<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
7 1/2% SENIOR NOTES DUE 2008 (THE "EXCHANGE NOTES")
FOR ALL OUTSTANDING 7 1/2% SENIOR NOTES DUE 2008 (THE "PRIVATE NOTES")
OF
[LOGO OF TUBOSCOPE]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JUNE 11,
1998 UNLESS EXTENDED.
--------------
Tuboscope Inc., a Delaware corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of its 7 1/2% Senior Notes
due 2008 (the "Exchange Notes"), which exchange has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which this Prospectus is a part (the "Registration
Statement"), for each $1,000 principal amount of its outstanding 7 1/2% Senior
Notes due 2008 (the "Private Notes"), of which $100,000,000 in aggregate
principal amount are outstanding as of the date hereof. The form and terms of
the Exchange Notes are the same as the form and terms of the Private Notes
except that (i) the exchange will have been registered under the Securities
Act, and, therefore, the Exchange Notes will not bear legends restricting the
transfer thereof, (ii) holders of the Exchange Notes will not be entitled to
certain rights of holders of the Private Notes under the Registration Rights
Agreement (as defined), and (iii) certain provisions relating to an increase
in the stated interest rate on the Private Notes provided for under certain
circumstances will be eliminated. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of an indenture dated as of February 25, 1998 governing the
Private Notes and the Exchange Notes (the "Indenture"). The Private Notes and
the Exchange Notes are sometimes referred to herein collectively as the
"Notes." See "The Exchange Offer" and "Description of the Notes."
The Notes are redeemable at any time at the option of the Company in whole
or in part, at a price equal to 100% of the principal amount, plus accrued and
unpaid interest, if any, to date of redemption plus a Make-Whole Premium (as
defined), if any, relating to the then prevailing Treasury Yield (as defined)
and the remaining life of the Notes. The Notes are senior unsecured
obligations of the Company and rank pari passu in right of payment with all
other existing and future senior indebtedness of the Company, including
borrowings under its bank credit facility (the "Bank Credit Facility"), and
rank senior in right of payment to any existing and future subordinated
indebtedness of the Company. The Private Notes are and the Exchange Notes will
be unconditionally guaranteed on a senior unsecured basis (the "Guarantees")
by certain of its subsidiaries so that the Notes are not structurally
subordinated to the Company's obligations under the Bank Credit Facility or
any other funded indebtedness of the Company that is guaranteed, from time to
time, by subsidiaries of the Company. The guarantee of the Notes by any
subsidiary of the Company may be released if, but only so long as, no other
funded indebtedness of the Company is guaranteed by such subsidiary. See
"Description of the Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at
the rate of 7 1/2% per annum and the interest thereon will be payable semi-
annually on February 15 and August 15 of each year, commencing August 15,
1998. The Exchange Notes will bear interest from and including the date of
issuance of the Private Notes (February 25, 1998). Holders whose Private Notes
are accepted for exchange will be deemed to have waived the right to receive
any interest accrued on the Private Notes.
SEE "RISK FACTORS," BEGINNING ON PAGE 9, FOR A DISCUSSION OF CERTAIN FACTORS
THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------
THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED PRIVATE
NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON JUNE 11, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION
(THE "EXPIRATION DATE"). TENDERS OF PRIVATE NOTES MAY BE WITHDRAWN AT ANY TIME
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE
OFFER IS NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF PRIVATE NOTES
BEING TENDERED FOR EXCHANGE. PRIVATE NOTES MAY BE TENDERED ONLY IN INTEGRAL
MULTIPLES OF $1,000. IN THE EVENT THE COMPANY TERMINATES THE EXCHANGE OFFER
AND DOES NOT ACCEPT FOR EXCHANGE ANY PRIVATE NOTES, THE COMPANY WILL PROMPTLY
RETURN ALL PREVIOUSLY TENDERED PRIVATE NOTES TO THE HOLDERS THEREOF. THE
EXCHANGE OFFER IS SUBJECT TO CUSTOMARY CONDITIONS. SEE "THE EXCHANGE OFFER--
CONDITIONS."
The date of this Prospectus is May 8, 1998
<PAGE>
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided that the holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to the Company, as
required by the Registration Rights Agreement, that such conditions have been
met. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Company believes that none of the
registered holders of the Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Exchange Notes will not be listed on any securities exchange, but the
Private Notes are eligible for trading in the National Association of
Securities Dealers, Inc.'s Private Offerings, Resales and Trading through
Automatic Linkages (PORTAL) market. There can be no assurance that an active
market for the Notes will develop. To the extent that a market for the Notes
does develop, the market value of the Notes will depend on market conditions
(such as yields on alternative investments), general economic conditions, the
Company's financial condition and certain other factors. Such conditions might
cause the Notes, to the extent that they are traded, to trade at a significant
discount from face value. See "Risk Factors--Absence of Public Market for
Notes."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus,
meeting the requirements of the Securities Act, in connection with any resale
of such Exchange Notes. Any broker-dealer that resells Exchange Notes that
were received by it for its own account pursuant to the Exchange Offer may be
deemed to be an "underwriter" within the meaning of the Securities Act. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. The Company
has indicated its intention to make this Prospectus (as it may be amended or
supplemented) available to any broker-dealer for use in connection with any
such resale for a period of 180 days after the Expiration Date. See "The
Exchange Offer--Resale of the Exchange Notes" and "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer. See "The Exchange Offer--Resale of the Exchange
Notes."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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UNTIL AUGUST 6, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS
IN CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC"
or the "Depositary") and registered in its name or in the name of Cede & Co.,
as its nominee. Beneficial interests in the global note representing the
Exchange Notes will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. After the
initial issuance of such global note, Exchange Notes in certificated form will
be issued in exchange for the global note only in accordance with the terms
and conditions set forth in the Indenture. See "Description of the Notes--The
Exchange Offer--Book-Entry Transfer" and "--Book Entry; Delivery and Form."
----------------
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. When included in this Prospectus or in
documents incorporated herein by reference, the words "may," "expects,"
"intends," "anticipates," "plans," "projects," "estimates," and the negatives
thereof and analogous or similar expressions are intended to identify forward-
looking statements. Such statements, which include statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," are inherently subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
reflected in such forward-looking statements. Such risks and uncertainties
include, among others, the cyclical nature of the oilfield services industry,
risks associated with the Company's significant foreign operations, compliance
with the environmental laws, risks associated with growth through acquisitions
and various other matters, many of which are beyond the Company's control.
These forward-looking statements speak only as of the date of this Prospectus.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
in this Prospectus to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) under the Securities Act with respect
to the Exchange Notes offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information,
exhibits and undertakings contained in the Registration Statement. For further
information with respect to the Company and the Exchange Notes offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto and the financial statements, notes and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "Exchange Act") and, in accordance therewith, files reports,
proxy statements and other information with the Commission. All such
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington D.C. 20549 and at the following Regional Offices of the
Commission:
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<PAGE>
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and New York Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission also maintains a web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission (http://www.sec.gov). In addition, the
Company's common stock, par value $.01 per share is listed for trading on the
New York Stock Exchange and reports, proxy statements and other information
concerning the Company may be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes
remain outstanding, it will furnish to the holders of the Notes and file with
the Commission (unless the Commission will not accept such filing) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such forms pursuant to the Exchange Act
including a "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and, with respect to the annual financial statements
only, a report thereon by the Company's independent accountants and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference the following documents:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1997 and amendment to such Annual Report on Form 10-K/A;
(b) The sections of the Company's Proxy Statement for the May 8, 1998
Annual Meeting of Stockholders entitled "Voting Securities and Principal
Holders Thereof," "Executive Compensation--Summary Compensation Table," "--
Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last
Fiscal Year and Year-End Option Value," "--Management Agreements" and
"Certain Transactions"; and
(c) All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to termination of the offering made hereby.
Any statement contained herein or in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
that also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH
PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED ON THE WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY AND ALL OF THE DOCUMENTS
REFERRED TO ABOVE WHICH ARE INCORPORATED IN THIS PROSPECTUS BY REFERENCE,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). SUCH REQUESTS FOR DOCUMENTS
SHOULD BE DIRECTED TO TUBOSCOPE INC., 2835 HOLMES ROAD, HOUSTON, TEXAS 77051,
ATTENTION: SECRETARY, TELEPHONE NUMBER (713) 799-5100.
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SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information in this Prospectus, including
the consolidated financial statements of the Company (the "Consolidated
Financial Statements") and Notes thereto included elsewhere in this Prospectus.
Unless the context otherwise requires, reference to the "Company" or
"Tuboscope" shall mean Tuboscope Inc. and its subsidiaries.
THE COMPANY
The Company is a leading supplier of highly-engineered products and services
to the oil and gas drilling, production, and transmission industries worldwide.
It conducts operations in 54 countries, spanning every major oilfield market,
and believes it is the global market leader in products accounting for
approximately 89% of its 1997 revenue. The Company operates through four main
product lines: (i) Tubular Services, (ii) Solids Control Products & Services,
(iii) Coiled Tubing & Pressure Control Products, and (iv) Pipeline & Other
Industrial Services. These four main product lines generally serve to improve
efficiency and reduce the operating costs of oil and gas operations and span
all major activities comprising upstream oil and gas production, including
drilling, production and hydrocarbon transportation.
In 1997, the Company had record sales of $525.2 million, net income of $53.1
million (10.1% of sales) and earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $125.5 million (23.9% of sales). The Company made
capital expenditures of $35.2 million in 1997. Revenues in 1997 were generated
in the United States (37%), Europe (20%), Latin America (18%), Canada (11%) and
other locations (14%). The Company was founded in 1937 and today employs
approximately 4,500 people worldwide. In 1997, compared to 1996, revenue grew
54%, gross profit before goodwill amortization grew 68%, EBITDA grew 73%, and
operating income grew 82%, excluding certain nonrecurring charges taken in
1996.
STRATEGY
The Company's strategy is to achieve significant earnings and cash flow
growth through (i) investment in promising internal growth opportunities and
(ii) the execution of attractive consolidating and growth acquisitions within
or related to the Company's four main product lines.
The Company's leading positions in high-growth segments within oilfield
services provide attractive reinvestment opportunities. The Company invests
aggressively in revenue-generating capital equipment, employee training,
product development and technology to achieve growth over both short-term and
long-term horizons, while striving to maintain a prudent capital structure. The
Company emphasizes superior customer service and technology leadership
throughout its operations.
The Company underwent major management, strategic and product mix changes
when it merged with D.O.S., Ltd. ("Drexel") in April 1996. Subsequently, the
Company successfully acquired and integrated 18 other businesses in 1996 and
1997, of which four were in the Company's Tubular Services market, ten were in
the Company's Solids Control Products & Services market, three were in the
Company's Coiled Tubing & Pressure Control Products market, and one was in the
Company's Pipeline & Other Industrial Services market. The criteria the Company
uses in evaluating acquisition opportunities include the potential for
operating efficiency savings; regional or product line consolidations;
potential for revenue enhancement; attractive valuations; and new products or
services which can benefit from the Company's technical expertise, geographic
coverage or market presence.
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BUSINESS LINES
Tubular Services is the Company's largest business line, accounting for
approximately 43% of its 1997 revenues. Tubular Services consists of the
provision of inspection and quality assurance services for tubular goods (such
as drill pipe, tubing, line pipe and casing), internal coating products and
services, and fiberglass tubulars (tubing, casing and line pipe), 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. The Company believes it is the largest provider of tubular
inspection and internal tubular coating services worldwide. The Company also
believes it is the second largest manufacturer and provider of fiberglass
tubulars for oilfield applications worldwide.
Solids Control Products & Services is the Company's second largest business
line, accounting for approximately 30% of its 1997 revenues. 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. 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 believes the increased use of expensive synthetic drilling fluids and
certain environmental issues are leading to higher demand for highly-engineered
solids control products and closed loop drilling systems. Additionally, the
Company believes that rising awareness among oil and gas producers of the
drilling efficiency gains enabled by effective solids control technology will
spur further growth in the Solids Control Products and Services line.
Coiled Tubing and Pressure Control Products accounted for approximately 16%
of the Company's 1997 revenues. Coiled Tubing and Pressure Control Products
consists of the sale of highly-engineered coiled tubing, pressure control,
pressure pumping, wireline and related tools to companies engaged in providing
oil and gas well drilling, completion and remediation services. Use of coiled
tubing generally allows for continuous production of the well during servicing
operations, thereby eliminating the need to temporarily stop the flow of
hydrocarbons and significantly improving the economics of servicing a well. The
Company believes it is the world's largest manufacturer of coiled tubing
equipment, and that growing customer understanding and acceptance of the
technology and an increase in the number of applications for which it is useful
will lead to continued high growth in this market.
