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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from________________to___________________
TUBOSCOPE VETCO
INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-18312 76-0252850
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
2835 Holmes Road, Houston, Texas 77051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 799-5100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value
(Title of Class)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 5, 1996 was $162,400,656 based on the closing sales
price of such stock on such date.
[_] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The number of shares outstanding of the registrant's common stock, as of
March 5, 1996 was 18,560,075
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1996 Annual Meeting are
incorporated by this reference into Part III as set forth herein.
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PART I
ITEM 1. BUSINESS
Tuboscope Vetco International Corporation (the "Company") was incorporated
under the laws of Delaware on March 28, 1988 for the purpose of acquiring
Tuboscope Vetco International Inc. fka Tuboscope Inc. ("TVI") from Minstar Inc.
("Minstar"). The acquisition of TVI (the "Merger") was consummated on May 13,
1988. The Company is a holding company which owns all of the outstanding capital
stock of TVI, CTI Inspection Services Inc. (CTI), and Tuboscope Vetco Capital
Corporation (TVCC). The Company has no independent operations. As used in this
Report, except as the context otherwise requires or as otherwise defined, the
"Company" and "Tuboscope" mean Tuboscope Vetco International Corporation
together with its subsidiaries.
HISTORY
The Company was one of the first companies to provide tubular inspection
and corrosion protection services to the oil and gas industry, commencing
operations in 1937. From 1937 through the mid-1940s, Tuboscope provided these
services primarily to domestic companies involved in the exploration and
production of oil and gas. TVI expanded its operations into international
markets during the mid-1940s.
During the early 1960s, the Company introduced inspection equipment for use
by steel mills to detect manufacturing defects in oilfield tubulars and to
assist in quality control. In the mid-1960s, the Company developed the
Linalog(R) tool used to inspect oil and gas pipelines without disrupting product
flow and began marketing its pipeline inspection services. In 1990, the Company
strengthened its ultrasonic inspection capabilities with the acquisition of
Sound Optics Systems, Inc. dba Sound Optical Systems, Inc. (SOS), one of the
technological leaders of ultrasonic inspection services for oil country tubular
goods.
In October 1991, the Company significantly expanded its international
operations with the acquisition of Baker Hughes Tubular Services, Inc. (Vetco
Services). From the 1930s through the 1940s, Vetco Services provided oil
country tubular inspection and coating services primarily in the Western United
States. In the 1950s, Vetco Services began providing tubular inspection and
coating services in several international markets, acting primarily as a
licensee of the Company in Europe. By the 1960s, Vetco Services was no longer
acting as a licensee for the Company and had developed a significant presence in
the European markets. Vetco Services subsequently entered the Middle East and
Far East markets in the 1970s. In the mid-1970s, Vetco Services added its
industrial inspection services for heavy industrial projects. In 1977, Vetco
Services was acquired by Combustion Engineering, Inc. and operated as a division
of that company until it was acquired by Baker Hughes Incorporated ("BHI") in
March 1989. BHI merged Vetco Services' then existing operations with BHI's
existing international inspection and coating services operation, Baker PA, to
form Vetco Services.
In 1993 the Company added to its North American oilfield services with the
acquisition of the inspection assets of D. J. Inspection Services Inc. (DJ) and
furthered its industrial inspection capacity with the acquisition of CTI. In
October 1994, the Company purchased the manufacturing and inspection assets of
NDT Systems, Inc., Bandarena Enterprises Limited, NDT Eagle Ltd. and Tubular
Ultrasound Ltd. (NDT). The Company increased its direct operations in South
America through first the purchase in 1994 of its partner Paiven's interest in a
Venezuela operation, and then again in the fourth quarter of 1995, with the
acquisition of the operations of its former agent in Argentina.
The principal executive offices of the Company are located at 2835 Holmes
Road, Houston, Texas, 77051, telephone (713) 799-5100.
GENERAL
The Company is primarily engaged in the inspection and coating of oil
country tubular goods (drill pipe, line pipe, casing and tubing) and the in-
place inspection of oil and gas pipelines. Demand for the Company's inspection
services
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is based, in part, on the relatively low cost of such services compared to the
potential cost to a customer of the failure of a tubular or pipeline segment.
As a result of the Vetco Services acquisition, the Company is the largest
provider of these inspection and coating services in the world. Approximately
50% of the Company's revenue for the year ended December 31, 1995 was derived
from international (outside the United States and Canada) sales.
See Note 13 of Notes to Consolidated Financial Statements of the Company
for financial information relating to foreign and domestic operations and export
sales.
Oilfield Services
Oilfield Services, which constitutes the largest portion of the Company's
business, involves primarily the inspection and coating of new and used oil
country tubular goods. The Company's Oilfield Services operations provide
inspection and/or coating services in over 54 countries in North America, Latin
America, Europe, Africa, the Middle East and the Far East. Demand for these
services depends in large part upon the level of oil drilling and production
activity.
New Tubular Inspection. Newly manufactured pipe sometimes contains serious
defects that are not detected by the mill. In addition, pipe can be damaged in
transit and during handling prior to use at the well site. As a result,
exploration and production companies often have new tubulars inspected before
they are placed in service to reduce the risk of pipe failures during drilling
and completion of oil and gas wells.
The Company's tubular inspection equipment employs all major non-
destructive inspection techniques, including electromagnetics, ultrasonics, flux
leakage and gamma ray. The primary methods used by the Company to inspect new
tubulars are electromagnetics and ultrasonics. These inspection services are
provided both by mobile units and at fixed site inspection locations.
Used Tubular Inspection. Used tubulars are inspected by the Company to
detect service-induced flaws after the tubulars are removed from operation.
Used drill pipe and used tubing inspection programs allow operators to replace
lengths that are detected as being defective, thereby prolonging the life of the
remaining pipe and saving the customer the cost of unnecessary tubular
replacements and pipe failure related expenses.
As with new tubular inspection, the used tubular inspection services are
provided both by mobile units and at fixed site inspection locations. The used
tubular inspection centers offer a complete line of reclamation services
necessary to return tubulars to useful service. In addition to electromagnetic
inspection, these facilities offer tubular cleaning and straightening,
hydrostatic testing and re-threading.
Related Inspection Services. In addition to its new and used tubular
inspection services, the Company also offers a wide range of related inspection
services, including API thread inspection and ring and plug gauging, as well as
various used drill pipe services. The Company also provides an ultrasonic
inspection service for detecting potential fatigue cracks in the end area of
used drill pipe, the portion of the pipe that has traditionally been the most
difficult to inspect. The Company also provides a tubing wellhead inspection
system for inspecting tubing in gas lift wells, pumping wells and salt water
injection and disposal wells.
Tubular Coatings. The Company develops, manufactures and applies its
tubular coatings, known as Tube-Kote(R) coatings, to new and used tubulars.
Coatings help prevent corrosion of tubulars by using plastics with protective
properties. In addition, coatings are designed to improve oil flow by
controlling paraffin and scale buildup, which can reduce or block oil flow in
producing wells. The use of coatings extends the life of existing tubulars,
reduces the frequency of well workovers, reduces interruptions in service and
increases the hydraulic efficiency of the wells.
Revenue from the Company's Oilfield Services (including equipment sales)
provided approximately 76%, 72%, and 71% of the Company's revenue during the
years ended December 31, 1995, 1994 and 1993, respectively.
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Pipeline Services
Pipeline Services provides in-place inspection services for oil and gas
pipelines to identify defects in the pipelines without removing or dismantling
the pipelines or disrupting the product flow. This service gives customers a
convenient and cost effective method of identifying defects in pipelines and
enables them to remedy such defects. The Company inspects pipelines by
launching a Linalog(R) tool into the pipeline. Propelled by the product flow,
the Linalog(R) tool uses electromagnetics to record the severity and location of
internal and external pitting-type corrosion as well as defects in the pipeline,
providing a basis for evaluation and repair by the customer. Once the test is
complete, the Linalog(R) tool is returned to the Company, refurbished and used
for future pipeline inspections.
Revenue from the Company's Pipeline Services (including equipment sales)
represented approximately 10%, 11% and 11% of the Company's revenue for the
years ended December 31, 1995, 1994 and 1993, respectively.
Management believes that there are growth opportunities for the Company's
Pipeline Services due to the aging of the worldwide pipeline network and new
pipeline construction. U.S. regulatory inspection requirements and an extensive
pipeline infrastructure in Eastern Europe are additional industry factors that
are expected to contribute to the growth of the Company's Pipeline Services.
Additionally, management believes that the Linalog(R) Plus technology and the
Company's TruRes/TM/ inspection technology will provide additional markets and
growth opportunities. The Linalog(R) Plus service is a computer enhanced method
for presenting the inspection report produced by the Company's traditional
Linalog(R) technology. The TruRes/TM/ technology is present in the Company's
line of high resolution tools which utilize advanced computer technology and
other advancements within the body of the inspection tool.
Industrial Inspection Services
As a result of the Vetco Services acquisition in October 1991, and the CTI
Inspection Services Inc. (CTI) acquisition in April 1993, the Company provides
industrial inspection and monitoring services for the construction, operation
and maintenance of major projects in energy-related industries. Inspection
techniques include the X-raying of pipeline girth welds, electromagnetic
inspection of storage-tank floors and ultrasonic or eddy current inspection of
refinery equipment. Monitoring services include various quality assurance and
control and supervision services. Most of these services are provided during
fabrication, installation and maintenance of energy-related facilities. The
primary customers are power plants undergoing construction or maintenance,
chemical and petrochemical plants, pipeline construction companies and pipeline
owners. Revenue from Industrial Inspection Services accounted for approximately
7%, 9%, and 12% of the Company's revenue for the years ended December 31, 1995,
1994 and 1993, respectively.
Mill Systems and Sales
Mill Systems and Sales fabricates and sells or leases inspection equipment
to steel mills. The equipment is operated by the steel mills and is used for
quality control purposes to detect transverse, longitudinal and three-
dimensional defects in the pipe during a high-speed manufacturing process. Each
piece of mill inspection equipment is designed to customer specifications and is
installed and serviced by the Company. Since 1962, the Company has installed
more than 80 units worldwide.
Revenue from the Company's Mill System and Sales represented approximately
5%, 4%, and 5% of the Company's revenue for the years ended December 31, 1995,
1994 and 1993, respectively. Revenue for Mill Systems and Sales may fluctuate
significantly from year to year due to the timing of negotiating large domestic
and export sales contracts, arranging financing, and manufacturing equipment.
The Company historically has refrained from selling pipeline and oilfield
services inspection equipment to customers in areas where it provides inspection
services. Since January 1, 1986, the Company has sold approximately $35.8
million of pipeline and oilfield services inspection equipment and approximately
$12 million of mill inspection equipment in markets where it generally does not
provide inspection services, principally the former Soviet Union
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and China. During the fourth quarter of 1995, the Company signed an
approximately $5.7 million contract to provide coating equipment and start-up
assistance in the CIS. Management believes that opportunities exist for
additional equipment sales to former Eastern Bloc countries and to customers in
other markets where the Company historically has not provided inspection
services. However, there can be no assurance that any such sales will be made
by the Company. Additionally, the NDT acquisition has enhanced the Company's
range of products.
SEASONAL NATURE OF THE COMPANY'S BUSINESS
Historically, the level of the Company's business in North American
Oilfield Services and U.S. Pipeline Services has followed seasonal trends, which
are described below. However, the historical trends in Oilfield Services can be
subject to significant changes resulting from fluctuations in oil prices and
changes in domestic rig count. The Company's International Oilfield Services
(excluding Canada), Mill Systems and Sales, and Industrial Inspection Services
have no particular seasonal trend. The timing of mill equipment sales is not
easily predictable and, accordingly, revenue tends to fluctuate from quarter to
quarter.
The Company's Oilfield Services business in the United States tends to
realize lower activity levels during the first quarter of the calendar year due
to the typical delay in the approval of drilling budgets and weather
restrictions. The Company's Oilfield Services business in Canada typically
realizes a strong first quarter of the calendar year as operators take advantage
of the winter freeze to help gain access to drilling and production areas, and
then declines during the second quarter of the calendar year due to weather
conditions which result in road bans that curtail drilling activity. Oilfield
services activity in both the United States and Canada typically increases
during the third quarter of the calendar year and then peaks in the fourth
quarter of the calendar year as operators authorize the spending of remaining
drilling and/or production capital budgets for the year.
Pipeline Services typically experiences reduced activity during the first
quarter of the calendar year. The high winter demand for gas and petroleum
products in the northern states and the consequent curtailment of
maintenance/inspection programs result in less opportunity to perform pipeline
inspection during this time. During the second quarter of the calendar year,
activity begins to increase and normally continues at relatively stable levels
through the end of the year as operators finish scheduled maintenance programs.
CUSTOMERS AND DISTRIBUTION NETWORK
The Company markets its products and services primarily to oil and gas
companies and manufacturers of oil country tubular goods, principally through
its 63 employee sales organization. In addition, the Company sells its Oilfield
services to numerous tubular supply stores, which incorporate these products and
services as part of their packaged sales to end-users. The Company's
international oilfield inspection services were historically marketed in large
part through licensees. These licenses generally ranged in duration from three
to five years and were for the most part renewable, unless termination notices
were given by either party. In 1990, the Company commenced operating directly
in selected foreign markets rather than marketing its services through
licensees. With the acquisition of Vetco Services in 1991, which markets its
services directly or through joint ventures, and with the Company's recent
expansion in Latin America, the Company primarily has direct operations in the
international marketplace.
Of approximately 1,151 North American accounts served by Oilfield Services,
the 20 largest accounts comprised approximately 46% of total North American
sales attributable to Oilfield Services for the year ended December 31, 1995.
During the year ended December 31, 1995, the top 15 customers for Pipeline
Services represented approximately 53% of total revenue attributable to
Pipeline Services and the largest 10 accounts for Mill Systems and Sales
represented approximately 56% of total revenue attributable to Mill Systems and
Sales. No single customer accounted for as much as 10% of the Company's total
revenue in 1995.
See Note 13 of Notes to Company's Consolidated Financial Statements
contained herein for financial information relating to foreign and domestic
operations and export sales.
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PATENTS, LICENSES AND TRADEMARKS
Management believes that the Company's strong market position in its major
businesses is enhanced by its technology. Through an internal development
program and certain acquisitions, the Company has assembled an extensive array
of inspection systems and coatings in addition to a substantial number of
trademarks, patents and other proprietary rights.
The Company's electromagnetic inspection system, known as Amalog(R) IV,
performs four separate inspections in one semi-automated process: the
Sonoscope(R) section detects transverse defects, which are flaws aligned across
the pipe; the Amalog(R) section detects flaws with longitudinal dimensions; the
Isolog(R) section detects variations in the thickness of the wall of the pipe;
and the grade verifier section compares each length with a standard to determine
whether all the pipe is of the same metallurgical grade. The Company also
offers special end area inspection to locate transverse and longitudinal
defects. The Company's electromagnetic inspection capabilities were enhanced by
the acquisition of certain technology rights as part of the Vetco Services
acquisition. Most notable was the PipeImage/TM/ System for electromagnetic
inspection. This system uses small sensors, digital signal processing, computer
interpretation and three-dimensional image presentation to help identify flaws
in mid-range walled pipe which may be undetectable with conventional
electromagnetic inspection services.
The Company's ultrasonic inspection capabilities were significantly
enhanced with the July 1990 acquisition of SOS, one of the technological leaders
of ultrasonic inspection services for oil country tubular goods. The equipment
used in the Company's ultrasonic inspection systems (U-Tron(R), SOS Ultrasonic
Inspection Unit and Vetcoscan(R)) is designed to inspect heavywall or non-
magnetic tubing, casing and line pipe for manufacturing defects, where the
effectiveness of electromagnetic inspection is limited. As part of the
Company's NDT acquisition, it acquired the NDT/TM/ Eagle ultrasonic technology
which it utilizes in its Scotland facility. The Company's ultrasonic
capabilities were further increased with the introduction of its Endsonic(R)
technology for ultrasonic end area inspection in 1994.
As part of the Vetco Services acquisition, the Company acquired BHI's
interests in substantially all of the foreign and domestic trademarks and
patents and other proprietary technology used in the Vetco Services business
(other than Vetcoscan(R)). These technologies include Vetcolog(R),
PipeImage/TM/ and Vetcoscope(R) electromagnetic inspection systems and the end
area inspection system and all of the liquid and powder coating technology. In
addition, the Company obtained certain rights to use the Vetcoscan(R) ultrasonic
inspection technology outside the United States. In connection with such
acquisition, BHI's domestic coating and inspection business retained the right
to use such technology in the United States. ICO, Inc. acquired the domestic
inspection and coating business of BHI in September 1992. The Company
introduced its WellChek(R) technology in 1993 which inspects pipe on the rig
floor as it is "tripped" from the well.
As part of the Company's tubular coating services, the Company develops,
manufactures and applies its tubular coatings, known as Tube-Kote(R) coatings,
to new and used tubulars. Tube-Kote(R) coatings are manufactured by and for the
Company using a variety of resins, including phenolic, epoxy or urethane, each
selected for its suitability under certain corrosive conditions and then
formulated to enhance performance. Some coatings are applied in combination,
such as a phenolic base with an epoxy top coat, and then cured into a single
coating to develop the properties of both plastics. Every coating is tested and
evaluated in field conditions before being released for customer use. Tube-
Kote(R) coatings are developed and manufactured either at the Company's Houston,
Texas facility or are manufactured in North America or Europe through agreements
with local manufacturers. The Company's TK(R) - tubing insert is a cost
effective solution for corrosive down hole environments.
The Company also offers a complete line of connection services for
internally coated line pipe. These include Thru-Kote/TM/ and Thru-Kote/TM/ U.B.
systems for welding coated line pipe, and a variety of other specialized
fittings.
The Company has proprietary rights to a number of foreign and domestic
trademarks important to its business. It also owns various foreign and domestic
patents related to the design and manufacture of certain products. Many
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of the patents have expired or will soon expire, and many of the trademark
registrations are up for renewal within the next two years. Management intends
to renew these trademarks. Although management believes that no single patent
is material to the business of the Company, it continues to seek new patents to
protect the Company's proprietary interests in certain products as necessary.
COMPETITION
The Company's major competitor in the domestic inspection and coating
markets is ICO, Inc. In addition, in the domestic and international inspection
markets, a large number of small regional inspection companies provide
competition. Certain foreign jurisdictions and government-owned petroleum
companies located in some of the countries in which the Company operates have
adopted policies or regulations which may give local nationals in these
countries certain competitive advantages.
The principal competitive factors in Oilfield Services are price,
availability, quality of service and product performance and technology. The
price and availability tend to be the controlling factors of inspection
services, while quality of service, product performance, price and availability
principally impact customers' decisions to purchase coating services.
The Company's major competitors in Pipeline Services are Vetco Pipeline
Services, Inc., a U.S. subsidiary of Rauma Repola; British Gas plc; Ipel Kopp
(Pipetronix), a subsidiary of A.G. Preussay Anlagensau; and H. Rosen Engineering
GmbH. Management believes the major competitive factors for Pipeline Services
are product performance and technology, quality of service and price. The
market for the Company's Industrial Inspection Services is highly fragmented and
comprised of many competitors with price being the major competitive factor.
The Company's main competitor in Mill Systems and Sales is Institut Dr. Forster
GmbH & Company KG. Product performance, quality of service and price are the
competitive factors in this area.
ENGINEERING AND MANUFACTURING
The Company manufactures or assembles the equipment and products which it
leases and sells to customers and which it uses in providing inspection and
coating services. In addition to producing new equipment and products, the
Company produces spare parts for its equipment and for resale, and renovates and
repairs equipment at its manufacturing facilities in Houston and Midland, Texas.
The equipment and products designed and manufactured by the Company range
from electromagnetic and ultrasonic inspection systems to coating products.
Design and engineering are based on research and development efforts as well as
established customer and industry standards.
RAW MATERIALS
The Company believes that materials and components used in its servicing
and manufacturing operations and purchased for sales are readily available at
competitive prices from numerous sources.
BACKLOG
The Company does not believe that backlog is material to its business.
ENVIRONMENTAL MATTERS
The Company's inspection and coating services routinely involve the
handling and disposal of chemical substances and waste materials, some of which
may be considered to be hazardous wastes. These potential hazardous wastes
result primarily from the use of mineral spirits to clean pipe threads during
the tubular inspection process and from the coating process.
The Company's operations are subject to numerous local, state and federal
laws and regulations, including the regulations promulgated by the Occupational
Safety and Health Administration, the United States Environmental
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Protection Agency, the Nuclear Regulatory Commission and the United States
Department of Transportation. Management believes that the Company is in
substantial compliance with these laws and regulations, and that the compliance
and remedial action costs associated with these laws and regulations have not
had a material adverse effect on its results of operations, financial condition
or competitive position, to date.
The Company cannot predict the effect on it of new laws and regulations
with respect to radioactive hazardous wastes caused by naturally occurring
radioactive materials or with respect to other environmental matters.
Circumstances or developments which are not currently known as well as the
future cost of compliance with environmental laws and regulations could be
substantial and could have a material adverse effect on the results of
operations and financial condition of the Company.
Pursuant to an agreement executed as part of the acquisition of TVI in
1988, Minstar has agreed, subject to certain limitations concerning the time for
submitting claims and the amount of losses to be covered as described below, to
indemnify the Company with respect to all losses, liabilities, damages and
expenses incurred in connection with, arising out of or resulting from the
production, use, generation, emission, storage, treatment, transportation,
disposal or other handling or disposition or migration of any kind of any toxic
or hazardous wastes at any time prior to the closing of the 1988 acquisition
date. Claims for indemnification were required to be made before May 13, 1992.
Minstar is obligated to indemnify the Company for the first $1 million of losses
incurred by the Company and fifty percent of losses in excess of $2 million.
The Company is solely responsible for the second $1 million of losses incurred
and fifty percent of losses in excess of $2 million. The Company has claims for
indemnification from Minstar aggregating $1 million. Therefore, the Company
would then be responsible for the next $1 million of losses. Amounts for any
losses in excess of $2 million aggregate amount are to be shared equally by
Minstar and the Company until the indemnity obligation terminates. See
"Business--Legal Proceedings" for a description of the indemnity to be provided
by Minstar with respect to actions, suits, litigation, proceedings or
governmental investigations which may also apply to certain environmental
matters.
EMPLOYEES
As of December 31, 1995, the Company employed 2,155 full-time employees
worldwide, of whom 1,077 were employed in North America. The Company considers
its relations with its employees to be excellent.
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ITEM 2. PROPERTIES
The following is a description of the Company's major facilities:
<TABLE>
<CAPTION>
SIZE
Location DESCRIPTION (SQUARE FEET) OWNED/LEASED
-------- ----------- ------------- ------------
<S> <C> <C> <C>
DOMESTIC:
Amelia, Louisiana Coating Plant 85,000 on 8 Acres Building Owned*
Bakersfield, California Reclamation Facility 7,200 on 6 Acres Owned
Casper, Wyoming Inspection Facility 91,720 on 29 Acres Owned
Oklahoma City, Oklahoma Inspection Facility 6,000 on 5 Acres Owned
Edmond, Oklahoma Coating Plant 40,000 on 19 Acres Owned
Harvey, Louisiana Coating Plant and Inspection Facility 53,000 on 7 Acres Owned
Houston, Texas Holmes Road Complex: Manufacturing, Warehouse 300,000 on 50 Acres Owned
and Corporate Offices, Coating Manufacturing
Plant, Pipeline Services, Manufacturing and
Log Operations
Engineering/Technical Research Center 76,000 on 6 Acres Owned
Coating Plant 83,000 on 43 Acres Owned
Sheldon Road Complex: Region Administration 137,000 on 94 Acres Land Owned **
Offices and Pipe Inspection and Storage Facilities Building Leased
SOS Inspection Facility 32,000 on 31 Acres Owned
Midland, Texas Coating Plant, Reclamation Facility and Technical 87,000 on 25 Acres Owned
Service Building
Midland, Texas Manufacturing Facility 65,120 on 10 acres Leased
Odessa, Texas Pipe Storage Yard and Ancillery Service Facility 12,000 on 23.20 Acres See below
Morgan City, Louisiana Inspection Facility and Division Office 42,400 on 3 Acres Building Owned*
North Slope (Deadhorse), Alaska Inspection, Repair and Service Center 18,400 Building Owned*
Kenai, Alaska Inspection Facility 9,100 on 21 Acres Leased
INTERNATIONAL:
Edmonton (Nisku), Canada Coating Plant and Inspection Facility; Pipeline 114,000 on 40 Acres Owned
Services, Maintenance and Log Operations
Argentina:
Plaza Huincul, Reclamation and 2.3 acres Leased
Neuquen State inspection facilities * Warehouse 2000 Sq.
feet (200m/2/)
Comodoro Rivadavia, Reclamation and 1.1 acres Leased
Chubut State inspection facilities *warehouse 5,000 Sq.
*offices 2,300 Sq.
feet (230 m/2/)
Venezuela:
Anaco Inspection Facility 2.5 Acres Leased
600 Sq. feet office
Maricabo Inspection Facility 1 Acre Leased
450 Sq. feet office
Columbia:
Yopal Inspection Facility .25 Acre Leased
200 Sq. feet office
Berlaimont, France Coating Plant 44,000 on 16 Acres Owned
Singapore Coating Plant 50,644 on 8 Acres Building Owned*
Singapore Inspection Facility 19,429 on 3 Acres Building Owned*
Bordon, England Pipeline Services, Maintenance and Log Operations 12,000 Building Owned*
Aberdeen, Scotland Inspection Facility & Coating Plant 64,982 on 10 Acres Owned
Celle, Germany Inspection Facility and Vetco Services' Headquarters 43,560 on 12 Acres Building Owned*
Gladbeck, Germany Coating Plant 25,635 on 4 Acres Owned
Veenoord,Netherlands Reclamation and Repair Facility 53,361 on 2 Acres Leased
A1 Khobar, Saudi Arabia Reclamation, Inspection Facility and Office Space 28,341 on 8 Acres Leased
</TABLE>
- -----------------------------
* Building owned subject to a ground lease.
** Land leased to building owner under a 99 year lease.
The Company owns undeveloped acreage next to several of its facilities,
including over 100 acres of undeveloped property located in Houston, Texas.
Machinery, equipment, buildings, and other facilities owned and leased are
considered by management to be adequately maintained and adequate for the
Company's operations. Substantially all of the owned U.S. major facilities
(including real property) are subject to liens in favor of banks to secure
senior indebtedness, except for the SOS Inspection Facility which is subject to
liens in favor of the former owners of such property. In addition, the
Aberdeen, Scotland facility is subject to a lien associated with the financing
of that facility. See Part II, Item 7, "Management's Discussion and Analysis of
Results of Operations and Financial Condition of the Company" and Note 7 of
Notes to the Company's Consolidated Financial Statements incorporated by
reference herein.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in numerous legal proceedings which arise in the
ordinary course of its business. A description of certain of these proceedings
follows. The Company is unable to predict the outcome of these proceedings;
however, for the reasons set forth below, management believes that none of these
legal proceedings will have a material adverse effect on the results of
operations or financial condition of the Company. Notwithstanding the
foregoing, there can be no absolute assurance that the indemnity from Minstar
discussed below or the Company's insurance coverage will be sufficient to
protect the Company from incurring substantial liability as a result of these
proceedings.
The Company has been party to two lawsuits that allege wrongful death or
injury of former employees resulting from exposure to silica and silica dust
during employment with the Company, both of which have been settled. These
settlements have been made on the Company's behalf by the Company's and
Minstar's insurance carriers without financial loss to the Company. The Company
is aware of the possibility that suits may be brought against it by other former
employees alleging exposure to silica and silica dust during their employment
with the Company. These suits may involve claims for wrongful death under a
theory of gross negligence and claims for punitive damages, the amounts of which
could be substantial but cannot be predicted. Additionally, the Company has
been sued for two other claims arising out of allegations of exposure to
asbestos, benzene and certain other substances alleged to have been used
primarily during its processes in the 1960 and 1970. The Company believes that,
based upon insurance and indemnification from Minstar, any such potential
claims, if asserted, would not have a material adverse effect on the Company's
results of operations or financial condition.
Pursuant to an agreement executed in connection with the acquisition of TVI
in 1988, Minstar agreed, subject to certain limitations, to hold the Company
harmless from and against any and all losses, liabilities, damages, deficiencies
and expenses (in excess of $1.5 million in the aggregate) arising out of product
and/or general liability claims arising out of occurrences on or prior to the
closing of the acquisition. In addition, Minstar agreed, subject to certain
limitations, to hold the Company harmless from any and all losses, liabilities
and damages, deficiencies and expenses related to any action, suit, litigation,
proceeding or governmental investigation existing or pending on or prior to the
closing of the acquisition. There is, however, a dispute with Minstar
concerning whether the indemnification referenced in the first sentence of this
paragraph is applicable only if the claim is the type that would be covered by a
product or general liability insurance policy. The Company firmly maintains
that all suits or claims are the responsibility of Minstar when the event giving
rise to liability occurred prior to the closing of the acquisition. No assurance
can be given, however, that Minstar will not contest responsibility for future
suits, including those filed under theories of gross negligence. Management
believes that Minstar is responsible for indemnifying it with respect to all of
the aforementioned lawsuits subject in certain instances to the $1.5 million
basket. In addition, while management believes certain liability arising from
certain of the above described suits will be covered by insurance, such suits
may be subject to a reservation of rights and the coverage could be contested by
the carriers providing such insurance.
The Company is a defendant in litigation that arose out of the rupture of
Texas Eastern's natural gas pipeline in Edison, New Jersey, in March of 1994.
The plaintiffs consist almost exclusively of the residents and family members of
an apartment complex that was located within several hundred feet of the point
of origin of the pipeline rupture. The plaintiff's claims include, but are not
limited to, claims for property damage, personal injury, medical bills, lost
income, loss of consortium, lost wages, living shelter, emotional injury,
interruption of schooling, permanent disability, mental anguish, and attorney's
fees and costs. The Defendants include Texas Eastern, Quality Materials, Inc.,
Tuboscope Pipeline Services, Inc. ("TPSI"), and current and prior landowners of
land adjacent to the pipeline right-of-way. It is estimated that the number of
plaintiffs could reach as high as 1,200 individuals. These cases are globally
addressed in Master Litigation No. L-614614-93; NANCY KEMPS, ET AL. V. TEXAS
EASTERN TRANSMISSION CORP., ET AL.; In the Superior Court of New Jersey, Law
Division, Middlesex County. An additional action has been brought by a co-
defendant, Civil Action No. 94-1644; QUALITY MATERIALS, INC. V. TEXAS
EASTERN CORP. AND TEXAS EASTERN TRANSMISSION CORP., In the United States
District Court of New Jersey. Also, an adjacent land owner has filed a
separate action styled L-0000Z-96 EDISON TYLER VILLAGES LLC. V. TEXAS EASTERN
TRANSMISSION CORP. in the Superior Court of New Jersey, Middlesex County, Law
Division . A defense is being provided by the Company's insurance carrier
subject to a reservation of rights letter. Management believes, based upon
insurance and its rights
10
<PAGE>
against co-defendants, that these cases will not have a material adverse effect
on the Company's results of operations or financial condition.
The Company is aware of an investigation by the Department of Justice
concerning certain alleged violations of the International Emergency Economic
Powers Act which may involve the Company. The Company has not been officially
notified or served with any process with respect to such investigation. The
Company believes that the outcome of this investigation will not have a material
adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following will be submitted to the Security Holders at the annual
meeting.
Proposal One: Approval and adoption of the Agreement and Plan of Merger
dated as of January 3, 1996, (the "Merger Agreement"), between Tuboscope, Grow
Acquisition Limited, a Bermuda corporation and wholly owned subsidiary of
Tuboscope ("Sub"), and D.O.S. Ltd., a Bermuda corporation ("Drexel"), providing
for the merger (the "Merger") of Sub with and into Drexel. Under the Merger
agreement, each outstanding ordinary share, par value $0.10 per share, of
Drexel will be converted into .4645 share of common stock, par value $0.01 per
share, of Tuboscope ("Tuboscope Common Stock") or an aggregate of approximately
16,700,000 shares of Tuboscope Common Stock as of the date of the Proxy
Statement/Prospectus. Approval and adoption of the Merger Agreement will also
constitute approval of the transactions contemplated thereby, including the
assumption by Tuboscope of the rights and obligations of Drexel under Drexel's
stock option plans.
Proposal Two: Approval of the sale by Tuboscope to SCF-III, L.P., a
Delaware limited partnership and an affiliate of a stockholder of Drexel
("SCF"), of 4,200,000 shares of Tuboscope Common Stock and warrants to purchase,
subject to adjustment under certain circumstances, an aggregate of 2,533,000
shares of Tuboscope Common Stock at an exercise price of $10 per share expiring
on December 31, 2000, for an aggregate purchase price of $31,000,000, pursuant
to a Subscription Agreement dated as of January 3, 1996 between Tuboscope and
SCF.
