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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from________________________________to________________________________
TUBOSCOPE VETCO
INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
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)
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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)
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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 19, 1997 was $423,655,903 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 19, 1997 was 43,564,734.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Annual Report to Stockholders and Proxy
Statement for its 1997 Annual Meeting are incorporated by this reference into
Part II and Part III, respectively, as set forth herein.
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PART I
ITEM 1. BUSINESS
GENERAL
Tuboscope Vetco International Corporation (together with its subsidiaries,
the "Company") is a supplier of technical services and highly-engineered
products to the oil and gas drilling, production, and transmission industries
worldwide.
The Company operates through four main product lines in the oil and gas
industry segment. The product lines are: (i) Tubular Services; (ii) Solids
Control Products & Services; (iii) Coiled Tubing & Pressure Control Products;
and (iv) Pipeline & Other Industrial Services. Tubular Services consists of
the provision of internal coating products and services, and inspection and
quality assurance services for tubular goods (such as drill pipe, tubing, line
pipe, and casing) used primarily in oil and gas operations. Additionally,
Tubular Services includes the sale and leasing of proprietary equipment used to
inspect tubular products at steel mills. Solids Control Products & Services
consists of the sale and rental of technical equipment used in, and the
provision of services related to, the separation of drill cuttings (solids) from
fluids used in oil and gas drilling processes. Coiled Tubing & Pressure Control
Products consists of the sale of highly-engineered coiled tubing, pressure
control, wireline, and related tools to companies engaged in providing oil and
gas well drilling and remediation services. Pipeline & Other Industrial
Services consists primarily of the provision of technical inspection services
and quality assurance for in-service pipelines used to transport oil and gas.
Additionally, this product line includes a wide variety of technical industrial
inspection, monitoring, and quality assurance services provided by the Company
for the construction, operation, and maintenance of major projects in energy-
related industries.
The Company was incorporated under the laws of Delaware on March 28, 1988
as a successor to one of the first companies to provide tubular inspection
services to the oil and gas industry, which commenced operations in 1937. The
Company has since grown through a series of mergers and acquisitions which have
added product lines. The Company entered the Solids Control Products & Services
and the Coiled Tubing & Pressure Control Products businesses on April 24, 1996,
when it merged (the "Drexel Merger") with Drexel Oilfield Services ("Drexel"),
the largest provider of solids control services and coiled tubing equipment
worldwide. The principal executive offices of the Company are located at 2835
Holmes Road, Houston, Texas, 77051, telephone 713-799-5100.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward looking statements are those that
do not state historical facts and are inherently subject to risk and
uncertainties. The forward-looking statements contained herein are based on
current expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties are set forth below under "Factors
Affecting Future Operating Results."
TUBULAR SERVICES
Tubular Services is the Company's largest business line. It generated
approximately 51%, 81%, and 77% of the Company's revenue for the years ended
December 31, 1996, 1995 and 1994, respectively. On a pro forma basis giving
effect to the Drexel Merger and an acquisition made by Drexel in November 1995
of SWECO(R) Oilfield Services ("SOFS"), the Tubular Services business generated
approximately $174 million (46%) and $154 million (49%) of the Company's
revenue for the years ended December 31, 1996 and 1995, respectively. The
Company's Tubular Services operates in the oilfield tubular markets of 54
countries, including North America, Latin America, Europe, Africa, the Middle
East, and the Far East. The Company provides tubular inspection services at
drilling and workover rig locations, at pipe yards owned by its customers, at
steel mills manufacturing tubular goods, and at facilities which it owns. The
Company provides for the internal coating of tubular goods at ten plants
worldwide, and through licensees in certain locations.
Demand for tubular services products depends upon the activity level of
drilling, well remediation, and flowline installation operation activity in the
oil and gas industry. Tuboscope's customers rely on tubular inspection services
to avoid failure of in service tubing, casing, flowlines, and drillpipe. Such
tubular failures are expensive and in some cases catastrophic. Tuboscope's
customers rely on internal coatings of tubular goods to prolong their useful
lives and to increase the volumetric throughput of in-service tubular goods.
Tubular inspection and coating services are used most
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frequently in drilling and production operations in high-temperature, deep,
corrosive oil and gas environments. In selecting a provider of tubular
inspection and tubular coating services, oil and gas operators consider such
factors as reputation, experience, technology of products offered, reliability
and price. The Company believes it is the largest provider of tubular inspection
and the largest provider of internal tubular coating services worldwide.
Tubular Corrosion Control. The Company develops, manufactures and applies its
proprietary tubular coatings, known as Tube-Kote(R) coatings, to new and used
tubulars. Tubular coatings help prevent corrosion of tubulars by providing a
tough plastic shield to isolate steel from corrosive oilfield fluids such as
CO2, H2S and brine. Delaying or preventing corrosion extends the life of
existing tubulars, reduces the frequency of well remediation and reduces
expensive interruptions in service and production for oil and gas producers. In
addition, coatings are designed to increase the fluid flow through tubulars by
decreasing or eliminating paraffin and scale buildup, which can reduce or block
oil flow in producing wells. The smooth inner surfaces of coated tubulars often
increase the fluid through-put on certain high-rate oil and gas wells.
The Company has a long history of introducing new coating products custom-
engineered to address increasingly corrosive environments encountered in oil and
gas drilling and production operations. The Company's reputation for supplying
quality internal coatings is an important factor in its business, since the
failure of coatings can lead to expensive production delays and premature
tubular failure.
Subsequent to December 31, 1996, the Company acquired Fiber Glass Systems,
Inc. ("Fiber Glass Systems"), a leading provider of high pressure fiberglass
tubulars used in oilfield applications, for a combination of stock and cash.
Fiber Glass Systems has manufactured fiberglass pipe since 1968 under the name
"Star," and was the first manufacturer of high-pressure fiberglass pipe to be
licensed by the API in 1992. Like coated tubulars, fiberglass pipe is used to
guard against corrosive fluids produced in the oilfield. The acquisition added
a new product to the Company's corrosion control products.
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 tubular failures during
drilling and completion of oil and gas wells. 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 defective lengths, thereby prolonging the life of the remaining pipe
and saving the customer the cost of unnecessary tubular replacements and
expenses related to tubular failures.
The Company's tubular inspection services employ all major non-destructive
inspection techniques, including electromagnetic, ultrasonic, magnetic flux
leakage and gamma ray. These inspection services are provided both by mobile
units which work at the wellhead as used tubing is removed from a well, and at
fixed site tubular inspection locations. The Company provides an ultrasonic
inspection service for detecting potential fatigue cracks in the end area of
used drill pipe, the portion of the pipe that traditionally has been the most
difficult to inspect. Tubular inspection facilities also offer a wide range of
related services, such as API thread inspection and ring and plug gauging, and a
complete line of reclamation services necessary to return tubulars to useful
service, including tubular cleaning and straightening, hydrostatic testing and
re-threading.
In addition to its new and used tubular inspection and reclamation services,
the Company also offers a comprehensive proprietary tubular inventory management
system (TDS) which permits the real-time tracking of customer's tubular
inventories within the Company's facilities. The system permits customers to
dial-in to monitor tubular inspection and coating progress.
In 1996, the Company installed its first proprietary high-speed full body
ultrasonic tubular inspection unit (TruScope(R)). The new service provides 100%
ultrasonic coverage of tubulars at a rate of up to 200 feet per minute.
Mill Systems and Sales. The Company engineers and fabricates inspection
equipment for steel mills, which it sells and leases. 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 the
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, in
most major steel mills. Equipment is manufactured at the
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Company's Houston, Texas facility. In 1996, the Company moved its NDT division
manufacturing facilities from Midland, Texas to Houston to improve overall
manufacturing efficiency and reduce the cost of manufacturing products. Revenue
for Mill Systems and Sales fluctuates significantly from year to year due to the
timing of negotiating large domestic and export sales contracts, arranging
financing and manufacturing equipment.
The Company's tubular services customers include almost all major oil and gas
companies, large and small independent producers, national oil companies,
drilling contractors, oilfield supply stores, and steel mills. No single
customer accounted for more than 10% of the Company's revenue in 1996. The
Company's competitors in Tubular Services include ICO Inc., Shaw Industries, and
Shield Coat Inc. In addition, the Company competes with a number of smaller
regional competitors in tubular inspection. 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. In tubular coating
certain substitutes such as non-metallic tubulars, inhibitors, corrosion
resistant alloys, cathodic protection systems, and non-metallic liners systems
also compete with the Company's products.
SOLIDS CONTROL PRODUCTS & SERVICES
The Company generated approximately 23% of its revenue for the year ended
December 31, 1996 from Solids Control Products & Services. On a pro forma basis
giving effect to the Drexel Merger and the SOFS acquisition, the Solids Control
Products & Services business generated approximately $98 million (26%) and $75
million (24%) of the Company's revenue for the years ended December 31, 1996 and
1995, respectively. The Company's Solids Control Products & Services business
serves oilfield drilling markets in North America, Latin America, Europe,
Africa, the Middle East and the Far East.
Solids control is the application of highly-engineered products and services
to extract drill cuttings from fluids used in oil and gas drilling operations.
The removal of drill cuttings is required to permit the reuse of expensive
drilling fluids. By removing rock cuttings and other solid contaminants from the
fluids used in drilling operations, solids control equipment reduces the volume
of drilling fluids and solids for disposal subsequent to drilling operations
(which minimizes the environmental impact of the drilling operation and reduces
post-drilling reclamation costs) and reduces the volume of drilling fluids
consumed by the operation, further reducing drilling costs. Effective solids
control also reduces the probability of sticking and losing expensive downhole
drilling equipment in the wellbore and the resulting need to redrill the well.
The use of solids control technology improves the efficiency of the drilling
process by preventing the recirculation and subsequent recutting of solids at
the drill bit and by reducing wear on mechanical components such as mud pumps
and mud motors.
The Company believes the regulatory and industry trend towards minimizing the
environmental impact of drilling operations in a number of environmentally-
sensitive oil and gas productive regions will lead to higher demand for highly-
engineered solids control products and closed loop drilling systems. The
Company further believes the trend towards more technically complex drilling,
including highly deviated directional wells and slim-hole completions, will
favorably impact the demand for solid controls technology because of its ability
to reduce costly downhole problems.
Due to the Drexel Merger, the Company believes it is the world's leading
manufacturer and provider of solids control equipment and services to the oil
and natural gas drilling industry. The Company manufactures conventional and
linear motion shale shakers, high speed and conventional centrifuges, desanders,
desilters, screens, degassers and closed loop drilling fluids systems at its
facilities in Conroe, Texas and Dundee, United Kingdom. The Company markets
solids control equipment under the Brandt/EPI /TM/ brand name. For the twelve
months ended December 31, 1996, on a pro forma basis giving effect to the Drexel
Merger, approximately 48% of the Company's solids control equipment revenue was
generated from the sale of solids control equipment and inventory, and
approximately 52% of such revenue was generated from rentals and services.
Outside the petroleum market, solids control equipment is used in numerous
applications. The Company recently expanded into the kaolin (clay) paper
processing and rock and aggregate markets by providing its shakers for use in
the separation process utilized in these industries. Management believes that
there are additional opportunities for expansion into these and other markets,
such as the food processing and municipal waste water markets, although such
expansion cannot be assured.
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The Company's customers for Solids Control Products & Services include almost
all major oil and gas companies, large and small independent producers, national
oil companies, and drilling contractors. No single customer accounted for more
than 10% of the Company's revenue in 1996. Competitors in oilfield solids
control equipment and services include Smith International ("SWACO"), Derrick
Manufacturing Corp. and a number of regional competitors. The Company acquired
four regional competitors in solids control in 1996 in order to achieve
consolidation savings, gain entrance to solids control markets in Canada and
expand its market presence in Louisiana and Venezuela. The Company's solids
control equipment is sold or rented in highly competitive markets. Management
believes that on-site service is becoming an increasingly important competitive
element in the solids control equipment market. Management believes that, in
addition to on-site services, the principal competitive factors affecting its
solids control equipment business are performance, quality, reputation, customer
service, product availability, breadth of product line and price. Management
believes market conditions are generally improving in solids control due to
strong demand by oil and gas drillers to reduce overall drilling costs and
minimize environmental impact, and rising levels of technology required to serve
the market.
COILED TUBING & PRESSURE CONTROL PRODUCTS
As a result of the Drexel Merger, the Company believes it is the world's
leading designer and manufacturer of coiled tubing equipment and coiled tubing
pressure control equipment used in oil and gas well remediation and drilling
operations. This product line generated approximately 14% of the Company's
revenue for the year ended December 31, 1996. On a pro forma basis giving
effect to the Drexel Merger and the SOFS acquisition, the Coiled Tubing &
Pressure Control Products segment generated approximately $62 million (16%) and
$50 million (16%) of the Company's revenue for the years ended December 31, 1996
and 1995, respectively. The Company's Coiled Tubing & Pressure Control Products
line sells capital equipment and consumables to all the major oilfield coiled
tubing remediation and drilling service providers.
Coiled tubing consists of flexible steel tubing manufactured in a continuous
string and wrapped on a spool. It can extend several thousand feet in length
and is run in and out of the well bore at a high rate of speed by a
hydraulically operated coiled tubing unit. A coiled tubing unit is typically
mounted on a truck or skid and consists of a hydraulically operated tubing reel
or drum, an injector head which pushes or pulls the tubing in or out of the well
bore, and various power and control systems. Coiled tubing is typically used
with sophisticated pressure control equipment which permits the operator to
continue to safely produce the well. The Company manufactures and sells both
coiled tubing units and the ancillary pressure control equipment used in these
operations.
Coiled tubing provides a number of significant functional advantages over the
principal alternatives of conventional drillpipe and workover pipe. Coiled
tubing allows faster "tripping" since the coiled tubing can be reeled very
quickly on and off a drum and in and out of a well bore. In addition, the small
size of the coiled tubing unit compared to an average workover rig reduces
preparation time at the well site. Coiled tubing permits a variety of workover
and other operations to be performed without having to pull the existing
production tubing from the well and allows ease of operation in
horizontal/highly deviated wells. Thus, operations using coiled tubing can be
performed much more quickly and, in many instances, at a significantly lower
cost. Finally, use of coiled tubing generally allows continuous production of
the well, eliminating the need to temporarily stop the flow of hydrocarbons. As
a result, the economics of a workover are improved because the well can continue
to produce hydrocarbons and thus produce revenues while the well treatments are
occurring. Continuous production also reduces the risk of formation damage
which can occur when the well is "shut in."
Currently, most coiled tubing units are used in well remediation applications.
The Company believes that advances in the manufacturing process of coiled
tubing, tubing fatigue protection and the capability to manufacture larger
diameter coiled tubing strings have resulted in increased uses and applications
for coiled tubing products. For example, well operators are increasingly
finding uses for coiled tubing in drilling applications such as slim hole
reentries of existing wells. The Company engineered and manufactured the first
three coiled tubing units built specifically for coiled tubing drilling in 1996.
There are certain limitations to the use of coiled tubing. Coiled tubing
generally is made of high strength, alloy steel which wears down or fatigues
over time as a result of internal pressure, acidic operating environments and
normal bending cycles. Thus, operators must carefully monitor the use of the
tubing. In addition, coiled tubing will buckle if the weight the coiled tubing
is pushing becomes too great or if the tube becomes inhibited by some obstacle
or irregularity in the well bore. Buckling has not proven to be a significant
obstacle in most well remediation applications, and the
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Company believes it will become less of an issue as the result of the
availability of stronger and larger diameter coiled tubing.
Generally, the Company supplies customers with the equipment and components
necessary to use coiled tubing, which the customers typically purchase
separately. The Company's coiled tubing product line consists of coiled tubing
units, coiled tubing injector heads, coiled tubing and wireline pressure control
equipment, snubbing units, nitrogen pumping equipment and cementing,
stimulation, and blending equipment. The Company markets its coiled tubing
equipment under the Hydra Rig(R) brand name primarily to providers of coiled
tubing drilling and workover services. The Company's primary coiled tubing unit
production facilities are located at its Hydra Rig facility in Fort Worth,
Texas. In addition, the Company markets coiled tubing pressure control equipment
under the Texas Oil Tools(R) brand name and manufactures such equipment at its
facility in Conroe, Texas and to a lesser extent at the Dundee facility in the
United Kingdom. Additionally, through its September 1996 acquisitions of SSR
(International) Ltd. and Pressure Control Engineering Ltd., the Company entered
the wireline unit manufacturing business, and greatly expanded its offering of
downhole coiled tubing tools. Many coiled tubing customers also purchase and
operate wireline units.
The Company's coiled tubing product offering includes a wide variety of
sophisticated downhole tools engineered to enable oil and gas producers to re-
enter complex multilateral wells, to install coiled tubing velocity strings, to
bypass electrical submersible pumps, and to perform a variety of other
remediation and completion activities utilizing coiled tubing. One such
product, the MLR system, was awarded a Meritorious Award for Engineering
Innovation at the 1996 Offshore Technology Conference in Houston, Texas.