Pipeline & Other Industrial Services accounted for approximately 11% of the
Company's revenues. The Pipeline & Other Industrial Services product line
consists primarily of the provision of technical inspection services and
quality assurance for in-service pipelines used to transport oil and gas.
Industrial Services consists of inspection and monitoring services for the
construction, operation and maintenance of major projects in energy-related
industries. Driven by the advancing age of the world's pipelines, continued
construction of new pipelines and environmental and regulatory concerns, the
Company believes that the inspection of pipelines and related facilities will
continue to be a high growth market.
The Company's headquarters are located at 2835 Holmes Road, Houston, Texas
77051, and its telephone number is (713) 799-5100.
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<PAGE>
THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that
are properly tendered and accepted. The Company
will issue Exchange Notes on or promptly after
the Expiration Date. There is $100,000,000
aggregate principal amount of Private Notes
outstanding. See "The Exchange Offer--Purpose of
the Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by a holder thereof (other than (i)
a broker-dealer who purchases such Exchange
Notes directly from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a
person that is an affiliate of the Company
within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions
of the Securities Act; provided that the holder
is acquiring Exchange Notes in the ordinary
course of its business and is not participating,
and had no arrangement or understanding with any
person to participate, in the distribution of
the Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in
exchange for Private Notes, where such Private
Notes were acquired by such broker-dealer as a
result of market-making activities or other
trading activities, must acknowledge that it
will deliver a prospectus in connection with any
resale of such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received
by it for its own account pursuant to the
Exchange Offer may be deemed to be an
"underwriter" within the meaning of the
Securities Act. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the
meaning of the Securities Act. See "The Exchange
Offer--Resale of the Exchange Notes."
Registration Rights
Agreement.................. The Private Notes were sold by the Company on
February 25, 1998 to Credit Suisse First Boston
Corporation, ABN AMRO Incorporated, Chase
Securities Inc. and Salomon Smith Barney
(collectively, the "Initial Purchasers")
pursuant to a Purchase Agreement, dated February
19, 1998, by and among the Company and the
Initial Purchasers (the "Purchase Agreement").
Pursuant to the Purchase Agreement, the Company
and the Initial Purchasers entered into a
Registration Rights Agreement, dated as of
February 25, 1998 (the "Registration Rights
Agreement"), which grants the holders of the
Private Notes certain exchange and registration
rights. The Exchange Offer is intended to
satisfy such
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<PAGE>
rights, which will terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on June 11, 1998, unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term
"Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the
Private Notes.............. The Exchange Notes will bear interest from and
including the date of issuance of the Private
Notes (February 25, 1998). Holders whose Private
Notes are accepted for exchange will be deemed
to have waived the right to receive any interest
accrued on the Private Notes. See "The Exchange
Offer--Interest on the Exchange Notes."
Conditions to the Exchange
Offer...................... The Company reserves the right in its sole and
absolute discretion, subject to applicable law,
at any time and from time to time, (i) to delay
the acceptance of the Private Notes for
exchange, (ii) to terminate the Exchange Offer
if certain specified conditions have not been
satisfied, (iii) to extend the Expiration Date
of the Exchange Offer and retain all Private
Notes tendered pursuant to the Exchange Offer,
subject, however, to the right of holders of
Private Notes to withdraw their tendered Private
Notes, or (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer
in any respect. See "The Exchange Offer--Terms
of the Exchange Offer." In addition, the
Exchange Offer is subject to certain customary
conditions that may be waived by the Company.
The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Private
Notes being tendered for exchange. See "The
Exchange Offer--Conditions."
Procedures for Tendering
Private Notes.............. Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes
and any other required documentation to The Bank
of New York, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder
will represent to and agree with the Company
that, among other things, (i) the Exchange Notes
to be acquired by such holder of Private Notes
in connection with the Exchange Offer are being
acquired by such holder in the ordinary course
of its business, (ii) if such holder is not a
broker-dealer, such holder is not currently
participating in, does not intend to participate
in, and has no arrangement or understanding with
any person to participate in a distribution of
the Exchange Notes, (iii) such
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<PAGE>
holder is a broker-dealer registered under the
Exchange Act or is participating in the Exchange
Offer for the purposes of distributing the
Exchange Notes, such holder will comply with the
registration and prospectus delivery
requirements of the Securities Act in connection
with a secondary resale transaction of the
Exchange Notes acquired by such person and
cannot rely on the position of the staff of the
Commission set forth in no-action letters (see
"The Exchange Offer--Resale of Exchange Notes"),
(iv) such holder understands that a secondary
resale transaction described in clause (iii)
above and any resales of Exchange Notes obtained
by such holder in exchange for Private Notes
acquired by such holder directly from the
Company should be covered by an effective
registration statement containing the selling
securityholder information required by Item 507
or Item 508, as applicable, of Regulation S-K of
the Commission and (v) such holder is not an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. Any broker-
dealer that resells Exchange Notes that were
received by it for its own account pursuant to
the Exchange Offer may be deemed to be an
"underwriter" within the meaning of the
Securities Act. If the holder is a broker-dealer
that will receive Exchange Notes for its own
account in exchange for Private Notes that were
acquired as a result of market-making activities
or other trading activities, such holder will be
required to acknowledge in the Letter of
Transmittal that such holder will deliver a
prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and
by delivering a prospectus, such holder will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering such
owner's Private Notes, either make appropriate
arrangements to register ownership of the
Private Notes in such owner's name or obtain a
properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed prior to the Expiration
Date. See "The Exchange Offer-- Procedures for
Tendering."
Guaranteed Delivery
Procedures................. Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver
their Private Notes, the Letter of Transmittal
or any other
5
<PAGE>
documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
set forth under "The Exchange Offer-- Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes............. Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the Exchange
Offer prior to the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer will
be delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights........... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations............. The exchange of Private Notes for Exchange Notes
will be treated as a "non-event" for federal
income tax purposes. As a result, no material
federal income tax consequences will result to
holders exchanging Private Notes for Exchange
Notes. See "Certain United States Federal Income
Tax Considerations."
Exchange Agent.............. The Bank of New York, the Trustee under the
Indenture, is serving as the Exchange Agent in
connection with the Exchange Offer. The mailing
address of the Exchange Agent is 101 Barclay
St.--Floor 7E, New York, New York 10286. For
assistance and requests for additional copies of
this Prospectus, the Letter of Transmittal or
the Notice of Guaranteed Delivery, the telephone
number for the Exchange Agent is (212) 815-4146,
and the facsimile number for the Exchange Agent
is (212) 815-6339.
6
<PAGE>
THE EXCHANGE NOTES
The Exchange Offer applies to the entire aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof, (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, and (iii) certain provisions relating
to an increase in the stated interest rate on the Private Notes provided for
under certain circumstances will be eliminated. The Exchange Notes will
evidence the same debt as the Private Notes (which they replace) and will be
issued under, and be entitled to the benefits of, the Indenture. For further
information and for definitions of certain capitalized terms used below, see
"Description of the Notes."
Securities Offered.......... $100,000,000 aggregate principal amount of 7 1/2%
Senior Notes due 2008 of the Company
Maturity Date............... February 15, 2008.
Interest Payment Dates...... February 15 and August 15 of each year,
commencing August 15, 1998.
Optional Redemption......... The Notes may be redeemed at any time, at the
option of the Company, in whole or in part, at a
price equal to 100% of the principal amount plus
accrued and unpaid interest (if any) to the date
of redemption plus a Make-Whole Premium (if any)
relating to the then prevailing Treasury Yield
and the remaining life of the Notes. See
"Description of the Notes--Optional Redemption."
Ranking and Guarantees...... The Exchange Notes will be senior unsecured
indebtedness of the Company and will rank pari
passu in right of payment with any existing and
future senior unsecured indebtedness of the
Company, including obligations under its Bank
Credit Facility and senior in right of payment
to all existing and future indebtedness that is,
by its terms, expressly subordinated to the
Notes. See "Capitalization." The Company's
obligations under the Exchange Notes will be
unconditionally guaranteed by certain of its
subsidiaries (the "Guarantors") so that the
Exchange Notes will not be structurally
subordinated to the Company's obligations under
the Bank Credit Facility or any other funded
indebtedness of the Company that is guaranteed,
from time to time, by subsidiaries of the
Company. The Indenture will provide for the
release and addition of subsidiaries of the
Company as guarantors and for the limitation of
the obligations of each guarantor under certain
circumstances. The guarantee of the Exchange
Notes by any subsidiary may be released if, but
only so long as, no other funded indebtedness of
the Company is guaranteed by such subsidiary.
See "Description of the Notes--Ranking and
Guarantees."
Covenants................... The Indenture contains covenants that limit the
Company's ability to incur indebtedness secured
by certain liens and to engage in certain
sale/leaseback transactions. These limitations
are subject to certain qualifications and
exceptions. See "Description of the Notes--
Certain Covenants."
RISK FACTORS
See the specific matters set forth under "Risk Factors" on pages 9 through 12
hereof, for a discussion of certain factors that should be considered in
connection with the Exchange Offer and an investment in the Exchange Notes.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data for the
Company and its subsidiaries as of and for the five years ended December 31,
1997. The summary financial data have been derived from the Company's audited
consolidated financial statements. The following data should be read in
conjunction with "Selected Historical Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $525,231 $341,431 $190,015 $192,175 $183,340
Operating profit (loss).... 100,925 (21,281)(1) 27,460 27,048 2,445(1)
Income (loss) before income
taxes and extraordinary
loss...................... 84,949 (34,988) 15,205 14,289 (10,807)
Net income (loss).......... 53,104 (49,599) 8,819 7,524 (12,859)
OTHER DATA:
EBITDA(2).................. $125,515 $ 72,633 $ 42,570 $ 40,859 $ 27,262
Ratio of EBITDA to interest
expense(3)................ 8.7x 5.4x 3.5x 3.6x 2.6x
Ratio of earnings to fixed
charges(4)................ 6.8x 3.9x 2.2x 2.1x 1.2x
Depreciation and
amortization.............. $ 26,110 $ 17,606 $ 15,037 $ 14,380 $ 14,218
Capital expenditures....... $ 35,190 $ 18,681 $ 7,645 $ 7,549 $ 14,640
BALANCE SHEET DATA (END OF
PERIOD):
Working capital............ $ 81,294 $ 74,393 $ 44,623 $ 35,926 $ 5,279
Total assets............... 686,167 505,165 306,679 317,027 310,108
Total debt................. 218,377 184,743 111,617 123,851 101,489
Common stockholders'
equity.................... 300,033 218,902 121,441 113,424 105,256
</TABLE>
- --------
(1) The 1996 operating loss includes $63.1 million of charges for the write-
off of certain assets, $11.3 million of Drexel transaction costs, and $2.2
million of charges for the write-off of Italian operations. Excluding
these costs, operating profit in 1996 was $55.3 million. The 1993
operating profit includes restructuring charges of $13.3 million.
Excluding these costs, operating profit in 1993 was $15.7 million.
(2) "EBITDA" means earnings before interest, taxes, depreciation,
amortization, restructuring charges, write-off of long-lived assets,
Drexel transaction costs, write-off of Italian operations and
extraordinary items and should not be considered as an alternative to net
income or any other generally accepted accounting principles measure of
performance as an indicator of the Company's operating performance or as a
measure of liquidity. The Company believes EBITDA is a widely accepted
financial indicator of a company's ability to service debt.
(3) Ratio of EBITDA to interest expense represents an industry ratio that
provides an investor with information as to the Company's current ability
to meet its interest costs.
(4) For the purpose of this calculation, "earnings" consist of net income
(loss) before income taxes, write-off of long-lived assets, Drexel
transaction costs, write-off of Italian operations, restructuring charges,
extraordinary items, and fixed charges. "Fixed charges" consist of
interest expense and amortization of debt discount and related expenses
believed by management to be representative of the interest factor
thereon. Earnings were insufficient to cover fixed charges by $35.0
million in 1996 if the write-off of long-lived assets, Drexel transaction
costs, and the write-off of Italian operations is included in 1996
earnings. Earnings were insufficient to cover fixed charges by $10.8
million in 1993 if restructuring charges are included in 1993 earnings.
8
<PAGE>
RISK FACTORS
Prior to making an investment in the Exchange Notes, prospective investors
should carefully consider all of the information contained and incorporated by
reference in this Prospectus and, in particular, should evaluate the following
risk factors.
