 122.8 $ 4.5 $ 41.6 $ 426.4
======== ========= ============= =========== ======= ========
</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.
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 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 FAS 121. This resulted in write-downs of
excess of cost over net assets acquired of $254.2 million related to directional
drilling and formation evaluation assets acquired in 1993 from Smith
International Inc., formation evaluation assets acquired in the 1988 acquisition
of Gearhart Industries, Inc., and completion products assets acquired in
conjunction with the acquisitions of Mono Pumps and AVA in 1990 and 1992,
respectively. In addition, $162.5 million of excess and duplicated machinery,
equipment and inventory related to formation evaluation and completion products
have been written down.
Additional asset related charges within the Energy Services Group include
excess and redundant equipment, software, inventory and excess of cost over net
assets acquired of $36.0 million related to other product lines which are
combinations of Halliburton and Dresser operations. The remaining asset related
charges include $26.0 million of write-downs of redundant or impaired equipment,
software and inventory in the Engineering and Construction and Dresser Equipment
Groups, plus $30.7 million for write-downs of information technology equipment
to be replaced with standard equipment and other duplicated shared services
assets applicable to all segments. The majority of the asset related balance of
$67.1 million at December 31, 1998 represents the write-downs to fair value less
disposal costs at the expected disposal date. The majority of the balance will
be utilized during the first and second quarters of 1999 in connection with
planned activities.
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.
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. 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.
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.
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.
126
<PAGE>
At December 31, 1998, no adjustments or reversals to the remaining accrued
special charges are planned.
In the third quarter of 1997, a subsidiary of Halliburton sold certain
assets of its subsea operations to Global Industries, Inc. for $102.0 million
cash. Halliburton recognized a loss of $9.7 million ($6.3 million after tax) on
the sale. Also in the third quarter of 1997, Halliburton recorded merger
transaction charges of $8.6 million (also $8.6 million after tax) for costs
incurred by Halliburton and NUMAR to complete the NUMAR acquisition.
In the fourth quarter of 1997, Halliburton recorded several nonrecurring
transactions. Halliburton recognized a pretax charge of $21.6 million ($14.0
million after tax) to provide $9.6 million within the Energy Services Group and
$6.4 million within the Dresser Equipment Group for various asset related
charges whose carrying value has been impaired and $5.6 million for early
retirement incentives. A subsidiary of Halliburton, along with its joint venture
partner Ingersoll-Rand Company, approved profit initiatives at Dresser-Rand
Company and Ingersoll-Dresser Pump Company. Halliburton's share of these
initiatives included facility consolidation charges of $18.0 million ($7.5
million after tax and minority interest) for the closure of a Dresser-Rand
facility in Europe, consolidation of repair and service operations and the
discontinuance of certain product lines. A subsidiary of Halliburton and Shaw
Industries, Ltd. agreed to a long-term extension of their strategic pipe coating
alliance. See Note 5. This transaction resulted in a pretax gain of $41.7
million.
Additionally, Halliburton recorded its share of personnel reduction charges
of $30.2 million recorded during the two-month period ended December 31, 1997 to
reduce employment levels by approximately 1,000 at Dresser-Rand and 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.
During the first quarter of 1996, Landmark recorded asset related charges of
$12.2 million ($8.7 million after tax) for the write-off of in-process research
and development activities acquired in connection with the purchase by Landmark
of certain assets and the assumption of certain liabilities of Western Atlas
International, Inc. and the write-off of related redundant assets and
activities.
During the third quarter of 1996, Halliburton recorded special charges of
$73.6 million ($50.3 million after tax), which included $41.0 million of
personnel charges to terminate approximately 1,000 employees related to
reorganization efforts within the Engineering and Construction Group and plans
to combine various administrative support functions throughout Halliburton into
shared services; $20.2 million of facility charges for restructuring certain
Engineering and Construction Group businesses, provide for excess lease space
and other items; and $12.4 million for merger transaction costs incurred in
relation to the merger with Landmark.
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
127
<PAGE>
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
through March 2002 29.4 45.9
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>
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. 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
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 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
128
<PAGE>
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 $ 7,457.9 $ 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, 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.
Over the last 20 years approximately 183,000 claims have been filed against
Dresser and its former divisions or subsidiaries. Claims continue to be filed
with 29,400 new claims filed in 1998. 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.
Since 1976, Dresser and its former divisions and subsidiaries have settled
or disposed of 120,000 claims for a gross cost of approximately $89.1 million
with insurance carriers paying all but $37.0 million. Provision has been made
for the estimated exposure, based on historical experience and expected
recoveries from insurance carriers, related to the 63,400 claims which were open
at the end of 1998 including 14,000 for which settlements are pending.
Management has no reason to believe that the insurance carriers will not be able
to meet their share of future obligations under the agreements.
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
129
<PAGE>
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. Global now disputes that it assumed responsibility for any
of such asbestos claims based on negligence. Global also now asserts certain
other claims relating to the insurance coverage responding to asbestos claims.
In order to resolve these assertions, Global has invoked the dispute resolution
provisions of the 1992 agreement, which require binding arbitration. On February
19, 1999 Dresser filed suit in the Delaware Chancery Court seeking an injunction
to restrain such arbitration as being barred by the Delaware statute of
limitations. Halliburton believes that these new assertions by Global are
without merit and intends to vigorously defend itself against them.
Management recognizes the uncertainties of litigation and the possibility
that a series of adverse rulings could materially impact operating results.
However, based upon Dresser'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.
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.
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.
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<PAGE>
Merger. In connection with the Merger, Dresser and its directors have been
named as defendants in three lawsuits filed in late February 1998 and early
March 1998 in the Delaware Court of Chancery. The lawsuits each purport to be a
class action filed on behalf of Dresser's stockholders and allege that the
consideration to be paid to Dresser's stockholders in the Merger is inadequate
and does not reflect the true value of Dresser. The complaints also each allege
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
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
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<PAGE>
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 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.
132
<PAGE>
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:
<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.
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<PAGE>
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 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.
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 7,457.9 6,561.5
------------ ------------ ------------
Combined $ 13,064.0 $ 16,276.5 $ 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>
134
<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
services 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.
135
<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 benefit
from
136
<PAGE>
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.
137
<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>
138
<PAGE>
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:
<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 a net amortization and deferral of $10.0 million,
resulting in a 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 healthcare 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 healthcare 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.
During 1997, Halliburton adopted amendments to eliminate certain
postretirement medical benefit programs. These amendments resulted in a
curtailment gain of $11.2 million.
139
<PAGE>
<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)
============= =============
</TABLE>
<TABLE>
<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)
============= =============
</TABLE>
<TABLE>
<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%
</TABLE>
<TABLE>
<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.
140
<PAGE>
Assumed health-care cost trend rates have a significant effect on the
amounts reported for the total of the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point 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>
141
<PAGE>
HALLIBURTON COMPANY
Notes to June 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 consolidated 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-K.
In our opinion, the consolidated financial statements present fairly our
financial position as of June 30, 1999 and 1998, and the results of our
operations for the six months ended June 30, 1999 and 1998 and our cash flows
for the six months then ended. The results of operations for the six months
ended June 30, 1999 and 1998 may not be indicative of results for the full year.
Additionally, prior year amounts have been reclassified to conform to the
current year presentation.
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.
