<PAGE> 1
PROSPECTUS
$150,000,000
[Smith International Logo]
7% SENIOR NOTES DUE 2007
------------------------
Interest payable March 15 and September 15
------------------------
THE NOTES WILL MATURE ON SEPTEMBER 15, 2007. THE NOTES WILL BE SENIOR UNSECURED
OBLIGATIONS OF THE COMPANY AND WILL RANK PARI PASSU IN RIGHT OF PAYMENT WITH THE
COMPANY'S OBLIGATIONS UNDER ALL EXISTING AND FUTURE SENIOR UNSECURED
INDEBTEDNESS OF THE COMPANY (INCLUDING THE BANK CREDIT FACILITIES, AS DEFINED
HEREIN) AND SENIOR IN RIGHT OF PAYMENT TO ALL EXISTING AND FUTURE INDEBTEDNESS
OF THE COMPANY THAT IS BY ITS TERMS EXPRESSLY SUBORDINATED TO THE NOTES. THE
NOTES WILL BE REDEEMABLE IN WHOLE OR IN PART, AT THE OPTION OF THE COMPANY AT
ANY TIME, AT A REDEMPTION PRICE AS SET FORTH HEREIN UNDER "DESCRIPTION OF
NOTES -- REDEMPTION." THE NOTES WILL BE REPRESENTED BY ONE OR MORE GLOBAL
SECURITIES REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (THE
"DEPOSITARY") OR ITS NOMINEE. BENEFICIAL INTERESTS IN THE NOTES WILL BE SHOWN
ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS MAINTAINED BY
THE DEPOSITARY (WITH RESPECT TO PARTICIPANTS' INTERESTS) AND ITS PARTICIPANTS.
EXCEPT AS DESCRIBED HEREIN, NOTES IN DEFINITIVE FORM WILL NOT BE ISSUED. SEE
"DESCRIPTION OF NOTES -- BOOK-ENTRY, DELIVERY AND FORM."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE 99.307% AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
---------------------- ---------------------- ----------------------
Per Note................................ 99.307% .650% 98.657%
Total................................... $148,960,500 $975,000 $147,985,500
</TABLE>
- ------------
(1) Plus accrued interest from September 15, 1997, if any.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(3) Before deducting expenses payable by the Company estimated at $525,000.
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Andrews &
Kurth L.L.P., counsel for the Underwriters. It is expected that delivery of the
Notes will be made on or about September 15, 1997, through the book-entry
facilities of the Depositary against payment therefor in immediately available
funds.
------------------------
MORGAN STANLEY DEAN WITTER
ABN AMRO CHICAGO CORPORATION
CHASE SECURITIES INC.
September 10, 1997
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY,
THE UNDERWRITERS MAY OVER-ALLOT THE NOTES IN CONNECTION WITH THE OFFERING, AND
MAY BID FOR AND PURCHASE THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS".
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or by the Underwriters. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any securities other than
the securities described in this Prospectus or an offer to sell or the
solicitation of an offer to buy such securities in any jurisdiction to any
persons to whom it is unlawful to make such offer in such jurisdiction. The
delivery of this Prospectus or any sale made hereunder does not imply that there
has been no change in the affairs of the Company since the date hereto or that
the information contained herein or therein is correct as of any time subsequent
to the date on which such information is given.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 3
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Use of Proceeds............................................. 8
Capitalization.............................................. 9
Selected Consolidated Financial Data........................ 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Business.................................................... 18
Description of Notes........................................ 21
Underwriters................................................ 29
Legal Matters............................................... 30
Experts..................................................... 30
</TABLE>
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission.
2
<PAGE> 3
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to the
Company and the securities offered hereby. Any statements contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Commission by the Company pursuant
to the Exchange Act, are incorporated herein by reference and made a part of
this Prospectus:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996; and
(ii) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or suspended, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the request of any such person, a copy of any
or all of the foregoing documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Written or telephone requests for such copies
should be directed to Investor Relations, Smith International, Inc., 16740 Hardy
Street, P.O. Box 60068, Houston, Texas 77205; telephone: (281) 443-3370.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and notes thereto,
appearing elsewhere in this Prospectus or incorporated by reference herein. As
used herein, unless the context otherwise requires, the "Company" or "Smith"
refers to Smith International, Inc., together with its subsidiaries. In this
Prospectus, references to "dollars" and "$" are to United States dollars.
THE COMPANY
The Company is a leading worldwide supplier of premium products and
services to the oil and gas exploration and production industry. The Company
provides a comprehensive line of technologically-advanced products and
engineering services, including drilling and completion fluid systems, solids
control equipment, waste management services, three-cone drill bits, diamond
drill bits, fishing services, drilling tools, underreamers, sidetracking systems
and liner hangers. Demand for the Company's products and services is generally
determined by the level of exploration and production activity in major energy
producing areas and the depth and drilling conditions of these projects. From
1993 to 1996, the Company's revenues and operating income increased from $220.7
million to $1,156.7 million and from $18.6 million to $132.5 million,
respectively, representing compounded annual growth rates of 74 percent and 92
percent, respectively. From the first six months of 1996 to the first six months
of 1997, revenues increased 46 percent to $740.6 million and operating income
increased 75 percent to $97.1 million. The Company was incorporated in the State
of California in January 1937 and reincorporated under Delaware law in May 1983.
The Company's executive offices are headquartered at 16740 Hardy Street,
Houston, Texas 77032 (telephone number 281/443-3370).
The Company operates through five business units which provide products and
services throughout the world. The Company's business units include (i) M-I
Fluids which provides drilling and completion fluid systems and services; (ii)
M-I SWACO which provides solids control, pressure control and rig
instrumentation equipment and waste management services; (iii) Smith Tool which
manufactures and sells three-cone drill bits for use in the oil and gas industry
and in mining operations; (iv) Smith Drilling & Completions which manufactures
and markets products and services used in drilling, workover, well completion,
fishing and well re-entry operations; and (v) Smith Diamond Technology which
manufactures and markets shear drill bits featuring cutters made of
polycrystalline diamond or natural diamond.
4
<PAGE> 5
THE OFFERING
Securities Offered......... $150,000,000 aggregate principal amount of 7%
Senior Notes due 2007 (the "Notes").
Maturity Date.............. September 15, 2007.
Interest................... 7% per annum.
Interest Payment Dates..... March 15 and September 15 of each year, commencing
March 15, 1998.
Ranking.................... The Notes will be senior unsecured obligations of
the Company and will rank pari passu in right of
payment with the Company's obligations under all
existing and future senior unsecured indebtedness
of the Company (including the bank credit
facilities) and senior in right of payment to all
existing and future indebtedness of the Company
that is expressly subordinated to the Notes.
Redemption................. The Notes will be redeemable in whole or in part,
at the option of the Company at any time, at a
redemption price as set forth herein under
"Description of Notes -- Redemption."
Certain Covenants.......... The indenture governing the Notes contains certain
covenants that, among other things, limit the
ability of the Company and its subsidiaries to
create liens, enter into sale and lease-back
transactions, and, with respect to the Company,
engage in mergers and consolidations or transfer
substantially all of the Company's assets. See
"Description of Notes -- Certain Covenants of the
Company."
Use of Proceeds............ The net proceeds from the issuance of the Notes
will be used to repay borrowings outstanding under
the bank credit facilities. See "Use of Proceeds."
5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain financial information of the Company
and should be read in conjunction with the consolidated financial statements and
notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ---------- -------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $210,669 $220,712 $653,901 $874,544 $1,156,658 $509,092 $ 740,647
Gross profit............................... 71,535 79,963 221,274 292,540 392,062 171,232 254,459
Income (loss) from continuing operations... 10,260 (1,325) 60,104 86,248 132,520 55,384 97,095
Net income (loss).......................... (1,811) 68,328 35,879 45,592 64,444 27,929 45,042
Earnings (loss) per share.................. (0.10) 1.79 0.92 1.16 1.62 0.70 1.12
OTHER DATA:
EBITDA excluding minority interests(1)..... $ 32,997 $ 30,175 $ 67,312 $ 87,619 $ 128,747 $ 54,766 $ 93,307
Depreciation and amortization.............. $ 22,737 $ 11,600 $ 21,802 $ 25,540 $ 31,601 $ 14,058 $ 21,632
Ratio of earnings to fixed charges(2)...... 1.01 n/a(3) 5.39 5.64 6.70 6.72 7.27
Capital expenditures, net(4)............... $ 14,912 $ 8,100 $ 13,705 $ 25,084 $ 61,247 $ 24,451 $ 30,927
BALANCE SHEET DATA:
Current assets............................. $296,224 $255,847 $421,596 $485,291 $ 665,277 $603,355 $ 757,943
Total assets............................... 370,482 348,386 619,780 702,844 1,074,582 933,281 1,225,216
Current liabilities........................ 167,752 79,970 164,247 185,289 300,501 234,937 318,938
Total debt................................. 149,343 46,702 130,852 142,385 303,426 248,813 372,748
Shareholders' equity....................... 149,785 214,466 253,121 300,886 368,536 329,389 413,355
</TABLE>
- ---------------
(1) "EBITDA excluding minority interests" represents the amount of earnings
before interest, taxes, depreciation and amortization earned by the Company
after reduction for the portion of the respective amounts allocable to the
minority interest ownership partner. "EBITDA excluding minority interests"
is not a measurement recognized under generally accepted accounting
principles and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or to cash flows as a
measure of liquidity.