RISKS ASSOCIATED WITH THE OIL AND GAS INDUSTRY
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 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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 63% and 65% of the Company's revenues in 1996 and 1997,
respectively, were derived from operations outside the United States. The
Company's foreign operations, which include significant operations in Europe,
Latin America, Canada, the Far East and the Middle East, 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.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company is actively seeking strategic acquisitions that will provide
additional and complementary products, equipment and services. However, there
can be no assurance that attractive acquisitions will be available to the
Company at reasonable prices, or that the Company will successfully integrate
the operations and assets of any acquired business with its own or that the
Company's management will be able to manage effectively the increased size of
the Company or operate a new line of business. Any inability on the part of
the Company to integrate and manage acquired businesses and their assumed
liabilities could have a material adverse effect on the Company's results of
operations and financial condition. The Company may incur substantial
indebtedness to finance future acquisitions. There can be no assurance that
the Company will be able to obtain any such financing or that, if available,
such financing will be on terms acceptable to the Company. Acquisitions may
result in increased depreciation and amortization expense, increased interest
expense, increased financial leverage or decreased operating income, any of
which could have a material adverse effect on the Company's operating results.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition and Liquidity."
9
<PAGE>
LEVERAGE
As of December 31, 1997, as adjusted for the issuance of the Notes and the
application of the net proceeds therefrom, the Company's total debt would have
been $236.9 million compared to total stockholders equity of $300.0 million.
See "Capitalization." The Company's level of indebtedness will have several
important effects on its operations, including (i) a substantial portion of
the Company's cash flow from operations will be dedicated to the payment of
interest on its indebtedness and will not be available for other purposes and
(ii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired. Moreover, future acquisition or
development activities may require the Company to alter its capitalization
significantly. These changes in capitalization may significantly alter the
leverage of the Company. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control. There can be
no assurance that the Company's future performance will not be adversely
affected by such economic conditions and financial, business and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition and Liquidity."
Furthermore, to the extent that the Company is unable to repay the principal
amount of the Notes at maturity out of cash on hand, it will need to refinance
the Notes, or repay the Notes with the proceeds of an equity offering, at or
prior to their maturity. There can be no assurance that the Company will be
able to generate sufficient cash flow to service its interest payment
obligations under its indebtedness or that future borrowings or equity
financing will be available for the payment or refinancing of the Company's
indebtedness. To the extent that the Company is not successful in negotiating
renewals of its borrowings or in arranging new financing, it may have to sell
significant assets, which would have a material adverse effect on the
Company's business and results of operations. Among the factors that will
affect the Company's ability to effect an offering of its capital stock or
refinance the Notes are financial market conditions and the value and
performance of the Company at the time of such offering or refinancing. There
can be no assurance that any such offering or refinancing can be successfully
completed. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition and Liquidity" and "Description
of Certain Indebtedness."
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
Substantially all of the Company's operating income and cash flow is
generated by its subsidiaries. As a result, funds necessary to meet the
Company's debt service obligations are provided in part by distributions or
advances from its subsidiaries. Under certain circumstances, contractual and
legal restrictions, as well as the financial condition and operating
requirements of the Company's subsidiaries, could limit the Company's ability
to obtain cash from its subsidiaries for the purpose of meeting its debt
service obligations, including the payment of principal and interest on the
Notes. Although holders of the Notes are direct creditors of the Company's
material United States subsidiaries by virtue of the Guarantees (as defined
herein), the Company has other subsidiaries ("Non-Guarantor Subsidiaries"),
including its foreign subsidiaries, that are not included among the Guarantors
(as defined herein), and such Non-Guarantor Subsidiaries are not obligated
with respect to the Notes or the Bank Credit Facility although they generate a
substantial portion of the Company's operating income and cash flow. As a
result, the claims of creditors of the Non-Guarantor Subsidiaries effectively
have priority with respect to the assets and earnings of such companies over
the claims of creditors of the Company, including the holders of the Notes. In
the event of an insolvency, liquidation or reorganization of a Non-Guarantor
Subsidiary, any creditors of such Non-Guarantor Subsidiary, including trade
creditors, would be entitled to payment in full from the assets of such Non-
Guarantor Subsidiary before the Company, as a stockholder, would be entitled
to receive any distribution therefrom.
FRAUDULENT CONVEYANCE RISKS
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the issuance of the Guarantees. To the extent that a court were
to find that (x) a Guarantee was incurred by a Guarantor with intent to
hinder, delay or defraud any present or future creditor of such Guarantor or
such Guarantor contemplated insolvency with a design to prefer one or more of
its creditors to the exclusion in whole or in part of others,
10
<PAGE>
(y) a Guarantor did not receive fair consideration or reasonably equivalent
value for issuing its Guarantee and such Guarantor (i) was insolvent, (ii) was
rendered insolvent by reason of the issuance of its Guarantee, (iii) was
engaged or about to engage in a business or transaction for which the
remaining assets of such Guarantor constituted unreasonably small capital to
carry on its business or (iv) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, the court
could avoid or subordinate such Guarantee in favor of other creditors of such
Guarantor. Among other things, a legal challenge of any Guarantee may focus on
the benefits, if any, realized by such Guarantor as a result of the Company's
issuance of the Notes. The Guarantees will contain a savings clause, which
generally will limit the obligation of any Guarantor under its Guarantee to
the maximum amount as will, after giving effect to all of the liabilities of
such Guarantor, result in such obligation not constituting a fraudulent
conveyance. To the extent a Guarantee was avoided or limited as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Notes
would cease to have any claim against such Guarantor and would be creditors
solely of the Company and the other Guarantors. In that event, the claims of
holders of the Notes against such Guarantor would be subject to the prior
payment of all liabilities (including trade payables) of such Guarantor. There
can be no assurance that, after providing for all prior claims, there would be
sufficient assets to satisfy the claims of the holders of the Notes relating
to any avoided portion of any Guarantee.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally,
however, a guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, is greater than the fair market value of all
of its assets at a fair valuation or if the present fair market value of its
assets is less than the amount that would be absolute and mature. Based upon
financial and other information including the terms of the Guarantees, the
Company believes that the Guarantors are solvent and will continue to be
solvent after issuing the Guarantees, will have sufficient capital for
carrying on their business after such issuance and will be able to pay their
debts as they mature. There can be no assurance, however, that a court passing
on such standards would agree with such beliefs. See "Description of the
Notes--Ranking and Guarantees."
OPERATING RISK AND LEGAL PROCEEDINGS
The operations of the Company involve many risks, which even through a
combination of experience, knowledge and careful evaluation may not be
overcome. These risks include equipment failures, pipeline ruptures and other
accidents which could also result in personal injury, property damages,
pollution and other environmental risks. Although the Company maintains
insurance in accordance with customary industry practice, the Company may not
be fully insured against possible losses pursuant to such risks. Such losses
could have a material adverse impact on the Company. In addition, from time to
time the Company is involved in various litigation matters arising in the
ordinary course of its business and is currently involved in numerous legal
proceedings in connection with its operations and those of its acquired
companies. The Company believes that, based upon insurance, indemnification
obligations from third parties, and the Company's legal defenses that none of
these legal proceedings will have a material adverse effect on the results of
operation or financial condition of the Company. There can be no absolute
assurance that the indemnity obligations, insurance coverage or legal defenses
will always be sufficient to protect the Company from incurring substantial
liability as a result of these types of proceedings. For a description of the
Company's legal proceedings, see Item 3 Legal Proceedings included in the
Company's 1997 Annual Report on Form 10-K incorporated herein by reference.
ENVIRONMENTAL REGULATION
The Company is subject to numerous local, state and federal 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, which costs have not been material. The Company's inspection,
coating and solids control services routinely involve the handling of waste
materials, some of which may be considered to be hazardous wastes. 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 the Company's results of operations and financial
condition.
11
<PAGE>
ABSENCE OF PUBLIC MARKET FOR NOTES
The Private Notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws.
Although the Exchange Notes may be resold or otherwise by the holders (who
are not affiliates of the Company) without compliance with the registration
requirements under the Securities Act, they will be new securities for which
there is currently no established trading market. The Company does not intend
to apply for listing of the Exchange Notes on a national securities exchange
or for quotation of the Exchange Notes on an automated dealer quotation
system. Although the Initial Purchasers in the offering of the Private Notes,
have informed the Company that they currently intend to make a market in the
Exchange Notes, they are not obligated to do so, and any such market-making,
if initiated, may be discontinued at any time without notice. The liquidity of
any market for the Exchange Notes will depend upon the number of holders of
the Notes, the interest of securities dealers in making a market in the
Exchange Notes and other factors. Accordingly, there can be no assurance as to
the development or liquidity of any market for the Exchange Notes. If an
active trading market for the Exchange Notes does not develop, the market
price and liquidity of the Exchange Notes may be adversely affected. If the
Exchange Notes are traded, they may trade at a discount from their face value,
depending upon prevailing interest rates, the market for similar securities,
the performance of the Company and certain other factors.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" (as defined under Rule 405 of the
Securities Act) of the Company may publicly offer for sale or resell the
Exchange Notes only in compliance with provisions of Rule 144 under the
Securities Act.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Private Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer may be
deemed to be an "underwriter" within the meaning of the Securities Act. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. To the extent that
Private Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Private Notes could be
adversely affected due to the limited amount, or "float," of the Private Notes
that are expected to remain outstanding following the Exchange Offer.
Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Private
Notes are not tendered or are tendered and not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See
"Plan of Distribution" and "The Exchange Offer."
12
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on February 25, 1998 (the
"Closing Date") to the Initial Purchasers pursuant to the Purchase Agreement.
The Initial Purchasers subsequently sold the Private Notes to (i) "qualified
institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities
Act ("Rule 144A"), in reliance on Rule 144A and (ii) to certain persons in
offshore transactions in reliance on Regulations under the Securities Act. As
a condition to the sale of the Private Notes, the Company and the Initial
Purchasers entered into the Registration Rights Agreement on February 25,
1998. Pursuant to the Registration Rights Agreement, the Company agreed that,
unless the Exchange Offer is not permitted by applicable law or Commission
policy, it would (i) file with the Commission a Registration Statement under
the Securities Act with respect to the Exchange Notes within 60 days after the
Closing Date, and (ii) use its best efforts to cause such Registration
Statement to become effective under the Securities Act within 180 days after
the Closing Date. A copy of the Registration Rights Agreement has been filed
as an exhibit to the Registration Statement. The Registration Statement is
intended to satisfy certain of the Company's obligations under the
Registration Rights Agreement and the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Private Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in a distribution of the Exchange Notes, will be allowed to
resell Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in the distribution of the
Exchange Notes or is a broker-dealer, such holder cannot rely on the position
of the staff of the Commission enumerated in certain no-action letters issued
to third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Private Notes where such Private Notes were acquired by such
broker-dealer as a result of market-making or other trading activities.
Pursuant to the Registration Rights Agreement, the Company has agreed to make
this Prospectus, as it may be amended or supplemented from time to time,
available to broker-dealers for use in connection with any resale for a period
of 180 days after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear
13
<PAGE>
legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to any of the rights of holders of the Private
Notes under the Registration Rights Agreement. The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be issued under, and be entitled to the benefits of, the Indenture, which
also authorized the issuance of the Private Notes, such that both series of
Notes will be treated as a single class of debt securities under the
Indenture.
As of the date of this Prospectus, $100,000,000 in aggregate principal
amount of the Private Notes are outstanding. Only a registered holder of the
Private Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Private Notes entitled to participate in the
Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on June
11, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, and (ii) mail to
the registered holders an announcement thereof which shall include disclosure
of the approximate number of Private Notes deposited to date, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 7 1/2% per annum.
Interest on the Exchange Notes will be payable semi-annually on each February
15 and August 15, commencing August 15, 1998. Holders of
14
<PAGE>
Exchange Notes will receive interest on August 15, 1998 from the date of
initial issuance of the Exchange Notes, plus an amount equal to the accrued
interest on the Private Notes from the date of initial delivery to the date of
exchange thereof for Exchange Notes. Holders of Private Notes that are
accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
15
<PAGE>
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes. All
questions as to the validity, form, eligibility (including time of receipt),
acceptance and withdrawal of tendered Private Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Private Notes
not properly tendered or any Private Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Private
Notes must be cured within such time as the Company shall determine. Although
the Company intends to notify holders of defects or irregularities with
respect to tenders of Private Notes, neither the Company, the Exchange Agent
nor any other person shall incur any liability for failure to give such
notification. Tenders of Private Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of the respective business of such holder, (ii)
such holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) such holder acknowledges and
agrees that any person who is a broker-dealer registered under the Exchange
Act or is participating in the Exchange Offer for the purposes of distributing
the Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Private Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission and (v) such holder is
not an "affiliate," as defined in Rule 405 under the Securities Act, of the
Company. If the holder is a broker-dealer that will receive Exchange Notes for
such holder's own account in exchange for Private Notes that were acquired as
a result of market-making activities or other trading activities, such holder
will be required to acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
16
<PAGE>
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Private Notes to be withdrawn (the
"Depositor"), (ii) identify the Private Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Private Notes) and
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Private Notes
17
<PAGE>
were tendered (including any required signature guarantees). All questions as
to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Private Notes so withdrawn are validly retendered. Properly
withdrawn Private Notes may be retendered by following one of the procedures
described above under "The Exchange Offer--Procedures for Tendering" at any
time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission.