142
<PAGE>
The table below presents revenues and operating income by segment.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-------------------- --------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Energy Services Group $ 1,681 $ 2,381 $ 3,434 $ 4,666
Engineering and Construction Group 1,372 1,438 2,880 2,785
Dresser Equipment Group 617 766 1,280 1,389
--------- --------- --------- ---------
Total $ 3,670 $ 4,585 $ 7,594 $ 8,840
========= ========= ========= =========
Operating income:
Energy Services Group 49 304 106 587
Engineering and Construction Group 64 74 122 133
Dresser Equipment Group 53 77 107 116
Special charge credits 47 -- 47 --
General corporate (17) (19) (34) (39)
--------- --------- --------- ---------
Total $ 196 $ 436 $ 348 $ 797
========= ========= ========= =========
</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:
Three Months Six Months
Ended June 30 Ended June 30
Millions of dollars 1998 1998
- -------------------------------- ------------- -------------
Revenues:
Halliburton $ 2,476 $ 4,831
Dresser 2,109 4,009
------------- -------------
Combined $ 4,585 $ 8,840
============= =============
Net income:
Halliburton $ 136 $ 254
Dresser 107 192
------------- -------------
Combined $ 243 $ 446
============= =============
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 purchase price of $265 million was
paid with a non-interest bearing promissory note 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.
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<PAGE>
Note 4. Inventories
June 30, December 31,
Millions of dollars 1999 1998
- -------------------------- ------------- -------------
Finished products and parts $ 630 $ 638
Raw materials and supplies 314 250
Work in process 405 562
Progress payments (126) (148)
------------- -------------
Total $ 1,223 $ 1,302
============= =============
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 $110
million higher than reported at June 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.
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<PAGE>
Dresser Industries, Inc.
Financial Position June 30 December 31
Millions of dollars 1999 1998
- -------------------------------- ----------- -----------
Current assets $ 5,320 $ 2,417
Noncurrent assets 5,718 2,614
----------- -----------
Total $ 11,038 $ 5,031
=========== ===========
Current Liabilities 2,910 1,389
Noncurrent liabilities 1,896 1,544
Minority interest 162 154
Shareholders' equity 6,070 1,944
----------- -----------
Total $ 11,038 $ 5,031
=========== ===========
Three Months Six Months
Dresser Industries, Inc. Ended June, 30 Ended June 30
Operating Results ---------------- ----------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------ ------- ------- ------- -------
Revenues $ 3,670 $ 2,109 $ 7,594 $ 4,009
======= ======= ======= =======
Operating income
$ 154 $ 198 $ 311 $ 355
======= ======= ======= =======
Income before taxes and minority interest $ 79 $ 180 $ 215 $ 320
Income taxes (31) (65) (87) (115)
Minority interest (10) (9) (18) (13)
Change in accounting method -- -- (19) --
------- ------- ------- -------
Net income $ 38 $ 106 $ 91 $ 192
======= ======= ======= =======
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. Dresser has approximately 74,000 pending
claims at June 30, 1999. Settlements, previously reported, covering
approximately 12,500 claims, are carried as pending until releases are signed.
We have an additional 10,200 asbestos claims pending which have arisen as a
result of construction and renovation work performed by the Engineering and
Construction Group segment. During the first six months of 1999, approximately
20,500 claims were filed and approximately 6,800 claims against us were settled
or otherwise resolved. The settlements reached during the first six 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.
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
145
<PAGE>
pending claims based on Dresser's negligence, the pre-1967 acts of Harbison-
Walker, punitive damages, and for all similar future claims.
Dresser and Global are selecting an arbitrator. We expect the arbitration
to start in late 1999. We believe that the assertions by Global are without
merit and Dresser intends to vigorously defend against them. On February 19,
1999 Dresser filed suit in the Delaware Chancery Court seeking an injunction to
restrain the arbitration as being barred by the statute of limitation. On July
13, 1999 the Delaware Chancery Court dismissed the lawsuit and found that the
Court had no jurisdiction to hear the lawsuit. 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. A trial date
of December 6, 1999 has been set to hear arguments regarding a permanent
injunction. Global has appealed the temporary injunction. A submission date of
September 21, 1999 has been set for oral argument before the appellate court.
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.
Regarding this site, sufficient information 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.
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.
146
<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 3.0 million
shares of common stock which were outstanding during the six months ended June
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.
Millions of dollars and shares Three Months Six Months
except per share data Ended June 30 Ended June 30
- -------------------------------------- ---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
Income before accounting change $ 83 $ 243 $ 164 $ 446
======= ======= ======= =======
Basic weighted average shares 440 438 440 438
Effect of common stock equivalents 4 5 3 5
Diluted weighted average shares 444 443 443 443
======= ======= ======= =======
Income per common share before change in
accounting method:
Basic $ 0.19 $ 0.55 $ 0.37 $ 1.02
======= ======= ======= =======
Diluted $ 0.19 $ 0.55 $ 0.37 $ 1.01
======= ======= ======= =======
Note 8. Comprehensive Income
Three Months Six Months
Ended June 30 Ended June 30
---------------- ----------------
Millions of dollars 1999 1998 1999 1998
- ---------------------------------------- ------- ------- ------- -------
Net income $ 83 $ 243 $ 145 $ 446
Cumulative translation
adjustment, net of tax (15) (7) (39) (16)
Minimum pension liability adjustment -- -- (7) --
------- ------- ------- -------
Total comprehensive income $ 68 $ 236 $ 99 $ 430
======= ======= ======= =======
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 June 30, 1999 and December 31,
1998 consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
Millions of dollars 1999 1998
- ---------------------------------------------- -------- -----------
<S> <C> <C>
Cumulative translation adjustment $ (181) $ (142)
Minimum pension liability (14) (7)
-------- --------
Total accumulated other comprehensive income $ (195) $ (149)
======== ========
</TABLE>
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 associated with the merger and industry
downturn.
The table below includes the components of the pretax special charge and
the amounts utilized and adjusted through June 30, 1999.
147
<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 (442) (45) (3) (60) (4) (554)
------- --------- ------------- ----------- ------- ------
Balance December 31, 1998 67 190 123 4 42 426
Utilized in 1999 (43) (119) (40) (3) (8) (213)
Adjustments to 1998 charges -- (30) (16) (1) -- (47)
------- --------- ------------- ----------- ------- ------
Balance June 30, 1999 $ 24 $ 41 $ 67 $ -- $ 34 $ 166
======= ========= ============= =========== ======= ======
</TABLE>
We utilized $43 million of asset related reserves during the first six
months of 1999. Until the assets are disposed of, normal depreciation and
amortization will continue to be charged against our results of operations.
The following summarizes reductions of employees, consultants and contract
personnel related to the 1998 special charge through June 30, 1999:
. 1998 4,400 including 3,800 within the Energy Services Group
. 1999 4,400 including 3,500 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, 1,300 have not yet taken place. These
reductions will occur in the second half 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 June 30, 1999, we have sold or returned to the owner 145 service
and administrative facilities related to the 1998 special charge. As of June 30,
1999, we had vacated an additional 123 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. Until the
properties included in the facility consolidation charges are vacated, we plan
to continue normal depreciation, lease costs and operating expenses, which will
be charged against our results of operations. 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 six months of 1999, we incurred $8 million in other
special charge costs. The balance will be utilized during 1999 and possibly 2000
in connection with our renegotiation of agency agreements, supplier and other
contracts and elimination of other duplicate capabilities.
148
<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. These costs, which relate to the
Energy Services Group segment, were recognized for previously capitalized
business mobilization costs and facility start-up costs associated with a new
manufacturing facility in the U.K.
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.
149
<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 $ 4,495.1 $ 16,276.5
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.
150
<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
-------------------------------------------------
Under option
31 March 1997 31 March 1996 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>
151
<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
152
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
PES (INTERNATIONAL) LIMITED
We have audited the financial statements on pages 155 to 176 which have
been prepared under the historical cost convention and the accounting policies
set out on pages ___, ___ and ___.
Respective responsibilities of directors and auditors
As described on page 152 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.
153
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
PES (INTERNATIONAL) LIMITED
We have audited the financial statements for the period ending March 31,
1996 which have been prepared under the historical cost convention and the
accounting policies set out on pages 160 and 161.
Respective responsibilities of directors and auditors
As described on page 152, 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 judgments 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 1996 and of the profit
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 22 November 1996
Aberdeen, U.K.