Management believes that high-productivity multilateral drilling will continue
to grow.
The Company's customers for Coiled Tubing & Pressure Control Products include
almost all major oil and gas coiled tubing service companies, as well as major
oil companies and large independents. No single customer accounted for more
than 10% of the Company's revenue in 1996. Competitors in Coiled Tubing &
Pressure Control Products include Stewart & Stevenson, Dreco Inc. and a few
smaller competitors. Management believes market conditions are generally
improving in the coiled tubing equipment market due to growing widespread
acceptance of the technology, and growth in the number of oilfield applications
such as coiled tubing drilling.
PIPELINE & OTHER INDUSTRIAL SERVICES
Pipeline & Other Industrial Services generated approximately 12%, 19%, and
23% of the Company's revenue for the years ended December 31, 1996, 1995, and
1994, respectively. On a pro forma basis giving effect to the Drexel Merger
and the SOFS acquisition, Pipeline & Other Industrial Services generated
approximately $43 million (12%) and $36 million (11%) of the Company's revenue
for the years ended December 31, 1996 and 1995, respectively. The Company's
Pipeline & Other Industrial Services provides a wide variety of industrial
inspection services, including in-place inspection services of oil and gas
transmission pipelines, and technical industrial inspection, monitoring, and
quality assurance services for the construction, operation, and maintenance of
major projects in energy-related industries.
Pipeline Services. In-place inspection services for oil and gas pipelines
identifies defects in the pipelines without removing or dismantling the
pipelines or disrupting the product flow, giving customers a convenient and
cost-effective method of identifying defects in pipelines. The Company inspects
pipelines by launching a sophisticated survey instrument into the pipeline.
Propelled by the product flow, the instrument uses electromagnetics and digital
and analog recording devices to monitor 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 survey instrument is returned to the Company, refurbished and used
for future pipeline inspections.
The Company expanded its presence in the pipeline inspection market when it
acquired Vetco Pipeline Services, Inc., a major competing pipeline inspection
provider, in September, 1996. The acquisition provided the Company with access
to certain new technologies including pipeline deformation inspection, increased
market presence in North America, and significant consolidation savings.
Management believes 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 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
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new digital TruRes(R) inspection technology will provide 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(R) technology applies advanced digital computer technology and other
advancements within the body of the inspection tool to provide greater
measurement sampling density and pipe-body coverage.
Industrial Inspection Services. 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 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.
The Company's CTI tank inspection unit, which was included in its Pipeline &
Other Industrial Services group, was sold in the third quarter of 1996. Less
than $1 million in revenue was generated from this operation in 1996.
The Company's Pipeline & Other Industrial Services customers include most
major pipeline operators, national oil and gas companies, and various nuclear
power plant operators. No customer accounted for more than 10 percent of
revenues for the Company in 1996. The Company's primary competitors include
British Gas Plc; Ipel Kopp (Pipetronix), a subsidiary of A.G. Preussay
Anlagensau; and H. Rosen Engineering GmbH, and BJ Services. Management believes
the major competitive factors for Pipeline Services are reputation for quality
service, reliability of obtaining a successful survey on the first run, product
technology, price, and technical support of survey results interpretation.
1996 ACQUISITIONS
On April 24, 1996, pursuant to that certain Agreement and Plan of Merger dated
as of January 3, 1996 by and among the Company, Grow Acquisition Limited, a
Bermuda corporation and wholly owned subsidiary of the Company ("Grow"), and
D.O.S. Ltd., a Bermuda corporation ("Drexel"), Grow was merged with and into
Drexel (the "Drexel Merger"). Upon consummation of the Drexel Merger, all of
the outstanding ordinary shares of Drexel were converted into the right to
receive approximately 16.7 million shares of the Company's common stock, par
value $.01 per share ("Company Common Stock").
In connection with the Drexel Merger, on April 24, 1996, the Company sold to
SCF-III, L.P., a Delaware limited partnership ("SCF"), 4,200,000 shares of
Company Common Stock and warrants to purchase 2,533,000 shares of Company Common
Stock at an exercise price of $10 per share expiring on December 31, 2000, for
an aggregate purchase price of $31 million pursuant to a certain Subscription
Agreement dated as of January 3, 1996 between the Company and SCF.
Also in connection with the Drexel Merger, on April 24, 1996 Baker Hughes
Incorporated ("BHI") exchanged all of its 100,000 shares of Series A Convertible
Preferred Stock, par value $.01 per share, of the Company for 1,500,000 shares
of Company Common Stock and warrants to purchase 1,250,000 shares of Company
Common Stock at an exercise price of $10 per share expiring on December 31,
2000, pursuant to that certain Exchange Agreement dated as of January 3, 1996
between the Company and BHI.
Prior to the Drexel Merger, Drexel was the world's leading provider of solids
control equipment and services to the oil and natural gas industry and coiled
tubing units and related pressure control equipment to oilfield service
companies. The Drexel Merger provided the Company increased market
capitalization, additional growth opportunities, improved capital structure and
consolidation savings opportunities. Measures to achieve the expected
consolidation savings were fully implemented in 1996.
During 1996, in addition to the Drexel Merger, the Company completed the
acquisition of seven businesses. On May 31, 1996, pursuant to that certain
Share Purchase Agreement dated as of May 31, 1996, the Company acquired all of
the outstanding shares of capital stock of Wadeco Oilfield Services Ltd.
("Wadeco"), a Canadian-based company in the Solids Control Products & Services
business, for $16.4 million (provided from the Company's cash reserves and its
existing revolving credit facility). In addition, the Company assumed $5.2
million of Wadeco debt. The acquisition provided the Company with a presence in
the Canadian solids control market and access to a fleet of high-quality solids
control equipment.
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In June 1996, the Company acquired substantially all of the assets of Western
Service & Supply, S.A., a Venezuela-based company in the Solids Control Products
& Services business, for an aggregate purchase price of $2.6 million in cash.
This acquisition increased the Company's market share in Latin America, and
provided an opportunity to achieve consolidation cost savings.
In September 1996, the Company acquired all of the outstanding shares of
S.S.R. (International) Ltd., and Pressure Control Engineering Ltd., two Scotland
based companies in the Coiled Tubing & Pressure Control Products business. The
consideration included cash of $7.8 million, 129,967 shares of Company Common
Stock valued at $1.9 million, and $5 million of notes convertible into shares of
Company Common Stock. These acquisitions expanded the Company's coiled tubing
and pressure control equipment product offerings.
In September 1996, the Company acquired all of the outstanding shares of
capital stock of Vetco Pipeline Services, Inc. ("Vetco Pipeline"), a U.S.-based
company in the pipeline inspection business, for an aggregate purchase price of
$8.5 million in cash plus additional earnout consideration contingent upon the
realization of gross profit from certain contracts. The acquisition of Vetco
Pipeline provided additional pipeline inspection technology and significant
consolidation cost savings.
In October 1996, the Company acquired substantially all of the solids control
assets of Polar Oilfield Services, a Canadian-based solids control business, for
an aggregate purchase price of approximately $1.8 million in cash.
In December 1996, the Company acquired all of the outstanding shares of
capital stock of Gauthier Brothers Rentals, Inc., the leading provider of solids
control equipment and services in the Louisiana Gulf Coast area for total
consideration of approximately $11 million. The purpose of the acquisition was
to improve the Company's market position through increased rental revenue and
closed loop systems.
SEASONAL NATURE OF THE COMPANY'S BUSINESS
Historically, the level of the Company's business has followed seasonal
trends, which are described below. However, the historical trends in Tubular
Services and Solids Control Products & Services can also be subject to
significant changes resulting from fluctuations in oil prices and changes in rig
count.
The Company's tubular inspection, tubular coating, and solids control
businesses in the United States tend 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 tubular inspection,
tubular coating, and solids control businesses in Canada typically realize 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. Tubular
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. The seasonal trend in
North America is somewhat offset by the increased activity level in Latin
America during the first quarter of each year.
Pipeline inspection 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.
Mill systems 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.
In general, the Coiled Tubing and Pressure Control line has experienced lower
revenue in the fourth quarter due to major customers placing orders, based on
their budgeting process, in the fourth quarter for delivery during the next
three quarters. This process may change in the future as a major customer has
changed to a continuing budget process and will place orders throughout the
year. There can be no guarantees that this trend will continue or that any
other customer will change its ordering process.
8
<PAGE>
The Company anticipates that these seasonal trends will continue; however,
there can be no guarantee that spending by the Company's customers will continue
or that other circumstances will remain the same as in prior years.
MARKETING & DISTRIBUTION NETWORK
The Company's products are marketed through a 142 employee sales organization
and a network of agents and distributors which spans 54 countries. The
Company's customers include major and independent oil and gas companies,
national oil companies, oilfield equipment and product distributors and
manufacturers, drilling and workover contractors, oilfield service companies,
pipeline operators, steel mills, and other industrial companies.
Certain tubular inspection and tubular coating products and service often are
incorporated as a part of a tubular package sold by tubular supply stores to end
users. The Company's international oilfield inspection services were
historically marketed in large part through licensees, with agreements generally
ranging in duration from three to five years. In 1990, the Company commenced
operating directly in selected foreign markets rather than marketing its
services through licensees. With the 1991 acquisition of Vetco Services, 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.
The Company's Solids Control customers are predominantly oil and natural gas
producers and rig operators and its coiled tubing equipment customers are
primarily oil and natural gas service companies. The Company operates sales and
distribution facilities at strategic locations worldwide to service areas with
intensive drilling activity. The Company's worldwide employee Solids Control
sales organization is complemented by service and engineering facilities which
provide specialty repair and maintenance services to existing customers.
The Company's Coiled Tubing & Pressure Control Products primarily are sold
directly to end users through a worldwide employee Coiled Tubing & Pressure
Control Products sales organization. The Company also has in place certain
exclusive alliances with major oilfield service companies to provide pressure
control equipment.
PATENTS, LICENSES AND TRADEMARKS
Management believes that the Company's strong market position in its major
businesses is enhanced by its leading technologies and reputation for innovation
and expertise. Through an internal development program and certain
acquisitions, the Company has assembled an extensive array of coiled tubing,
solids control, tubular coating, tubular inspection, mill systems, and pipeline
inspection technologies protected by a substantial number of trade and service
marks, patents, trade secrets, and other proprietary rights.
In 1996, the Company engineered, manufactured, and delivered the first three
coiled tubing units designed specifically to drill wells. The Company continues
to invest in technology to improve and expand coiled tubing drilling, and holds
a number of patents in both coiled tubing drilling and conventional coiled
tubing unit designs. Additionally, the Company holds a number of patents
related to the manufacture and design of pressure control equipment. The
Company has joint development agreements for the proprietary SAFECONN connector
system which permits the safe deployment of long perforating guns into live
wells. The Company, through its Pressure Control Engineering subsidiary, also
offers a wide array of coiled tubing completion and fishing tools, including its
patented multi-lateral reentry (MLR) system, its StiffLine 2000 coiled tubing
velocity string wellhead hanger system, its HAPPI coiled tubing hydraulic anchor
push-pull intensifier. The Company has a wide complement of patented blow out
preventors and ancillary equipment for coiled tubing.
The Company's Solids Control Products & Services line engineers and assembles
linear motion shakers, combination linear motion/scalping shakers and various
centrifuge designs. Additionally, various styles of screens for use with
shakers are designed by the Company for specialized use in the separation of
drill cuttings from fluids used in oil and gas drilling operations. The Company
has various patents related to its screens and shale shakers in both the U.S.
and international locations.
The Company and its recent acquisition Vetco Pipeline Services pioneered the
pipeline inspection process with what is now known as "conventional pipeline"
inspection technology. The Company copyrighted Linalog(R) technology plus
computer enhancement technique adds the ability to integrate computer analysis
into the conventional technology.
9
<PAGE>
The Company's Tru Res(R) technology employs a patented state of the art high
resolution inspection tool and next generation magnetic flow leakage technology
to provide enhanced defect characterization.
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. In addition, the
Company's PipeImage/TM/ System for electromagnetic inspection 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 equipment and technology used in the Company's ultrasonic inspection
systems (U-Tron(R), SOS Ultrasonic Inspection Unit, Vetcoscan(R) and NDT/TM/
Eagle) is designed to inspect heavywall or non-magnetic tubing, casing and line
pipe for manufacturing defects, where the effectiveness of electromagnetic
inspection is limited. The Company's ultrasonic capabilities were further
enhanced with the introduction of its Endsonic(R) technology for ultrasonic end
area inspection in 1994, and its patented full body ultrasonic inspection unit
(Truscope(R)) which provides 100% ultrasonic coverage at a rate of 200 feet per
minute.
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. In 1993 the Company
introduced its WellChek(R) technology 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 proprietary 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. Presently the Company utilizes both
thermoplastic and thermosetting plastics technology to provide materials with
enhanced chemical resistance or mechanical properties to meet the end users
field requirements. 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 restricted sales agreements with
third party manufacturers.
The Company also offers a complete line of connection services for internally
coated pipe. These include Thru-Kote(R) and Thru-Kote(R) U.B. systems for
welding coated line pipe, and a variety of other specialized fittings.
Additionally, the Company's TK(R) - tubing insert is a cost effective solution
for corrosive down hole environments.
The Company has proprietary rights to a number of foreign and domestic
trademarks and service marks important to its business. It also owns various
foreign and domestic patents related to the design and manufacture of certain
products. Many 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.
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 solids control,
inspection, tubular coating, and pipeline inspection 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, Texas; Conroe, Texas; Dundee, Scotland; and
Montrose, Scotland. The Company manufactures screens used in its solids control
operations and for sale to others at its New Iberia,
10
<PAGE>
Louisiana; Conroe, Texas; Leduc, Alberta; and Trinidad facilities. The Company
manufactures coiled tubing units, wireline units, and pressure control equipment
at its Fort Worth, Texas; Conroe, Texas; Montrose, Scotland; Aberdeen, Scotland;
and Poole, England facilities. The Company, through its 1997 acquisition of
Fiber Glass Systems, manufactures fiberglass tubulars and fittings at its San
Antonio, Texas and Big Springs, Texas facilities. The Company manufactures its
tubular coatings in its Houston, Texas facility, or through restricted sale
agreements with third party manufacturers.
The equipment and products designed and manufactured by the Company range from
electromagnetic and ultrasonic inspection systems, coating products,
electromagnetic pipeline inspection tools, mechanical solids control equipment,
coiled tubing and wireline equipment, pressure control equipment, and downhole
coiled tubing tools. Design and engineering are based on research and
development efforts as well as established customer and industry standards.
Certain of the Company's manufacturing facilities and certain of the Company's
products have various certification, including, ISO 9001, API and ASME.
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's backlog is based upon anticipated revenues from customer orders
that the Company believes are firm and scheduled for shipment within twelve
months. The level of backlog at any particular time is not necessarily
indicative of the future operating performance of the Company, and orders may be
changed at any time. As of December 31, 1996, the Company's backlog of Coiled
Tubing & Pressure Control Products was $21.9 million, an increase of
approximately 20% above the $18.2 million in backlog as of December 31, 1995.
Such increase was primarily a result of an increase in demand, and due to the
acquisitions of SSR International Ltd and Pressure Control Engineering Ltd. in
1996. Backlog amounts in the Company's other product lines are immaterial.
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 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 the Company in
1988 from Minstar Inc. ("Minstar"), 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
11
<PAGE>
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. 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, 1996, the Company employed 3,602 full-time employees
worldwide, of whom 1,876 were employed in North America. The Company considers
its relations with its employees to be excellent.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The oil and gas industry in which the Company participates historically has
experienced significant volatility. Demand for the Company's services and
products depends primarily upon the number of oil and gas wells being drilled,
the depth and drilling conditions of such wells, the volume of production, the
number of well completions and the level of workover activity. Drilling and
workover activity can fluctuate significantly in a short period of time,
particularly in the United States and Canada.
The willingness of oil and gas operators to make capital expenditures for the
exploration and production of oil and natural gas will continue to be influenced
by numerous factors over which the Company has no control, including the
prevailing and expected market prices for oil and natural gas. Such prices are
impacted by, among other factors, the ability of the members of the Organization
of Petroleum Exporting Countries ("OPEC") to maintain price stability through
voluntary production limits, the level of production by non-OPEC countries,
worldwide demand for oil and gas, general economic and political conditions,
costs of exploration and production, availability of new leases and concessions,
and governmental regulations regarding, among other things, environmental
protection, taxation, price controls and product allocations. No assurance can
be given as to the level of future oil and gas industry activity or demand for
the Company's services and products.
The Company's foreign operations, which include significant operations in
Canada, Europe, the Far East, the Middle East and Latin America, 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 movement of funds or result in the deprivation of
contract rights or the taking of property without fair compensation.