(2) For purposes of computing the ratios: "Earnings" consist of "Income (loss)
from continuing operations", which includes earnings allocable to the
minority interest ownership partner, minus (i) interest expense, net plus
(ii) fixed charges. "Fixed charges" consist of interest, whether expensed or
capitalized, the portion of rental expense estimated to represent a
reasonable approximation of the interest component and preferred stock
dividend requirements.
(3) As a result of a $19.9 million litigation settlement charge in 1993, the
Company's earnings were not sufficient to fully cover the amount of fixed
charges by $3.5 million. Excluding the effect of the litigation settlement
charge, the Company's ratio of earnings to fixed charges for 1993 was 2.96.
(4) Capital expenditures are presented net of any proceeds arising from
lost-in-hole sales and sales of fixed asset equipment replaced.
6
<PAGE> 7
RISK FACTORS
This Prospectus does not describe all of the risks of an investment in the
Notes. Prospective investors should carefully consider, among other factors, the
matters described below.
DEPENDENCE ON OIL AND GAS INDUSTRY
The Company's business and operations are dependent upon conditions in the
oil and gas industry and, specifically, the level of drilling activity in the
exploration and production of hydrocarbons. The demand for drilling and related
services is directly influenced by oil and gas prices, expectations about future
prices, the cost of producing and delivering oil and gas, government
regulations, local and international political and economic conditions,
including the ability of the Organization of Petroleum Exporting Countries
("OPEC") to set and maintain production levels and prices, the level of
production by non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and gas reserves. There can
be no assurance that current levels of oil and gas exploration expenditures will
be maintained or that demand for the Company's services will reflect the level
of such expenditures.
HOLDING COMPANY STRUCTURE AND SUBORDINATION OF NOTES
The Company conducts a substantial portion of its operations through
subsidiaries. Accordingly, the Company relies on dividends and cash advances
from its subsidiaries to provide funds necessary to meet its obligations,
including the payment of principal and interest on the Notes. The ability of any
such subsidiary to pay dividends or make cash advances is subject to applicable
laws and the financial condition and operating requirements of such subsidiary.
The Notes are unsecured obligations of the Company and will rank pari passu
in right of payment with the Company's obligations under all existing and future
senior unsecured indebtedness of the Company (including the bank credit
facilities) and senior in right of payment to all existing and future
indebtedness of the Company that is, by its terms, expressly subordinated to the
Notes. The Notes are effectively subordinated in right of payment to the
liabilities of the subsidiaries of the Company (including claims of trade
creditors and tort claimants). In addition, the Notes will be effectively
subordinated to all secured debt of the Company and its subsidiaries. As of June
30, 1997, on a pro forma basis giving effect to the Offering (as defined herein)
and the application of the net proceeds therefrom, (i) the Company would not
have had any outstanding senior secured indebtedness, (ii) the aggregate
principal amount of indebtedness outstanding of the subsidiaries of the Company
would have been $28,214,000 and (iii) such subsidiaries would have had
$95,029,000 of additional borrowing availability under an existing bank credit
facility. In the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Notes only after all secured indebtedness has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the Notes
outstanding. See "Description of Notes -- Ranking."
ABSENCE OF A TRADING MARKET FOR THE NOTES
The Notes are a new issue of securities that have no established trading
market and may not be widely distributed. There can be no assurance that an
active trading market will develop for the Notes or of the price at which the
holders would be able to sell the Notes. The Notes could trade at prices that
may be higher or lower than the initial offering price thereof depending upon
many factors, including prevailing interest rates, the Company's operating
results and the market for similar securities.
7
<PAGE> 8
USE OF PROCEEDS
The Company expects to use the net proceeds from the sale of the Notes
offered hereby (estimated to be $147,460,500) to repay outstanding bank debt
under its revolving credit agreements. The Company currently has a $120,000,000
credit facility and guarantees a portion of the $80,000,000 credit facility
utilized by the Company's majority-owned subsidiary, M-I L.L.C. ("M-I") (the
"bank credit facilities"). The bank credit facilities are unsecured and expire
in March 2002. At June 30, 1997, borrowings outstanding under the bank credit
facilities equaled $175,200,000 and had a weighted average interest rate of 6.44
percent for the six months ended June 30, 1997. The outstanding debt expected to
be repaid from the net proceeds of the offering of the Notes (the "Offering")
has been used to finance acquisitions and working capital requirements.
8
<PAGE> 9
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 (i) on a historical basis and (ii) as adjusted to
reflect the Offering and the anticipated application of the estimated net
proceeds thereof of $147,460,500. See "Use of Proceeds". This table should be
read in conjunction with the Company's consolidated financial statements and
notes thereto incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 24,265 $ 24,265
======== ========
Long-term debt:
Notes payable to insurance companies........................ $ 85,778 $ 85,778
Bank revolvers payable...................................... 175,200 5,374(1)
Term loans and other........................................ 30,918 30,918
Senior notes offered hereby................................. -- 148,961
-------- --------
Total long-term debt.............................. 291,896 271,031
-------- --------
Minority interests.......................................... 174,002 196,367(1)
Shareholders' equity:
Preferred stock, $1 par value. Authorized 5,000 shares, no
shares issued and outstanding............................. -- --
Common stock, $1 par value. Authorized 60,000 shares, issued
and outstanding 40,281 shares............................. 40,281 40,281
Additional paid-in capital.................................. 281,677 281,677
Less treasury securities, 656 common shares................. (7,702) (7,702)
Retained earnings........................................... 107,524 107,524
-------- --------
Total............................................. 421,780 421,780
-------- --------
Total capitalization.............................. $887,678 $889,178
======== ========
</TABLE>
- ---------------
(1) The Company's majority-owned subsidiary, M-I, is owned 64 percent by Smith
and 36 percent by Halliburton Company. The "as adjusted" amounts reflect the
contribution by the minority interest partner of amounts required to retire
its portion of the aggregate principal amount of indebtedness outstanding
under the M-I bank credit facility anticipated to be repaid with the
proceeds of the Offering.
9
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company for each of the
five years in the period ended December 31, 1996 have been derived from the
audited consolidated financial statements of the Company. The selected
consolidated financial data for the six months ended June 30, 1996 and 1997 have
been derived from the unaudited consolidated financial statements of the
Company, which, in the opinion of management, reflect all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation of the interim periods. The following data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ---------------------
1992 1993 1994(1) 1995 1996 1996 1997
-------- -------- -------- -------- ---------- -------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues........................ $210,669 $220,712 $653,901 $874,544 $1,156,658 $509,092 $ 740,647
Cost of revenues................ 139,134 140,749 432,627 582,004 764,596 337,860 486,188
-------- -------- -------- -------- ---------- -------- ----------
Gross profit.................... 71,535 79,963 221,274 292,540 392,062 171,232 254,459
Operating expenses.............. 61,275 61,388 161,170 206,292 259,542 115,848 157,364
Litigation settlement(2)........ -- 19,900 -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ----------
Operating income (loss) from
continuing operations......... 10,260 (1,325) 60,104 86,248 132,520 55,384 97,095
Interest expense, net........... 10,103 2,202 8,572 12,238 16,445 6,803 11,247
Income tax provision
(benefit)..................... (1,007) 468 6,815 12,609 26,798 10,794 22,069
Minority interests.............. -- -- 8,838 15,809 24,833 9,858 18,737
-------- -------- -------- -------- ---------- -------- ----------
Net income (loss) from
continuing operations......... 1,164 (3,995) 35,879 45,592 64,444 27,929 45,042
Non-operating (income)
expense(3).................... 2,975 (72,323) -- -- -- -- --
Preferred stock dividends....... 1,740 868 -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ----------
Net income (loss) applicable to
common stock.................. $ (3,551) $ 67,460 $ 35,879 $ 45,592 $ 64,444 $ 27,929 $ 45,042
======== ======== ======== ======== ========== ======== ==========
Earnings (loss) per share:
From continuing operations.... $ (0.02) $ (0.13) $ 0.92 $ 1.16 $ 1.62 $ 0.70 $ 1.12
Net income.................... $ (0.10) $ 1.79 $ 0.92 $ 1.16 $ 1.62 $ 0.70 $ 1.12
BALANCE SHEET DATA
Current assets.................. $296,224 $255,847 $421,596 $485,291 $ 665,277 $603,355 $ 757,943
Total assets.................... 370,482 348,386 619,780 702,844 1,074,582 933,281 1,225,216
Current liabilities............. 167,752 79,970 164,247 185,289 300,501 234,937 318,938
Long-term debt.................. 46,000 46,000 115,000 117,238 228,443 216,348 291,896
Total debt...................... 149,343 46,702 130,852 142,385 303,426 248,813 372,748
Shareholders' equity............ 149,785 214,466 253,121 300,886 368,536 329,389 413,355
OTHER DATA
Depreciation and amortization... $ 22,737 $ 11,600 $ 21,802 $ 25,540 $ 31,601 $ 14,058 $ 21,632
Capital expenditures, net(4).... 14,912 8,100 13,705 25,084 61,247 24,451 30,927
</TABLE>
- ---------------
(1) On February 28, 1994, the Company acquired a 64 percent interest in M-I from
Dresser Industries, Inc. in exchange for consideration of $160.0 million.
(2) In September 1993, the Company agreed to settle a class action civil lawsuit
which alleged violations of Section 1 of the Sherman Act. The amount
recorded by the Company related to the cost of settlement, related legal
fees and other costs and expenses.
(3) Non-operating (income) expense for 1993 includes a $1.3 million charge
related to the effect of a change in accounting principle and a $73.6
million gain associated with the sale of discontinued operations. The 1992
amount relates to losses from discontinued operations.