If the Company reasonably determines that such condition (that the Exchange
Offer not violate applicable law, rules, regulations or interpretation of the
Staff) is not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders or (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
to withdraw such Private Notes (see "--Withdrawal of Tenders").
LIQUIDATED DAMAGES
The Company has agreed pursuant to a registration rights agreement (the
"Registration Rights Agreement") with the Initial Purchasers, for the benefit
of the holders of the Private Notes, that the Company will, at its cost, (i)
within 60 days after the Issue Date, file a registration statement (the
"Exchange Offer Registration Statement") with the Securities and Exchange
Commission (the "Commission") with respect to the Exchange Offer to exchange
the Private Notes for Exchange Notes, which will have terms substantially
identical in all material respects to the Private Notes except that the
Exchange Notes will not contain terms with respect to transfer restrictions
and (ii) use its best efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act within 180 days
after the Issue Date. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer the Exchange Notes in exchange
for surrender of the Notes. The Company will keep the Registered Exchange
Offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the Exchange Offer is mailed to the holders of the
Private Notes. For each Private Note surrendered to the Company pursuant to
the Exchange Offer, the holder of such Private Note will receive an Exchange
Note having a principal amount at maturity equal to that of the surrendered
Private Note at maturity. Interest on each Exchange Note will accrue from the
last interest payment date on which interest was paid on the Private Note
surrendered in exchange thereof or, if no interest has been paid on such
Private Note, from the date interest begins to accrue on such Private Note.
Under existing Commission interpretations, the Exchange Notes would be freely
transferable by holders other than affiliates of the Company after the
Exchange Offer without further registration under the Securities Act if the
holder of the Exchange Notes acquires the Exchange Notes in the ordinary
course of its business, has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and is not an affiliate
of the Company, as such terms are interpreted by the Commission; provided,
however, that broker-dealers ("Participating Broker-Dealers") receiving
Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes (other than a
resale of an unsold allotment from the original sale of the Notes) with the
prospectus contained in the Exchange Offer Registration Statement. Under the
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, with similar prospectus delivery
requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes.
18
<PAGE>
A holder of Private Notes (other than certain specified holders) who wishes
to exchange such Private Notes for Exchange Notes in the Exchange Offer is
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes and that it is not an "affiliate" of the
Company, as defined in Rule 405 of the Securities Act, or if it is an
affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such a Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days of the Issue
Date, or if the Initial Purchasers so request with respect to Notes not
eligible to be exchanged for Exchange Notes in the Exchange Offer, or if any
holder of Private Notes is not eligible to participate in the Exchange Offer
or does not receive freely tradable Exchange Notes in the Exchange Offer, the
Company, will, at its cost, (a) as promptly as practicable, file a shelf
registration statement (the "Shelf Registration Statement") with the
Commission covering resales of the Private Notes or the Exchange Notes, as the
case may be, (b) use its best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) keep the
Shelf Registration Statement effective until the earlier of (i) the time when
the Notes covered by the Shelf Registration Statement can be sold pursuant to
Rule 144 without any limitations under clauses (c), (e), (f) and (h) of Rule
144 and (ii) two years from the Issue Date. The Company will, in the event a
Shelf Registration Statement is filed, among other things, provide to each
holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Private Notes or the Exchange Note, as the case may be. A holder selling
such Private Notes or Exchange Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
If (i) by April 27, 1998, neither the Exchange Offer Registration Statement
nor the Shelf Registration Statement has been filed with the Commission; (ii)
by August 24, 1998, neither the Registered Exchange Offer is consummated nor
the Shelf Registration Statement is declared effective; or (iii) after either
the Exchange Offer Registration Statement or the Shelf Registration Statement
is declared effective, such Registration Statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with resales
of Private Notes or Exchange Notes in accordance with and during the periods
specified in the Registration Rights Agreement (each such event referred to in
clause (i) through (iii) being herein called a "Registration Default" and each
period during which a Registration Default has occurred and is continuing, a
"Registration Default Period"), additional cash interest will accrue on the
Private Notes and the Exchange Notes at the rate of 0.25% per annum for the
first 90 days of the Registration Default Period and at the rate of 0.50% per
annum thereafter for the remaining portion of the Registration Default Period,
calculated on the principal amount of the Notes as of the date on which such
interest is payable. Such interest is payable in addition to any other
interest payable from time to time with respect to the Notes.
If the Company effects the Exchange Offer, it will be entitled to close the
Exchange Offer 30 business days after the commencement thereof provided that
it has accepted all Notes theretofore validly tendered in accordance with the
terms of the Exchange Offer.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
19
<PAGE>
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify such
holders (including any broker-dealers) and certain parties related to such
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Private Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Private Notes
pursuant to Rule 144A, (iii) use its best efforts to keep the Registration
Statement effective and to amend and supplement the prospectus in order to
permit the prospectus to be lawfully delivered by all persons subject to the
prospectus delivery requirements of the Securities Act for such period of time
as such persons must comply with such requirement in order to resell the
Exchange Notes and (iv) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request for a period of not less than
180 days after the Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail or By Facsimile (for Eligible
Overnight Delivery: Institutions Only):
(212) 815-6339
The Bank of New York
Corporate Trust Operations Confirm Receipt of Notice
101 Barclay St.--Floor 7E of Guaranteed Delivery by Telephone:
New York, New York 10286 (212) 815-4146
Delivery of the Letter of Transmittal to an address other than as set forth
above or transmission of instructions via facsimile other than as set forth
above does not constitute a valid delivery of such Letter of Transmittal.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$250,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
20
<PAGE>
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
21
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange Private Notes in like
principal amount, the terms of which are identical in all material respects to
the Exchange Notes except that (i) the offering of the Exchange Notes has been
registered under the Securities Act, (ii) the Exchange Notes are not subject
to transfer restrictions and (iii) certain provisions relating to an increase
in the stated interest rate on the Private Notes provided for under certain
circumstances will be eliminated. The Private Notes surrendered in exchange
for Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in a change in the
indebtedness of the Company.
The net proceeds from the Private Offering, which were approximately $97.9
million after deducting discounts, commissions and estimated fees and expenses
incurred in connection therewith, were applied, in part, to repay
approximately $81.5 million of indebtedness outstanding under the Bank Credit
Facility. The remaining net proceeds (approximately $16.4 million) will be
used for future acquisitions, working capital and other general corporate
purposes. For a description of the indebtedness repaid with the proceeds of
the Private Offering, see "Description of Certain Indebtedness."
CAPITALIZATION
The following table sets forth the capitalization, including short-term
borrowings, of the Company at December 31, 1997 and as adjusted to reflect the
issuance of the Private Notes on February 25, 1998 and the use of the net
proceeds therefrom.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED
------------ -------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C>
Short-term borrowings and current portion of long-
term debt........................................... $ 30,574 $ 30,574
Long-term debt (excluding current portion):
Bank Credit Facility............................... 175,352 93,832
7% Senior Notes due 2008........................... -- 100,000
Other.............................................. 12,451 12,451
------------ ------------
Total debt....................................... 218,377 236,857
Total stockholders' equity........................... 300,033 300,033
------------ ------------
Total capitalization including short-term borrowings. $ 518,410 $ 536,890
============ ============
</TABLE>
22
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company as of and for the five years ended December 31, 1997. The
summary financial data have been derived from the Company's audited
consolidated financial statements. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................. $525,231 $341,431 $190,015 $192,175 $183,340
Cost of sales............ 362,251 243,854 138,367 140,462 137,188
Gross profit............. 162,980 97,577 51,648 51,713 46,152
Selling, general and
administrative expense.. 51,475 35,662 20,732 21,511 26,773
Research and engineering
costs................... 10,580 6,595 3,456 3,154 3,678
Write-off of assets and
restructure costs....... -- 76,601 -- -- 13,256
-------- -------- -------- -------- --------
Operating profit (loss).. 100,925 (21,281)(1) 27,460 27,048 2,445(1)
Interest expense......... 14,456 13,414 12,328 12,190 10,595
Other (income) expense,
net..................... 1,520 293 (73) 569 2,657
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss...... 84,949 (34,988) 15,205 14,289 (10,807)
Provision (benefit) for
income taxes............ 31,845 8,238 6,386 6,001 (2,445)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary loss...... 53,104 (43,226) 8,819 8,288 (8,362)
Extraordinary loss, net
of income tax........... -- (6,373) -- (764) (4,497)
-------- -------- -------- -------- --------
Net income (loss)........ 53,104 (49,599) 8,819 7,524 (12,859)
Dividends applicable to
redeemable preferred
stock................... -- -- 700 700 700
-------- -------- -------- -------- --------
Net income (loss)
applicable to common
stock................... $ 53,104 $(49,599) $ 8,119 $ 6,824 $(13,559)
======== ======== ======== ======== ========
Earnings (loss) per
common share............ $ 1.22 $ (1.35) $ .44 $ .37 $ (.74)
======== ======== ======== ======== ========
Earnings (loss) per
common share assuming
dilution................ $ 1.14 $ (1.35) $ .44 $ .37 $ (.74)
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(2)................ $125,515 $ 72,633 $ 42,570 $ 40,859 $ 27,262
Ratio of EBITDA to
interest expense(3)..... 8.7x 5.4x 3.5x 3.4x 2.6x
Ratio of earnings to
fixed charges(4)........ 6.8x 3.9x 2.2x 2.1x 1.2x
Depreciation and
amortization............ $ 26,110 $ 17,606 $ 15,037 $ 14,380 $ 14,218
Capital expenditures..... $ 35,190 $ 18,681 $ 7,645 $ 7,549 $ 14,640
BALANCE SHEET DATA (END
OF PERIOD):
Working capital.......... $ 81,294 $ 74,393 $ 44,623 $ 35,926 $ 5,279
Total assets............. 686,167 505,165 306,679 317,027 310,108
Total debt............... 218,377 184,743 111,617 123,851 101,489
Preferred stock.......... -- -- 10,175 10,175 10,175
Common stockholders'
equity.................. 300,033 218,902 121,441 113,424 105,256
</TABLE>
- --------
(1) The 1996 operating loss includes $63.1 million of charges for the write-
off of certain assets, $11.3 million of Drexel transaction costs, and
$2.2 million of charges for the write-off of Italian operations.
Excluding these costs, operating profit in 1996 was $55.3 million. The
1993 operating profit includes restructuring charges of $13.3 million.
Excluding these costs, operating profit in 1993 was $15.7 million.
(2) "EBITDA" means earnings before interest, taxes, depreciation,
amortization, restructuring charges, write-off of long-lived assets,
Drexel transaction costs, write-off of Italian operations and
extraordinary items and should not be considered as an alternative to net
income or any other generally accepted accounting principles measure of
performance as an indicator of the Company's operating performance or as
a measure of liquidity. The Company believes EBITDA is a widely accepted
financial indicator of a company's ability to service debt.
(3) Ratio of EBITDA to interest expense represents an industry ratio that
provides an investor with information as to the Company's current ability
to meet its interest costs.
(4) For the purpose of this calculation, "earnings" consist of net income
(loss) before income taxes, write-off of long-lived assets, Drexel
transaction costs, write-off of Italian operations, restructuring
charges, extraordinary items, and fixed charges. "Fixed charges" consist
of interest expense and amortization of debt discount and related
expenses believed by management to be representative of the interest
factor thereon. Earnings were insufficient to cover fixed charges by
$35.0 million in 1996 if the write-off of long-lived assets, Drexel
transaction costs, and the write-off of Italian operations is included in
earnings. Earnings were insufficient to cover fixed charges by $10.8
million in 1993 if restructuring charges are included in 1993 earnings.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
historical financial statements included elsewhere in this Prospectus.
GENERAL
Drexel Merger and Other Significant Events
The Company completed the Drexel Merger on April 24, 1996. 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 Drexel Merger, together with seven subsequent strategic acquisitions
completed during 1996 and eleven additional strategic acquisitions completed
during 1997, have significantly impacted the operating results, financial
condition, liquidity, and direction of the Company. Excluding the Drexel
Merger, the total consideration for the 1997 and 1996 acquisitions was $134.6
million consisting of net cash of $80.1 million, notes payable of $12.4
million, equity of $23.9 million, and accrued payments of $18.2 million.