Proposal Three: Approval of an amendment to Tuboscope's Certificate of
Incorporation to increase the number of authorized shares of Tuboscope Common
Stock from 35,000,000 to 60,000,000.
Proposal Four: The election of the members of the Tuboscope Board of
Directors.
Proposal Five: Approval of Tuboscope's 1996 Equity Participation Plan of
Tuboscope Vetco International Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq Stock Market under the
symbol "TUBO". The following table sets forth, for the calendar periods
indicated, the range of high and low closing prices for the common stock, as
reported by Nasdaq:
<TABLE>
<CAPTION>
1995 1994
---- ----
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................... $8 1/2 $6 1/8 $7 1/2 $4 5/8
2nd Quarter................... 7 1/2 6 7 1/8 4 1/2
3rd Quarter................... 7 5 3/4 8 6 1/8
4th Quarter................... 6 5/8 5 5/8 7 3/8 5 5/8
</TABLE>
The closing price of the Company's common stock on March 5, 1996 was $ 8
3/4. The approximate number of stockholders of record on March 5, 1996 was 269.
Holders of Tuboscope Common Stock are entitled to such dividends as may be
declared from time to time by the Tuboscope Board of Directors out of funds
legally available therefore. The Company has not declared or paid any dividends
on its common stock since its inception and does not currently plan to declare
or pay any dividends. However, a restrictive covenant contained in TVI's
Secured Credit Agreement expressly prohibits Tuboscope from
11
<PAGE>
paying dividends on the Tuboscope Common Stock. The terms of the Tuboscope
Series A Preferred Stock also restrict Tuboscope's ability to pay dividends.
Tuboscope has not paid any dividends on the Tuboscope Common Stock since its
inception.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information below is presented in order to highlight significant trends
in the Company's results from operations and financial condition.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1995 1994 1993 1992 1991
------------ ----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA (1):
<S> <C> <C> <C> <C> <C>
Revenue......................................................... $190,015 $192,175 $183,340 $164,996 $151,769
Cost of sales................................................... 138,367 140,462 137,188 123,149 109,366
-------- -------- -------- -------- --------
Gross profit.................................................... 51,648 51,713 46,152 41,847 42,403
Selling, general and administrative expense..................... 20,732 21,511 26,773 21,491 16,619
Research and engineering costs.................................. 3,456 3,154 3,678 3,209 3,845
Restructuring costs............................................. -- -- 13,256 1,406 3,270
-------- -------- -------- -------- --------
Operating profit................................................ 27,460 27,048 2,445 15,741 18,669
Interest expense................................................ 12,328 12,190 10,595 11,676 11,255
Other (income) expense, net..................................... (73) 569 2,657 (484) 84
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item........................................... 15,205 14,289 (10,807) 4,549 7,330
Provision (benefit) for income taxes............................ 6,386 6,001 (2,445) 1,027 2,784
-------- -------- -------- -------- --------
Income (loss) before extraordinary item......................... 8,819 8,288 (8,362) 3,522 4,546
Extraordinary item, net of income tax........................... -- (764) (4,497) -- --
-------- -------- -------- -------- --------
Net income (loss)............................................... 8,819 7,524 (12,859) 3,522 4,546
Dividends applicable to redeemable preferred
stock........................................................ 700 700 700 700 124
-------- -------- -------- -------- --------
Net income (loss) applicable to common stock.................... $ 8,119 $ 6,824 $(13,559) $ 2,822 $ 4,422
======== ======== ======== ======== ========
Income (loss) before extraordinary item and after
deduction of preferred stock dividends....................... $.44 $.41 $(.49) $.15 $.35
Extraordinary item.............................................. -- (.04) (.25) -- --
-------- -------- -------- -------- --------
Net income (loss) per common share.............................. $.44 $.37 $(.74) $.15 $.35
======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Working capital................................................. $ 44,623 $ 35,926 $ 5,279 $ 28,202 $ 49,795
Total assets.................................................... 306,679 317,027 310,108 299,734 326,969
Long-term debt (2).............................................. 111,617 123,851 101,489 101,373 118,207
Preferred stock................................................. 10,175 10,175 10,175 10,175 10,124
Common stockholders' equity..................................... 121,441 113,424 105,256 119,849 115,223
OTHER DATA:
EBITDA(3)....................................................... $ 42,570 $ 40,859 $ 14,006 $ 29,446 $ 27,820
Ratio of EBITDA to interest expense(4).......................... 3.45x 3.35x 1.32x 2.52x 2.47x
Ratio of earnings to fixed charges (5).......................... 1.92x 1.88x .05x 1.24x 1.56x
Depreciation and amortization................................... $ 15,037 $ 14,380 $ 14,218 $ 13,221 $ 9,235
Capital expenditures............................................ $ 7,645 $ 7,549 $ 14,640 $ 5,296 $ 7,546
- ----------------------
</TABLE>
(1) Certain amounts in 1991 and 1992 have been reclassified to conform to the
current year presentation.
(2) Includes long-term capital lease obligations and exludes current
maturities.
(3) "EBITDA means earnings before interet, taxes, depreciation, amortizaion,
restructuring charges and extraordinary items and should not be considered
as an alternative to net income or any other generally accepted accounting
principles measure of performance as an indicator of Tuboscope's operating
performance or as a measure of liquidity. As used herein, EBITDA is
consistent with the definition used in the Company's credit agreement for
covenant purposes. The Company believes EBITDA is a widely accepted
financial indicator of a company's ability to service debt.
(4) Ratio of "EBITDA" to interest expense represents an industry ratio that
provides an investor with information as to the Company's current ability
to meet its interest costs.
(5) For the purpose of this calculation, "earnings" consist of net income
(loss) before income taxes, extraordinary items and fixed charges. "Fixed
charges" consist of interest expense and amortization of debt discount and
related expenses believed by management to be representative of the
interest factor thereon. Earnings were insufficient to cover fixed charges
by $12.1 million for the period ended December 31, 1993.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Key Industry Indicators*:
Rig Activity: 1995 1994 1993
-------- -------- --------
U.S. 723 775 754
Canada 231 261 184
International 757 734 773
----- ----- -----
Worldwide 1,711 1,770 1,711
===== ===== =====
U.S. Workover Rig Activity 1,277 1,298 1,392
===== ===== =====
West Texas Intermediate Crude (per barrel) $18.25 $17.26 $18.37
====== ======= ======
Natural Gas Prices $/mbtu (per mbtu) $1.47 $1.72 $1.97
===== ===== =====
*Averages for the years indicated
The Company's business depends, in large part, on the worldwide rig count
as 76% of the Company's 1995 total revenue was oilfield related. Demand for and
price of oil and gas worldwide affect the drilling and production activity of
the Company's oilfield customers. Although U.S. rig activity has increased from
the June 1992 post World War II low of 596, it has remained below the average of
1991 of 860. The U.S. average rig activity for 1995, 1994, and 1993 was 723,
775, and 754, respectively, an increase ranging from 0% to 7.5%, as compared to
the 1992 average rig count of 721. International rig activity for 1995 was up
3% compared to 1994, but continued to trail 1992 and 1991 levels by 12% and 17%
respectively. In addition, while the 1995 average West Texas Intermediate Crude
prices improved to $18.25 in 1995 from $17.26 in 1994, prices remained well
below the 1992 average price of $20.55. Also, natural gas prices were down in
1995 from an average of $1.97 per mbtu in 1993 and $1.72 per mbtu in 1994 to
$1.47 per mbtu in 1995.
As a result of these industry conditions, the Company recorded a $13.3
million restructure charge and implemented a major restructuring plan in the
third quarter of 1993. The 1993 restructuring plan, which was primarily focused
on reducing International and North America overhead and consolidating
operations, followed several strategic actions in 1991 and 1992 which closed or
consolidated 15 North America operating locations in response to the declining
North America oilfield activity. Primarily as a result of these actions as well
as an overall increase in revenue, the Company's gross profit and operating
profit have shown the following improvements in 1995 and 1994 over 1993
(excluding restructuring costs) results:
1995 1994 1993
--------- --------- ---------
Revenue $190,015 $192,175 $183,340
======== ======== ========
Gross Profit $ 51,648 $ 51,713 $ 46,152
======== ======== ========
Operating profit $ 27,460 $ 27,048 $ 15,701
======== ======== ========
The 1996 average U.S. rig count through February 23, 1996 was 705 rigs, a
decrease of 4% compared to the same period in 1995, while the Canadian rig count
was up 3% to 359 during the same period. The 1996 international rig count was
up 2.5% through January 1996 compared to January 1995. While rig activity
continues to be sluggish, the Company expects to report similar earnings in the
first quarter of 1996 compared to 1995.
The Company refinanced its senior and subordinated debt in 1994 and 1993,
respectively. On June 30, 1994 the Company and its subsidiaries entered into a
new senior credit agreement for $23,000,000 in term loans, a $35,000,000
revolving credit facility, and a $1,000,000 letter of credit facility. The term
loan facility requires increasing quarterly principal payments with an initial
payment of $500,000 on September 30, 1994 and the final payment of $1,250,000
14
<PAGE>
due March 31, 2000. The revolving credit agreement expires June 30, 1997. In
April 1993, TVI issued $75 million of 10.75% Senior Subordinated Notes due April
15, 2003. Proceeds from the new senior and subordinated debt were principally
used to retire the existing senior and subordinated debt.
In December 1995, the Company completed a sale-leaseback transaction for
its Sheldon Road facility in Houston, Texas. The transaction generated a tax
gain of approximately $7.6 million and enabled the Company to utilize certain
expiring tax credits. Proceeds of $12.5 million were used to reduce a portion
of the Company's senior debt. As a result of this transaction, improved
earnings in 1995 and 1994, and debt reductions due to cash flow from operations,
the Company's debt/total capitalization ratio has been reduced from 52.3% at
December 31, 1993 to 45.9% at December 31, 1995.
Set forth below is the Company's revenue for 1995, 1994 and 1993 divided
into the Company's major service areas (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Oilfield Services:
Inspection
North America....................... $ 44,926 $ 43,471 $ 41,268
-------- -------- --------
International....................... 49,070 48,099 44,918
Total Inspection........ 93,996 91,570 86,186
-------- -------- --------
Coating
North America....................... 32,478 32,540 31,213
International....................... 18,842 17,115 12,916
-------- -------- --------
Total Coating............ 51,320 49,655 44,129
-------- -------- --------
Total Oilfield Services.. 145,316 141,225 130,315
Pipeline Services........................ 19,139 21,468 20,301
Industrial Inspection Services........... 13,340 16,978 20,440
Mill Systems & Sales..................... 10,009 8,290 9,799
Other Revenue............................ 2,211 4,214 2,485
-------- -------- --------
Total Revenue.......... $190,015 $192,175 $183,340
======== ======== ========
RESULTS OF OPERATIONS
Year ended December 31, 1995 vs year ended December 31, 1994
Revenue. Revenue was $190.0 million for the fiscal year ended December 31,
1995, a decrease of $2.2 million, or 1%, compared to $192.2 million for the
fiscal year ended December 31, 1994.
Revenue from the Company's Oilfield Services was $145.3 million for 1995,
an increase of $4.1 million, or 3%, over 1994. The 1994 results included $8.3
million of sales related to a reclamation inspection facility project in Algeria
while 1995 results included $1.2 million of sales related to this project.
Excluding the Algerian project, inspection revenue was up $9.5 million in 1995
over 1994, with the increase split between North America (up $1.5 million) and
International (up $8.0 million) operations. The increase in North America
inspection revenue was primarily due to increased activity at the Company's
Houston facility and improved Canadian operations as a result of an alliance
with a major oil and gas company. The increase in international inspection
revenue was due to a $4.6 million increase in Latin American operations.
Revenue in Latin America was up due to the Company's acquisition of Argentina
operations from its former agent in that country and to the beginning of a three
year contract in Colombia with a major customer which was awarded during 1995.
In addition, international inspection revenue increased due
15
<PAGE>
to stronger activity in the Netherlands and throughout the Far East region.
Coating revenue was up $1.7 million in 1995 over 1994 primarily as a result of
the sale of coating plant equipment in Russia.
Pipeline Services revenue was $19.1 million for 1995, a decrease of $2.3
million (or 11%) compared to the $21.5 million earned in 1994. The decline was
primarily due to lower prices for conventional pipeline inspection services in
the U.S. in the first half of 1995, project delays in Nigeria, and a non
recurring equipment sale of $1.4 million in 1994.
Industrial Inspection revenue was $13.3 million for 1995, a decrease of
$3.6 million (or 21%) compared to $17.0 million in 1994. The decline was due
mainly to less work in Saudi Arabia and Germany. The decline in Saudi Arabia
was a result of a decline in activity for a major customer in that country while
the decline in Germany was due to industrial inspection work at nuclear power
plants in 1994 which was not repeated in 1995.
Mill Systems and Sales revenue was $10.0 million in 1995, a $1.7 million
(or 21%) increase over 1994 results of $8.3 million. The increase was due to a
full year's revenue from the NDT Systems operations which were acquired in
October 1994.
Other revenue was $2.2 million for 1995, a $2.0 million decrease from $4.2
million in 1994. The decline was due primarily to discontinued environmental
operations and lower tank inspection revenue in the Chicago market.
Gross Margin and Gross Profit. Gross profit was $51.6 million for 1995,
down slightly from $51.7 million in 1994. The decrease was due to a $2.2
million decrease in revenue in 1995, offset by stronger gross profit results
from improved productivity in the Southern U.S. inspection operations, greater
gross profit throughout the Far East inspection operations as a result of lower
fixed costs, and stronger results from Latin American inspection operations.
Gross margin (defined as revenue minus variable expense) as a percent of revenue
was 47.3% in 1995 compared to 46.2% in 1994. The improvement in gross margin
was due to improved gross margin percents in the U.S. and through increased
operations in high margin Latin American inspection locations.
Selling, General and Administrative Expense. Selling, general and
administrative costs of $20.7 million for 1995 was $779,000 (or 4%) less than
1994. The decrease was due mainly to lower 1995 bonuses and legal costs, offset
to some degree by greater overhead costs for Latin America operations.
Research and Engineering Costs. Research and engineering costs were $3.5
million for 1995 compared to $3.2 million in 1994. The increase was due
primarily to a full years cost of engineering associated with NDT's operations
which were acquired in October 1994.
Operating Profit. Operating profit was $27.5 million for 1995 compared to
$27.0 million in 1994. The operating profit improvement was mainly related to
the improved gross margin percents and lower selling, general, and
administrative costs discussed above.
Interest Expense. Interest expense was $12.3 million in 1995, a $138,000
increase from 1994. The increase was due to higher interest rates on variable
rate loans in 1995 than in 1994.
Other Expense (Income). Other expense (income), which includes interest
income, foreign exchange, amortization of debt financing cost, minority
interest, and other expense (net) resulted in a net income of $73,000 in 1995
compared to a net expense of $569,000 in 1994. The 1995 other expense (net)
results included a $1.7 million net gain from an arbitration award and a $1.0
million expense accrual for an Italian affiliate. While the investigation of
the Italian affiliate is ongoing, management currently believes that any
additional costs will be covered by the established reserve.
The Company reported foreign exchange gains of $440,000 in 1995 compared to
foreign exchange losses of $269,000 in 1994. The 1995 foreign exchange gains
were mainly the result of the weaker U.S. dollar (during the first half of 1995)
and gains on foreign subsidiaries which have U.S. dollar payables (accounts and
notes).
16
<PAGE>
Provision for Income Taxes. The Company reported an effective tax rate of
42% for 1995 and 1994. The effective tax rate is more than the statutory rate
primarily due to distributions of foreign earnings and nondeductible goodwill
amortization.
The Company has, as of December 31, 1995, gross deferred tax assets of
$14.4 million, including approximately $5.9 million of foreign tax credit
carryovers and $4.3 million of domestic and foreign net operating loss
carryovers. The Company has recorded a valuation allowance of $3.4 million
against these deferred tax assets. Realization of a substantial portion of the
Company's deferred tax assets will require the completion of certain tax
planning strategies. In the event the Company were to determine in the future
that any such tax planning strategies would not be implemented, an adjustment to
the deferred tax liability of up to $4.8 million would be charged to income in
the period such determination was made.
Extraordinary Item, Net of Income Tax Benefit. On June 30, 1994,
refinancing of TVI's senior secured term loan and revolving credit facility was
completed. The refinancing and related early retirement of existing senior debt
resulted in an extraordinary after-tax charge of $764,000 associated with the
write-off of unamortized debt fees in the second quarter of 1994. There were no
extraordinary charges in 1995.
Net Income (Loss). Net income was $8.8 million for 1995 compared to $7.5
million in 1994 due to the factors discussed above.
Year ended December 31, 1994 vs year ended December 31, 1993
Revenue. Revenue was $192.2 million for the fiscal year ended December 31,
1994, an increase of $8.8 million, or 5%, compared to $183.3 million for the
fiscal year ended December 31, 1993.
Revenue from the Company's Oilfield Services was $141.2 million for 1994,
an increase of $10.9 million, or 8%, over 1993. The increase was mainly due to
a $7.4 million increase in International Oilfield Services revenue as
International Inspection Services revenue increased $3.2 million (or 7%) and
International Coating Service revenue was up $4.2 million (or 33%). The
increase in International Inspection revenue was up due to $8.3 million in
equipment sales related to a reclamation facility in Algeria. Excluding the
Algerian equipment sales, International Inspection revenue would have decreased
$5.1 million as the International rig count dropped 5% and Inspection revenue
declined in Italy, Netherlands, and Saudi Arabia. International Coating revenue
increased as a result of a full years activity from the Company's Aberdeen,
Scotland coating facility and improved market conditions for drill pipe and line
pipe coating revenue in the Far East. North America Inspection revenue was up
$2.2 million (or 5%) due to an approximate $1.5 million increase in U.S.
inspection revenue and a $664,000 increase in Canada inspection revenue. The
increase in U.S. revenue was due in part to a 3% increase in the average U.S.
rig count in 1994 compared to 1993. The increase in Canada inspection revenue
was not reflective of the 42% increase in the Canadian rig count as the increase
in rig count was mainly due to shallow wells which do not require the Company's
services. North America Coating revenue increased $1.3 million (or 4%) in 1994
mainly as a result of greater revenue from the Company's Amelia, Louisiana
Coating facility related to increased offshore activity.
Pipeline Services revenue was $21.5 million for 1994, an increase of $1.2
million (or 6%) over the $20.3 million earned in 1993. The increase was due to
increased U.S. activity, initial service revenue in the former Soviet Union, and
the introduction of the Company's hi-resolution tool (TruRes/TM/) in the second
half of 1994.
Industrial Inspection revenue was $17.0 million for 1994, a decrease of
$3.5 million (or 17%) compared to $20.4 million in 1993. The decline was
primarily a result of lower activity in the Middle East due to a general decline
in Middle East gulf markets and delayed projects in Saudi Arabia.
Mill Systems and Sales revenue was $8.3 million, $1.5 million (or 15%) less
than 1993 revenue of $9.8 million. The decrease was due primarily to a $2.9
million reduction in mill equipment sales in 1994 compared to 1993, offset by
revenue of $1.4 million from the Company's NDT Systems business which was
purchased on October 7, 1994.
17
<PAGE>
Other revenue was $4.2 million for 1994, and included revenue from the
Company's tank inspection business, CTI Inspection Services Inc. (CTI), and
revenue from the Company's Environmental Services. The main reason for the $1.7
million increase in other revenue was primarily due to Environmental Services
revenue in Alaska during 1994 with no corresponding revenue in 1993.
Gross Margin and Gross Profit. Gross profit was $51.7 million for 1994, an
increase of $5.6 million (or 12%) over 1993. The improvement in gross profit
was due to greater revenue and a more favorable product line mix in 1994 than
1993; greater revenue in high margin product lines such as Pipeline Services and
Coating and less revenue in lower margin product lines such as Industrial
Inspection. Gross profit also improved due to lower fixed costs in 1994
compared to 1993 as a result of the 1993 restructure. Gross margin (defined as
revenue minus variable expense) as a percent of revenue was 46.2% in 1994
compared to 45.9% in 1993. The improvement in gross margin was due to stronger
margins in Pipeline Services as a result of the Company's new Hi-Resolution tool
and higher margins in International Coating especially in the Far East due to
strong market conditions in 1994. The increase in these margins was partially
offset by lower mill equipment sales in 1994.
Selling, General and Administrative Expense. Selling, general and
administrative costs of $21.5 million for 1994 was $5.3 million less than 1993
results. The 1993 results included bad debt reserves of $934,000 and litigation
costs of $1.4 million. Excluding these items, selling, general and
administrative expense decreased $2.9 million primarily due to cost reductions
achieved through the restructuring plan implemented during the third quarter of
1993. In addition, fewer active employees in the German pension plan in 1994
resulted in lower pension liabilities and a reduction in selling, general, and
administrative expense.
Research and Engineering Costs. Research and engineering costs were $3.2
million for 1994 compared to $3.7 million in 1993. The decrease was mainly due
to work performed during the second quarter of 1994 by the Mill engineering
group on deferred expense manufacturing projects associated with the sale or
lease of Rotary UT units (Truscope/TM/) as compared to research and engineering
expense projects in 1993.
Restructuring Costs. The Company incurred $13.3 million of restructuring
costs in the third quarter of 1993 in response to a decline in international
drilling activity and heavy discounting in the domestic markets. Restructuring
costs were mainly related to the Company's international operations as
international overhead personnel was reduced significantly, and total
international headcount was reduced by approximately 13%. The Company also
accrued for costs associated with consolidating certain international and
domestic facilities. North America headcount (fixed costs personnel) was also
reduced as part of the restructure. There were no comparative restructuring
charges in 1994.
Operating Profit. Operating profit was $27.0 million for 1994 compared to
$2.4 million in 1993. Excluding 1993 restructure charges of $13.3 million and
accruals for legal claims, bad debt reserves, and social taxes of $2.1 million,
1993 operating profit would have been $17.8 million. Operating profit
improvement was mainly related to the increase in revenue discussed above, and
the 1993 restructuring and resulting decrease in 1994 fixed costs (both
operations and selling, general, and administrative).
Interest Expense. 1994 interest expense of $12.2 million was $1.6 million
greater than 1993 interest expense of $10.6 million. The increase was mainly
related to the 1993 retirement of an interest swap agreement which resulted in a
gain and lower interest expense of approximately $1.2 million during 1993.
Other Expense (Income). Foreign exchange losses in 1994 were $269,000
compared to $793,000 in 1993. The majority of the 1993 loss was due to the high
inflation rates in Brazil which resulted in a foreign exchange loss of
approximately $383,000. The 1993 foreign exchange loss in Brazil was partially
offset by interest earned of $244,000, which is reflected in 1993 interest
income. The majority of the other 1993 foreign exchange loss was associated
with foreign exchange losses in the UK related to a decline in the pound
sterling. In addition, 1994 results included a net gain of $1.3 million from
the settlement of a South America insurance claim.
Provision (Benefit) for Income Taxes. The Company recorded a tax provision
for continuing operations of $6.0 million for the year ended December 31, 1994.
The recorded provision as a percentage of income before income taxes and
extraordinary items is 42%. The effective tax rate is more than the statutory
rate primarily due to distributions of foreign earnings and nondeductible
goodwill amortization.
18
<PAGE>
Extraordinary Item, Net of Income Tax Benefit. On June 30, 1994,
refinancing of TVI's senior secured term loan and revolving credit facility was
completed. The refinancing and related early retirement of existing senior debt
resulted in an extraordinary after-tax charge of $764,000 associated with the
write-off of unamortized debt fees in the second quarter of 1994.
On April 16, 1993, TVI completed its registration and sale of $75 million
of 10.75% Senior Subordinated Notes (Notes) due 2003. Substantially all of the
net proceeds from the sale of the Notes were used to redeem all of the $65.7
million of 14% Senior Subordinated Debentures due 1998, which were called at
107% of the principal balance on May 3, 1993. An extraordinary after-tax charge
of $4.5 million was recognized in the second quarter of 1993 due to the write-
off of fees and the call premium associated with the retirement of the $65.7
million 14% debentures.
Net Income (Loss). Net income was $7.5 million for 1994 compared to a loss
of $12.9 million in 1993 due to the factors discussed above.
FINANCIAL CONDITION AND LIQUIDITY
For the twelve months ended December 31, 1995, the Company generated $21.6
million of cash from operations as compared to $16.4 million for the same period
ended December 31, 1994, a 32% increase. The Company's principal use of the
cash generated from operations were for capital expenditures, costs of
acquisitions, and debt payments. At December 31, 1995, current assets and
liabilities were $4.7 million higher than December 31, 1994. The increase was
due primarily to increases in accounts receivable and inventory, and decreases
in accrued liabilities, and federal income taxes payable. Accounts
receivable increased $731,000 due to a 3% increase in revenue in the fourth
quarter of 1995 over 1994. Inventory was up $1.7 million due to additional
inventory parts associated with building additional hi-res pipeline pigs and
for the new Trusccope/TM/ system. Accrued liabilities, accounts payable, and
other liabilities decreased $2.6 million mainly due to severance payments on
the 1993 restructuring reserve and lower accrued interest payable. Federal and
foreign income taxes payable decreased $1.2 million due to an increase in
advance tax payments required as a result of prior year profitability of the
Company.
For the twelve months ended December 31, 1995, cash flows used for investing
activities were $1.1 million compared to $12.4 million for the twelve months
ended December 31, 1994. During 1995 cash flows used from investing activities
were related to capital expenditures of $7.6 million and $5.4 million
associated with the acquisition of the Argentine operations. This use of funds
was offset by a cash inflow of $12.5 million from a sale-leaseback of the
Company's Sheldon Road facility. Capital expenditures consist primarily of
routine renovations and additions to property and equipment, with 1995 capital
spending concentrated mainly on the expansion of the Amelia, Louisiana
inspection facility and construction of Truscope/TM/ (rotary ultrasonic
inspection system). The Company's planned 1996 capital spending is expected to
approximate $8.5 million, excluding any effects of the Drexel merger. The
Company expects to fund its capital expenditure requirements in 1996 principally
from cash generated from operations and its revolving credit line.
For the twelve months ended December 31, 1995, net cash used for financing
activities was $19.9 million compared to net cash provided by financing
activities of $1.9 million for the twelve months ended December 31, 1994. The
majority of the cash flow used for financing activities relates to principal
payments on the Company's debt. Current and long-term debt was $111.6 million
at December 31, 1995, a decrease of $18.7 million from December 31, 1994. The
decrease was primarily due to a $12.5 million payment on the Company's senior
debt with proceeds from the sale-leaseback of the Company's Sheldon Road
facility in Houston, Texas. The remaining decrease was due to the retirement of
the SOS debt, $2.5 million, and installment payments on the senior debt and
debt secured by the Aberdeen facility. The Company's outstanding debt at
December 31, 1995 consisted of $75 million of 10.75% Senior Subordinated Notes
due 2003, $7.5 million of term loans due under the Company's Senior Credit
Agreement, $20.0 million due under the Company's $35 million revolving credit
facility, $5.1 million of notes payable related to the construction of the
Aberdeen, Scotland coating facility, $2.0 million of industrial revenue bonds,
and $2.0 million of other outstanding debt.
The Company had $9.5 million available for borrowing at December 31, 1995
under a $35 million revolving credit facility. Approximately $5.5 million of
this revolving line of credit facility was used for outstanding letters of
credit.
19
<PAGE>
The Company also had $252,000 of outstanding letters of credit against the $1
million letter of credit note under this facility, and approximately $748,000 of
remaining credit available.
The Company's bank credit agreement and the Indenture prohibits the Company
from paying dividends on the Tuboscope Common Stock.
See discussion of the Company's risk factors and foreign operations in Note 1
to the Consolidated Financial Statements.
On January 3, 1996, the Company entered into a definitive merger agreement
with D.O.S. Ltd. ("Drexel") providing for the merger of a wholly owned
subsidiary of the Company with and into Drexel. The merger agreement provides
that, upon consummation of the merger, stockholders of Drexel will receive .4645
share of the Company's common stock for each share of issued and outstanding
Drexel common stock. The merger is subject to a number of closing conditions,
including the approval of the Company's shareholders.
In connection with the proposed merger, the Company also announced (i) the
sale of 4,200,000 shares of Tuboscope Common Stock and warrants to purchase up
to 2,533,000 shares of Tuboscope Common Stock for $31,000,000 to SCF-III, L.P.,
and (ii) the exchange of 100,000 shares of outstanding Tuboscope Series A
Preferred Stock held by Baker Hughes Incorporated for 1,500,000 shares of
Tuboscope Common Stock and warrants to purchase up to 1,250,000 shares of
Tuboscope Common Stock.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 121 established "accounting
standards for the impairment of the long-lived assets, certain identified
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of." The
new statement requires the value of long-lived assets, certain identifiable
intangibles, and goodwill to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If this change in circumstances or other initial indication has
occurred, the next step in determining whether an asset has been impaired is
performed using the expected future undiscounted cash flows of assets, grouped
at the lowest level for which there are identifiable cash flows, compared to the
carrying value of those assets. If the undiscounted cash flow value is less
than the net carrying value, the amount of impairment is then measured by
comparing the discounted cash flows with the corresponding carrying values of
the assets evaluated. SFAS No. 121 is effective for financial statements for
fiscal years beginning after December 15, 1995. The Company plans to adopt
SFAS No. 121 in the first quarter of 1996. The Company's existing policy is to
evaluate the realizability of long-term assets on an aggregate basis based on
undiscounted cash flows. Management has accumulated preliminary cash flow
information at the lowest asset grouping levels for which there are identifiable
cash flows. These levels are represented by separate product line operations at
individual operating locations. Based on the preliminary data, the Company's
adoption of SFAS No. 121 is expected to result in a write-down of long-lived
assets in a range of approximately $40 million to $45 million in the first
quarter of 1996. This write-down of long-lived assets is a result of both the
adoption of SFAS No. 121 which requires assets to be evaluated at their lowest
level for which there are identifiable cash flows and initial indications of
possible impairments as a result of the certain factors discussed below.
The original purchase accounting for the Company was in May 1988 (when the
Company was acquired from Minstar) and was related primarily to North American
assets. At that time, 75% of the Company's sales were derived from North
American operations. Since the second quarter of 1988, the average U.S. rig
count has declined by 21%, from 902 in the second quarter of 1988 to 705 in 1996
(average through February 23, 1996). Rig activity increased from 1988 to
1990, peaking at 1,179 in December of 1990, and then subsequently declined to a
post WWII low of 596 in June 1992. While rig activity increased slightly in 1993
and 1994, it again declined in 1995. This overall decline has continued during
this time period despite periodic independent forecasts, which predicted
increasing rig activity.
In October 1991, the Company completed the acquisition of substantially all
the foreign operations of Baker Hughes Tubular Services, Inc. (Vetco Services)
for $50,000,000 in cash, $10,000,000 of Redeemable Series A Convertible
20
<PAGE>
Preferred Stock and 1,686,047 shares of Common Stock valued at $8.60 per share
or $14,500,000. The acquisition of these foreign operations transformed the
Company into a global organization, which in 1995 and 1994 had 50% and 52%,
respectively, of its revenue earned outside of North America. At the time of
the acquisition (3rd quarter of 1991), the international rig count was 907. The
international rig count has since declined 15% to 767 in the fourth quarter of
1995. In specific international areas, the average rig activity has declined
50% in Italy and 37% in the Far East from October 1991 compared to December
1995. The Company expects write-downs in both of these international areas.
As a result of the expected $40 million to $45 million write-down of long-
lived assets, depreciation and amortization is expected to be reduced by
approximately $2,500,000 on an annual basis and total equity by approximately
$35,000,000 to $40,000,000. The majority of the assets to be written off are
expected to be intangible assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is filed as a separate part of this Report (see
page 22).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the captions "Proposal to Elect Tuboscope Directors," "Management and
Operations After the Merger-Directors After the Merger and "-Executive Offices
After the Merger" of the registrant's definitive Proxy Statement for its 1996
Annual Meeting to be filed with the Securities and Exchange Commission (the
"Commission") on or before April 30, 1996.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the captions "Proposal to Elect Tuboscope Directors-Executive
Compensation," "-Executive Committee Report on Executive Compensation," "-
Compensation Committee Interlocks and Insider Participation" and "-Performance
Graph" of the registrant's definitive Proxy Statement for its 1996 Annual
Meeting to be filed with the Commission on or before April 30, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Security Ownership of Certain Beneficial Owners and
Management of Tuboscope," of the registrant's definitive Proxy Statement for its
1996 Annual Meeting to be filed with the Commission on or before April 30, 1996.
21
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal to Elect Tuboscope Directors-Certain Transactions"
of the registrant's definitive Proxy Statement for its 1996 Annual Meeting to be
filed with the Commission on or before April 30, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. The list of financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by Independent Auditors' Report
are filed as part of this Report (see page 24).
2. The list of financial statement schedules contained in the accompanying
Index to Consolidated Financial Statements covered by Independent
Auditors' Report are filed as part of this Report (see page 24).