(4) Capital expenditures are presented net of any proceeds arising from
lost-in-hole sales and sales of fixed asset equipment replaced.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" is provided to assist readers in understanding the
Company's financial performance during the periods presented and significant
trends which may impact the future performance of the Company. It should be read
in conjunction with the consolidated financial statements of the Company and the
related notes incorporated by reference herein.
The Company's primary business is the manufacture and sale of premium
products and services to the oil and gas industry's exploration and production
sectors. The Company's worldwide operations are largely driven by the level of
exploration and production activity in major energy producing areas and the
depth and drilling conditions of these projects. The level of worldwide drilling
activity is influenced by the prices of oil and natural gas but may also be
affected by political actions and uncertainties, environmental concerns, capital
expenditure plans of exploration and production companies and the overall level
of global economic growth and activity.
Management anticipates that total worldwide drilling activity will continue
to increase from historical activity levels, with the 1997 rate of growth
comparable to the 1996 growth rate. The average worldwide rig count increased
approximately 7 percent from 1995 to 1996 due to strong North American growth
which was driven by higher U.S. land rig activity and record Canadian activity
levels. The 1997 worldwide rig count is expected to increase from 1996 levels
due to higher North American rig count activity. Management believes that the
Company's operations are well positioned to benefit from the expected increase
in North American oil and gas drilling activity.
Management also believes, with the increase in offshore rig dayrates and
other fixed costs, operators are shifting exploration and production spending
toward value-added, technology-based products which reduce the cost of their
overall drilling programs. Additionally, the significant level of extended-reach
drilling programs, which often involve more difficult drilling conditions,
increases the need for efficient products and services which reduce both
drilling time and formation damage. The Company continues to focus on investing
in the development of technology-based products that considerably improve the
drilling process through increased efficiency and rates of penetration.
Management believes the overall savings realized by the use of the Company's
premium products, such as polycrystalline diamond drill bits, diamond enhanced
three-cone drill bits and synthetic drilling fluids, compensate for the higher
costs of these products over their non-premium counterparts.
11
<PAGE> 12
RESULTS OF OPERATIONS
Revenues
The Company operates through five business units which market the Company's
products and services throughout the world. The following table presents revenue
and average rig count information for the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
1996 1997 1996 1997
---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
--------- ---- --------- ---- --------- ---- --------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues by Business Unit:
M-I Fluids...................... $157,235 58 $214,714 56 $290,934 57 $420,815 57
M-I SWACO....................... 18,989 7 31,872 8 36,013 7 59,410 8
Smith Tool...................... 46,494 17 59,799 16 91,721 18 118,041 16
Smith Drilling & Completions.... 33,799 13 57,156 15 64,574 13 104,894 14
Smith Diamond Technology........ 13,755 5 19,622 5 25,850 5 37,487 5
-------- --- -------- --- -------- --- -------- ---
Total................... $270,272 100 $383,163 100 $509,092 100 $740,647 100
======== === ======== === ======== === ======== ===
Revenues by Area:
U.S............................. $116,760 43 $152,754 40 $212,142 42 $288,459 39
Export.......................... 17,451 7 24,948 6 30,572 6 45,208 6
Non-U.S......................... 136,061 50 205,461 54 266,378 52 406,980 55
-------- --- -------- --- -------- --- -------- ---
Total................... $270,272 100 $383,163 100 $509,092 100 $740,647 100
======== === ======== === ======== === ======== ===
Average Active Rig Count:
U.S............................. 760 934 734 895
Canada.......................... 150 255 243 325
Non-North America............... 794 812 787 808
-------- -------- -------- --------
Total................... 1,704 2,001 1,764 2,028
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
-------------- -------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- ---------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues by Business Unit:
M-I Fluids................................... $344,027 53 $495,135 57 $ 669,585 58
M-I SWACO.................................... 38,570 6 61,259 7 82,741 7
Smith Tool................................... 154,912 23 167,116 19 196,691 17
Smith Drilling & Completions................. 92,095 14 115,245 13 148,722 13
Smith Diamond Technology..................... 24,297 4 35,789 4 58,919 5
-------- --- -------- --- ---------- ---
Total................................ $653,901 100 $874,544 100 $1,156,658 100
======== === ======== === ========== ===
Revenues by Area:
U.S.......................................... $280,435 43 $358,392 41 $ 451,147 39
Export....................................... 56,421 9 50,454 6 71,470 6
Non-U.S...................................... 317,045 48 465,698 53 634,041 55
-------- --- -------- --- ---------- ---
Total................................ $653,901 100 $874,544 100 $1,156,658 100
======== === ======== === ========== ===
Average Active Rig Count:
U.S.......................................... 775 724 779
Canada....................................... 260 231 270
Non-North America............................ 734 758 793
-------- -------- ----------
Total................................ 1,769 1,713 1,842
======== ======== ==========
</TABLE>
12
<PAGE> 13
For the Three and Six Months Ended June 30, 1996 and 1997
M-I Fluids
M-I Fluids, a division of M-I, provides drilling fluid and completion fluid
systems, engineering and technical services to the oil and gas industry. M-I
Fluids revenues increased $57.5 million, or 37 percent, over the second quarter
of 1996 and $129.9 million, or 45 percent, from the first six months of 1996.
The majority of the revenue growth over the prior year relates to the
incremental revenues associated with the Anchor Drilling Fluids A.S. ("Anchor")
operations, which were acquired in June 1996, and the increased level of
deep-water drilling activity in the U.S. Gulf Coast area.
M-I SWACO
M-I SWACO, a division of M-I, manufactures and markets equipment and
services for solids control, pressure control, rig instrumentation and waste
management. M-I SWACO revenues increased $12.9 million and $23.4 million from
the second quarter and first six months of 1996, respectively. Increased market
share in Latin America coupled with higher drilling activity in the U.S., Canada
and Latin America contributed the majority of the revenue variance.
Smith Tool
Smith Tool manufactures and sells three-cone bits for use in the oil and
gas industry and in mining applications. Smith Tool revenues increased $13.3
million from the second quarter of 1996 and $26.3 million from the first six
months of 1996. Increased unit sales and a favorable shift in the sales mix
toward premium bits accounted for the revenue growth over the prior year
periods. On a geographic basis, revenue growth in the U.S. and Canada, related
to higher rig activity, accounted for the majority of the increase from the
second quarter of 1996. Increased North America revenues, attributable to higher
activity levels, and higher Europe/ Africa revenues, related to the introduction
of the new Magnum(TM) Bit line in the North Sea area, accounted for the majority
of the growth over the first half of 1996.
Smith Drilling & Completions
Smith Drilling & Completions manufactures and markets products and services
used in the oil and gas industry for drilling, workover, well completion and
well re-entry. Smith Drilling & Completions' revenues increased $23.4 million,
or 69 percent, over the second quarter of 1996 and $40.3 million, or 62 percent,
from the first six months of 1996. The increase is attributable to the
incremental revenues associated with The Red Baron (Oil Tools Rental) Ltd.'s
("Red Baron") and the Tri-Tech Fishing Services, L.L.C.'s operations, which were
acquired in October 1996 and April 1997, respectively. Higher levels of re-entry
drilling activity in the U.S. Gulf Coast area also contributed to the growth
over the prior year.
Smith Diamond Technology
Smith Diamond Technology manufactures and markets shear bits featuring
cutters made of polycrystalline diamond or natural diamond at its GeoDiamond
division. Smith Diamond Technology also manufactures polycrystalline diamond and
cubic boron nitride at its MegaDiamond and Supradiamant subsidiaries. These
ultrahard materials are used in the Company's three-cone and diamond drill bits
and in other specialized cutting tools. Smith Diamond Technology revenues
increased $5.9 million, or 43 percent, over the second quarter of 1996 and $11.6
million, or 45 percent, from the first six months of 1996. Higher unit sales in
Latin America, Europe/Africa and the Far East, related to increased market
penetration, higher activity levels and continued expansion into new markets,
account for the year-over-year revenue growth.
13
<PAGE> 14
For the Fiscal Years Ended December 31, 1994, 1995 and 1996
M-I Fluids
M-I Fluids, a division of the M-I business acquired in February 1994,
contributed 58 percent of the Company's revenues in 1996. M-I Fluids' 1996
revenues increased $174.5 million, or 35 percent, from 1995, and 1995 revenues
increased $151.1 million, or 44 percent, from 1994. The increase over 1995
relates primarily to the incremental revenues associated with the Anchor
operations, which were acquired in June 1996, and an increased level of
deep-water drilling activity in the U.S. Gulf Coast area. The revenue increase
over 1994 was primarily attributable to the inclusion in 1995 of a full year's
revenues for acquired operations and higher sales volumes.
M-I SWACO
M-I SWACO's 1996 revenues increased $21.5 million, or 35 percent, from
1995, and 1995 revenues increased $22.7 million, or 59 percent, from 1994. The
increase over 1995 relates to increased market penetration in Latin America
combined with higher drilling activity in Latin America and the U.S. The revenue
increase over 1994 was attributable to increased market penetration and drilling
activity levels in Latin America.
Smith Tool
Smith Tool's 1996 revenues increased $29.6 million, or 18 percent, from
1995, and 1995 revenues increased $12.2 million, or 8 percent, from 1994. The
increase over 1995 relates to improved pricing, increased unit sales and a
favorable shift in the sales mix toward premium bits. The majority of the
increase from 1995 was generated in the United States; however, the introduction
of the Magnum line of premium bits in the North Sea contributed to a significant
increase in Europe/Africa revenues. Again, higher unit sales, improved pricing
in the U.S. and higher non-North American drilling activity levels account for
the majority of the revenue increase over 1994.