Government-owned petroleum companies located in some of the countries in which
the Company operates have adopted policies (or are subject to governmental
policies) giving preference to the purchase of goods and services from companies
that are majority-owned by local nationals. As a result of such policies, the
Company relies on joint ventures, license arrangements and other business
combinations with local nationals in these countries. In addition, political
considerations may disrupt the commercial relationship between the Company and
such government-owned petroleum companies. Although the Company has not
experienced any significant problems in foreign countries arising from
nationalistic policies, political instability, economic instability or currency
restrictions, there can be no assurance that such a problem will not arise in
the future.
The Company's inspection and coating services routinely involve the handling
of waste materials, some of which may be considered to be hazardous wastes. The
Company is subject to numerous local, state and federal laws and regulations
concerning the containment and disposal of hazardous materials, pursuant to
which Tuboscope has been required to incur compliance and clean-up costs.
Compliance with environmental laws and regulations due to currently unknown
circumstances or developments, however, could result in substantial costs and
have a material adverse effect on Tuboscope's results of operations and
financial condition.
A significant portion of the Company's recent growth in revenues and
profitability has been the result of its aggressive acquisition program. The
Company's future operating results will be impacted by the Company's ability to
identify additional attractive acquisition opportunities, consummate such
acquisitions on favorable terms and successfully integrate the operations of the
acquired businesses with those of the Company.
12
<PAGE>
ITEM 2. PROPERTIES
The following is a description of the Company's major facilities:
<TABLE>
<CAPTION>
SIZE
(APPROXIMATE OWNED/
LOCATION DESCRIPTION SQUARE FEET) LEASED
-------- ----------- ------------- ------
<S> <C> <C> <C>
DOMESTIC:
- --------
Amelia, Louisiana Coating Plant, Pipe Inspection and 85,000 on 35 Acres Building Owned*
Storage Facilities
Bakersfield, California Reclamation Facility 7,200 on 6 Acres Owned
Casper, Wyoming Inspection Facility 91,720 on 29 Acres Owned
Corpus Christi, Texas Service Facility 20,800 on 4 Acres Owned
Conroe, Texas Solids Control and Pressure 125,000 on 30.49 Owned
Control Manufacturing Facility, Acres
Warehouse, Sales and
Administrative Offices, &
Engineering
Oklahoma City, Oklahoma Inspection Facility 6,000 on 5 Acres Owned
Edmond, Oklahoma Coating Plant 40,000 on 19 Acres Owned
Fort Worth, Texas Coiled Tubing Manufacturing 75,200 on 9.67 Acres Owned
Facility, Warehouse & Offices
Fabrication Center 26,700 Leased
Harvey, Louisiana Coating Plant and Inspection 53,000 on 7 Acres Owned & Leased
Facility
Houston, Texas Holmes Road Complex: Owned
Manufacturing, Warehouse,
Corporate Offices, Coating
Manufacturing Plant & Pipeline
Services
Engineering/Technical Research 76,000 on 6 Acres Owned
Center
Highway 90: Coating Plant 83,000 on 43 Acres Leased
Sheldon Road Complex: Region 137,000 on 94 Acres Land Owned **
Administration Offices, Pipe Building Leased
Inspection and Storage Facilities
SOS Inspection Facility 32,000 on 31 Acres Owned
Lake Arthur, Louisiana Solids Control Service & Rework 7,800 Leased
Facility
Midland, Texas Coating Plant, Reclamation 87,000 on 25 Acres Owned
Facility and Technical Service
Building
Odessa, Texas Inspection Pipe Storage Yard and 12,000 on 23.2 Acres Leased
Ancillary Service Facility
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SIZE
(APPROXIMATE OWNED/
LOCATION DESCRIPTION SQUARE FEET) LEASED
-------- ----------- ------------- ------
<S> <C> <C> <C>
Morgan City, Louisiana Inspection Facility 42,400 on 3 Acres Building Owned*
New Iberia, Louisiana Manufacturing and Warehouse 25,500 on 3.4 Acres Owned
Facility
North Slope (Deadhorse), Alaska Inspection, Repair and Service 18,400 Building Owned*
Center
Kenai, Alaska Inspection Facility 9,100 on 21 Acres Leased
INTERNATIONAL:
CANADA:
- ------
Calgary, Alberta Pipeline Services Facility 33,825 on .8 Acres Leased
Sales and Inspection Facility 20,000 on .63 Acres Owned
Edmonton, Alberta Nisku Complex: Coating Plant, 114,000 on 40 Acres Owned
Inspection Facility, Pipeline
Services and Maintenance Center
Leduc, Alberta Solids Control Equipment Rental 38,626 on 9.36 Acres Owned
and Services Facility
ARGENTINA:
- ---------
Plaza Huincul, Neuquen State Reclamation and Inspection 2,000 on 2.3 Acres Leased
Facility
Comodoro Rivadavi, Chubut State Reclamation and Inspection 7,300 on 1.1 Acres Leased
Facility
COLOMBIA:
- --------
Yopal, Colombia Warehouse, Storage Yard and 4,600 on 3.75 Acres Leased
Offices
TRINIDAD:
- --------
Couva, Trinidad Manufacturing 8,073 Leased
VENEZUELA:
- ---------
Anaco, Venezuela Inspection Facility 600 on 2.5 Acres Leased
Maracaibo, Venezuela Solids Control Facility 25,000 on 1 Acre Owned
FRANCE:
- ------
Berlaimont, France Coating Plant 44,000 on 16 Acres Owned
SINGAPORE:
- ---------
Jurong, Singapore Coating Plant 50,644 on 8 Acres Building Owned*
Jurong, Singapore Inspection Facility 19,429 on 3 Acres Building Owned*
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SIZE
(APPROXIMATE OWNED/
LOCATION DESCRIPTION SQUARE FEET) LEASED
-------- ----------- ------------- ------
<S> <C> <C> <C>
UNITED KINGDOM:
- --------------
Bordon, England Pipeline Services Center 12,000 Building Owned*
Aberdeen, Scotland Inspection Facility & Coating 64,982 on 10 Acres Owned
Plant
Dundee, Scotland Manufacturing 16,000 on 3.7 Acres Owned
Montrose, Scotland Manufacturing and Assembly 22,400 on 1.5 Acres Owned
Aberdeen, Scotland Manufacturing & Administrative 45,209 Owned
& Sales
Dorset, England Manufacturing & Administrative 12,700 on .33 Acres Leased
& Sales
GERMANY:
- -------
Celle, Germany Inspection Facility, 43,560 on 12 Acres Building Owned*
Administrative
& Engineering Offices
Gladbeck, Germany Coating Plant 25,635 on 4 Acres Owned
NETHERLANDS:
- -----------
Veenoord, Netherlands Reclamation and Repair Facility 53,361 on 2 Acres Leased
SAUDI ARABIA:
- ------------
A1 Khobar, Saudi Arabia Reclamation, Inspection Facility 28,341 on 8 Acres Leased
and Offices
</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.
ITEM 3. LEGAL PROCEEDINGS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to the Company's legal
proceedings described below. Litigation is inherently uncertain and may result
in adverse rulings or decisions. Additionally, the Company may enter into
settlements or be subject to judgments which may, individually or in the
aggregate, have a material adverse effect on the Company's results of
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements.
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
15
<PAGE>
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 1960s and 1970s. 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 the
Company 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 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 a Defendant in litigation styled Artisan Corporation v. Optima
-----------------------------
Petroleum Corporation - Optima Petroleum Corporation and Dunhaven Energy Inc.
- -----------------------------------------------------------------------------
vs. Artisan Corporation and Tuboscope Vetco Canada Inc. causes No.9601-06975 and
- -------------------------------------------------------
9601-9867, Court of Queen's Bench of Alberta, Judicial District of Calgary. The
plaintiffs allege breach of contract and negligence in connection with
inspection of drill pipe in Canada in 1995 and seek damages in excess of 8
million Canadian Dollars. Management believes that, based upon insurance and
its rights and defenses against co-parties that this case will not have a
material adverse effect on the Company's results of operations or financial
condition. This action is being vigorously contested.
16
<PAGE>
The products acquired by the Company due to the Drexel Merger are used in
complex industrial applications. Litigation arising from a catastrophic
occurrence at such applications may result in the Company being named as a
defendant in lawsuits asserting large claims. Although the Company believes its
insurance coverage is adequate for its current operations and its uninsured
losses from product liability claims have not been significant, a successful
liability claim for which the Company is underinsured or uninsured could have a
material adverse effect on the Company.
The Company is a defendant in litigation in the United States District Court
for the Southern District of Texas, Houston Division, styled Derrick
-------
Manufacturing Corporation vs. Advanced Wirecloth, Inc., Environmental
- ---------------------------------------------------------------------
Procedures, Inc. dba SWECO Oilfield Services, Vincent D. Leone, and William S.
- ------------------------------------------------------------------------------
Cagle; Civil Action No.942417 which is a consolidated action, having
- ------
consolidated Civil Action No.95-3653 into that Civil Action. Plaintiff asserts
a number of claims related to the Company's screen manufacturing and its solids
control business including: (1) infringement of United States Patent
No.4,575,421; (2) trademark infringement under 15 U.S.C.(S) 1114, Section 32 of
the Lanham Act; (3) unfair competition under 15 U.S.C. (S)1125(a), Section 43(a)
of the Lanham Act; (4) state common law unfair competition; and (5) violation of
Texas' Anti-Dilution Act. Plaintiff has asked for an unspecified amount of
damages arising from these claims as well as a permanent injunction, as
asserted in the original action as well as claims including: (1) infringement of
United States Patent No.5,417,859; (2) trademark infringement under 15 U.S.C.
(S) 1114, Section 32 of the Lanham Act; (3) unfair competition under 15 U.S.C.
(S) 1125(a), Section 43(a) of the Lanham Act; (4) state common law unfair
competition; (5) false marking of Advanced's and SWECO's screens with U.S.
Patent No.5,385,669 in violation of 35 U.S.C. (S) 292(a); and (6) violation of
Texas' Anti-Dilution Act. Plaintiff has asked for an unspecified amount of
damages arising from these claims as well as for preliminary and permanent
injunctions.
All claims against defendant William S. Cagle have been dismissed. A separate
case involving one of the same two patents asserted by Derrick against Advanced
Wirecloth, but involving a different screen manufacturer as defendants, was
tried to a jury before the same Judge in Derrick Manufacturing Corporation vs.
-------------------------------------
Southwestern Wire Cloth, Inc., Southwestern Wire Cloth Oilfield Screens, Inc.
- -----------------------------------------------------------------------------
and Robert E. Norman, Civil Action No.H-94-0135 in the United States District
- ---------------------
Court for the Southern District of Texas. The Judge entered a judgment as a
matter of law that the patent in suit was procured by inequitable conduct and is
unenforceable, notwithstanding a jury verdict against the defendant awarding the
Plaintiff $4,000,000 in damages. The Southwestern case is now on appeal to the
Court of Appeals for the Federal Circuit. If the district court's judgment is
affirmed on appeal, the Company believes that it will have no exposure on the
patent in the suit that was adjudicated and common to the Southwestern and
Advanced Wirecloth cases, i.e., United States Patent No.4,575,421. The other
patent on which Derrick has sued Advanced Wirecloth, i.e., United States Patent
No.5,417,859, is the subject of a second suit between Derrick and Southwestern,
Civil Action No.95-C-1184K, pending in the United States District Court for the
Northern District of Oklahoma. The outcome of the case, if favorable to
Southwestern, could have a favorable impact on Advanced Wirecloth with respect
to the second Derrick patent. In view of the appeal in the Derrick vs.
Southwestern Wire Cloth case, the Judge has stayed all proceedings in the
Advanced Wirecloth case pending the outcome of the Southwestern appeal.
Notwithstanding the outcome of the Southwestern Wirecloth cases the Company
believes it has strong defenses to all of Derrick's allegations and that based
on these and certain indemnities from the Seller's in the SOFS-Drexel
transaction, and insurance the result from this litigation will not have a
material adverse effect on the Company's results of operations or financial
condition. This action is being vigorously contested.
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
No matters were submitted to a vote of stockholders during the fourth quarter
of 1996.
17
<PAGE>
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>
1996 1995
------------------- -----------------
HIGH LOW HIGH LOW
-------- -------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter $10 1/4 $ 5 7/8 $8 1/2 $6 1/8
2nd Quarter 13 7/16 9 7/8 7 1/2 6
3rd Quarter 15 7/8 10 5/16 7 5 3/4
4th Quarter 16 1/2 13 1/2 6 5/8 5 5/8
</TABLE>
The closing price of the Company's common stock on March 19, 1997 was
$13 1/8. The approximate number of stockholders of record on March 19, 1997
was 251.
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. The Company's Senior Credit Agreement restricts the
Company from paying dividends on its capital until all mandatory prepayments
have been made from excess cash flow and the total funded debt to capital ratio
is not greater than 40%. The Company's total funded debt to capital ratio (as
defined under the agreement) was 46.8% at December 31, 1996. The Company was
therefore prohibited from paying dividends under the terms of its Senior Credit
Agreement at December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
There is hereby incorporated herein by reference the information appearing
under the caption "Selected Financial Data" of the registrant's Annual Report to
Stockholders for the year ended December 31, 1996, which is included as part of
Exhibit 13 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
There is hereby incorporated herein by reference the information appearing
under the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition of the Company" of the registrants's Annual Report to
Stockholders for the year ended December 31, 1996, which is included as part of
Exhibit 13 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
There is hereby incorporated herein by reference the Consolidated Financial
Statements of the Company, the Notes to Consolidated Financial Statements
and the Report of Independent Auditors with respect thereto appearing on
Pages 23 through 43 of the registrant's Annual Report to Stockholders
for the year ended December 31, 1996, which is included as part of Exhibit 13 to
this Form 10-K. Reference is made to the Index to Financial Statements in Item
14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
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 1 -"Election of Directors" and "Executive Officers
of the Company" of the registrant's definitive Proxy Statement for its 1997
Annual Meeting to be filed with the Securities and Exchange Commission (the
"Commission") on or before April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the captions "Executive Compensation" of the registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Commission on or
before April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Certain Holders Thereof" of the
registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed
with the Commission on or before April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing
under the caption "Certain Transactions" of the registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Commission on or
before April 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Financial Statements:
The information under the following captions, which is included in the
1996 Annual Report to Stockholders, is incorporated herein by reference and
is included as part of Exhibit 13 to this Form 10-K:
Tuboscope Vetco International Corporation:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995, and 1994
Consolidated Statements of Common Stockholders' Equity and
Redeemable Preferred Stock for the years ended December 31, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
19
<PAGE>
2. Financial Statement Schedules:
The information under the following captions is filed as part of
this Report:
Schedule I Parent Company Only Condensed Balance Sheets
Schedule I Parent Company Only Condensed Statements of Operations
Schedule I Parent Company Only Condensed Statements of Cash Flows
Schedule I Parent Company Only Notes to Condensed Financial Statements
Schedule II Valuation and Qualifying Accounts
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.
3. The list of exhibits contained in the Index to Exhibits are filed as
part of this Report.
(b) Reports on Form 8-K
A Form 8-K/A regarding the acquisition of Vetco Pipeline Services, Inc.
was filed on November 12, 1996.
20
<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/ L. E. SIMMONS
--------------------------------------
L. E. Simmons
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/ L. E. SIMMONS Chairman of the Board March 25, 1997
- -----------------------------
L. E. Simmons
/s/ JOHN F. LAULETTA Director March 25, 1997
- ----------------------------- President and Chief Executive
John F. Lauletta Officer
(Principal Executive Officer)
/s/ JOSEPH C. WINKLER Executive Vice President, Chief March 25, 1997
- ----------------------------- Financial Officer and Treasurer
Joseph C. Winkler (Principal Financial and
Accounting Officer)
/s/ MARTIN I. GREENBERG Vice President, Controller, March 25, 1997
- ----------------------------- Assistant Treasurer and
Martin I. Greenberg Assistant Secretary
/s/ JEROME R. BAIER Director March 25, 1997
- -----------------------------
Jerome R. Baier
/s/ J. S. DICKSON LEACH Director March 25, 1997
- -----------------------------
J. S. Dickson Leach
/s/ ERIC L. MATTSON Director March 25, 1997
- -----------------------------
Eric L. Mattson
/s/ MARTIN R. REID Director March 25, 1997
- -----------------------------
Martin R. Reid
</TABLE>
21
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- ---------
A S S E T S (IN THOUSANDS)
-----------
<S> <C> <C>
Cash.................................................................................. $ 9 $ 9
Accounts receivable................................................................... 17 --
Investment in subsidiaries............................................................ 228,502 132,496
-------- --------
Total assets.................................................................... $228,528 $132,505
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-------------------------------------------
Amounts due to affiliates............................................................. $ 7,068 $ 889
Interest payable...................................................................... 45 --
Notes payable......................................................................... 2,513 --
Redeemable Series A Convertible Preferred Stock....................................... -- 10,175
Common stockholders' equity:
Common stock, $.01 par value 60,000,000 shares authorized, 41,612,495 shares
issued and outstanding (18,546,075 at December 31, 1995)...................... 416 185
Paid-in capital................................................................... 261,932 116,379
Retained earnings (deficit)....................................................... (42,949) 6,650
Cumulative translation adjustment................................................. (497) (1,773)
-------- --------
Total common stockholders' equity........................................ 218,902 121,441
-------- --------
Total liabilities and equity............................................. $228,528 $132,505
======== ========
</TABLE>
See notes to condensed financial statements.