154
<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.
155
<PAGE>
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.
156
<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
------------ ------------
9,409,020 6,818,127
CREDITORS - Amounts falling due
within one year (Note 15) (10,122,582) (6,670,912)
------------ ------------
NET CURRENT (LIABILITIES)/
ASSETS
(713,562) 147,215
------------ ------------
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.
157
<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
LIABILITIES 3,694,733 1,580,230
CREDITORS - Amounts falling due after more
than one year (Note 16) (234,000) ---
----------- ------------
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
158
<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 ACTIVITIES (Note 22) 789,434 (767,853)
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>
PES (INTERNATIONAL) LIMITED
159
<PAGE>
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.
160
<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:
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
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
=========== ===========
</TABLE>
161
<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
purchase agreements 319,205 216,162
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 $6,000 (1996 -
$5,000).
4 STAFF COSTS
(1)
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
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
=========== ===========
</TABLE>
During the year $Nil (1996 - $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:
<TABLE>
<CAPTION>
1997 1996
Number Number
<S> <C> <C>
Production 176 112
Distribution and marketing 27 25
Administration 18 17
---------- ----------
221 154
========== ==========
</TABLE>
162
<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 $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.
163
<PAGE>
7 TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
The tax charge/(credit) for the year comprises the 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
========== ==========
</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 for the financial year was $614,903 (1996 - profit
$301,813).
9 DIVIDENDS
<TABLE>
<CAPTION>
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Dividends on equity shares
`A' ordinary shares paid of $384.22 per share 45,000 45,516
========== ==========
</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 730,000 167,095 -- 38,560 935,655
Exchange -- (26,858) -- (6,198) (33,056)
Additions -- -- 1,667,861 -- 1,667,861
Acquisitions
(Note 24) -- 161,528 -- -- 161,528
------------- ------------- ------------- ------------- -------------
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
------------- ------------- ------------- ------------- -------------
At 31 March
1997 32,488 163,928 55,595 9,640 261,651
============= ============= ============= ============= =============
</TABLE>
164
<PAGE>
<TABLE>
<CAPTION>
Goodwill
Development arising on Purchased
costs Patents consolidation goodwill Total
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
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.
165
<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 $1,781,901 (1996 -
$860,887) in respect of assets held under finance and hire purchase lease
agreements.
12 INVESTMENTS
<TABLE>
<CAPTION>
The Group The Company
(Pounds) (Pounds)
<S> <C> <C>
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
=============== ===============
</TABLE>
166
<PAGE>
(1) Shares at cost in subsidiary undertakings
<TABLE>
<CAPTION>
Company
(Pounds)
<S> <C>
At 1 April 1996 605,183
Additions during the period 2,039,133
---------------
At 31 March 1997 2,644,316
===============
</TABLE>
(2) Investment in associated undertaking
<TABLE>
<CAPTION>
Group Company
(Pounds) (Pounds)
<S> <C> <C>
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
=============== ===============
</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 120,663
==========
</TABLE>
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 $109
per share. The investment in own shares has been recorded at this amount
representing estimated realizable value.
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%
Trustee
PES Trustees Limited Company Scotland 100%
PES Petroquip Limited Dormant Scotland 100%
PES Petroserv Limited Dormant Scotland 100%
</TABLE>
167
<PAGE>
<TABLE>
<CAPTION>
Percentage
of nominal
Country of share capital
Nature of registration/ and voting
Name of Business incorporation rights
-------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
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 $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
<TABLE>
<CAPTION>
Group
-------------------------------------
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
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
=============== =================
</TABLE>
The company had no stock at either 31 March 1997 or 1996.
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>
168
<PAGE>
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
21) 504,979 -- 315,740 --
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
21) 1,200,416 -- 413,972 --
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>
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 $234,000 is repayable on 31 July 1997 but was
repaid early subsequent to the year end. The Second tranche of $234,000 is
repayable on 6 April 1998.
169
<PAGE>
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
=========== ===========
</TABLE>
Deferred tax
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>
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>
170
<PAGE>
18 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
Group and Company
1997 1996
(Pounds) (Pounds)
<S> <C> <C>
Authorized:
88,288 Ordinary Shares of (Pounds) 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.
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.
171
<PAGE>
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
<TABLE>
<CAPTION>
Group Share Capital Profit Reserves
premium redemption and loss arising on Acquisition
account reserves account consolidation reserve
(Pound) (Pound) (Pound) (Pound) (Pound)
<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>
Company
Share Capital
premium Profit and redemption
account loss account reserve
(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>
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>
172
<PAGE>
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>
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>
173
<PAGE>
(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)
----------
(1,359,688)
----------
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)
----------
(676,045)
----------
---------- ---------- -------- ---------- ----------
(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.
174
<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: 1,265,600
Shares allotted 266,400
Cash 468,000
Loan notes 33,250
----------
Acquisition expenses
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>
Change in
1997 1996 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>
175
<PAGE>
26 OPERATING LEASE COMMITMENTS
The group has commitments under operating leases to make payments in the
following year as set out below:
1997 1996
(Pounds) (Pounds)
Plant and machinery and motor vehicles:
Operating leases which expire:
Within 1 year 1,117 --
2-5 years 19,768 3,799
======== =======
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
any.
31 POST BALANCE SHEET EVENTS
Details of post balance sheet events are given in the directors'
report.
176
<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)
177
<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 each
--------------------------------------------------
Under option Under option
31 March 31 March 31 March 31 March
1998 1997 1998 1997
L. W. Kinch 30,000 35,379 -- --
D. W. Whiteford 14,691 17,721 -- --
M. L. Bowyer 782 870 2,161 1,560
D. Rubbo 10,075 974 1,560 1,560
C. Smith 1,624 1,109 1,522 400
S. Owens 3,757 -- 390 390
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
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
178
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS OF
PES (INTERNATIONAL) LIMITED
We have audited the financial statements on pages 180 through 197 which have
been prepared under the historical cost convention and the accounting policies
set out on pages 184 and 185.
Respective responsibilities of directors and auditors
As described on page 178, 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 5 February 1999
Aberdeen, U.K.
179
<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.
180
<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.
181
<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
LIABILITIES 25,627,661 3,694,733
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
182
<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
OPERATING ACTIVITIES (Note 22) (2,000,571) 789,434
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
ACQUISITIONS AND DISPOSALS -- (483,672)
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>
183
<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.
(7) Stocks
Stocks and work in progress are stated at the lower of cost and net
realizable value.
184
<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 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.
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>
185
<PAGE>
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 $6,000 (1997 -
$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>
(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>
186
<PAGE>
(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 $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 $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>
187
<PAGE>
7 TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
The tax charge/(credit) for the year comprises the following:
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 $2,379,108 (1997 -profit
$614,903).
9 DIVIDENDS
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Dividends on equity shares
'A' ordinary shares paid of $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>
188
<PAGE>
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. 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 $2,467,973 (1997 -
$1,781,901) in respect of assets held under finance and hire purchase lease
agreements.
189
<PAGE>
12 INVESTMENTS
<TABLE>
<CAPTION>
The Group The 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.
190
<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 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 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>
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.
191
<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.
192
<PAGE>
The bank loan is repayable as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Group Company Group Company
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
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 --
======= ======= ======== =======
</TABLE>
17 PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
1998 1997
Group Group
(Pounds) (Pounds)
<S> <C> <C>
Deferred tax 90,417 34,639
Deferred income 761,414 19,600
------- ------
851,831 54,239
======= ======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
Group Group
(Pounds) (Pounds)
<S> <C> <C>
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
======= =======
</TABLE>
Deferred income
<TABLE>
<CAPTION>
1998 1997
Group Group
(Pounds) (Pounds)
<S> <C> <C>
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
======= =======
</TABLE>
193
<PAGE>
18 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
Group and Company
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
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
======= =======
</TABLE>
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.