Smith Drilling & Completions
Smith Drilling & Completions' 1996 revenues increased $33.5 million over
1995, and 1995 revenues increased $23.2 million over 1994. The increase in
revenues over 1995 relates primarily to the increased level of re-entry activity
in the U.S. Gulf Coast area and the addition of the Red Baron operations, which
were acquired in October 1996. The variance over 1994 primarily relates to the
increased sales volumes associated with higher non-North American drilling
activity.
Smith Diamond Technology
Smith Diamond's revenues increased $23.1 million, or 65 percent, over 1995,
and 1995 revenues increased $11.5 million, or 47 percent, over 1994. Higher unit
sales, primarily in the United States and Latin America, driven by increased
market growth, new product introductions and continued expansion into markets
outside the U.S. account for the increase over 1995. The 47 percent increase
over 1994 relates to higher sales volumes in Latin America, Europe/Africa and
the Middle East and the inclusion of a full year's revenues for operations
acquired during 1994.
14
<PAGE> 15
For the periods indicated, the following table summarizes the results of
the Company and presents these results as a percentage of total revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
1996 1997 1996 1997
-------------- -------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- -------- --- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $270,272 100 $383,163 100 $509,092 100 $740,647 100
-------- --- -------- --- -------- --- -------- ----
Gross profit.............. 90,323 33 133,194 35 171,232 34 254,459 34
Operating expenses........ 59,989 22 81,124 21 115,848 23 157,364 21
-------- --- -------- --- -------- --- -------- ----
Income before interest and
taxes................... 30,334 11 52,070 14 55,384 11 97,095 13
Interest expense, net..... 3,764 1 6,013 2 6,803 2 11,247 2
-------- --- -------- --- -------- --- -------- ----
Income before income taxes
and minority
interests............... 26,570 10 46,057 12 48,581 9 85,848 11
-------- --- -------- --- -------- --- -------- ----
Income tax provision...... 5,779 2 12,102 3 10,794 2 22,069 3
-------- --- -------- --- -------- --- -------- ----
Income before minority
interests............... 20,791 8 33,955 9 37,787 7 63,779 8
Minority interests........ 5,810 2 10,026 3 9,858 2 18,737 2
-------- --- -------- --- -------- --- -------- ----
Net income...... $ 14,981 6 $ 23,929 6 $ 27,929 5 $ 45,042 6
======== === ======== === ======== === ======== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
-------------- -------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- ---------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $653,901 100 $874,544 100 $1,156,658 100
-------- --- -------- --- ---------- ---
Gross profit.............................. 221,274 34 292,540 33 392,062 34
Operating expenses........................ 161,170 25 206,292 23 259,542 22
-------- --- -------- --- ---------- ---
Income before interest and taxes.......... 60,104 9 86,248 10 132,520 12
Interest expense, net..................... 8,572 1 12,238 1 16,445 2
-------- --- -------- --- ---------- ---
Income before income taxes and minority
interests............................... 51,532 8 74,010 9 116,075 10
Income tax provision...................... 6,815 1 12,609 2 26,798 2
-------- --- -------- --- ---------- ---
Income before minority interests.......... 44,717 7 61,401 7 89,277 8
Minority interests........................ 8,838 1 15,809 2 24,833 2
-------- --- -------- --- ---------- ---
Net income...................... $ 35,879 6 $ 45,592 5 $ 64,444 6
======== === ======== === ========== ===
</TABLE>
Three and Six Months Ended 1997 Versus Three and Six Months Ended 1996
Total revenues increased $112.9 million, or 42 percent, from the prior year
quarter and $231.6 million, or 45 percent, over the first six months of 1996 as
the Company experienced growth across all business units and geographic areas.
Increased drilling activity levels, particularly deepwater and re-entry activity
in the Gulf Coast area, and the addition of acquired operations contributed the
majority of the variance. The impact of the acquisitions of Anchor and Red
Baron, which each had significant operations in the Eastern Hemisphere, resulted
in the Company's revenues outside the U.S. increasing from 58 percent of total
revenues for the first six months of 1996 to 61 percent of total revenues for
the first six months of 1997.
Gross profit increased $42.9 million and $83.2 million from the second
quarter and first six months of 1996, respectively. The increase in gross profit
over the second quarter of 1996 resulted in a 2 percentage point improvement in
the Company's gross profit margin over the same period. The variance over the
prior year quarter is attributable to the favorable impact of acquired
operations and certain price increases enacted during the year.
15
<PAGE> 16
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased $21.1 million over the second quarter of 1996
and $41.5 million from the first half of 1996; however, as a percentage of
revenues, operating expenses for the six month period experienced, a 2
percentage point improvement over the first half of 1996. The dollar variance
over the first six months of 1996 relates primarily to increased variable costs
attributable to the higher level of revenues. Incremental costs associated with
the acquired operations, for which immaterial amounts were included in the first
half of 1996, also contributed to the year-over-year dollar variance.
Net interest expense, which represents interest expense less interest
income, increased $2.2 million and $4.4 million from the second quarter and
first half of 1996, respectively. The increase relates to the higher level of
borrowings to fund business acquisitions and finance general working capital
needs, which increased as a result of the revenue growth experienced by the
Company.
The Company's effective tax rate for the second quarter and first six
months of 1997 approximated 26 percent, which is higher than the rate for the
comparable periods in the prior year and lower than the U.S. statutory rate. The
effective rate increase over the prior year relates primarily to increased
profitability in tax jurisdictions with higher statutory rates. The effective
rate was lower than the statutory rate, due primarily to the utilization of U.S.
net operating loss carryforwards and alternative minimum tax credits.
Minority interests represent the share of M-I's profits associated with the
36 percent minority partner's interest in those operations and, to a lesser
extent, minority interests in investments in other joint ventures held by M-I.
Minority interests increased $4.2 million and $8.9 million from the second
quarter and first half of 1996 due to the increased profitability of the M-I
operations.
1996 Versus 1995
Total revenues for 1996 increased $282.1 million, or 32 percent, from the
prior year with the Company experiencing growth across all business units and
geographic areas. The variance over the prior year is attributable to the
increased level of deep-water and re-entry drilling activity in the U.S. Gulf
Coast area and the incremental revenues associated with operations acquired
during 1996. The impact of the current year acquisitions, which had significant
operations in the Eastern Hemisphere, resulted in a shift in the Company's
non-U.S. revenues from 59 percent of total revenues in 1995 to 61 percent of
total revenues in 1996.
Gross profit increased $99.5 million, or 34 percent, from the prior year.
The higher gross profit resulted in an increase in the Company's gross profit
margin from 33 percent in 1995 to 34 percent in 1996. The improvement in margins
primarily resulted from the revenue growth and related cost efficiencies
generated by the Smith Diamond operations, which were formed in 1995.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased $53.3 million or 26 percent from the prior
year; however, as a percentage of revenues, operating expenses decreased from 23
percent in 1995 to 22 percent in 1996. The increase in absolute dollars is due
to increased variable costs associated with the higher level of revenues and
incremental costs associated with the acquired business operations for which no
amounts were included in the prior year.
Net interest expense, which represents interest expense less interest
income, increased $4.2 million over the prior year. The increase in net interest
expense relates to the higher level of borrowings to fund the business
acquisitions. To a lesser extent, borrowings required to finance general working
capital needs, which increased as a result of the revenue growth experienced by
the Company, also contributed to the higher net interest expense amounts.
The effective tax rate for the year approximated 23 percent which is higher
than the prior year's effective rate and lower than the U.S. statutory rate. The
effective tax rate was higher than the prior year's rate and lower than the
statutory rate due primarily to the impact of U.S. net operating loss
carryforwards utilized.
Minority interests represent the share of M-I's profits associated with the
36 percent minority partner's interest in those operations and, to a lesser
extent, minority interests in investments in other joint ventures held
16
<PAGE> 17
by M-I. Minority interests increased $9.0 million from the prior year due to the
increased profitability of the M-I operations.
1995 Versus 1994
Total revenues for 1995 increased $220.6 million, or 34 percent, from 1994.
The increase primarily related to the inclusion of a full year's revenues for
operations acquired in 1994. Higher non-U.S. drilling activity, primarily in
Latin America, which experienced double digit growth, increased unit sales and
improved pricing, also contributed to the increase over 1994.
Gross profit increased $71.2 million, or 32 percent, from 1994. The
increase was due primarily to the impact of acquired operations. In addition,
the increase in gross profit reflected higher non-U.S. volumes, due to the
higher level of drilling activity, and higher sales in the U.S.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased $45.1 million or 28 percent from the prior
year; however, as a percentage of revenues, operating expenses decreased from
1994. The increase in absolute expenses is due primarily to increased variable
costs related to the higher level of revenues and incremental expenses
associated with the operations acquired. In addition, the increase in operating
expenses reflects the establishment of the Smith Diamond Technology business
unit, which was formed in 1995, and the expansion of M-I operations in Latin
America.
Net interest expense, which represents interest expense less interest
income, increased $3.6 million from $8.6 million in 1994 to $12.2 million in
1995. The increase in net interest expense was due to higher debt levels
necessary to fund working capital requirements and business acquisitions.
The effective tax rate for the year approximated 17 percent, which is lower
than the statutory rate and higher than the prior year's effective rate of 13
percent. The effective tax rate for the year was lower than the statutory rate
and higher than the prior year's rate due primarily to the impact of U.S. net
operating loss carryforwards utilized.