============================================
22
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity in net earnings (loss) of subsidiaries............ ($49,326) $8,874 $7,563
Interest expense......................................... (45) -- --
Foreign exchange loss.................................... (171) -- --
State franchise tax and other............................ (57) (55) (39)
-------- ------ ------
Net income (loss)........................................ (49,599) 8,819 7,524
Dividends applicable to redeemable preferred stock....... -- 700 700
-------- ------ ------
Net income (loss) applicable to common stock............. ($49,599) $8,119 $6,824
======== ====== ======
</TABLE>
See notes to condensed financial statements.
============================================
23
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... ($49,599) $ 8,819 $ 7,524
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Equity in net (earnings) loss of subsidiaries......................... 49,326 (8,874) (7,563)
Changes in current assets and liabilities:
Accounts receivable................................................ (17) -- --
Interest payable................................................... 45 -- --
Amounts due to affiliates.......................................... 6,179 357 425
--------- ------- -------
Net cash provided by operating activities................................ 5,934 302 386
--------- ------- -------
Cash flows used for investing activities:
Investment in subsidiaries................................................ (37,466) -- --
--------- ------- -------
Cash flows provided by (used for) financing activities:
Proceeds from sale of common stock........................................ 31,707 398 314
Dividends paid on Redeemable Series A Convertible Preferred Stock......... (175) (700) (700)
--------- ------- -------
Net cash provided by (used for) financing activities..................... 31,532 (302) (386)
--------- ------- -------
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.
24
<PAGE>
SCHEDULE I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
No cash dividends were paid to Tuboscope Vetco International Corporation.
For information concerning restrictions pertaining to the common stock and
commitments and contingencies, see Notes 7 and 10 of notes to consolidated
financial statements of Tuboscope Vetco International Corporation.
25
<PAGE>
SCHEDULE II
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
ADDITIONS
(DEDUCTIONS)
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND CHARGE OFFS END OF
OF YEAR EXPENSES AND OTHER YEAR
--------- ------------ ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1996........................................... $ 955 $ 628 $ 799 $2,382
1995........................................... $1,599 $ (272) $ (372) $ 955
1994........................................... $1,858 $ -- $ (259) $1,599
Allowance for inventory reserves:
1996........................................... $5,988 $ 329 $ 2,677 $8,994
1995........................................... $6,272 $ (275) $ (9) $5,988
1994........................................... $6,147 $ 91 $ 34 $6,272
Valuation allowance for deferred income taxes:
1996........................................... $3,404 $ -- $(2,233) $1,171
1995........................................... $1,310 $2,119 $ (25) $3,404
1994........................................... $ 862 $ 665 $ (217) $1,310
</TABLE>
The increase in the allowance for doubtful accounts and allowance for inventory
reserves during 1996 was due primarily to the merger with Drexel.
The change in the valuation allowance for deferred income taxes in 1996 relates
to foreign tax credits and net operating losses. These items were relieved in
connection with the write-off of long-lived assets discussed in Notes 2 and 6.
26
<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.
2(b) Share Purchase Agreement dated as of May 31, 1996 between TVI (Note 15)
Wadeco Inc., J & S Hokanson Investments Ltd., John Hokanson,
Douglass Bell, Robert Russell, Richard Rutherford and Wadeco
Oilfield Services Ltd.
2(c) Stock Purchase and Sale Agreement dated as of September 6, 1996 by (Note 16)
and among Tuboscope Pipeline Services, Inc., Vetco Pipeline Services,
Inc., Rauma USA, Inc. and Rauma Corporation
2(d) Addendum No. 1 to Stock Purchase and Sale Agreement dated as of (Note 16)
September 20, 1996 by and among Tuboscope Pipeline Services, Inc.,
Vetco Pipeline Services, Inc., Rauma USA, Inc. and Rauma
Corporation
2(e) Addendum No. 2 to Stock Purchase and Sale Agreement dated as of (Note 16)
September 20, 1996 by and among Tuboscope Pipeline Services, Inc.,
Vetco Pipeline Services, Inc., Rauma USA, Inc. and Rauma
Corporation
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 Company, (Note 1)
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) 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(c) Supplemental Indenture dated as of December 18, 1996, among Exhibit 4(c)
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(d) 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).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE NO.
- -------------- ----------- -----------
<S> <C> <C>
4(e) 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(f) 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).
4(g) Secured Credit Agreement, dated August 2, 1996, between Tuboscope (Note 14)
Vetco International Inc., and Drexel Holdings, Inc., and The Chase
Manhattan Bank, N.A., ABN Amro Bank N.V., Houston Agency, and
the other Lenders Party Hereto, and ABN Amro Bank N.V., Houston
Agency as Administrative Agent.
10(a) Savings Investment Plan, dated May 13, 1988, as amended by (Note 1)
First Amendment to Savings Investment Plan.
10(b) Second, Third and Fourth Amendments to Savings Investment Plan. (Note 4)
10(c) Fifth, Sixth and Seventh Amendments to Savings Investment Plan. (Note 8)
10(d) Supplementary Agreement Fixed Rental Scheme, dated May 19, 1989, (Note 1)
between Jurong Town Corporation and AMF Far East Pte. Ltd.
10(e) Description of Life Insurance Plan. (Note 1)
10(f) Amended and Restated Stock Option Plan for Key Employees of (Note 5)
Tuboscope Vetco International Corporation.
10(g) Form of Revised Incentive Stock Option Agreement. (Note 5)
10(h) Form of Revised Non-Qualified Stock Option Agreement. (Note 5)
10(i) Stock Option Plan for Non-Employee Directors of Tuboscope Vetco (Note 6)
International Corporation.
10(j) Amendment to Stock Option Plan for Non-Employee Directors of (Note 6)
Tuboscope Vetco International Corporation.
10(k) Form of Non-Qualified Stock Option Agreement. (Note 6)
10(l) Employee Qualified Stock Purchase Plan. (Note 8)
10(m) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI relating to the Vetco Services Acquisition.
10(o) Technology Transfer Agreement, dated as of October 29, 1991, (Note 3)
between Tuboscope Inc. and BHI.
10(p) Lease Agreement with respect to Celle, Germany facility. (Note 3)
10(q) Building Agreement for Land at Jurong, dated May 5, 1983, between (Note 3)
Jurong Town Corporation and Vetco International, Inc.
10(r) Lease between J.G.B. Properties Limited and Vetco Inspection GmbH. (Note 3)
10(s) Eighth and Ninth Amendment to Savings Investment Plan. (Note 9)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE NO.
- -------------- ----------- -----------
<S> <C> <C>
10(t) Subscription Agreement, dated as of January 3, 1996, by and between (Note 12)
Tuboscope Vetco International Corporation and SCF-III, L.P.
10(u) Exchange Agreement, dated as of January 3, 1996, among Tuboscope (Note 13)
Vetco International Corporation and Baker Hughes Incorporated.
10(v) 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(w) Voting Agreement, dated as of January 3, 1996, among D.O.S. Ltd., (Note 12)
Brentwood Associates IV, L.P. and Baker Hughes Incorporated.
10(x) Form of Amended and Restated Executive Agreement. (Note 13)
10(y) Master Lease Agreement, dated December 18, 1995, between the (Note 13)
Company and Heller Financial Leasing, Inc.
10(z) 1996 Equity Participation Plan. (Note 17)
10(aa) D.O.S. Ltd. 1993 Stock Option Plan. (Note 18)
13 Annual Report to Stockholders for the year ended December 31, 1996. Exhibit 13
21 Subsidiaries. Exhibit 21
23 Consent of Ernst & Young LLP 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.
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 10-Q 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.
29
<PAGE>
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, 1995 and incorporated by reference herein
pursant to Rule 12b-32 of the Exchange Act.
Note 14 Previously filed in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and incorporated by reference herein
pursuant to Rule 12b-32 of the Exchange Act.
Note 15 Previously filed in the Company's Current Report on Form 8-K filed
on June 14, 1996, as amended by Amendment No. 1 on Form 8-K/A filed on
August 2, 1996, and incorporated by reference herein pursuant to
Rule 12b-32 of the Exchange Act.
Note 16 Previously filed in the Company's Current Report on Form 8-K filed
on October 7, 1996, as amended by Amendment No. 1 filed on November 12,
1996, and incorporated by reference herein pursuant to Rule 12b-32 of
the Exchange Act.
Note 17 Previously filed by the Company in Registration No. 333-05233 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 18 Previously filed by the Company in Registration No. 333-05237 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
30
<PAGE>
EXHIBIT 4(c)
================================================================================
TUBOSCOPE VETCO INTERNATIONAL INC.,
as Issuer,
TUBOSCOPE VETCO INTERNATIONAL CORPORATION,
as Guarantor
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee
-------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of December 13, 1996
-------------------
$75,000,000
10 3/4% Senior Subordinated Notes due 2003
================================================================================
<PAGE>
FIRST SUPPLEMENTAL INDENTURE dated as of December 17, 1996, between
TUBOSCOPE VETCO INTERNATIONAL INC., a Texas corporation, as issuer (the
"Company"), TUBOSCOPE VETCO INTERNATIONAL CORPORATION, a Delaware corporation,
as guarantor (the "Guarantor"), and NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, a national banking association, as trustee (the "Trustee").
RECITALS
--------
WHEREAS, the Company, the Guarantor and the Trustee are parties to
that certain Indenture dated as of April 1, 1993 (the "Indenture"), regarding
the Company's 10 3/4% Senior Subordinated Notes due 2003 (the "Notes");
WHEREAS, the Company has commenced an offer to purchase (the "Offer")
for cash all of its outstanding Notes from all registered holders thereof (the
"Holders"), upon the terms and subject to the conditions set forth in the Offer
to Purchase and Consent Solicitation Statement dated as of November 20, 1996 and
in the related Consent and Letter of Transmittal, as amended by the terms set
forth in the Company's press release dated December 4, 1996;
WHEREAS, in connection with the Offer and forming a part thereof, the
Company has solicited consents (the "Consents") of the Holders of the Notes to
effect certain amendments (the "Amendments") to the Indenture (the
"Solicitation");
WHEREAS, there have been validly delivered Consents of Holders of a
majority in aggregate principal amount of the Notes outstanding that are owned
by Holders other than the Company, any subsidiary or any person directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the Company or any subsidiary;
WHEREAS, Section 9.2 of the Indenture permits the Company, the
Guarantor and the Trustee to enter into a Supplemental Indenture; and
WHEREAS, in accordance with the terms of the Offer and Solicitation,
the Company has determined that it is necessary or required to supplement the
Indenture to reflect the Amendments.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual
premises contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
1. Section 4.3 Covenant Defeasance of the Indenture is hereby
amended by deleting the first sentence of the Section in its entirety and
inserting the following sentence in lieu thereof:
"Upon the Company's exercise under Section 4.1 of the option
applicable to this Section 4.3, the Company shall be released from its
obligations under any covenant contained in Section 8.1(a)(v), and in
Sections 10.13, 10.16 and 10.18, with respect to the Outstanding Notes
on and after the date the conditions set forth below are satisfied
(hereinafter, "covenant defeasance"), and Notes shall thereafter be
deemed to be not "Outstanding" for the purposes of any direction,
waiver, consent or declaration or Act of Holders (and the consequences
of any thereof) in connection with such covenants but shall continue
to be deemed "Outstanding" for all other purposes hereunder."
2. Section 10.7 Limitation on Company and Subsidiary Indebtedness of
the Indenture is hereby deleted in its entirety.
3. Section 10.8 Limitation on Indebtedness and Preferred Stock of
Subsidiaries of the Indenture is hereby deleted in its entirety.
4. Section 10.9 Limitation on Payment Restrictions Affecting
Subsidiaries of the Indenture is hereby deleted in its entirety.
5. Section 10.10 Limitation on Restricted Payments of the Indenture
is hereby deleted in its entirety.
6. Section 10.11 Provision of Financial Reports of the Indenture is
hereby deleted in its entirety.
7. Section 10.12 Transactions with Related Persons of the Indenture
is hereby deleted in its entirety.
<PAGE>
8. Section 10.14 Restriction on Senior Subordinated Indebtedness of
the Indenture is hereby deleted in its entirety.
9. Section 10.15 Restriction on Lien of the Indenture is hereby
deleted in its entirety.
10. Section 10.17 Limitation on Sale-Leaseback Transactions of the
Indenture is hereby deleted in its entirety.
11. This First Supplemental Indenture will become effective upon the
date on which the Company has accepted for purchase all Notes validly tendered
(and not withdrawn) pursuant to the terms and conditions of the Offer.
12. Capitalized terms used herein without definition shall have the
meanings set forth in the Indenture.
13. This First Supplemental Indenture may be executed in any number
of counterparts with the same effect as if the signatures to each counterpart
were upon a single instrument, and all such counterparts together will be deemed
an original of this First Supplemental Indenture.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, and their respective corporate seals
to be hereunto affixed and attested, all as of the date first written above.
TUBOSCOPE VETCO INTERNATIONAL INC.
By: /s/ JAMES F. MARONEY, III
-----------------------------------------------
James F. Maroney, III
Vice President, General Counsel
and Secretary
Attest: /s/ VINCE GILLESPIE
-------------------
Vince Gillespie
Assistant Secretary
TUBOSCOPE VETCO INTERNATIONAL INC.
CORPORATION
By: /s/ JAMES F. MARONEY, III
-----------------------------------------------
James F. Maroney, III
Vice President, General Counsel
and Secretary
Attest: /s/ VINCE GILLESPIE
-------------------
Vince Gillespie
Assistant Secretary
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
Attest:
---------------------
Name:
-----------------------
Title:
----------------------
<PAGE>
SELECTED FINANCIAL DATA
The information below is presented in order to highlight significant trends in
the Company's results from operations and financial condition. See Note 3 of
the Notes to the Consolidated Financial Statements regarding the 1996
acquisitions.
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Statement of Operations Data
Revenue $341,431 $190,015 $192,175 $183,340 $164,996
Operating profit (loss) (21,281) 27,460 27,048 2,445 15,741
Net income (loss) (49,599) 8,819 7,524 (12,859) 3,522
Net income (loss) per common share $(1.35) $.44 $.37 $(.74) $.15
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (end of period):
Working capital $ 74,393 $ 44,623 $ 35,926 $ 5,279 $ 28,202
Total assets 505,165 306,679 317,027 310,108 299,734
Long-term debt (1) 184,743 111,617 123,851 101,489 101,373
Common stockholders' equity 218,902 121,441 113,424 105,256 119,849
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
General
Drexel Merger and Other Significant Events
Tuboscope Vetco International Corporation (the "Company") completed a
merger ("Drexel Merger") with D.O.S. Ltd. on April 24, 1996. The Drexel Merger
represented the combination of the largest provider of oil-field-related
Inspection and Coating services in the world with the world's leading provider
of Solids Control equipment and services to the oil and natural gas industry and
Coiled Tubing units and related Pressure Control equipment to oilfield service
companies.
This transaction, along with seven other strategic acquisitions which were
completed during 1996 and 1995 and several actions implemented by management in
1996, has significantly impacted the operating results, financial condition,
liquidity, and direction of the Company.
A summary of the 1996 and 1995 acquisitions is included in Note 3 to the
1996 Consolidated Financial Statements. In addition to the Drexel Merger, the
other strategic acquisitions accomplished several goals, including:
. Provided the Company with the leading Solids Control equipment and services
business in Canada with its acquisition of Wadeco Oilfield Services Ltd.
("Wadeco").
. Provided the Company with the leading Solids Control equipment and services
business on the Louisiana Gulf Coast with its acquisition of Gauthier Brothers
Rentals, Inc. ("Gauthier Brothers").
. Increased the Company's Solids Control sales and market share in Canada and
Venezuela with the purchase of substantially all the Solids Control assets of
Polar Oilfield Services and Western Service and Supply, S.A., respectively.
. Increased the Company's worldwide Pipeline inspection market share with its
acquisition of Vetco Pipeline Services, Inc. ("Vetco Pipeline").
. Provided the Company with the leading Oilfield Inspection services business
in Argentina, which also provided the infrastructure to grow the Company's
Solids Control and Pipeline business.
1
<PAGE>
. Increased the Company's manufacturing capabilities and further strengthened
the Company's presence in the growing market for Coiled Tubing and Wireline
Pressure Control products with its acquisition of S.S.R . (International) Ltd.
and Pressure Control Engineering Ltd. ("SSR/PCE").