The Company's strategic acquisitions following the Drexel Merger have
accomplished the following goals:
. Provided the Company with a leading solids control equipment and
services market position in Canada with its acquisitions of Wadeco
Oilfield Services Ltd. ("Wadeco") and Polar Oilfield Services in 1996
and its acquisitions of Fisher Fluids Processing Inc. and the operating
assets of Blackfire Oil Inc. in 1997.
. Established the Company as a leading provider of solids control
equipment and services on the Louisiana Gulf Coast with its acquisition
of Gauthier Brothers Rentals, Inc. ("Gauthier Brothers") in 1996, and
expanded the Company's solids control product offerings with its
acquisitions of the solids control division of Nu-Tec, Inc., WMCO
Instruments, Inc. and WMCO Equipment Inc. in 1997.
. Increased the Company's solids control sales and market share in
Venezuela with its acquisition of substantially all the assets of
Western Service and Supply, S.A.
. Increased the Company's worldwide pipeline inspection market share and
achieved consolidation cost benefits and integrated technologies with
its acquisition of Vetco Pipeline Services, Inc. ("Vetco Pipeline") in
1996.
. 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. in
1996 and its acquisition of Tulsa Equipment Manufacturing Company, a
manufacturer of pressure pumping equipment, in 1997.
. Established the Company as a leading manufacturer of high pressure fiber
glass tubulars used in oil field applications through its acquisition of
Fiber Glass Systems, Inc. ("FGS") in 1997.
. Expanded the Company's tubular services product offerings through the
acquisitions of Gator Hawk, Inc., a leading provider of external
hydrostatic pressure testing of tubular connections; Cut-Rite Tubular
Services Ltd., a provider of inspection, repair and cleaning services in
Canada; and the tubular inspection division of Pro Serv AS, a provider
of inspection services in Norway.
. Increased the Company's solids control centrifuge manufacturing and
refurbishment capabilities with its acquisition of SouthWest Centrifuge,
Inc.
. Enhanced the Company's solids control product line and entered the liner
hanger market in the North Sea with its acquisition of the Enaco Plc
companies ("ENACO") and certain operating assets owned by ENACO's
shareholders.
24
<PAGE>
In addition to these acquisitions, the Company took the following actions in
1997 and 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 by executing the sale of 4.2 million shares of its Common
Stock and warrants to purchase 2.533 million shares of Common Stock at
$10 per share to a partnership affiliated with SCF Partners, LP. In
addition, the Company converted 100,000 shares of Series A Convertible
Preferred Stock into 1.5 million shares of Common Stock and warrants to
purchase 1.25 million shares of 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, the operating facilities of the Company and Drexel 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 operations of recently acquired Vetco
Pipeline with its existing pipeline services operations.
. The Company shut down or sold operations which were performing at less
than satisfactory levels, including its U.S. tank inspection operation,
and its 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.
. The Company achieved significant technological advances in several
products, including the delivery of five coiled tubing drilling units,
the successful installation and operation of two Truscope(R) units (full
body rotary ultrasonic inspection system) at major oil country tubular
manufacturing facilities, and the commercial introduction of TruRes(R)
unit (high-resolution pipeline inspection).
. In August 1996, the Company refinanced the Bank Credit Facility. 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 outstanding under the previous
senior credit agreement and the $75 million 10 3/4% Senior Subordinated
Notes (the "10 3/4% Notes"), and to finance growth and acquisitions. At
December 31, 1997, the Company had $16.5 million available for borrowing
under its revolving credit facility.
. The Company consolidated its U.S. solids control manufacturing of
centrifuges and screens into their own manufacturing locations to
provide an increased focus on their processes.
. The Company expanded its fleet of pipeline inspection equipment and
increased the high resolution market penetration with the introduction
of TR1000(TM) tools.
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>
1997* 1996* 1995*
------ ------ ------
<S> <C> <C> <C>
Rig Activity:
U.S................................................... 943 779 723
Canada................................................ 374 271 231
International......................................... 810 805 757
------ ------ ------
Worldwide............................................. 2,127 1,855 1,711
====== ====== ======
U.S. Workover Rig Activity............................. 1,422 1,334 1,277
====== ====== ======
West Texas Intermediate Crude (per barrel)............. $20.70 $22.01 $18.46
====== ====== ======
Natural Gas Prices $/mbtu (per mbtu)................... $ 2.40 $ 2.41 $ 1.47
====== ====== ======
</TABLE>
- --------
* Averages for the years indicated. The source for rig activity information
was Baker Hughes Incorporated ("BHI"), and the source for oil and gas
prices was Spears and Associates.
25
<PAGE>
Worldwide drilling and U.S. workover activity improved during 1997. U.S.,
Canada, and international rig activity in 1997 increased 21%, 38%, and 1% over
1996 levels, while U.S. workover activity in 1997 was up 7% from 1996 levels.
The price for West Texas Intermediate Crude declined 6% in 1997 compared to
1996, and 1997 natural gas prices were down slightly from 1996 levels. The
overall improvement in market conditions created strong demand for the
Company's products and services which, together with the 1997 and 1996
initiatives discussed above, resulted in improved operating results as shown
in the Company's following actual and pro forma (giving effect to all 1996 and
1997 acquisitions) financial statements (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ --------
PRO PRO
FORMA(1) ACTUAL FORMA(1) ACTUAL ACTUAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue......................... $559,213 $525,231 $479,458 $341,431 $190,015
Net Income Before Write-off of
Assets, Merger Costs, and
Extraordinary Charges.......... $ 55,145 $ 53,104 $ 32,244 $ 25,384 $ 8,819
Net Income (Loss)............... $ 55,145 $ 53,104 $(42,731) $(49,599) $ 8,819
Dilutive earnings Per Share
Before Write-off of Assets,
Merger Costs, and Extraordinary
Charges........................ $ 1.17 $ 1.14 $ 0.72 $ 0.69 $ 0.44
Dilutive earnings (Loss) Per
Share.......................... $ 1.17 $ 1.14 $ (0.96) $ (1.35) $ 0.44
</TABLE>
- --------
(1) Pro forma information is unaudited and is presented as if the 1997 and
1996 acquisitions were made as of January 1, 1996. Such information
should not be considered indicative of actual results that would have
been achieved if the 1997 and 1996 acquisitions had been consummated on
January 1, 1996.
The $79.8 million (17%) increase in pro forma revenue for 1997 over 1996 was
due to several factors including: improved overall market conditions as
discussed above; a significant growth in Latin American revenue and in revenue
from solids control and pipeline operations; greater revenue from the
Company's coiled tubing/pressure control products; and an increase in
worldwide coating sales.
The pro forma 1997 net income (before write-off of assets, merger costs, and
extraordinary item) of $55.1 million was $22.9 million higher than the
comparable amount in 1996 of $32.2 million. This increase was due to revenue
growth from greater activity levels as discussed in the results of operations.
Subsequent to December 31, 1997, the average price of oil and gas has
declined. This change in price has been caused by various concerns, including
rising reported world oil inventories, the financial crisis in Asia, an
increase in official production quotas, concerns that increased Iraq
production might soon reenter the world market, and temperate weather
conditions. Although oil prices have declined, the U.S. rig count (as reported
by BHI) at January 23, 1998 was 996, up 6% over the average rig count for
1997. At the date of this Prospectus, the Company was not aware of any
material spending cut-backs of its major customers, although lower oil prices
for a prolonged period could result in some spending reductions, which could
have a material adverse effect on the Company.
During 1997 the Company generated approximately $31.8 million, or 6%, of its
total revenue from Singapore, Malaysia, Indonesia, Thailand, Vietnam,
Australia, Japan, and Korea. Most of the Company's customers in these
countries are large, multinational oil companies with limited direct exposure
to the current economic climate in Southeast Asia, and a significant portion
of the Company's contracts are denominated in U.S. dollars. Management does
not believe that the economic downturn in Southeast Asia will have a material
direct adverse impact on the business of the Company, except to the extent
that reduced hydrocarbon demand in the area may contribute to lower oil and
gas prices and reduced oil and gas activity worldwide.
1996 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.
26
<PAGE>
. 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 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
extraordinary charge of $6.4 million related to the early retirement of
its outstanding 10 3/4% Notes.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 vs Year Ended December 31, 1996
Revenue. Revenue for the year ended December 31, 1997 was $525.2 million, an
increase of $183.8 million, or 54%, over the $341.4 million of revenue in
1996. On a pro forma basis giving effect to only the Drexel acquisition, 1997
revenue was up $148.5 million, or 39%, over 1996 revenue. This increase was
due to greater activity during 1997, the 1997 acquisitions and the full year
effect of the 1996 acquisitions. Increases in internal growth revenue
accounted for $78.1 million, or 53% of the $148.5 million increase in pro
forma revenue, while the 1997 and 1996 acquisitions (excluding the Drexel
Merger) increased pro forma revenue by $70.4 million, or 47%.
Tubular Services, comprised of Inspection, Coating and Mill Systems and
Sales, generated revenue of $225.0 million in 1997, an increase of $51.2
million, or 29%, over 1996 revenue of $173.8 million. Inspection operations
grew 9.7% over the 1996 levels due primarily to the acquisitions of Gator
Hawk, Cut-Rite and the tubular inspection division of Pro Serv AS, and to an
increase in North American revenue, which resulted, in part, from a 25%
increase in the average North American rig count. Tubular coating and
corrosion control revenue in 1997 increased 60% from 1996 levels due mainly to
the acquisition in March 1997 of FGS and a 31% increase in North American
revenue as a result of higher activity levels. Mill Systems and Sales revenue
was higher due to the sale of high speed ultrasonic equipment in the U.S. and
the sale of equipment into the CIS during 1997.
Solids Control Products and Services revenue was $155.4 million in 1997, an
increase of $78.1 million, or 101%, over 1996 revenue of $77.3 million. The
Drexel Merger added the rental and sale of solids control products to the
Company's operations. The 1996 and 1997 acquisitions (excluding the Drexel
Merger) accounted for a $24.0 million increase in solids control rental
revenue. U.S. solids control rental operations increased 147% primarily due to
the acquisition of Gauthier Brothers and growth in the Gulf Coast market.
Canadian rental revenue grew 139% due primarily to the Wadeco acquisition in
1996, the acquisition of Fisher Fluids in August 1997, the acquisition of the
operating assets of Blackfire Oil, Inc. in September 1997 and general market
growth as represented by the 38% increase in the Canadian average rig count in
1997. Latin American rental revenue increased 83% in 1997 over 1996 due
primarily to the Company's operations in Venezuela, Mexico, and Colombia.
Further growth in rental revenue occurred in Europe with the acquisition of
ENACO and an increase in general activity. Solids control equipment sales in
1997 increased 69% over 1996 levels due primarily to increased U.S. and Latin
American sales.
Coiled Tubing and Pressure Control Products revenue was $83.4 million in
1997, an increase of $36.4 million, or 77%, over 1996 revenue of $47.0
million. This increase was due to (i) the full year impact of the Drexel
Merger, (ii) the 1997 acquisitions and the full year impact of the 1996
acquisitions (excluding the Drexel Merger), which collectively accounted for
$13.7 million of the increase in revenue, and (iii) the growth in the sale of
coiled tubing units and coiled tubing blowout preventors.
Pipeline and Other Industrial Services revenue was $61.4 million, an
increase of $18.1 million, or 42%, over 1996 revenue of $43.4 million.
Pipeline revenue grew $14.1 million due to strong growth in the North American
and Latin American markets, the acquisition of Vetco Pipeline and the
successful introduction of "Tru Res" (high resolution pipeline inspection
unit). In addition, Industrial Services increased $5.3 million over 1996
levels primarily due to improving operations in the Middle East.
27
<PAGE>
Gross Profit. Gross profit was $163.0 million, an increase of $65.4 million,
or 67%, over 1996 profits of $97.6 million. This increase was primarily due to
the Drexel Merger, the 1997 and 1996 acquisitions, and the growth in revenue
discussed above.
Selling, General, and Administrative Costs. Selling, general and
administrative costs were $51.5 million in 1997, an increase of $15.8 million
over 1996 costs of $35.7 million. This increase was due primarily to increased
costs associated with the 1997 acquisitions and the full year effect of 1996
acquisitions.