3. The list of exhibits contained in the Index to Exhibits are filed as
part of this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1995. The
Company filed a Current Report on Form 8-K on February 16, 1996.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By /s/ MARTIN R. REID
------------------------------
Martin R. Reid
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MARTIN R. REID Chairman of the Board March 20, 1996
- -------------------------------
Martin R. Reid
/s/ WILLIAM V. LARKIN, JR. Director March 20, 1996
- ------------------------------- President and Chief Executive
William V. Larkin, Jr. Officer
(Principal Executive Officer)
/s/ RONALD L. KOONS Executive Vice President, Chief March 20, 1996
- ------------------------------- Financial Officer and Treasurer
Ronald L. Koons (Principal Financial and
Accounting Officer)
/s/ MARTIN I. GREENBERG Vice President, Controller, March 20, 1996
- ------------------------------- Assistant Treasurer and
Martin I. Greenberg Assistant Secretary
/s/ JEROME R. BAIER Director March 20, 1996
- -------------------------------
Jerome R. Baier
/s/ MARTIN G. HUBBARD Director March 20, 1996
- -------------------------------
Martin G. Hubbard
/s/ ERIC L. MATTSON Director March 20, 1996
- -------------------------------
Eric L. Mattson
/s/ TIMOTHY M. PENNINGTON, III Director March 20, 1996
- -------------------------------
Timothy M. Pennington, III
/s/ PATRICK T. SEAVER Director March 20, 1996
- -------------------------------
Patrick T. Seaver
/s/ JAMES J. SHELTON Director March 20, 1996
- -------------------------------
James J. Shelton
/s/ FREDERICK J. WARREN Director March 20, 1996
- -------------------------------
Frederick J. Warren
</TABLE>
23
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
Tuboscope Vetco International Corporation:
<S> <C>
Report of Independent Auditors................................................................ 25
Consolidated Balance Sheets as of December 31, 1995 and 1994.................................. 26
Consolidated Statements of Operations for the years ended December 31, 1995, 1994, 1993....... 27
Consolidated Statements of Common Stockholders' Equity and Redeemable Preferred
Stock for the years ended December 31, 1995, 1994, 1993.................................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, 1993....... 29
Notes to Consolidated Financial Statements.................................................... 30
The following financial statement schedules of the registrant and its subsidiaries required to be
included in Item 14(a)(2) are listed below:
Schedule I Parent Company Only Condensed Balance Sheets...................................... 47
Schedule IParent Company Only Condensed Statements of Operations.............................. 48
Schedule IParent Company Only Condensed Statements of Cash Flows.............................. 49
Schedule IParent Company Only Notes to Condensed Financial Statements......................... 50
Schedule IIValuation and Qualifying Accounts.................................................. 51
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted or the information is presented in the consolidated financial
statements or related notes.
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tuboscope Vetco International Corporation
We have audited the accompanying consolidated balance sheets of Tuboscope
Vetco International Corporation as of December 31, 1995 and 1994 and the related
consolidated statements of operations, common stockholders' equity and
redeemable preferred stock, and cash flows for each of the three years in the
period ended December 31, 1995. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tuboscope Vetco International Corporation at December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
February 17, 1996
25
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
A S S E T S
-----------
Current assets:
<S> <C> <C>
Cash and cash equivalents......................................................... $ 9,394 $ 8,531
Accounts receivable, net.......................................................... 52,071 51,068
Inventory, net.................................................................... 14,364 12,431
Deferred federal income taxes..................................................... 2,521 2,701
Prepaid expenses and other........................................................ 6,403 6,263
-------- --------
Total current assets............................................................ 84,753 80,994
-------- --------
Property and equipment:
Land, buildings and leasehold improvements........................................ 81,557 89,889
Operating equipment............................................................... 102,257 99,508
Equipment leased to customers..................................................... 2,930 3,079
Accumulated depreciation and amortization......................................... (46,706) (42,581)
-------- --------
Net property and equipment...................................................... 140,038 149,895
Identified intangibles, net......................................................... 29,379 32,139
Goodwill, net....................................................................... 47,751 49,032
Other assets, net................................................................... 4,758 4,967
-------- --------
Total assets.................................................................... $306,679 $317,027
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable.................................................................. $ 14,306 $ 15,010
Accrued liabilities............................................................... 18,705 19,766
Federal and foreign income taxes payable.......................................... 2,557 3,787
Current portion of long-term debt and short-term borrowings....................... 4,562 6,505
-------- --------
Total current liabilities....................................................... 40,130 45,068
Long-term debt...................................................................... 107,055 123,851
Pension liabilities................................................................. 9,869 9,306
Deferred taxes payable.............................................................. 16,411 13,534
Other liabilities................................................................... 1,598 1,669
Commitments and contingencies (Notes 7 and 11)
Total liabilities............................................................... 175,063 193,428
-------- --------
Redeemable Series A Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 100,000 shares issued and outstanding.............................. 10,175 10,175
-------- --------
Common stockholders' equity:
Common stock, $.01 par value, 35,000,000 shares authorized, 18,546,075 shares
issued and outstanding (18,466,763 at December 31, 1994)....................... 185 184
Paid-in capital.................................................................. 116,379 115,982
Retained earnings (deficit)...................................................... 6,650 (1,469)
Cumulative translation adjustment................................................ (1,773) (1,273)
-------- --------
Total common stockholders' equity............................................... 121,441 113,424
-------- --------
Total liabilities and equity.................................................... $306,679 $317,027
======== ========
</TABLE>
See accompanying notes.
26
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Sale of services............................................... $ 178,608 $ 175,371 $ 173,477
Sale of products............................................... 7,844 13,573 6,709
Rental income.................................................. 3,563 3,231 3,154
----------- ----------- -----------
190,015 192,175 183,340
----------- ----------- -----------
Costs and expenses:
Cost of services sold.......................................... 132,799 131,326 132,752
Cost of products sold.......................................... 4,258 7,935 3,260
Amortization of goodwill....................................... 1,310 1,201 1,176
Selling, general and administrative............................ 20,732 21,511 26,773
Research and engineering costs................................. 3,456 3,154 3,678
Restructuring costs............................................ - - 13,256
----------- ----------- -----------
162,555 165,127 180,895
----------- ----------- -----------
Operating profit................................................. 27,460 27,048 2,445
Other expense (income):
Interest expense............................................... 12,328 12,190 10,595
Interest income................................................ (210) (343) (457)
Foreign exchange (gains) losses................................ (440) 269 793
Amortization of debt financing cost............................ 540 711 838
Minority interest.............................................. 652 680 884
Other, net..................................................... (615) (748) 599
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item......... 15,205 14,289 (10,807)
Provision for (benefit from) income taxes........................ 6,386 6,001 (2,445)
----------- ----------- -----------
Income (loss) before extraordinary item.......................... 8,819 8,288 (8,362)
Extraordinary item, net of income tax benefits of $411,000 and
$2,421,000 in 1994 and 1993, respectively...................... -- (764) (4,497)
----------- ----------- -----------
Net income (loss)................................................ 8,819 7,524 (12,859)
Dividends applicable to preferred stock.......................... 700 700 700
----------- ----------- -----------
Net income (loss) applicable to common stock..................... $ 8,119 $ 6,824 $ (13,559)
=========== =========== ===========
Earnings (loss) per common share:
Income (loss) before extraordinary item and after deduction
of preferred stock dividends................................. $.44 $.41 $(.49)
Extraordinary item............................................. -- (.04) (.25)
----------- ----------- -----------
Net income (loss).............................................. $.44 $.37 $(.74)
=========== =========== ===========
Weighted average number of common shares outstanding............. 18,530,338 18,447,059 18,355,454
=========== =========== ===========
</TABLE>
See accompanying notes.
27
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON RETAINED CUMULATIVE REDEEMABLE
STOCK PAID-IN EARNINGS TRANSLATION PREFERRED
$.01 PAR CAPITAL (DEFICIT) ADJUSTMENT STOCK
-------- --------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992................................. $182 $113,925 $ 5,266 $ 476 $10,175
Common stock issued, 199,000
shares at $8.625 per share............................. 2 1,714 -- -- --
Common stock issued, 5,902 shares at various
option prices from $.32 to $6.875, on date issued,
per share.............................................. -- 29 -- -- --
Dividends paid during 1993 ($5.25 per share for
Series A Convertible Preferred Stock) net of........... --
December 31, 1992 accrual.............................. -- -- (525) -- (175)
Dividends accrued at December 31, 1993 ($1.75 per share
for Series A Convertible Preferred Stock).............. -- -- (175) -- 175
Translation adjustment..................................... -- -- -- (2,779) --
Net loss................................................... -- -- (12,859) -- --
-------- --------- -------- ----------- -------
Balance, December 31, 1993................................. 184 115,668 (8,293) (2,303) 10,175
Common stock issued, 40,216 shares
at an average price of $6.24 per share................ -- 251 -- -- --
Common stock issued, 14,135 shares
at $4.356 per share................................... -- 63 -- -- --
Dividends paid during 1994 ($5.25 per share
for Series A Convertible Preferred Stock), net of
December 31, 1993 accrual............................. -- -- (525) -- (175)
Dividends accrued at December 31, 1994 ($1.75 per share
for Series A Convertible Preferred Stock)............. -- -- (175) -- 175
Translation adjustment..................................... -- -- -- 1,030 --
Net income................................................. -- -- 7,524 -- --
-------- --------- -------- ----------- -------
Balance, December 31, 1994................................. 184 115,982 (1,469) (1,273) 10,175
Common stock issued, 71,171 shares
at an average price of $5.59 per share................ 1 397 -- -- --
Dividends paid during 1995 ($5.25 per share
for Series A Convertible Preferred Stock), net of
December 31, 1994 accrual.............................. -- -- (525) -- (175)
Dividends accrued at December 31, 1995, ($1.75 per share
for Series A Convertible Preferred Stock............... -- -- (175) -- 175
Translation adjustment..................................... -- -- -- (500) --
Net Income................................................. -- -- 8,819 -- --
-------- --------- -------- ----------- -------
Balance, December 31, 1995................................. $185 $116,379 $ 6,650 $(1,773) $10,175
======== ========= ======== =========== =======
</TABLE>
See accompanying notes.
28
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)................................................... $ 8,819 $ 7,524 $(12,859)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization....................................... 15,037 14,380 14,218
Compensation related to employee 401(K) plan........................ 239 251 --
Provision (recovery) for losses on accounts receivable.............. (272) -- 1,084
Provision (recovery) for losses on inventory........................ (275) 91 9
Write-off of property and equipment................................. -- -- 2,754
Write-off of unamortized debt fees.................................. -- 1,175 2,319
Provision (benefit) for deferred income taxes....................... 3,057 901 (8,638)
Accrued differential on reverse interest rate swap agreements....... -- -- (680)
Pension amortization benefit........................................ (315) (315) (315)
Changes in current assets and liabilities, net of effects from
various acquisitions:
Accounts receivable....................................... (731) (31) (9,146)
Inventory............................................... (1,658) (42) 522
Prepaid expenses and other.............................. (762) (210) 36
Accounts payable, accrued liabilities and other......... (2,594) (7,797) 14,563
Federal and foreign income taxes payable................ 158 821 (1,568)
Pension liabilities....................................... 878 (359) 189
-------- -------- --------
Net cash provided by operating activities........................... 21,581 16,389 2,488
-------- -------- --------
Cash flows used for investing activities:
Capital expenditures................................................ (7,645) (7,549) (14,640)
Proceeds from sale-leaseback of Sheldon Road facility............... 12,500 -- --
Business acquisitions, net of cash acquired......................... (5,373) (4,000) (1,103)
Prepaid lease costs................................................. -- -- 1,200
Reduction of other liabilities, related to Vetco acquisition........ -- -- (1,213)
Other............................................................... (566) (819) (204)
-------- -------- --------
Net cash used for investing activities.............................. (1,084) (12,368) (15,960)
-------- -------- --------
Cash flows provided by (used for) financing activities:
Borrowings under financing agreements............................... 1,844 76,022 100,431
Principal payments under financing agreements....................... (20,825) (72,082) (86,527)
Debt issuance costs................................................. (95) (1,387) --
Purchase of foreign currency options................................ (258) -- --
S-3 filing costs.................................................... -- -- (2,464)
Dividends paid on Redeemable Series A Convertible Preferred Stock... (700) (700) (700)
Issuance of common stock under employee stock plan.................. 125 63 --
Proceeds from sale of common stock.................................. 34 -- 29
-------- -------- --------
Net cash provided by (used for) financing activities................ (19,875) 1,916 10,769
-------- -------- --------
Effect of exchange rate changes on cash............................. 241 102 (118)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................ 863 6,039 (2,821)
Cash and cash equivalents:
Beginning of period................................................. 8,531 2,492 5,313
-------- -------- --------
End of period....................................................... $ 9,394 $ 8,531 $ 2,492
======== ======== ========
</TABLE>
See accompanying notes.
29
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
1. NATURE OF BUSINESS AND RISK FACTORS
The Company is primarily engaged in the inspection and coating of oil
country tubular goods (drill pipe, line pipe, casing and tubing), and the in
place inspection of oil and gas pipelines. Demand for the Company's inspection
services is based, in part, on the relatively low cost of such services compared
to the potential cost to a customer of the failure of a tubular or pipeline
segment. The Company's results depend to a large extent upon the level of
worldwide oil drilling and production activity, the price of oil and gas, and
worldwide oil and gas inventory levels.
The Company operates in over 54 countries in North America, Latin
America, Europe, Africa, the Middle East, and the Far East. Approximately 50%
of the Company's 1995 revenue was earned outside of North America, and as a
result, the Company's operations are subject to the risks normally associated
with conducting business in foreign countries, including uncertain political and
economic environments, which may limit or disrupt markets, restrict the
movements of funds or result in the deprivation of contract rights or the taking
of property without compensation.
In addition, the Company has significant international customer
concentrations in such countries as Saudi Arabia, Venezuela, Columbia, Italy,
and Argentina whose spending can be volatile based on oil price changes, the
political environment, and delays in the government budget. Adverse changes in
individual circumstances can have a significant negative impact on the financial
performance of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the
accounts of Tuboscope Vetco International Corporation (the Company) and its
wholly owned subsidiaries, Tuboscope Vetco International Inc. (TVI), Tuboscope
Vetco Capital Corporation (TVCC), and CTI Inspection Services, Inc. (CTI). All
significant intercompany accounts and transactions have been eliminated.
Revenue recognition
The Company recognizes revenue when goods are shipped or when services
are rendered. On large equipment sales which have multiple completion stages
and which the collection of payment is assured, the Company recognizes revenue
under the percentage of completion method.
Research and engineering costs
Research and engineering costs include support services for
redesigning or improving existing products, as well as upgrading current
capabilities to meet customer needs or requirements, and research and
development costs.
Research and development costs are accumulated through engineering
research and development projects. Research and development expenses, included
in research and engineering costs, amounted to approximately $577,000,
$1,147,000, and $1,262,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
30
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
Environmental costs
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Environmental costs which extend the
life, increase the capacity or improve the safety or efficiency of property
owned by the Company are capitalized. Costs which prevent environmental
contamination that has yet to occur are also capitalized. Liabilities are
recorded when environmental assessments and/or remedial efforts are probable,
and the cost can be reasonably estimated.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable are net of allowances for doubtful accounts of
approximately $955,000 and $1,599,000 in 1995 and 1994, respectively.
Inventory
The Company maintains inventory consisting of equipment components,
subassemblies and expendable parts required to manufacture and support its
tubular inspection equipment and coating facilities. Equipment under production
for specific sale and lease contracts is also included in equipment components
and parts. Expendable parts are charged to maintenance or supply expense as
used. Components and parts maintained at outlying coating and inspection
facilities are not generally inventoried and parts issued to these locations are
charged to maintenance expense upon issuance when not inventoried.
Rehabilitated equipment and parts are restored to inventory at their net
rehabilitation cost.
Inventory is stated at the lower of cost, as determined by the
weighted moving average method, or market. At December 31, inventory consists
of the following (in thousands):
1995 1994
--------- ---------
Components, subassemblies and expendable parts... $12,976 $11,468
Equipment under production....................... 3,185 3,044
Inventory reserve................................ (1,797) (2,081)
------- -------
Inventory, net................................... $14,364 $12,431
======= =======
Property and equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives for financial reporting
purposes and generally by the accelerated or modified accelerated costs recovery
systems for income tax reporting purposes. Estimated useful lives are 33 years
for buildings and 5-12 years for machinery and equipment. The cost of repairs
and maintenance is charged to income as incurred. Major repairs and improvements
are capitalized and depreciated over the remaining useful life of the asset. The
depreciation of fixed assets recorded under capital lease agreements is included
in depreciation expense. Property and equipment depreciation expense was
$10,515,000, $10,159,000, and $9,665,000, for December 31, 1995 1994, and 1993
respectively.
31
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
Identified intangibles
Identified intangibles are being amortized on a straight-line basis, over
estimated useful lives between 5 and 40 years, and are presented net of
accumulated amortization of approximately $12,567,000 and $10,438,000 at
December 31, 1995 and 1994, respectively. Identified intangibles consist
primarily of technology, patents, trademarks, license agreements, existing
service contracts and covenants not to compete.
Goodwill
Goodwill represents the excess of the purchase price over the fair market
value of the net assets acquired and is principally related to the acquisition
of "Vetco Services". Such excess costs are being amortized on a straight-line
basis over an estimated useful life of 40 years. Accumulated amortization at
December 31, 1995 and 1994 was approximately $5,145,000 and $3,835,000,
respectively. The carrying value of goodwill will be reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill would be reduced by the estimated
shortfall of cash flows.
Adoption of Statement of Financial Accounting Standards No. 121
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 121 established "accounting
standards for the impairment of the long-lived assets, certain identified
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of." The
new statement requires the value of long-lived assets, certain identifiable
intangibles, and goodwill to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If this change in circumstances or other initial indication has
occurred, the next step in determining whether an asset has been impaired is
performed using the expected future undiscounted cash flows of assets, grouped
at the lowest level for which there are identifiable cash flows, compared to the
carrying value of those assets. If the undiscounted cash flow value is less
than the net carrying value, the amount of impairment is then measured by
comparing the discounted cash flows with the corresponding carrying values of
the assets evaluated. SFAS No. 121 is effective for financial statements for
fiscal years beginning after December 15, 1995. The Company plans to adopt
SFAS No. 121 in the first quarter of 1996. The Company's existing policy is to
evaluate the realizability of long-term assets on an aggregate basis based on
undiscounted cash flows. Management has accumulated preliminary cash flow
information at the lowest asset grouping levels for which there are identifiable
cash flows. These levels are represented by separate product line operations at
individual operating locations. Based on the preliminary data, the Company's
adoption of SFAS No. 121 is expected to result in a write-down of long-lived
assets in a range of approximately $40 million to $45 million in the first
quarter of 1996.
Accounting for income taxes
Under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" (SFAS No. 109), deferred income taxes are recognized for the tax
effects of temporary differences between the financial reported carrying amounts
of assets and liabilities and the income tax amounts.
Financial instruments
Prior to 1994, TVI entered into reverse interest rate swap agreements in the
management of interest rate exposure. The differential to be paid or received
is normally accrued as interest rates change and is recognized over the life of
the agreements or hedged liability, whichever is shorter. In addition, from
time to time TVI enters into
32
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
forward foreign currency contracts. Gains and losses resulting from these
instruments are recognized in the same period as the underlying hedged
transaction. The purpose of these hedges is to reduce exposure to currency
movements affecting existing foreign currency denominated assets, liabilities
and firm commitments resulting primarily from trade receivables and payables and
intercompany loans. There were no reverse interest rate swap agreements,
foreign currency hedges or contracts, or other outstanding derivative financial
instruments at December 31, 1995, other than the interest rate cap agreement as
discussed in Note 7.
Foreign exchange rates
Revenue and expenses for foreign operations have been translated into U.S.
dollars using average exchange rates and reflect currency exchange gains and
losses resulting from transactions conducted in other than local currencies.
Substantially all foreign assets and liabilities have been translated at the
end of each year at year-end exchange rates with the difference reflected in
stockholders' equity as a cumulative translation adjustment.
Deferred charges
Costs incurred in conjunction with the issuance and registration of long-term
debt are included in other assets and are being amortized on a straight-line
basis over the term of the related debt. Amortization of these costs amounted
to approximately $540,000, $711,000, and $838,000, for the years ended December
31, 1995, 1994 and 1993, respectively.
Earnings per common share
The computation of earnings per common share is based on net income reduced by
preferred stock dividend requirements, divided by the weighted average number of
outstanding common shares and common stock equivalents. Common stock equivalents
include stock options outstanding under the treasury stock method for years
ending 1995 and 1994. Common stock equivalents were not included in the year
ending 1993 as they would be considered anti-dilutive.
Reclassification of prior year amounts
Certain reclassifications of 1994 and 1993 amounts have been made to conform
to the 1995 financial statement presentation.
Use of estimates in the preparation of financial statements
The consolidated financial statements and related notes, which have been
prepared in conformity with generally accepted accounting principles, require
the use of management estimates.
3. ACQUISITIONS
On September 6, 1995, TVI acquired the assets and operations of its former
agent in Argentina for $5,000,000 in cash, the assumption of $242,000 in debt,
and acquisition costs of $373,000. An additional contingent payment of
$758,000 will be made if certain revenue levels are realized. The assets
purchased included inspection equipment used in the inspection of oil country
tubular goods, sucker rod inspection technology, and covenant not to compete
agreements with the former owners. The acquisition was accounted for under the
purchase method of accounting.
33
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
On October 7, 1994, TVI acquired all the manufacturing and inspection
equipment and inventory of NDT Systems, Inc. and certain related companies (NDT)
for $4,000,000 in cash. NDT manufactures and sells equipment used in the
inspection of oil country tubular goods and provides oilfield inspection
services in the United Kingdom.
On February 4, 1993, the Company acquired certain assets and liabilities of DJ
Inspection Services Inc. (DJ) for approximately $612,000 in cash and the
assumption of approximately $1,836,000 of lease obligations. The assets
purchased included inspection equipment used in the inspection of oil country
tubular goods and covenant not to compete agreements from both DJ and its
majority owner.
The Company acquired the assets and certain liabilities of CTI Inspection
Services Inc. on April 1, 1993. The purchase price consisted of $200,000 in
cash and common stock valued at approximately $1,716,000. The acquisition has
been accounted for as a purchase. CTI is engaged in the business of above
ground storage tank and vessel inspection.
4. ACCRUED LIABILITIES
At December 31, accrued liabilities consist of the following (in thousands):
1995 1994
------- -------
Accrued compensation............... $ 4,531 $ 5,089
Accrued restructuring costs........ 1,963 4,760
Accrued interest................... 1,760 2,471
Accrued insurance.................. 3,364 3,047
Real estate, sales and other taxes. 1,126 1,183
Accrued commissions................ 2,132 1,150
Other.............................. 3,829 2,066
------- -------
$18,705 $19,766
======= =======
5. RESTRUCTURING COSTS
In 1993, the Company incurred a $13,256,000 restructuring charge as a
result of a restructuring plan implemented in response to international and
domestic market conditions. International drilling declined throughout 1993 as
evidenced by the decline in the international rig count, which averaged 770 rigs
for the first nine months of 1993, down from 870 rigs in the same period of
1992. In addition, heavy discounting in the domestic market resulted in lower
operating margins. In response to these factors, management implemented a major
restructuring plan in the third quarter of 1993.
The restructuring charge was related mainly to estimated severance costs
associated with international and domestic overhead personnel, and costs to
close certain facilities. During 1995 and 1994 approximately $2,797,000 and
$4,400,000, respectively, was charged against the restructuring accrual for
international and domestic cash severance payments and costs associated with
closing certain facilities.
At December 31, 1995, the Company had approximately $1,963,000 remaining in
accrued liabilities related to the restructuring and completion of the original
plan. The remaining accrual at December 31, 1995 was related mainly to the
continuation of foreign severance payments.
34
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
6. INCOME TAXES
The components of income (loss) before income taxes and extraordinary item
consist of the following (in thousands):
DECEMBER 31,
------------------------------
1995 1994 1993
--------- -------- ---------
Domestic.... $(2,610) $ 1,874 $(14,713)
Foreign..... 17,815 12,415 3,906
------- ------- --------
$15,205 $14,289 $(10,807)
======= ======= ========
Such income is inclusive of various intercorporate eliminations of income or
expense items, such as royalties, interest and similar items that are taxable or
deductible in the respective locations. Such income is also inclusive of export
sales by domestic locations. Therefore, the relationship of domestic and
foreign taxes to reported domestic and foreign income is not representative of
actual effective tax rates.
The provision for income taxes (benefit) before extraordinary item consists of
the following at December 31 (in thousands):
1995 1994 1993
-------- -------- --------
Current provision (benefit):
Federal............................. $ 1,933 $ 907 $ (715)
State............................... 246 204 100
Foreign............................. 1,150 3,989 4,386
------- ------ -------
Total current provision........... 3,329 5,100 3,771
------- ------ -------
Deferred provision (benefit):
Federal............................. (2,294) (731) (3,216)
State............................... (187) (400) (170)
Foreign............................. 5,538 2,032 (2,830)
------- ------
Total deferred provision (benefit) 3,057 901 (6,216)
------- ------ -------
Total provision (benefit)......... $ 6,386 $6,001 $(2,445)
======= ====== =======
Additionally, in 1994 the Company recorded a current tax benefit of
$411,000 relating to the extraordinary item of $1,175,000 and in 1993 the
Company recorded a deferred tax benefit of $2,421,000 relating to the
extraordinary item of $6,918,000.
During 1993, the Revenue Reconciliation Act of 1993 became law. Under the
Act, the maximum federal income tax rate was retroactively increased from 34% to
35% which resulted in an additional $394,000 provision for deferred tax
liabilities.
The reconciliation of the expected to the computed tax provision (benefit) is as
follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate................................. $ 5,322 $ 5,001 $(3,783)
Foreign tax credits utilized.................................................... (1,239) (1,807) (1,936)
Foreign withholding taxes....................................................... 927 1,243 1,761
Valuation allowance against net operating loss, net of carryover benefits....... 907 448 862
Nondeductible goodwill amortization............................................. 266 331 595
Foreign earnings subject to tax at rates differing from federal statutory rate.. (430) (217) (475)
Increase in federal income tax rate............................................. -- -- 394
Utilization of foreign net operating loss carryover............................. (83) (149) (346)
Federal income tax provision on distributed foreign earnings.................... 905 1,142 332
State income taxes, net of federal benefit...................................... 33 (127) (46)
Other, net...................................................................... (222) 136 197
------- ------- -------
$ 6,386 $ 6,001 $(2,445)
======= ======= ========
</TABLE>
35
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ --------------
<S> <C> <C>
Gross deferred tax assets:
Foreign tax credit carryforward......................... $ 5,943 $ 4,673
Domestic and foreign net operating losses............... 4,255 3,138
Accrued liabilities and other reserves................. 1,228 1,756
Investment tax credit carryforward...................... -- 1,934
Reclamation accruals.................................... -- 169
Retirement and benefit accruals......................... 151 682
Inventory reserves...................................... 2,086 2,286
Elimination of intercompany markup...................... - 0 - 2,054
Minimum tax credit carryforward......................... 276 276
Other deferred tax assets............................... 466 528
--------- --------
Subtotal gross deferred tax assets.................... 14,405 17,496
Valuation allowance..................................... (3,404) (1,310)
--------- --------
Net deferred tax assets................................... 11,001 16,186
-------- ---------
Gross deferred tax liabilities:
Property and equipment.................................. (13,683) (19,684)
Intangible assets....................................... (3,831) (3,277)
Reserve for legal entity restructure and foreign earnings (2,874) (2,874)
Pension liability....................................... (1,132) (748)
Elimination of intercompany markup...................... (2,664) --
All other............................................... (707) (436)
-------- ---------
Gross deferred tax liabilities............................ (24,891) (27,019)
-------- ---------
Total net deferred tax liability.......................... $(13,890) ($10,833)
======== =========
</TABLE>
The total net deferred tax liability is comprised of $2,521 of net current tax
assets and $16,411 net noncurrent deferred tax liabilities.
The Company has undistributed earnings of foreign subsidiaries, as
calculated under the laws of the jurisdiction in which the foreign subsidiary is
located, of approximately $5,456,000 at December 31, 1995. If such earnings
were repatriated, foreign withholding taxes of approximately $516,000 would
result. The Company has already recognized and provided federal income taxes
related to the majority of these earnings of its foreign subsidiaries. It is
not practical to determine the amount of federal income taxes, if any, that
might become due in the event that the balance of such earnings were to be
distributed.
At December 31, 1995 the Company has $1,254,000 of domestic net operating
losses which will be carried forward and will expire between 2007 and 2009. The
utilization of the domestic net operating losses is restricted to the taxable
income of one subsidiary. The Company also has approximately $10,878,000 of
foreign net operating loss carryforwards of which $6,178,000 can be carried
forward indefinitely and the remaining $4,700,000 will expire between 1997 and
2,001.
The Company has a valuation allowance of $2,242,000 against these net
operating losses as the Company believes that the corresponding deferred tax
asset may not be realizable. The Company's valuation allowance for these loss
carryforwards increased from $1,310,000 at December 31, 1994 to $2,242,000 at
December 31, 1995. This increase is principally related to current net
operating losses that may not be realizable.
36
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
The Company has investment tax credit carryforwards of approximately
$1,467,000 for federal income tax purposes which will expire between 1996 and
2000 if not previously utilized. The entire amount represents financial
statement investment tax credit carryforwards, which if realized, will be
applied to reduce noncurrent intangible assets. In addition, the Company has
foreign tax credit carryforwards of $5,943,000 which will expire between 1997
and 2000. In 1995, the Company recorded a valuation allowance of $1,162,000
against the foreign tax credit carryforwards as the Company believes that the
corresponding deferred tax asset may not be realizable. The Company also has
minimum tax credit carryforwards of $276,000, all of which can be carried
forward indefinitely.
The Company is currently engaged in tax audits and appeals in various tax
jurisdictions. The years covered by each audit or appeal vary considerably
among legal entities. Assessments, if any, are not expected to have a material
adverse effect on the financial statements.
The Company has considered prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. The Company has assumed
approximately $4,838,000 ($6,000,000 net of valuation allowance of $1,162,000)
of benefit attributable to such tax planning strategies. In the event the
Company were to determine in the future that any such tax planning strategies
would not be implemented, an adjustment to the deferred tax liability would be
charged to income in the period such determination was made.
37
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
7. LONG-TERM DEBT
At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$35,000,000 Revolving Facility expiring June 30, 1997. Interest of
6.75% at December 31, 1995 payable as described below........................... $ 20,000 $ 20,000
$13,000,000 Term Notes payable to lenders, interest of 6.75%
at December 31, 1995. Principal and interest payable
as described below through June 30, 1999.......................................... 3,750 12,000
$10,000,000 Term Notes payable to lender, interest of 7.25% at December 31,
1995. Principal and interest payable as described below through March 31, 2000.. 3,750 10,000
$7,500,000 Promissory Notes payable, interest of 11.50% at December 31, 1995
Principal and interest payable as defined below through February 1, 1999.......... 5,143 6,428
$75,000,000 senior subordinated notes, interest at 10.75% payable semi-
annually, principal due on April 15, 2003........................................ 75,000 75,000
Notes payable related to the acquisition of "SOS," interest at 10%................. -- 2,500
Industrial Development Revenue Bonds, unsecured, interest at rates 9.5% and 10%,
maturities through October 1, 2005............................................... 2,000 2,000
$1,700,000 Promissory Note, interest at prime rate + 1% (9.5% at December 31,
1995), principal and interest due in monthly installments through December 28,
1997............................................................................. 816 1,160
$1,135,760 Financing Agreement, principal and interest due in monthly installments
through August 8, 1999. Interest of 11.49% at December 31, 1995.................. 893 1,036
Other.............................................................................. 265 232
-------- --------
Total debt......................................................................... 111,617 130,356
Less current maturities............................................................ 4,562 6,505
-------- --------
Long-term debt due after one year.................................................. $107,055 $123,851
======== ========
</TABLE>
<TABLE>
<CAPTION>
Principal payments of long-term debt for years subsequent to 1996 are as follows
(in thousands):
<S> <C>
1997.............................................. $ 23,274
1998.............................................. 1,552
1999.............................................. 3,979
2000.............................................. 1,250
Thereafter........................................ 77,000
--------
$107,055
========
</TABLE>
On June 30, 1994, the Company's subsidiaries, TVI, CTI, and TVCC, entered into
a new credit agreement with a group of participating lenders. The agreement
included $23,000,000 in term loan facilities, a $35,000,000 revolving credit
facility, and a $1,000,000 letter of credit facility. These obligations are
guaranteed by the Company and secured by substantially all of the assets of TVI,
CTI, TVCC, Tuboscope Pipeline Services Inc. and Tube-Kote Inc., and the stock of
certain subsidiaries. Proceeds from the new loans were used principally to
retire the debt balances outstanding under the previous senior credit agreement.