194
<PAGE>
Company
<TABLE>
<CAPTION>
Share Profit and Capital
premium Loss redemption
account account reserve
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
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
========== ========== =========
</TABLE>
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
<TABLE>
<CAPTION>
1998 1997
Group Group
(Pounds) (Pounds)
<S> <C> <C>
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
========= =========
</TABLE>
The amounts are secured over the assets to which they relate.
195
<PAGE>
22 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
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
========== ===========
</TABLE>
23 ANALYSIS OF NET DEBT
(1) Reconciliation of net cash flow to movement in net debt
<TABLE>
<CAPTION>
(Pounds)
<S> <C>
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)
==========
</TABLE>
(2) Analysis of net debt
<TABLE>
<CAPTION>
Other At 31
At 1 April non-cash March
1997 Cash 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>
196
<PAGE>
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."
24 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS AS SHOWN IN BALANCE SHEET
<TABLE>
<CAPTION>
Change in
1998 1997 period
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
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
========= ========== =========
</TABLE>
25 OPERATING LEASE COMMITMENTS
The group has commitments under operating leases to make payments in the
following year as set out below:
<TABLE>
<CAPTION>
1998 1997
(Pounds) (Pounds)
<S> <C> <C>
Plant and machinery and motor vehicles:
Operating leases which expire:
Within 1 year 6,050 1,117
2-5 years 59,804 19,768
====== ======
</TABLE>
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.
197
<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
__________, 1999 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 . . 1999 (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 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 . . 1999 or such later date as Halliburton may determine
being not later than . . 1999. 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 and two deferred, contingent elements ("Deferred
Elements").
2.2 Upon Completion of the Offer, Halliburton will issue up to 3.27400
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 1.21138 shares will be issued promptly after Completion of
the Offer; and
2.2.2 0.98220 shares (the "First Deferred Element") will be issued
promptly after a date 18 months after Completion of the
Offer ("First Determination Date"), subject to potential
reduction or delay, or both, as provided herein; and
2.2.3 1.08042 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:
Annex I-3
<PAGE>
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 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%;
Annex I-4
<PAGE>
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 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.
Annex I-5
<PAGE>
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 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
Annex I-6
<PAGE>
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 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.
Annex I-7
<PAGE>
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.
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
Annex I-8
<PAGE>
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 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 _______,
1999 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
. . 1999
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 13 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 _______ 1999. 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.
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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.
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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.
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(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
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<PAGE>
accepted the offer may by a written communication addressed to
the offeror require him to acquire those shares.
(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.
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<PAGE>
(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 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.
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<PAGE>
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 (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:
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(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
(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.
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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 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.
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:
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(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
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
II-3
<PAGE>
(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 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 13th day of September, 1999.
HALLIBURTON COMPANY
By: /s/ Richard B. Cheney
---------------------------
Richard B. Cheney
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lester L. Coleman, Susan S. Keith and John M.
Allen, or any of them, his true and lawful attorney-in-fact and agent, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
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 13th day of September, 1999:
Signature Title
--------- -----
/s/ Richard B. Cheney Chief Executive Office and Director
- -----------------------------------
Richard B. Cheney
/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 Director
- -----------------------------------
William E. Bradford
/s/ Lord Clitheroe* Director
- -----------------------------------
Lord Clitheroe
<PAGE>
/s/ Robert L. Crandall* Director
- -----------------------------------
Robert L. Crandall
/s/ Charles J. DiBona* Director
- -----------------------------------
Charles J. DiBona
/s/ Lawrence S. Eagleburger* Director
- -----------------------------------
Lawrence S. Eagleburger
/s/ W. R. Howell* Director
- -----------------------------------
W. R. Howell
/s/ Ray L. Hunt* Director
- -----------------------------------
Ray L. Hunt
/s/ Delano E. Lewis* Director
- -----------------------------------
Delano E. Lewis
/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>
Dated 1999
----------------------------------
(1) ___________________ LIMITED
- and -
(2) ___________________________
SERVICE AGREEMENT
RUBBO/KINCH
CMS Cameron McKenna
Mitre House
160 Aldersgate Street
London EC1A 4DD
T +44(0)171 367 3000
F +44(0)171 367 2000
<PAGE>
THIS AGREEMENT is made BETWEEN:-
(A) The Company: [ ], a company incorporated in Scotland
and registered under number [ ]; and
(B) You: [ ]of [ ].
1. Employment
1.1 Conditional upon Completion, your employment under this Agreement will
commence on __________________________ 1999 (the "Commencement Date") and
will continue (subject to earlier termination as provided in this
Agreement) for a fixed term of three years from the Commencement Date and
continuing thereafter until terminated by either side on three months'
notice expiring on or after the end of the fixed term.
1.2 Your previous employment with the Company, which began on _____________,
counts as part of your period of continuous employment with the Group.
1.3 At the date of this Agreement your job title is _______________. Your
duties are set out in more detail in the Schedule to this Agreement. It is
intended that these duties will continue throughout the period of this
Agreement, but the Company reserves the right to vary your job description
to meet its operational requirements (after giving you due notice of any
change) having due regard to your status as a senior employee.
1.4 You will (without further remuneration), if and for as long as the Company
requires, during this Agreement:
1.4.1 carry out duties for the benefit of or on behalf of any Group
Company; and/or
1.4.2 hold any office and/or other appointment in or on behalf of the
Group;
1.5 You will, at all times during the period of this Agreement:
1.5.1 devote the whole of your time, attention and ability during your
hours of work (as set out in Clause 1.6) to the duties of your
employment;
1.5.2 faithfully and diligently perform your duties and exercise only such
powers as are consistent with them;
1.5.3 obey all and any lawful and reasonable directions of the Board;
<PAGE>
1.5.4 act only in accordance with the Memorandum and Articles of
Association of the Company or, where acting pursuant to Clause 1.4,
of the relevant Group Company;
1.5.5 use your reasonable endeavours to promote the interests of the
Group; and
1.5.6 keep the Board or its designee promptly and fully informed (in
writing if so requested) of your conduct of the business or affairs
of the Group and provide such explanations as they may reasonably
require.
1.6 Your hours of work are the normal hours of business of the Company together
with such additional hours as may be necessary for you to perform your
duties properly. It is the understanding of both you and the Company that
you are employed as a managing executive and, accordingly, that Regulations
4(1) and (2), 6(1) (2) and (7), 10(1), 11(1) and (2) and 12(1) of the
Working Time Regulations 1998 do not apply in relation to your employment
under this Agreement.
1.7 Your normal place of work is the Company's office at _____________. You
will, if and for as long as required by the Company, make visits in the
ordinary course of your duties to such places anywhere in the world as it
may reasonably specify. Notwithstanding the foregoing, you shall not be
required to spend more than 45 working days in any period of 90 working
days (nor more than a total of 90 working days in any period of 365 days)
working, stationed, or travelling away from your normal place of work. It
is recognised that due to the nature of your work you may be asked to
exceed these limits from time to time and it is agreed that you will not
unreasonably withhold your consent to such requests, provided always that
you shall notify the Company as soon as reasonably practicable of any
period to be spent travelling away from your normal place of work and in
any event you shall give the Company Secretary two weeks' notice if any
proposed visit would result in you exceeding the limits specified in this
Clause 1.7. You agree that if you do not comply with these notification
provisions, any visit which results in you exceeding the limits set out in
this Clause 1.7 shall not be a breach of this Agreement.
2. Pay
2.1 During your employment, the Company will pay you a salary at the rate of
(Pounds)______ each year (or such higher rate as may be awarded to you
pursuant to Clause 2.2) which will accrue from day to day and be payable in
equal monthly instalments in arrears on or before the last working day of
each month (the "Salary"). The Salary is inclusive of all and any fees
receivable by you as the holder of offices or appointments within the Group
or on behalf of the Company or any Group Company.