Research and Engineering Costs. 1997 research and engineering costs were
$10.6 million, an increase of $4.0 million over the 1996 costs of $6.6
million. The majority of these costs were related to solids control
innovations associated with screens, shakers, and centrifuges, the Company's
"Tru Res(R)" high resolution pipeline tools, and continuing efforts related to
product and service development in Tubular Services and Coiled Tubing
technology. The increase in costs was due primarily to research and
engineering projects associated with Drexel operations and the various
acquisitions in 1997 and 1996, and the Company's efforts to increase its
technological development.
Write-off of Long-Lived Assets. The first quarter 1996 write-off of long-
lived assets of $63.1 million included (i) a writedown of $50.8 million
associated with the Company's adoption of SFAS No. 121 and (ii) a decision by
management to sell certain assets following the Drexel Merger, which resulted
in additional write-downs of approximately $12.3 million.
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 consolidation 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 shut down. The Italian operations contributed
approximately $2.5 million of revenue in 1996 with break-even profit results.
Operating Profit (Loss). Operating profit was $100.9 million, an increase of
$45.6 million, or 82%, over 1996 profit of $55.3 million (excluding write-off
of long-lived assets, Drexel transaction costs, and the write-off of Italian
operations, as discussed above). Including these charges, operating profits
for 1997 were $100.9 million compared to a 1996 operating loss of $21.3
million. This improvement in operating profit was due to the increase in
operations related to increased activity levels and market share gains,
consolidation savings, minor price increases, and the effect of the 1997
acquisitions and the full year results of the 1996 acquisitions.
Interest Expense. Interest expense was $14.5 million, an increase of $1.0
million over 1996 interest expense of $13.4 million. This increase was due to
an increase in debt resulting primarily from the 1996 and 1997 acquisitions.
The increase was partially offset by a lower effective interest rate resulting
from the Company's retirement in the fourth quarter of 1996 of its 10 3/4%
Notes from proceeds of the Company's Bank Credit Facility. In addition, the
Company entered into four interest rate swap transactions in 1996 which
effectively hedged $90 million of the Company's variable interest rate debt.
Also in May 1997, the Company purchased a $40 million interest rate collar
agreement which provides protection if interest rates rise above 7.77%.
Other Expense (Income). Other expense, which includes interest income,
foreign exchange, minority interest and other expense (net), resulted in a net
expense of $1.5 million, an increase of $1.2 million from 1996 net expense of
$.3 million. This increase was primarily related to a slight foreign exchange
expense in 1997 as compared to foreign exchange gains in 1996.
Provision for Income Taxes. The Company's effective tax rate for 1997 was
37.5%. This rate is higher than the domestic rate of 35% due to charges not
allowed under domestic and foreign jurisdictions related to goodwill
amortization and foreign earnings subject to tax rates differing from domestic
rates.
Net Income (Loss). Net income was $53.1 million in 1997, an improvement over
the 1996 net loss of $49.6 million. This improvement was due to the factors
discussed above.
28
<PAGE>
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 made in 1996. On a pro
forma basis, Solids Control revenue was up $13.0 million in 1996 over 1995 due
to increased activity 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 S.S.R.
(International) Ltd. and Pressure Control Engineering (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 $43.4 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(R) "High Resolution"
pipeline tools.
29
<PAGE>
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 consolidation 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 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 gain of $293,000 in
1996, compared to a net gain of $73,000 in 1995. The 1996 gain was due to
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% Notes with the
proceeds from its Bank Credit Facility. The early retirement of the 10% Notes
resulted in an extraordinary loss of $6.4 million (net of income tax benefits
of $3.4 million).
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.
30
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
For the twelve months ended December 31, 1997, the Company generated $46.3
million of cash from operations as compared to $10.6 million in 1996.
Excluding changes in working capital accounts and other liabilities, cash
provided by operating activities was $89.9 million in 1997 compared to $29.1
million in 1996. The 1996 results included the transaction costs associated
with the Drexel Merger and an extraordinary loss due to the early retirement
of the 10% Notes. The Company's principal uses of cash generated from
operations were for capital expenditures, acquisitions, and debt payments. At
December 31, 1997, working capital was $81.3 million, an increase of $6.9
million from December 31, 1996. This increase was due primarily to the 1997
acquisitions, larger manufacturing operations, and a greater revenue base.
Accounts receivable increased $48.0 million as a result of the 1997
acquisitions and internal revenue growth. Total days sales outstanding based
on trade accounts receivable was 82.7 days and 82.3 days at December 31, 1997
and 1996, respectively. Inventory was up $31.1 million due to increased
manufacturing at the Company's Conroe, Ft. Worth, Houston and UK facilities to
meet the industry demand for the Company's products, coupled with inventories
associated with 1997 acquisitions. Accounts payable and accrued liabilities
increased mainly as a result of 1997 acquisitions and an increase in trade
payables due to the growth in operations. The current portion of long-term
debt increased due to the terms of the Bank Credit Facility and debt
associated with 1997 acquisitions.
For the twelve months ended December 31, 1997, cash flows used for investing
activities were $73.0 million compared to $60.5 million in 1996. During 1997,
cash flows used for investing activities included $35.2 million of capital
spending and $36.9 million for 1997 acquisitions. Capital expenditures for
1997 were concentrated primarily in the fast growing Latin American, Canadian,
and Gulf Coast markets for solids control, oilfield inspection equipment and
pipeline operations. The Company anticipates that it will continue to invest
in its products and expects to fund its capital expenditure requirements in
1998 principally from cash generated from operations and its revolving credit
line.
For the twelve months ended December 31, 1997, net cash generated from
financing activities was $29.0 million, compared to $50.5 million in 1996. The
1997 cash generated from financing activities was principally from net
borrowings under the Company's Bank Credit Facility and net proceeds from the
sale of the Company's Common Stock.
Current and long-term debt was $218.4 million at December 31, 1997, an
increase of $33.6 million compared to December 31, 1996. This increase was due
mainly to borrowings on the revolving credit facility and debt assumed in the
1996 and 1997 acquisitions. The Company's outstanding debt at December 31,
1997 consisted of $115.3 million of term loans due under the Company's Bank
Credit Facility, $79.0 million due under the Company's revolving credit
facility, $5.0 million of convertible notes related to the acquisition of
Gauthier Brothers, $4.2 million of debt assumed in the FGS acquisition, $2.5
million due under the Company's swingline facility, and other debt of $12.4
million.
The Company had $16.5 million available for borrowing at December 31, 1997
under a $100 million revolving credit facility and $1.3 million available
under its $5 million swingline facility, subject to certain financial
covenants which limit total borrowing availability. Approximately $4.5 million
of the revolving credit facility was used for outstanding letters of credit.
The Company's Bank Credit Facility restricts the Company from paying
dividends on its capital stock unless the total funded debt to capital ratio
is less than 40%. The Company's total funded debt to capital ratio (calculated
as defined under the agreement) was 42.5% at December 31, 1997, 4.3 percentage
points lower than the December 31, 1996 ratio.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The
31
<PAGE>
Year 2000 problem is a result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year
2000 problem will not pose significant operational problems for the Company's
computer systems as so modified and converted.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131) which establishes standards for the way that public companies
report information about operating segments in both annual and interim
financial statements. SFAS No. 131 also establishes standards for disclosures
about products and services, geographic areas and major customers. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The
Company will adopt SFAS No. 131 retroactively in 1998. The adoption of SFAS
No. 131 will not affect the Company's results of operations or financial
position, but will increase the Company's disclosure of segment information.
In June 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes new rules for the reporting and display of
comprehensive income. Adoption of SFAS No. 130 will have no impact on the
Company's net income or financial position. SFAS No. 130 would require the
Company's foreign currency translation adjustments, which are currently
reported in stockholders' equity, to be added to net income to determine total
comprehensive income. Disclosure of total comprehensive income is also
required.
32
<PAGE>
BUSINESS
GENERAL
The Company is a supplier of technical services and highly-engineered
products to the oil and gas drilling, completion, 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, inspection and
quality assurance services for tubular goods (such as drill pipe, tubing, line
pipe, and casing), and fiberglass tubulars (tubing, casing, and line pipe),
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, pressure
pumping, wireline, and related tools to companies engaged in providing oil and
gas well drilling, completion 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 is 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 completed its merger with Drexel, the
largest provider of solids control services and coiled tubing equipment
worldwide.
Tubular Services
Tubular Services is the Company's largest business line. It generated
approximately 43%, 51%, and 81% of the Company's revenue for the years ended
December 31, 1997, 1996 and 1995, respectively. The Tubular Services business
generated approximately $225 million in revenue for the year ended December
31, 1997. The Company's Tubular Services operates in the oilfield tubular
markets of 54 countries, in 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. The Company
entered the fiberglass tubular market on March 7, 1997, with its acquisition
of Fiber Glass Systems, Inc. ("Fiber Glass Systems"), which manufactures
fiberglass tubulars at plants in San Antonio, Texas and Big Spring, Texas.
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. The Company'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.
The Company's customers rely on internal coatings of tubular goods to prolong
the useful lives of tubulars and to increase the volumetric throughput of in-
service tubular goods. The Company's customers sometimes use their fiberglass
tubulars in lieu of conventional steel tubulars, due to the corrosion
resistant properties of fiberglass. Tubular inspection and coating services,
and fiberglass tubulars, are used most frequently in 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. The Company believes it is the second largest
provider of fiberglass tubulars to oilfield applications worldwide.
33
<PAGE>
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 CO\\2\\, H\\2\\S 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.
On March 7, 1997, the Company acquired 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
fiber glass pipe since 1968 under the name "Star(R)," 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 July 1997, Tuboscope began offering hydrostatic testing of tubular
connections when it acquired substantially all of the operating assets of
Gator Hawk, Inc. ("Gator Hawk"). The Company offers a proprietary external
measurement, the Iso-Gator(R) service at the rig site as strings of tubulars
are assembled on critical or high-pressure wells.
In August 1997, the Company improved its market position in Canada by
acquiring Cut-Rite Tubular Services, Ltd., a provider of tubular inspection,
repair and cleaning services. Also, in September 1997, the Company
strengthened its market position in Norway by acquiring the tubular inspection
division of Pro Serv AS, a provider of tubular inspection services.
In addition to its new and used tubular inspection and reclamation services,
the Company also offers a comprehensive proprietary tubular inventory
management system (TDS(TM)) 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.
34
<PAGE>
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.
The first commercial TruScope unit was installed in 1997.
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 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 1997. The
Company's competitors in Tubular Services include ICO Inc., Ameron, A.O.
Smith, 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 30% of its revenue for the year ended
December 31, 1997 from Solids Control Products & Services. The Solids Control
Products & Services business generated approximately $155 million in revenue
for the year ended December 31, 1997. 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 which must be disposed of subsequent to
drilling operations (which minimizes the environmental impact of the drilling
operation and reduces post-drilling reclamation costs). Efficient separation
of rock cuttings also 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. 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.
35
<PAGE>
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(R) and various other brand names. For the
year ended December 31, 1997, approximately 44% of the Company's solids
control equipment revenue was generated from the sale of solids control
equipment and inventory, and approximately 56% of such revenue was generated
from rentals and services.
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 1997. Competitors in oilfield
solids control equipment and services include Smith International ("SWACO"),
Derrick Manufacturing Corp. and a number of regional competitors. The Company
acquired six regional competitors in solids control in 1997 in order to
enhance its manufacturing and refurbishing capacity, achieve consolidation
savings, strengthen its presence in Canada and expand its product lines. 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
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, completion and drilling operations. This product
line generated approximately 16% of the Company's revenue for the year ended
December 31, 1997. The Coiled Tubing & Pressure Control Products segment
generated approximately $83 million in revenue for the year ended December 31,
1997. 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."
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<PAGE>
Currently, most coiled tubing units are used in well remediation and
completion 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, and delivered two more in
1997.
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 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, pressure pumper 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. 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.
Additionally, the Company began offering cementing equipment and fabricating
nitrogen pumping units in Tulsa, Oklahoma, in December 1997, when it acquired
Tulsa Equipment Manufacturing Company.
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(TM) 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 1997. Competitors in Coiled
Tubing & Pressure Control Products include Stewart & Stevenson, National
Oilwell, Elmar, Eastern Oil Tools, 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 11%, 12%, and
19%, of the Company's revenue for the years ended December 31, 1997, 1996 and
1995, respectively. Pipeline & Other Industrial Services generated
approximately $61 million in revenue for the year ended December 31, 1997. 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.
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<PAGE>
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.
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 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 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 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 1997. The Company's primary competitors include
Pipeline Integrity International, a subsidiary of British Gas Plc; Pipetronix
GmbH, a subsidiary of Preussag Ag; 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.