An after-tax extraordinary loss of $764,000 was incurred in the second quarter
of 1994 as a result of the early retirement of debt under the previous senior
credit agreement and related write-off of unamortized debt fees.
38
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
The available amount under the revolving credit facility is determined using
the borrowing base, as defined, but not to exceed the maximum commitment of
$35,000,000. Annual commitment fees on the unused portion of the revolver range
from .325% to .5% based on certain financial ratios. The fee on letters of
credit issued under the agreement is 1% per annum on the principal amount. At
December 31, 1995, TVI had outstanding letters of credit amounting to
approximately $5,487,000 and an available facility of approximately $9,513,000
remaining on the $35,000,000 revolving line of credit. The Company also had
approximately $252,000 of outstanding letters of credit against the $1,000,000
letter of credit note and approximately $748,000 of remaining credit available.
Interest on the revolving credit facility is payable quarterly , and the
revolving credit agreement expires June 30, 1997.
The term loan facility requires increasing quarterly installments with the
initial payment of $500,000 beginning September 30, 1994 and the final payment
due March 31, 2000. Mandatory prepayment is required when the Company
generates excess cash flow as defined, or upon the transfer of certain assets.
A mandatory prepayment of $12,500,000 was made in December 1995 related to the
sale-leaseback of the Company's Sheldon Road inspection facility in Houston,
Texas.
The credit agreement provides for the borrowers to elect interest at a base
rate or a Eurodollar rate, as defined. Interest on the base rate loans accrue at
base rate to base rate plus 0.5%, based on a ratio of total funded debt to
earnings before interest, taxes, extraordinary gains and losses, and
depreciation and amortization. Interest on Eurodollar rate loans accrues at
LIBOR plus 0.75% to LIBOR plus 2.5%, based on a ratio of total funded debt to
earnings before interest, taxes, extraordinary gains and losses, and
depreciation and amortization. Interest is payable on all notes at calendar
quarter end for base rate borrowings and on the earlier of the last business day
of the interest period or three months from inception for LIBOR rate borrowings.
The credit agreement requires an interest rate cap agreement be maintained
beginning no later than six months from the initial borrowing date for at least
$15,000,000 of the term loans and to maintain such protection for a period of
not less than three years. The senior creditors have the right to match any
proposed terms by outside parties with respect to interest rate cap agreements
purchased by the Company.
At December 31, 1995 the Company had purchased a $20,000,000, interest rate
cap from the lenders which expires on August 31, 1997. The interest rate cap
agreement entitles the Company to receive from the lenders on a quarterly basis
the amounts, if any, by which the LIBOR rate exceeded 6% (from August 26, 1994
to August 31, 1996) or 8% (from August 31, 1996 to August 31, 1997) multiplied
by $20,000,000 and the effective number of days outstanding on an annualized
basis. The LIBOR rate at December 31, 1995 was 5.625%. Remaining payments on
the interest cap agreement include three installments of $36,000 each due in
February, May, and August of 1996. Management does not believe there are any
credit risk or market risk associated with the interest rate cap agreement other
than normal fluctuations in market interest rates. The net book value and
estimated fair market value of the interest cap agreement was $87,714 at
December 31, 1995, and is included in "Other Assets."
In January 1994, the Company obtained a $7.5 million loan secured by its new
inspection and coating facility in Aberdeen, Scotland. The funds were used to
reduce the Company's revolving credit facility by $4.0 million and the senior
term debt by $3.5 million. Interest is calculated at base rate plus 3%.
Interest and principal are payable monthly through February 1, 1999.
In April 1993, TVI issued $75,000,000 of 10.75% senior subordinate notes
(Notes) due April 15, 2003. The proceeds of the Notes were used to redeem the
$65,697,000 senior subordinate debentures. TVI has the option to redeem the
Notes beginning in 1998 at 105 3/8% of principal ranging down to 100% of
principal plus accrued interest in 2001. The Notes are subordinated to the
payment in full of all senior indebtedness, as defined. Under the provisions of
the indenture, TVI is prohibited from paying any dividends to the holders of
common stock and acquiring or retiring for value any common stock of TVI under
certain circumstances. At December 31, 1995, no retained earnings are available
for payment of dividends on common stock and no other restricted payments have
been made. In the event that certain assets are sold and proceeds in excess of
$10,000,000 are not reinvested into related
39
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
businesses or used to reduce Senior debt within 270 days, TVI is required to
offer to repurchase the Notes at 100% of principal plus accrued interest on a
pro rata basis. Upon a change in control and a rating decline (triggering
event), TVI may be required to repurchase the Notes at 101% of principal plus
accrued interest. TVI's 10.75% debentures are not traded actively on bond
markets. Based on information obtained from a national brokerage company, the
fair market value of the debentures was approximately $80,250,000 and
$75,000,000 at December 31, 1995 and 1994, respectively, based on trades
consummated near the respective year end dates. Management believes the
carrying amount of the Company's other debt approximates fair market value.
On May 1, 1993, TVI repurchased its $65,697,000 senior subordinated
debentures at a premium. The loss has been reflected as an extraordinary item
in the consolidated statement of operations. The pre-tax extraordinary item
consists of a $4,599,000 premium paid at the repurchase and $2,319,000 write-off
of the original issue discount and unamortized debt issue costs.
The credit agreement, indenture and notes contain various covenants that
limit TVI's ability to, among other things, pay dividends, purchase capital
stock, incur additional indebtedness, dispose of assets and transact with
affiliates. TVI is also required to maintain certain minimum financial ratios,
as set forth in the agreements. In addition to the covenants and financial
ratios mentioned above, the credit agreement contains certain events of default.
Management believes it is in compliance with all covenants in the credit
agreement and indenture.
8. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
The holders of the Redeemable Series A Convertible Preferred Stock are
entitled to receive cash dividends, at the annual rate of $7.00 per share, which
are payable quarterly. The dividends are cumulative with additional dividends
thereon, compounded quarterly and at the same rate, for each period such
dividends remain unpaid. Accrued dividends payable of $175,000 were included in
the Preferred Stock balance at December 31, 1995.
The holders of the Preferred Stock may convert each share into ten shares
of Common Stock of the Company. The Preferred Stock is redeemable at the option
of the Company, at redemption prices ranging from $103.50 per share plus accrued
and unpaid dividends during the 12 months beginning October 31, 1994 to $100 per
share plus accrued and unpaid dividends at October 31, 1996. The redemption
price at December 31, 1995 was $101.75.
The Company must redeem all of the outstanding Preferred Stock on December
1, 1996 at $100 per share plus accrued and unpaid dividends. The Preferred
Stock may be exchanged, at the option of the Company, for shares of common stock
with the number of shares to be exchanged for each share of Preferred Stock
equal to $100 plus any accrued and unpaid dividends divided by the then current
market price of the Common Stock.
The holders of the Preferred Stock are entitled to certain voting rights
whenever dividends amounting to six quarterly dividend payments are in arrears.
9. COMMON STOCKHOLDERS' EQUITY
A stockholder approved stock option plan reserves and authorizes the grant
of options to purchase up to 1,799,000 shares of common stock to officers and
key employees of the Company and 200,000 shares for non- employee members of the
Board of Directors. Options granted are generally exercisable in installments
starting one year from the date of grant and generally expire ten years from the
date of grant.
40
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
The following summarizes options activity:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Shares under option at beginning of year..... 1,325,653 1,122,324 827,974
Granted...................................... 245,000 235,000 342,000
Cancelled.................................... (55,096) (30,597) (41,748)
Exercised.................................... (9,933) (1,074) (5,902)
----------- ----------- -----------
Shares under option at end of year........... 1,505,624 1,325,653 1,122,324
=========== =========== ===========
Average price of outstanding options......... $ 6.45 $ 6.46 $ 6.47
=========== =========== ===========
Price range of options exercised............. $.32-$6.875 $.32-$6.875 $.32-$6.875
=========== =========== ===========
Exercisable at end of year................... 772,374 600,437 408,075
=========== =========== ===========
Options available for grant at end of year... 455,333 245,237 449,640
=========== =========== ===========
</TABLE>
At the 1993 Annual Meeting of Stockholders, the stockholders approved a
qualified stock purchase plan within the meaning of Section 423(b) of the
Internal Revenue Code of 1986. As part of such plan, a maximum of 100,000
shares of the Company's common stock was authorized to be sold. The plan was
activated in the second quarter of 1994, and 24,179 shares and 14,135 shares
were issued at an average price of $5.16 per share and $4.36 per share in 1995
and 1994, respectively.
10. RETIREMENT AND OTHER BENEFIT PLANS
On May 13, 1988, TVI adopted a defined contribution retirement plan, which
covers substantially all domestic employees. Employees may voluntarily
contribute up to 20% of compensation, as defined, to the plan. The
participants' contributions are matched by the Company up to a maximum of 1 1/2%
of compensation. Beginning on January 1, 1994, the Company's matching
contribution was in common stock of the Company. Prior to 1994, the matching
contribution was in cash. Contributions were approximately $239,000 (36,680
shares at an average transfer price of $6.51), $251,000 (40,216 shares at an
average transfer price of $6.24), and $552,000 (in cash), for 1995, 1994, and
1993 respectively.
41
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
In connection with the acquisition of Vetco Services, TVI assumed the
responsibility of two defined benefit pension plans in Germany covering
substantially all full-time employees. Plan benefits are based on years of
service and employee compensation for the last three years of services. The
plans are unfunded and benefit payments are made directly by the Company.
Pension expense includes the following components for the fiscal years ending
December 31, 1995, 1994, and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost....... $ 292 $ 277 $ 328
Interest cost...... 564 500 448
Net amortization... (315) (315) (315)
----- ----- -----
Pension expense.... $ 541 $ 462 $ 461
===== ===== =====
</TABLE>
The following table sets forth the amounts recognized in the Company's
consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested.................................................. $6,924 $6,041
Non-Vested.............................................. 235 289
------ ------
Accumulated benefit obligation.......................... 7,159 6,330
Additional amounts related to projected pay increases... 900 822
------ ------
Total projected benefit obligations..................... 8,059 7,152
Unrecognized net gain................................... 1,939 2,254
------ ------
Pension liability....................................... 9,998 9,406
Less - amount included in current liabilities........... 129 100
------ ------
Noncurrent portion of pension liability................. $9,869 $9,306
====== ======
</TABLE>
The rate of increase in future compensation levels used in determining the
projected benefit obligations was 3% for December 31, 1995 and 1994. The
discount rate was 7% for December 31, 1995 and 1994. The unrecognized net gain
from the change in projected compensation levels is being amortized over ten
years.
Certain other foreign operations maintain small defined benefit and defined
contribution plans.
11. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings for events which arise in the
ordinary course of its business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the results of
operations or financial position of the Company.
TVI leases certain facilities and equipment under operating leases that
expire at various dates through 2049. These leases generally contain renewal
options and require the lessee to pay maintenance, insurance, taxes and other
operating expenses in addition to the minimum annual rentals.
Rental expense related to operating leases approximated $8,258 ,000,
$8,464,000, and $7,384,000, in 1995, 1994, and 1993, respectively.
42
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994,AND 1993
Future minimum lease commitments under noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1995 are payable
as follows (in thousands):
1996............................ $ 8,487
1997............................ 5,866
1998............................ 4,435
1999............................ 3,602
2000............................ 3,372
Thereafter...................... 10,209
-------
Total future lease commitments.. $35,971
=======
The total future lease commitments at December 31, 1994 were $15,485,000.
The increase at December 31, 1995 was mainly due to a sale-leaseback transaction
for the Company's Sheldon Road inspection facility and equipment in Houston,
Texas.
12. CONSOLIDATED STATEMENT OF CASH FLOWS
The Company had the following noncash financing and investing activities
(in thousands):
1995 1994 1993
-------- ----- --------
Acquisitions:
Fair value of assets acquired......... $ 6,373 $ -- $ 7,951
Cash paid............................. (5,373) -- (1,103)
Common stock issued................... -- -- (1,716)
------- ----- -------
Liabilities assumed................... $ 1,000 $ -- $ 5,132
======= ===== =======
Dividends accrued on preferred stock.. $ 175 $ 175 $ 175
======= ===== =======
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
Interest.......................... $12,978 $11,774 $10,984
======= ======= =======
Taxes (net of refunds)............ $ 3,306 $ 3,530 $ 5,029
======= ======= =======
13. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company provides various services in one industry segment, the
inspection and coating of tubular products used in the oil and gas industry, and
industrial inspection of oilfield and energy related products.
Information about the Company's operations in various geographic areas is
presented below. The Company's areas of operation outside the United States are
grouped into six geographic areas, representative of the major markets served.
Revenue from unaffiliated customers represents total net revenue from the
respective areas after elimination of inter-geographic transactions. U.S.
exports are shown with the corresponding destination of the product or service.
Operating profit (loss) represents revenue less operating costs and expenses
corresponding to the specific geographic areas. Identifiable assets are those
assets used in the geographic areas listed and reflect eliminations of inter-
geographic balances.
43
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
UNITED FAR MIDDLE LATIN OTHER
STATES CANADA EUROPE EAST EAST AMERICA INTERNATIONAL CONSOLIDATED
----------- --------- --------- ----------- ----------- ---------- ------------- ------------
(IN THOUSANDS)
YEAR ENDED 12/31/95:
Total revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unaffiliated customers....... $ 92,928 $13,664 $ 47,722 $ 15,785 $ 13,613 $5,795 $ 508 $190,015
U.S. export sales............ (12,481) 14 1,111 2,920 30 4,110 4,296 --
-------- ------- -------- -------- -------- ------ ------ --------
TOTAL.......................... $ 80,447 $13,678 $ 48,833 $ 18,705 $ 13,643 $9,905 $4,804 $190,015
======== ======= ======== ======== ======== ====== ====== ========
Operating profit............... $ 3,463 $ 5,383 $ 7,764 $ 4,939 $ 1,721 $3,294 $ 896 $ 27,460
======== ======= ======== ======== ======== ====== ====== ========
Identifiable assets............ $156,733 $12,356 $ 90,567 $ 27,881 $ 9,892 $8,510 $ 740 $306,679
======== ======= ======== ======== ======== ====== ====== ========
YEAR ENDED 12/31/94:
Total revenue:
Unaffiliated customers...... $ 92,873 $13,876 $ 51,415 $ 15,515 $ 16,775 $1,345 $ 376 $192,175
U.S. export sales........... (14,532) -- 2,628 1,066 152 6,220 4,466 --
-------- ------- -------- -------- -------- ------ ------ --------
TOTAL.......................... $ 78,341 $13,876 $ 54,043 $ 16,581 $ 16,927 $7,565 $4,842 $192,175
======== ======= ======== ======== ======== ====== ====== ========
Operating profit............... $ 1,078 $ 5,608 $ 9,611 $ 2,705 $ 3,459 $3,513 $1,074 $ 27,048
======== ======= ======== ======== ======== ====== ====== ========
Identifiable assets............ $167,203 $12,899 $ 94,166 $ 29,367 $ 11,719 $ 908 $ 765 $317,027
======== ======= ======== ======== ======== ====== ====== ========
YEAR ENDED 12/31/93:
Total revenue:
Unaffiliated customers....... $ 87,183 $13,599 $ 43,952 $ 15,711 $ 20,252 $ 504 $2,139 $183,340
U.S. export sales............ (12,366) 7 4,199 1,938 768 3,730 1,724 --
-------- ------- -------- -------- -------- ------ ------ --------
TOTAL.......................... $ 74,817 $13,606 $ 48,151 $ 17,649 $ 21,020 $4,234 $3,863 $183,340
======== ======= ======== ======== ======== ====== ====== ========
Operating profit (loss)........ $(11,378) $ 4,174 $ 3,405 $ 278 $ 2,628 $2,043 $1,295 $ 2,445
======== ======= ======== ======== ======== ====== ====== ========
Identifiable assets............ $168,228 $12,139 $ 87,751 $ 29,718 $ 11,893 $ 379 $ -- $310,108
======== ======= ======== ======== ======== ====== ====== ========
</TABLE>
44
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 1995, 1994 and 1993 is as follows:
EARNINGS
(LOSS)
OPERATING NET PER
PROFIT INCOME COMMON
REVENUE (LOSS) (LOSS) SHARE
--------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
First Quarter....................................... $ 43,686 $ 4,661 $ 1,042 $.05
Second Quarter...................................... 45,652 5,784 1,872 .09
Third Quarter....................................... 47,067 7,012 2,002 .10
Fourth Quarter...................................... 53,610 10,003 3,903 .20
-------- -------- -------- ------
Total Year........................................ $190,015 $ 27,460 $ 8,819 $.44
======== ======== ======== ======
1994
First Quarter....................................... $ 45,531 $ 4,748 $ 1,110 $.05
Second Quarter...................................... 45,239 5,767 727 .03
Third Quarter....................................... 49,453 7,457 2,234 .11
Fourth Quarter...................................... 51,952 9,076 3,453 .18
-------- -------- -------- ------
Total Year........................................ $192,175 $ 27,048 $ 7,524 $. 37
======== ======== ======== ======
1993
First Quarter....................................... $ 39,789 $ 3,244 $ 643 $.03
Second Quarter...................................... 45,212 4,433 (3,977) (.23)
Third Quarter....................................... 48,777 (10,204) (11,125) (.61)
Fourth Quarter...................................... 49,562 4,972 1,600 .08
-------- -------- -------- ------
Total Year........................................ $183,340 $ 2,445 $(12,859) ($.74)
======== ======== ======== ======
</TABLE>
The second quarter 1995 results included a $1,665,000 net gain from an
arbitration award and a $1,000,000 expense accrual for an Italian affiliate.
Results for the fourth quarter 1994 were benefitted by a $1,327,000 gain from an
insurance settlement. The second quarter 1994 net income and earnings per
common share includes an extraordinary item of $764,000 after tax, or $.04. The
second quarter 1993 net loss and loss per common share includes an extraordinary
item of $4,497,000 after tax, or $.25. The third quarter 1993 net loss included
a restructuring charge of $13,256,000.
45
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
15. SUMMARIZED FINANCIAL INFORMATION OF REGISTRANT (TVI)
The following is summarized balance sheet information for TVI as of
December 31, 1995 and December 31, 1994 and summarized consolidated statements
of operations for the years ended December 31, 1995, 1994, and 1993 (in
thousands). TVI's $75,000,000 10.75% senior subordinated notes are fully and
unconditionally guaranteed by the Company.
SUMMARIZED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
ASSETS
<S> <C> <C> <C>
Current assets........................................... $ 98,502 $ 84,327
Noncurrent assets........................................ 202,833 215,827
-------- --------
Total assets........................................... $301,335 $300,154
======== ========
LIABILITIES AND EQUITY
----------------------
Current liabilities...................................... $ 38,463 $ 36,100
Noncurrent liabilities................................... 130,617 140,980
Stockholders' equity..................................... 132,255 123,074
-------- --------
Total liabilities and equity........................... $301,335 $300,154
======== ========
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME............. 1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Revenue.................................................. $187,891 $189,231 $181,004
======== ======== =========
Operating profit......................................... $ 27,596 $ 26,712 $ 3,384
======== ======== =========
Income (loss) before income taxes and extraordinary item. $ 15,594 $ 15,034 $ (9,788)
======== ======== =========
Net income (loss)........................................ $ 9,050 $ 8,001 $(12,086)
======== ======== =========
</TABLE>
16. SUBSEQUENT EVENTS - MERGER WITH D.O.S. LTD.
On January 4, 1996, the Company announced that it had reached a definitive
merger agreement with D.O.S. Ltd. ("DOS"). The agreement provides that, upon
consummation of the merger, stockholders of DOS will receive .4645 shares of the
Company's common stock for each share of issued and outstanding DOS common
stock, and that DOS will become a wholly-owned subsidiary of the Company. The
merger is subject to a number of conditions including the approval of the
Company's shareholders.
In connection with this proposed merger, the Company also announced (i) the
sale of 4,200,000 shares of Tuboscope Common Stock and warrants to purchase up
to 2,533,000 shares of Tuboscope Common Stock for $31,000,000 to an investment
group, and (ii) the exchange of 100,000 shares of outstanding Tuboscope Series A
Preferred Stock for 1,500,000 shares of Tuboscope Common Stock and warrants to
purchase up to 1,250,000 shares of Tuboscope Common Stock. In March 1996, a
definitive proxy statement was mailed to stockholders disclosing the terms and
conditions of such transactions.
46
<PAGE>
SCHEDULE I
==========
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
A S S E T S (IN THOUSANDS)
<S> <C> <C>
Cash............................................................................... $ 9 $ 9
Investment in subsidiaries......................................................... 132,496 124,122
-------- --------
Total assets....................................................................... $132,505 $124,131
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Amounts due TVI.................................................................... $ 889 $ 532
Redeemable Series A Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 100,000 shares issued and outstanding............................... 10,175 10,175
Common stockholders' equity:
Common stock, $.01 par value 35,000,000 shares authorized, 18,546,075 shares
issued and outstanding (18,466,763 at December 31, 1994).................... 185 184
Paid-in capital................................................................ 116,379 115,982
Retained earnings (deficit).................................................... 6,650 (1,469)
Cumulative translation adjustment.............................................. (1,773) (1,273)
-------- --------
Total common stockholders' equity.................................................. 121,441 113,424
======== --------
Total liabilities and equity....................................................... $132,505 $124,131
======== ========
</TABLE>
See notes to condensed financial statements.
47
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity in net earnings (loss) of subsidiaries....... $8,874 $7,563 ($12,821)
State franchise tax and other....................... (55) (39) (38)
------ ------ --------
Net income (loss)................................... 8,819 7,524 (12,859)
Dividends applicable to redeemable preferred stock.. 700 700 700
------ ------ --------
Net income (loss) applicable to common stock........ $8,119 $6,824 ($13,559)
====== ====== ========
</TABLE>
See notes to condensed financial statements.
48
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss)............................................................... $ 8,819 $ 7,524 $(12,859)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Equity in net (earnings) loss of subsidiaries....................................... (8,874) (7,563) 12,821
Changes in current assets and liabilities:
Amounts due from TVI subsidiary................................................. -- 175
Amounts due TVI................................................................. 357 425 734
------- ------- --------
Net cash provided by operating activities...................................... 302 386 871
------- ------- --------
Cash flows used for investing activities:
Investment in subsidiaries...................................................... -- -- (200)
------- ------- --------
Cash flows used for financing activities:
Proceeds from sale of common stock.............................................. 398 314 29
Dividends paid on Redeemable Series A Convertible Preferred Stock............... (700) (700) (700)
------- ------- --------
Net cash used for financing activities.......................................... (302) (386) (671)
------- ------- --------
Net change in cash and cash equivalents............................................... -- -- --
Cash and cash equivalents:
Beginning of the year........................................................... 9 9 9
------- ------- --------
End of the year................................................................. $ 9 $ 9 $ 9
------- ======= ========
</TABLE>
See notes to condensed financial statements.
49
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
No cash dividends were paid to Tuboscope Vetco International Corporation.
For information concerning restrictions pertaining to the redeemable preferred
stock and the common stock and commitments and contingencies, see Notes 7, 8, 9
and 11 of notes to consolidated financial statements of Tuboscope Vetco
International Corporation.
50
<PAGE>
SCHEDULE II
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
ADDITIONS
BALANCE (DEDUCTIONS) BALANCE
BEGINNING CHARGED TO CHARGE OFFS END OF
OF YEAR COSTS AND AND OTHER YEAR
--------- EXPENSES ------------ -------
------------
(IN THOUSANDS)
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
1995......................................... $1,599 $ (272) $(372) $ 955
1994......................................... $1,858 $ -- $(259) $1,599
1993......................................... $1,396 $1,084 $(622) $1,858
Allowance for inventory reserves:
1995......................................... $2,081 $ (275) $ (9) $1,797
1994......................................... $1,956 $ 91 $ 34 $2,081
1993......................................... $1,947 $ 9 $ -- $1,956
Valuation allowance for deferred income taxes:
1995......................................... $1,310 $2,119 $ (25) $3,404
1994......................................... $ 862 $ 665 $(217) $1,310
</TABLE>
51
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE NO.
---------- ----------- --------
<S> <C> <C>
2(a) Agreement and Plan of Merger, dated as of January 3, 1996, among (Note 12)
Tuboscope Vetco International Corporation, Grow Acquisition
Limited and D.O.S. Ltd.
3(a) Restated Certificate of Incorporation, dated March 12, 1990. (Note 7)
3(b) Amended and Restated Bylaws. (Note 2)
3(c) Certificate of Designation of Series A Convertible Preferred Stock, (Note 3)
dated October 22, 1991.
3(d) Certificate of Amendment to Restated Certificate of Incorporation (Note 10)
dated May 12, 1992.
3(e) Certificate of Amendment to Restated Certificate of Incorporation (Note 11)
dated May 10, 1994.
4(a) Stockholders' Agreement, dated May 13, 1988, between the (Note 1)
Company, Brentwood, Hub, the Management Investors, the Other
Investors, and the Institutional Investors, including the Common
Stock Registration Rights Agreement attached thereto as Exhibit A.
4(b) Purchase Agreement, dated May 13, 1988, between the Company, (Note 1)
Tuboscope Acquisition Corporation and the purchasers named on the
execution pages thereto.
4(c) Indenture (including the form of Note), dated as of April 1, 1993, (Note 4)
among Tuboscope Vetco International Inc., the Company and
Norwest Bank Minnesota, National Association, as Trustee,
regarding the 10 3/4% Senior Subordinated Notes due 2003 of
Tuboscope Vetco International Inc.
4(e) Various documentation relating to $1,000,000 Alaska Industrial
Revenue Bond financing. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to
furnish copies of relevant documentation to the Securities and
Exchange Commission upon request).
4(f) Various documentation relating to $1,000,000 Wyoming Industrial
Revenue Bond financing. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to
furnish copies of relevant documentation to the Securities and
Exchange Commission upon request).
4(g) Plan of Recapitalization. (Note 2)
4(h) Various promissory notes in the aggregate principal amount of
$4,000,000 relating to the acquisition of Sound Optics Systems, Inc.,
dba South Optical Systems, Inc. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to
furnish copies of the relevant documentation to the Securities and
Exchange Commission upon request).
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE NO.
- ----------- ----------- --------
<S> <C> <C>
4(i) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI Hughes Incorporated relating to Vetco Services
Acquisition.
4(j) Secured Credit Agreement, dated June 30, 1994, between Tuboscope (Note 9)
Vetco International Inc., CTI Inspection Services Inc., Tuboscope
Vetco Capital Corp, Tuboscope Vetco International Corporation and
ABN AMRO Bank, N.V., as Agent.
10(a) Form of Employment Agreement, dated May 13, 1988, between (Note 1)
Tuboscope Inc., the Company and William V. Larkin and E. Wayne
Overman.
10(b) Savings Investment Plan, dated May 13, 1988, as amended by (Note 1)
First Amendment to Savings Investment Plan.
10(c) Second, Third and Fourth Amendments to Savings Investment Plan. (Note 4)
10(d) Fifth, Sixth and Seventh Amendments to Savings Investment Plan. (Note 8)
10(e) Lease Agreement, dated July 1, 1981, between C.M. Thibodaux (Note 1)
Company, Ltd. and AMF Tuboscope, Inc.
10(f) Lease Agreement between Sam J. Siracusa, John Siracusa, Jr., (Note 1)
Elizabeth Ann Siracusa, Louis Anthony Siracusa, Philomena
Siracusa Archer, Catherine Agnes Siracusa, Maria Josette Siracusa,
Julie Ann Siracusa, the Succession of Joseph C. Siracusa and AMF
Tuboscope, Inc., as amended by letter agreement among the same
parties, dated June 14, 1989.
10(g) Agreement to Purchase, Sell and Sublease, dated June 9, 1980, (Note 1)
between Alaska International Construction, Inc. and AMF
Tuboscope, Inc., as amended by letter agreement, dated June 12,
1980 between the same parties.
10(h) Lease Agreement, dated June 10, 1977, between Batinorest and (Note 1)
A.M.F. France.
10(i) Supplementary Agreement Fixed Rental Scheme, dated May 19, (Note 1)
1989, between Jurong Town Corporation and AMF Far East Pte.
Ltd.
10(j) Lease, dated December 13, 1984, between Barclays Nominees (Note 1)
(KWS) Limited and AMF International Limited, as amended by
Transfer of Whole Agreement, dated November 20, 1987, between
AMF International Limited and Tuboscope Limited.
10(k) Description of Life Insurance Plan. (Note 1)
10(l) Amended and Restated Stock Option Plan for Key Employees of (Note 5)
Tuboscope Vetco International Corporation.
10(m) Form of Revised Incentive Stock Option Agreement. (Note 5)
10(n) Form of Revised Non-Qualified Stock Option Agreement. (Note 5)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE NO.
- ---------- ----------- --------
<S> <C> <C>
10(o) Stock Option Plan for Non-Employee Directors of Tuboscope Vetco (Note 6)
International Corporation.
10(p) Amendment to Stock Option Plan for Non-Employee Directors of (Note 6)
Tuboscope Vetco International Corporation.
10(q) Form of Non-Qualified Stock Option Agreement. (Note 6)
10(r) Employee Qualified Stock Purchase Plan. (Note 8)
10(s) Purchase Agreement, dated as of July 20, 1990, by and among Oil (Note 7)
and Gas Manufacturing Company, Inc., F.T. Glascock, Thomas C.
Glascock, J. David Glascock, Hutchison-Hayes International, Inc.,
John F. Joplin, William F. Joplin, Sound Optics Systems, Inc. dba
Sound Optical Systems, Inc. and Tuboscope Inc.
10(t) Form of Employment Agreement, dated July 23, 1990, between (Note 7)
Tuboscope Inc. and Thomas Glascock and William Glascock.
10(u) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI relating to the Vetco Services Acquisition.
10(v) Amended and Restated Employment Agreement dated June 23, 1993, (Note 8)
between the Company, Tuboscope Vetco International Inc., and
Martin R. Reid.
10(w) Technology Transfer Agreement, dated as of October 29, 1991, (Note 3)
between Tuboscope Inc. and BHI.
10(x) Sublease, dated December 1, 1987, between McDermott (Note 3)
Incorporated and AMF Tuboscope, Inc. as amended by letter
agreement, dated November 10, 1989, between Tuboscope Inc. and
McDermott Incorporated.
10(y) Letter agreement, dated March 5, 1990 amending the Agreement to (Note 3)
Purchase, Sell and Sublease dated June 9, 1980 between AMF
Tuboscope Inc. and Alaska International Construction, Inc. as
amended June 12, 1980.
10(z) Employment Agreement, between Vetco Inspection GmbH and (Note 3)
Gerhard H. Hage.
10(aa) Lease Agreement with respect to Celle, Germany facility. (Note 3)
10(bb) Building Agreement for Land at Jurong, dated May 5, 1983, (Note 3)
between Jurong Town Corporation and Vetco International, Inc.
10(cc) Lease Agreement, dated January 1, 1988, between Mohamed Alhajri (Note 3)
Est. and Vetco Saudi Company.
10(dd) Lease Agreement, dated November 26, 1989, between (Note 3)
Mohammed F. Al-Hajri Est. and Vetco Saudi Arabia Ltd.
10(ee) Lease between J.G.B. Properties Limited and Vetco Inspection (Note 3)
GmbH.
10(ff) Eighth and Ninth Amendment to Savings Investment Plan. (Note 9)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE NO.
- ----------- ----------- -------
<S> <C> <C>
10(gg) Subscription Agreement, dated as of January 3, 1996, by and (Note 12)
between Tuboscope Vetco International Corporation and SCF-III,
L.P.
10(hh) Exchange Agreement, dated as of January 3, 1996, among Exhibit 10(hh)
Tuboscope Vetco International Corporation and Baker Hughes
Incorporated.
10(ii) Voting Agreement, dated as of January 3, 1996, among Tuboscope (Note 12)
Vetco International Corporation, D.O.S. Ltd., D.O.S. Partners,
L.P., Panmell (Holdings), Ltd. And Zink Industries Limited.
10(jj) Voting Agreement, dated as of January 3, 1996, among D.O.S. (Note 12)
Ltd., Brentwood Associates IV, L.P. and Baker Hughes
Incorporated.
10(kk) Form of Amended and Restated Executive Agreement. Exhibit 10(kk)
10(ll) First Amendment to Amended and Restated Employment Agreement Exhibit 10(ll)
between the Company, Tuboscope Vetco International Inc. and
Martin Reid.
10(mm) Third Amendment to General Manager Employment Agreement Exhibit 10(mm)
between the Company, Tuboscope Vetco International Inc. and
Gerhard H. Hage.
10(nn) Third Amendment to Employment Agreement between the Exhibit 10(nn)
Company, Tuboscope Vetco International Inc. and
William V. Larkin.
10(oo) Master Lease Agreement, dated December 18, 1995, between the Exhibit 10(oo)
Company and Heller Financial Leasing, Inc.
