<PAGE> 1
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma statement of income (loss) from
continuing operations for the year ended December 31, 1993 presents the
acquisitions of M-I and A-Z/Grant and Lindsey as though the acquisitions were
effective January 1, 1993. The unaudited pro forma statement of income (loss)
from continuing operations gives effect to the acquisitions under the purchase
method of accounting and the assumptions included in the accompanying unaudited
notes to pro forma financial statements. The unaudited pro forma statement of
income (loss) from continuing operations reflects the amortization of estimated
goodwill, additional depreciation expense related to the estimated write-up of
fixed assets and rental tools of A-Z/Grant and Lindsey and estimated
adjustments to interest and taxes.
The following unaudited pro forma balance sheet as of December 31,
1993 presents the acquisition of M-I as if the acquisition had occurred at
December 31, 1993. The unaudited pro forma balance sheet reflects the
acquisition under the purchase method of accounting and the assumptions
included in the accompanying unaudited notes to pro forma financial statements.
The unaudited pro forma balance sheet reflects only those adjustments relating
to the acquisition of M-I, the consolidation of the Company's 64% interest in
M-I and certain estimated asset and liability valuation adjustments anticipated
to result from the Company's allocation of the purchase price to the accounts
of M-I at February 28, 1994.
Management has not fully evaluated all of the consequences of the
acquisition of M-I including assessing the fair market value of the assets
acquired and the total amount of costs that may be necessary to reorganize the
operations of M-I. As a result, the current estimate of the excess of the
purchase price over net assets acquired in the acquisition of M-I totaling
$53.8 million has been reflected as goodwill in the unaudited pro forma balance
sheet. Upon completion of these evaluations during 1994, any additional asset
and liability adjustments and the adjusted excess purchase price over net
assets acquired will be recorded as goodwill in accordance with purchase
accounting rules and principles.
The unaudited pro forma financial statements are not intended to be
indicative of the results that would have occurred if the acquisitions had been
effective as of the dates indicated or that may be obtained in the future. The
unaudited pro forma financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company included in
the Company's Form 10-K for the year ended December 31, 1993.
<PAGE> 2
SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF
INCOME (LOSS) FROM CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------------------
HISTORICAL PRO FORMA
-------------------------------- -----------------------
A-Z/GRANT
SMITH & LINDSEY M-I ADJUSTMENTS COMBINED
------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues $220,712 $31,600 $404,312 $656,624
Cost of Revenues 138,170 23,200 275,676 597 (a) 437,643
-------- ------- -------- -------- --------
Gross Margin 82,542 8,400 128,636 (597) 218,981
Operating Expenses:
Selling Expenses 41,997 4,600 91,882 138,479
G & A Expenses 21,970 1,000 17,825 40,795
Equity in Joint
Ventures and Other
Income, net -- -- (5,292) 1,345 (b) (3,772)
175 (c)
-------- ------- -------- -------- --------
Total Operating
Expenses 63,967 5,600 104,415 1,520 175,502
-------- ------- -------- -------- --------
Income from Continuing
Operations Before
Litigation Settlement,
Interest and Taxes 18,575 2,800 24,221 (2,117) 43,479
Litigation Settlement 19,900 -- -- 19,900
Interest Expense
(Income), net 2,202 -- (628) 4,800 (d) 10,434
4,060 (e)
-------- ------- ------- -------- --------
Income (Loss) From
Continuing Operations
Before Income Taxes (3,527) 2,800 24,849 (10,977) 13,145
Income Tax Provision 468 -- 4,812 93 (f) 5,373
-------- ------- -------- -------- ---------
Income (Loss) From
Continuing Operations
Before Minority
Interest (3,995) 2,800 20,037 (11,070) 7,772
Minority Interest -- -- 7,213 7,213
-------- ------- ------- -------- --------
Income (Loss) From
Continuing Operations ($3,995)(g) $ 2,800 $ 12,824 $(11,070) $ 559 (g)
======== ======= ======== ======== ========
Average Common and
Equivalent Shares
Outstanding 37,775 37,775
======== =========
Income (Loss) from
Continuing Operations
Per Common Share ($0.13)(g) ($0.01)(g)
======== ========
</TABLE>
See accompanying unaudited notes to pro forma financial statements.
<PAGE> 3
SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
-------------------------------------
HISTORICAL PRO FORMA
--------------------- ------------------------
SMITH M-I Adjustments Combined
-------- -------- ----------- --------
(h)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $101,561 ($2,203) ($80,000)(i) $ 16,858
(2,500)(j)
Receivables 67,830 104,059 171,889
Inventory 81,654 80,535 (2,944)(m) 159,245
Prepaid Expense & Other 4,802 6,088 10,890
-------- -------- -------- --------
Total Current Assets 255,847 188,479 (85,444) 358,882
-------- -------- -------- --------
Rental Tools, net 20,510 --- 20,510
Property, Plant and Equipment, net 41,652 51,792 (320)(m) 93,124
Investments in Joint Ventures
and Unconsolidated Subsidiaries 6,283 9,518 15,801
Investment in M-I Drilling --- --- 160,000 (i) ---
Fluids Co. (160,000)(k)
Goodwill 2,954 --- 41,317 (k) 56,763
10,692 (m)
1,800 (j)
Other Assets 21,140 14,520 700 (j) 34,440
(1,920)(m)
------- -------- -------- --------
Total Assets $348,386 $264,309 $(33,175) $579,520
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term Borrowings & Current
Portion of Long-term Debt $ 702 $ 1,091 $ 10,000 (i) $ 11,793
Accounts Payable 24,763 30,467 55,230
Accrued Payroll Costs 10,923 7,082 18,005
Income Taxes Payable 9,484 3,069 1,920 (m) 14,473
Other 34,098 17,653 3,588 (m) 55,339
-------- -------- -------- --------
Total Current Liabilities 79,970 59,362 15,508 154,840
-------- -------- -------- --------
Long-Term Debt 46,000 --- 70,000 (i) 116,000
Minority Interests --- 2,621 66,759 (l) 69,380
Other Long-term Liabilities 7,950 16,884 24,834
Shareholders' Equity 214,466 185,442 (118,683)(k) 214,466
(66,759)(l)
-------- -------- -------- --------
Total Liabilities &
Shareholders' Equity $348,386 $264,309 ($33,175) $579,520
======== ======== ======== ========
</TABLE>
See accompanying unaudited notes to pro forma financial statements.
<PAGE> 4
SMITH INTERNATIONAL, INC.
UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS -
(a) To record additional depreciation expense as a result of adjustments
to increase the book value of the A-Z/Grant and Lindsey rental tools and
property and equipment to estimated fair value and depreciate the assets
over the estimated remaining lives of the respective assets.
(b) To record annual amortization of goodwill which will be amortized
over 40 years
(c) To record annual amortization of debt issuance costs which will be
amortized over the 4 year life of the debt.
(d) To record interest expense at an interest rate of 6.0 percent on the
acquisition-related debt, as refinanced (see Note i below), assuming no
principal reduction.
(e) To reduce interest income at an interest rate of 4.0 percent as
approximately $101.5 million of the Company's cash was used to fund the
acquisitions and, therefore, would not have been available to earn
interest income.
(f) To record additional income tax expense related to the earnings of
A-Z/Grant and Lindsey, the Company's portion of M-I earnings and the
effects of the aforementioned adjustments at the U.S. Alternative Minimum
Tax Rate of 2.0 percent. Additional taxes would not be required because
of the Company's net operating loss carryforward position.
(g) Income (loss) from continuing operations is presented excluding the
cumulative effect of change in accounting principle. The Smith and
unaudited pro forma income (loss) from continuing operations of ($3,995)
and $559, respectively, include the special charge for a litigation
settlement of $19,900 ($0.53 per common share). The Smith and unaudited
pro forma income from continuing operations excluding the litigation
settlement would increase to $15,905 and $20,459, respectively, or $0.40
and $0.52 per common share, respectively. The preferred stock dividends
of $868 must be deducted from the applicable income (loss) from continuing
operations amounts in order to compute these amounts per common share.