Minority interests represent the share of M-I's profits associated with the
36 percent minority partner's interest in those operations and, to a lesser
extent, minority interests in investments in other joint ventures held by M-I.
Minority interests increased $7.0 million from $8.8 million in 1994 to $15.8
million in 1995. The increase in minority interests was due to the higher level
of M-I's earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at June 30, 1997. Working
capital at June 30, 1997 increased $74.2 million, or 20 percent, from December
31, 1996.
The Company's primary internal source of liquidity is cash flow generated
from operations. External sources of liquidity include debt and, if needed,
equity financing. The Company has U.S. and non-U.S. borrowing facilities for
operating and financing needs. During 1997, the Company and M-I amended their
revolving line of credit agreements increasing available borrowing capacity to
$200 million. At June 30, 1997, the Company had approximately $25 million of
funds available under its $200 million and other long-term revolving line of
credit facilities. Additionally, the Company had approximately $37 million of
non-U.S. short-term borrowing facilities with various banks, which had available
borrowing capacity of $20 million. The Company believes funds generated from
operations, cash on hand and amounts available under existing credit facilities
will be sufficient to finance capital expenditures and other working capital
needs for the foreseeable future.
The Company completed several acquisitions during the first six months of
1997, and management intends to continue evaluating opportunities to acquire
products or businesses complementary to the Company's operations. These
acquisitions, if they arise, may involve the use of cash or, depending on the
size and terms of the acquisition, may require debt or equity financing.
17
<PAGE> 18
BUSINESS
The Company is a leading worldwide supplier of premium products and
services to the oil and gas exploration and production industry. The Company
provides a comprehensive line of technologically-advanced products and
engineering services, including drilling and completion fluid systems, solids
control equipment, waste management services, three-cone drill bits, diamond
drill bits, fishing services, drilling tools, underreamers, sidetracking systems
and liner hangers. Demand for the Company's products and services is generally
determined by the level of exploration and production activity in major energy
producing areas and the depth and drilling conditions of these projects. From
1993 to 1996, the Company's revenues and operating income increased from $220.7
million to $1,156.7 million and from $18.6 million to $132.5 million,
respectively, representing compounded annual growth rates of 74 percent and 92
percent, respectively. From the first six months of 1996 to the first six months
of 1997, revenues increased 46 percent to $740.6 million and operating income
increased 75 percent to $97.1 million. The Company was incorporated in the State
of California in January 1937 and reincorporated under Delaware law in May 1983.
The Company's executive offices are headquartered at 16740 Hardy Street,
Houston, Texas 77032 (telephone number 281/443-3370).
M-I FLUIDS
Through a division of its majority-owned subsidiary, the Company is the
leading worldwide provider of drilling fluids systems, products and technical
services to end users engaged in drilling oil, natural gas and geothermal wells.
Drilling fluid products and systems are used to cool and lubricate the bit
during drilling operations, contain formation pressures, suspend and remove rock
cuttings from the hole and maintain the stability of the wellbore. Technical
services are provided to ensure that the products and systems are applied
effectively to optimize drilling operations. These services include recommending
products and services during the well planning phase; testing drilling fluid
properties and recommending adjustments during the drilling phase; and analyzing
well results after the project is complete to improve the performance of wells
to be drilled in the future.
M-I Fluids offers water-base, oil-base and synthetic-base drilling fluid
systems. Water-base drilling fluids are the most widely utilized system around
the world, having application in both land and offshore environments. They are
typically comprised of an engineered blend of weighting materials, which are
used to contain formation pressures, as well as a broad range of chemical
additives, which yield specific drilling performance features required for a
given drilling environment. Oil-base drilling fluids are used to drill water-
sensitive shales, to reduce torque and drag and to drill in areas where stuck
pipe is likely to occur. These systems are low viscosity systems that sharply
increase rates of penetration in certain drilling areas of the world.
Synthetic-base drilling fluids are used in similar drilling environments and
often exceed the superior performance characteristics of oil-base drilling
fluids.
In June 1996, M-I completed the acquisition of Anchor, one of the largest
suppliers of products and services in the global drilling fluids industry. The
acquisition strengthened M-I's market position in the Eastern Hemisphere
drilling fluids market, most notably in the North Sea and West African markets,
expanded M-I's offering in synthetic and advanced water-base fluid designs and
provided an additional laboratory and technical support facility to complement
its facility in Houston, Texas.
During 1996, M-I also completed the construction of completion fluid mixing
and storage facilities at several of its major U.S. supply bases to serve the
Gulf Coast completion fluid market. Completion fluids, also known as clear brine
fluids, are solids-free, clear salt solutions that have high specific gravities.
Combined with a range of specialty chemicals, these fluids are used by operators
in the oil and gas industry to control bottom-hole pressures and to meet a
well's specific corrosion, inhibition, viscosity and fluid loss requirements
during the completion and workover phases. These systems are specially designed
to maximize well production by minimizing formation damage that can be caused by
solids-laden systems. M-I provides a complete line of completion fluid products
and services, including a full range of low- and high-density brines, specialty
chemicals, filtration and chemical treatment services used in the reclamation of
these specialized fluids and technical engineering and laboratory support
services.
18
<PAGE> 19
M-I SWACO
Through M-I's SWACO division, a complete line of solids control, pressure
control, rig instrumentation and waste management services are offered to the
worldwide drilling market on both a sale and rental basis. Key products in the
pressure control line include the D-Gasser and Super Choke, which hold dominant
market positions, as well as the Super Mud Gas Separator, which protects against
the large pressure surges encountered in underbalanced drilling operations used
in horizontal wells. The solids control product line of shakers, hydroclones and
centrifuges has been designed to offer operators the option to drill "dry
locations", where drilling fluid waste is minimized and handled in an
environmentally safe manner. Swaco's rig instrumentation line features the
SMART(TM) and GEO-SMART Data Acquisition Systems, advanced monitoring systems
that measure, monitor and display the drilling status of a well with high speed
accuracy.
SMITH TOOL
The Smith Tool business unit is a worldwide leader in the design,
manufacture and marketing of drill bits used in drilling oil and gas wells and
in mining applications under the Smith Tool(TM) and Smith Mining(TM) product
lines. Most bits manufactured by Smith Tool are three-cone drill bits for the
petroleum industry, which range in size from 3 1/2 to 28 inches in diameter.
These three-cone bits are comprised of two major components -- the body and the
cones, which contain different types of pointed structures referred to as
"cutting structures" or "teeth". The cutting structures are either an integral
part of the steel cone with a hardmetal applied surface (referred to as "milled
tooth") or made of an inserted material (referred to as "insert") which is
usually tungsten carbide. In the last few years, there has been a significant
increase in demand for drill bits in which the tungsten carbide insert is coated
with polycrystalline diamond ("PDC"). Products with diamond enhanced inserts
last longer and increase penetration rates, which decreases overall drilling
costs in certain formations. Smith Tool is the leading provider of drill bits
utilizing diamond enhanced insert technology.
SMITH DRILLING & COMPLETIONS
The Smith Drilling & Completions business unit manufactures and markets
product lines used in the oil and gas industry under the following names:
Drilco/Grant, A-Z/Servco, Smith Red Baron, Smith Tri-Tech, TIPSA and Lindsey
Completions Systems. In general, all product lines are manufactured, marketed,
serviced, sold and maintained by the same management, operations and sales
personnel operating on a worldwide basis. Houston, Texas is the sales,
management, engineering and manufacturing headquarters for the business unit.
The Drilco/Grant and TIPSA product groups include rotating drilling heads,
automatic connection torque monitoring and control systems, downhole drilling
tools, tubular drill string components, drilling tool and production string
inspection products and services and machine shop services. The rotating
drilling heads are rented and sold to the end users for use in air drilling
areas and in underbalanced drilling areas. The downhole tools are sold and
rented to the end users and include stabilizers to centralize the drill string
and reamers to maintain a uniform hole diameter. The tubular products,
manufactured under the Drilco/Grant product group, include (i) drill collars to
provide drilling weight to the bit, (ii) Hevi-Wate(TM ) drill pipe to provide
stress transition between drill collars and conventional drill pipe or to
provide drilling weight to the bit in horizontal drilling, (iii) connecting subs
to attach string members of differing diameters and connections and (iv) kellys
to rotate the drill string on conventional drilling rigs.
The A-Z/Servco, Smith Red Baron and Smith Tri-Tech product groups provide
downhole remedial re-entry and fishing tools and services for use in connection
with the drill string for specialized drilling and workover operations. Products
include the patented Reamaster(TM) and Underream-While-Drilling System(TM) which
allow two operations to be performed simultaneously. The product group also
includes the patented Millmaster(TM) Performance Milling System, the patented
Packstock(TM), Anchorstock(TM) Performance Window Cutting System and the newly
developed Trackmaster(TM). These products provide a sidetrack or section milling
operation to remove a section of casing permitting the well to be re-drilled
using the existing casing slot. In addition, the product groups provide hole
opening and underreaming services to enlarge the wellbore to allow for annular
area for proper cementing of the casing or for gravel pack displacement; packer
milling to
19
<PAGE> 20
remove production packers; conventional milling to remove wellbore obstructions;
mechanical, hydraulic and explosive pipe cutting to remove casing during a well
abandonment; and fishing services to remove wellbore obstructions during
workover operations, including coil tubing operations.