11 Statement re: computation of per share earnings. Exhibit 11
21 Subsidiaries. (Note 13)
23(a) Consent of Ernst & Young. Exhibit 23
27 Financial Data. Exhibit 27
</TABLE>
- ------------------
Note 1 Previously filed by the Registrant in Registration No. 33-31102 and
incorporated by reference herein pursuant to Rule 12b-32 of the Exchange
Act.
Note 2 Previously filed by the Registrant in Registration No. 33-33248 and
incorporated by reference herein pursuant to Rule 12b-32 of the Exchange
Act.
Note 3 Previously filed by the Registrant in File No. 33-43525 and incorporated
by reference herein pursuant to Rule 12b-32 of the Exchange Act.
Note 4 Previously filed by the Registrant in Registration No. 33-56182 and
incorporated by reference herein pursuant to Rule 12b-32 of the Exchange
Act.
55
<PAGE>
Note 5 Previously filed by the Registrant in Registration No. 33-72150 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 6 Previously filed by the Registrant in Registration No. 33-72072 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 7 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 8 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 9 Previously filed in the Quarterly Report on Form 10Q for the quarter
ended June 30, 1994 and incorporated by reference herein pursuant to
Rule 12b-32 of the Exchange Act.
Note 10 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 11 Previously filed in the Company's Proxy Statement for the 1994 Annual
Meeting of Stockholders and incorporated by reference herein pursuant
to Rule 12b-32 of the Exchange Act.
Note 12 Previously filed in the Company's Current Report on Form 8-K filed on
January 16, 1996 and incorporated by reference herein pursuant to Rule
12b-32 of the Exchange Act.
Note 13 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
56
<PAGE>
EXHIBIT 10(hh)
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (this "Agreement") is made and entered into as of
January 3, 1996, by and among BAKER HUGHES INCORPORATED, a Delaware corporation
("BHI"), and TUBOSCOPE VETCO INTERNATIONAL CORPORATION, a Delaware corporation
(the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, D.O.S. Ltd., a Bermuda corporation ("D.O.S. Ltd."), is to be merged
with a wholly-owned subsidiary ("Sub") of the Company (the "Merger") pursuant to
an Agreement and Plan of Merger dated as of January 3, 1996 among the Company,
Sub and D.O.S. Ltd. (the "Merger Agreement");
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of the Company and its shareholders to improve its capital
structure by issuing shares of the Company's Common Stock, par value $.01 per
share ("Common Stock"), and warrants to purchase Common Stock, in exchange for
the outstanding shares of the Company's Redeemable Series A Convertible
Preferred Stock, par value $.01 per share ("Preferred Stock");
WHEREAS, the Company will issue to BHI, and BHI will acquire, on the terms and
subject to the conditions set forth herein, 1,500,000 shares (the "Shares") of
the Company's Common Stock and warrants (the "Warrants") to purchase 1,250,000
shares of Common Stock (the Shares and the Warrants are collectively referred to
herein as the "Securities"), in exchange for the 100,000 shares of Preferred
Stock held by BHI (the "BHI Preferred Stock").
NOW, THEREFORE, in consideration of and subject to the mutual agreements,
terms and conditions herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Capitalized terms used herein without definitions shall have the meanings
assigned to such terms in the Merger Agreement.
<PAGE>
EXHIBIT 10(hh)
ARTICLE II.
EXCHANGE OF SECURITIES
2.1 Exchange. At the Closing, the Company will issue, sell, transfer,
convey and deliver to BHI (i) the Shares as evidenced by the delivery of a
certificate or certificates evidencing the Shares in good delivery form and (ii)
the Warrants as evidenced by the delivery of the Warrant Certificate in the form
set forth on Appendix I, subject to the terms and conditions set forth herein,
in exchange (the "Exchange") for the delivery, conveyance and transfer to the
Company of the BHI Preferred Stock as evidenced by the delivery of the share
certificate or certificates representing such shares of Preferred Stock, duly
endorsed in blank for transfer, together with such other documentation
evidencing the transfer as may be reasonably requested by the Company.
2.2 Suspension of Dividend. BHI agrees that the cash dividends otherwise
due and owing on March 31, June 30, September 30 and December 31, 1996 pursuant
to Paragraph 2 of the Certificate of Designation of Series A Convertible
Preferred Stock of Tuboscope Corporation (the "Certificate of Designation")
shall not be due and owing; provided, that if the Exchange contemplated in
---------
Section 2.1 hereof is not consummated for any reason, such cash dividends shall
be paid for all such periods, notwithstanding the provisions of this paragraph,
and any quarterly payments which may not have been made owing to this paragraph
shall be made at the time of the next quarterly payment called for in the
Certificate of Designation, together with interest on such quarterly payments
for the period from the date on which they would otherwise have been due to the
date of payment at an interest rate equal to the prime rate as announced from
time to time by Texas Commerce Bank National Association.
2.3 Closing. The closing of the Exchange shall take place at the Closing
on the Closing Date. The Exchange shall be deemed to be made as of the
Effective Time.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company warrants and represents to BHI as follows:
3.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware with
corporate power and authority to own, operate and lease its properties and to
carry on its business as now conducted.
2
<PAGE>
EXHIBIT 10(hh)
3.2 Authorization, Execution and Enforceability. The Company has full
power and authority to enter into this Agreement and the capacity and authority
to make the representations, warranties, covenants and agreements herein. The
execution, delivery and performance by the Company of this Agreement have been
duly and validly authorized and are within the corporate powers of the Company.
This Agreement has been duly executed and delivered by the Company and
constitutes its valid and binding agreement, enforceable in accordance with its
terms, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights of
creditors, and the effect of general principles of equity, including without
limitation concepts of materiality, reasonableness, good faith and fair dealing
and the possible unavailability of specific performance or injunctive relief
regardless of whether considered in a proceeding in equity or at law. The
Shares to be issued by the Company to BHI hereunder, as of the Closing will be
duly and validly authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued and fully paid and
non-assessable. When executed by the Company and delivered in accordance with
their terms, the Warrants will constitute valid and binding obligations of the
Company, enforceable in accordance with their terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights of creditors, and the effect of general
principles of equity, including without limitation concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of
specific performance or injunctive relief regardless of whether considered in a
proceeding in equity or at law. The shares of Common Stock reserved for
issuance upon exercise of the Warrants will be as of the Closing duly authorized
and reserved for such purpose, and, if and when the Warrants are exercised in
accordance with the rights provided for therein, the shares of Common Stock
issuable upon such exercise will be validly issued, fully paid and non-
assessable, and the issuance of such shares will not be subject to any
preemptive or similar rights.
3.3 Capital Structure as of Closing Date. Except as contemplated by this
Agreement, the representations and warranties set forth in Section 3.2(b) of the
Merger Agreement will be true and correct as of the Closing Date, except that to
the extent such representations and warranties speak as of an earlier date, they
will be true and correct as of such earlier date.
3.4 Consents and Approvals; No Violations.
(a) No consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department, commission, agency or
other instrumentality or any other person or entity is required to authorize, or
is otherwise required in connection with, the execution and delivery of this
Agreement by the Company or its performance of the terms hereof, including
without limitation, the issuance of the Shares and Warrants or the exercise of
the Warrants, or the validity or enforceability hereof or thereof against the
Company as to which the failure to obtain or make would have a Company Material
Adverse Effect (as defined below) or would materially adversely affect the
consummation of the transactions contemplated hereby,
3
<PAGE>
EXHIBIT 10(hh)
except for the filing of a notification report by the Company and BHI under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the expiration or termination of the applicable waiting period with
respect thereto. As used in this Agreement, "Company Material Adverse Effect"
shall mean any effect that is, individually or in the aggregate, materially
adverse to the business, operations, assets, condition (financial or otherwise)
or results of operations of the Company and its Subsidiaries taken as a whole
except for general economic changes that may affect the industries of the
Company or any of its Subsidiaries generally.
(b) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
the Company or any of its Subsidiaries under, any provision of (i) the
Certificate of Incorporation or Bylaws of the Company or any provision of the
comparable charter or organizational documents of any of its Subsidiaries, (ii)
any loan or credit agreement, note, bond, mortgage, or indenture applicable to
the Company or any of its Subsidiaries, (iii) any other agreement, instrument,
permit, concession, franchise or license applicable to the Company or any of its
Subsidiaries or (iv) any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Company or any of its Subsidiaries or any of
their respective properties or assets, other than, in the case of clause (iii),
any such conflicts, violations, defaults, rights, liens, security interests,
charges or encumbrances that, individually or in the aggregate, would not have a
Company Material Adverse Effect, materially impair the ability of the Company to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby.
3.5 Form 10K and Proxy. The representations and warranties set forth
in Section 3.2(e) of the Merger Agreement are true and correct. The Company's
Annual Report on Form 10K for the year ended December 31, 1995 (the "Annual
Report") and the Proxy Statement related to the Company's meeting of
stockholders at which the Merger Agreement is to be considered (the "Proxy
Statement") will comply in all material respects with the requirements of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, (as applicable) and the rules and regulations of the Securities and
Exchange Commission thereunder applicable, and neither the Annual Report, as of
the date it is filed, or the Proxy Statement, as of the Effective Time, will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
4
<PAGE>
EXHIBIT 10(hh)
3.6 Antidilution Provisions. The issuance or exercise of the
Warrants granted hereunder will not cause an antidilution adjustment to the
warrants granted to SCF-III, L.P ("SCF") pursuant to that certain Subscription
Agreement and Warrant dated as of January 3, 1996 by and between the Company and
SCF.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF BHI
BHI represents and warrants to the Company as follows:
4.1 Organization, Authorization, Execution and Enforceability. BHI
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware with power and authority to own, operate and lease
its properties and to carry on its business as now conducted. BHI has full
power and authority to enter into this Agreement and the capability and
authority to make the representations, warranties, covenants and agreements
herein. The execution, delivery and performance by BHI of this Agreement have
been duly and validly authorized and are within the corporate powers of BHI.
This Agreement has been duly executed and delivered by BHI and constitutes its
valid and binding agreement, enforceable in accordance with its terms, subject
to the effect of bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights of creditors, and the effect of
general principles of equity, including without limitation concepts of
materiality, reasonableness, good faith and fair dealing and the possible
unavailability of specific performance or injunctive relief regardless of
whether considered in a proceeding in equity or at law.
4.2 Consents and Approvals. No consent, action, approval or
authorization of, or registration, declaration or filing with, any governmental
department, commission, agency or other instrumentality or any other person or
entity is required to authorize, or is otherwise required in connection with,
the execution and delivery of this Agreement by BHI or its performance of the
terms hereof, including without limitation, the transfer of the Preferred Stock
and the exchange of the Shares and the Warrants, or the validity or
enforceability hereof or thereof against BHI as to which the failure to obtain
or make would have a Company Material Adverse Effect or would materially
adversely affect the consummation of the transactions contemplated hereby,
except for the filing of a notification report by the Company and BHI under the
HSR Act and the expiration or termination of the applicable waiting period with
respect thereto.
4.3 Stock ownership.
(a) BHI is the lawful owner, of record and beneficially, of the entire
right title and interest in and to the BHI Preferred Stock, free and clear of
all Encumbrances, except such Encumbrances as may arise under applicable federal
and
5
<PAGE>
EXHIBIT 10(hh)
state securities laws and regulations. As used in this Section 4.3,
"Encumbrances" shall mean any claim, lien, pledge, option, change, easement,
security interest, mortgage, right of way, encumbrance, restrictions, equities,
reservation, adverse claims or other similar right or interest of any nature
created by, through or under BHI or any of its affiliates.
(b) Delivery of the BHI Preferred Stock pursuant hereto will vest good
and marketable title in the Company, free and clear of all Encumbrances.
4.4 Accredited Investor. BHI is an "accredited investor" as defined
in Rule 501 of Regulation D promulgated pursuant to the Securities Act of 1933,
as amended.
ARTICLE V.
COVENANTS OF THE COMPANY
The Company further agrees, except as set forth in or contemplated by
this Agreement or as otherwise approved by BHI in writing, that:
5.1 Registration Rights.
(a) Reference is made to that certain Agreement for the Purchase and
Sale of the Baker Hughes Tubular Services Eastern Hemisphere Division of Baker
Hughes Incorporated dated as of October 1, 1991 by and between the Company and
BHI (the "Purchase Agreement"). BHI represents and warrants that it is, as of
the date of this Agreement, the sole Holder of Registrable Securities (as such
capitalized terms are defined in the Purchase Agreement) and that the only
registration rights BHI has, as of the date hereof, with respect to equity
securities of the Company are as provided in the Purchase Agreement. The
Company represents and warrants that the Company has not granted any outstanding
registration rights or agreed to grant any registration rights to any person or
entity except for the registration rights to be granted pursuant to Section 5.12
of the Merger Agreement and registration rights granted under the Outstanding
Registration Rights Agreements (as such term is defined in Exhibit D to the
Merger Agreement).
(b) If the Closing occurs, the Purchase Agreement shall automatically
be amended as follows:
(i) Section 1.1 of the Purchase Agreement shall be amended to add the
following definitions (except with respect to the definition of Registrable
Securities, which shall be substituted for the definition in Section 1.1):
6
<PAGE>
EXHIBIT 10(hh)
"DOS Registrable Securities" means the securities subject to the
registration rights to be provided by Buyer pursuant to Section 5.12 of the
Agreement and Plan of Merger dated as of January 3, 1996 among the Buyer, Grow
Acquisition Limited and D.O.S. Ltd.
"Exchange Agreement" means the Exchange Agreement dated as of January
3, 1996 by and among BHI and Buyer.
"Junior Registrable Securities" means the 1,500,000 shares of Common
Stock acquired pursuant to the Exchange Agreement and the shares of Common Stock
for which the Warrants are exercisable and any Common Stock or other security of
Buyer issued as a dividend or other distribution with respect to, or in exchange
for, or in replacement of, such shares of Common Stock or the Warrants. The
rights of the Holders of Junior Registrable Securities shall be subordinate to
the rights of Holders of Senior Registrable Securities and shall be subordinate
to the rights of the holders of DOS Registrable Securities and pari passu with
-----------
respect to all registration rights (other than registration rights relating to
the DOS Registrable Securities) granted by the Buyer after October 1, 1991
unless otherwise expressly subordinated with the written agreement of the
Holders. Notwithstanding the foregoing, if the Holders make a request for
Registration pursuant to Section 8.3 and request that all Registrable Securities
be included in such Registration then the Junior Registrable Securities shall
be, for purposes of such Registration, superior to registration rights (other
than registration rights relating to the DOS Registrable Securities) granted by
the Buyer after October 1, 1991 and all such other registration rights (other
than registration rights relating to the DOS Registrable Securities) shall rank
subordinate to the rights of Holders of the Junior Registrable Securities.
"Registrable Securities" means Senior Registrable Securities and
Junior Registrable Securities. Notwithstanding the foregoing, any particular
Registrable Security shall cease to be a Registrable Security at such time as
(i) it has been effectively registered under the 1933 Act and sold or
transferred in accordance with the Registration statement covering it, (ii) it
has been distributed to the public pursuant to Rule 144 (or any similar
provision then in force) under the 1933 Act, or (iii) it has been transferred
and a new certificate or other evidence of ownership for it has been delivered
by or on behalf of the Buyer and such certificate and the shares evidenced
thereby are not subject to any stop transfer order or similar restriction on
resale.
"Senior Registrable Securities" means the 1,686,047 shares of Common
Stock owned by BHI as of the date hereof and any Common Stock or other security
of Buyer issued as a dividend or other distribution with
7
<PAGE>
EXHIBIT 10(hh)
respect to, or in exchange for, or in replacement of, such shares of Common
Stock. The rights of the Holders of Senior Registrable Securities shall be
senior to the rights of Holders of Junior Registrable Securities and to the
rights of the holders of DOS Registrable Securities.
"Warrants" means those certain Warrants for the purchase of an
aggregate of 1,250,000 shares (subject to adjustment as provided therein) of
Common Stock issued to Buyer pursuant to the Exchange Agreement.
(ii) A new sentence shall be added to the end of Section 8.3(b) as
follows:
Notwithstanding the foregoing, the Buyer shall be entitled to postpone
for a reasonable period of time (not exceeding 90 days) the filing (but not the
preparation) of any registration statement otherwise required to be prepared and
filed by it pursuant hereto if (i) at the time the Buyer receives a request for
such registration, the Buyer is in possession of material non-public information
that would be required to be disclosed in a registration statement but that has
not been and will otherwise not be disclosed to the public and the Buyer deems
disclosure not to be in the best interests of the Buyer and its stockholders
(and the Buyer so notifies the Holders requesting a Registration within 5
Business Days of such request), or (ii) the Buyer determines (and the Buyer so
notifies the Holders requesting a Registration within 5 Business Days of such
request) that in its judgment, such registration and offering would materially
interfere with any financing, acquisition, corporate reorganization or other
material transaction involving the Buyer that prior to such request the Board of
Directors of the Buyer had agreed by resolution to pursue.
(iii) The third and fourth sentences of Section 8.2(c) of the
Purchase Agreement shall be amended by deleting such sentences and adding to the
end of Section 8.2(c):
Notwithstanding any other provisions of this Section 8.2, if the
underwriter determines that marketing factors require a limitation on the amount
of shares of Common Stock to be Registered, then the underwriter may limit the
amount of Registrable Securities to be included in the Registration and
underwriting, and the amount of securities to be offered shall be reduced first
from the Common Stock being offered for the account of persons or entities
entitled to include Common Stock in such offering and whose rights to include
Common Stock in the offering rank subordinate to the rights of the Holders of
Junior Registrable Securities and then, if the offering size shall require
further reduction, from the Common Stock being offered for the account of the
Holders of Junior Registrable Securities and
8
<PAGE>
EXHIBIT 10(hh)
such other persons and entities entitled to include Common Stock in such
offering and whose rights to include such Common Stock rank pari passu to the
----------
registration rights of the Holders of Junior Registrable Securities (allocated
pro rata in proportion to their respective number of shares to be registered),
and then, if the offering size shall require further reduction, from the
Common Stock being offered for the account of the holders of DOS Registrable
Securities and such other persons or entities entitled to include Common Stock
in such offering and whose rights to include Common Stock in the offering rank
subordinate to the rights of the Holders of Senior Registrable Securities and
senior to the rights of Junior Registrable Securities and then, if the offering
size shall require further reduction, from the Common Stock being offered for
the account of the Holders of Senior Registrable Securities and such other
persons and entities entitled to include Common Stock in such offering and whose
rights to include such Common Stock rank pari passu to the registration rights
----------
of the Holders of Senior Registrable Securities (allocated pro rata in
proportion to their respective number of shares to be registered), to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by such managing underwriter or underwriters
prior to any reduction of the securities to be sold by the Company: provided,
however, that such limitation shall not exclude more than 50% of the aggregate
amount of the Senior Registrable Securities of Holders sought to be registered
by Holders in such Registration; and provided, further, however the provisions
of this Section 8.2 are subject to the rights and obligations of certain
stockholders of the Buyer as set forth in the Stockholders' Agreement.
(iv) A new Section 8.3(d) shall be added as follows:
Notwithstanding any other provisions of this Section 8.3, if any other
person or entity participates in an underwritten offering pursuant to this
Section 8.3 and if the underwriter determines that marketing factors require a
limitation on the amount of shares of Common Stock to be Registered, then the
underwriter may limit the amount of Registrable Securities to be included in the
Registration and underwriting, and the amount of securities to be offered shall
be reduced first from the Common Stock being offered for the account of persons
or entities entitled to include Common Stock in such offering and whose rights
to include Common Stock in the offering rank subordinate to the rights of the
Holders of Junior Registrable Securities and then, if the offering size shall
require further reduction, from the Common Stock being offered for the account
of the Holders of Junior Registrable Securities and such other persons and
entities entitled to include Common Stock in such offering and whose rights to
include such Common Stock rank pari passu to the registration rights of the
----------
Holders of Junior Registrable Securities (allocated pro rata in proportion to
their respective number of
9
<PAGE>
EXHIBIT 10(hh)
shares to be registered), and then, if the offering size shall require further
reduction, from the Common Stock being offered for the account of the Company
and the holders of DOS Registrable Securities and such other persons or entities
entitled to include Common Stock in such offering and whose rights to include
Common Stock in the offering rank subordinate to the rights of the Holders of
Senior Registrable Securities and senior to the rights of Junior Registrable
Securities (in whatever proportion or order they have agreed among themselves)
and then, if the offering size shall require further reduction, from the Common
Stock being offered for the account of the Holders of Senior Registrable
Securities and such other persons and entities entitled to include Common Stock
in such offering and whose rights to include such Common Stock rank pari passu
----------
to the registration rights of the Holders of Senior Registrable Securities
(allocated pro rata in proportion to their respective number of shares to be
registered). If the number of Junior Registrable Securities are limited as a
result of the application of the immediately preceding sentence or Section
8.3(c) with the result that less than 75% of the Registrable Securities
requested to be included in such Registration are sold, then the number of
Registrations that may be requested by Holders under Section 8.3 shall be
increased by one.
(v) A new Section 8.3(e) shall be added as follows:
Any written request or notice by a Holder pursuant to Section 8.2 or
8.3 to include Registrable Securities in a Registration must specify what
portion of such Registrable Securities that are proposed to be included in a
Registration constitute Senior Registrable Securities and what portion
constitute Junior Registrable Securities in order for such request or notice to
be effective.
5.2 Obtaining Consents. The Company will use its reasonable best
efforts to obtain, and to assist BHI in obtaining, all consents, resignations,
authorizations and approvals and making all filings necessary for the
consummation of the transactions contemplated by this Agreement, if any,
required under any applicable law or regulation.
5.3 Satisfaction of Closing Conditions. The Company shall use its
reasonable best efforts to satisfy the conditions to Closing set forth in
Article VII relating to the Company in an expeditious manner. The Company shall
not be required to institute or defend any action in any court or before any
administrative body or take action to divest or hold separate any assets of it
or any of its affiliates in connection with satisfying such conditions.
5.4 Delivery of Documents at Closing. At the Closing, subject to
satisfaction of the conditions set forth in Article VII, the Company shall
execute and deliver to BHI all documents required to be delivered by the Company
pursuant to Section 7.1.
10
<PAGE>
EXHIBIT 10(hh)
ARTICLE VI.
COVENANTS OF BHI
BHI further agrees, except as set forth in or contemplated by this
Agreement or as otherwise approved by the Company in writing, as follows:
6.1 Obtaining Consents. BHI will use its reasonable best efforts to
obtain, and to assist the Company in obtaining, all consents, authorizations and
approvals and making all filings necessary for the consummation of the
transactions contemplated by this Agreement, if any, required under any
applicable law or regulation.
6.2 Satisfaction of Closing Conditions. BHI shall use its reasonable
best efforts to satisfy the conditions to Closing set forth in Article VII
relating to BHI in an expeditious manner. BHI shall not be required to
institute or defend any action in any court or before any administrative body or
take action to divest or hold separate any assets of it or any of its affiliates
in connection with satisfying such conditions.
6.3 Delivery of Documents at Closing. At the Closing, subject to
satisfaction of the conditions set forth in Article VII, BHI shall execute and
deliver to the Company the documents contemplated to be delivered by BHI
pursuant to Section 7.2.
6.4 Disposition of Securities. BHI agrees that it will not, until
December 31, 1997 (the period from the date of this Agreement to December 31,
1997, the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any of the Shares, the Warrants or the Warrant Shares. The
foregoing restriction does not apply to (i) any Disposition that may be effected
in a tender or exchange offer made to all holders of a class or series of the
Company's securities, (ii) any Disposition, conversion or exchange of the Shares
or Warrant Shares for other securities, cash or property in connection with a
merger, consolidation, recapitalization, redemption or other reclassification
involving the Company or the Company's securities, (iii) any Disposition in
connection with a disposition or other transfer of all or substantially all of
the assets of BHI, provided the transferee agrees to be bound by this Section
6.4 or (iv) any Disposition to an affiliate of BHI that agrees to be bound by
this Section 6.4. Such restriction shall not apply to any securities BHI may
hold as a result of any transaction described in clause (i) or (ii) above
following such transaction. The foregoing restriction has been expressly agreed
to preclude BHI, among other things, from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of any of the Shares, the Warrants or the Warrant Shares during
the Lock-up Period, even if such shares would be disposed of by someone other
than BHI. Furthermore, BHI has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Shares except in
11
<PAGE>
EXHIBIT 10(hh)
compliance with this restriction. An exercise of the Warrants shall not
constitute a Disposition of the Shares, the Warrants or the Warrant Shares.
ARTICLE VII.
CONDITIONS TO THE CLOSING;
TERMINATION, AMENDMENT AND WAIVER
7.1 Conditions to Obligation of BHI. The obligation of BHI to effect
the transactions contemplated by this Agreement is subject to the following
conditions:
(a) Representations and Warranties of the Company. Except as
contemplated by this Agreement, (i) the representations and warranties of the
Company hereunder shall be made again at the Closing and shall be true in all
material respects as of the Closing Date, except that to the extent such
representations and warranties speak as of an earlier date, they will be true
and correct as of such earlier date, (ii) the Company shall have performed (or
caused to have been performed) in all respects all covenants required of it (and
its subsidiaries) by this Agreement as of the Closing and (iii) the Company
shall have furnished BHI at the Closing with a certificate of the President of
the Company to such effect.
(b) Third Party Consents and Approvals. The Company shall have made
all filings with, and obtained all required consents, approvals, permits and
authorizations in connection with the execution and delivery of this Agreement
and the transactions contemplated hereby from any governmental entity except
where the failure to obtain such consents, approvals, permits and authorizations
would not be reasonably likely to result in a Company Material Adverse Effect
(assuming the transactions contemplated by this Agreement have taken place) or
to materially adversely affect the consummation of the transactions contemplated
hereby.
(c) Stock and Warrant Certificates. The Company shall have delivered
to BHI at the Closing one or more stock certificates representing the Shares in
good delivery form and certificates representing the Warrants in the form set
forth on Appendix I.
(d) Conditions Precedent to Merger. All of the conditions precedent
to the consummation of the Merger as set forth in Sections 6.1 and 6.3 of the
Merger Agreement shall have been satisfied as of the Closing Date; and all
conditions precedent set forth in Section 6.2 of the Merger Agreement shall have
been satisfied or waived by the Company as of the Closing Date, provided that
any such waiver shall not be materially adverse to BHI as a holder of Preferred
Stock exchanging the Preferred Stock for Securities.
12
<PAGE>
EXHIBIT 10(hh)
7.2 Conditions to Obligations of the Company. In addition to the
satisfaction of the conditions referred to in subparagraph (b) of Section 7.1
hereof, the obligations of the Company to effect the transactions contemplated
by this Agreement shall be subject to the following conditions:
(a) Representations and Warranties of BHI. Except as contemplated in
this Agreement, (i) the representations and warranties of BHI hereunder shall be
made again at the Closing and shall be true in all material respects as of the
Closing Date, except that to the extent such representations and warranties
speak as of an earlier date, they will be true and correct as of such earlier
date, (ii) BHI shall have performed in all material respects all covenants
required of it by this Agreement as of the Closing Date and (iii) BHI shall have
furnished the Company at the Closing with a certificate of one of its authorized
representatives to such effect.
(b) Delivery of BHI Preferred Stock. BHI shall have delivered the
share certificate or certificates representing the BHI Preferred Stock, together
with such other documentation evidencing the transfer as may be reasonably
requested by the Company as specified in Section 2.1 hereof.
(c) Conditions Precedent to Merger. All of the conditions precedent
to the consummation of the Merger as set forth in Sections 6.1, 6.2 and 6.3 of
the Merger Agreement shall have been satisfied, or waived by a party having the
right to waive such condition under the Merger Agreement, as of the Closing
Date.
7.3 Termination of Agreement. Anything herein to the contrary
notwithstanding, this Agreement and the transactions contemplated herein may be
terminated at any time before the Closing as follows:
(a) Mutual Consent. By the mutual consent of the Company and BHI.
(b) Expiration Date. By the Company or BHI if the Closing shall not
have occurred by December 31, 1996.
(c) Termination of Merger Agreement. By the Company or BHI if the
Merger Agreement shall have been terminated.
(d) Amendment of Merger Agreement. By BHI if an amendment or
modification of the Merger Agreement is made which is materially adverse to BHI
as a holder of Preferred Stock exchanging the Preferred Stock for Securities.
7.4 Effect of Termination and Failure of Conditions. In the event of
termination of this Agreement as provided in Section 7.3, or of the failure of a
condition resulting in BHI, or the Company not performing its or their
obligations hereunder pursuant to the terms of Section 7.1 or 7.2, as the case
may be, this Agreement shall forthwith become void
13
<PAGE>
EXHIBIT 10(hh)
and there shall be no liability on the part of any party hereto with respect
thereto except that nothing herein shall relieve any party from liability for
any breach hereof.
ARTICLE VIII.
MISCELLANEOUS
8.1 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of the Agreement.
8.2 Entire Agreement. This Agreement, the documents to be executed
hereunder, and the exhibits attached hereto constitute the entire agreement
between the parties hereto pertaining to the subject matter hereof and supersede
all prior agreements, understandings, negotiations and discussions, whether oral
or written, of the parties pertaining to the subject matter hereof.
Notwithstanding the foregoing, except as specifically provided in this Agreement
if the Closing occurs, the Purchase Agreement shall continue in full force and
effect, including specifically sections 8.11 and 8.12 of the Purchase Agreement.
8.3 Waiver. At any time prior to the Closing, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed on behalf of such party. The
consummation of the transactions contemplated hereby shall not be deemed a
waiver of the right any party may have hereunder with respect to any other
party's representations, warranties, covenants or agreements contained in or
related to this Agreement being incorrect, untrue or breached.
8.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto. No supplement,
alteration or modification of this Agreement shall be binding unless executed in
writing by the parties hereto.
8.5 Further Actions. Each party shall execute and deliver such other
certificates, agreements and other documents and take such other actions as may
reasonably be requested by the other parties in order to consummate or implement
the transactions contemplated by this Agreement.
8.6 Assignment. Except as otherwise expressly provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the Company and BHI. The
Company may not assign or delegate any of its rights or duties hereunder,
without the prior written consent of BHI. BHI may not assign or delegate any of
its rights or duties hereunder without the prior
14
<PAGE>
EXHIBIT 10(hh)
written consent of the Company, which consent shall not be unreasonably
withheld; but in any event BHI shall remain responsible for any assignee's
performance. Any assignment or delegation made without such consent shall be
void.
8.7 Independent Covenants. The covenants contained herein are
independent and separate, and in the event that any provision contained herein
is declared invalid or illegal, the other provisions hereof shall not be
affected or impaired thereby and shall remain valid and enforceable.
8.8 Remedies and Certain Rights. In the event of a breach or
threatened breach by any party hereto of the provisions of this Agreement, any
other party hereto shall be entitled to specific performance.
8.9 Governing Law. This Agreement and the other documents delivered
pursuant hereto and the legal relations between the parties shall be governed
and construed in accordance with the laws of the State of Delaware, without
giving effect to principles of conflict of laws.
8.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
8.11 Withholding or Granting of Consent. Except as otherwise
provided in this Agreement, each party hereto may, with respect to any consent
or approval that it is entitled to grant pursuant to this Agreement or any other
document or instrument or agreement delivered or entered into pursuant hereto,
grant or withhold such consent or approval in its sole and uncontrolled
discretion, with or without cause, and subject to such conditions as it shall
deem appropriate.
8.12 Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed or
telecopied or sent by certified or registered mail, postage prepaid, and shall
be deemed to be given, dated and received when so delivered personally,
telegraphed or telecopied or, if mailed, five business days after the date of
mailing to the following address or telecopy number, or to such other address or
addresses as such person may subsequently designate by notice given hereunder.
if to Tuboscope Vetco International:
Tuboscope Vetco International Corporation
2835 Holmes Road
Houston, TX 77051
Telecopy: (713) 799-5183
Attn: General Counsel
15
<PAGE>
EXHIBIT 10(hh)
with a copy to:
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626
Telecopy: (714) 755-8290
Attn: Patrick Seaver
if to Baker Hughes Incorporated:
Baker Hughes Incorporated
3900 Essex Lane, Suite 1200
Houston, TX 77027
Attn: General Counsel
with a copy to:
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
Telecopy: (713) 229-1522
Attn: J. David Kirkland, Jr.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first above written.
BAKER HUGHES INCORPORATED
Date: March 13, 1996 By: /s/ LAWRENCE O'DONNELL, III
-------------- ----------------------------
Name: Lawrence O'Donnell, III
-----------------------
Title: Vice President
--------------
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
Date: March 13, 1996 By: /s/ MARTIN I. GREENBERG
-------------- ------------------------
Name: Martin I. Greenberg
-------------------
Title: Vice President
--------------
16
<PAGE>
APPENDIX I
TO EXCHANGE AGREEMENT
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
EXPIRING DECEMBER 31, 2000
NO. __ 1,250,000 SHARES
BY THIS WARRANT (this "Warrant"), Tuboscope Vetco International
Corporation, a Delaware corporation (the "Company"), certifies that, for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Baker Hughes Incorporated, a Delaware corporation (along with its
registered assigns, the "Holder"), is entitled to subscribe for and purchase
from the Company, subject to the terms and conditions set forth herein, at any
time or from time to time prior to 5:00 p.m. (Houston, Texas time) on December
31, 2000 (the "Expiration Date"), 1,250,000 (subject to adjustment as set forth
herein) fully paid and non-assessable shares (the "Shares") of the Company's
Common Stock, $0.01 par value per share (the "Common Stock"), at a price equal
to the exercise price per share, initially $10.00 (subject to adjustment as set
forth herein) per share (the "Exercise Price").