BALANCE SHEET -
(h) The historical balance sheet of the Company includes the historical
accounts of A-Z/Grant and Lindsey acquired by the Company on December 22,
1993 for $19.0 million and certain purchase accounting adjustments.
Management has not fully evaluated all of the consequences of the
acquisition of A-Z/Grant and Lindsey including completing the appraisals of
the assets acquired and assessing the total amount of costs that may be
necessary to consolidate the operations of A-Z/Grant and Lindsey with the
Company. Upon completion of these evaluations, any additional asset and
liability adjustments will be recorded and the excess purchase price over
net assets acquired, if any, will be recorded as goodwill in accordance
with purchase accounting rules and principles.
(i) To record the purchase of the 64% interest in M-I using $80.0 million
in cash and issuing a note payable to Dresser of $80.0 million. The
Company refinanced the Dresser note payable in March 1994 with a $40
million term loan from its insurance company lenders and a $65 million
revolving line of credit from a bank group. The term loan
<PAGE> 5
SMITH INTERNATIONAL, INC.
UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS - (CONTINUED)
bears interest at a rate of 6.02 percent and is payable over a four year
period ending in January 1998. The revolving line of credit is due in
March 1997 and bears interest at a rate ranging from LIBOR + 3/4 percent
to LIBOR +1 1/2 percent based upon the debt-to-total capitalization of
the Company. The Company has reflected $10.0 million of debt as current
portion of long-term debt and $70.0 million of debt as long-term in
accordance with the terms of the refinanced acquisition debt.
(j) To record $1.8 million of estimated acquisition costs in connection
with the M-I acquisition and $0.7 million of debt issuance costs in
connection with the refinanced acquisition debt.
(k) To eliminate the investment in M-I of $160.0 million against the
Company's estimated portion of its equity in M-I of $118.7 million with the
remaining balance of $41.3 million reported tentatively as goodwill.
(l) To reclassify the minority interest ownership in M-I by Halliburton of
$66.8 million from shareholders' equity to minority interest.
(m) To record the Company's portion of the current estimate of adjustments
to asset reserves and liabilities required at the acquisition date in
connection with the purchase of M-I with the corresponding adjustment
recorded as goodwill. Management has not fully evaluated all of the
consequences of the acquisition of M-I including assessing the fair market
value of the assets acquired and the total amount of costs that may be
necessary to reorganize the operations of M-I. Upon completion of a full
evaluation of the Company's purchase price allocation of M-I accounts,
additional adjustments may become necessary to the preliminary allocation
of the purchase price. The Company expects this evaluation process will
be completed in 1994.
<PAGE> 6
(LOGO)
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and
Halliburton Company Partnership)
COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1991 AND 1990
<PAGE> 7
Price Waterhouse (LOGO)
REPORT OF INDEPENDENT ACCOUNTANTS
December 11, 1991
To the Partners and Management Committee of
M-I Drilling Fluids Company
In our opinion, the accompanying combined balance sheets and the related
combined statements of earnings, of partners' equity and of cash flows present
fairly, in all material respects, the combined financial position of M-I
Drilling Fluids Company (a Dresser Industries, Inc. and Halliburton Company
Partnership) and its subsidiaries and affiliates at October 31, 1991 and 1990,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership'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/ PRICE WATERHOUSE
<PAGE> 8
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company Partnership)
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 31,
-----------
1991 1990
---- ----
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 10,345 $ 8,944
-------- --------
Notes and accounts receivable 92,816 92,926
Less - allowance for doubtful receivables - Note 9 843 570
-------- --------
91,973 92,356
-------- --------
Inventories:
Finished products and work in process 100,210 83,113
Raw materials and supplies 12,670 11,157
-------- --------
112,880 94,270
-------- --------
Prepaid expenses 2,086 2,337
-------- --------
Receivables from related parties - Note 8 7,648 5,669
-------- --------
Total current assets 224,932 203,576
-------- --------
Investments and other assets:
Investments in and advances to affiliates 9,229 13,605
Long-term receivables 459 388
Other assets 4,727 4,935
-------- --------
Total investments and other assets 14,415 18,928
-------- --------
Property, plant and equipment - at cost - Note 2:
Land, land improvements and mineral deposits 30,844 31,982
Buildings 48,390 50,865
Machinery and equipment 234,870 235,677
-------- --------
314,104 318,524
Less - accumulated depreciation, depletion and amortization 252,264 261,207
-------- --------
Total properties, net 61,840 57,317
-------- --------
$301,187 $279,821
======== ========
Liabilities and Partners' Equity
--------------------------------
Current liabilities:
Short-term debt - Note 3 $ 3,093 $ 2,197
Accounts payable 31,997 27,720
Accrued compensation and benefits 6,519 6,893
Accrued taxes other than income taxes 716 1,854
Accrued insurance 8,094 5,679
Foreign income taxes 9,652 7,088
Other accrued liabilities 10,077 12,115
Accounts payable to related parties - Note 8 1,679 1,600
-------- --------
Total current liabilities 71,827 65,146
Long-term debt 810
Minority interests and other liabilities 10,189 9,153
Commitments and contingencies - Notes 4 and 5
Partners' equity 219,171 204,712
-------- --------
$301,187 $279,821
======== ========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 9
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company Partnership)
COMBINED STATEMENTS OF EARNINGS
(in thousands)
<TABLE>
<CAPTION>
Year ended
October 31,
-----------
1991 1990
---- ----
<S> <C> <C>
Sales and service revenues $ 443,341 $ 394,045
Cost of sales and services 243,990 223,566
--------- ---------
Gross earnings 199,351 170,479
--------- ---------
Other costs and expenses - Notes 6 and 8:
Selling 130,169 115,396
Engineering 7,252 6,069
Administrative and general 22,929 19,717
Provision for Kuwait losses - Note 4 (1,046) 3,800
--------- ---------
159,304 144,982
--------- ---------
Income from operations 40,047 25,497
Other income (deductions):
Interest expense (695) (588)
Interest earned 1,262 2,810
Other, net - Note 6 813 1,781
--------- ---------
Earnings before income taxes, minority
interest and equity earnings 41,427 29,500
Foreign income taxes - Note 7 (8,234) (7,346)
Minority interest in earnings of subsidiaries (3,081) (2,174)
Equity in earnings of unconsolidated affiliates 2,000 2,497
--------- ---------
Net earnings $ 32,112 $ 22,477
========= =========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 10
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and
Halliburton Company Partnership)
COMBINED STATEMENTS OF PARTNERS' EQUITY
(in thousands)
YEARS ENDED OCTOBER 31, 1991 AND 1990
<TABLE>
<CAPTION>
Common
stock of Cumulative Partners'
Canadian translation Retained contributions Partners'
affiliates adjustments earnings and advances withdrawals
---------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Partners' equity at October 31, 1989 $ 8,563 $ 2,018 $ (200) $611,390 $(460,096)
Cash contributions 42,548
Cash distributions (48,044)
SWACO contributed assets 2,876 19,371
Cumulative translation adjustments 3,809
Net income 22,477
------- ------- ------- -------- ---------
Partners' equity at October 31, 1990 11,439 5,827 22,277 673,309 (508,140)
Cash contributions 42,300
Cash distributions (56,447)
Cumulative translation adjustments (3,506)
Net income 32,112
------- ------- ------- -------- ---------
Partners' equity at October 31, 1991 $11,439 $ 2,321 $54,389 $715,609 $(564,587)
======= ======= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Total Dresser Halliburton Total
----- ------- ----------- -----
<S> <C> <C> <C> <C>
Partners' equity at October 31, 1989 $161,675 $ 97,005 $ 64,670 $161,675
Cash contributions 42,548 26,507 16,041 42,548
Cash distributions (48,044) (30,070) (17,974) (48,044)
SWACO contributed assets 22,247 21,276 971 22,247
Cumulative translation adjustments 3,809 2,418 1,391 3,809
Net income 22,477 13,880 8,597 22,477
-------- -------- -------- --------
Partners' equity at October 31, 1990 204,712 131,016 73,696 204,712
Cash contributions 42,300 27,072 15,228 42,300
Cash distributions (56,447) (36,125) (20,322) (56,447)
Cumulative translation adjustments (3,506) (2,244) (1,262) (3,506)
Net income 32,112 20,552 11,560 32,112
-------- -------- -------- --------
Partners' equity at October 31, 1991 $219,171 $140,271 $ 78,900 $219,171
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 11
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company Partnership)
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
October 31,
-----------
1991 1990
---- ----