The Lindsey Completion Systems group manufactures, markets and services
pocket slip liner hanger systems, liner hangers and accessory completion
equipment used in the completion of a wellbore.
SMITH DIAMOND TECHNOLOGY
Smith Diamond Technology designs, manufactures and markets shear drill bits
featuring cutters made of polycrystalline diamond or natural diamond. The
Company manufactures polycrystalline diamond and cubic boron nitride at its
MegaDiamond and Supradiamant subsidiaries. These ultrahard materials are used in
the Company's three-cone and diamond drill bits and in other specialized cutting
tools. MegaDiamond developed and uses patented processes for applying diamonds
to a curved surface with multiple transition layers. Smith is the only oilfield
equipment manufacturer that develops, manufactures and markets its own synthetic
diamond materials, which provide the Company a cost and technological advantage.
In addition, the Company's in-house diamond research, engineering and
manufacturing capabilities enhance the Company's ability to develop the
application of diamond technology across other Smith product lines and into
several non-energy cutting tool markets. Diamond enhanced products last longer
and increase penetration rates, which decreases overall drilling costs in
certain formations. The Company believes that its ability to develop specialized
diamond inserts for specific applications has and continues to provide new
business opportunities such as Diamond Enhanced Insert roller cone bits and
Impax(TM) hammer bits as well as non-energy cutting tool applications.
20
<PAGE> 21
DESCRIPTION OF NOTES
The Notes will be issued pursuant to an Indenture dated as of September 8,
1997 (the "Indenture") between the Company and The Bank of New York, as trustee
(the "Trustee"), a copy of the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Notes and the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, the Notes and the Indenture, including the definitions therein of certain
capitalized terms used but not defined herein. The Indenture provides for the
issuance from time to time of unsecured debentures, notes (including the Notes
offered hereby) or other evidences of indebtedness by the Company ("Securities")
in an unlimited amount. Additional Securities may be issued under the Indenture
from time to time. Numerical references in parentheses below are to sections in
the Indenture.
GENERAL
Each Note will mature on September 15, 2007 and will bear interest at the
rate per annum stated on the cover page hereof from September 15, 1997 payable
semiannually on March 15 and September 15 of each year, commencing March 15,
1998, to the person in whose name the Note is registered at the close of
business on the March 1 or September 1 preceding such interest payment date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The aggregate principal amount of the Notes that may be issued will be
limited to $150,000,000. Principal and interest will be payable at the offices
of the Trustee and the Paying Agent in the event the Notes do not remain in
book-entry form. In addition, in the event the Notes do not remain in book-entry
form, at the option of the Company, payment of interest will be made by check
mailed to the address of the person entitled thereto as it appears in the
register of the Notes (the "Note Register") maintained by the registrar. In the
event the Notes do not remain in book-entry form, the Notes will be transferable
and exchangeable at the office of the registrar and any co-registrar and will be
issued in fully registered form, without coupons, in denominations of $1,000 and
any whole multiple thereof. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection with certain
transfers and exchanges.
RANKING
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with the Company's obligations under all existing
and future senior unsecured indebtedness of the Company (including indebtedness
incurred under the Company's bank credit facilities) and senior in right of
payment to all existing and future indebtedness of the Company that is, by its
terms, expressly subordinated to the Notes. See "Risk Factors -- Holding Company
Structure and Subordination of Notes".
REDEMPTION
The Notes will be redeemable in whole or in part, at the option of the
Company at any time, at a redemption price equal to the greater of (i) 100% of
their principal amount or (ii) the sum of the present values of the remaining
scheduled payments of principal and interest thereon discounted to the date of
redemption on a semiannual basis (assuming a 360-day year consisting of twelve
30-day months) at the Treasury Yield plus 20 basis points, plus in the case of
each clause (i) and (ii) accrued interest to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes that would be utilized, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
Notes. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated
or, if such firm is unwilling or unable to select
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the Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such redemption date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Trustee obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such Quotations. "Reference Treasury Dealer
Quotations" means, with respect to each Reference Treasury Dealer and any
redemption date, the average as determined by the Trustee of the bid and asked
prices for the Comparable Treasury Issue (expressed in each case as a percentage
of its principal amount) quoted in writing to the Trustee by the Reference
Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption
date.
"Reference Treasury Dealer" means (i) Morgan Stanley & Co. Incorporated,
ABN AMRO Chicago Corporation and Chase Securities Inc. and their respective
successors, provided however, that if any of the foregoing shall cease to be a
primary U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), the Company shall substitute therefor another Primary Treasury Dealer
and (ii) any other Primary Treasury Dealer selected by the Trustee after
consultation with the Company.
Holders of the Notes to be redeemed will receive notice thereof by
first-class mail at least 30 and not more than 60 days prior to the date fixed
for redemption.
CERTAIN COVENANTS OF THE COMPANY
The Indenture governing the Notes does not contain any restrictions on the
payment of dividends or any financial covenants. The Indenture does not contain
provisions which would afford holders of the Notes protection in the event of a
transfer of assets to a subsidiary and incurrence of unsecured debt by such
subsidiary, or in the event of a decline in the Company's credit quality
resulting from highly leveraged or other similar transactions involving the
Company.
Limitation on Indebtedness Secured by a Lien. The Indenture provides that
neither the Company nor any Subsidiary will create, assume, guarantee or suffer
to exist any Indebtedness secured by any lien, pledge, mortgage, security
interest, conditional sale or other title retention agreement or other similar
encumbrance ("Lien") on any Principal Property of the Company or a Subsidiary
unless the Company secures or causes such Subsidiary to secure the Securities
equally and ratably with, or prior to, such secured Indebtedness. This
restriction will not apply to Indebtedness secured by (i) Liens on any Principal
Property of any Person which exists prior to the time (A) such Person becomes a
Subsidiary, (B) such Person merges into or consolidates with a Subsidiary of the
Company or (C) a Subsidiary of the Company merges into or consolidates with such
Person in a transaction in which such Person becomes a Subsidiary of the
Company, provided that such Liens were not created in anticipation of or in
connection with any transaction described in clauses (A), (B) or (C) above; (ii)
Liens in favor of the Company or a Subsidiary; (iii) Liens on any Principal
Property of the Company or a Subsidiary in favor of the United States of America
or any state or political subdivision thereof, or in favor of any other country
or any political subdivision thereof, to secure payment pursuant to any contract
or statute or to secure any Indebtedness incurred for the purpose of financing
all or part of the purchase price or the cost of construction or improvement of
the Principal Property subject to such Liens; (iv) Liens on any Principal
Property subsequently acquired by the Company or any Subsidiary,
contemporaneously with such acquisition or within 180 days thereafter, to secure
or provide for the payment of any part of the purchase price, construction or
improvement of such Principal Property, or Liens assumed by the Company or any
Subsidiary upon any Principal Property subsequently acquired by the Company or
any Subsidiary which were existing at the time of such acquisition, provided
that the amount of any Indebtedness secured by any such
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Lien created or assumed does not exceed the cost to the Company or Subsidiary,
as the case may be, of the Principal Property covered by such Lien; (v) Liens
existing on the date of issuance of the Notes; (vi) Liens representing the
extension, renewal or refunding of any Lien referred to in the foregoing clauses
(i) through (v), inclusive, and the Indebtedness secured thereby; (vii) Liens
for taxes and governmental charges not yet due or which are being contested in
good faith; (viii) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements; and (ix) any other Lien, other than Liens referred to in the
foregoing clauses (i) through (viii), inclusive, so long as the aggregate of all
Indebtedness secured by Liens pursuant to this clause (ix) and the aggregate
Value of the Sale and Lease-Back Transactions in existence at that time (not
including those in connection with which the Company has voluntarily retired
funded Indebtedness as provided in the Indenture) does not exceed 10% of
Consolidated Net Tangible Assets. (Section 10.7).
Limitation on Sale and Lease-Back Transactions. The Indenture provides
that neither the Company nor any Subsidiary will enter into any Sale and
Lease-Back Transaction with respect to any Principal Property unless either (i)
the Company or such Subsidiary would be entitled, pursuant to the foregoing
covenant relating to "Limitation on Indebtedness Secured by a Lien", to create,
assume, guarantee or suffer Indebtedness secured by a Lien under any provision
of clauses (i) through (v) in the preceding paragraph or to incur Indebtedness
in a principal amount equal to or exceeding the Value of such Sale and
Lease-Back Transaction secured by a Lien on the property to be leased without
equally and ratably securing the Securities or (ii) the Company or such
Subsidiary, within 120 days after the effective date of such transaction,
applies an amount equal to the greater of (x) the net proceeds of the sale of
the property subject to the Sale and Lease-Back Transaction and (y) the Value of
such Sale and Lease-Back Transaction, to the voluntary retirement of
Indebtedness of the Company (which may include the Securities). (Section 10.8).
Certain Definitions. "Consolidated Net Tangible Assets" is defined in the
Indenture to mean total consolidated assets of the Company and its Subsidiaries,
less (i) current liabilities of the Company and its Subsidiaries, and (ii) the
net book amount of all intangible assets of the Company and its Subsidiaries.
"Capital Stock" is defined in the Indenture to mean any and all shares,
interests, participations or other equivalents in the equity interest (however
designated) in any Person and any rights (other than debt securities convertible
into an equity interest), warrants or options to subscribe for or to acquire an
equity interest in such Person.