In addition to these acquisitions, the Company took the following actions
in 1996 to improve its overall profitability, financial condition, and
liquidity:
. In connection with the Drexel Merger, the Company raised net equity of
$29.1 million related to the sale of 4.2 million shares of Common Stock and
warrants to purchase 2.5 million shares of Company Common Stock at $10 per
share. In addition, the Company converted $10 million of Series A Convertible
Preferred Stock into 1.5 million shares of Common Stock and warrants to purchase
1.25 million shares of Company Common Stock at an exercise price of $10 per
share.
. The Company completed the consolidation of its Solids Control manufacturing
operations to help improve profitability and efficiencies. In addition,
Tuboscope and Drexel operating facilities were consolidated in Texas,
California, Argentina, Scotland, Colombia, and Singapore. Also, corporate
overhead functions were consolidated in Houston and the eastern hemisphere
headquarters were consolidated in Aberdeen, Scotland.
. The Company consolidated the recently acquired Vetco Pipeline operation
with its Pipeline Services operations.
. The Company shut down or sold operations which were performing at less than
satisfactory levels, including the U.S. tank inspection operation, and the
Oilfield Inspection operations in Japan and Italy.
. The Company established a Solids Control market presence in Argentina and
began screen manufacturing operations in Trinidad and Canada.
. Significant technological advances were made in several products, including
the delivery of three coiled tubing drilling units, the successful installation
and operation of a Truscope unit (full body rotary ultrasonic inspection system)
at a major customer's facility, and the commercial introduction of TruRes (high-
resolution pipeline inspection unit).
. In August 1996, the Company refinanced its Senior Credit Agreement. The new
agreement included a $130 million term loan facility, a $100 million revolving
credit facility, and a $5 million swingline facility. The new facility has been
used to retire debt balances outstanding under the previous senior credit agree-
ment, to retire the $75 million 10 3/4% Senior Subordinated Notes (the "Notes"),
and to finance growth and acquisitions. At December 31, 1996, the Company had
$68.2 million available for borrowing under its revolving credit facility. The
term loan facility requires quarterly payments beginning September 30, 1997 with
the final payment due August 6, 2002. The revolver and swingline facility are
required to be repaid by August 6, 2001.
2
<PAGE>
1996 Operating Environment Overview and Pro Forma Discussion
The Company's results depend, in large part, on the level of worldwide oil
and gas drilling and production activity, the price of oil and gas, and
worldwide oil and gas inventory levels. Key industry indicators for the past
three years include the following:
<TABLE>
<CAPTION>
1996* 1995* 1994*
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Rig Activity:
U.S. 779 723 775
Canada 271 231 261
International 805 757 734
- --------------------------------------------------------------------------
Worldwide 1,855 1,711 1,770
- --------------------------------------------------------------------------
U.S. Workover Rig Activity 1,334 1,277 1,298
- --------------------------------------------------------------------------
West Texas Intermediate Crude (per barrel) $22.01 $18.46 $17.26
- --------------------------------------------------------------------------
Natural Gas Prices $/mbtu (per mbtu) $ 2.41 $ 1.47 $ 1.72
- --------------------------------------------------------------------------
</TABLE>
*Averages for the years indicated. The source for rig activity information
was Baker Hughes and for oil and gas prices was Spears and Associates.
Worldwide drilling and U.S. workover activity, and prices for oil and gas
all improved during 1996. U.S., Canada, and International rig activity increased
8%, 17%, and 6% over 1995 levels, while U.S. workover activity was up 4%. In
addition, the price for West Texas Intermediate Crude was up 19% and natural gas
prices increased 64%. This improved operating environment, as well as the 1996
actions previously discussed, is reflected in the improvement reported in the
Company's following actual and pro forma (for all 1996 acquisitions) operating
results (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995 1994
Proforma (1) Actual Proforma (1) Actual Actual
<S> <C> <C> <C> <C> <C>
Revenue $416,840 $341,431 $368,472 $190,015 $192,175
Net Income Before
Write-off of Assets, Merger
Costs, and Extraordinary
Charges $ 29,896 $ 25,384 $ 18,132 $ 8,819 $ 8,288
Net Income (Loss) $(45,079) $(49,599) $ 18,132 $ 8,819 $ 7,524
Earnings Per Share Before
Write-off of Assets,
Merger Costs, and
Extraordinary Charges $ 0.70 $ 0.69 $ 0.43 $ 0.44 $ 0.41
Earnings (Loss) Per Share $ (1.05) $ (1.35) $ 0.43 $ 0.44 $ 0.37
</TABLE>
(1) Information is presented on a pro forma basis as if the 1996 acquisitions
were made as of January 1, 1995. The pro forma information is not
necessarily indicative of the results of operations as they would have been
had the transactions been effected at the beginning of 1995.
The $48.4 million (13%) increase inpro forma revenue for 1996 over 1995 was
due to several factors including improved overall market conditions as discussed
above, a significant growth in Latin American revenue for Inspection, Solids
Control, and Pipeline operations, greater revenue from the Company's Coiled
Tubing/Pressure Control products, and an increase in worldwide Coating sales.
3
<PAGE>
The increase in revenue, the costs savings from consolidating overhead and
operating functions, lower depreciation and amortization due to the first
quarter 1996 write-off of long-lived assets, and the divesture of certain
operations resulted in a 63% improvement in earnings per share before the write-
off of assets, Drexel transaction costs, and extraordinary charges for the 1996
pro forma period compared to the 1995 pro forma period.
Write-off of Assets, Drexel Transaction Costs, and Extraordinary Charges
During 1996 the Company incurred the following write-off of assets, Drexel
transaction costs, and extraordinary charges:
. During the first quarter of 1996, the Company recorded a write-off of long-
lived assets of $63.1 million. The write-off was due to the adoption of
SFAS No. 121 and a decision by management to sell certain assets, primarily
as a result of the Drexel merger. The write-off is discussed in detail in
Note 2 "Write-Off of Long-Lived Assets" of the Notes to the Consolidated
Financial Statements.
. During the second quarter of 1996, the Company recorded $11.3 million of
transaction costs associated with the Drexel Merger. Severance payments to
former executive officers of the Company represented $6.5 million of the
transaction costs. The remaining costs related mainly to the consolidation
of eastern hemisphere headquarters and consolidation costs associated with
Tuboscope personnel and facilities.
. During the fourth quarter of 1996, the Company decided to close its direct
Italian operation, resulting in a write-off of assets of $2.2 million.
. During the fourth quarter of 1996, the Company recorded an after-tax $6.4
million extraordinary charge related to the early retirement of its
outstanding Notes. See Note 7 of the Notes to the Consolidated Financial
Statements.
Results of Operations
Year Ended December 31, 1996 vs Year Ended December 31, 1995
Revenue. Revenue was $341.4 million for the fiscal year ended December 31,
1996, an increase of $151.4 million over 1995 results. The increase was
primarily related to the seven acquisitions the Company completed during 1996.
The Drexel Merger, which was completed April 1, 1996, accounted for $107.5
million of the increase.
Revenue from the Company's Tubular Services, comprised of Inspection,
Coating, and Mill Systems and Sales, was approximately $173.8 million in 1996,
an increase of $20.1 million, or 13.1%, over 1995 results. Inspection revenue
increased in 1996 due to an increase in Latin American inspection operations,
which benefitted from the acquisition of an Argentina operation in September
1995 and a large contract in Colombia awarded in the fourth quarter of 1995. In
addition, Europe and North America Inspection operations increased as rig
activity increased slightly in both areas. Coating revenue also increased as a
result of improved volume at all of the Company's North America Coating plants
and stronger operations at the Scotland and Singapore Coating plants. Mill
Systems and Sales revenue was down due to lower international Mill equipment
sales.
The Drexel Merger added the rental and sale of Solids Control equipment to
the Company's operations. In addition, the Company completed the acquisition of
Wadeco effective May 1, 1996. Solids Control operations, which includes the
rental and sale of equipment used in the removal of rock cuttings and other
solid contaminants from the fluids used in drilling operations, earned revenue
of $77.3 million since the effective date of the Drexel Merger and the effective
dates of other Solids Control acquisitions in 1996. On a pro forma basis, Solids
Control revenue was up $13.0 million in 1996 over 1995 due to increased activity
4
<PAGE>
in Latin America, specifically Venezuela and Argentina, and greater revenue from
North America rental operations.
Coiled Tubing and Pressure Control Products, which were also acquired as
part of the Drexel Merger, contributed revenue of $47.0 million since the
effective date of the Drexel Merger and the acquisition of SSR/PCE, in September
1996. Coiled Tubing Products included the sale of coiled tubing units, wireline
units, downhole tools and blowout preventors used in oilfield workover, drilling
and production operations. On a pro forma basis, Coiled Tubing and Pressure
Control Products revenue was up $10.5 million, due mainly to an increase in
Coiled Tubing sales in the North Sea and Norway, and the sale of coiled tubing
drilling units.
Pipeline and Other Industrial Services revenue was $43.3 million in 1996,
an increase of $7.0 million over 1995 results. The improvement was primarily in
international pipeline operations as a result of greater revenue in Saudi
Arabia, Nigeria, and Argentina, and revenue from Vetco Pipeline, which was
acquired in September 1996. These results were offset to some extent by lower
Industrial Inspection revenue in the Middle East and the sale of the Company's
CTI Tank Inspection operation.
Gross Profit. Gross profit was approximately $97.6 million (28.6% of
revenue) for 1996, compared to $51.6 million (27.2% of revenue) for 1995. Drexel
and Wadeco operations accounted for the majority of the 1996 improvement ($37.8
million of $46.0 million). Improved gross profit percentages for 1996 benefited
from greater revenue in high profit margin product lines, including Pipeline,
Coating, and Solids Control, and from lower depreciation and amortization
expense associated with the write-off of long-lived assets in the first quarter
of 1996.
Selling, General, and Administrative Costs. Selling, general, and
administrative costs were $35.7 million in 1996, compared to $20.7 million in
1995. The $15.0 million increase was due primarily to $16.3 million of overhead
costs associated with the operations of Drexel, Wadeco, SSR/PCE, and Vetco
Pipeline since the effective dates of their acquisitions.
Research and Engineering Costs. Research and engineering costs were $6.6
million in 1996, compared to $3.5 million in 1995. The increase was primarily
due to engineering costs associated with Drexel operations, which were $2.7
million since the effective date of the acquisition. Other increases were due
primarily to costs associated with the Company's TruRes "high resolution"
pipeline tools.
Write-off of Long-Lived Assets. The first quarter 1996 write-off of long-
lived assets of $63.1 million included a writedown of $50.8 million associated
with the Company's adoption of SFAS No. 121 and a decision by management to sell
certain assets, primarily as a result of the Drexel Merger, which resulted in
additional write-downs of approximately $12.3 million. See additional
discussions in Note 2 of the Consolidated Financial Statements.
Drexel Transaction Costs. The $11.3 million of Drexel transaction costs
incurred in 1996 included executive severance costs of $6.5 million associated
with former officers of the Company and consolidation costs of $4.8 million
related to Tuboscope personnel and facilities. The consolidation costs were
related mainly to the con-solidation of overhead facilities and personnel in
Europe and the consolidation of certain operating locations in North America.
Write-off of Italian Operations. The $2.2 million write-off of Italian
operations was due to a decision by the Company in December 1996 to exit direct
operations of its inspection business in Italy. In November 1996, the Italian
operations were placed in liquidation, and in February 1997 the operations were
officially closed. The Italian operations contributed approximately $2.5 million
of revenue in 1996 with break-even profit results.
Operating Profit (Loss). Operating loss was $21.3 million for 1996 compared
to operating profit of $27.5 million in 1995. The operating loss was due to the
write-off of long-lived assets, Drexel transaction costs, and the write-off of
Italian operations, as discussed above. Excluding these charges, operating
profit would have been $55.3 million in 1996, an increase of $27.8 million over
1995 results. The improvement was mainly due to
5
<PAGE>
the operating profit contributed by the Drexel operations since the merger date.
In addition, the acquisitions of Wadeco, SSR/PCE, and Vetco Pipeline also
contributed to the increase in operating profit, as well as stronger operations
from Coating, Pipeline, and Latin American Inspection operations and the
decrease in depreciation and amortization expense resulting from the first
quarter 1996 write-off of long-lived assets.
Interest Expense. Interest expense was $13.4 million in 1996, a $1.1
million increase over 1995. The increase was due to greater outstanding debt
balances as a result of the acquisitions, offset to some extent by lower
effective interest rates on outstanding debt balances.
Other Expense (Income). Other expense (income), which includes interest
income, foreign exchange, amortization of debt financing cost, minority
interest, and other expense (income) resulted in a net loss of $293,000 in 1996,
compared to a net gain of $73,000 in 1995. The 1996 results included $1.2
million in foreign exchange gains recognized primarily in the U.K. related to an
increase in the pound sterling compared to the U.S. dollar.
Provision (Benefit) for Income Taxes. The Company reported a provision of
$8.2 million on a pre-tax loss of $35 million. The provision is primarily a
result of charges not allowable under domestic and foreign jurisdictions related
to the long-lived assets and Drexel transaction costs, goodwill amortization and
foreign earnings subject to tax at rates differing from the domestic rate.
The Company has, as of December 31, 1996, gross deferred tax assets of
$10.2 million, which includes $3.3 million attributable to domestic and foreign
net operating loss carryovers. The Company has recorded a valuation allowance of
$1.2 million against these deferred tax assets. The Company believes that
sufficient sources of taxable income will occur in future periods so that the
net deferred tax assets will be realized.
Extraordinary Loss, Net of Income Tax Benefit. In the fourth quarter of
1996, the Company retired its outstanding $75 million 10 3/4% Senior
Subordinated Notes with the proceeds from its Senior Term Loan Facility. The
early retirement of the Notes resulted in an extraordinary loss of $6.4 million
(net of income tax benefits of $3.4 million). See Note 7 of the Notes to the
Consolidated Financial Statements.
Net Income (Loss). Net loss was $49.6 million for 1996, compared to net
income of $8.8 million in 1995, due to the factors discussed above.
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 Tubular Services was $153.7 million for 1995, an
increase of $6.4 million, or 4%, over 1994. The 1994 results included $8.3
million of sales related to a reclamation inspection facility pro-ject in
Algeria while 1995 results included $1.2 million of sales related to this
project. Excluding the Algerian project, Tubular Services revenue was up $13.5
million in 1995 over 1994, with increases in North American and International
Inspection, Coating, and Mill Systems and Sales. The increase in North American
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 an 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 to stronger activity in the
Netherlands and throughout the Far East region. Coating revenue was also up in
1995 primarily as a result of the sale of coating plant equipment in Russia.
Mill Systems and Sales revenue increased due to a full year's revenue from the
NDT Systems operations which were acquired in October 1994.
Pipeline & Other Industrial Services revenue was $36.3 million for 1995, a
decrease of $8.6 million, or 19%, compared to the $44.8 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, pipeline project
delays in Nigeria, and
6
<PAGE>
a non-recurring 1994 Pipeline equipment sale. In addition, industrial inspection
revenue was down due 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. Lower tank
inspection revenue and the sale of the environmental services operation also
contributed to the lower 1995 revenue.
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 inspec-tion 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 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 American 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.
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).
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.
Extraordinary Item, Net of Income Tax Benefit. On June 30, 1994,
refinancing of the Company'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.
Financial Condition and Liquidity
For the twelve months ended December 31, 1996, the Company generated $10.6
million of cash from operations as compared to $21.6 million for the same period
of 1995. Excluding changes in working capital accounts and other liabilities,
cash provided by operating activities was $29.1 million in 1996 compared to
7
<PAGE>
$26.3 million in 1995. The 1996 results included the cash costs associated with
the Drexel Merger and the extraordinary loss due to the early retirement of the
Notes. The Company's principal use of cash generated from operations were for
capital expenditures, costs for acquisitions, and debt payments. At December 31,
1996, current assets and liabilities were $74.4 million, a $29.8 million
increase over December 31, 1995. The increase was due primarily to the 1996
acquisitions, larger manufacturing operations, and a greater revenue base.
Accounts receivable increased $44.0 million as a result of the 1996 acquisitions
and internal revenue growth. Total days sales outstanding based on total
accounts receivable was 82.3 days and 87.4 days at December 31, 1996 and 1995,
respectively. Inventory was up $32.8 million due to the 1996 acquisitions,
especially related to the Drexel Merger and SSR/PCE acquisition. Prepaid
expenses and other increased $5.4 million as a result of the 1996 acquisitions
and increased insurance prepayments. Accounts payable and accrued liabilities
increased mainly as a result of the 1996 acquisitions and increase in trade
payables due to the growth in operations. The current portion of long-term debt
increased due to the new terms of the Senior Credit Agreement.
For the twelve months ended December 31, 1996, cash flows used for
investing activities were $60.5 million compared to $1.1 million in 1995. During
1996 cash flows used for investing activities included $18.7 million of capital
spending and $43.2 million for 1996 acquisitions. Capital expenditures for 1996
were concentrated primarily in the fast growing Latin America market for Solids
Control, Oilfield Inspection, and Pipeline operations. The Company's planned
1997 capital spending is expected to approximate $25.0 million. The Company
expects to fund its capital expenditure requirements in 1997 principally from
cash generated from operations and its revolving credit line.