2
<PAGE>
2.2 On or about 1st April 2000 and each subsequent anniversary, your Salary
will be reviewed by the Board and the rate of Salary then payable may be
increased by the Company with effect from the date of such review by such
amount (if any) as the Board may decide.
2.3 The Company reserves the right at any time during, or in any event on
termination of your employment, to deduct from Salary any overpayment made
and/or monies owed to the Company by you including but not limited to any
excess holiday, outstanding loans, advances of Salary or expenses, and the
cost of repairing any damage or loss to the Company's property and/or to
property leased by or on behalf of the Company which is caused by you other
than the cost of repairing normal wear and tear.
3. Fringe Benefits [NOTE - TO BE TAILORED FOR INDIVIDUAL ENTITLEMENTS]
3.1 You are entitled to be and remain a member of the Company Pension Scheme
(the "Scheme") subject to the terms of its Deed and Rules from time to time
(details of which are available from the Personnel Department), for so long
as it continues in operation. A contracting-out certificate is not in force
for your employment
3.2 You will be covered by a group life assurance scheme, subject to the terms
of such scheme from time to time. You will receive life assurance cover
which is currently four times your Salary (or, if less, four times the
Inland Revenue pensionable earnings cap for the time being applicable to
you) payable in the event of your death in service, subject always to the
rules of the relevant policy and if and to the extent that such cover is
available on normal terms.
3.3 You are entitled to participate in the Company's permanent health and
private medical expenses insurance schemes maintained from time to time for
the benefit of its employees, subject always to the rules of such schemes
and if and to the extent that such cover is available on normal terms.
Details of each scheme are available from the Personnel Department.
3.4 [DEPENDING ON CURRENT ENTITLEMENT]. [You will be eligible to receive a
Company car or a car allowance in accordance with the terms of the Car
Benefit Policy (as amended from time to time).]
3.5 [If you have a Company car, you must comply with all Group regulations
relating to Company cars, notify the Company immediately of any accident
involving your Company car and of any charge brought against you for a
motoring offence and, on the termination of your employment, return your
Company car to the Company at its offices.]
3
<PAGE>
3.6 You are also eligible to be considered for participation in a bonus scheme
which will be notified to you separately.
4. Expenses
4.1 The Company will reimburse you with your reasonable travelling, telephone,
hotel, entertainment and other business expenses incurred in the course of
your duties provided that you comply with Group regulations from time to
time in this respect and provide the Company with receipts or other proof
of payment as the Company may reasonably require.
5. Holiday
5.1 In addition to 8 public holidays, you are entitled to holiday without loss
of pay in each holiday year (which runs from 1st January to 31st December)
to be taken at such time or times as may be authorised in advance by the
Board, as follows:
<TABLE>
<CAPTION>
Year of Service Annual Holiday Entitlement per
--------------- -------------- ---------------
Entitlement Complete Month
----------- --------------
of Service
----------
<S> <C> <C>
In the holiday year on joining
the Company 20 days 1.67 days
In the holiday year in which 1
year's service is completed 21 days 1.75 days
In the holiday year in which 2
years service is completed 23 days 1.92 days
In the holiday year in which 3
years service is completed 24 days 2 days
In the holiday year in which 4
years service is completed and
all subsequent years 25 days 2.08 days
</TABLE>
You may not, except with prior permission from the Board, carry forward
any unused part of your holiday entitlement to a subsequent holiday year.
5.2 In the first and final holiday years of your employment, your holiday
entitlement will be calculated at the rate indicated in Clause 5.1 above
for each complete calendar month of your employment by the Company during
that holiday year. You will be entitled on termination to pay in lieu of
any unused holiday entitlement. If you have taken holiday in excess of your
accrued entitlement, you will be required to repay any excess Salary you
have received for such holiday. The basis for payment and repayment is
1/260th of your Salary for each day.
4
<PAGE>
6. Incapacity
6.1 If you are absent from work because of illness, mental disorder or injury
("Incapacity"), you must report that fact promptly to the Company and,
after seven continuous days' absence, provide medical practitioners'
certificate(s) of your Incapacity and its cause for Statutory Sick Pay
purposes covering the whole period of your absence. For Statutory Sick Pay
purposes, your qualifying days are your normal working days. Any
unauthorised absence must be properly explained and, in the case of an
absence of uncertain duration, you must keep the Company regularly informed
of your anticipated return to work.
6.2 If you are absent from work due to Incapacity and have complied with the
provisions of Clause 6.1, you will continue to be paid full basic Salary
for the first 26 weeks' of absence and 50% of basic Salary for the next 26
weeks thereafter, in any period of 12 months. All other benefits to which
you are entitled under this Agreement (namely [pension, life assurance,
medical insurance and car benefits]) will continue in full force and effect
during such period of absence. Such payment will be deemed to include all
and any Statutory Sick Pay to which you are entitled and any Social
Security Sickness Benefit or other state benefits recoverable by you
(whether or not recovered) may be deducted from such payment. If your
absence exceeds 30 consecutive days, the Company will be entitled to
appoint a temporary replacement to cover your absence.
6.3 You will, whenever requested by the Board or the board of directors of PES
(International) Limited, submit to examination by an independent medical
practitioner selected and paid for by the Company. You hereby authorise
such medical practitioner to disclose to and discuss with the Board any
matters which, in his opinion, might hinder or prevent you (if during a
period of Incapacity) from returning to work for any period or (in other
circumstances) from properly performing your duties at any time. In the
event that you wish to resign on account of ill health or are forced to
resign as a consequence of illness, injury or mental disorder, you or your
personal representatives shall also be entitled to require the appointment
of such an independent medical practitioner to report on your condition and
the issue of whether you are fit to return to work.
6.4 Any report obtained from an independent medical practitioner under this
Clause 6 shall be made available by the Company to you or your
representative on request.
7. Confidentiality, Integrity and Share Dealing
7.1 During your employment under this Agreement, you will not:-
5
<PAGE>
7.1.1 in connection with the business of the Group, directly or indirectly
receive or obtain any discount, rebate, commission or other
inducement (whether in cash or in kind) which is not authorised by
regulations or guidelines from time to time governing dealings by
employees on behalf of the Company, or, if you do, you will account
immediately to the Company for the amount so received;
7.1.2 directly or indirectly disclose or make use of any Confidential
Information for any purpose other than a legitimate purpose of the
Company;
7.1.3 (except in the proper course of your duties under this Agreement)
remove from Company premises or copy or allow others to copy the
contents of any document, computer disk, tape or other tangible item
which contains any Confidential Information or which belongs to the
Company;
7.1.4 at any time make any untrue or misleading statement relating to the
Group.
7.2 In relation to dealings in shares, debentures or other securities of the
Company or any Group Company and unpublished price sensitive information
affecting the shares, debentures or other securities of any other company:-
7.2.1 you will comply where relevant with every rule of law, every
regulation of The London Stock Exchange Limited, the New York Stock
Exchange and every regulation of the Group from time to time in
force including compliance with the rules for the time being
applicable to the relevant stock exchange on which shares of the
Company or any Group Company are for the time being listed or
traded;
7.2.2 (in relation to overseas dealings) you will comply with all laws of
the state and all regulations of the stock exchange, market or
dealing system in which such dealings take place;
7.2.3 you will not (and will procure so far as you are able that your
spouse and children do not) deal or become or cease to be interested
(within the meaning of Part I of Schedule XIII to the Companies Act
1985) in any securities of the Company or any Group Company except
in accordance with any rules or guidelines from time to time
relating to securities transactions by employees of the Company or
any Group Company; and
7.2.4 [TO BE QUALIFIED FOR EMPLOYEES WITH OTHER BUSINESS INTERESTS] you
will not, without the prior written permission of the Board (which
shall not be unreasonably withheld),
6
<PAGE>
hold any public office or directly or indirectly undertake any other
work for or hold any interest in any other company, firm or business
(except for up to 5 per cent of the issued ordinary shares of any
company so long as it does not create a conflict of interest as
determined by the Company in accordance with the "Halliburton
Company Code of Business Conduct" (as amended from time to time)).