1. Exercise of Warrant; Company Office. This Warrant may be
-----------------------------------
exercised at any time or from time to time prior to the Expiration Date as to
the entire number or any lesser number of whole shares of Common Stock, by the
surrender of this Warrant to the Company at its office at 2835 Holmes Road
Houston, Texas 77051, or such other place as is designated in writing by the
Company pursuant to this Section 1, together with (a) a duly executed election
in substantially the form of Exhibit A attached hereto and made a part hereof
---------
for all purposes, and (b) a wire transfer or a certified or bank cashier's check
payable to the order of the Company in an amount equal to the Exercise Price
multiplied by the number of shares of Common Stock covered by such election.
Notwithstanding the foregoing sentence, at any time that the Current Market
Price (as hereinafter defined) is greater than the Exercise Price, the Holder
may, at its option, exercise this Warrant at any time or from time to time prior
to the Expiration Date as to the entire number or any lesser number of whole
shares of Common Stock, by the surrender of this Warrant to the Company at the
location designated in the foregoing sentence together with a duly executed
election in substantially the form of Exhibit A attached hereto and made a part
---------
hereof for all purposes and, in return therefor, the Company shall deliver to
the Holder that certain number of shares of Common Stock that is determined by
dividing (aa) the product of (1) the number of shares of Common Stock covered by
such election and (2) the difference between the Current Market Price at the
date of such exercise and the Exercise Price in effect on the date of such
exercise by (bb) the Current Market Price at the date of such exercise. For so
long as this Warrant is outstanding, the Company shall continue to maintain an
office in the State of Texas where notices, presentations and demands in respect
of this Warrant may be made
<PAGE>
upon it and shall notify the Holder in writing at least 15 days before changing
the location of any such office.
2. Stock Ownership; Stock Certificates; Partial Exercise.
-----------------------------------------------------
Upon each exercise of this Warrant, the Holder shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise as of the
close of business on the day this Warrant is exercised, notwithstanding that the
stock transfer books of the Company shall then be closed or certificates
representing such shares shall not then have been actually delivered to the
Holder. As soon as possible after each such exercise of this Warrant, the
Company shall issue and deliver to the Holder a certificate or certificates for
the shares issuable upon such exercise issued in such denominations as may be
specified by Holder and registered in the name of the Holder or, subject to
Section 9, such other name or names as shall be designated in the Holder's
election to exercise. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the right of the Holder to purchase the balance
of the shares subject to purchase hereunder on the terms and conditions set
forth herein (including all changes and adjustments that have occurred
hereunder). The Company will, at the time of each exercise of this Warrant, upon
the request of the Holder hereof, acknowledge in writing its continuing
obligation to afford to such Holder all rights to which such Holder shall
continue to be entitled after such exercise in accordance with the terms
of this Warrant; provided, however, that if the Holder of this Warrant shall
--------
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford such rights to such Holder.
3. Company Records; Transfer or Assignment of Warrant; Exchange
------------------------------------------------------------
of Warrant. Any warrants issued in connection herewith or in substitution
- ----------
herefor, upon complete or partial transfer, assignment or exercise (the
"Warrants") shall be numbered and shall be registered in the warrant register of
the Company (the "Warrant Register") as they are issued. The Company shall treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes, except that if the Warrant is properly
transferred or assigned and notice of such transfer or assignment is given to
the Company, the Company shall treat the transferee or assignee as the owner
thereof for all purposes (or, if such transfer or assignment is properly made in
blank, the Company shall treat the bearer of this Warrant as the owner thereof
for all purposes). The Warrant shall be transferred by the Company upon delivery
thereof duly endorsed by the Holder or by his duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced if requested by the Company in its reasonable
discretion. The Company shall immediately register all assignments and transfers
in the Warrant Register and, upon any registration of assignment or transfer,
the Company shall deliver a new Warrant or Warrants to the person or entity
entitled thereto on the terms and conditions set forth herein (including all
changes and adjustments that have occurred hereunder). A Warrant, if properly
transferred or assigned, may be exercised by a subsequent Holder without having
a new Warrant issued. The Warrants may be exchanged at the option of the Holder
thereof for another Warrant, or
2
<PAGE>
other Warrants, of different denominations and representing in the aggregate the
right to purchase the same number of shares of Common Stock on the terms and
conditions set forth herein (including all changes and adjustments that have
occurred hereunder) upon surrender to the Company or its duly authorized agent.
All provisions of this Section 3 shall be subject to Section 9.
4. Reserved Stock. The Company shall reserve
--------------
and keep available at all times solely for the purpose of providing for the
exercise of this Warrant the maximum number of shares of Common Stock as to
which this Warrant may then be exercised. All such shares shall be duly
authorized and free of preemptive rights and, when issued upon such exercise,
shall be validly issued, fully paid and non-assessable.
5. Certain Adjustments.
-------------------
(a) Number of Shares; Exercise Price. The number of shares of Common
--------------------------------
Stock which the Holder of this Warrant shall be entitled to receive upon each
exercise hereof shall be determined by multiplying the number of shares of
Common Stock which would otherwise (but for the provisions of this Section 5) be
issuable upon such exercise, as designated by the Holder hereof, by a fraction
of which (a) the numerator is $10.00 and (b) the denominator is the Exercise
Price in effect on the date of such exercise. The Exercise Price shall be
adjusted and readjusted from time to time as provided in this Section 5 and, as
so adjusted or readjusted, shall remain in effect until a further adjustment or
readjustment thereof is required by this Section 5.
(b) Issuance of Additional Shares of Common Stock or Certain
--------------------------------------------------------
Convertible Securities. If after the date hereof the Company shall issue any
- ----------------------
Common Stock other than Excluded Stock (as hereinafter defined) without
consideration or for a consideration per share less than the Current Market
Price in effect immediately prior to such issuance, the Exercise Price in effect
immediately prior to each such issuance shall immediately (except as otherwise
expressly provided below) be reduced to the price determined by dividing (1) an
amount equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issuance multiplied by the Current Market Price in
effect immediately prior to such issuance and (B) the consideration, if any,
received by the Company upon such issuance, by (2) the total number of shares of
Common Stock outstanding immediately after such issuance.
For the purposes of any adjustment of the Exercise Price pursuant to
this Section 5(b), the following provisions shall be applicable:
(A) Cash. In the case of the issuance of Common Stock for cash, the
----
amount of the consideration received by the Company shall be deemed to be the
amount of the cash proceeds received by the Company for such Common Stock before
deducting therefrom any discounts, commissions, taxes or other expenses allowed,
paid or incurred by the Company for any underwriting or otherwise in connection
with the issuance and sale thereof.
3
<PAGE>
(B) Consideration Other Than Cash. In the case of the issuance of
-----------------------------
Common Stock (otherwise than upon the conversion of shares of capital stock or
other securities of the Company) for a consideration in whole or in part other
than cash, including securities acquired in exchange therefor (other than
securities of the Company that by their terms are exchangeable for such Common
Stock), the consideration other than cash shall be deemed to be the fair value
thereof as determined in good faith by the Board of Directors of the Company and
irrespective of any accounting treatment; provided, that such fair value as
--------
determined by the Board of Directors shall not exceed the aggregate Current
Market Price of the shares of Common Stock being issued as of the date on which
the Board of Directors authorizes the issuance of such shares.
(C) Options and Convertible Securities. In the case of the issuance
----------------------------------
of (i) options, warrants or other rights to purchase or acquire Common Stock
(whether or not at the time exercisable), (ii) securities by their terms
convertible into or exchangeable for Common Stock (whether or not at the time so
convertible or exchangeable) or (iii) options, warrants or rights to purchase
such convertible or exchangeable securities (whether or not at the time
exercisable), other than in each case Excluded Stock:
(1) the aggregate maximum number of shares of Common Stock deliverable
upon exercise of such options, warrants or other rights to purchase or acquire
Common Stock shall be deemed to have been issued at the time such options,
warrants or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subclauses (A) and (B)
above), if any, received by the Company upon the issuance of such options,
warrants or rights plus the minimum purchase price provided in such options,
warrants or rights for the Common Stock covered thereby;
(2) the aggregate maximum number of shares of Common Stock deliverable
upon conversion of or in exchange for any such convertible or exchangeable
securities, or upon the exercise of options, warrants or other rights to
purchase or acquire such convertible or exchangeable securities and the
subsequent conversion or exchange thereof, shall be deemed to have been issued
at the time such securities were issued or such options, warrants, or rights
were issued and for a consideration equal to the consideration, if any, received
by the Company for any such securities and related options, warrants or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the additional consideration (determined in the manner provided
in subclauses (A) and (B) above), if any, to be received by the Company upon the
conversion or exchange of such securities, or upon the exercise of any related
options,
4
<PAGE>
warrants or rights to purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof;
(3) on any change in the number of shares of Common Stock deliverable
upon exercise of any such options, warrants or rights or conversion or exchange
of such convertible or exchangeable securities or any change in the
consideration to be received by the Company upon such exercise, conversion or
exchange, including, but not limited to, a change resulting from the anti-
dilution provisions thereof, the Exercise Price as then in effect shall
forthwith be readjusted to such Exercise Price as would have been obtained had
an adjustment been made upon the issuance of such options, warrants or rights
not exercised prior to such change, or of such convertible or exchangeable
securities not converted or exchanged prior to such change, upon the basis of
such change;
(4) on the expiration or cancellation of any such options, warrants or
rights or the termination of the right to convert or exchange such convertible
or exchangeable securities, if the Exercise Price shall have been adjusted upon
the issuance thereof, the Exercise Price shall forthwith be readjusted to such
Exercise Price as would have been obtained had an adjustment been made upon the
issuance of such options, warrants, rights or such convertible or exchangeable
securities on the basis of the issuance of only the number of shares of Common
Stock actually issued upon the exercise of such options, warrants or rights, or
upon the conversion or exchange of such convertible or exchangeable securities;
and
(5) if the Exercise Price shall have been adjusted upon the issuance
of any such options, warrants, rights or convertible or exchangeable securities,
no further adjustment of the Exercise Price shall be made for the actual
issuance of Common Stock upon the exercise, conversion or exchange thereof.
(D) Excluded Stock. "Excluded Stock" shall mean (1) shares of Common
--------------
Stock issued by the Company as a stock dividend payable in shares of Common
Stock, or upon any subdivision or split-up of the outstanding shares of Common
Stock for which an adjustment to the Exercise Price is made pursuant to Section
5(c), (2) options to acquire Common Stock and shares of Common Stock issued or
to be issued from time to time to directors, officers, employees, consultants,
advisors, independent contractors and agents of the Company pursuant to stock
option plans or other employee benefit plans approved of by the Board of
Directors, or an authorized committee thereof, of
5
<PAGE>
the Company, (3) the shares of Common Stock issued or issuable upon exercise of
the Warrants or any other warrants to purchase shares of Common Stock issued and
outstanding as of the date hereof and (4) shares of Common Stock issued by the
Company pursuant to an underwritten public offering of Common Stock or pursuant
to a public tender or exchange offer.
(c) Stock Dividends, Subdivisions, Reclassifications or Combinations.
----------------------------------------------------------------
If the Company shall (i) declare a dividend or make a distribution on its Common
Stock in shares of its Common Stock, (ii) subdivide or reclassify the
outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify the outstanding Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record date for such
dividend or distribution or the effective date of such subdivision, combination
or reclassification shall be proportionately adjusted so that the Holder of this
Warrant who exercises this Warrant after such date shall be entitled to receive
the number of shares of Common Stock which he would have owned or been entitled
to receive had this Warrant been exercised immediately prior to such date.
Successive adjustments in the Exercise Price shall be made whenever any event
specified above shall occur.
(d) Other Distributions. In case the Company shall fix a record date
-------------------
for the making of a distribution to all holders of shares of its Common Stock
(i) of shares of any class other than its Common Stock or (ii) of evidences of
indebtedness of the Company or any subsidiary or (iii) of other assets,
including cash, (excluding dividends or distributions referred to in Section
5(c) above and excluding any cash dividend or cash distribution if the per share
amount when combined with the per share amount of all cash dividends and
distributions paid by the Company on Common Stock during the 365-day period
ending on such record date (as adjusted to appropriately reflect any of the
events referred to in Section 5(c) or in this Section 5(d) and excluding cash
dividends or distributions for which an adjustment to the Exercise Price was
previously made pursuant to this Section 5(d)), does not exceed 10% of the
Current Market Price on such record date) or (iv) of rights or warrants
(excluding those referred to in Section 5(b) above), in each case the Exercise
Price in effect immediately prior thereto shall be reduced immediately
thereafter to the price determined by dividing (1) an amount equal to the
difference resulting from (x) the number of shares of Common Stock outstanding
on such record date multiplied by the Current Market Price on such record date,
less (y) the fair market value (as determined in good faith by the Board of
Directors) of said shares or evidences of indebtedness or assets or rights or
warrants to be so distributed, by (2) the number of shares of Common Stock
outstanding on such record date. Such adjustment shall be made successively
whenever such a record date is fixed. In the event that such distribution is
not so made, the Exercise Price then in effect shall be readjusted, effective as
of the date when the Board of Directors determines not to distribute such
shares, evidence of indebtedness, assets, rights or warrants, as the case may
be, to the Exercise Price which would then be in effect if such record date had
not been fixed.
(e) Other Dilutive Events. In case any event shall occur as to which
---------------------
the provisions of this Section 5 are not strictly applicable but the failure to
make any adjustment relating thereto would not fairly protect the purchase
rights represented by this Warrant in accordance with the essential intent and
principles of this Section 5, then, in each such case, the Company shall
immediately make all adjustments necessary to preserve, without dilution,
6
<PAGE>
the purchase rights represented by this Warrant on a basis consistent with the
intent and principles established in this Section 5 and shall also immediately
appoint a firm of independent certified public accountants of recognized
national standing (which may be the regular auditors of the Company if they
satisfy such standard), which shall give their opinion that such adjustment, if
any, preserves, without dilution, the purchase rights represented by this
Warrant on a basis consistent with the intent and principles established in this
Section 5. Upon receipt of such opinion, the Company will immediately deliver a
copy thereof to the Holder of this Warrant. The Company shall not, by amendment
of its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, and will at all times in good faith assist
in carrying out all of such terms and in the taking of all such actions as may
be necessary or appropriate in order to protect the rights of the Holder of this
Warrant against dilution or other impairment. Without limiting the generality of
the foregoing, the Company (i) will not permit the par value of any shares of
stock receivable upon the exercise of this Warrant to exceed the amount payable
therefor upon such exercise, (ii) will take all such action as may be necessary
or appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of stock on the exercise of the Warrants from time
to time outstanding, and (iii) will not take any action which results in any
adjustment of the Exercise Price if the total number of shares of Common Stock
issuable after such action upon the exercise of all of the Warrants would exceed
the total number of shares of Common Stock then authorized by the Company's
certificate of incorporation and available for the purpose of issuance upon such
exercise.
(f) Size of Adjustment; Rounding. No adjustment in the Exercise Price
----------------------------
shall be required unless such adjustment would require an increase or decrease
of at least one cent ($.01) in such price; provided, however, that any
--------
adjustment which is thereby not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one-hundredth of a
Share, as the case may be.
(g) Notice. Whenever there shall be an adjustment as provided in this
------
Section 5, the Company shall promptly cause written notice thereof to be sent to
the Holder, which notice shall be accompanied by an officer's certificate
setting forth the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof.
However, the failure by the Company to satisfy its obligations under this
Section 5(g) shall not in any manner affect or alter the rights of the Holder
under this Warrant.
(h) Fractional Shares. The Company shall not be required to issue
-----------------
fractions of shares of Common Stock or other capital stock of the Company upon
the exercise of Warrants. If any fraction of a share would be issuable upon the
exercise of any Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
Current Market Price of such share of Common Stock on the date of exercise of
the Warrant.
7
<PAGE>
(i) Current Market Price. The Current Market Price at any date shall
--------------------
mean, in the event the Common Stock is publicly traded, the average of the daily
closing prices per share of Common Stock for 30 consecutive trading days ending
3 trading days before such date (as adjusted for any stock dividend, other
dividend for which an adjustment to the Exercise Price would be required
pursuant to Section 5(d), split, combination or reclassification that took
effect during such 30 trading day period). The closing price for each day shall
be the last reported sale price regular way or, in case no such reported sale
takes place on such day, the average of the last closing bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or if not listed or
admitted to trading on any national securities exchange, the closing sale price
for such day reported by NASDAQ, if the Common Stock is traded over-the-counter
and quoted in the National Market System, or if the Common Stock is so traded,
but not so quoted, the average of the closing reported bid and asked prices of
the Common Stock as reported by NASDAQ or any comparable system or, if the
Common Stock is not listed on NASDAQ or any comparable system, the average of
the closing bid and asked prices as furnished by two members of the National
Association of Securities Dealers, Inc. selected from time to time by the
Company for that purpose. If the Common Stock is not traded in such manner that
the quotations referred to above are available for the period required
hereunder, the Current Market Price per share of Common Stock shall be deemed to
be the fair value per share of Common Stock as determined by the Board of
Directors of the Company in good faith and irrespective of any accounting
treatment.
(j) Treasury Stock. For the purposes of this Section 5, the sale or
--------------
other disposition of any Common Stock theretofore held in the Company's treasury
shall be deemed to be an issue thereof.
(k) Valid Issuance. All shares of Common Stock which may be issued
--------------
upon the exercise of this Warrant will upon issuance by the Company be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof, and the Company shall take no
action which will cause a contrary result (including, without limitation, any
action which would cause the Exercise Price to be less than the par value, if
any, of the Common Stock).
6. Certain Corporate Events or Actions.
-----------------------------------
(a) Consolidation, Merger, Etc. In case of any consolidation with or
---------------------------
merger of the Company with or into another corporation or other entity (except
for a merger or consolidation in which the Company is the continuing corporation
other than as a subsidiary of another corporation or other entity), or in case
of any sale, lease or conveyance to another corporation or other entity of the
assets of the Company as an entirety or substantially as an entirety, such
successor, purchasing, leasing or receiving corporation or other entity, as the
case may be, shall, prior to and as a condition to the occurrence of such event,
(i) execute with the Holder an agreement providing that the Holder shall have
the right thereafter to receive upon exercise of this Warrant the kind and
amount of shares of stock and other securities, property, cash or any
combination thereof receivable upon such consolidation, merger, sale, lease or
conveyance by a holder of the number of shares of Common Stock for
8
<PAGE>
which this Warrant might have been exercised immediately prior to such
consolidation, merger, sale, lease or conveyance (provided that, if the holders
of shares have the right to make an election with respect to the kind or amount
of securities, cash or other property receivable upon consummation of such
event, then the kind and amount of securities, cash or other consideration
receivable to the Holder upon consummation of such event shall be deemed to be
the kind and amount so receivable per share by a plurality of the shares held by
holders of such shares making such an election) and (ii) make effective
provision in its certificate of incorporation or otherwise, if needed, in order
to effect such agreement. Such agreement shall provide for adjustments which
shall be equivalent to the adjustments in Section 5 and shall contain provisions
equivalent to this Section 6.
(b) Reclassification, Etc. In case of any reclassification or change
----------------------
of the shares of Common Stock issuable upon exercise of this Warrant or in case
of any consolidation or merger of another corporation or other entity with or
into the Company in which the Company is the continuing corporation (other than
as a subsidiary of another corporation or other entity) and in which there is a
reclassification or change (including a change to the right to receive cash or
other property) of the shares of Common Stock, the Holder shall have the right
thereafter to receive upon exercise of this Warrant the kind and amount of
shares of stock and other securities, property, cash or any combination thereof
receivable upon such reclassification, change, consolidation or merger by a
holder of the number of shares of Common Stock into which this Warrant would
have been exercisable immediately prior to such reclassification, change,
consolidation or merger (provided that, if the holders of shares have the right
to make an election with respect to the kind or amount of securities, cash or
other property receivable upon consummation of such event, then the kind and
amount of securities, cash or other consideration receivable to the Holder upon
consummation of such event shall be deemed to be the kind and amount so
receivable per share by a plurality of the shares held by holders of such shares
making such an election). Thereafter, appropriate provision (as determined by
the Board of Directors of the Company in good faith) shall be made for
adjustments which shall be equivalent to the adjustments in Section 5. This
Section 6(b) shall be applicable to successive reclassifications, changes,
consolidations or mergers.
7. Certain Notices. In case at any time the Company shall propose
---------------
or have knowledge of any proposal:
(a) to pay any dividend or make any distribution on shares of Common
Stock or to fix a record date for the making of any such dividend or
distribution to holders of Common Stock; or
(b) to take, or fix a record date for, any action that would result in
any adjustment to the Exercise Price pursuant to Section 5; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock, or consolidation or merger, or sale, lease or conveyance of
property, of the type addressed in Section 6; or
9
<PAGE>
(d) to effect any voluntary or involuntary liquidation, dissolution or
winding-up of the Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof to the Holder at least 30 days prior to the date on which (i) the
books of the Company shall close, or a record date shall be set, for any such
action described in Section 7(a) or (b) or (ii) such reclassification, change,
consolidation, merger, sale, lease, conveyance, liquidation, dissolution or
winding-up shall be effective, as the case may be.
8. Expenses. The Company shall pay all costs, fees, taxes (other
--------
than any federal or state income or stock transfer taxes) and expenses payable
in connection with the preparation, issuance and delivery from time to time of
Warrants and of shares of Common Stock or other securities issued upon the
exercise of Warrants.
9. Restrictions on Transfer. The Holder, by its acceptance hereof,
------------------------
represents and warrants that it is acquiring the Warrants and any Common Stock
issued upon the exercise of this Warrant for investment purposes, for its own
account, and not with an intent to sell or distribute the Warrants or any such
Common Stock except in compliance with applicable United States federal and
state securities law. Neither this Warrant nor any of the Common Stock issued
upon the exercise of this Warrant, nor any interest in either, may be sold,
assigned, pledged, hypothecated, encumbered or in any other manner transferred
or disposed of, in whole or in part, except in compliance with applicable United
States federal and state securities laws and the terms and conditions hereof.
The provisions of this Section 9 shall be binding upon all subsequent holders of
this Warrant, if any. This Warrant and the shares of Common Stock or other
securities issued upon exercise of this Warrant shall be subject to a stop-
transfer order and the certificate or certificates evidencing any such shares or
securities shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION.
SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT UPON
SUCH REGISTRATION OR UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE CORPORATION STATING THAT SUCH SALE, ASSIGNMENT OR
TRANSFER IS EXEMPT FROM REGISTRATION UNDER SUCH ACT AND LAWS."
10. Registration of Common Stock; Listing. If any shares of Common
-------------------------------------
Stock required to be reserved for purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal or
state law before such shares may be issued upon exercise, the Company will, at
its expense and as expeditiously as possible, cause such shares to be duly
registered or approved, as the case may be. At any such time as Common Stock is
listed for trading, the Company will, at its expense, obtain promptly and
maintain the approval of all securities exchanges (including, for this purpose,
10
<PAGE>
NASDAQ) on which the Common Stock is listed for trading for an additional
listing, upon official notice of issuance, of the shares of Common Stock
issuable upon exercise of the then outstanding Warrants and maintain the listing
of such shares after their issuance.
11. Availability of Information. The Company will comply with the
---------------------------
reporting requirements of Sections 13 and 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") (or, if the Company is not required to
so comply pursuant to the Exchange Act, it will make publicly available the
information specified by Rule 144(c)(2) under the Securities Act) and will
comply with all other public information reporting requirements of the
Securities and Exchange Commission (the "Commission") (including Rule 144
promulgated by the Commission under the Securities Act) from time to time in
effect and relating to the availability of an exemption from the Securities Act
for the sale of any restricted securities (as defined in the Securities Act) or
the sale of securities by affiliates (as defined in the Securities Act). The
Company will also cooperate with each holder of any restricted securities in
supplying such information as may be necessary for such holder to complete and
file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of any restricted securities or the sale of
securities by affiliates. The Company will furnish to each Holder of a Warrant,
promptly upon their becoming available, copies of all financial statements,
reports, notices and proxy statements sent or made available generally by the
Company to its stockholders, and copies of all regular and periodic reports and
all registration statements and prospectuses filed by the Company with any
securities exchange or with the Commission.
12. Loss, Theft, Etc. Upon receipt of evidence satisfactory to the
-----------------
Company of the loss, theft, destruction or mutilation of any Warrant and upon
surrender and cancellation of any Warrant if mutilated, the Company shall
execute and deliver to the Holder thereof a new Warrant in the form and
substance of the lost, stolen, destroyed or mutilated Warrant (including all
changes and adjustments that have occurred hereunder). In the event a bond for
security therefor is required, the cost of such bond shall be paid by the
Holder.
13. No Rights or Liabilities as a Stockholder. Nothing contained in
-----------------------------------------
this Warrant shall be construed as conferring upon the Holder hereof any rights
as a stockholder of the Company or as imposing any obligation upon such Holder
to purchase any securities or as imposing any liability upon such Holder as a
stockholder of the Company, whether such obligation or liability is asserted by
the Company or by creditors of the Company at law or in equity.
14. Governing Law. This Warrant shall be governed by and construed
-------------
in accordance with the internal laws of the State of Delaware.
15. Remedies. The Company stipulates that the remedies at law of the
--------
Holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that, to the extent permitted by
applicable law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
11
<PAGE>
16. Notices. All notices and other communications provided for
-------
herein shall be delivered or mailed by registered or certified mail, return
receipt requested, postage prepaid, addressed (a) if to any Holder of any
Warrant, to the address of such Holder as set forth in the Warrant Register or
to such other address as such Holder has notified the Company of in writing or
(b) if to the Company, to the address set forth in Section 1 or to such other
address as the Company has notified such Holder of pursuant to Section 1 and
this Section 16; provided, however, that the exercise of any Warrant shall be
effective in the manner provided in Section 1. All notices given pursuant to
this Warrant shall be deemed to be effective upon receipt thereof by the party
to whom such notice is addressed.
17. Miscellaneous. This Warrant and any term hereof may be changed,
-------------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. Any provision of this Warrant which shall be prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the Company
waives any provision of law which shall render any provision hereof prohibited
or unenforceable in any respect. The section and paragraph headings used in
this Warrant are inserted for convenience only and shall not be used for any
interpretive purpose.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
Dated: _________________, 1996 TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
[Corporate Seal] By:
-------------------------------------
Attest:
Secretary
12
<PAGE>
EXHIBIT A TO WARRANT
--------------------
To: TUBOSCOPE VETCO INTERNATIONAL CORPORATION
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to subscribe for
__________ shares of Common Stock covered by the within Warrant [and tenders
payment herewith in the amount of $____________] [and tenders no payment
herewith with respect to such shares of Common Stock covered by the within
Warrant and thus requests ____ shares of Common Stock (the quotient of (i) ___
shares covered by this exercise multiplied by $____) (the Current Market Price
at the date of this exercise minus the Exercise Price), divided by $_____ (the
Current Market Price at the date of this exercise)] in accordance with the terms
thereof, and requests that certificates for such shares in the following
denominations be issued in the name of, and delivered to, the person[s] at the
following address[es]:
Denominations:
(Print Address[es] and Social Security Number[s] or
Employer Identification Number[s] as applicable)
and, if said number of shares shall not be all the shares covered by the within
Warrant, that a new Warrant for the balance remaining of the shares covered by
the within Warrant be registered in the name of, and delivered to, the
undersigned at the address stated below:
Date: __________, ____ Name: ______________________________________
(Print)
(Signature)
Address: __________________________________
<PAGE>
EXHIBIT 10(kk)
AMENDED AND RESTATED EXECUTIVE AGREEMENT
This Amended and Restated Executive Agreement is made and entered into as of
23rd day of June, 1993, between Tuboscope Vetco International Inc., a Texas
corporation (the "Company"), Tuboscope Vetco International Corporation, a
Delaware Corporation ("Tuboscope"), and _______________________ (the
"Executive"). The Company and Tuboscope are hereinafter sometimes jointly
referred to as "the Companies".
WHEREAS, the Executive is employed as an Executive Officer of Tuboscope and the
Company; and
WHEREAS, the Boards of Directors of the Companies have, by and through their
respective Executive Committees, authorized certain "Change of Control Severance
Protections" in order to retain and motivate management and to ensure continuity
of management thereby entering an Executive Agreement dated ______________,
________ (the "Agreement"); and,
WHEREAS, the Boards of Directors of the Companies have, by and through their
respective Executive Committees, authorized certain changes in the Agreement in
order to retain and further motivate the Executive and to further ensure
continuity of management and/or transition of the Companies; and,
WHEREAS, the parties wish to amend and restate the Agreement to reflect these
additional changes and thereby enter this Amended and Restated Executive
Agreement ("this Agreement");
NOW THEREFORE, in consideration of the premises and mutual promises contained
herein the sufficiency and receipt of which are hereby acknowledged the parties
agree as set forth below:
1. Definitions
-----------
For the purposes of this Agreement, the following terms shall have the
following respective meanings:
(a) "Annual Base Salary" shall mean the Annual Base Salary being earned by
------------------
the Executive on the date that the relevant Change of Control occurs.
(b) "Annual Incentive Compensation Opportunity" shall mean the maximum
-----------------------------------------
amount of cash bonus for which Executive could be eligible during the
fiscal year in which the relevant Change of Control occurs.
(c) "Cause" shall mean a willful and continued failure to substantially
-----
perform the duties of Executive's office or the willful engagement in
conduct which is materially injurious to either of the Companies.
(d) A "Change in Control" shall be deemed to have occurred if:
-----------------
<PAGE>
EXHIBIT 10(kk)
(i) any "person", as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "1934
Act") (other than Tuboscope with respect to the Company) is,
becomes or enters a contract to become, the "beneficial owner",
as such term is used in Rule 13d-3 promulgated under the 1934
Act, directly or indirectly, of securities representing fifty
percent (50 %) or more of the common stock of Tuboscope or the
Company; or
(ii) all or substantially all of the business of either of the
Companies is disposed of, or a contract is entered to dispose of
all of the business of either of the Companies pursuant to a
merger, consolidation or other transaction in which (x) the
respective Company is not the surviving company, or (y) the
stockholders of the respective Company prior to the transaction
do not continue to own at least sixty percent (60%) of the
surviving corporation; or ,
(iii) either of the Companies is materially or completely liquidated;
or
(iv) any person (other than either of the Companies) purchases any
common stock of either of the Companies in a tender or exchange
offer with the intent, expressed or implied, of purchasing or
otherwise acquiring control of either of the Companies; or
(v) a majority of the board of directors of either of the Companies
is replaced over a two (2) year period unless such replacements
have been approved by at least two-thirds (2/3) of those
remaining directors who were directors at the beginning of such
two (2) year period.
(e) "Good Reason" shall mean:
-----------
(i) a material reduction in Executive's authority, duties or
responsibilities (including status, offices, titles and reporting
requirements) from those of Executive at the time of the relevant
Change in Control on the basis of which Executive reasonably
determines that he can no longer carry out his job in the manner
contemplated prior to the Change in Control;
(ii) Executive is assigned any duties or responsibilities that are
inconsistent, in any material respect, with the scope of duties
and responsibilities associated with the Executive's position
immediately prior to the Change in Control;
(iii) any reduction in Executive's Annual Base Salary or Annual
Incentive Compensation Opportunity;
<PAGE>
EXHIBIT 10(kk)
(iv) any material reduction (in the aggregate) in Executive's employee
benefits;
(v) the Companies fail to obtain a written agreement satisfactory to
Executive from any successor or assigns of either of the
Companies to assume and perform this Agreement as provided in
paragraph 5;
(vi) either of Companies requires Executive to be based at any office
located more than thirty (30) miles from the Companies current
offices without Executive's consent;
(f) "Fair Value" shall mean the closing sales price (on a national
----------
securities exchange or automated quotation system) of the common stock
into which Executive's options can be exercised on the date of Change
in Control.
2. Acceleration of Options And Cash Out
In the event of a Change of Control, all of Executive's unvested stock
options and other grants of long term incentives shall vest without further
action by either of the Companies or Executive and the Companies shall pay
to Executive, in cancellation of all of the options granted to Executive by
Tuboscope prior to the Change in Control and not previously exercised, cash
in an amount equal to the difference between (i) the Fair Value of the
common stock into which such options are exercisable and (ii) the exercise
price of such options.