For the twelve months ended December 31, 1996, net cash generated from
financing activities was $50.5 million compared to cash used of $19.9 million in
1995. The 1996 cash generated from financing activities was from net borrowings
under the Company's new Senior Credit Agreement and net proceeds from the sale
of the Company's Common Stock. Current and long-term debt was $184.7 million at
December 31, 1996, an increase of $73.1 million compared to December 31, 1995.
The increase was due mainly to borrowings on the revolving credit facility and
debt assumed in the 1996 acquisitions. The Company's outstanding debt at
December 31, 1996 consisted of $130.0 million of term loans due under the
Company's Senior Credit Agreement, $28.5 million due under the Company's
revolving credit facility, $5.0 million of convertible notes related to the
acquisition of Gauthier Brothers, $3.9 million related to the construction of
the Aberdeen, Scotland coating facility, $3.0 million due under the Company's
swingline facility, $2.5 million related to the acquisition of SSR/PCE, and
other debt of $11.8 million.
The Company had $68.2 million available for borrowing at December 31, 1996
under a $100 million revolving credit facility, subject to certain financial
covenants which limit total borrowing availability. Approximately $3.3 million
of this revolving credit facility was used for outstanding letters of credit.
The Company's Senior Credit Agreement restricts the Company from paying
dividends on its capital stock until all mandatory prepayments have been made
from excess cash flow and the total funded debt to capital ratio is not greater
than 40%. The Company's total funded debt to capital ratio (calculated as
defined under the agreement) was 46.8% at December 31, 1996.
See discussion of the Company's risk factors and foreign operations in Note
1 and Note 12 of the Notes to the Consolidated Financial Statements.
Factors Affecting Future Operating Results
This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward looking statements are those that do not state
historical facts and are inherently subject to risk and uncertainties. The
forward-looking statements contained herein are based on current expectations
and entail various risks and uncertainties that
8
<PAGE>
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below.
The oil and gas industry in which the Company participates historically has
experienced significant volatility. Demand for the Company's services and
products depends primarily upon the number of oil and gas wells being drilled,
the depth and drilling conditions of such wells, the volume of production, the
number of well completions and the level of workover activity. Drilling and
workover activity can fluctuate significantly in a short period of time,
particularly in the United States and Canada.
The willingness of oil and gas operators to make capital expenditures for
the exploration and production of oil and natural gas will continue to be
influenced by numerous factors over which the Company has no control, including
the prevailing and expected market prices for oil and natural gas. Such prices
are impacted by, among other factors, the ability of the members of the
Organization of Petroleum Exporting Countries ("OPEC") to maintain price
stability through voluntary production limits, the level of production by non-
OPEC countries, worldwide demand for oil and gas, general economic and political
conditions, costs of exploration and production, availability of new leases and
concessions, and governmental regulations regarding, among other things,
environmental protection, taxation, price controls and product allocations. No
assurance can be given as to the level of future oil and gas industry activity
or demand for the Company's services and products.
The Company's foreign operations, which include significant operations in
Canada, Europe, the Far East, the Middle East and Latin America, 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 movement of funds or result in the deprivation of
contract rights or the taking of property without fair compensation. Government-
owned petroleum companies located in some of the countries in which the Company
operates have adopted policies (or are subject to governmental policies) giving
preference to the purchase of goods and services from companies that are
majority-owned by local nationals. As a result of such policies, the Company
relies on joint ventures, license arrangements and other business combinations
with local nationals in these countries. In addition, political considerations
may disrupt the commercial relationship between the Company and such government-
owned petroleum companies. Although the Company has not experienced any
significant problems in foreign countries arising from nationalistic policies,
political instability, economic instability or currency restrictions, there can
be no assurance that such a problem will not arise in the future.
The Company's inspection and coating services routinely involve the
handling of waste materials, some of which may be considered to be hazardous
wastes. The Company is subject to numerous local, state and fed-eral laws and
regulations concerning the containment and disposal of hazardous materials,
pursuant to which the Company has been required to incur compliance and clean-up
costs. Compliance with environmental laws and regulations due to currently
unknown circumstances or developments, however, could result in substan-tial
costs and have a material adverse effect on the Company's results of operations
and financial condition.
A significant portion of the Company's recent growth in revenues and
profitability has been the result of its aggressive acquisition program. The
Company's future operating results will be impacted by the Company's ability to
identify additional attractive acquisition opportunities, consummate such
acquisitions on favorable terms and successfully integrate the operations of the
acquired businesses with those of the Company.
9
<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 (the Company) as of December 31, 1996 and 1995
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, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for the impairment of long-lived assets
in 1996.
ERNST & YOUNG LLP
Houston, Texas
February 14, 1997
10
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,407 $ 9,394
Accounts receivable, net 96,083 52,071
Inventory, net 47,170 14,364
Deferred income taxes 776 2,521
Prepaid expenses and other 11,797 6,403
- -------------------------------------------------------------------------------------------------
Total current assets 166,233 84,753
Property and equipment:
Land, buildings and leasehold improvements 73,499 81,557
Operating equipment and equipment leased to customers 167,440 105,187
Accumulated depreciation and amortization (59,559) (46,706)
- -------------------------------------------------------------------------------------------------
Net property and equipment 181,380 140,038
Identified intangibles, net 22,583 29,379
Goodwill, net 132,125 47,751
Other assets, net 2,844 4,758
- ------------------------------------------------------------------------------------------------
Total assets $505,165 $306,679
- ------------------------------------------------------------------------------------------------
Liabilities and Equity
Current liabilities:
Accounts payable $ 28,896 $ 14,306
Accrued liabilities 41,554 18,705
Income taxes payable 4,876 2,557
Current portion of long-term debt and short-term borrowings 16,514 4,562
- -------------------------------------------------------------------------------------------------
Total current liabilities 91,840 40,130
Long-term debt 168,229 107,055
Pension liabilities 9,846 9,869
Deferred taxes payable 15,364 16,411
Other liabilities 984 1,598
Commitments and contingencies
- ------------------------------------------------------------------------------------------------
Total liabilities 286,263 175,063
Redeemable Series A Convertible Preferred Stock -- 10,175
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized, 41,612,495
shares issued and outstanding (18,546,075 at December 31, 1995) 416 185
Paid-in capital 261,932 116,379
Retained earnings (deficit) (42,949) 6,650
Cumulative translation adjustment (497) (1,773)
Total common stockholders' equity 218,902 121,441
- -------------------------------------------------------------------------------------------------
Total liabilities and equity $505,165 $306,679
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
(in thousands, except for share data)
<S> <C> <C> <C>
Revenue:
Sale of services $ 245,452 $ 178,608 $ 175,371
Sale of products 93,016 7,844 13,573
Rental income 2,963 3,563 3,231
- -------------------------------------------------------------------------------------------------------
341,431 190,015 192,175
- -------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of services sold 183,101 132,799 131,326
Cost of products sold 58,127 4,258 7,935
Amortization of goodwill 2,626 1,310 1,201
Selling, general and administrative 35,662 20,732 21,511
Research and engineering costs 6,595 3,456 3,154
Write-off of long-lived assets 63,061 -- --
Drexel transaction costs 11,306 -- --
Write-off of Italian operations 2,234 -- --
- -------------------------------------------------------------------------------------------------------
362,712 162,555 165,127
- -------------------------------------------------------------------------------------------------------
Operating profit (loss) (21,281) 27,460 27,048
Other expense (income):
Interest expense 13,414 12,328 12,190
Interest income (470) (210) (343)
Foreign exchange (gains) losses (1,221) (440) 269
Amortization of debt financing cost 814 540 711
Minority interest 741 652 680
Other, net 429 (615) (748)
- -------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary loss (34,988) 15,205 14,289
Provision for income taxes 8,238 6,386 6,001
- -------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss (43,226) 8,819 8,288
Extraordinary loss, net of income tax benefits of
$3,431,000 and $411,000 in 1996 and 1994, respectively (6,373) -- (764)
- -------------------------------------------------------------------------------------------------------
Net income (loss) (49,599) 8,819 7,524
Dividends applicable to preferred stock -- 700 700
- -------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (49,599) $ 8,119 $ 6,824
- -------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) before extraordinary loss and after
deduction of preferred stock dividends $(1.17) $.44 $.41
Extraordinary loss (.17) -- (.04)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $(1.35) $.44 $.37
- -------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 36,809,126 18,530,338 18,447,059
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
12
<PAGE>
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, 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 or 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
Common stock issued, 661,697
shares at an average price of
$6.86 per share 7 4,534 -- -- --
Common stock issued, 4,200,000
shares and warrants to purchase
2,533,000 shares of common stock
for net proceeds of $29,100,000 42 29,058 -- -- --
Common stock issued in merger
with Drexel, 16,704,723 shares
at $6.00 per share and 962,915
options assumed 167 101,976 -- -- --
Common stock issued, 1,500,000
shares in exchange for outstanding
Series A Convertible Preferred
Stock and warrants to purchase
1,250,000 shares of common stock 15 9,985 -- -- (10,000)
Dividends paid during 1996 ($1.75
per share for Series A Convertible
Preferred Stock) -- -- -- -- (175)
Translation adjustment -- -- -- 1,276 --
Net Loss -- -- (49,599) -- --
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $416 $261,932 $(42,949) $ (497) $ --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (49,599) $ 8,819 $ 7,524
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 17,606 15,037 14,380
Compensation related to employee 401(K) plan 229 239 251
Provision (recovery) for losses on accounts receivable 628 (272) --
Provision (recovery) for losses on inventory 329 (275) 91
Write-off of long-lived assets 63,061 -- --
Write-off of unamortized debt fees 2,231 -- 1,175
Provision (benefit) for deferred income taxes (4,894) 3,057 901
Pension amortization benefit (485) (315) (315)
Changes in current assets and liabilities, net of
effects from acquisitions:
Accounts receivable (4,374) (731) (31)
Inventory (2,163) (1,658) (42)
Prepaid expenses and other (4,373) (762) (210)
Accounts payable, accrued liabilities and other (7,671) (2,594) (7,797)
Federal and foreign income taxes payable (424) 158 821
Pension liabilities 462 878 (359)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,563 21,581 16,389
- ----------------------------------------------------------------------------------------------
Cash flows used for investing activities:
Capital expenditures (18,681) (7,645) (7,549)
Proceeds from sale-leaseback transactions 2,973 12,500 --
Business acquisitions, net of cash acquired (43,236) (5,373) (4,000)
Other (1,513) (566) (819)
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (60,457) (1,084) (12,368)
- ----------------------------------------------------------------------------------------------
Cash flows provided by (used for) financing activities:
Borrowings under financing agreements, net 175,090 1,844 76,022
Principal payments under financing agreements (157,244) (20,825) (72,082)
Cash received in Drexel merger 2,101 -- --
Debt issuance costs (785) (95) (1,387)
Purchase of foreign currency options -- (258) --
Dividends paid on Redeemable Series A Convertible
Preferred Stock (175) (700) (700)
Issuance of common stock under employee stock plan 128 125 63
Net proceeds from sale of common stock 31,350 34 --
- ----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activitie 50,465 (19,875) 1,916
- ----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 442 241 102
- ----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,013 863 6,039
Cash and cash equivalents:
Beginning of period 9,394 8,531 2,492
- ----------------------------------------------------------------------------------------------
End of period $ 10,407 $ 9,394 $ 8,531
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Risk Factors
On April 24, 1996, pursuant to an Agreement and Plan of Merger dated
January 3, 1996, the merger of Tuboscope Vetco International Corporation ("the
Company") and D.O.S. Ltd. ("Drexel") was consummated (the "Drexel Merger"). The
Drexel Merger represented the combination of the largest provider of oilfield-
related inspection and coating services in the world with the world's leading
provider of solids control equipment and services to the oil and natural gas
industry and coiled tubing units and related pressure control equipment to
oilfield service companies.
The Company is primarily engaged in the inspection and coating of oil
country tubular goods (drill pipe, line pipe, casing and tubing), the in-place
inspection of oil and gas pipelines, the rental and sale of solids control
equipment and services, and the sale of coiled tubing and pressure control
equipment. All of these services and equipment are sold primarily to the oil and
gas industry. 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. Demand for the
Company's coating services is based on the economic benefits of extending the
life of existing tubulars, reducing the frequency of well workovers, and
reducing interruptions in services and increasing the hydraulic efficiency of
the wells. The Company's Solids Control operations help reduce drilling costs
and minimize the environmental impact of drilling operations by removing rock
cuttings and other solid contaminants from the fluids used in drilling
operations. Coiled tubing equipment provides several economic benefits in oil
and gas workover operations versus conventional techniques, including quicker
service time and the continuous production of the well. Overall, 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 57% of the
Company's 1996 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, Colombia, 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
the Company and its wholly-owned subsidiaries. All 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
where the collection of payment is assured, the Company recognizes revenue under
the percentage of completion method.
15
<PAGE>
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 $2,382,000 and $955,000, in 1996 and 1995, respectively.
Inventory
The Company maintains inventory consisting of equipment components,
subassemblies and expendable parts required to manufacture and support its
tubular inspection equipment, coating facilities, solids control operations, and
coiled tubing/pressure control operations. 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 generally not inventoried and are expensed upon issuance. 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):
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Components, subassemblies and expendable parts $42,689 $17,167
Equipment under production 13,475 3,185
Inventory reserve (8,994) (5,988)
- ----------------------------------------------------------------------
Inventory, net $47,170 $14,364
- ----------------------------------------------------------------------
</TABLE>
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 acceler-ated 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 $13,118,000, $10,515,000, and $10,159,000 for December
31, 1996, 1995, and 1994 respectively.
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 $9,059,000 and $12,567,000 at December
31, 1996 and 1995, 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 Drexel
Merger. Such excess costs are being amortized on a straight-line basis over an
estimated useful life of 40 years. Accumulated amortization at December 31, 1996
and 1995 was approximately $7,771,000 and $5,145,000, respectively.
Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and
16
<PAGE>
for Long-Lived Assets to be Disposed Of" (SFAS No. 121). Impairment losses are
recognized when indicators of impairment are present and the estimated
undiscounted cash flows are not sufficient to recover the assets carrying
amount. Assets held for disposal are measured at the lower of carrying value or
estimated fair value less costs to sell.
Write-Off of Long-Lived Assets
During the first quarter 1996, the Company recorded a write-off of long-
lived assets of approximately $63,100,000 including a writedown of approximately
$50,800,000 associated with the Company's adoption of SFAS No. 121 and a
decision by management to sell certain assets, primarily as a result of the
Drexel Merger, which resulted in additional write-downs of approximately
$12,300,000.
In connection with the adoption of SFAS No. 121, management accumulated
cash flow information at the lowest asset grouping levels for which there were
identifiable cash flows. These levels were represented by separate product line
operations at individual operating locations. Based on the data, the Company
recorded a write-down to its long-lived assets of approximately $50,800,000 in
the first quarter of 1996.
The majority of the SFAS No. 121 write-down was in international locations
such as Italy, Saudi Arabia, Japan, and Germany which have experienced
significant reductions in rig activity and other business declines since their
acquisition. In addition, the analysis of U.S. locations by identifiable cash
flows for individual asset locations resulted in additional write-downs.
In addition to the write-down of $50,800,000 associated with the adoption
of SFAS No. 121, the Company recognized $12,300,000 of write-downs associated
with the decision to sell certain assets. A decision was made to sell the
Company's corporate headquarters in the first quarter of 1996 and the Company
recognized a write-down represented by the difference between the facilities net
book value and estimated fair value less costs to sell. A decision was also made
in the first quarter of 1996 to sell certain tank inspection equipment and
related operations which were performing below acceptable levels. The sale of
these operations was completed in the third quarter of 1996.
Accounting for Income Taxes
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.
Derivative Financial Instruments
The Company is not a trader in financial instruments. On occasion, the
Company utilizes various derivative financial instruments, including interest
rate caps, interest rate swap transactions and options to manage its exposure to
interest rate risk and currency fluctuations associated with specific
liabilities and assets, principally debt. Substantially all of the Company's
financial instruments are interest rate transactions. Interest rate swap
transactions involve the receipt of fixed rate interest payments for floating
rate amounts without an exchange of the underlying notional amount.
The Company's objectives for using swap transactions on its debt are to
effectively convert a portion of its floating rate term loans to a fixed rate
and to hedge against the risk of rising interest rates. Expenses associated with
interest rate caps and swap transactions are deferred and recognized as a
component of interest expense over the term of the agreement. At December 31,
1996, the Company had an interest rate cap and various swap transactions in
place (see Note 7).