<S> <C> <C>
Cash flows from operating activities:-
Net earnings $ 32,112 $ 22,477
-------- --------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation, depletion and amortization 10,300 8,308
Gains on sale of assets (1,333) (894)
Equity in earnings of unconsolidated subsidiaries and
affiliates, net of dividends received ($1,813 in
1991 and S1,446 in 1990) (187) (1,051)
Minority interest 3,081 2,174
Increase in receivables (3,797) (23,014)
Increase in inventory (22,002) (6,083)
Decrease (increase) in related party receivables (1,979) 3,893
Increase in accounts payable and accrued liabilities 4,539 5,056
Increase in income taxes payable 3,509 2,877
Increase (decrease) in related party payables 79 (1,295)
Other, net 6,334 306
-------- --------
Total adjustments (1,456) (9,723)
-------- --------
Net cash provided by operating activities 30,656 12,754
-------- --------
Cash flows from investing activities:
Assets acquired 462
Capital expenditures (16,552) (10,201)
Proceeds from sale of assets 2,505 1,898
-------- --------
Net cash used in investing activities (14,047) (7,841)
-------- --------
Cash flows from financing activities:-
Reduction of long-term debt (807) (17)
Increase in short-term debt and current
portion of long-term debt 894 567
Decrease in related party advances, net (545) (808)
Decrease (increase) in long-term notes receivable (253) 240
Partners' contributions and distributions:
Cash contributions 42,300 42,548
Cash distributions (56,447) (48,044)
-------- --------
Net cash used in financing activities (14,858) (5,514)
-------- --------
Effect of translation adjustments on cash (350) 593
-------- --------
Net increase (decrease) in cash and cash equivalents 1,401 (8)
Cash and cash equivalents, beginning of year 8,944 8,952
-------- --------
Cash and cash equivalents, end of year $ 10,345 $ 8,944
======== ========
Supplemental disclosures of cash flow information:-
Cash paid during the year for:
Interest $ 695 $ 588
Income taxes 5,730 4,689
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 12
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company Partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF FORMATION AND SIGNIFICANT ACCOUNTING POLICIES:
Effective December 1, 1986, Dresser Industries, Inc. (Dresser) and Halliburton
Company (Halliburton) (the Partners) combined their drilling fluids operations
and formed M-I Drilling Fluids Company (the Partnership), owned 60 percent by
Dresser and 40 percent by Halliburton. In May 1990, Dresser contributed SWACO
to the Partnership in exchange for an increase in ownership to 64%. SWACO's net
assets were recorded at historical net book value, $22,247,000, at the date of
contribution. The Partnership principally provides drilling fluid systems to
the petroleum industry for oil and gas well drilling.
Partnership profits and losses are allocated to the Partners in accordance with
their respective Partnership interests.
Combination
Since December 1, 1986, the Partners have been effecting the legal transfer of
their drilling fluids operations to the Partnership. The accompanying combined
financial statements reflect the operations of the Partnership as if all
transfers had been completed as of December 1, 1986. Accordingly, the combined
financial statements include the Partnership's financial statements and the
financial statements of all its majority-owned subsidiaries, together with the
financial statements of M-I Drilling Fluids Canada, Inc., which is owned
directly by the Partners, and the financial statements of those operations
which have been operated for the benefit of the Partnership by the Partners
until legal transfer is completed. All material intercompany accounts and
transactions are eliminated. Investments in 20% to 50% owned affiliates are
reported at cost, adjusted for the Partnership's equity in undistributed
earnings or losses.
Receivables
Appropriate allowances are provided for all doubtful receivables, including
allowances for all receivables delinquent for more than 180 days except for
accounts which do not represent collection risks.
Inventories
Inventories are recorded at the lower of actual cost or market. Obsolete items
or excess quantities which are determined to be unsalable are valued at their
net realizable value.
<PAGE> 13
-2-
Property, plant and equipment
Fixed assets are recorded at cost less accumulated depreciation over their
estimated service life. The straight-line depreciation method is used for
financial statement purposes. All significant fixed assets are reviewed
periodically and, if determined to be excess, obsolete or unsuitable for their
intended use, are reduced to values recognizing their impaired utility or are
assigned shorter remaining useful lives for depreciation purposes. Depletion of
mineral properties is based upon estimates of economically recoverable tonnage.
Maintenance and repairs are expensed as incurred and betterments are
capitalized.
Benefit plans
The Partnership maintains defined contribution plans covering substantially all
employees in the United States. Employees of the foreign operations
participate in defined contribution plans or statutory plans. Partnership
contributions related to these benefit plans are recognized on a current basis.
Income taxes
The Partnership is generally not subject to U.S. or state income taxes. The
taxable income or loss of the Partnership is reported by the Partners in their
U.S. income tax returns and, therefore, no U.S. income tax expense is
reflected in the Partnership's Combined Statement of Earnings.
Entities operating in foreign countries provide for foreign income taxes in
accordance with the tax laws and regulations of the applicable foreign country.
Deferred foreign income taxes are provided for timing differences between
income and expenses reported for financial statement purposes and tax purposes.
Translation of foreign currencies
For operations in countries which do not have highly inflationary economies,
asset and liability accounts are translated at the rate in effect at the
balance sheet date, and revenue and expense accounts are translated at weighted
average rates. Translation adjustments are reflected as a component of
partners' equity.
For operations in countries with highly inflationary economies, inventories,
cost of sales and property, plant and equipment and related depreciation are
translated at historical rates. Other asset and liability accounts are
translated at rates in effect at the balance sheet date, and revenues and
expenses excluding cost of sales and depreciation are translated at weighted
average rates. Translation adjustments are reflected in the Combined Statement
of Earnings.
Cash flow statement
Cash and cash equivalents include cash on hand and investments with maturities
of three months or less.
<PAGE> 14
-3-
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment activity for the years ended October 31, 1991 and
1990 is summarized below (in thousands):
Balance at Balance at
October 31, Additions Retire- October 31,
1990 at cost ments Other 1991
---- ------- ----- ----- ----
Land and
improvements $ 31,982 $ 1,036 $ (2,237) $ 63 $ 30,844
Buildings 50,865 246 (1,935) (786) 48,390
Machinery and
equipment 235,677 15,270 (12,622) (3,455) 234,870
-------- ------- -------- -------- --------
$318,524 $16,552 $(16,794) $ (4,178) $314,104
======== ======= ======== ======== ========
Balance at Balance at
October 31, Additions Retire- October 31,
1989 at cost ments Other 1990
---- ------- ----- ----- ----
Land and
improvements $ 27,009 $ 2,121 $ (64) $ 2,916 $ 31,982
Buildings 51,964 3,117 (2,586) (1,630) 50,865
Machinery and
equipment 182,356 60,463 (9,738) 2,596 235,677
-------- ------- -------- -------- --------
$261,329 $65,701 $(12,388) $ 3,882 $318,524
======== ======= ======== ======== ========
Accumulated depreciation, depletion and amortization of property, plant and
equipment for the years ended October 31, 1991 and 1990 are summarized below
(in thousands):
Balance at Balance at
October 31, Additions Retire- October 31,
1990 at cost ments Other 1991
---- ------- ----- ----- ----
Land and
improvements $ 19,585 $ 564 $ (2,047) $ (45) $ 18,057
Buildings 39,445 955 (1,733) (415) 38,252
Machinery and
equipment 202,177 8,764 (11,842) (3,144) 195,955
-------- ------- -------- -------- --------
$261,207 $10,283 $(15,622) $ (3,604) $252,264
======== ======= ======== ======== ========
<PAGE> 15
-4-
Balance at Balance at
October 31, Additions Retire- October 31,
1989 at cost ments Other 1990
---- ------- ----- ----- ----
Land and
improvements $ 17,209 $ 641 $ (32) $ 1,767 $ 19,585
Buildings 42,042 1,785 (2,452) (1,930) 39,445
Machinery and
equipment 166,588 41,016 (8,900) 3,473 202,177
-------- ------- -------- ------- --------
$225,839 $43,442 $(11,384) $ 3,310 $261,207
======== ======= ======== ======= ========
The 1990 additions to property, plant and equipment and accumulated
depreciation, depletion and amortization include $55,564,000 and $35,196,000
resulting from the contribution of SWACO Geolograph Company (SWACO) to the
Partnership. Other changes arise from the translation of foreign amounts at
rates in effect at the balance sheet date.