"Indebtedness" is defined in the Indenture to mean (i) long-term
liabilities representing borrowed money or purchase money obligations as shown
on the liability side of a balance sheet (other than liabilities evidenced by
obligations under leases), (ii) indebtedness secured by any Lien existing on
property owned subject to such Lien, whether or not such secured indebtedness
has been assumed and (iii) contingent obligations in respect of, or to purchase
or otherwise acquire, any such indebtedness of others described in the foregoing
clauses (i) or (ii) above, including guarantees and endorsements (other than for
purposes of collection in the ordinary course of business of any such
indebtedness).
"Person" is defined in the Indenture to mean any individual, corporation,
partnership, joint venture, association, joint-stock company, trust, limited
liability company, unincorporated organization or any other entity.
"Principal Property" is defined in the Indenture to mean any manufacturing
plant, processing plant or any mining facility or property owned or leased by
the Company or any Subsidiary, any Capital Stock or Indebtedness of a Subsidiary
or any other property or right owned by or granted to the Company or any
Subsidiary and used or held for use in any of the principal businesses conducted
by the Company or any Subsidiary, except for any such property or right which,
in the opinion of the Board of Directors of the Company as set forth in a Board
Resolution adopted in good faith, is not material to the total business
conducted by the Company and its Subsidiaries considered as one enterprise.
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"Sale and Lease-Back Transaction" is defined in the Indenture to mean the
leasing by the Company or a Subsidiary for a period of more than three years of
any Principal Property which has been sold or is to be sold or transferred by
the Company or any such Subsidiary to any party (other than the Company or a
Subsidiary).
"Significant Subsidiary" is defined in the Indenture to mean any Subsidiary
(i) which, as of the close of the fiscal year of the Company immediately
preceding the date of determination, contributed more than 10% of the
consolidated net operating revenues of the Company and its Consolidated
Subsidiaries for such year or (ii) the total net tangible assets of which as of
the close of such immediately preceding fiscal year exceeded 10% of the
Consolidated Net Tangible Assets of the Company and its Consolidated
Subsidiaries.
"Subsidiary" of a Person is defined in the Indenture to mean (a) a
corporation, a majority of whose Voting Stock is at the time, directly or
indirectly, owned by any Person, by one or more subsidiaries of such Person or
by such Person and one or more subsidiaries of such Person, (b) a partnership in
which such Person or a subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership, but only if
such Person or its subsidiary is entitled to receive more than 50% of the assets
of such partnership upon its dissolution, or (c) any other Person (other than a
corporation or partnership) in which such Person, directly or indirectly, at the
date of determination thereof, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Value" is defined in the Indenture to mean, with respect to any particular
Sale and Lease-Back Transaction, as of any particular time, the amount equal to
the greater of (i) the net proceeds of the sale or transfer of the property
leased pursuant to such Sale and Lease-Back Transaction and (ii) the fair value
in the opinion of the Board of Directors of the Company of such property at the
time of the Company's entering into such Sale and Lease-Back Transaction,
subject to adjustment at any particular time for the length of the remaining
initial lease term.
"Voting Stock" is defined in the Indenture to mean all classes of Capital
Stock of a Person then outstanding normally entitled to vote in elections of
directors or Persons performing similar functions, whether at all times or only
so long as no senior class of stock has such voting power by reason of any
contingency.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company may not consolidate with or merge
into any other corporation, or convey, transfer or lease its properties and
assets substantially as an entirety to any other party, unless, among other
things, (i) the corporation formed by such consolidation or into which the
Company is merged or the party which acquires by conveyance or transfer, or
which leases the properties and assets of the Company substantially as an
entirety, is organized and existing under the laws of the United States, any
State thereof or the District of Columbia and expressly assumes the Company's
obligations on the Securities and under the Indenture by means of an indenture
supplemental to the Indenture; and (ii) immediately after giving effect to such
transaction no Event of Default, and no event which, after notice or lapse of
time, or both, would become an Event of Default, shall have occurred and be
continuing. (Section 8.1).
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture to mean (i) default for 30
days in the payment of any interest upon the Securities; (ii) default in the
payment of the principal of or premium, if any, on the Securities when due
either at maturity or upon acceleration, redemption or otherwise; (iii) default
in the deposit of any sinking fund payment, when and as due by the terms of a
Security of that series; (iv) default by the Company in the performance of any
other of the covenants or warranties in the Indenture applicable to the Company
which shall not have been remedied for a period of 60 days after notice of
default; and (v) certain events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary. Within 90 days after the occurrence
of any default under the Indenture, the Trustee is required to notify the
Holders of the Securities of any default unless, in the case of any default
other than a default in the payment of principal of or premium, if any, or
interest on any Securities, a trust committee of the Board of Directors or
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Responsible Officers of the Trustee in good faith considers it in the interest
of the Holders of the Securities not to do so. (Section 5.1).
The Indenture provides that if an Event of Default, other than an Event of
Default as described in clause (v) in the above paragraph shall have occurred
and be continuing, either the Trustee or the Holders of at least 25% in
aggregate principal amount of the Securities then outstanding may declare the
entire principal and accrued interest of the Securities to be due and payable
immediately. If an Event of Default described in clause (v) in the above
paragraph occurs, the principal amount shall automatically, and without any
declaration or other action on the part of the Trustee or any Holder, become
immediately due and payable. Any time after acceleration with respect to the
Securities has been made, but before a judgment or decree for the payment of
money based on such acceleration has been obtained by the Trustee, the Holders
of a majority in principal amount of the Outstanding Securities, may, under
certain circumstances, rescind and annul such acceleration. The Holders of a
majority in principal amount of the Outstanding Securities may waive any past
defaults under the Indenture with respect to the Securities, except defaults in
payment of principal of or premium, if any (other than by a declaration of
acceleration), or interest on the Securities or provisions that may not be
modified or amended without the consent of the Holders of all Outstanding
Securities.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of its covenants and agreements under the
Indenture.
Subject to certain conditions set forth in the Indenture, the Holders of a
majority in principal amount of the then Outstanding Securities shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee under the Indenture in respect of the Securities. No Holder of any
Securities shall have any right to cause the Trustee to institute any
proceedings, judicial or otherwise, with respect to the Indenture or any remedy
thereunder unless, among other things, the Holder or Holders of Securities shall
have offered to the Trustee reasonable indemnity against costs, expenses and
liabilities relating to such proceedings.
The Indenture provides that, in determining whether the Holders of the
requisite aggregate principal amount of the Outstanding Securities have given,
made or taken any request, demand, authorization, direction, notice, consent,
waiver or other action thereunder as of any date, Securities owned by the
Company or any Affiliate of the Company shall be disregarded and deemed not to
be Outstanding, except that, in determining whether the Trustee shall be
protected in relying upon any such request, demand, authorization, direction,
notice, consent, waiver or other action, only Securities which a Responsible
Officer of the Trustee actually knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Company or any Affiliate of the Company.
MODIFICATION OF THE INDENTURE
The Indenture provides that the Company and the Trustee may, without the
consent of the Holders, modify or amend the Indenture in order to (i) evidence
the succession of another corporation to the Company and the assumption by any
such successor corporation of the covenants of the Company in the Indenture and
in the Securities; (ii) add to the covenants, agreements and obligations of the
Company for the benefit of the Holders of the Securities; (iii) add any
additional Events of Default to the Indenture; (iv) add to or change any of the
provisions of the Indenture necessary to permit the issuance of the Securities
in bearer form, registrable as to principal, and with or without interest
coupons; (v) evidence and provide for the acceptance of appointment under the
Indenture by a successor Trustee; or (vi) cure any ambiguity, or correct or
supplement any provision of the Indenture which may be inconsistent with any
other provision of the Indenture, provided such action does not adversely affect
the interest of the Holders of the Securities. (Section 9.1).
Modification or amendment of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of the Securities, except that no such modification or amendment may,
without the consent of the Holders of all then Outstanding Securities,
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(i) change the due date of the principal of, or any installment of principal of
or interest on, any Securities; (ii) reduce the principal amount of, or any
installment of principal or interest or rate of interest on, or any premiums
payable on redemption of, any Securities; (iii) reduce the principal amount of
any Securities payable upon acceleration of the maturity thereof; (iv) change
the place or the currency of payment of principal of, or any premium or interest
on, any Securities; (v) impair the right to institute suit for the enforcement
of any payment on or with respect to any Securities on or after the due date
thereof; (vi) reduce the percentage in principal amount of Securities then
Outstanding, the consent of whose Holders is required for modification or
amendment of the Indenture or for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults; or (vii) modify certain
provisions of the Indenture regarding the amendment or modification of, or
waiver with respect to, any provision of the Indenture or the Securities.
(Section 9.2).
DISCHARGE OF THE INDENTURE
The Indenture shall, upon the written request or order of the Company,
cease to be of further effect (except as to any surviving rights of registration
of transfer or exchange of Securities therein expressly provided for), when (i)
either (A) all Securities theretofore authenticated and delivered (other than
(1) Securities which have been destroyed, lost or stolen and which have been
replaced or paid and (2) Securities for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid or discharged from such trust) have been delivered to the Trustee for
cancellation or (B) all such Securities not theretofore delivered to the Trustee
for cancellation (1) have become due and payable, (2) will become due and
payable at their stated maturity within one year, and the Company in the case of
(A)(1) or (2) above, has deposited or caused to be deposited with the Trustee an
amount in Dollars sufficient to pay and discharge the entire indebtedness on
such Securities not theretofore delivered to the Trustee for cancellation, for
principal (and premium, if any) and interest to the date of such deposit (in the
case of Securities which have become due and payable) or to the stated maturity
date, as the case may be; (ii) the Company has paid or caused to be paid all
other sums payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an officers' certificate and an Opinion of Counsel,
each stating that all conditions precedent provided for in the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with. (Section 4.1).