3. Termination Payments After a Change in Control
If within twenty-four (24) months after a Change in Control, (a)
Executive's employment with the Companies is terminated for any reason
other than for Cause, death or disability or (b) Executive voluntarily
terminates his employment with the Companies for Good Reason, the Companies
shall, in lieu of any other severance obligation:
(a) pay to Executive two and one-half (2-1/2) times the sum of his (i)
Annual Base Salary and (ii) Annual Incentive Compensation Opportunity
then in effect; provided if the sum of Executive's (i) Annual Base
Salary and (ii) Annual Incentive Compensation Opportunity for either
of the two (2) years previous to the Change of Control is greater than
the Executive will be paid two and one-half (2-1/2) times the greater
amount;
(b) continue to provide to Executive basic health and life insurance
coverage substantially comparable to the coverage in effect upon the
date of Executive's termination (including coverage of Executive's
family) for thirty (30) months after such termination or until
Executive is re-employed and eligible for basic
<PAGE>
EXHIBIT 10(kk)
health and life insurance benefits from his employer which are equal
to or better than those provided by the Companies on the date of
termination, provided, however, that if Executive is not eligible for
coverage with any new employer for "preexisting conditions" and the
like, the Companies shall continue to provide coverage for such
conditions through the end of the thirty (30) month period; in
consideration for such coverage, Executive shall continue to pay an
amount equal to the amount paid by him for such coverage by the
Companies prior to his termination or such amount as other then
current executive employees of the Companies pay for such coverage;
(c) (i) permit Executive to participate in the Companies' 401(k) Plan for
thirty (30) months after the date of termination and continue to
contribute to his account an amount equal to three percent (3%) of
Executive's Annual Base Salary for each year or partial year of such
continuance or, (ii) pay to Executive an amount equal to two and one-
half (2-1/2) times three percent (3%) of Executive's Annual Base
Salary at the date of termination (2-1/2 x [Annual Base Salary x
.03]); in addition, if Executive is not fully vested in his 401 (k)
account on the date of termination, the Companies shall either fully
vest Executive in such account or pay Executive an amount equal to the
unvested portion of such account; any amounts payable pursuant to this
subparagraph 3(c) shall be grossed up so that the amount Executive
actually receives after payment of any federal and state taxes payable
on such amount, equals the amounts described above;
(d) either transfer to Executive ownership and title to the Executive's
company car or, if Executive receives a monthly car allowance in lieu
of a company car, pay Executive an amount equal to two and one-half
(2-1/2) times Executive's annual car allowance;
(e) pay Executive an amount such that after paying any federal or state
taxes on any payments to be received pursuant to subparagraph 3(c).
and 3(d) above and the amount payable pursuant to this subparagraph
3(e), the Executive shall retain an amount equal to the amounts
payable under subparagraphs 3(c) and 3(d);
(f) provide Executive with the full "Executive Plan" outplacement services
of Drake, Beam & Morin, or such other outplacement services as
reasonably acceptable to Executive;
(g) if it shall be determined that any payment to or for the benefit of
Executive pursuant to subparagraphs 3(a)-(g), (collectively, the
"payments") would be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code (or any successor provision) or any
interest or penalties are incurred by Executive with respect to such
excise tax (such excise tax together with any
<PAGE>
EXHIBIT 10(kk)
such interest and penalties, the "Excise Tax"), pay Executive an
additional amount (a "Gross-Up Payment") such that after payment by
Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, Executive will
retain an amount of the Gross-Up Payment equal to the Excise Tax on
the payments;
(h) all payments due pursuant to this paragraph 3. shall be made within
five (5) business days of the date of termination.
4. Term
This Agreement shall remain in full force and effect until such time as
(a) if prior to a Change of Control, Executive is no longer employed by
either of the Companies as an executive officer; or
(b) if subsequent to a Change of Control, all rights, benefits or payments
owing to Executive hereunder have been satisfied.
5. Assumption By Successor
The Companies will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of either of the Companies to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Companies would be required to perform if no
succession had taken place.
6. No Mitigation - No Offset
If Executive is terminated not for Cause or voluntarily terminates for Good
Reason, Executive shall be under no obligation to seek other employment and
there shall be no offset against amounts due Executive under this Agreement
on account of any remuneration attributable to any subsequent employment
Executive may obtain.
7. Attorney's Fees
If Executive reasonably determines that it is necessary to initiate any
legal action (including any arbitration proceeding as described in
paragraph 8) to obtain any payments, benefits or rights provided by this
Agreement to him, the Companies shall reimburse Executive for all
attorneys' fees, arbitrator's fees, costs and other related expenses
incurred by him to the extent Executive is awarded any relief in said
action.
<PAGE>
EXHIBIT 10(kk)
8. Dispute Resolution
If any dispute arises out of this Agreement, the "complaining party" shall
give the "other party" written notice of such dispute. The other party
shall have ten (10) business days to resolve the dispute to the complaining
party's satisfaction. If the dispute is not resolved by the end of such
period, the complaining party may by written notice (the "Notice") demand
arbitration of the dispute as set out below, and each party hereto
expressly agrees to submit to, and be bound by, such arbitration.
(a) Each party, will, within ten (10) business days of the Notice,
nominate an arbitrator. Each nominated arbitrator must be someone
experienced in dispute resolution and of good character without moral
turpitude and not within the employ or direct or indirect influence of
the nominating party. The two nominated arbitrators will, within ten
(10) business days of nomination, agree upon a third arbitrator. If
two (2) appointed arbitrators can not agree on a third arbitrator
within such period, the parties may seek such an appointment through
any permitted court proceeding or by the American Arbitration
Association ("AAA"). The three arbitrators will set the Rules and
timing of the arbitration, but will generally follow the Rules of the
AAA and this Agreement where same are applicable and shall provide for
written fact findings.
(b) The arbitration hearing will in no event take place more than ninety
(90) days after the appointment of the third arbitrator.
(c) The arbitration will take place in Houston, Texas unless otherwise
unanimously agreed to by the parties.
(d) The results of the arbitration and the decision of the arbitrators
will be final and binding on the parties and each party agrees and
acknowledges that these results shall be enforceable in a court of
law.
9. This Agreement will be governed by and construed in accordance with the
internal substantive laws, and not the choice of law rules, of the State of
Texas.
<PAGE>
EXHIBIT 10(kk)
IN WITNESS WHEREOF, the Company, Tuboscope and the Executive have executed this
Agreement on the 23rd day of June, 1993.
EXECUTIVE TUBOSCOPE VETCO INTERNATIONAL INC.,
a Texas Corporation
______________________________ By: ______________________________
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION, a Delaware Corporation
By: _______________________________
<PAGE>
EXHIBIT 10(kk)
FIRST AMENDMENT TO AMENDED AND RESTATED EXECUTIVE AGREEMENT
Tuboscope Vetco International Inc., a Texas corporation (the "Company"),
Tuboscope Vetco International Corporation, a Delaware corporation (the
"Corporation"), and ______________________ (the "Executive") have previously
entered into an Executive Agreement dated as of ________, ______ as amended June
23, 1993 (the "Amended Agreement"). The Company and the Corporation are
hereinafter sometimes jointly referred to as "the Companies".
WHEREAS, the Companies are contemplating a transaction pursuant to which the
Companies would combine their business enterprises with those of another
company; (the contemplated transaction hereinafter referred to as the
"Transaction"); and
WHEREAS, the Companies and Executive wish to modify the Amended Agreement in
certain respects generally and in particular respects in contemplation of the
Transaction;
NOW, THEREFORE, in consideration of the premises and mutual promises contained
herein the sufficiency and receipt of which are hereby acknowledged the parties
agree as set forth below:
1.1 Paragraph 2 of the Amended Agreement is amended to read hereafter as
follows:
"In the event of Change of Control, all of Executive's unvested stock
options shall vest without further action by either of the Companies or
Executive. Notwithstanding anything to the contrary contained in the
agreements covering such stock options, such stock options shall be
exercisable for the two (2) full calendar years following the Executive's
termination of employment with the Companies pursuant to the other terms of
the Amended and Restated Stock Option Plan for Key Employees and Directors
of Tuboscope Vetco International Corporation."
2. Subparagraph 3(g) of the Amended Agreement is amended by inserting
"paragraph 2 and" immediately prior to "subparagraphs 3(a)-(g)" in the
second line.
<PAGE>
EXHIBIT 10(kk)
IN WITNESS WHEREOF, the Company, the Corporation, and the Executive have
executed this Agreement on this 3rd day of January, 1996.
EXECUTIVE TUBOSCOPE VETCO INTERNATIONAL, INC.
________________________________ By: _______________________________
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By: _______________________________
<PAGE>
EXHIBIT 10(ll)
FIRST AMENDMENT TO AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
Tuboscope Vetco International Inc., a Texas corporation (the "Company"),
Tuboscope Vetco International Corporation, a Delaware corporation (the
"Corporation"), and Martin R. Reid (the "Executive") have previously entered
into an Amended and Restated Employment Agreement dated as of June 23, 1993 (the
"Amended Agreement"). The Company and the Corporation are hereinafter sometimes
jointly referred to as "the Companies."
WHEREAS, the Companies are contemplating a transaction pursuant to which the
Companies would combine their business enterprises with those of another company
(the contemplated transaction is hereinafter referred to as the "Transaction");
and
WHEREAS, the Companies and Executive wish to modify the Amended Agreement in
certain respects generally and in particular respects in contemplation of the
Transaction;
NOW, THEREFORE, in consideration of the premises and mutual promises contained
herein the sufficiency and receipt of which are hereby acknowledged the parties
agree as set forth below:
1. Paragraph 12.02 of the Amended Agreement is amended to read hereafter as
follows:
"In the event of Change of Control, all of Executive's unvested stock
options shall vest without further action by either of the Companies or
Executive. Notwithstanding anything to the contrary contained in the
agreements covering such stock options, such stock options shall be
exercisable for the five (5) full calendar years following the Change of
Control pursuant to the other terms of the Amended and Restated Stock
Option Plan for Key Employees and Directors of Tuboscope Vetco
International Corporation."
2. Subparagraph 12.03(a) of the Amended Agreement is amended to read hereafter
as follows:
"(a) pay to Executive two and one half (2-1/2) times the sum of his Annual
Base Salary and Annual Incentive Compensation Opportunity then in
effect; provided, however, that if the sum of Executive's Annual Base
Salary and Annual Incentive Compensation Opportunity for any of the
three (3) years previous to the Change of Control is greater than
Executive's Annual Base Salary and Annual Incentive Compensation
Opportunity then in effect, the Executive will be paid two and one
half (2-1/2) times the greater amount."
3. Subparagraph 12.03(f) of the Amended Agreement is amended by inserting
"paragraph 12.02 and" immediately prior to "subparagraphs 12.03(a)-(f)" in
the second line.
<PAGE>
EXHIBIT 10(ll)
IN WITNESS WHEREOF, the Company, the Corporation, and the Executive
have executed this Agreement on this 3rd day of January, 1996.
EXECUTIVE TUBOSCOPE VETCO INTERNATIONAL INC.
/s/ MARTIN R. REID By: /s/ WILLIAM V. LARKIN, JR.
- ------------------------ --------------------------------
Martin R. Reid William V. Larkin, Jr.
President
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By: /s/ WILLIAM V. LARKIN, JR.
--------------------------------
William V. Larkin, Jr.
President
2
<PAGE>
EXHIBIT 10(mm)
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
Tuboscope Vetco International Inc., a Texas corporation (the "Company"),
Tuboscope Vetco International Corporation, a Delaware corporation (the
"Corporation"), and Gerhard H. Hage, Jr. (the "Executive") have previously
entered into a General Manager Employment Agreement dated as of October 16, 1989
as amended April 30, 1992 and June 23, 1993 (the "Amended Agreement"). The
Company and the Corporation are hereinafter sometimes jointly referred to as
"the Companies."
WHEREAS, the Companies are contemplating a transaction pursuant to which the
Companies would combine their business enterprises with those of another
company; (the contemplated transaction is hereinafter referred to as the
"Transaction"); and
WHEREAS, the Companies and Executive wish to modify the Amended Agreement in
certain respects generally and in particular respects in contemplation of the
Transaction;
NOW, THEREFORE, in consideration of the premises and mutual promises contained
herein the sufficiency and receipt of which are hereby acknowledged the parties
agree as set forth below:
1. Paragraph 3 of the Amended Agreement is amended to read hereafter as
follows:
"In the event of Change of Control, all of Executive's unvested stock
options shall vest without further action by either of the Companies or
Executive. Notwithstanding anything to the contrary contained in the
agreements covering such stock options, such stock options shall be
exercisable for the two (2) full calendar years following the Executive's
termination of employment with the Companies pursuant to the other terms of
the Amended and Restated Stock Option Plan for Key Employees and Directors
of Tuboscope Vetco International Corporation."
<PAGE>
EXHIBIT 10(mm)
IN WITNESS WHEREOF, the Company, the Corporation, and the Executive have
executed this Agreement on this 3rd day of January, 1996.
EXECUTIVE TUBOSCOPE VETCO INTERNATIONAL INC.
/s/ GERHARD H. HAGE, JR. By: /s/ MARTIN R. REID
- ------------------------------ -------------------------------
Gerhard H. Hage, Jr. Martin R. Reid
Chairman of the Board
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By: /s/ MARTIN R. REID
Martin R. Reid
-------------------------------
Chairman of the Board
2
<PAGE>
EXHIBIT 10(nn)
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
Tuboscope Vetco International Inc., a Texas corporation (the "Company"),
Tuboscope Vetco International Corporation, a Delaware corporation (the
"Corporation"), and William V. Larkin, Jr. (the "Executive") have previously
entered into an Employment Agreement dated as of May 13, 1988 as amended April
30, 1992 and June 23, 1993 (the "Amended Agreement"). The Company and the
Corporation are hereinafter sometimes jointly referred to as "the Companies."
WHEREAS, the Companies are contemplating a transaction pursuant to which the
Companies would combine their business enterprises with those of another
company; (the contemplated transaction is hereinafter referred to as the
"Transaction"); and
WHEREAS, the Companies and Executive wish to modify the Amended Agreement in
certain respects generally and in particular respects in contemplation of the
Transaction;
NOW, THEREFORE, in consideration of the premises and mutual promises contained
herein the sufficiency and receipt of which are hereby acknowledged the parties
agree as set forth below:
1. Paragraph 3 of the Amended Agreement is amended to read hereafter as
follows:
"In the event of Change of Control, all of Executive's unvested stock
options shall vest without further action by either of the Companies or
Executive. Notwithstanding anything to the contrary contained in the
agreements covering such stock options, such stock options shall be
exercisable for the five (5) full calendar years following the Change of
Control pursuant to the other terms of the Amended and Restated Stock
Option Plan for Key Employees and Directors of Tuboscope Vetco
International Corporation."
2. Subparagraph 4(g) of the Amended Agreement is amended by inserting
"paragraph 3 and" immediately prior to "subparagraphs 4(a)-(g)" in the
second line.
<PAGE>
EXHIBIT 10(nn)
IN WITNESS WHEREOF, the Company, the Corporation, and the Executive have
executed this Agreement on this 3rd day of January, 1996.
EXECUTIVE TUBOSCOPE VETCO INTERNATIONAL INC.
/s/ WILLIAM V. LARKIN, JR. By: /s/ MARTIN R. REID
- -------------------------------- -------------------------------
William V. Larkin, Jr. Martin R. Reid
Chairman of the Board
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By: /s/ MARTIN R. REID
--------------------------
Martin R. Reid
Chairman of the Board
2
<PAGE>
EXHIBIT 10(oo)
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT (this "Lease") is between HELLER FINANCIAL
LEASING, INC. ("Lessor"), a Delaware corporation with an office address at 500
West Monroe Street, Chicago, Illinois 60661, and TUBOSCOPE VETCO INTERNATIONAL
INC. ("Lessee"), a Texas corporation, with its address and principal place of
business at 2835 Holmes Road, Houston, Texas 77001, which parties hereby agree
as follows:
1. LEASING AND DISCLAIMER:
(a) Subject to the terms and conditions set forth below, Lessor agrees
to lease to Lessee and Lessee agrees to hire from Lessor the buildings, land
improvements, equipment, machinery and fixtures (collectively, the "Equipment";
a unit or part thereof being sometimes hereinafter referred to as an "Item")
described in any Lease Schedule hereto, now or hereafter executed by the parties
(each, a "Schedule") and located on approximately 94 acres of developed property
in Harris County, Texas, commonly known as the Sheldon Industrial Facility at
10222 Sheldon Road, Houston Texas (the "Sheldon Industrial Facility"). Nothing
contained herein shall obligate either party to execute any Schedule subsequent
to the date hereof. Any modifications to this Lease contained in any Schedule
shall be controlling, but only with respect to the Equipment described in such
Schedule. Until and unless a Schedule is sold, assigned or otherwise
transferred by Lessor, or Lessor and Lessee expressly agree otherwise in
writing, this Lease, all Riders hereto, now or hereafter executed by the parties
(each, a "Rider"), and all Schedules shall constitute one lease, and references
to this Lease shall include all such Riders and Schedules. In the event that a
Schedule is sold, assigned or otherwise transferred by Lessor, such Schedule
shall be deemed to be a separate lease, which shall include and incorporate each
term and condition in this Lease and all Riders hereto.
(b) LESSOR IS NEITHER THE MANUFACTURER NOR SELLER OF THE EQUIPMENT,
---------------------------------------------------------------
AND MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH
- -----------------------------------------------------------------------------
RESPECT TO THE EQUIPMENT, ALL OF WHICH ARE HEREBY EXPRESSLY DISCLAIMED. LESSEE
- -------------------------------------------------------------------------------
UNDERSTANDS AND AGREES THAT NO WARRANTY IS TO BE IMPLIED WITH RESPECT TO THE
- ----------------------------------------------------------------------------
CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, THE FITNESS OF THE EQUIPMENT
- -----------------------------------------------------------------------------
FOR A PARTICULAR PURPOSE, THE ACCURACY OF THE DESCRIPTION OF THE EQUIPMENT, OR
- ------------------------------------------------------------------------------
WITH RESPECT TO INFRINGEMENT, INTERFERENCE OR THE LIKE. LESSOR SHALL NOT BE
- ----------------------------------------------------------------------------
LIABLE IF, FOR WHATEVER REASON, THE EQUIPMENT IS NOT DELIVERED TO LESSEE.
- -------------------------------------------------------------------------
2. TERM, RENT AND PAYMENT:
(a) The term (the "Term") of this Lease for each Item shall commence
on the date (the "Acceptance Date") Lessee executes a Delivery and Acceptance
Certificate (an "Acceptance Certificate") therefor and, unless sooner terminated
pursuant to Section 8 or 16, shall continue for the period specified as the
"Term" in the applicable Schedule. If any Term shall be extended, or this Lease
is renewed pursuant to a renewal option, the word "Term" shall include all such
extensions and renewals, and all provisions of this Lease shall apply during all
extension and renewal periods, except as may be otherwise specifically provided
in a subsequent written agreement.
(b) Lessee agrees to pay to Lessor's order basic rent ("Basic Rent")
for each Item in the amount therefor set forth in the applicable Schedule. The
first Basic Rent payment shall be due on the day of the month specified in such
Schedule. (If the applicable Schedule specifies that Rent (as defined below) is
to be paid in advance, such date shall be the "Commencement Date." If the
applicable Schedule specifies that Rent is to be paid in arrears, the
"Commencement Date" shall be the first day of the first calendar month
immediately following the Acceptance Date".) Subsequent Basic Rent payments
shall be made monthly on the same day of each month thereafter. If the
applicable Schedule specifies that Rent is to be paid in advance, then on the
Acceptance Date, Lessee shall pay to Lessor as interim rent for each Item the
amount specified therefor in the Schedule. If the applicable Schedule specifies
that Rent is to be paid in arrears, then on the Commencement Date for that
Schedule, Lessee shall pay to Lessor as interim rent for each Item the amount
specified therefor in the Schedule. Such interim rent (in either case, "Interim
Rent") shall cover the period from the Acceptance Date through the day
immediately
<PAGE>
EXHIBIT 10(oo)
preceding the Commencement Date. Any payment due on a day which is not a
business day shall be made on the following business day.
(c) Basic Rent, Interim Rent and all other amounts payable to Lessor
under any provision of this Lease (collectively, "Rent") shall, unless Lessor
otherwise directs, be paid to Lessor at its office address set forth above and
shall be deemed received upon receipt of wire transfer of funds or when good
funds are received by Lessor. Lessee agrees to pay Lessor on demand a late
charge on all Rent not paid within 10 days of the date due hereunder equal to
the lesser of: (i) 4% of the amount not timely paid or (ii) the maximum rate
permitted by applicable law.
3. QUIET ENJOYMENT: So long as no Event of Default (as defined below)
exists, Lessor will not interfere with Lessee's quiet enjoyment and use of the
Equipment during the initial Term or any extended or renewal Term.
4. NET LEASE; NO SET-OFF: This Lease is a net lease and Lessee shall not
be entitled to any abatement or reduction of, or set-off against, any Rent by
reason of any (a) past, present or future claim against Lessor or any successor
or assignee of Lessor or any supplier of any Item or any other person, (b)
defect in or damage to, or loss, prohibition, restriction on use or destruction
of, any Item (except as expressly provided in Section 8) from whatever cause, or
(c) other cause whatsoever, whether similar or dissimilar to the foregoing, it
being the intention of the parties that all Rent shall continue to be payable in
all events in the specified manner and at the specified times and that Lessees
obligation to pay Rent shall be absolute and unconditional unless the obligation
to pay the same shall be terminated pursuant to the express provisions of this
Lease.
5. USE, LOCATION AND POSSESSION; LIENS:
(a) Lessee shall use each Item in a careful and proper manner and for
the use contemplated by the manufacturer thereof and in compliance with all
applicable laws, rules, and regulations and the provisions of the insurance
required to be maintained hereunder and the terms of any manufacturers warranty.
Each Item will at all times be kept at the location specified in the applicable
Schedule unless the Lessor has given prior written consent to a change in
location. Lessee shall at all times keep each Item in its possession and
control.
(b) Lessee shall keep each Item free and clear of all, and shall not
create, incur, assume or suffer to exist any, claims, liens, pledges, rights of
others or other encumbrances (collectively "Liens"), other than those arising
by, through or under Lessor ("Lessor Liens").
(c) Lessor shall have the right, but not the obligation, at all
reasonable times to enter upon the premises where the Equipment is located or
used to inspect the Equipment. Such inspections shall be for, among other
things, determining whether Lessee is complying with its obligations hereunder.
Neither Lessee nor any third party may rely upon any such inspections by Lessor
and Lessor shall not be obligated to inform Lessee or any third party of the
result of any such inspection. Any inspection that is not followed by a notice
of an Event of Default shall not constitute a waiver of any Event of Default
then existing and Lessor's failure to inspect the Equipment or to discover any
information regarding the Equipment shall not constitute a waiver of any of
Lessor's rights hereunder.
6. MAINTENANCE AND SERVICE; IMPROVEMENTS:
(a) Lessee shall, at its expense, at all times maintain, service and
repair each Item as would a prudent owner of such Item, and in any event so as
to keep each Item in good operating condition, ordinary wear and tear excepted,
in compliance with all applicable laws, rules, regulations, and manufacturer's
recommended basic warranty, extended warranty and/or maintenance programs, and,
as otherwise may be required to enforce warranty claims against each vendor and
manufacturer of each Item. To the extent that Lessee's maintenance, repair or
servicing standards exceed the foregoing, then Lessee shall keep each Item in at
least as good condition as other
2
<PAGE>
EXHIBIT 10(oo)
comparable equipment owned or used by Lessee. In addition, Lessee shall, at its
expense, comply with all maintenance requirements set forth by Lessor in any
Maintenance Rider now or hereafter executed by the parties. Lessee shall, if at
any time requested to do so by Lessor, affix in a prominent position on each
Item plates, tags or other identifying labels showing ownership thereof by
Lessor.
(b) Any alterations or modifications with respect to any Item that may
at any time during the Term be required to comply with any applicable law or any
governmental or other rule or regulation shall be made by Lessee at its expense,
and shall thereupon become the property of Lessor.
(c) Unless required pursuant to Subsection (b), Lessee will not,
without Lessor's prior consent, affix or install any accessory, equipment, or
device on, or modify, any Item if such addition or modification will impair the
original function or use thereof or cannot be readily removed without causing
damage to such Item. Further, Lessee will not, without Lessor's prior written
consent, affix or install any Item to or in any other personal property, or to
or in any real property so that such Item shall constitute a fixture. Upon
Lessor's request, Lessee shall obtain and deliver to Lessor disclaimers or
waivers from all owners and/or mortgagees of real estate in which the Item is
located in form and content acceptable to Lessor.
7. NO AGENCY: Lessee acknowledges that it alone has selected the
Equipment and the supplier(s) thereof; that it has reviewed and approved any
written supply contract or purchase order covering the Equipment purchased from
the supplier, or has been advised by the Lessor in writing of the identity of
the supplier; that it may have rights under such supply contract or purchase
order; and that it may contact the supplier for a description of any such rights
and/or supplier's warranty. Nothing herein contained shall be construed to
deprive Lessee of whatever rights Lessee may have against parties other than
Lessor or Lessor's assignee, such as the supplier and the manufacturer of any
Item, and Lessee agrees to look solely to such third parties with respect to any
and all claims concerning the Equipment. So long as Lessee is not in breach or
default of this Lease, Lessee may pursue such claims for the mutual benefit of
Lessor and Lessee in accordance with their interests in the Equipment. Lessor
shall not be liable for any consequential damages hereunder or with respect to
any Item. The supplier is not the agent of Lessor and no employee of the
supplier is authorized to waive, supplement or otherwise alter any provision of
this Lease. Lessee and Lessor hereby agree that they intend this Lease to be a
"Finance Lease" as defined by Article 2A of the Uniform Commercial Code (the
"UCC"). Lessee acknowledges that Lessee has reviewed and approved any written
"Supply Contract" covering the Equipment from any "Supplier" (as those terms are
defined in Article 2A of the UCC).
8. RISK OF DAMAGE AND LOSS: Lessee assumes and shall be solely
responsible for the entire risk of any Item being lost, destroyed, damaged,
stolen, confiscated or condemned, from whatever source, until the date such Item
is returned and accepted by Lessor (the "Return Date") in accordance with
Section 11. In the event of damage to any Item, Lessee, at its expense, shall
promptly repair the same, restoring it to the condition required to be
maintained hereunder. If any Item is lost, destroyed, stolen, damaged in such a
way that it is not commercially reasonable to repair it (or such repairs are not
completed within 60 days of the damage or by the end of the Term with respect
thereto, whichever is shorter), confiscated or condemned (each, an "Event of
Loss"), then Lessee shall pay to Lessor the Stipulated Loss Value (as defined
below) of such Item and all other Rent owing with respect to such Item, which
such payment shall be due on the first to occur of (x) the end of the Term with
respect thereto or (y) the sooner of (i) 60 days after such Event of Loss or
(ii) the second Basic Rent payment date following such Event of Loss. Lessor
and Lessee shall execute a Stipulated Loss Value Rider, which shall be
applicable to the Equipment and each Item, and the Stipulated Loss Value for the
Equipment and each item (the "Stipulated Loss Value") shall be as set forth
therein. In addition Lessee shall pay to Lessor interest on the amount of the
Stipulated Loss Value from the Basic Rent payment date immediately preceding the
date of the Event of Loss until such Stipulated Loss Value is paid to Lessor at
a rate per annum equal to the lesser of three percent (3%) above the prime rate
(the "Prime Rate") as published in The Wall Street Journal and in effect on the
date of the Event of Loss or the maximum amount permitted by applicable law
under the circumstances.
3
<PAGE>
EXHIBIT 10(oo)
Upon due payment by the Lessee of all such amounts, thisLease shall
terminate with respect to such Item and Lessor shall transfer title thereto to
Lessee, without representation or warranty other than as to Lessor Liens. So
long as no Event of Default exists, any proceeds of insurance required hereunder
received by Lessor with respect to any damage or Event of Loss respecting any
Equipment shall be paid to Lessee to the extent necessary to reimburse Lessee
for costs incurred and paid by Lessee in repairing the same or shall be credited
against amounts payable by Lessee with respect to the Equipment involved.
9. INSURANCE: Lessee at its expense shall at all times through the
Return Date (and until the Equipment is accepted by Lessor) (a) keep the
Equipment insured against all risks of loss or damage from every cause
whatsoever in an amount not less than the greater of fair market value or the
Stipulated Loss Value thereof, and (b) obtain liability insurance, including
automobile if the Equipment includes motor vehicles, respecting the Equipment
covering liability for bodily injury, including death, and property damage, in
an amount of at least $1 million per occurrence plus excess coverage in the
amount of $14 million or such greater amount as may comply with general industry
standards, or such greater amount as Lessee may maintain, or in such other
amounts as Lessor may from time to time require.
Lessor shall be the sole named loss-payee with respect to damage or
loss to the Equipment with no provision for co-insurance and shall be named as
an additional insured on the liability insurance. All insurance shall be with
insurers and in form satisfactory to Lessor; have a deductible not to exceed
$100,000 per occurrence, or such other amount as Lessor may from time to time
require; shall provide for at least 30 days' prior written notice to Lessor
before any cancellation or material modification thereof; shall waive any claim
for premium against Lessor; and shall provide that Lessor will be insured
regardless of any breach by Lessee of any representation, warranty or covenant
in any such policy or any application therefor. Lessee shall deliver to Lessor
certificates of insurance and other evidence satisfactory to Lessor evidencing
the insurance required hereby, and at Lessor's request Lessee will furnish
copies of such policies to Lessor. In the case of renewals, evidence of renewal
shall be delivered to Lessor at least 5 days prior to expiration of the current
policy.
10. ACCEPTANCE: By its execution of any Acceptance Certificate, Lessee
warrants and agrees that the Equipment covered thereby conforms to the
specifications and requirements of Lessee and that, as between Lessee and
Lessor, was delivered in good repair and that Lessee has unconditionally
accepted it hereunder "AS IS" and "WITH ALL FAULTS" as of the Acceptance Date.
11. RETURN OF EQUIPMENT: Upon the expiration or earlier termination or
cancellation of this Lease with respect to any Items, except in the case of
retention by Lessee upon purchase of the Equipment, Lessee shall, at its own
cost and expense, promptly return such Items to Lessor to such locations as
Lessor may specify, for acceptance by Lessor in the condition required to be
maintained hereunder or in the condition specified in any Return Rider now or
hereafter executed by the parties. Lessee will pay for any repairs required to
place the Equipment in such condition. In the event Lessee shall not surrender
up and redeliver any Item to Lessor as herein required or shall not pay promptly
upon the expiration or earlier termination of this Lease the purchase price for
any Item under any applicable Purchase Option Rider now or hereafter executed by
the parties, then Lessee shall pay to Lessor Basic Rent for such Item (at the
highest rate payable during the Term) until the Item is duly returned, restored
to the proper condition and accepted by Lessor or the purchase price is paid.
12. GENERAL TAX INDEMNITY: Lessee agrees to pay and does hereby
indemnify, on an after-tax basis, Lessor against all sales, use, real and
personal property, ad valorem, value added, leasing, stamp or other taxes,
levies, imposts, fees, duties, charges or withholdings of any nature, including
all license and registration fees, together with any penalties, fines or
interest thereon (collectively, "Impositions") arising out of the transactions
contemplated by this Lease (including the acquisition of any Item prior to the
Acceptance Date) and imposed against Lessor, Lessee, this Lease (including any
Rent) or the Equipment or any Item by the United States or any state or
political subdivision thereof or any foreign government or taxing authority,
excluding, however, any Impositions based on or measured by the net income of
Lessor imposed by the United States or any state or political subdivision
thereof. Lessee will notify Lessor of the need to file any reports and returns
relating to any Imposition at least 60
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EXHIBIT 10(oo)
days before the due date thereof and will remit any amounts payable in
connection therewith to Lessor 10 days before payment is due. Lessee shall
prepare and file all returns, and pay all Impositions on or before the due date
therefor, unless Lessor directs Lessee otherwise and Lessee shall supply Lessor
with proof of such payment, together with copies of all such returns filed by
Lessee. In the event that Lessor pays any such Impositions, Lessee will on
demand reimburse Lessor for the full amount paid by Lessor therefor. Lessee
acknowledges that in some jurisdictions Impositions may not be billed, audited,
assessed or due until after this Lease has terminated and agrees that in such
event Lessee will remain liable for such Impositions notwithstanding such
termination. LESSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, REGARDING LESSEE'S
----------------------------------------------------------------
TAX OR ACCOUNTING TREATMENT OF THIS LEASE.
- -----------------------------------------
13. INCOME TAX INDEMNIFICATION:
(a) Lessee acknowledges that Lessor is the owner of the Equipment for
state law and Federal income tax purposes and that the most accelerated
depreciation or cost recovery deductions on the full amount of the Equipment
cost will be available to Lessor. Lessee acknowledges that Lessor intends to
claim and take the depreciation deductions ("Depreciation Deductions") with
respect to the Equipment in accordance with Section 168 of the Internal Revenue
Code of 1986, as amended (the "Code").