During 1990, the Partnership undertook a review of the useful lives of the
property, plant and equipment used in the business. As a result of this review,
the estimated useful lives of most of the Partnership's productive assets were
extended. This change in estimate of the useful lives increased net earnings
for the year ended October 31, 1990 by $3,900,000.
NOTE 3 - SHORT-TERM DEBT:
Loan arrangements have been established with banks under which the
Partnership's foreign subsidiaries may borrow on an overdraft and short-term
note basis at interest rates ranging from 10% to 21% at October 31, 1991. The
amount available and unused under such short-term note arrangements
approximated $3,400,000 at October 31, 1991. Short-term debt is guaranteed by
the Partners or their affiliates or by pledges of assets. The Partnership has
understandings with the banks regarding deposit balances as compensation for
credit arrangements.
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
The Partnership and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of their business. Management believes
(based on advice of legal counsel) that such litigation and claims will be
resolved without material effect on the Partnership's combined financial
position.
Total rental and lease expenses charged to earnings were $8,462,000 and
$7,246,000 for the years ended October 31, 1991 and 1990, respectively. At
October 31, 1991, the aggregate minimum annual obligations under noncancellable
lease agreements were $5,053,000 for 1992, $2,060,000 for 1993, $1,278,000 for
1994, $874,000 for 1995, $520,000 for 1996 and $1,855,000 for all subsequent
years. The lease obligations relate primarily to office space and warehouses.
<PAGE> 16
-5-
At October 31, 1991, the Partnership has outstanding letters of credit of
$6,788,000. The letters of credit are issued in the normal course of business
to ensure certain suppliers and insurance carriers of timely payment of
contractual obligations.
Certain foreign entities are subject to statutes and laws in the countries in
which they operate that restrict the distribution of dividends. Restricted
foreign net assets aggregated approximately $15,690,000 and $9,907,000 at
October 31, 1991 and 1990, respectively.
In October 1990, the Partnership provided $3,800,000 against its total exposure
to loss of $7,350,000 as a result of Iraq's invasion of Kuwait. In July 1991,
the Partnership reversed $1,046,000 of this provision because the actual losses
sustained were less than anticipated.
NOTE 5 - BENEFIT PLANS AND RETIREE BENEFITS:
U.S. benefit plans
The Partnership has defined contribution and salary deferred savings 401(k)
plans covering substantially all U.S. employees. The Partnership makes monthly
contributions to the plans. The cost of the plans was $1,795,000 and $1,882,000
for the years ended October 31, 1991 and 1990, respectively.
The Partnership also sponsors three defined benefit plans for hourly employees
covered by collective bargaining agreements. These plans were adopted by the
Partnership as a continuation of prior plans. The benefit obligation and costs
related to these plans are not significant.
Non-U.S. benefit plans
Employees of the Partnership's non-U.S. subsidiaries participate in defined
contribution or statuary plans. The expense incurred by the Partnership for
these plans aggregated $871,000 and $466,000 for the years ended October 31,
1991 and 1990, respectively.
Retiree benefits
The Partnership currently provides certain healthcare benefits for retired
employees. The Partnership recognizes the cost of such benefits, which has not
been material, as they are paid.
NOTE 6 - SUPPLEMENTARY INCOME STATEMENT INFORMATION:
Repairs and maintenance expense charged to earnings amounted to $11,920,000 and
$10,297,000 during the years ended October 31, 1991 and 1990, respectively.
Net foreign exchange adjustments, including gains and losses from both
settlement of commercial transactions and translation adjustments, resulted in
net losses of $1,613,000 and $758,000 during the years ended October 31, 1991
and 1990, respectively. Net foreign exchange adjustments are included in "Other
income (deductions)".
<PAGE> 17
-6-
NOTE 7 - INCOME TAXES:
The components of earnings before income taxes are summarized below (in
thousands):
1991 1990
---- ----
Domestic $27,799 $18,293
Foreign 13,628 11,207
------- -------
$41,427 $29,500
======= =======
Taxes on income (tax benefits) consisted of the following (in thousands):
1991 1990
---- ----
Current:
Foreign $8,005 $7,278
U.S. federal 246 81
State 1 43
------ ------
8,252 7,402
------ ------
Deferred:
Foreign (18) (56)
------ ------
(18) (56)
------ ------
Total income taxes $8,234 $7,346
====== ======
The Partnership's foreign operations have net operating loss carryforwards for
financial statement and income tax reporting purposes of $7,185,000 which
expire as follows: $199,000 in 1992, $984,000 in 1993, $1,214,000 in 1994 and
$4,788,000 in 1995 or thereafter. There are no domestic carryforwards
available for tax reporting purposes. In addition, a U.K. subsidiary has a
$28,246,000 net operating loss carryforward which is available for an unlimited
carryforward period.
Undistributed earnings of the Company's foreign subsidiaries amount to
approximately $62 million at October 31, 1991. No provisions are generally
made for U.S. or additional foreign taxes on undistributed earnings of foreign
subsidiaries, since the Company plans to continue to finance foreign operations
and expansion through reinvestment of a substantial portion of such earnings.
<PAGE> 18
-7-
An analysis of the difference between the U.S. statutory rate and the effective
rate is as follows:
1991 1990
---- ----
U.S. statutory rate 34.0% 34.0%
Partnership income allocated directly to the Partners (18.1) (13.2)
Tax on foreign income higher than the U.S statutory rate 8.2 7.2
Other (4.2) (3.1)
----- -----
Effective tax rate 19.9% 24.9%
===== =====
Statement of Financial Accounting Standards No. 96, "Accounting for Income
Taxes", was issued in December 1987. Amendments issued in December 1988, 1989
and 1991, respectively, deferred the effective date. As currently amended,
Statement No. 96 requires the Company to make changes in accounting for income
taxes no later than fiscal year 1994. On June 5, 1991, the Financial
Accounting Standards Board issued an Exposure Draft of Proposed Statement of
Financial Accounting Standards. The Exposure Draft included significant changes
to Statement No. 96. Due to uncertainty of the final requirements of Statement
No. 96, it is not possible at this time to estimate the effect of the changes
on the Company's financial position and results of operations.
NOTE 8 - RELATED PARTY TRANSACTIONS:
In the ordinary course of business, the Partnership engages in sales and
purchases of goods with the Partners and their subsidiaries and affiliates and
with 20% to 50% owned affiliates (Related Parties). Additionally, the
Partnership leases buildings, office space and equipment from Related Parties
and incurs charges for data processing and accounting and administrative
services provided by Related Parties.
A summary of transactions with Related Parties during the years ended October
31, 1991 and 1990 follows (in thousands):
1991 1990
---- ----
Sales $9,495 $14,435
Purchases 1,607 1,053
Rental expense 1,700 2,241
Administrative charges 3,133 2,730
The Partners advance funds to, and receive distributions from, the Partnership.
Such advances and payments are accounted for as part of partners' equity and no
interest is charged or earned.
<PAGE> 19
-8-
NOTE 9 - ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The following is a summary of the activity in the allowance for doubtful
receivables for the years ended October 31, 1991 and 1990 (in thousands):
1991 1990
---- ----
Balance, beginning of year $ 570 $ 849
Additions charged to expense, net 488 (61)
Write-offs (215) (433)
Other additions 215
----- -----
Balance, end of year $ 843 $ 570
===== =====
NOTE 10 - INFORMATION BY GEOGRAPHIC AREA:
Revenues include sales and services to unaffiliated customers and
intergeographic area sales and services. No single customer accounted for 10%
or more of total sales and service revenues.
Operating profit consists of total revenues less total operating expenses.
General corporate expenses, interest expense, interest income, equity in
undistributed earnings of the affiliates and foreign exchange gains and losses
have been excluded in determining operating profit.