1997 ACQUISITIONS
In 1997, Tuboscope made the following acquisitions:
<TABLE>
<CAPTION>
DATE OF
ACQUIRED ENTITY PRODUCT LINE ACQUISITION
--------------- ------------ -----------
<S> <C> <C>
Fiber Glass Systems, Inc. ......... Tubular Services March 1997
South-West Centrifuge Services,
Inc. ............................. Solids Control July 1997
Gator Hawk, Inc. .................. Tubular Services July 1997
Chargewood Limited, Enaco Plc, and
Pump Systems Limited together with
certain assets owned by their
shareholders...................... Solids Control August 1997
Fisher Fluids Processing, Inc. .... Solids Control August 1997
Cut-Rite Tubular Services, Ltd. ... Tubular Services August 1997
Operating assets of Blackfire Oil
Inc. ............................. Solids Control September 1997
Pro Serv AS........................ Tubular Services September 1997
Nu-Tec, Inc.'s Solids Control Divi-
sion.............................. Solids Control December 1997
WMCO Instruments, Inc. and WMCO
Equipment, Inc. .................. Solids Control December 1997
Tulsa Equipment Manufacturing Com-
pany, Inc. ....................... Coiled Tubing and December 1997
</TABLE> Pressure Control Products
38
<PAGE>
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 continuous budgeting 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.
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 customers will remain the same as in prior years.
MARKETING & DISTRIBUTION NETWORK
The Company's products are marketed through a 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 primarily has direct operations in the international
marketplace, but operates through agents in certain markets.
The Company's Solids Control customers are predominantly oil and natural gas
producers and rig operators. 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.
The Company's Pipeline Services customers are primarily major oil and gas
transmission companies and national oil companies in various countries around
the world. The Company sells its services worldwide through a network of sales
employees and agency agreements.
39
<PAGE>
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. In 1997 the Company
manufactured and delivered two more such coiled tubing units designed for
drilling. 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(TM) 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(TM)) system, its StiffLine 2000(TM) coiled tubing velocity string
wellhead hanger system, its HAPPI(TM) 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 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. During 1997, the Company acquired the
proprietary Gumbo Box(TM) and related Solids Control products of Nu-Tec, and
the proprietary Accu-Scan(TM) automated rig instrumentation service of WMCO.
The Gumbo Box(TM) removes certain sticky shales from drilling fluids, and the
Accu-Scan(TM) monitors drilling fluid levels, mud gas, and makes other
important measurements related to drilling operations.
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's copyrighted Linalog(R) technology plus
computer enhancement technique adds the ability to integrate computer analysis
into the conventional technology.
The Company's Tru Res(R) technology employs a patented state of the art high
resolution inspection tool and next generation magnetic flux 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.
40
<PAGE>
As part of the Vetco Services acquisition, the Company acquired the
interests of BHI 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. High demand for the WellChek(R)
service prompted Tuboscope to expand its fleet of these units by 42% during
1997. The Gator Hawk acquisition provided the Company with the patented Iso-
Gator(R) hydrostatic tubular connection testing service, which is performed at
the rig site to ensure tubing strings are made up properly.
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, Louisiana;
Conroe, Texas; Leduc, Alberta; and Trinidad facilities. The Company
manufactures coiled tubing units, wireline units, pressure pumping equipment
and pressure control equipment at its Fort Worth, Texas; Conroe, Texas; Tulsa,
Oklahoma; Montrose, Scotland; Aberdeen, Scotland; and Poole, England
facilities. The Company, through its 1997 acquisition of Fiber Glass Systems,
manufactures fiber glass 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 pumping 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.
41
<PAGE>
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, 1997, the Company's backlog of
Coiled Tubing & Pressure Control Products was $42.1 million, an increase of
approximately 92% above the $21.9 million in backlog as of December 31, 1996.
Backlog amounts in the Company's other product lines are not meaningful
indicators of future business.
ENVIRONMENTAL MATTERS
The Company's inspection, coating and solids control 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 and the handling of drilling fluids on behalf of the drillers and/or
producers.
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 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.
EMPLOYEES
As of December 31, 1997, the Company employed 4,598 full-time employees
worldwide, of whom approximately 2,626 were employed in North America. The
Company considers its relations with its employees to be excellent.
42
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
L.E. Simmons............ 51 Chairman of the Board
John F. Lauletta........ 53 Director, President and Chief Executive Officer
Joseph C. Winkler....... 46 Executive Vice President, Chief Financial Officer and Treasurer
Martin I. Greenberg..... 58 Vice President--Controller and Assistant Secretary
James F. Maroney, III... 46 Vice President--Secretary and General Counsel
Kenneth L. Nibling...... 47 Vice President--Human Resources and Administration
Haynes B. Smith, III.... 46 Vice President--Western Hemisphere Operations
Peter J. Stuart......... 40 Vice President--Eastern Hemisphere Operations
Clay C. Williams........ 35 Vice President--Corporate Development
Jerome R. Baier......... 45 Director
Eric L. Mattson......... 46 Director
Jeffrey A. Smisek....... 43 Director
Douglas E. Swanson...... 59 Director
</TABLE>
Executive Officers and Directors of the Company
L.E. Simmons. Mr. Simmons has been a director and Chairman of the Board of
the Company since April 1996. Mr. Simmons has for more than five years served
as President and a director of L.E. Simmons & Associates, Incorporated, which,
through an affiliate, manages private institutional investment partnerships.
Mr. Simmons also serves as a director of Zions Bancorporation and CE Franklin
Ltd.
John F. Lauletta. Mr. Lauletta has been the President and Chief Executive
Officer and a director of the Company and TVI since April 1996. From 1993 to
April 1996, Mr. Lauletta was the President and Chief Executive Officer of
Drexel. From 1973 until 1993, Mr. Lauletta was with BHI, holding several
executive positions, including President of Exlog/TOTCO, President of Milpark
Drilling Fluids and Vice President of Baker Hughes INTEQ.
Joseph C. Winkler. Mr. Winkler has been Executive Vice President, Chief
Financial Officer and Treasurer of the Company and TVI since April 1996. From
1993 to April 1996, Mr. Winkler served as the Chief Financial Officer of
Drexel. Prior to joining Drexel, he was Chief Financial Officer of Baker
Hughes INTEQ and served in a similar role for various companies owned by BHI,
including Eastman/Teleco and Milpark Drilling Fluids. For ten years prior to
joining BHI, Mr. Winkler held the position of Chief Financial Officer of an
independent oil and gas producer after having spent several years with Arthur
Young & Company.
Martin I. Greenberg. Mr. Greenberg has been Vice President, Controller,
Assistant Treasurer and Assistant Secretary of the Company and TVI since
November 1991. From June 1991 to November 1991, Mr. Greenberg was Vice
President--Finance and Controller of the Company and TVI. Mr. Greenberg served
as Vice President--Controller and Assistant Secretary of the Company and TVI
from July 1990 to June 1991. Mr. Greenberg was Assistant Controller of TVI
from January 1974 to July 1990.
James F. Maroney, III. Mr. Maroney has been Vice President of the Company
and TVI since May 1991, Secretary of the Company and TVI since January 1991
and General Counsel of the Company and TVI since November 1989. Mr. Maroney
was Assistant Secretary of the Company and TVI from December 1989 to January
1991. Mr. Maroney was Associate General Counsel and Head of Litigation for
TransAmerican Natural Gas Corporation, a gas production company, from 1987 to
1989. From 1985 to 1987, Mr. Maroney was in a private law practice
specializing in commercial litigation.
43
<PAGE>
Kenneth L. Nibling. Mr. Nibling has been Vice President--Human Resources and
Administration of the Company and TVI since December 1991. From July 1988 to
November 1991, Mr. Nibling was Director of Human Resources for Union Texas
Petroleum Corp., an international exploration and production company. From
January 1984 to July 1988, Mr. Nibling was Manager, Compensation and
Employment for Louisiana Land and Exploration Company.
Haynes B. Smith, III. Mr. Smith has been Vice President--Western Hemisphere
Operations of the Company since February 1998 and of TVI since April 1996.
From May 1991 to April 1996, Mr. Smith was Vice President and General Manager
of Inspection Services of the Company. From 1989 to May 1991, Mr. Smith was
Northeast Zone Manager of the Company. From June 1972 to 1989, Mr. Smith held
various sales and managerial positions with the Company and AMF Tuboscope Inc.
Peter J. Stuart. Mr. Stuart has been Vice President--Eastern Hemisphere
Operations of the Company since February 1998 and of TVI since April 1996. Mr.
Stuart has been Managing Director of Tuboscope (UK) Ltd. since January 1998
and of Tuboscope Vetco (UK) Ltd. since April 1996. From March 1992 to April
1996, Mr. Stuart was Managing Director of Drexel Equipment (UK) Ltd. From
August 1985 to March 1992, Mr. Stuart was a Project Engineer, and latterly
Operations Manager, for Drexel's operations in the United Kingdom. From August
1979 to July 1985, Mr. Stuart held engineering positions with Sparrows
Offshore and Halliburton in the United Kingdom.
Clay C. Williams. Mr. Williams has been Vice President--Corporate
Development of the Company and TVI since February 1997. From April 1996 to
February 1997, Mr. Williams was Director of Corporate Development of the
Company and TVI. From March 1996 to April 1996, Mr. Williams was Director of
Corporate Development of Drexel. Mr. Williams was an associate at SCF Partners
from December 1993 to March 1996. From July 1992 to December 1993, Mr.
Williams was a graduate student at the University of Texas business school.
Mr. Williams was a senior petrophysical engineer for Shell Oil Company from
1985 to July 1992.
Jerome R. Baier. Mr. Baier has been a director of the Company since 1988.
Mr. Baier is and has been a Managing Director of Northwestern Investment
Management Company since January 1998. From October 1996 to December 1997, Mr.
Baier was Vice President--Securities of Northwestern Mutual Life Insurance
Company ("Northwestern"). From October 1989 to October 1996, Mr. Baier was
Director--Securities of Northwestern. For more than five years prior to
October 1989, Mr. Baier was Associate Director--Securities of Northwestern.
Eric L. Mattson. Mr. Mattson has been a director of the Company since
January 1994. Mr. Mattson is and has been Senior Vice President and Chief
Financial Officer of BHI since July 1993. For more than five years prior to
1993, Mr. Mattson was Vice President and Treasurer of BHI. Mr. Mattson also
serves as a director of Rental Service Corporation.
Jeffrey A. Smisek. Mr. Smisek has been a director of the Company since his
appointment in February 1998. Mr. Smisek has been Executive Vice President,
General Counsel and Secretary of Continental Airlines since November 1996, and
was previously Senior Vice President, General Counsel and Secretary of
Continental Airlines. Prior to joining Continental Airlines in 1995, Mr.
Smisek was a partner of Vinson & Elkins L.L.P., a law firm, for more than five
years.
Douglas E. Swanson. Mr. Swanson has been a director of the Company since his
appointment in October 1997. Mr. Swanson is and has been the President, Chief
Executive Officer and Chairman of the Board of Cliffs Drilling Company since
1992. From 1978 to 1992, Mr. Swanson was an Executive Vice President of Cliffs
Drilling Company.
44
<PAGE>
DESCRIPTION OF THE NOTES
The Private Notes were issued pursuant to the Indenture, dated as of
February 25, 1998, by and among the Company, the Guarantors and The Bank of
New York as trustee under the Indenture (the "Trustee"). The Exchange Notes
will be issued under the same Indenture. The Indenture also provides the
Company the flexibility of issuing additional Notes in the future in an
unlimited amount. The Exchange Notes will be issued solely in exchange for an
equal principal amount of Private Notes pursuant to the Exchange Offer. The
form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Private Notes except that (i) the
offering of the Exchange Notes has been registered under the Securities Act,
(ii) the Exchange Notes will not be subject to transfer restrictions and (iii)
certain provisions relating to an increase in the stated interest rate on the
Private Notes provided for under certain circumstances will be eliminated.
The following summaries of certain provisions of the Notes and the Indenture
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the Notes and the Indenture. Certain capitalized
terms used herein without definition are defined in the Indenture. References
to the Notes herein refers to the Private Notes and the Exchange Notes,
collectively. Copies of the Indenture in substantially the form in which it is
to be executed are available from the Company upon request.