8. Termination of Agreement
8.1 This Agreement will automatically terminate:
8.1.1 when you reach your 60th birthday; or
8.1.2 if you are prohibited by law from being a director.
8.2 The Company will be entitled, with the prior approval of a resolution of
the board of directors of PES (International) Limited, by giving notice, to
terminate this Agreement with immediate effect if you:
8.2.1 commit any act of gross misconduct or repeat or continue any other
material breach of your obligations under this Agreement; or
8.2.2 engage in any conduct which, in the reasonable opinion of the board
of directors of PES (International) Limited, is likely to cause your
continued employment to be detrimental to the interests of the
Group; or
8.2.3 are convicted of any criminal offence which is punishable with 6
months or more imprisonment (save for any motoring offence for which
you are not sentenced to a term of immediate or suspended
imprisonment); or
8.2.4 commit any act of dishonesty, whether or not relating to your
employment; or
8.2.5 resign your office as a director of the Company or any Group Company
otherwise than at the request of the relevant Company or any Group
Company;
8.2.6 are, in the reasonable opinion of the board of directors of PES
(International) Limited, incompetent in the performance of your
duties (provided that the performance against any business plan will
not be the sole determinant when assessing your competency under
this Clause 8.2.6); or
8.2.7 commit any act which materially violates the "Halliburton Company
Code of Business Conduct" (as amended from time to time).
7
<PAGE>
8.3 The Company will be entitled to terminate this Agreement notwithstanding
Clause 6.2 or your entitlement at that time to sick pay or benefits under
the Company's permanent health insurance scheme, by notice which is not
less than your then entitlement to statutory minimum notice plus a week
given at any time when you have been absent from work due to Incapacity
for a period or periods aggregating 26 weeks in the preceding 12 months
provided that the Company will withdraw any such notice if, before it
expires, you resume your duties full time and provide medical evidence
satisfactory to the Board that you are fully recovered and that no
recurrence of your Incapacity can reasonably be anticipated.
8.4 On serving or receiving notice to terminate this Agreement or at any time
thereafter during the currency of such notice the Company is, at its
discretion, entitled to pay you your Salary (at the rate then payable
under Clause 2.1 hereof) in lieu of notice.
8.5 At any time after notice (including summary notice) to terminate this
Agreement has been served or received by the Company, the Company may
elect to suspend you from the performance of all or any of your duties
under this Agreement and, after doing so:-
8.5.1 require you to resign (without any claim for compensation) from any
offices and/or appointments which you hold as a director, nominee
or representative of the Company or any Group Company; and/or
8.5.2 require you to transfer, without payment, to the Company (or as the
Company may direct) any qualifying shares or nominee shareholdings
provided to you by or held by you in or on behalf of any Group
Company in which you have no beneficial interest; and/or
8.5.3 require you to return to the Company on request any documents,
computer disks and tapes and other tangible items in your
possession or under your control which belong to the Company or
which contain or refer to any Confidential Information; and/or
8.5.4 require you to delete all Confidential Information from any
computer disks, tapes or other re-usable material in your
possession or under your control and destroy all other documents
and tangible items in your possession or under your control which
contain or refer to any Confidential Information; and/or
8.5.5 appoint a replacement to hold the same or similar job title as you
and/or to carry out all or any of your duties instead of you; and/
or
8.5.6 exclude you from all or any premises of the Group; and/or
8
<PAGE>
8.5.7 require you not, without the prior consent of the Board, to engage
in any contact (whether or not at your own instance) with any
customer, supplier, employee, director, officer or agent of any
company in the Group which touches and concerns any of the business
affairs of the Group.
8.6 If you fail to comply with Clauses 8.5.1 and/or 8.5.2 within seven days of
being so required, the Company is hereby irrevocably authorised to appoint
some person in your name and on your behalf to sign any document or do any
thing necessary or requisite to effect such resignation(s) and/or
transfer(s) (without prejudice to any claims which you may have against the
Company arising out of this Agreement or its termination or such
registration or transfer).
8.7 The Company agrees that it will at all times act reasonably towards you in
respect of all aspects of this Agreement and your employment hereunder, and
that it will exercise all rights which it may have under this Agreement in
a reasonable manner, including its right to terminate your employment
hereunder. In the event that the Company wishes to terminate your
employment under Clause 8.2 or in the event that you resign in
circumstances where you are treating this Agreement as terminable without
notice by reason of the conduct of the Company, in either case where such
termination or resignation is to take effect within the period of three
years from the Commencement Date, you and the Company shall abide by the
following procedure:
8.7.1 if the Company wishes to terminate your employment under Clause 8.2,
the Company will inform you by written notice that your employment
is or will be terminated under Clause 8.2. Such notice will also
contain full details of the grounds on which the Company intends to
rely when terminating your employment;
8.7.2 if you resign in circumstances where you are treating this Agreement
as terminable without notice by reason of the conduct of the
Company, you will inform the Company by written notice of such fact
within 7 days of your resignation. Such notice will also contain
full details of the grounds on which you intend to rely in
connection with such resignation;
8.7.3 within a period of 14 days following the actual or deemed receipt of
such notice, you or the Company (as the case may be) may inform the
other that an Arbiter must be appointed whose role will be to decide
whether your employment has or is to be terminated lawfully in
accordance with Clause 8.2 (taking into account whether the Company
has acted reasonably as set out in Clause 8.7 above) or whether you
were entitled to resign without notice by reason of the conduct of
the Company (as the case may be) and whether the termination of your
9
<PAGE>
employment is Termination for Cause for the purposes of, and as
defined in, the Offer Document dated . June 1999 between [ ]
and [ ];
8.7.4 if you or the Company do not so inform the other that an Arbiter
must be appointed, the grounds for dismissal or resignation (as the
case may be) as set out in the notice served pursuant to Clause
8.7.1 or Clause 8.7.2 will be deemed to be accepted and agreed
between the parties;
8.7.5 the Arbiter shall be an advocate being an employment law specialist
of at least 10 years call or a solicitor with current accreditation
from the Law Society of Scotland as an employment law specialist,
and shall be selected by agreement between you and the Company.
Failing agreement within 7 days, the President of the Law Society of
Scotland shall be requested to nominate a suitable Arbiter within 7
days or as soon as reasonably practicable;
8.7.6 the arbitration shall proceed in accordance with the Arbitration
Rules of the Chartered Institute of Arbitrators Scottish Branch
(1998) ("the Rules") save that you and the Company hereby agree that
the following Articles of the Rules shall not apply to arbitration
proceedings under this Clause 8.7: Article 4.1, Article 4.2(i),
Article 5.1 (v), (vi), (vii), (viii) and (x), Article 6, Article
7.2, Article 7.3, Article 14.4, Article 16 and Article 19;
8.7.7 you and the Company hereby agree that each party will bear their own
costs (including legal costs) of the arbitration proceedings under
this Clause 8.7 save that the Company will pay the costs, fees and
expenses of the Arbiter;
8.7.8 the place and seat of the arbitration shall be Scotland and the
language of the arbitration shall be English;
8.7.9 to the extent that it is reasonably practicable, the Arbiter will be
required to inform the parties of his/her final decision within two
months of his/her appointment and you and the Company agree to
cooperate to ensure that this is achieved;
8.7.10 the decision of the Arbiter shall be final and binding on you and
the Company;
8.7.11 you and the Company expressly exclude all and any rights of appeal
from the decision of the Arbiter;
10
<PAGE>
8.7.12 you and the Company agree that Section 3 of the Administration of
Justice (Scotland) Act 1972 shall not apply to proceedings under
this Clause 8.7;
8.7.13 for the avoidance of doubt, the Company shall be entitled to
terminate your employment notwithstanding that such termination is
the subject of arbitration proceedings under this Clause 8.7.