The financial information by geographic area for the years ended October 31,
1991 and 1990 follows (in thousands):
1991 1990
---- ----
Sales and service revenues:
United States $208,329 $188,891
Canada 12,919 7,112
Latin America 24,408 19,805
Europe 111,966 91,488
Middle East, Far East and Africa 85,739 86,749
Intergeographic area sales and service revenues:
United States 49,917 32,578
Canada 39 440
Latin America 95
Europe 20,100 19,631
Middle East, Far East and Africa 22,285 26,191
Eliminations (92,456) (78,840)
-------- --------
Total sales and service revenues $443,341 $394,045
======== ========
<PAGE> 20
-9-
1991 1990
---- ----
Operating profit:
United States $ 47,621 $ 34,405
Canada 1,683 (243)
Latin America (1,455) (1,184)
Europe 9,310 9,267
Middle East, Far East and Africa 11,369 5,287
--------- --------
68,528 47,532
Corporate (21,675) (18,234)
Adjustments and eliminations (7,608) (2,775)
--------- --------
Total operating profit 39,245 26,523
Interest earned, net 569 2,219
Foreign exchange gains (losses), net 1,613 758
--------- --------
Earnings before income taxes, minority
interest and equity earnings $ 41,427 $ 29,500
========= ========
Equity earnings:
United States $ 30 $ 294
Latin America 175 (218)
Europe 224 108
Middle East, Far East and Africa 1,571 2,313
--------- --------
Total equity earnings $ 2,000 $ 2,497
========= ========
Identifiable assets:
United States $ 151,985 $152,702
Canada 14,126 12,494
Latin America 46,052 30,880
Europe 66,843 61,891
Middle East, Far East and Africa 68,791 58,542
Corporate 5,175 1,296
Investments in affiliates 9,229 13,605
Long-term receivables 197 379
Adjustments and eliminations (61,211) (51,968)
--------- --------
$ 301,187 $279,821
========= ========
<PAGE> 21
(LOGO)
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and
Halliburton Company Partnership)
COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1992 AND 1993
<PAGE> 22
Price Waterhouse (LOGO)
REPORT OF INDEPENDENT ACCOUNTANTS
April 26, 1994
To Dresser Industries, Inc. and Halliburton Company
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of partners' equity and of cash flows
present fairly, in all material respects, the combined financial position of
M-I Drilling Fluids Company (a Dresser Industries, Inc. and Halliburton
Company Partnership) and its subsidiaries and affiliates at October 31, 1992
and 1993, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership'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.
As discussed in Note 1, the Partnership changed its method of accounting for
income taxes effective November 1, 1992. As discussed in Note 1, the
Partnership also changed its method of accounting for postretirement health
benefits effective November 1, 1991.
/s/ PRICE WATERHOUSE
<PAGE> 23
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company partnership)
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 31,
-----------
1992 1993
---- ----
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 7,328 $ 13,459
Notes and accounts receivable, net of allowance
for doubtful receivables of $512 and $2,100 81,208 92,604
Inventories:
Finished products and work in process 85,097 81,767
Raw materials and supplies 5,376 5,041
--------- ---------
90,473 86,808
--------- ---------
Prepaid expenses 2,796 2,616
Deferred tax asset 2,256
Receivables from related parties 4,955 4,956
--------- ---------
Total current assets 186,760 202,699
--------- ---------
Investments in and advances to affiliates 9,727 9,699
Long-term receivables 413 6,504
Deferred tax asset 270
Property, plant and equipment, net 56,758 53,060
Other assets 9,430 8,234
--------- ---------
$ 263,088 $ 280,466
========= =========
Liabilities and Partners' Equity
-------------------------------
Current liabilities:
Short-term debt $ 1,973 $ 953
Accounts payable 30,153 42,202
Accrued compensation and benefits 6,699 7,454
Accrued insurance 9,500 9,683
Foreign income taxes 7,201 3,354
Deferred tax liability 41
Other accrued liabilities 13,443 10,646
Accounts payable to related parties 1,318 1,137
--------- ---------
Total current liabilities 70,328 75,429
Accrued post retirement benefits 17,900 20,400
Deferred tax liability 552
Minority interests and other liabilities 9,528 3,775
Commitments and contingencies (Note 4)
Partners' equity 164,780 180,862
--------- ---------
$ 263,088 $ 280,466
========= =========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 24
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company partnership)
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year ended
October 31,
-----------
1992 1993
---- ----
<S> <C> <C>
Revenues:
Product sales $ 316,251 $ 344,324
Service revenues 67,085 51,939
--------- ---------
383,336 396,263
--------- ---------
Cost of sales:
Product sales 184,344 207,053
Service revenues 36,896 28,284
--------- ---------
221,240 235,337
--------- ---------
Gross earnings 162,096 160,926
--------- ---------
Other costs and expenses:
Selling 123,312 119,250
Engineering 7,691 7,623
Administrative and general 22,747 18,521
Restructuring charge (Note 5) 8,074 --
--------- ---------
161,824 145,394
--------- ---------
Earnings from operations 272 15,532
Other income (deductions):
Interest expense (874) (610)
Interest earned 1,470 932
Other, net 2,396 3,460
--------- ---------
Earnings before income taxes, minority interest, equity
earnings and cumulative effect of change in accounting
principles 3,264 19,314
Foreign income taxes (9,245) (4,281)
Minority interest in earnings of subsidiaries (3,053) (1,003)
Equity in net earnings of unconsolidated affiliates 2,536 2,640
--------- ---------
Earnings (loss) before cumulative effect of change in
accounting principles (6,498) 16,670
Cumulative effect of change in accounting principle (15,700) --
--------- ---------
Net earnings (loss) $ (22,198) $ 16,670
========= =========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 25
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and
Halliburton Company Partnership)
COMBINED STATEMENTS OF PARTNERS' EQUITY
(in thousands)
YEARS ENDED OCTOBER 31, 1992 AND 1993
<TABLE>
<CAPTION>
Common
stock of Cumulative Partners'
Canadian translation Retained contributions Partners'
affiliates adjustments earnings and advances withdrawals
---------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Partners' equity at October 31, 1991 $11,439 $ 2,321 $ 54,389 $715,609 $(564,587)
Cash contributions 37,900
Cash distributions (60,900)
Repurchase and cancelation of stock (2,690)
Cumulative translation adjustment (6,503)
Net loss (22,198)
------- -------- -------- -------- ---------
Partners' equity at October 31, 1992 8,749 (4,182) 32,191 753,509 (625,487)
Cash contributions 71,700
Cash distributions (64,050)
Cumulative translation adjustment (8,238)
Net income 16,670
------- -------- -------- -------- ---------
Partners' equity at October 31, 1993 $ 8,749 $(12,420) $ 48,861 $825,209 $(689,537)
======= ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Partners' Equity
---------------------------------------
Total Dresser Halliburton Total
----- ------- ----------- -----
<S> <C> <C> <C> <C>
Partners' equity at October 31, 1991 $219,171 $140,271 $ 78,900 $219,171
Cash contributions 37,900 24,256 13,644 37,900
Cash distributions (60,900) (38,976) (21,924) (60,900)
Repurchase and cancelation of stock (2,690) (1,722) (968) (2,690)
Cumulative translation adjustment (6,503) (4,162) (2,341) (6,503)
Net loss (22,198) (14,207) (7,991) (22,198)
-------- -------- -------- --------
Partners' equity at October 31, 1992 164,780 105,460 59,320 164,780
Cash contributions 71,700 45,888 25,812 71,700
Cash distributions (64,050) (40,992) (23,058) (64,050)
Cumulative translation adjustment (8,238) (5,273) (2,965) (8,238)
Net income 16,670 10,669 6,001 16,670
-------- -------- -------- --------
Partners' equity at October 31, 1993 $180,862 $115,752 $ 65,110 $180,862
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 26
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company partnership)
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
October 31,
-----------
1992 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:-
Net earnings (loss) $ (22,198) $ 16,670
--------- --------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 10,852 10,155
(Gain)/loss on disposal of assets (452) 332
Changes in asset valuation allowances 7,211 2,577
Deferred tax expense (benefit) 409 (3,448)
Cumulative effect of change in accounting principle 15,700 --
Equity in earnings of unconsolidated subsidiaries and
affiliates, net of dividends received of $1,954 and
$2,447 (582) (193)
Minority interests 3,169 1,161
Decrease (increase) in receivables 11,931 (8,882)
Decrease in inventories 22,868 10,194
Increase in accounts payable and other
accruals 4,878 11,006
Decrease in income taxes payable (2,543) (5,489)
Other, net (9,595) (13,192)
--------- --------
Total adjustments 63,846 4,221
--------- --------
Net cash provided by operating activities 41,648 20,891
--------- --------
Cash flows from investing activities:
Capital expenditures (10,703) (8,675)
Proceeds from sale of assets 1,101 1,886
Stock repurchase (2,690) --
Other (4,704) (3,743)
--------- --------
Net cash used by investing activities (16,996) (10,532)
--------- --------
Cash flows from financing activities:
Repayment of borrowings (1,122) (1,020)
Increase (decrease) in related party receivables/payables 1,344 (1,108)
Partners' contributions 37,900 71,700
Partners' distributions (60,900) (64,050)
--------- --------
Net cash provided (used) by financing activities (22,778) 5,522
--------- --------
Effect of translation adjustments, on cash (4,891) (9,750)
--------- --------
Net increase (decrease) in cash and cash equivalents (3,017) 6,131
Cash and cash equivalents, beginning of year 10,345 7,328
--------- --------
Cash and cash equivalents, end of year $ 7,328 $ 13,459
========= ========
Supplemental disclosures of cash flow information:-
Cash paid during the year for:
Interest $ 874 $ 610
Income taxes paid 8,760 8,644
</TABLE>
See accompanying notes to combined financial statements.