DEFEASANCE AND COVENANT DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be
discharged from all its obligations with respect to the Securities (except for
certain obligations to exchange or register the transfer of the Securities, to
replace stolen, lost or mutilated Securities, to maintain paying agencies and to
hold moneys for payment in trust) upon the deposit in trust for the benefit of
the Holders of the Securities of money or U.S. Government Obligations, or both,
which, through the payment of principal and interest in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
any installment of principal of and any premium and interest on the Securities
on the respective Stated Maturities in accordance with the terms of the
Indenture and the Securities. Such defeasance or discharge may occur only if,
among other things, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Holders of the Securities will not recognize gain
or loss for federal income tax purposes as a result of such deposit, defeasance
and discharge, and will be subject to federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, accompanied by a ruling to
the effect received from or published by the Internal Revenue Service.
Defeasance of Certain Covenants. The Indenture provides that the Company
may omit to comply with certain restrictive covenants described under the
captions "Certain Covenants of the Company -- Limitation on Indebtedness Secured
by a Lien" and "Certain Covenants of the Company -- Limitation on Sale and
Lease-Back Transactions" above, and that such omission will be deemed not to be
or result in an Event of Default in each case with respect to each series of
Securities. In order to do so, the Company will be required to deposit, in trust
for the benefit of the Holders of the Securities, money or U.S. Government
Obligations, or both, which through the payment of principal and interest in
respect thereof in accordance with their terms,
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will provide money in an amount sufficient to pay any installment of the
principal of and any premium and interest on the Securities on the respective
Stated Maturities in accordance with the terms of the Indenture and the
Securities. The Company will also be required, among other things, to deliver to
the Trustee an Opinion of Counsel to the effect that Holders of the Securities
will not recognize gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain obligations and will be subject to
federal income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit and defeasance had not occurred. In
the event the Company exercises this option with respect to the Securities and
the Securities are declared due and payable because of the occurrence of any
Event of Default, the amount of money and U.S. Government Obligations so
deposited in trust will be sufficient to pay amounts due on the Securities at
the time of their Stated Maturity but may not be sufficient to pay amounts due
on the Securities upon any acceleration resulting from such Event of Default. In
such case, the Company will remain liable for such payments.
THE TRUSTEE
The Bank of New York will be the Trustee under the Indenture. Its address
is 101 Barclay Street, New York, New York 10286. The Company has also appointed
the Trustee as the initial registrar and as the initial Paying Agent under the
Indenture.
The Indenture will contain certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. In the event the Trustee acquires any
conflicting interest (as defined in the Trust Indenture Act of 1939), however,
it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the internal laws of the State of New York, except as may
otherwise be required by mandatory provisions of law, without regard to
conflicts of laws principles thereof.
BOOK-ENTRY, DELIVERY AND FORM
The Notes to be sold as set forth herein will be issued in the form of a
fully registered Global Certificate (the "Global Certificate"). The Global
Certificate will be deposited on the date of the closing of the sale of the
Notes offered hereby (the "Closing Date") with, or on behalf of, The Depository
Trust Company (the "Depositary") and registered in the name of its nominee (such
nominee being referred to herein as the "Global Certificate Holder") or will
remain in the custody of the Trustee pursuant to a FAST Balance Certificate
Agreement or similar agreement between the Depositary and the Trustee.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only to another nominee of the Depositary or to a
successor of the Depositary or its nominee.
The Depositary has advised the Company and the Underwriters as follows: It
is a limited-purpose trust company which was created to hold securities for its
participating organizations (the "Participants") and to facilitate the clearance
and settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. Participants
include securities brokers and dealers (including the Underwriters), banks,
trust companies, clearing corporations and certain other organizations. Access
to the Depositary's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("indirect participants"). Persons who are not Participants may beneficially own
securities held by the Depositary only through Participants or indirect
participants.
The Depositary has also advised that pursuant to procedures established by
it (i) upon the issuance by the Company of the Notes, the Depositary will credit
the accounts of Participants designated by the Underwriters with the principal
amount of the Notes purchased by the Underwriters, and (ii) ownership of
beneficial interests in the Global Certificate will be shown on, and the
transfer of that ownership will be
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effected only through, records maintained by the Depositary (with respect to
Participants' interests), the Participants and the indirect participants. The
laws of some states require that certain persons take physical delivery in
definitive form of securities which they own. Consequently, the ability to
transfer beneficial interests in the Global Certificate is limited to such
extent.
All payments on the Global Certificate registered in the name of the
Depositary's nominee will be made by the Company through the Paying Agent to the
Depositary's nominee as the registered owner of the Global Certificate. Under
the terms of the Indenture, the Company and the Trustee will treat the persons
in whose names the Notes are registered as the owners of such Notes for the
purpose of receiving payments of principal and interest on such Notes and for
all other purposes whatsoever. Therefore, neither the Company, the Trustee nor
the Paying Agent has any direct responsibility or liability for the payment of
principal or interest on the Notes to owners of beneficial interests in the
Global Certificate. The Depositary has advised the Company and the Trustee that
its present practice is, upon receipt of any payment of principal or interest,
to credit immediately the accounts of the Participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the Global Certificate as shown on the records of the Depositary.
Payments by Participants and indirect participants to owners of beneficial
interests in the Global Certificate will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name" and will be
the responsibility of such Participants or indirect participants.
The Company will issue Notes in definitive form in exchange for the Global
Certificate if, and only if, either (1) the Depositary is at any time unwilling
or unable to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, (2) an Event of Default has occurred and is
continuing and the Trustee has received a request from the Depositary to issue
Notes in definitive form in lieu of all or a portion of the Global Certificate
(in which case the Company shall execute within 30 days of such request, and the
Trustee, upon receipt of a Company Order, shall promptly authenticate and make
available for delivery Notes in definitive form), or (3) the Company determines
not to have the Notes represented by a Global Certificate. In any such instance,
an owner of a beneficial interest in the Global Certificate will be entitled to
have Notes equal in principal amount to such beneficial interest registered in
its name and will be entitled to physical delivery of such Notes in definitive
form. Notes so issued in definitive form will be issued in denominations of
$1,000 and whole multiples thereof and will be issued in registered form only,
without coupons.
So long as the Global Certificate Holder is the registered owner of the
Global Certificate, the Global Certificate Holder will be considered the sole
Holder under the Indenture of any Notes evidenced by the Global Certificates.
Beneficial owners of Notes evidenced by the Global Certificate will not be
considered the owners or Holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records of the
Depositary or for maintaining, supervising or reviewing any records of the
Depositary relating to the Notes.
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<PAGE> 29
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
have severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective principal amounts of the Notes set forth after their
names below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME OF NOTES
---- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $105,000,000
ABN AMRO Chicago Corporation................................ 22,500,000
Chase Securities Inc........................................ 22,500,000
------------
$150,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Notes if any are taken.
The Underwriters initially propose to offer part of the Notes directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess of
.40% of the principal amount of the Notes. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of .25% of the principal amount
of the Notes to certain other dealers. After the initial public offering of the
Notes, the public offering price and other selling terms may from time to time
be varied by the Underwriters.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Notes as permitted by applicable laws
and regulations. The Underwriters are not obligated, however, to make a market
in the Notes and any such market making may be discontinued at any time at the
sole discretion of the Underwriters. Accordingly, no assurance can be given as
to the liquidity of, or trading markets for, the Notes.
In order to facilitate the offering of the Notes, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Notes. Specifically, the Underwriters may over-allot in connection with the
offering, creating a short position in the Notes for their own account. In
addition, to cover over-allotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, the Notes in the open market. Finally,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the Notes in the Offering, if the
syndicate repurchases previously distributed Notes in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Underwriters have engaged in transactions with and performed various
investment banking and other services for the Company in the past, and may do so
from time to time in the future.
Affiliates of certain of the Underwriters lend to, and engage in general
financing and banking transactions with, the Company and its affiliates and will
receive a portion of the repayment to be made by the Company under its bank
credit facilities with the proceeds of the Offering. See "Use of Proceeds".
Because more than 10 percent of the net proceeds of the Offering, not including
the underwriting commissions, will be paid to affiliates of Underwriters who are
members of the National Association of Securities Dealers, Inc. (the "NASD"),
the Offering is being conducted pursuant to Rule 2710(c)(8) of the NASD's
Conduct Rules.
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LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Neal S. Sutton, Senior Vice President, General Counsel and Secretary
of the Company, and by Gardere Wynne Sewell & Riggs, L.L.P., counsel for the
Company, and certain legal matters will be passed upon for the Underwriters by
Andrews & Kurth L.L.P. Mr. Sutton has options to purchase 68,500 shares of
Common Stock of the Company, of which 32,250 are currently exercisable. Pursuant
to its bylaws, the Company is required to indemnify Mr. Sutton to the full
extent permitted by Delaware law against any expenses actually and reasonably
incurred by him in connection with any action, suit or proceeding in which he is
made a party by reason of his being an officer of the Company, including,
without limitation, in connection with rendering professional legal services.
The Company also maintains directors' and officers' liability insurance under
which Mr. Sutton is insured against certain expenses and liabilities.
EXPERTS
The audited consolidated financial statements of the Company at December
31, 1996 and 1995, and for each of the three years in the period ended December
31, 1996, incorporated by reference in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated by reference in this
Prospectus in reliance upon the authority of said firm as experts in accounting
and auditing in giving said report.
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