9. Intellectual Property
9.1 In relation to each and every improvement, invention or discovery which
relates either directly or indirectly to the business of the Company which
you (jointly or alone) make, conceive, or discover at any time during your
employment, you:
9.1.1 shall promptly submit and disclose full details of it to the
Intellectual Property Department of the Company, or to such other
person as the Company may direct, to enable the Company to determine
whether or not, applying the provisions of s.39 of the Patents Act
1977, it is the property of the Company (a "Company Invention");
this disclosure shall include a sketch of the improvement,
invention, or discovery, where possible of illustration, together
with a description thereof, and shall bear the signature of the
inventor and the date upon which he/she signed the sketch or
description and shall be witnessed by at least two Company employees
who shall also sign and date the same and to whom the invention must
have been fully disclosed. The Company shall keep all such details
of any such improvement, invention or discovery which is not the
property of the Company (applying the provisions of the said s.39)
strictly confidential.
9.1.2 shall hold any Company Invention in trust for the Company and, at
its request and expense, do all things necessary or desirable to
enable the Company or its nominee to exploit the Company Invention
for commercial purposes and to secure patent or other appropriate
forms of protection for it anywhere in the world. Decisions as to
the patenting and exploitation of any Company Invention are at the
sole discretion of the Company.
9.1.3 shall assign, and for no further consideration do hereby assign, to
the Company, its successors and assigns, your entire right, title,
and interest in and to each Company Invention and all applications
for Letters Patent thereon which may be filed. You further
acknowledge that the assignment of your entire right, title and
interest in and to any and all such improvements, inventions, and
discoveries to the Company is deemed effective upon conception of
such invention.
11
<PAGE>
9.1.4 agree that any application for Letters Patent made by you within one
year after the termination of your period of employment with the
Company, covering or relating to any matters of Restricted Business,
shall be deemed to cover inventions conceived during the term of
your employment within the Company, and shall be subject to this
Agreement. You shall, without further consideration and upon request
by the Company, assist and cooperate with the Company by executing
any and all documents, and by performing any and all lawful acts,
necessary to document the assignment to the Company of your right,
title and interest in and to any and all such inventions.
9.1.5 agree that, whenever the Company shall request it, you shall,
without further consideration, apply for Letters Patent for any or
all Company Inventions in all countries desired by the Company, but
at the expense of the Company, and will sign any and all papers,
take all lawful oaths and do all lawful acts required in or
concerning such applications, and/or divisions, continuations or
renewals thereof and any application for the reissuance of patents
granted thereon or on such divisions, continuations or renewals of
such applications and will at the expense of the Company assist in
all proper ways, as by giving testimony in the conduct of any
interference proceeding or litigation in which the priority or
originality of any of said Company Inventions, or the validity or
the scope of patents granted thereon, shall be involved or
concerned.
9.2 In relation to each and every copyright work or design, including without
limitation any computer program or other work of authorship which relates
either directly or indirectly to the business of the Company excluding
works made wholly outside your normal working hours which are wholly
unconnected with your employment (a "Company Work") which you (jointly or
alone) originate, conceive, write or make at any time during the period of
your employment, you:-
9.2.1 shall promptly disclose such Company Work to the Company;
9.2.2 shall assign, and for no further consideration do hereby assign to
the Company by way of future assignment all copyright, design right
and other proprietary rights (if any) throughout the world in such
Company Work;
9.2.3 hereby irrevocably and unconditionally waive in favour of the
Company any and all moral rights conferred on you by Chapter W of
Part I of the Copyright Designs and Patents Act 1988 in relation to
any such Company Works;
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9.2.4 acknowledge that, for the purposes of the proviso to Section 2(1) of
the Registered Designs Act 1949 (as amended by the Copyright Designs
and Patents Act 1988), the covenants on the part of you and the
Company will be treated as good consideration and, for the purposes
of that Act, the Company will be the proprietor of any design which
forms part of the Company Works;
9.2.5 agree to assist the Company and its nominee (at the cost and expense
of the Company) at any time, in the protection of the Company's
worldwide right, title and interest in and to the Company Works and
all rights of copyright therein, including, but not limited to, the
execution of all formal assignment documents requested and prepared
by the Company or its nominee and the execution of all lawful oaths
and applications for registration of copyright in any country
designated by the Company.
9.3 You agree that (at the request and expense of the Company) you will do all
things necessary or desirable to substantiate the rights of the Company to
each and every Company Invention or Company Work and that you will permit
the Company (whom you hereby irrevocably appoint as your attorney for this
purpose) to execute documents, to use your name and to do all things which
may be necessary or desirable for the Company to obtain for itself or its
nominee the full benefit of each and every Company Invention or Company
Work. A certificate in writing signed by any Director or the Secretary of
the Company that any instrument or act falls within the authority hereby
conferred will be conclusive evidence to that effect so far as any third
party is concerned.
10. Restrictive Covenants
10.1 For the period of 12 months after the termination of your employment under
this Agreement, you will not directly or indirectly:-
10.1.1 be engaged or concerned or interested in any business carried on
within the Restricted Area wholly or partly in competition with any
Restricted Business (save for the holding as a passive investor only
of not more than 5% of the issued ordinary shares of any company of
a class which are listed or traded on the London Stock Exchange, any
other recognised stock exchange, EASDAQ or NASDAQ).
10.1.2 seek or accept, in any capacity whatsoever, any business, orders or
custom which is similar to or in competition with any Restricted
Business from any Customer.
10.1.3 induce or attempt to persuade any Employee to leave employment or
engagement by the Company or any Group Company or offer employment
or engagement to any Employee.
13
<PAGE>
10.2 You will not at any time after the termination of your employment under
this Agreement, directly or indirectly:-
10.2.1 induce or seek to induce, by any means involving the disclosure or
use of Confidential Information, any Customer to cease dealing
with the Company or any Group Company or to restrict or vary the
terms upon which it deals with the Company or any Group Company;
10.2.2 disclose or make use of any Confidential Information; or
10.2.3 represent yourself or permit yourself to be held out as having any
connection with or interest in the Company or any Group Company.
10.3 Each restriction in Clause 10 (whether drafted separately or together with
another) is independent and severable from the other restrictions and
enforceable accordingly. If any restriction is unenforceable for any
reason but would be enforceable if part of the wording were deleted, it
will apply with such deletions as may be necessary to make it valid and
enforceable.
10.4 The Company may transfer or assign its rights under this Clause 10 to its
successors in title. You may not transfer or assign any rights or
obligations under this Clause 10.
11. Interpretation
11.1 The headings to the clauses are for convenience only and shall not affect
the construction or interpretation of this Agreement.
11.2 Any reference in this Agreement to any Act or delegated legislation shall
include any statutory modification or re-enactment of it or of the
provision referred to.
11.3 In this Agreement:
"Board" means the board of directors of the Company and includes any
committee of such board duly authorised to act on its behalf.
"Completion" means the date on which the Offer (as defined in the
Agreement made between L W Kinch & Others (1) and Halliburton Company (2)
dated ______________________) becomes unconditional in all respects.
"Confidential Information" means all and any information (whether or not
recorded in documentary form or on computer disk or tape) of the Company,
any Group Company or any of its or their customers, suppliers or agents
which the Company or the relevant Group Company regards as confidential or
in respect of which it owes an obligation of confidentiality to a third
party which is not part of your own stock in trade and which is not
readily ascertainable to
14
<PAGE>
persons not connected with the Company either at all or without a
significant expenditure of labour, skill or money.