<PAGE> 27
M-I DRILLING FLUIDS COMPANY
(a Dresser Industries, Inc. and Halliburton Company Partnership)
NOTES TO COMBINED FINANCIAL STATEMENTS
(amounts in $000s)
NOTE 1 - SUMMARY OF FORMATION AND SIGNIFICANT ACCOUNTING POLICIES:
Effective December 1, 1986, Dresser Industries, Inc. (Dresser) and Halliburton
Company (Halliburton) (the Partners) combined their drilling fluids operations
and formed M-I Drilling Fluids Company (the Partnership), owned 60 percent by
Dresser and 40 percent by Halliburton. In May 1990, Dresser contributed SWACO
to the Partnership in exchange for an increase in ownership to 64%. SWACO's
net assets were recorded at historical net book value, $22,247, at the date of
contribution. The Partnership principally provides drilling fluid systems to
the petroleum industry for oil and gas well drilling.
Combination
Since December 1, 1986, the Partners have been effecting the legal transfer of
their drilling fluids operations to the Partnership. The accompanying combined
financial statements reflect the operations of the Partnership as if all
transfers had been completed as of December 1, 1986. Accordingly, the combined
financial statements include the Partnership's financial statements and the
financial statements of all its majority-owned subsidiaries, together with the
financial statements of M-I Drilling Fluids Canada, Inc., which is owned
directly by the Partners, and the financial statements of those operations
which have been operated for the benefit of the Partnership by the Partners
until legal transfer is completed. All material intercompany accounts and
transactions are eliminated. Investments in 20% to 50% owned affiliates are
reported at cost, adjusted for the Partnership's equity in undistributed
earnings or losses. As there are no quoted market prices for these investments,
a reasonable estimate of fair value could not be made without incurring
excessive costs. At October 31, 1992 and 1993, net assets reported by these
investees was $20,924 and $20,527 and net income was $6,162 and $4,185.
Partnership profits and losses are allocated to the Partners in accordance with
their respective partnership interests.
Concentrations of credit risk
The Partnership's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents and notes and accounts
receivable.
The Partnership's cash equivalents are high-quality securities placed with
major international banks and financial institutions. The Partnership believes
its investment policy limits its exposure to concentrations of credit risk.
<PAGE> 28
-2-
The Partnership's notes and accounts receivable result primarily from its
provision of drilling fluid systems and services and reflects a broad customer
base, both domestically and internationally. International activity is
concentrated in the Far East, certain areas of the African continent, in
various countries in South America and parts of Europe. The Partnership
routinely assesses the financial strength of its customers. As a consequence,
concentrations of credit risk are limited.
Revenue recognition
Revenues are recorded at the time products are delivered and services have been
performed. Allowances are provided for products expected to be returned.
Service and rental contracts are generally negotiated on a day-rate basis.
Appropriate allowances are provided for all doubtful receivables.
Inventories
Inventories are recorded at the lower of cost or market (first-in, first-out).
Obsolete items or excess quantities are valued at their net realizable value.
Property, plant and equipment
Fixed assets are recorded at cost less accumulated depreciation over their
estimated service life. The straight-line depreciation method is used for
financial statement purposes. All significant fixed assets are reviewed
periodically and, if determined to be excess, obsolete or unsuitable for their
intended use, are reduced to values recognizing their impaired utility or are
assigned shorter remaining useful lives for depreciation purposes. Depletion of
mineral properties is based upon estimates of economically recoverable tonnage.
Maintenance and repairs are expensed as incurred and betterments are
capitalized.
Benefit plans
The Partnership maintains defined contribution plans covering substantially all
employees in the United States. Employees of certain foreign operations
participate in defined contribution plans or statutory plans. Partnership
contributions related to these benefit plans are recognized on a current basis.
Postretirement healthcare benefits
In December 1990, Statement of Financial Accounting Standards No. 106 (FAS 106),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", was
issued. FAS 106 requires use of the accrual method of accounting for healthcare
benefits provided by the Company to retirees. The Company adopted FAS 106 at
November 1, 1991 (Note 6). Prior to that date, the Company had expensed these
benefits as they were paid. These payments have generally not been material.
The cumulative effect of this change in accounting method was to increase the
net loss by $15,700 for the year ended October 31, 1992.
<PAGE> 29
-3-
Income taxes
The Partnership is generally not subject to U.S. or state income taxes. The
taxable income or loss of the Partnership is reported by the Partners in their
U.S. income tax returns and, therefore, no U.S. income tax expense is reflected
in the Partnership's Combined Statement of Operations. At October 31, 1993,
the tax basis of assets of the Partnership exceeded the book basis by $9,001 and
the book basis of liabilities exceeded the tax basis by $14,818.
Entities operating in foreign countries provide for foreign income taxes in
accordance with the tax laws and regulations of the applicable foreign country.
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes". FAS 109 requires recognition of income taxes based on a liability
method. Deferred tax assets or liabilities are recorded based upon temporary
differences between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes. Deferred tax expense or benefit is the
result of changes in the deferred tax assets and liabilities during the period.
The valuation allowance at October 31, 1992 was $15,604. The Company adopted
FAS 109 effective November 1, 1992. Prior to November 1992, the Partnership
provided for income taxes under APB 11. The cumulative effect of this change in
accounting method was not material.
Translation of foreign currencies
For operations in countries which do not have highly inflationary economies,
asset and liability accounts are translated at the rate in effect at the
balance sheet date, and revenue and expense accounts are translated at weighted
average rates. Translation adjustments are reflected as a component of
partners' equity.
For operations in countries with highly inflationary economies, inventories,
cost of sales and property, plant and equipment and related depreciation are
translated at historical rates. Other asset and liability accounts are
translated at rates in effect at the balance sheet date, and revenues and
expenses excluding cost of sales and depreciation are translated at weighted
average rates. Translation adjustments are reflected in the Combined
Statements of Operations.
Cash flow statement
Cash and cash equivalents include cash on hand and investments with maturities
of three months or less. The carrying amount of cash and cash equivalents
approximates fair value because of the short maturity of these instruments.