As a result of having sales and purchases denominated in currencies other
than functional currencies used by the Company's foreign subsidiaries, the
Company is exposed to the effect of foreign exchange rate fluctuations. To the
extent possible, the Company has natural hedges to minimize the effect of rate
fluctuations. When natural hedges are not sufficient, generally it is the
Company's policy to enter into forward foreign exchange contracts to hedge
significant transactions for periods consistent with the underlying risk. The
Company does not engage in foreign exchange speculation. While forward contracts
affect the Company's results of operations, they do not subject the Company to
uncertainty from exchange rate movements,
17
<PAGE>
because gains and losses on these contracts offset losses and gains on the
transactions being hedged. At December 31, 1996 the Company had no forward
foreign exchange contracts outstanding.
The fair value of the Company's financial instruments which includes cash,
accounts receivable, short-term borrowings, and long-term debt, approximates
their carrying amounts.
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.
Stock Based Compensation
The Company is permitted to recognize compensation cost related to its
stock based employee compensation plans using either the intrinsic value method
or the fair value method. The Company has elected to continue to use the
intrinsic value method in accounting for its stock based employee compensation
plans, and accordingly, compensation cost for stock options is recognized over
the vesting period only to the extent the market price exceeds the exercise
price on the date of grant.
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.
Reclassification of Prior Year Amounts
Certain reclassifications of 1995 and 1994 amounts have been made to
conform to the 1996 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. Actual results could differ from these
estimates.
3. Acquisitions
During 1996, the Company began to implement its strategy of executing
consolidating acquisitions and adding related strategic products and services by
completing seven acquisitions, including the Drexel Merger. In 1997, the Company
continued to implement the strategy by acquiring all of the outstanding shares
of Fiber Glass Systems, Inc. for total consideration of up to approximately
$31,900,000, a portion of which is contin-gent upon Fiber Glass Systems actual
1997 results. The consideration may include approximately 2,400,000 shares of
Company Common Stock and cash consideration of approximately $1,300,000. Fiber
Glass Systems manufactures premium fiberglass tubulars and fittings for use in
corrosive oilfield environments.
Each of the acquisitions was accounted for using the purchase method of
accounting and, accordingly, the results of operations of each business is
included in the consolidated results of operations from the date of acquisition.
A summary of the acquisitions follows:
18
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $ 257,938 $ 6,373 $ 4,000
Cash paid (43,890) (5,373) (4,000)
Common stock issued in Drexel Merger (102,143) -- --
Common stock issued in other acquisitions (1,935) -- --
- ------------------------------------------------------------------------------
Liabilities assumed and debt issued $ 109,970 $ 1,000 $ --
- ------------------------------------------------------------------------------
</TABLE>
The purchase price of the fiscal 1996 acquisitions exceeded the preliminary
allocation of the fair value of assets acquired by $105,185,000, principally as
a result of the Drexel Merger, and such amounts are being amortized on a
straight-line basis over 40 years.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if these acquisitions had
occurred at the beginning of 1995. The pro forma information includes certain
adjustments which give effect to amortization of goodwill, interest expense on
acquisition debt and other adjustments, together with related income tax
effects. The pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the transactions been
effected at the beginning of 1995.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Revenue $416,840 $368,472
Income (loss) before extraordinary loss $(38,706) $ 18,132
Net income (loss) $(45,079) $ 18,132
Earnings (loss) per share $ (1.05) $ 0.43
</TABLE>
Excluding the write-off of long-lived assets, the write-off of Italian
operations, the Drexel transaction costs, and the extraordinary loss, pro forma
net income would have been $29,896,000 and $18,132,000 in 1996 and 1995,
respectively. The related earnings per share amounts would have been $0.70 and
$0.43 in 1996 and 1995, respectively.
A brief summary of each acquisition follows:
Fiscal 1996
In connection with the Drexel Merger, the Company issued 16,704,723 shares
of Company Common Stock valued at $102,143,000. In addition, the Company sold to
SCF-III, L.P., a Delaware limited partnership ("SCF"), 4,200,000 shares of
Company Common Stock and warrants to purchase 2,533,000 shares of Company Common
Stock at an exercise price of $10 per share expiring on December 31, 2000, for
an aggregate purchase price of $31,000,000 (net proceeds of $29,100,000). Also
in connection with the Drexel Merger, Baker Hughes Incorporated exchanged all of
its 100,000 shares of Series A Convertible Preferred Stock, par value $.01 per
share, of the Company for 1,500,000 shares of Company Common Stock and warrants
to purchase 1,250,000 shares of Company Common Stock at an exercise price of $10
per share expiring on December 31, 2000.
In May 1996, the Company acquired all of the outstanding shares of capital
stock of Wadeco Oilfield Services Ltd. ("Wadeco"), a Canadian based company in
the Solids Control business, for $16,405,000 in cash. In addition, the Company
assumed $5,200,000 of Wadeco debt.
In June 1996, the Company acquired all of the Solids Control assets of
Western Service & Supply, S.A., a Venezuela-based company in the Solids Control
business, for $1,765,000 in cash and $800,000 in notes payable.
In September 1996, the Company acquired all of the outstanding shares of
S.S.R. (International) Ltd., and Pressure Control Engineering Ltd., two U.K.
based companies in the Coiled Tubing and Pressure Control Products business, for
total consideration of $12,054,000. The consideration included cash of
$7,778,000, 129,967 shares of Company Common Stock valued at $1,935,000 and
total notes payable of $2,341,000. In addition, the Company assumed $2,293,000
of outstanding debt.
In September 1996, the Company acquired all of the outstanding shares of
capital stock of Vetco Pipeline Services, Inc., a U.S. based company in the
Pipeline Inspection business, for an aggregate purchase price of $8,500,000 in
cash plus additional earnout consideration.
19
<PAGE>
In October 1996, the Company acquired substantially all of the assets of
Polar Oilfield Services, a Canadian-based Solids Control business, for an
aggregate purchase price of $1,824,000 in cash.
In December 1996, the Company acquired all of the outstanding shares of
capital stock of Gauthier Brothers Rentals, Inc. and affiliates, a Louisiana-
based company in the Solids Control business, for total consideration of
$10,925,000. The consideration included cash of $5,925,000 and a convertible
note payable of $5,000,000.
Fiscal 1995
In September 1995, the Company acquired the assets and operations of its
former agent in Argentina for $6,131,000 in cash and the assumption of $242,000
in debt. 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.
Fiscal 1994
In October 1994, the Company 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.
4. Accrued Liabilities
At December 31, accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Compensation $13,466 $4,531
Insurance 4,211 3,364
Real estate, sales and other taxes 3,346 1,126
Inventory and freight 3,202 1,701
Commissions 1,751 2,132
Interest 1,412 1,760
Other 14,166 4,091
- ---------------------------------------------------------
$41,554 $18,705
- ---------------------------------------------------------
</TABLE>
5. Drexel Transaction Costs
The Company incurred $11,300,000 of transaction costs associated with the
Drexel Merger in 1996. The transaction costs included executive severance costs
of $6,500,000 associated with former officers of the Company and consolidation
costs of $4,800,000 related to Tuboscope personnel and facilities. The
consolidation costs of $4,800,000 were related mainly to the consolidation of
overhead facilities and personnel in Europe and the consolidation of certain
operating locations in North America.
20
<PAGE>
6. Income Taxes
The components of income (loss) before income taxes and extraordinary loss
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
- ---------------------------------------------------
<S> <C> <C> <C>
Domestic $(54,022) $(2,610) $ 1,874
Foreign 19,034 17,815 12,415
- ---------------------------------------------------
$(34,988) $15,205 $14,289
- ---------------------------------------------------
</TABLE>
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 (benefit) for income taxes before extraordinary loss consists
of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Domestic $ 4,034 $ 2,179 $ 1,111
Foreign 9,098 1,150 3,989
- ---------------------------------------------------------------------
Total current provision 13,132 3,329 5,100
- ---------------------------------------------------------------------
Deferred provision (benefit):
Domestic $(5,492) $(2,481) $(1,131)
Foreign 598 5,538 2,032
Total deferred provision (benefit) (4,894) 3,057 901
- ---------------------------------------------------------------------
Total provision $ 8,238 $ 6,386 $ 6,001
- ---------------------------------------------------------------------
</TABLE>
Additionally, in 1996 and 1994 the Company recorded a current tax benefit
of $3,431,000 and $411,000 relating to the extraordinary loss of $9,804,000 and
$1,175,000, respectively.
The reconciliation of the expected to the computed tax provision (benefit)
is as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate $(12,246) $ 5,322 $ 5,001
Foreign tax credits utilized (1,011) (1,239) (1,807)
Foreign withholding taxes 847 927 1,243
Valuation allowance against net operating loss,
net of carryover benefits -- 907 448
Nondeductible goodwill amortization 591 266 331
Foreign earnings subject to tax at rates differing
from federal statutory rate 3,107 (430) (217)
Nondeductible write-off of long-lived assets and
Drexel transaction costs 16,071 -- --
Utilization of foreign net operating loss carryover -- (83) (149)
Federal income tax provision on foreign earnings 786 905 1,142
State income taxes, net of federal benefit 130 33 (127)
Other, net (37) (222) 136
- -------------------------------------------------------------------------------------------------------------
$8,238 $ 6,386 $ 6,001
- -------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Foreign tax credit carryforward $ -- $ 5,943
Domestic and foreign net operating losses 3,276 4,255
Accrued liabilities and other reserves 2,796 1,228
Retirement and benefit accruals 308 151
Inventory reserves 2,791 2,086
Minimum tax credit carryforward 276 276
Other deferred tax assets 780 466
- -----------------------------------------------------------------------------------------
Subtotal gross deferred tax assets 10,227 14,405
Valuation allowance (1,171) (3,404)
- -----------------------------------------------------------------------------------------
Net deferred tax assets 9,056 11,001
- -----------------------------------------------------------------------------------------
Gross deferred tax liabilities:
Property and equipment (12,526) (13,683)
Intangible assets (1,015) (3,831)
Reserve for foreign earnings (4,402) (2,874)
Pension liability (1,290) (1,132)
Elimination of intercompany markup (2,486) (2,664)
All other (1,925) (707)
- -----------------------------------------------------------------------------------------
Gross deferred tax liabilities (23,644) (24,891)
- -----------------------------------------------------------------------------------------
Total net deferred tax liability $(14,588) $(13,890)
- -----------------------------------------------------------------------------------------
</TABLE>
The total net deferred tax liability is comprised of $776,000 of net
current tax assets and $15,364,000 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 $17,610,000 at December 31, 1996. If such earnings
were repatriated, foreign withholding taxes of approximately $932,000 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, 1996 the Company has $3,490,000 of domestic net operating
losses which will be carried forward and will expire between 2007 and 2011. The
Company also has approximately $7,502,000 of foreign net operating loss
carryforwards of which $3,212,000 can be carried forward indefinitely and the
remaining $4,290,000 will expire between 1997 and 2002.
The Company has a valuation allowance of $1,171,000 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 decreased from $2,242,000 at December 31, 1995 to $1,171,000 at
December 31, 1996. This decrease is principally related to net operating losses
that have expired or are no longer available to the Company.
The Company has investment tax credit carryforwards of approximately
$666,000 for federal income tax purposes which will expire between 1997 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 $5,826,000 which will expire between 1997 and 2001. In
1995, the Company had recorded a valuation allowance of $1,162,000 against the
foreign tax credit carryforward. In connection with the write-off of certain
long-lived assets, the Company determined that the net foreign tax credit
carryforward could not be utilized and were therefore written off. 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.
22
<PAGE>
7. Long-term Debt
At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
$130,000,000 Term Notes payable to lenders, interest ranging from
6.34% to 6.44% at December 31, 1996. Principal and interest payable
as described below through August 6, 2002 $130,000 $ --
$100,000,000 Revolving Facility expiring August 6, 2001. Interest
ranging from 6.25% to 6.34% at December 31, 1996 payable as
described below 28,520 --
$5,000,000 Unsecured convertible subordinated Promissory Notes,
interest at 7.0%. Principal and interest payable beginning
and each January 31 thereafter through January 31, 2002 5,000 --
$7,500,000 Promissory Notes payable, interest of 11.50% at
December 31, 1996. Principal and interest payable monthly
through February 1, 1999 3,857 5,143
$5,000,000 Swingline Facility expiring August 6, 2001. Interest of 8.25%
at December 31, 1996 payable as described below 3,000 --
UK (Pounds)1,500,100 Unsecured convertible subordinated Promissory Notes,
interest at 6.0%. Principal and interest payable annually through
September 12, 2001 2,513 --
$75,000,000 Senior Subordinated Notes, interest at 10.75% payable
semi-annually, principal due on April 15, 2003. Partial redemption
on December 19, 1996 60 75,000
$35,000,000 Revolving Facility repaid August 6, 1996 -- 20,000
Term Notes repaid August 6, 1996 -- 7,500
Other 11,793 3,974
- ---------------------------------------------------------------------------------------------------------
Total debt 184,743 111,617
Less: Current maturities 16,514 4,562
- ---------------------------------------------------------------------------------------------------------
Long-term debt due after one year $168,229 $107,055
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Principal payments of long-term debt for years subsequent to 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 27,500
1999 28,426
2000 28,888
2001 63,857
Thereafter 19,558
-----------------------------------------
$168,229
-----------------------------------------
</TABLE>
On August 6, 1996, the Company's principal subsidiaries entered into a new
Senior Credit Agreement (the "Credit Agreement") with a group of participating
lenders. The agreement included a $130,000,000 advance/term loan facility ("term
loans") due over six years, a $100,000,000 revolving credit facility ("revolving
loans") due over five years, and a $5,000,000 agent swingline facility due over
five years. These obligations are guaranteed by the Company and listed
subsidiaries of the Company, and secured by the stock pledge of listed
subsidiaries of the Company. Proceeds from the new loans have been used to
retire the debt balances outstanding under the previous senior credit agreement,
to finance growth and acquisitions, and to retire in the fourth quarter, the
$75,000,000 10 3/4% Senior Subordinated Notes ("the Notes") of the Company. On
23
<PAGE>
November 20, 1996, the Company made an offer to retire the Notes at a price
equal to (1) the present value on the payment date of $1,053.75 per $1,000
principal amount (the amount payable on April 15, 1998, which is the first date
on which the Notes are redeemable), determined on the basis of a yield to the
earliest redemption date equal to the sum of (x) the yield on the 7 7/8% U.S.
Treasury Note due April 15, 1998, plus (y) 150 basis points. The offer was
amended on December 4, 1996 to 100 basis points rather than 150 basis points. On
December 19, 1996, the Company completed its offer (other than a nominal
position not tendered) by paying $1,101.27 per note (plus accrued and unpaid
interest). In connection with the purchase of the Notes, the Company recorded a
before tax extraordinary charge of approximately $9,804,000 ($6,373,000 after
tax), consisting of $2,231,000 of unamortized debt cost and $7,573,000 of
premium and other cash costs paid on redemption.
The revolving loans and the swingline facility may be repaid in whole or in
part, at any time prior to August 6, 2001. At December 31, 1996, the Company had
outstanding letters of credit amounting to approximately $3,300,000 and an
available facility of approximately $68,179,000 on the $100,000,000 revolving
line of credit. Outstanding letters of credit on the swingline were
approximately $1,268,000 and availability under the facility was $732,000. The
outstanding balance on the term loans becomes fixed on June 30, 1997. The term
loan facility requires quarterly installments with the initial payment of 3.75%
of the term loan outstanding at June 30, 1997 beginning September 30, 1997 and
the final payment due August 6, 2002. Mandatory prepayment is required when the
Company generates excess cash flow as defined, or upon transfer of certain
assets.
Interest rates for the revolving and term loans, at the option of the
Company, are stated in either the lenders announced fluctuating commercial base
rate or a Eurodollar rate plus an applicable margin ranging from 0.450% to
0.875%. Commitment fees on the unused revolving and term loan balances range
from 0.175% to 0.375%. Interest is payable on all notes at calendar quarter end
for base rate borrowing and on the earlier of the interest period or three
months from inception for LIBOR rate borrowings. The credit agreement requires
interest rate protection agreements be maintained on at least 50% of the term
loan outstanding balance, for not less than three years.
The Company actively monitors its interest rate exposure. At December 31,
1996, the Company had in place a $20,000,000 interest rate cap, which expires
August 31, 1997. The interest rate cap agreement entitles the Company to receive
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, 1996 was 5.625%.
Management does not believe there are any credit risks or market risks asso-
ciated with the interest rate cap agreement other than normal fluctuations in
market interest rates. The net book value and estimated market value of the
interest cap agreement was not material at December 31, 1996.
Additionally, the Company entered into two interest rate swap transactions
on October 31, 1996 in notional amounts of $25,000,000 each ("Swap1"), effective
February 13, 1997, and expiring February 13, 1999, with the issuer (ABN Amro
Bank N.V. for one swap and The Chase Manhattan Bank, New York the other) ("the
counterparties") having the option to extend the termination date to February
13, 2000. In addition with the same counterparties, the Company on December 27,
1996 entered into two additional swap transactions with notional amounts of
$20,000,000 each, ("Swap2"), effective February 13, 1997 and expiring February
14, 2000.
The swap transactions are used to hedge $90,000,000 of the Company's
variable interest rate risk. Swap1 sets a fixed rate of 5.82% for the swap
transaction with ABN Amro and 5.81% for the swap transaction with Chase Bank.