"Customer" means any person with whom you or anyone working under your
supervision or control deals personally who, at the termination of your
employment, is negotiating with the Company or any Group Company for
Restricted Business or with whom the Company or any Group Company has
conducted any Restricted Business at any time during the final two years
of your employment with the Group.
"Employee" means any person who is and was, at any time during the period
of two years prior to the termination of your employment, employed or
engaged by the Company or any Group Company in a management, operational,
technical or sales position and who, by reason of such position, possesses
any Confidential Information or is likely to be able to solicit the custom
of any Customer or to induce any Customer to cease dealing with the
Company or any Group Company, were he to accept employment or engagement
in a business which is similar to or in competition with any Restricted
Business.
"Group Company" means the holding company (as defined in section 736 of
the Companies Act 1985) of the Company or any group undertaking (as
defined in section 259(5) of the Companies Act 1985) of the Company or of
its holding company.
"Group" means the Company and each Group Company.
"Restricted Area" means England, Scotland, Wales, Northern Ireland,
Norway, Denmark, Italy, Nigeria, the Congo, Angola, Equatorial Guinea, the
United States of America, Venezuela, Columbia, Brazil, Australia and
Brunei.
"Restricted Business" means the supply of well completion, intervention
and intelligent well products and services and all or any other commercial
activities carried on or to be carried on by the Company or any Group
Company in which you worked or about which you knew Confidential
Information to a material extent at any time during the final two years of
your employment with the Group.
12. General
12.1 You are not subject to any particular disciplinary rules or procedures
other than those specified in the Halliburton Company Code of Business
Conduct (as amended from time to time) and you should conduct yourself in
a thoroughly professional manner at all times. In order to investigate a
complaint of breach of contract or misconduct against you, the Company is
entitled to suspend you on full Salary and benefits for so long as the
Board considers appropriate in all the circumstances to carry out a
disciplinary investigation and/or hearing.
15
<PAGE>
12.2 If you have a grievance relating to your employment (other than one
relating to a disciplinary decision or one relating to Clause 8 of this
Agreement), you should refer that grievance to the Board whose decision
will be final and binding on you.
12.3 This Agreement is in substitution for any representations and warranties
made by or on behalf of the Company and any previous contracts of
employment or for services between you and the Company or any Group
Company (which are deemed to have been terminated by mutual consent).
12.4 The termination of this Agreement will not affect such of the provisions
of this Agreement as are expressed to operate or to have effect after
termination and will be without prejudice to any accrued rights or
remedies of the parties.
12.5 The validity, construction and performance of this Agreement (including
Clause 8.7) is governed by the law of Scotland.
12.6 All disputes, claims or proceedings between the parties relating to the
validity, construction or performance of this Agreement (save for any
disputes which are the subject of arbitration under Clause 8.7) are
subject to the exclusive jurisdiction of the courts of Scotland to which
the parties irrevocably submit. Each party irrevocably consents to the
award or grant of any relief in any such proceedings before the courts of
Scotland and either party is entitled to take proceedings in any other
jurisdiction to enforce a judgment or order of the courts of Scotland.
12.7 Any notice to be given by a party under this Agreement must be in writing
in the English language and must be delivered by hand or sent by first
class post or equivalent postal service, telex, facsimile transmission or
other means of telecommunication in permanent written form (provided that
the addressee has his or its own facilities for receiving such
transmissions) to the last known postal address or appropriate
telecommunication number of the other party and, in the case of the
Company, all notices must be addressed to the Company Secretary unless
otherwise agreed. Where notice is given by any of the prescribed means,
it is deemed to be received when, in the ordinary course of that means of
transmission, it would be received by the addressee. To prove the giving
of a notice, it is sufficient to show that it has been despatched. A
notice has effect from the sooner of its actual or deemed receipt by the
addressee.
12.8 The rights of the Company under this Agreement may be transferred to its
successors and assigns. You may not transfer your rights or obligations
under this Agreement
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IN WITNESS WHEREOF THESE PRESENTS CONSISTING THIS AND THE PRECEDING [THIRTEEN]
PAGES TOGETHER WITH THE ATTACHED SCHEDULE ARE EXECUTED AT [ ] ON
[ ] 1999 BY THE PARTIES AS FOLLOWS:-
- --------------------------------------------------------------------------------
Executed by ___________ Limited ) ______________
acting by _____________ (Director/secretary) )
and ___________________ (Director) ) ______________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Executed by __________________ ) ______________
in the presence of: _____________
Occupation of witness ______________ )
- --------------------------------------------------------------------------------
17
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EXHIBIT 8.1
[LETTERHEAD FOR CMS CAMERON MCKENNA APPEARS HERE]
The Directors
Halliburton Company
3600 Lincoln Plaza
500 North Akard Street
Dallas
Texas 75201-3391
Your ref: 13 September 1999
Our ref: TLP/AJS/MIT2.32B/0A1019.00023
Dear Sirs
Recommended Offer by Halliburton Company for PES (International) Limited
We acted as Uk counsel for Halliburton Company ("Halliburton") in connection
with the preparation of an offer document (the "Offer Document") which forms
part of a registration statement on Form S-4 (the "Registration Statement")
relating to the offer for the entire issued share capital of PES (International)
Limited not already held by Halliburton or its subsidiaries.
We confirm that the statements in the Offer Document relating to United Kingdom
taxation are true and accurate in all material respect under current United
Kingdom taxation legislation and Inland Revenue practice.
We hereby consent to the use of our name in the Registration Statement and to
the filing of this opinion as an Exhibit to the Registration Statement. By
giving such consent, we do not admit we are within the category of persons whose
consent is required under section 7 of the Securities Act 1933, as amended, or
the rules and regulations of the Securities and Exchange Commission issued
thereunder.
Yours faithfully
/s/ CMS Cameron McKenna
CMS Cameron McKenna
<PAGE>
[Letterhead of Vinson & Elkins L.L.P.]
Exhibit 8.2
September 13, 1999
Halliburton Company
3600 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201-3391
Subject: PES (International) Limited
------------------------------------
Gentlemen:
We participated in the preparation of the Registration Statement on Form S-
4 with respect to the Recommended Offer by Halliburton Company for the Ordinary
Share Capital of PES (International) Limited, including the discussion set forth
in the Registration Statement under the heading "United States Federal Tax
Consequences."
We hereby affirm that the discussion and the legal conclusions with respect
to the United States federal tax matters set forth herein constitute our opinion
as to the material United States federal tax consequences of the Offer and the
Compulsory Acquisition to holders of PES Shares.
We hereby consent to the use of our name in the Registration Statement and
to the filing of this opinion as part of the Registration Statement.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the inclusion in
this Amendment No. 1 to the registration statement of our report dated
January 25, 1999 included in Halliburton Company's Form 10-K for the year ended
December 31, 1998 and to all references to our Firm included in this
registration statement. In said report, Arthur Andersen LLP states that with
respect to 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
thereon appears herein. The financial statements referred to above have been
included herein in reliance on the report of such independent accountants given
on the authority of PricewaterhouseCoopers as experts in auditing and
accounting.
/s/ Arthur Andersen LLP
- -------------------------------
Arthur Andersen LLP
Dallas, Texas
September 10, 1999
<PAGE>
[Letterhead of PricewaterhouseCoopers appears here]
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Directors
Haliburton Company
3600 Lincoln Plaza
500 North Akard Street
Dallas
TEXAS 75201-3391
United States of America
The Directors
PES (International) Limited
Howe Moss Avenue
Kirkhill Industrial Estate
Dyce
ABERDEEN
AB21 0GP
13 September 1999
Ref JKM/WJS/SM
Dear Sirs
We consent to the inclusion in this registration statement of Halliburton
Company on Form S-4 (File No. 333- ) 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 1998 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
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Amendment No. 1 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
September 10, 1999