<PAGE> 30
-4-
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment activity for the years ended October 31 is
summarized below:
Balance at Balance at
October 31, Additions Retire- October 31,
1991 at cost ments Other 1992
---- ------- ----- ----- ----
Land and
improvements $ 30,844 $ 1,785 $ (640) $ (225) $ 31,764
Buildings 48,390 426 (11,473) (232) 37,111
Machinery and
equipment 234,870 8,492 (29,224) (1,480) 212,658
-------- ------- -------- ------- --------
$314,104 $10,703 $(41,337) $(1,937) $281,533
======== ======= ======== ======= ========
Balance at Balance at
October 31, Additions Retire- October 31,
1992 at cost ments Other 1993
---- ------- ----- ----- ----
Land and
improvements $ 31,764 $ 807 $ (3,484) $ (478) $ 28,609
Buildings 37,111 688 (1,970) (435) 35,394
Machinery and
equipment 212,658 7,180 (11,910) (1,964) 205,964
-------- ------- -------- ------- --------
$281,533 $ 8,675 $(17,364) $(2,877) $269,967
======== ======= ======== ======= ========
Accumulated depreciation, depletion and amortization of property, plant and
equipment for the years ended October 31 are summarized below (in thousands):
Balance at Balance at
October 31, Additions Retire- October 31,
1991 at cost ments Other 1992
---- ------- ----- ----- ----
Land and
improvements $ 18,057 $ 574 $ (571) $ (26) $ 18,034
Buildings 38,252 786 (10,049) (115) 28,874
Machinery and
equipment 195,955 9,492 (26,226) (1,354) 177,867
-------- ------- -------- ------- --------
$252,264 $10,852 $(36,846) $(1,495) $224,775
======== ======= ======== ======= ========
<PAGE> 31
-5-
Balance at Balance at
October 31, Additions Retire- October 31,
1992 at cost ments Other 1993
---- ------- ----- ----- ----
Land and
improvements $ 18,034 $ 680 $ (3,455) $ (61) $ 15,198
Buildings 28,874 1,960 (1,936) (164) 28,734
Machinery and
equipment 177,867 7,515 (11,060) (1,347) 172,975
-------- ------- -------- ------- --------
$224,775 $10,155 $(16,451) $(1,572) $216,907
======== ======= ======== ======= ========
The Partnership wrote off property, plant and equipment with a net book value
of $2,182 in conjunction with the restructuring charge included in the Combined
Statements of Operations for the year ended October 31, 1992 (Note 5).
NOTE 3 - SHORT-TERM DEBT:
Loan arrangements have been established with banks under which the
Partnership's foreign subsidiaries may borrow on an overdraft and short-term
note basis at interest rates ranging from 1% to 8% at October 31, 1993. The
amount available and unused under such short-term note arrangements
approximated $5,000 at October 31, 1993. Short-term debt is guaranteed by the
Partners or their affiliates or by pledges of assets. Under the terms of these
agreements, the Partnership is required to maintain certain compensating
balances. The carrying amount of these instruments approximates fair value
because of their short maturity.
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
The Partnership and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of their business. Management believes
(based on advice of legal counsel) that such litigation and claims will be
resolved without material effect on the Partnership's combined financial
position.
The Partnership's assets in Angola were seized in 1993 by factions in the local
civil war. The Partnership's facilities in Angola have been subjected to heavy
artillery fire. The Partnership has not been able to determine the extent of
loss or damage, if any, to the related assets and has no assurance as to when
it will regain control of the assets. No provision for loss has been recorded
at October 31, 1993. The carrying value of the Partnership's assets in Angola
approximates $2,100 at October 31, 1993.
The Partnership has conducted environmental surveys related to its U.S.
operations. The estimated cost of potential remediation activities for the
locations surveyed, including exit costs for sites intended to be phased out in
the foreseeable future, ranges between $3,000 and $6,000. The Partnership
accrues these costs when remediation plans become probable and the costs
reasonably
<PAGE> 32
-6-
estimable. The Partnership has recognized a charge to cost of goods sold of
$1,500 in both 1992 and 1993 related to future remediation activities. This
accrual is reflected in other accrued liabilities in the accompanying Combined
Balance Sheets.
Total rental and lease expenses charged to earnings were $8,646 and $7,093 for
the years ended October 31, 1992 and 1993. At October 31, 1993, the aggregate
minimum annual obligations under noncancelable lease agreements were $3,673 for
1994, $1,400 for 1995, $781 for 1996, $464 for 1997, $348 for 1998 and $7,427
for all subsequent years. The lease obligations relate primarily to office
space and warehouses.
At October 31, 1993, the Partnership has outstanding letters of credit of
$5,133. The letters of credit are issued in the normal course of business to
ensure certain suppliers and insurance carriers of timely payment of
contractual obligations.
Certain foreign entities are subject to statutes and laws in the countries in
which they operate that restrict the distribution of dividends. Restricted
foreign net assets aggregated approximately $17,866 and $10,568 at October 31,
1992 and 1993.
NOTE 5 - RESTRUCTURING CHARGE:
In October 1992, the Partnership announced a restructuring program designed to
reduce costs and improve operating efficiencies. The restructuring program
costs are presented as a charge to earnings in the Combined Statements of
Operations. The charge included, among other items, costs associated with the
consolidation and elimination of certain production and other facilities,
severance pay and unfunded costs of an employee pension plan.
NOTE 6 - BENEFIT PLANS AND RETIREE BENEFITS:
U.S. benefit plans
The Partnership has defined contribution and salary deferred 401(k) savings
plans covering substantially all U.S. employees. The Partnership makes monthly
contributions to the plans. The cost of the plans was $2,039 and $2,294 for the
years ended October 31, 1992 and 1993.
The Partnership also sponsors three defined benefit plans for hourly employees
covered by collective bargaining agreements. These plans were adopted by the
Partnership as a continuation of prior plans. The benefit obligation and costs
related to these plans are not significant.
Non-U.S. benefit plans
Employees of the Partnership's non-U.S. subsidiaries participate in defined
contribution statutory plans. The expense incurred by the Partnership for these
plans aggregated $1,025 and $1,165 for the years ended October 31, 1992 and
1993.
<PAGE> 33
-7-
Retiree benefits
The Partnership currently provides certain healthcare benefits for retired
employees. The Partnership funds the benefit plan as claims and premiums are
paid. The accrual method of accounting for these benefits was adopted November
1, 1991 in accordance with the provisions of statements of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pension". The Partnership elected to recognize this change in accounting
on the immediate recognition basis. The effects of postretirement benefits for
non-U.S. employees, which supplement foreign government plans, are not
significant.
Components of the Partnership's liability for the postretirement benefit plan
at October 31, was as follows:
1992 1993
---- ----
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 5,500 $ 6,100
Fully eligible active plan participants 3,400 3,100
Other active participants 9,200 8,300
-------- --------
Total accumulated postretirement benefit obligation 18,100 17,500
Unrecognized net gain -- 3,100
-------- --------
Accrued postretirement benefit liability $ 18,100 $ 20,600
======== ========
Accrued compensation and benefits on the Combined Balance Sheets include the
current portion of the benefit liability.
The net periodic postretirement benefit expense for the years ended October 31,
include the following components:
1992 1993
---- ----
Service cost for benefits earned $1,100 $1,200
Interest cost on accumulated postretirement
benefit obligation 1,400 1,500
------ ------
Net periodic postretirement benefit cost $2,500 $2,700
====== ======
Actual benefits paid $ 300 $ 200
====== ======
<PAGE> 34
-8-
Assumptions used to calculate the accumulated postretirement benefit obligation
at October 31, were as follows:
Discount rates -
October 31, 1993 7.0%
October 31, 1992 8.5%
Healthcare trend rate (weighted based on participant count) -
October 31, 1993 - 14% for 1993 declining to 6.0% in 2007 and thereafter.
October 31, 1992 - 15% for 1993 declining to 6.0% in 2007 and thereafter.
The above changes in assumptions and changes in circumstances and experience
resulted in an unrecognized net gain of $3,100.
A one percentage point increase in the assumed healthcare cost trend rate for
each year would increase the accumulated postretirement benefit obligation as
of October 31, 1993 by approximately $3,000 and would increase the net
postretirement benefit cost for 1993 by approximately $500.
The Partnership modified the postretirement benefits plan effective December 1,
1993 to reduce participant eligibility and the magnitude of benefits to be
paid. These modifications resulted in a decrease in the plan liability of
$3,500.