(b) Lessee represents, covenants and acknowledges as follows:
(i) Lessor will not be required to include any amount in its income in
connection with any Item for any taxable year or part thereof during the Term
respecting such Item other than (1) Interim Rent and Basic Rent, as such Rent
accrues in accordance with the terms hereof, (2) any amount constituting gain
recognized with respect to or by reason of the sale or other disposition of such
Item upon the termination of this Lease with respect thereto, (3) any amount
payable to Lessor to the extent such amount is required to be determined by
reference to the income tax effect to Lessor of the receipt thereof, (4) any
amount specifically identified as interest, and (5) any other amount with
respect to which Lessor shall be entitled to a contemporaneous and equal
offsetting deduction (any amount so includable in Lessor's income other than as
contemplated in clauses (1) through (5) above being referred to herein as an
"Inclusion"); and
(ii) Each Item will constitute the Classification of Property
specified in the applicable Schedule within the meaning of Section 168(e) of the
Code and Lessor will be entitled to Depreciation Deductions with respect to its
basis in the Equipment (which basis shall equal 100% of the Equipment Cost for
each Item) in accordance with such Classification of Property.
(c) If any changes occur in the state or Federal tax laws or any
taxing authority imposes additional taxes or adjustments to tax returns, or any
act or omission of the Lessee or the inaccuracy of any representation or
acknowledgment of Lessee herein or in connection with the transactions
contemplated hereby:
(i) Lessor shall lose or lose the right to claim, or be advised or
determines that it would be imprudent, improper or inadvisable to claim, or
there shall be disallowed or recaptured, all or any portion of the anticipated
Depreciation Deductions, or
(ii) Lessor shall suffer an Inclusion, (any such loss, disallowance,
reduction, recapture or Inclusion being hereinafter called a "Tax Loss"), then
Lessor shall give prompt notice of the occurrence of any such Tax Loss to Lessee
of which Lessor has knowledge and Lessee shall have the right to participate
with Lessor in any resulting good faith contest (as long as Lessor has not been
required to pay such Tax Loss and so long as such contest does not adversely
affect Lessor's rights under this Lease), or in any audit, tax proceeding or
suit that could result in Lessee's indemnification of a Tax Loss covered hereby.
Within 30 days after written notice to Lessee by Lessor that Lessor has
exhausted all reasonable administrative and judicial appeals (which shall be at
Lessee's sole cost and expense) and has been required to pay a Tax Loss Lessee
shall pay Lessor, as an indemnity
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EXHIBIT 10(oo)
payment, a lump sum amount which, after deduction of all Federal, state and
local taxes required to be paid by Lessor in respect of the receipt of such
payment, shall provide Lessor with not less than the same net after-tax return
that Lessor would have realized if such Tax Loss had not occurred, including any
interest and penalties payable by Lessor attributable to such Tax Loss. In
computing Lessee's liability under this Section, the Federal, state and local
taxes payable by Lessor shall be based upon Lessor's actual incremental tax owed
for the taxable year in which the Tax Loss occurred, plus any interest and
penalties.
(d) Lessee shall not be liable for indemnification respecting a Tax
Loss occurring solely as a result of (i) Lessor being subject to the application
of the mid-quarter convention of Section 168(d)(3) of the Code, (ii) Lessor
making any election to claim the Depreciation Deductions in a manner less rapid
than contemplated by the definition thereof, (iii) Lessor failing to have
sufficient taxable income to utilize the Depreciation Deductions, (iv) Lessor
being subject to the "alternative minimum tax" of Section 55 of the Code, or (v)
A voluntary transfer or other voluntary disposition by the Lessor of any
interest in any Equipment or this Lease when no Event of Default exists.
(e) For the purposes of this Section the term "Lessor" shall include
any affiliated group within the meaning of Section 1504 of the Code of which
Lessor is a member, if consolidated returns are filed for such affiliated group
for Federal tax purposes, and a Tax Loss shall be deemed to have occurred upon
the earliest of:
(i) The happening of any event which may cause such Tax Loss,
(ii) The payment by Lessor to the taxing authority of the tax
increase resulting from such Tax Loss, or
(iii) The adjustment of the tax return of Lessor to reflect such
Tax Loss.
14. GENERAL INDEMNIFICATION: Lessee hereby agrees to indemnify, save,
protect, defend and keep harmless Lessor, and its agents, directors, employees,
successors and assigns, from and against any and all losses, damages (including
indirect, special or consequential damage), harm, expenses, including reasonable
legal fees, penalties, injuries, claims, actions and suits, of whatsoever kind
and nature, in contract, tort or otherwise, whether caused by the active or
passive negligence of Lessor or otherwise and including Lessor's strict
liability in tort, in any way arising out of or in connection with the
selection, modification, purchase, acceptance, rejection, ownership, delivery,
lease, possession, maintenance, use, condition (including latent or other
defects, whether or not discoverable by Lessor or Lessee, and any claim for
patent, trademark or copyright infringement), return of, or operation of any
Item prior to its Return Date or relating to any default by Lessee or Event of
Default.
15. DEFAULT: Each of the following shall constitute an event of default
(an "Event of Default") hereunder:
(a) Lessee shall fail to make any payments of Rent within ten (10)
calendar days after the same shall become due and payable;
(b) Lessee or any guarantor of all or any part of Lessee's obligations
under this Lease (a "Guarantor") shall fail to pay or perform, as and when due
(including any applicable grace period), any obligations, reports or covenants
to Lessor or any of its affiliates arising under or in connection with this
Lease, including, but not limited to, Lessee's obligations, reports and
covenants under Sections 5, 6, 8, 9, 18 and 20 hereof or arising under any other
document or instrument including, but not limited to, any document or instrument
executed in connection with any other presently existing or future loans, leases
or other credit arrangements from Lessor or any of its affiliates, including
Heller Financial, Inc., in favor of Lessee, or otherwise;
6
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EXHIBIT 10(oo)
(c) Lessee or any Guarantor shall make any representation or warranty,
respectively, in this Lease or in any certificate or statement furnished at any
time hereunder or in connection with this Lease which proves to have be untrue
or misleading in any material respect when made or furnished;
(d) Lessee or any Guarantor or affiliate with total assets of at least
$1 million and/or total revenues of at least $3.5 million shall file a voluntary
petition in bankruptcy or a voluntary petition or answer seeking liquidation,
administration, reorganization, arrangement, readjustment of its debts, or for
any other relief under the Bankruptcy Code, or under any other act or law
pertaining to insolvency or debtor relief, whether state, federal, or foreign,
now or hereafter existing; or Lessee or any Guarantor shall enter into any
agreement indicating its consent to, approval of, or acquiescence in, any such
petition or proceeding; or Lessee or any Guarantor shall apply for or permit the
appointment by consent or acquiescence of a receiver, custodian administrator,
or trustee for all or a substantial part of its property; or Lessee or any
Guarantor shall make an assignment for the benefit of creditors; or Lessee or
any Guarantor shall be unable or shall fail to pay its debts generally as such
debts become due; or Lessee or any Guarantor shall admit, in writing, its
inability or failure to pay its debts generally as such debts become due;
(e) There shall have been filed against Lessee or any Guarantor or
affiliate an involuntary petition in bankruptcy or seeking liquidation,
administration, reorganization, arrangement, readjustment of its debts or for
any other relief under the Bankruptcy Code, or under any other act or law
pertaining to insolvency or debtor relief, whether state, federal or foreign,
now or hereafter existing, or Lessee or any Guarantor or affiliate shall suffer
or permit the involuntary appointment of a receiver, custodian, administrator,
or trustee for all or a substantial part of its property; or Lessee or any
Guarantor or affiliate shall suffer of permit the issuance of a warrant of
attachment, diligence, execution or similar process against all or any
substantial part of its property; unless, in each other case, such petition,
appointment or process is fully bonded against, vacated or dismissed within
forty-five (45) days from its effective date, but not later than ten (10) days
prior to any proposed disposition of any assets pursuant to any such proceeding;
(f) The occurrence of any default in the payment or performance of any
debt or other obligations (including, but not limited to, capital lease
obligations or any corporate guaranty) owed by (i) Lessee to any other person or
entity unaffiliated with Lessor with an outstanding principal balance in excess
of $1,000,000.00, now or hereafter existing, as the same may be modified,
amended, or refinanced from time to time, which entitles such person or entity
to accelerate the maturity thereof and any grace or cure period relative thereto
granted therein shall have expired without such default being waived or cured
(regardless whether such default is waived or whether or not any acceleration
occurs as a result thereof), or (ii) Tuboscope Vetco Capital Limited, a company
registered in Scotland ("TVCL"), Tuboscope Vetco Capital Corp., a Nevada
corporation, or Tuboscope Vetco International Corp. (Corp.), a Delaware
corporation, to Heller Financial Inc. in connection with the TVCL Industrial
Facility, Badentoy Avenue, Badentoy Industrial Park, Portlethen, by Aberdeen;
(g) Lessee shall fail to maintain a Total Debt Service Coverage Ratio
(hereafter defined), measured on a trailing twelve (12) month basis as of the
end of each fiscal quarter, commencing December 31, 1995, of at least 1.20 to 1.
For the purpose of this subsection (g), "Total Debt Service Coverage Ratio"
means EBITDA divided by Total Debt Service. "EBITDA" means Lessee's
consolidated net income plus interest expense, income taxes, depreciation,
amortization (including amortization of capitalized merger and acquisition
expenses) and other non-cash expenses, less interest income, all for the
----
quarterly period being tested. "Total Debt Service" means Lessee's consolidated
total interest expense less any non-cash interest expense or amortization of
deferred debt issuance cost (without duplication) plus required amortization of
Long Term Debt plus cash taxes paid, all for the quarterly period being tested.
"Long Term Debt" means Lessee's consolidated long term debt, including
capitalized leases and off balance sheet leases, the current portion of long
term debt, and the current portion of capital lease obligations;
(h) In the event of a change of the existing ownership (as of the
Commencement Date) representing at least twenty percent (20%) of the outstanding
common stock of Lessee's parent, Tuboscope Vetco
7
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EXHIBIT 10(oo)
International Corp. (Corp.), a Delaware corporation, and the surviving entity
---
after the change of ownership offers a debt rating of less than B+, as
determined by industry standards; or
(i) There is a material adverse change in Lessee's or any Guarantor's
financial condition since the first Acceptance Date.
16. REMEDIES: (a) Upon the occurrence of any Event of Default then, to the
extent permitted by applicable law, Lessor shall have the right to exercise any
one or more of the following remedies:
(i) To proceed by appropriate court action to enforce performance by
Lessee of its obligations hereunder or to recover damages for breach thereof;
(ii) To take possession of any Item, wherever located, with ten (10)
days written notice, legal process, prior judicial hearing, or liability for
trespass or other damage (WHICH RIGHTS LESSEE HEREBY VOLUNTARILY, INTELLIGENTLY
AND KNOWINGLY WAIVES) and thereafter hold, sell, operate or lease such Item free
of claims of Lessee, except as set forth below;
(iii) By notice to Lessee, to terminate this Lease and declare all
Rent then owing to Lessor hereunder immediately due and payable (whereupon
Lessee shall promptly pay the same);
(iv) Except for an Event of Default under Section 15(h), to demand
immediate payment of the Stipulated Loss Value of The Equipment as liquidated
damages for the remaining term (whereupon Lessee shall promptly pay the same);
and
(v) To pursue any other remedy available to Lessor at law or
inequity.
(b) Lessor and Lessee agree that an amount equal to the Stipulated
Loss Value of the Equipment represents a reasonable return for the use of the
Equipment and for the depreciation thereof, and shall be the basis for
liquidated damages for the remaining term for which the Lessee shall be liable
to the Lessor upon default. Any amounts realized by Lessor on account of the
Equipment subsequent to Lessor's taking possession thereof pursuant to Section
16(a)(ii) shall, after reimbursement to Lessor of all its expenses incurred in
connection therewith, including legal fees, (and a reasonable allocation of the
compensation, costs and expenses of internal counsel, based upon time spent), be
credited to amounts of Stipulated Loss Value and all other Rent owing by Lessee
hereunder or, if such Stipulated Loss Value and all other Rent has been paid, be
paid to Lessee.
(c) If Lessor elects not to sell, re-lease, or otherwise dispose of
all or any part of the Equipment, and holds such Equipment for Lessee for the
remaining Term, Lessor may recover, in addition to all Rent accrued and unpaid
as of the date of Lessor's recovery of possession of the Equipment, the present
value, as of such date, of the Rent for the remainder of the Term respecting
such Equipment (which Term shall include, for this purpose, to the extent
applicable, any agreed upon renewals which would, in the absence of an Event of
Default, automatically extend the Term upon the Lessee's failure to exercise any
option to purchase contained in any addenda or Rider hereto). Present value
shall be computed using a discount rate equal to the Prime Rate in effect on the
Acceptance Date.
(d) If Lessor sells, leases, or otherwise disposes of all or any part
of the Equipment, Lessor may recover from Lessee, in addition to any Rent
accrued and unpaid as of the date of Lessor's recovery of possession of the
Equipment; the present value computed by using a discount rate equal to the
Prime Rate in effect on the Acceptance Date, of the difference between (i) the
Rent for the remainder of the Term respecting such Equipment (which Term shall
include, for this purpose, to the extent applicable, any agreed upon renewals
which would, in the absence of an Event of Default, automatically extend the
Term upon the Lessee's failure to exercise any option to purchase contained in
any addenda or Rider hereto) and (ii) except in the case of a substantially
similar
8
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EXHIBIT 10(oo)
lease, the market rent determined by Lessor in its sole discretion, or (iii) in
the case of a lease of Equipment which is substantially similar to this Lease,
the total rent for the lease term of such substantially similar lease.
(e) Time of performance of Lessee's obligations hereunder is of the
essence. All remedies of Lessor hereunder are cumulative, and may, to the
extent permitted by law, be exercised concurrently or separately, and the
exercise of any one remedy shall not be deemed to be an election of such remedy
to the exclusion of any other remedy or to preclude the exercise of any other
remedy at any other time. However, Lessor is entitled to only one satisfaction.
Failure on the part of Lessor to exercise, or delay in exercising, any right or
remedy hereunder or Lessor's failure at any time to require performance by
Lessee of any of the provisions hereof shall not operate as a waiver thereof;
nor shall any single or partial exercise by Lessor of any right or remedy
hereunder preclude any other further exercise thereof or the exercise of any
other right or remedy. Lessee shall be liable for all expenses incurred by
Lessor in exercising the remedies provided hereunder, including, but not limited
to, court costs and reasonable attorney's fees. Lessee shall pay to Lessor
interest on any overdue payments under Section 13 or amounts due under this
Section 16 after demand therefor and until paid at a rate per annum equal to the
lesser of five percent above the Prime Rate then in effect or the maximum amount
permitted to be charged by Lessor by applicable law.
17. ASSIGNMENT. (a) Lessor may sell, assign or otherwise transfer all or
any part of its right, title and interest in and to the Equipment and/or this
Lease or in any Schedule executed in connection herewith, to (i) the parent or
any affiliate of Lessor, or (ii) a third-party financial institution that is
located in either North America, Europe, the Far Fast, or Australia and which
has total assets of at least $500,000,000, subject to the terms and conditions
of this Lease including, but not limited to, the right to the quiet enjoyment by
Lessee as set forth in Section 3 above. Any such assignee may assume all of the
rights and obligations of Lessor in connection with the Equipment or any
Schedules sold, assigned or otherwise transferred, in which case Lessor shall be
relieved therefrom. To the extent of any such assumption of obligations, all
references to Lessor herein shall thereafter mean such assignee.
(b) Lessor may also pledge, mortgage or grant a security interest in
the Equipment and assign this Lease as collateral. Each such pledgee,
mortgagee, lien holder or assignee shall be to a person or entity as set forth
above in Section 17(a) and shall have any and all rights as may be assigned by
Lessor but none of the obligations of Lessor hereunder. Any pledge, mortgage or
grant of security interest in the Equipment or assignment of this Lease shall be
subject to the terms and conditions hereof including, but not limited to, the
right to the quiet enjoyment of the Equipment by Lessee as set forth in Section
3 above. If Lessor grants a security interest in all or any part of any
Schedule, any Equipment covered thereby and/or any sums payable thereunder, only
the original of the Schedule held by Lessor shall be effective to transfer
Lessor's rights therein.
(c) Lessee shall not be relieved of any of its obligations hereunder
by reason of any such sale, assignment, or other transfer referred to in
Subsection (a) above, or any pledge, mortgage, grant of security interest or
collateral assignment referred to in Subsection (b) above, all of which such
obligations shall remain absolute and unconditional, including, but not limited
to, Lessee's Rent obligations as set forth in Section 4 above. Lessee agrees
that it will not assert against any purchaser, pledgee, mortgagee, lien holder
or assignee (collectively, an "Assignee") any defense, counterclaim or offset
that Lessee may have against Lessor and Lessee acknowledges that any such
assignment or other transfer by Lessor, or any such pledge, mortgage, grant of
security interest or collateral assignment by Lessor, shall not materially
change Lessee's duties or obligations under this Lease nor materially increase
the burdens or risks imposed on Lessee. Upon the written request of Lessor,
Lessee shall acknowledge all such obligations to the Assignee, which such
acknowledgment shall be in such form and substance as Lessor or any such
Assignee may require, consistent with their normal business practices.
(d) LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY OR
------------------------------------------------------------
PLEDGE ANY OF ITS INTEREST IN THE LEASE AGREEMENT OR ANY OF THE EQUIPMENT,
- --------------------------------------------------------------------------
WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. ANY SUCH SALE, TRANSFER,
- ----------------------------------------------------------------------
ASSIGNMENT,
- -----------
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EXHIBIT 10(oo)
SUBLEASE, CONVEYANCE, OR PLEDGE, WHETHER BY OPERATION OF LAW OR OTHERWISE,
- --------------------------------------------------------------------------
WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, SHALL BE VOID.
- -----------------------------------------------------------
18. REPORTS: (a) Lessee will immediately notify Lessor of:
(i) Each Event of Loss or accident involving or allegedly
involving any Item;
(ii) Any Lien (other than a Lessor Lien) which shall have
attached to any Item; and
(iii) The occurrence of any Event of Default or event which, with
the lapse of time or giving of notice or both could become an Event of Default.
(b) Lessee and each Guarantor, if any, shall, as soon as practicable,
and in any event within forty-five (45) days after the end of each fiscal
quarter, furnish to Lessor its unaudited financial statements including in each
instance, balance sheets, and income statements on a consolidated and
consolidating basis, and statements of cash flow, as appropriate, and separate
profit and loss statements as of and for the quarterly period then ended and for
its fiscal year to date, certified by the chief financial officer of Lessee and
prepared in accordance with generally accepted accounting principles,
consistently applied, and Lessee and any Guarantor hereunder shall, as soon as
practicable, and in any event within ninety (90) days after the end of each
fiscal year, furnish to Lessor its annual audited financial statements,
including balance sheets, income statements and cash flow statements for the
fiscal year then ended, on a consolidated and consolidating basis, as
appropriate, which have been prepared by its independent accountants. Such
audited financial statements shall be accompanied by the independent
accountant's opinion, which opinion shall be in form generally recognized as
"unqualified".
(c) Lessee will permit Lessor to inspect and examine the Equipment and
any Item and Lessee's records relating thereto and to review Lessee's financial
books and records at such times and from time to time as Lessor may wish upon
reasonable notice.
(d) Using the previously submitted environmental assessments from
Pilko and Associates ("Pilko") as a benchmark, Lessee shall, (i) annually, on
the anniversary of each Commencement Date during the initial Lease Term and any
renewal terms, and (ii) unless the Lease is earlier terminated or Lessee has
exercised an option to purchase the Equipment pursuant to any Rider, at the
expiration of ninety-six (96) months from the date of this Lease or upon the
expiration of any renewal term, as applicable, furnish to Lessor an
environmental review (each an "Annual Assessment") of the Sheldon-Industrial
Facility. Pilko shall complete the reviews addressed to Lessor unless Pilko is
no longer involved in completing such reviews or is otherwise unwilling to
complete the reviews for Lessor, in which case Lessor will choose an
environmental consulting firm reasonably acceptable to Lessee. Lessee shall
reimburse Lessor for any cost and expense of such review.
(e) Lessee will within forty-five (45) days of the close of each
fiscal quarter deliver to Lessor a compliance report covering the Total Debt
Service Coverage Ratio in effect at the end of each fiscal quarter certified by
the chief financial officer of Lessee.
19. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee hereby represents
and warrants to Lessor that on the date hereof and on the date of execution of
each Schedule:
(a) Lessee has full power, authority and legal right to enter into and
to perform its obligations under this Lease and all related documents
(collectively the "Documents"), is in good standing under the law of its
jurisdiction of incorporation and is duly qualified to do business and in good
standing wherever necessary to carry on its present business and operations,
including the jurisdictions) where the Equipment is or is to be located.
(b) The Documents have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements of Lessee, enforceable
against it in accordance with their terms.
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EXHIBIT 10(oo)
(c) No approval, consent or withholding of objections is required from
any governmental authority or instrumentality, or any person, with respect to
the entry into or performance by Lessee of the Documents except such as have
already been obtained.
(d) The entry into and performance by Lessee of its obligations under
the Documents will not (1) violate any judgment, order, law or regulation
applicable to Lessee or any provision of Lessee's Certificate of Incorporation
or By-Laws; or (2) result in any breach of, constitute a default under or result
in the creation of any Lien, pursuant to any indenture, mortgage, deed of trust,
bank loan or credit agreement or other instrument to which Lessee is a party.
(e) There are no suits or proceedings pending or threatened in any
court or by any governmental agency against or affecting Lessee, which, if
adversely determined, would have a material adverse effect on the ability of
Lessee to fulfill its obligations under this Lease or its financial condition or
prospects.
(f) Each balance sheet, profit and loss statement, and cash flow
statement delivered to Lessor has been prepared in accordance with generally
accepted accounting principles, and since the date of the most recent such
balance sheet, profit and loss statement, and cash flow statement, there has
been no material adverse change in the financial condition or prospects of
Lessee.
(g) The Equipment will at all times be used for commercial or business
purposes.
20. NEGATIVE COVENANT: (a) Without Lessor's prior written consent,
Lessee shall not mortgage, encumber or otherwise create any other Liens whatever
(except Lessor's Liens, if any) against Lessee's property upon which the
Equipment is located at the Sheldon Industrial Facility.
(b) Without Lessor's prior written consent, Lessee shall not use the
Equipment and the Sheldon Industrial Facility for anything other than primarily
a pipe inspection, storage and cleaning facility, which is its current use as of
the date of this Lease.
21. MISCELLANEOUS, JURY WAIVER, GOVERNING LAW, JURISDICTION, VENUE: (a)
Nothing herein contained shall give or convey to Lessee any right, title or
interest in and to any Equipment leased hereunder except as a lessee. Should
Lessor permit the use of any Equipment beyond the specified Term thereof, the
obligations of Lessee hereunder shall continue (including the obligation to pay
the Basic Rent at the highest rate applicable during the Term with respect
thereto) and such permissive use shall not be construed as renewal of the Term
thereof nor as a waiver of any right or continuation of any obligation of Lessor
hereunder. Lessee's obligations pursuant to Sections 10, 11, 12, 13 and 14
shall survive the expiration or earlier termination of this Lease and Lessee
shall remain liable therefor. Equipment shall at all times remain personal
property of Lessor notwithstanding any affixation to the real estate.
(b) The Equipment subject hereto is and at all times shall be and
remain the sole and exclusive property of Lessor, and Lessee shall have no
right, title or interest therein or thereto, except as expressly set forth in
this Lease. As a precaution, Lessee hereby also grants hereto, Lessor a first
priority continuing lien and security interest in the Equipment subject thereto
and the proceeds thereof to secure any obligation of Lessee under this Lease,
each Schedule hereunder, any other agreement between Lessor and Lessee. Lessee
further agrees that Lessee's obligations hereunder are additionally secured by
all security interests, liens and encumbrances heretofore, now or hereafter
granted by Lessee to Lessor under any instrument, whether or not related to this
Lease. Lessee agrees to execute any instrument or instruments necessary or
expedient for filing, recording, perfecting, or notifying of the interest of
Lessor in the Equipment upon request of, and as determined by, Lessor. Lessee
hereby specifically authorizes Lessor to file financing statements not signed by
Lessee (with copies to Lessee) or to execute same for and on behalf of Lessee as
Lessee's attorney-in-fact, irrevocably and coupled with an interest, for such
purposes.
11
<PAGE>
EXHIBIT 10(oo)
(c) To the extent permitted by applicable law, Lessee hereby waives
any and all rights and remedies conferred upon a lessee by such applicable law
(including but not limited to Article 2A of the UCC) to: (i) cancel this Lease;
(ii) repudiate this Lease; (iii) reject the Equipment; (iv) revoke acceptance of
the Equipment; (v) recover damages from Lessor for any breaches of warranty or
for any other reason; (vi) a security interest in the Equipment in Lessee's
possession or control for any reason; (vii) deduct all or any part of any
claimed damages resulting from Lessor's default, if any, under this Lease;
(viii) accept partial delivery of the Equipment; (ix) "Cover" by making any
purchase or lease of, or contract to purchase or lease, Equipment in
substitution for that due from Lessor; (x) recover any general, special,
incidental or consequential damages, for any reason whatsoever; and (xi) obtain
specific performance, replevin, detinue, sequestration, claim and delivery or
the like for any Equipment identified to this Lease. To the extent permitted by
applicable law, Lessee also hereby waives any rights now or hereafter conferred
by statute or otherwise which may require Lessor to sell, lease or otherwise use
any Equipment in mitigation of Lessor's damages as set forth in Section 16 of
this Lease or which may otherwise limit or modify any of Lessor's rights or
remedies under Section 16.
Any action by Lessee against Lessor for any default by Lessor under
this Lease, including breach of warranty or indemnity, shall be commenced within
one (1) year after any such cause of action accrues. LESSOR AND LESSEE EACH
----------------------
WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING HEREFROM OR IN
- ---------------------------------------------------------------------------
RELATION HERETO.
- ---------------
(d) All notices hereunder shall be in writing and shall be sent by
hand, by overnight courier or by certified or registered mail, return receipt
requested, to each party at its address set forth below, as such address may be
changed by such notice. All notices shall be deemed given when received, when
delivery is refused or when the same are returned for failure to be called for.
(e) If Lessee fails to perform any of its obligations hereunder Lessor
may, but shall not be obligated to, perform the same (without such performance
constituting a cure or waiver of Lessee's failure to so perform) and Lessee will
on demand reimburse Lessor for all its costs and expenses incurred in connection
therewith.
(f) THIS LEASE AND THE RIGHTS AND OBLIGATION OF THE PARTIES HEREUNDER
-----------------------------------------------------------------
SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
- -------------------------------------------------------------------------
INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO PRINCIPLES OF
- -----------------------------------------------------------------------
CONFLICTS OF LAW, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
- ---------------------------------------------------------------------
PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT OR THE STATE OF
- ------------------------------------------------------------------------
INCORPORATION OR PRINCIPAL PLACE OF BUSINESS OF THE LESSEE. LESSEE (i) CONSENTS
- --------------------------------------------------------------------------------
AT LESSOR'S ELECTION AND WITHOUT LIMITING LESSOR'S RIGHT TO COMMENCE AN ACTION
- ------------------------------------------------------------------------------
IN ANY OTHER JURISDICTION, TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURTS
- --------------------------------------------------------------------------------
(FEDERAL, STATE OR LOCAL) SITUATED IN COOK COUNTY, ILLINOIS; (ii) WAIVES ANY
- ----------------------------------------------------------------------------
OBJECTION TO IMPROPER VENUE AND FORUM NON CONVENIENS; AND (iii) CONSENTS TO
- ---------------------------------------------------------------------------
SERVICE OF PROCESS BY CERTIFIED MAIL, POSTAGE PREPAID, TO LESSEE AT ITS ADDRESS
- -------------------------------------------------------------------------------
AS SET FORTH HEREIN, WHICH SERVICE SHALL BE DEEMED COMPLETE WITHIN TEN (10) DAYS
- --------------------------------------------------------------------------------
AFTER THE DATE OF MAILING THEREOF. If any provision of this Lease shall
- ----------------------------------
contravene or be invalid under applicable law or regulation, such contravention
or invalidity shall not affect the entire Lease, the provisions held to be
invalid to be deemed deleted or modified and the Lease interpreted and construed
as though such invalid provision or provisions were not part hereof or conformed
thereto.
(g) This Lease and each Schedule constitutes the entire agreement of
the parties with respect to the subject matter hereof, and supersedes and
replaces any prior or contradictory representations, warranties or agreements by
Lessor and Lessee. Unless set forth in a Schedule or Rider hereto, signed by an
authorized manager of Lessor, Lessee shall have no right to purchase or
otherwise acquire title to or ownership of any Item of Equipment. No agent or
employee of any supplier or manufacturer is authorized to bind Lessor to this
Lease or any Schedule, or to waive, alter or add to the terms and conditions
printed herein and in any Schedule. This is a
12
<PAGE>
EXHIBIT 10(oo)
non-cancelable Lease and Lessee's obligations hereunder are absolute and
unconditional. This Lease, any amendments to, variations or modifications of
this Lease, any waiver of its provisions or conditions, any consent hereunder
and all Schedules shall not be valid unless in writing and signed by an
authorized officer or manager of Lessor.
____________________
[LESSEE'S INITIALS]
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the 18th day of December, 1995.
HELLER FINANCIAL LEASING, INC. TUBOSCOPE VETCO INTERNATIONAL INC.
By: /s/ WALTER R. SCHOULTZ By: /s/ WARREN E. MOORE
----------------------- -------------------
Name: Walter R. Schoultz Name: Warren E. Moore
Title: Vice President Title: Assistant Treasurer
Address: 500 West Monroe Street Address: 2835 Holmes Road
Chicago, Illinois 60661 P.O. Box 808
Attn: CEFD Central Region Houston, Texas 77001
Facsimile No.: 312.441.7519 Facsimile No.: 713.799.5227
13
<PAGE>
EXHIBIT 11
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
(IN THOUSANDS)
PRIMARY:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ 8,819 $ 8,288 ($8,362)
EXTRAORDINARY ITEM - (764) (4,497)
----------- ----------- ----------
NET INCOME (LOSS) 8,819 7,524 (12,859)
DIVIDENDS APPLICABLE TO COMMON STOCK 700 700 700
----------- ----------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK 8,119 $ 6,824 ($13,559)
=========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,530,338 18,447,059 18,355,454
=========== =========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND $ 0.44 $ 0.41 ($0.49)
AFTER DEDUCTION OF PREFERRED STOCK DIVIDENDS
EXTRAORDINARY ITEM - (0.04) (0.25)
----------- ----------- ----------
NET INCOME (LOSS) $ 0.44 $ 0.37 ($0.74)
=========== =========== ==========
FULLY DILUTED*
INCOME (LOSS) BEFORE EXTGRAORDINARY ITEM $ 8,819 $ 8,288 ($8,362)
EXTRAORDINARY ITEM - (764) (4,497)
----------- ----------- ----------
NET INCOME (LOSS) 8,819 7,524 (12,859)
DIVIDENDS APPLICABLE TO COMMON STOCK* 700 700 700
----------- ----------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 8,118 $ 6,824 ($13,559)
=========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,530,338 18,447,059 18,355,454
ASSUMED CONVERSION OF SENIOR PREFERRED STOCK - - -
INTO COMMON STOCK* ----------- ----------- ----------
ADJUSTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES 18,530,338 18,447,059 18,355,454
=========== =========== ==========
EARNINGS (LOSS PER COMMON SHARE:
INCOME (LOSS) BEFORE EXTRADIONARY ITEM AND AFTER DEDUCTION $ 0.44 $ 0.41 ($0.49)
OF PREFERRED STOCK DIVIDENDS
EXTRAORDINARY ITEM (0.04) (0.24)
----------- ----------
NET INCOME (LOSS) $ 0.44 $ 0.37 ($0.74)
=========== =========== ==========
</TABLE>
*Conversion of the Redeemable Series A Convertible Preferred Stock is not
assumed in the computation because its effect is antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
EXTRACTED FROM FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,394
<SECURITIES> 0
<RECEIVABLES> 52,071
<ALLOWANCES> 955
<INVENTORY> 14,364
<CURRENT-ASSETS> 84,753
<PP&E> 186,744
<DEPRECIATION> 46,706
<TOTAL-ASSETS> 306,679
<CURRENT-LIABILITIES> 40,130
<BONDS> 107,055
10,175
0
<COMMON> 185
<OTHER-SE> 116,379
<TOTAL-LIABILITY-AND-EQUITY> 306,679
<SALES> 7,844
<TOTAL-REVENUES> 190,015
<CGS> 4,258
<TOTAL-COSTS> 137,057
<OTHER-EXPENSES> 1,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,328
<INCOME-PRETAX> 15,205
<INCOME-TAX> 6,386
<INCOME-CONTINUING> 8,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,819
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