Swap2 sets a fixed rate for both swap transactions at 6.14%. The total interest
rate for the Company will include the fixed rate for all swap transactions plus
the margin listed in the term loan (determined by total funded debt to total
capital ratio). The counterparties to the contract will pay the Company based on
USD-LIBOR-BBA at the set date (February 13, 1997), and this will be reset each
six months until
24
<PAGE>
termination. The swap transactions can be canceled by the Company paying a
cancelation fee based upon prevailing market conditions and remaining life of
the agreement.
The Company contracts with investment grade counterparties to these
contracts and monitors overall credit risk and exposure related to all
counterparties. The Company does not anticipate non-performance by any
counterparties and exposure is generally limited to any unrealized gains in the
contracts. Gains and losses on interest cap and swap transactions are recognized
as a component of interest expense in the same period as the underlying
transactions.
The estimated fair value (obtained through independent confirmation) of the
swap transactions at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1996
- --------------------------------------------
Notional Carrying Fair
Counterparty Amount Amount Value
- --------------------------------------------
<S> <C> <C> <C>
ABN Amro $25,000 -- $101
ABN Amro $20,000 -- $ 41
Chase Bank $25,000 -- $ 20
Chase Bank $20,000 -- $ 28
</TABLE>
The Credit Agreement restricts the Company from paying dividends on its
capital stock until all mandatory prepayments have been made from excess cash
flow (as defined in the Credit Agreement) and the total funded debt to capital
ratio (as defined in the Credit Agreement) is not greater than 40%. The
Company's total funded debt to capital ratio (calculated as defined under the
agreement) was 46.8% at December 31, 1996. The credit agreement also contains
financial covenants with respect to interest coverage ratio, total funded debt
to capital ratio, and a minimum tangible net worth. Management believes it is in
compliance with all covenants in the credit agreement at December 31, 1996.
Long-term debt includes $10,588,000 of promissory notes to former owners of
businesses acquired who remain employed by the Company.
8. Common Stockholders' Equity
A stockholder approved stock option plan reserves and authorizes the grant
of options to purchase up to 3,990,952 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
over five year periods starting one year from the date of grant and generally
expire ten years from the date of grant.
The following summarizes options activity:
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option at beginning of year 1,505,624 1,325,653 1,122,324
Drexel Merger grants 962,915 -- --
Granted 183,200 245,000 235,000
Canceled (3,339) (55,096) (30,597)
Exercised (447,730) (9,933) (1,074)
- ------------------------------------------------------------------------------------------
Shares under option at end of year 2,200,670 1,505,624 1,325,653
- ------------------------------------------------------------------------------------------
Average price of outstanding options $ 5.71 $ 6.45 $ 6.46
- ------------------------------------------------------------------------------------------
Price range of options outstanding $.32-$12.75 $.32-$6.875 $.32-$6.875
- ------------------------------------------------------------------------------------------
Exercisable at end of year 1,412,732 772,374 600,437
- ------------------------------------------------------------------------------------------
Options available for grant at end of year 1,532,130 455,333 245,237
- ------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Substantially all outstanding options were priced between $3.55 and $6.875
per share at December 31, 1996. The weighted average of the remaining
contractual life for the outstanding options at December 31, 1996 was 5.5 years.
The weighted average fair value of options granted during 1996 and 1995 was
$2.83 and $2.93, respectively. The fair value of these options was estimated
using the Black-Scholes option pricing model. Assuming that the Company had
accounted for its stock-based employee compensation plans using the alternative
fair value method of accounting under SFAS No. 123, "Accounting for Stock-Based
Compensation" and amortized the fair value to expense over the options' vesting
period, net income and earnings per share for 1996 and 1995 would not be
materially different from those reported.
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 1994, and 20,042, 24,179, and 14,135 shares were issued at an average price
of $6.37 per share, $5.16 per share, and $4.36 per share in 1996, 1995, and
1994, respectively.
9. Retirement and Other Benefit Plans
On May 13, 1988, the Company 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 $229,000 (20,537
shares at an average transfer price of $11.13), $239,000 (36,680 shares at an
average transfer price of $6.51), and $251,000 (40,216 shares at an average
transfer price of $6.24) for 1996, 1995, and 1994 respectively.
In addition, the Company assumed a defined contribution retirement plan in
the Drexel Merger. Cash contributions of approximately $110,000 were made to
this plan between the date of merger (April 1, 1996) and December 31, 1996.
In connection with the acquisition of Vetco Services in 1991, the Company
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 service. 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, 1996, 1995, and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 260 $ 292 $ 277
Interest cost 561 564 500
Net amortization (485) (315) (315)
- ----------------------------------------------------------------
Pension expense $ 336 $ 541 $ 462
- ----------------------------------------------------------------
</TABLE>
The following table sets forth the amounts recognized in the Company's
consolidated balance sheets
(in thousands):
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $7,162 $6,924
Non-Vested 296 235
- --------------------------------------------------------------------------------------
Accumulated benefit obligation 7,458 7,159
Additional amounts related to projected pay increases 556 900
- --------------------------------------------------------------------------------------
Total projected benefit obligations 8,014 8,059
Unrecognized net gain 1,961 1,939
- --------------------------------------------------------------------------------------
Pension liability 9,975 9,998
Less - amount included in current liabilities 129 129
- --------------------------------------------------------------------------------------
Noncurrent portion of pension liability $9,846 $9,869
- --------------------------------------------------------------------------------------
</TABLE>
The rate of increase in future compensation levels used in determining the
projected benefit obligations was 2% for December 31, 1996, and 3% for December
31, 1995 and 1994. The discount rate was 7% for December 31, 1996, 1995, and
1994. The unrecognized net gain from the change in projected compensation levels
is being amortized over ten years.
26
<PAGE>
10. 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.
The Company 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 $12,940,000,
$8,258,000, and $8,464,000 in 1996, 1995, and 1994, respectively.
Future minimum lease commitments under noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1996 are payable
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $10,735
1998 8,386
1999 6,867
2000 6,234
2001 5,355
Thereafter 14,877
- -------------------------------------------
Total future lease commitments $52,454
- -------------------------------------------
</TABLE>
The total future lease commitments at December 31, 1995 were $35,971,000.
The increase at December 31, 1996 was mainly due to the acquisitions described
in Note 3.
27
<PAGE>
11. Consolidated Statement of Cash Flows
During 1996 the Company issued 1,500,000 shares of common stock and
warrants to purchase 1,250,000 shares of common stock at an exercise price of
$10.00 per share in exchange for all of the Company's 100,000 shares of Series A
Convertible Preferred Stock, par value $.01 per share. Dividends accrued on
preferred stock were $175,000 in each of 1995 and 1994.
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------
Cash paid during the period for:
Interest $14,836 $12,978 $11,774
Taxes (net of refunds) $ 9,749 $ 3,306 $ 3,530
</TABLE>
12. Financial Information Relating to Foreign and Domestic Operations and Export
Sales
The Company sells products and provides various services to the oil and gas
industry. 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.
<TABLE>
<CAPTION>
United Far Middle Latin Other
States Canada Europe East East America International Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Year Ended 12/31/96:
Total revenue:
Unaffiliated customers $167,826 $ 26,013 $ 70,703 $19,061 $15,830 $41,636 $ 362 $341,431
U.S. export sales (48,451) 3,052 11,253 4,530 5,867 10,610 13,139 --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $119,375 $ 29,065 $ 81,956 $23,591 $21,697 $52,246 $13,501 $341,431
Operating profit (loss) $(29,699) $ 9,394 $ (4,639) $(3,097) $(6,879) $11,470 $ 2,169 $(21,281)
Identifiable assets $243,594 $ 43,108 $111,049 $27,018 $17,272 $58,100 $ 5,024 $505,165
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended 12/31/95:
Total revenue:
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
Earnings
(Loss)
Operating Net Per
Profit Income Common
Revenue (Loss) (Loss) Share
- -----------------------------------------------------------------------------
(In thousands, except for per share data)
<S> <C> <C> <C> <C>
1996
First Quarter $ 47,018 $(57,244) $(55,589) $ (2.97)
Second Quarter 94,643 4,910 (1,187) (.02)
Third Quarter 94,672 15,405 6,796 .16
Fourth Quarter 105,098 15,648 381 .01
- -----------------------------------------------------------------------------
Total Year $341,431 $(21,281) $(49,599) $ (1.35)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
</TABLE>
The fourth quarter 1996 results included an extraordinary loss of
$6,373,000 (net of $3,431,000 tax benefit) related to the early retirement of
the Company's $75,000,000 Senior Subordinated Notes. In addition, the fourth
quarter 1996 results included a $2,234,000 write-off of Italian assets. The
second quarter 1996 results included $11,206,000 of Drexel transaction costs
related primarily to severance costs for former executive officers of the
Company and consolidation costs associated with the Tuboscope operations. The
first quarter 1996 results included the write-off of long-term assets of
$63,061,000 associated with the adoption of SFAS No. 121 and the decision by
management to sell certain assets.
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 include an extraordinary loss of $764,000 after tax.
29
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
DECEMBER 31, 1996
EXHIBIT 21
Tuboscope Vetco International Corporation (US-Delaware)
CTI Inspection Services, Inc. dba CTI Inc. (US-California); name change
7/16/96 to Tuboscope Tank Inspection Services, Inc; renamed 12/31/96
Gauthier Brothers Rentals, Inc.
CTI Inspection Services, Inc. dba CTI Inc. (US-California) - Canadian
branch; name change 7/16/96 to Tuboscope Tank Inspection Services,
Inc.
Tuboscope Vetco Capital Corp. (US-Nevada)
Tuboscope Vetco Capital Ltd. (Scotland)
Gauthier Brothers Rentals, Inc. (US-Louisiana); merged 12/31/96 into
Tuboscope Tank Inspection Services, Inc. and renamed Gauthier Brothers
Rentals, Inc.
Gauthier Brothers Recovery Systems Inc. (US-Louisiana)
Tuboscope Vetco International Inc. (US-Texas)
Tuboscope Vetco International Inc. (Colombia) branch
Tuboscope Vetco do Brasil Equipamentos e Servicos Ltda (Brazil)
Tuboscope Vetco (Thailand) Ltd.
Tuboscope Vetco Moscow Ltd. (Russia)
Tuboscope Vetco Export Sales Corp (FSC-Barbados)
Tuboscope Vetco Services (Panama) Inc.
Tuboscope Vetco Services (Panama) Inc.-Abu Dhabi branch
Tuboscope Vetco Services (Panama) Inc.-Kuwait branch
Tuboscope Vetco Services (Panama) Inc.-Singapore branch
Tuboscope Vetco (Nigeria) Ltd. (40%)
Gloria s.r.l. (Italy)
Tuboscope Vetco (Italia) s.r.l.
Tuboscope Overseas Corp. S.A. (Switzerland)
Tuboscope OGI GmbH (Germany); liquidated 8/6/96
Vetco Enterprise AG (Switzerland)
Tuboscope Vetco Osterreich GmbH (Austria)
Vetco Saudi Arabia Ltd. (P/S-45% Stock)
Tuboscope Vetco (Deutschland) GmbH (Germany)
Tuboscope Vetco (Deutschland) GmbH (Germany) - Bahrain branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Tunisia branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Italy branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - France branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Oman branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Netherlands branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Nigeria branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Egypt branch
Tuboscope Vetco (Deutschland) GmbH (Germany) - Pakistan branch
Tuboscope Vetch Technology GmbH (Germany)
Tuboscope Vetco Technology GmbH (Germany) - Italy branch
Tuboscope Vetco Technology GmbH (Germany) - Spain branch
Tuboscope Vetco Technology GmbH (Germany) - Indonesia branch
Tuboscope Vetco Technology GmbH (Germany) - Russian branch
Tuboscope Vetco (Brunei) SDN.BDH (49%)
Vetco Abu Dhabi (P/S-United Arab Emirates)
Vetco Coating GmbH (Germany)
Tuboscope Vetco de Argentina, S.A. (Argentina)
TVI Inspecciones de Venezuela, C.A. (Venezuela)
Tuboscope Vetco Canada Inc. (Canada)
Tuboscope Pipeline Services Canada Inc. (Canada)
Tuboscope Vetco Far East Pte Ltd. (Singapore)
Pesaka Inspection Services SDN.BHD (49%-Malaysia)
Tuboscope Vetco Far East Pte Ltd. - Phillippines branch
Tuboscope Vetco Far East Pte Ltd. - Australia branch
Tuboscope Pipeline Services Inc. (US-Texas)
Vetco Pipeline Services Inc. (US-Texas)
Vetco Pipeline Services Ltd. (Canada)
Vetco Pipeline Services S.A. de C.V. (Mexico)
1
<PAGE>
EXHIBIT 21 (CONTINUED)
Tuboscope Pipeline Services Ltd. (UK)
Tuboscope Vetco (UK) Ltd.
Linalog Ltd. (UK)
TVI Wadeco Inc. (Canada)
Wadeco Oilfield Services Ltd. (Canada)
Leo's Oilfield Hauling Ltd. (Canada)
Polysep Chemicals, Inc. (Canada)
Wadeco Inc. (US-North Dakota)
Vetco Inspection Norge A.S. (Norway)
Tuboscope Vetco (Japan) Ltd.
Tuboscope Vetco (France) S.A.
Linalog De Venezuela, Inc. (US-Nevada)
Tuboscope MECL (Trinidad) Ltd. (50% P/S)
Tube-Kote Inc. dba Tuboscope Vetco International Oilfield Services
(US-Texas)
Drexel Holdings, Inc. (US-Delaware)
Drexel Oilfield Services, Inc. (US-Texas); merged 12/31/96 into Drexel
Holdings, Inc.
Hydra Rig, Inc. (US-Texas)
The ONEA Corporation (US-Texas); merged 12/31/96 into Drexel Holdings,
Inc. SOFS (FSC-50%-Virgin Islands)
Hydra Rig Tools (US-Texas)
Environmental Procedures, Inc. (US-Delaware)
Environmental Procedures P.T.E. Ltd. (Singapore)
Environmental Procedures, Inc. (US-Delaware) - Ecuador branch
Environmental Procedures (US-Texas); merged 12/31/96 into
Environmental Procedures, Inc. (US-Delaware)
Advanced Wirecloth, Inc. (US-Louisiana)
Environmental Procedures, Inc. S.A. de CV (Mexico)
Environmental Procedures (US-Texas) - Colombia branch
SOFS (FSC - 50%-Virgin Islands)
Drexel Oilfield Services BDN (49%-Malaysia)
Drexel Oilfield Services PTE Ltd. (Singapore)
Drexel Equipment A/S (Norway)
Drexel Oilfield Services, Ltd. (Bermuda)
Drexel Oilfield Services, LLC (49%-Dubai)
Venezuela Well Analysis, S.A. (Venezuela)
Brandt Company de Argentina S.A. (Argentina)
Screen Manufacturing Company, Ltd. (Trinidad)
Venwell International, Inc. (US-Texas)
Venwell International, Inc. (US-Texas) - Trinidad branch
Wintersol s.r.l.
Drexel Equipment (UK) Ltd.
The Brandt Company (UK) Ltd.
Environmental Procedures (UK) Limited
SSR Ltd. (UK)
SSR (Norway)
Pressure Control Engineering Ltd. (UK)
2
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Tuboscope Vetco International Corporation of our report dated February 14,
1997, included in the 1996 Annual Report to Stockholders of Tuboscope Vetco
International Corporation.
Our audits also included financial statement schedules of Tuboscope Vetco
International Corporation listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1996 Equity Participation Plan (No. 333-05233) and
the D.O.S. Ltd. 1993 Stock Option Plan (No. 333-05237) of Tuboscope Vetco
International Corporation of our report dated February 14, 1997, with respect to
the consolidated financial statements of Tuboscope Vetco International
Corporation incorporated by reference in its Annual Report (Form 10-K) and our
report included in the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) for the year
ended December 31, 1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Houston, Texas
March 25, 1997
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE EXTRACTED FROM FORM 10K FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,407
<SECURITIES> 0
<RECEIVABLES> 96,083
<ALLOWANCES> 2,382
<INVENTORY> 47,170
<CURRENT-ASSETS> 166,233
<PP&E> 240,939
<DEPRECIATION> 59,559
<TOTAL-ASSETS> 505,165
<CURRENT-LIABILITIES> 91,840
<BONDS> 168,229
0
0
<COMMON> 416
<OTHER-SE> 218,486
<TOTAL-LIABILITY-AND-EQUITY> 505,165
<SALES> 93,016
<TOTAL-REVENUES> 341,431
<CGS> 58,127
<TOTAL-COSTS> 362,712
<OTHER-EXPENSES> 293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,414
<INCOME-PRETAX> (34,988)
<INCOME-TAX> 8,238
<INCOME-CONTINUING> (43,226)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,373)
<CHANGES> 0
<NET-INCOME> (49,599)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