NOTE 7 - INCOME TAXES:
The components of earnings before income taxes are summarized below:
1992 1993
---- ----
Domestic $ (19,823) $ 13,376
Foreign 23,087 5,938
--------- --------
$ 3,264 $ 19,314
========= ========
<PAGE> 35
-9-
Taxes on income (tax benefits) consisted of the following:
1992 1993
---- ----
Current:
Foreign $8,820 $ 7,657
U.S. federal 34 76
State (18) (4)
------ -------
8,836 7,729
------ -------
Deferred:
Foreign 409 (2,075)
Benefit of loss carryforward -- (1,373)
------ -------
409 (3,448)
------ -------
Total income taxes $9,245 $ 4,281
====== =======
The Partnership's foreign operations have net operating loss carryforwards for
income tax reporting purposes of $9,916 which expire as follows: $704 in 1994,
$966 in 1995, $1,738 in 1996, $2,236 in 1997 and $2,920 in 1998 and $1,352
thereafter. There are no domestic carryforwards available for tax reporting
purposes.
Undistributed earnings of the Partnership's foreign subsidiaries amount to
approximately $17,000 at October 31, 1993. No provisions are generally made
for U.S. or additional foreign taxes on undistributed earnings of foreign
subsidiaries, since the Partnership plans to continue to finance foreign
operations and expansion through reinvestment of a substantial portion of such
earnings.
Deferred tax assets (liabilities) are comprised of the following at October 31,
1993:
Interest and royalties $ (101)
Capital expenditure reserve (72)
Bad debt (34)
Other (27)
-------
Gross deferred tax liabilities (234)
-------
Accruals 992
Foreign exchange 865
Depreciation and amortization 664
Net operating loss carryforwards 3,696
Other 153
-------
Gross deferred tax assets 6,370
-------
Deferred tax assets valuation allowance (3,610)
-------
Net deferred tax assets $ 2,526
=======
<PAGE> 36
-10-
An analysis of the difference between the U.S. statutory rate and the effective
rate is as follows:
1992 1993
---- ----
U.S. statutory rate 34.0% 34.0%
Partnership (income) losses allocated directly to the Partners 206.5 (23.5)
Tax on foreign income higher than the U.S statutory rate 42.4 18.4
Other .3 (6.7)
----- -----
Effective tax rate 283.2% 22.2%
===== =====
NOTE 8 - RELATED PARTY TRANSACTIONS:
In the ordinary course of business, the Partnership engages in sales and
purchases of goods with the Partners and their subsidiaries and affiliates and
with 20% to 50% owned affiliates (Related Parties). Additionally, the
Partnership leases buildings, office space and equipment from Related Parties
and incurs charges for data processing and accounting and administrative
services provided by Related Parties. These costs are allocated to the
Partnership based upon actual usage and head count. Management believes this
method of allocation is reasonable and results in expense that is not
materially different from that which would be incurred on a stand-alone basis.
A summary of transactions with Related Parties follows for the years ended
October 31:
1992 1993
---- ----
Sales $11,192 $7,481
Purchases 3,035 2,735
Rental expense 2,156 2,278
Administrative charges 3,140 3,067
The Partners advance funds to, and receive distributions from, the Partnership.
Such advances and payments are accounted for as part of partners' equity and no
interest is charged or earned.
NOTE 9 - INFORMATION BY GEOGRAPHIC AREA:
Revenues include sales and services to unaffiliated customers and
intergeographic area sales and services. No single customer accounted for 10%
or more of total sales and service revenues. Intersegment sales include a
markup for normal profit by the selling segment.
Operating profit consists of total revenues less total operating expenses.
General corporate expenses, interest expense, interest income, equity in
undistributed earnings of the affiliates and foreign exchange gains and losses
have been excluded in determining operating profit.
<PAGE> 37
-11-
The financial information by geographic area for the years ended October 31
follows:
1992 1993
---- ----
Sales and service revenues:
United States $155,383 $195,398
Canada 10,856 13,964
Latin America 29,332 31,980
Europe 89,757 72,705
Middle East, Far East and Africa 98,442 83,059
Intergeographic area sales and service revenues:
United States 39,549 35,560
Canada 32 50
Latin America 287 216
Europe 17,641 16,367
Middle East, Far East and Africa 27,493 21,350
Eliminations (85,436) (74,386)
-------- --------
Total sales and service revenues $383,336 $396,263
======== ========
1992 1993
---- ----
Operating profit:
United States $ 13,715 $ 22,422
Canada 549 1,336
Latin America (884) 743
Europe 4,206 3,925
Middle East, Far East and Africa 11,232 5,987
-------- --------
28,818 34,413
Corporate (23,214) (17,294)
Restructuring charge (8,074) --
Adjustments and eliminations 2,742 (1,587)
-------- --------
Total operating profit 272 15,532
Interest earned, net 596 322
Foreign exchange gains, net 957 2,183
Other, net 1,439 1,277
-------- --------
Earnings before income taxes, minority
interest, equity earnings and cumulative
effect of change in accounting principle $ 3,264 $ 19,314
======== ========
<PAGE> 38
-12-
1992 1993
---- ----
Equity earnings:
Latin America $ 229 $ 227
Europe 5 84
Middle East, Far East and Africa 2,302 2,329
------- -------
Total equity earnings $ 2,536 $ 2,640
======= =======
1992 1993
---- ----
Identifiable assets:
United States $137,660 $142,120
Canada 11,929 9,245
Latin America 48,445 27,631
Europe 57,630 90,397
Middle East, Far East and Africa 60,412 67,055
Corporate (1,156) 9,470
Investments in affiliates 9,727 9,699
Long-term receivables 413 6,504
Adjustments and eliminations (61,972) (81,655)
-------- --------
$263,088 $280,466
======== ========
NOTE 10 - SUPPLEMENTARY INCOME STATEMENT INFORMATION:
Repairs and maintenance expense charged to earnings amounted to $8,172 and
$10,765 during the years ended October 31, 1992 and 1993.
Net foreign exchange adjustments, including gains and losses from both
settlement of commercial transactions and translation adjustments, resulted in
net losses of $957 and $2,183 during the years ended October 31, 1992 and 1993.
Net foreign exchange adjustments are included in "Other income (deductions)".
NOTE 11 - SUBSEQUENT EVENTS:
Effective February 28, 1994, Smith International, Inc. purchased the Dresser
Industries, Inc. interest in the Partnership.
Subsequent to year end, a foreign bank in which the Partnership had deposits of
$800 failed. Management believes a substantial portion this amount will be
recoverable. No adjustment has been made in the combined financial statements
as a result of this event.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-31556) of Smith International, Inc. of our report
dated December 11, 1991 on the Combined Financial Statements of M-I Drilling
Fluids Company (a partnership, whose partnership interests were owned by Dresser
Industries, Inc. and Halliburton Company) for the years ended October 31, 1991
and 1990 included in this Form 8-K.
/s/ PRICE WATERHOUSE
Price Waterhouse
May 13, 1994
Houston, Texas
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-69840) of Smith International, Inc. of our report
dated December 11, 1991 on the Combined Financial Statements of M-I Drilling
Fluids Company (a partnership, whose partnership interests were owned by
Dresser Industries, Inc. and Halliburton Company) for the years ended October
31, 1991 and 1990 included in this Form 8-K.
/s/ PRICE WATERHOUSE
Price Waterhouse
May 13, 1994
Houston, Texas
<PAGE> 3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-69840) of Smith International, Inc. of our report
dated April 26, 1994 on the Combined Financial Statements of M-I Drilling
Fluids Company (a partnership, whose partnership interests were owned by
Dresser Industries, Inc. and Halliburton Company) for the years ended October
31, 1992 and 1993 included in this Form 8-K.
/s/ PRICE WATERHOUSE
Price Waterhouse
May 13, 1994
Houston, Texas
<PAGE> 4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-31556) of Smith International, Inc. of our report
dated April 26, 1994 on the Combined Financial Statements of M-I Drilling
Fluids Company (a partnership, whose partnership interests were owned by
Dresser Industries, Inc. and Halliburton Company) for the years ended October
31, 1992 and 1993 included in this Form 8-K.
/s/ PRICE WATERHOUSE
Price Waterhouse
May 13, 1994
Houston, Texas