The Private Notes and the Exchange Notes will constitute a single series of
debt securities under the Indenture. Upon consummation of the Exchange Offer,
holders of Private Notes who do not exchange their Private Notes for Exchange
Notes will vote together with holders of the Exchange Notes for all relevant
purposes under the Indenture. In that regard, the Indenture requires that
certain actions by the holders thereunder (including acceleration following an
Event of Default) must be taken, and certain rights must be exercised, by
specified minimum percentages of the aggregate principal amount of the
outstanding securities issued under the Indenture. In determining whether
holders of the requisite percentage in principal amount have given any notice,
consent or waiver or taken any other action permitted under the Indenture, any
Private Notes that remain outstanding after the Exchange Offer will be
aggregated with the Exchange Notes, and the holders of such Private Notes and
the Exchange Notes will vote together as a single series for all such
purposes. Accordingly, all references herein to specified percentages in
aggregate principal amount of the outstanding Notes shall be deemed to mean,
at any time after the Exchange Offer is consummated, such percentages in
aggregate principal amount of the Private Notes and the Exchange Notes then
outstanding.
GENERAL
Each Note will mature on February 15, 2008 and will bear interest at the
rate of 7 1/2% per annum from February 25, 1998, payable semiannually on
February 15 and August 15 of each year, commencing August 15, 1998, to the
person in whose name the Note is registered at the close of business on the
February 1 or August 1 next preceding such interest payment date. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
Principal and interest will be payable at the offices of the Trustee, provided
that, at the option of the Company, payment of interest will be made by check
mailed to the address of the person entitled thereto as it appears in the
register of the Notes (the "Register") maintained by the Registrar. The Notes
will be transferable and exchangeable at the office of the Registrar and any
co-registrar and will be issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. The Company may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection with certain transfers and
exchanges.
The Notes will be redeemable at any time at the option of the Company in
whole or in part, at a price equal to 100% of the principal amount, plus
accrued and unpaid interest, if any, to date of redemption plus a Make-Whole
Premium (as defined) if any, relating to the then prevailing Treasury Yield
(as defined) and the remaining life of the Notes. See "--Optional Redemption."
For a discussion of the circumstances in which the interest rate on the
Notes may be temporarily increased, see "--Registered Exchange Offer;
Registration Rights."
45
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The Private Notes were initially issued in fully registered form without
interest coupons, represented by a global Note in definitive, fully registered
form without interest coupons (the "Private Global Note") and was deposited
with the Trustee as custodian for DTC and registered in the name of a nominee
of DTC.
The Private Notes, to the extent validly tendered and accepted and directed
by their holders in their Letters of Transmittal, will be exchanged through
book-entry electronic transfer for the Exchange Global Note in definitive,
fully registered form deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of DTC. Reference to the "Global Note"
shall be references to the Private Global Note and the Exchange Global Note.
Upon the issuance of the Global Note, DTC will credit, on its internal
system, the respective principal amount of the individual beneficial interests
represented by such Global Note to the accounts of persons who have accounts
with such depositary. Such accounts initially were designated by or on behalf
of the Initial Purchasers. Ownership of beneficial interests in a Global Note
will be limited to persons who have accounts with DTC ("participants") or
persons who hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
Qualified Institutional Buyers may hold their interests in the Global Note
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. In addition, no beneficial owner
of an interest in a Global Note will be able to transfer that interest except
in accordance with the applicable procedures of DTC and, if applicable, Cedel,
societe anonyme ("Cedel"), and Morgan Guaranty Trust Company of New York, as
operator of the Euroclear system ("Euroclear") (in addition to those under the
Indenture referred to herein, see "Transfer Restrictions").
Payments of the principal of, and interest on, the Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note is credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such
46
<PAGE>
direction. However, if there is an Event of Default under the Notes, DTC will
exchange the Global Note for Certificated Notes which it will distribute to
its participants and which will be legended as set forth under the heading
"Transfer Restrictions."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participants and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Note
among participants of DTC, Euroclear and Cedel, they are under no obligation
to perform or continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Guarantors or the Trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel or
the participants or indirect participants of their respective obligations
under the rules and procedures governing their respective operations.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in a
Global Note may, upon request to the Company or the Trustee, exchange such
beneficial interest for the Notes in the form of Certificated Notes. Upon any
such issuance, the Trustee is required to register such Notes in the name of,
and cause the same to be delivered to, such Person or Persons (or the nominee
of any thereof). All such Certificated Notes would be subject to the legend
requirements described herein under "Transfer Restrictions." In addition, if
(i) DTC or any successor depositary (the "Depositary") notifies the Company in
writing that it is no longer willing or able to act as a depositary and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Notes under the
Indenture, then, upon surrender by the registered owner or holder of a Global
Note (a "Global Note Holder") of its Global Note, Notes in such form will be
issued to each Person that such Global Note Holder and the Depositary identify
as the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
related Global Note Holder or the Depositary in identifying the beneficial
owners of the related Notes, and each such Person may conclusively rely on,
and will be protected in relying on, instructions from such Global Note Holder
or of the Depositary for all purposes (including with respect to the
registration and delivery, and the respective principal amounts, of the Notes
to be issued).
RANKING AND GUARANTEES
The Notes are senior unsecured obligations of the Company and rank pari
passu in right of payment with all existing and future senior unsecured
obligations of the Company, including the Company's obligations under the Bank
Credit Facility and senior in right of payment to all future indebtedness of
the Company that is, by its terms, expressly subordinated to the Notes.
The following subsidiaries of the Company, each of which also is a guarantor
of the Company's obligations under the Bank Credit Facility and which
constitute all of the material United States subsidiaries of the Company
(collectively, the "Guarantors"), have unconditionally guaranteed (the
"Guarantees") on a joint and several
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basis the Company's obligations to pay principal and interest with respect to
the Notes: Tuboscope I/P Inc., Tuboscope Vetco International Inc., Tubo-FGS
Inc., Fiber Glass Holdings, Inc., Environmental Procedures Inc., Tuboscope
Pipeline Services Inc. and Tuboscope (Holding U.S.) Inc. Each of the
Guarantees is an unsecured obligation of the Guarantor providing such
Guarantee and will rank pari passu with the guarantee provided by such
Guarantor under the Bank Credit Facility and with all existing and future
unsecured indebtedness of such Guarantor that is not, by its terms, expressly
subordinated in right of payment to such Guarantee.
Under the terms of the Indenture, a Guarantor may be released from its
Guarantee if such Guarantor is not a guarantor of (or co-obligor on) any
Funded Indebtedness of the Company other than the Notes and other than Funded
Indebtedness of the Company (i) subject to a release provision similar to the
release provision described in this paragraph and (ii) the related guarantee
(or obligation) of which will be released concurrently with the release of the
Guarantee of such Guarantor pursuant to such release provision, provided that
no Default or Event of Default under the Indenture has occurred and is
continuing. The Indenture will also provide that if any Subsidiary of the
Company guarantees or becomes a co-obligor on any Funded Indebtedness of the
Company other than the Notes at any time subsequent to the date on which the
Notes are originally issued (including, without limitation, following any
release of such Subsidiary from its Guarantee as described above), then the
Company will cause the Notes to be equally and ratably guaranteed by such
Subsidiary, which shall thereupon become a Guarantor.
The obligations of each Guarantor are limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by
or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Guarantor
under its Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal, state or foreign law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount based on the Adjusted Net
Assets of each Guarantor.
OPTIONAL REDEMPTION
The Notes are redeemable, at the option of the Company, at any time in whole
or from time to time in part, upon not less than 30 and not more than 60 days'
notice mailed to each holder of Notes to be redeemed at the holder's address
appearing in the Register, on any date prior to maturity at a price equal to
100% of the principal amount thereof plus accrued interest to the Redemption
Date (subject to the right of holders of record on the relevant record date to
receive interest due on an interest payment date that is on or prior to the
Redemption Date) plus a Make-Whole Premium, if any (the "Redemption Price").
In no event will the Redemption Price ever be less than 100% of the principal
amount of the Notes plus accrued interest to the Redemption Date.
The amount of the Make-Whole Premium with respect to any Note (or portion
thereof) to be redeemed is equal to the excess, if any, of:
(i) the sum of the present values, calculated as of the Redemption Date,
of:
A. each interest payment that, but for such redemption, would have been
payable on the Note (or portion thereof) being redeemed on each Interest
Payment Date occurring after the Redemption Date (excluding any accrued
interest for the period prior to the Redemption Date); and
B. the principal amount that, but for such redemption, would have been
payable at the final maturity of the Note (or portion thereof) being
redeemed;
over
(ii) the principal amount of the Note (or portion thereof) being
redeemed.
The present values of interest and principal payments referred to in clause
(i) above will be determined in accordance with generally accepted principles
of financial analysis. Such present values will be calculated by
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discounting the amount of each payment of interest or principal from the date
that each such payment would have been payable, but for the redemption, to the
Redemption Date at a discount rate equal to the Treasury Yield (as defined
below) plus 25 basis points.
The Make-Whole Premium will be calculated by an independent investment
banking institution of national standing appointed by the Company; provided,
that if the Company fails to make such appointment at least 45 business days
prior to the Redemption Date, or if the institution so appointed is unwilling
or unable to make such calculation, such calculation will be made by Credit
Suisse First Boston Corporation or, if such firm is unwilling or unable to
make such calculation, by an independent investment banking institution of
national standing appointed by the Trustee (in any such case, an "Independent
Investment Banker").
For purposes of determining the Make-Whole Premium, "Treasury Yield" means a
rate of interest per annum equal to the weekly average yield to maturity of
United States Treasury Notes that have a constant maturity that corresponds to
the remaining term to maturity of the Notes, calculated to the nearest 1/12th
of a year (the "Remaining Term"). The Treasury Yield will be determined as of
the third business day immediately preceding the applicable Redemption Date.
The weekly average yields of United States Treasury Notes will be determined
by reference to the most recent statistical release published by the Federal
Reserve Bank of New York and designated "H.15(519) Selected Interest Rates" or
any successor release (the "H.15 Statistical Release"). If the H.15
Statistical Release sets forth a weekly average yield for United States
Treasury Notes having a constant maturity that is the same as the Remaining
Term, then the Treasury Yield will be equal to such weekly average yield. In
all other cases, the Treasury Yield will be calculated by interpolation, on a
straight-line basis, between the weekly average yields on the United States
Treasury Notes that have a constant maturity closest to and greater than the
Remaining Term and the United States Treasury Notes that have a constant
maturity closest to and less than the Remaining Term (in each case as set
forth in the H.15 Statistical Release). Any weekly average yields so
calculated by interpolation will be rounded to the nearest 1/100th of 1%, with
any figure of 1/200% or above being rounded upward. If weekly average yields
for United States Treasury Notes are not available in the H.15 Statistical
Release or otherwise, then the Treasury Yield will be calculated by
interpolation of comparable rates selected by the Independent Investment
Banker.
If less than all of the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed by such method as the Trustee shall deem fair and
appropriate. The Trustee may select for redemption Notes and portions of Notes
in amounts of $1,000 or whole multiples of $1,000.
The Bank Credit Facility currently restricts the Company from redeeming the
Notes. The Notes are not entitled to the benefit of any sinking fund or other
mandatory redemption provisions.
CERTAIN COVENANTS
Limitation on Liens
Nothing in the Indenture or the Notes in any way limits the amount of
indebtedness or securities (other than the Notes) that the Company or its
Subsidiaries may incur or issue. The Indenture provides that the Company will
not, and will not permit any Subsidiary of the Company to, issue, assume or
guarantee any Indebtedness for borrowed money secured by any Lien on any
property or asset now owned or hereafter acquired by the Company or such
Subsidiary without making effective provision whereby any and all Notes then
or thereafter outstanding will be secured by a Lien equally and ratably with
any and all other obligations thereby secured for so long as any such
obligations shall be so secured.
The foregoing restriction does not, however, apply to:
(a) Liens existing on the date on which the Notes are originally issued or
provided for under the terms of agreements existing on such date;
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(b) Liens on property securing (i) all or any portion of the cost of
acquiring, constructing, altering, improving or repairing any property or
assets, real or personal, or improvements used or to be used in connection
with such property or (ii) Indebtedness incurred by the Company or any
Subsidiary of the Company prior to or within one year after the later of the
acquisition, the completion of construction, alteration, improvement or repair
or the commencement of commercial operation thereof, which Indebtedness is
incurred for the purpose of financing all or any part of the purchase price
thereof or construction or improvements thereon;
(c) Liens securing Indebtedness owed by a Subsidiary of the Company to the
Company or to any other Subsidiary of the Company;
(d) Liens on the property of any Person existing at the time such Person
becomes a Subsidiary of the Company and not incurred as a result of (or in
connection with or in anticipation of) such Person becoming a Subsidiary of
the Company, provided that such Liens do not extend to or cover any property
or assets of the Company or any of its Subsidiaries other than the property
encumbered at the time such Person becomes a Subsidiary of the Company and do
not secure Indebtedness with a principal amount in excess of the principal
amount outstanding at such time;
(e) Liens on any property securing (i) Indebtedness incurred in connection
with the construction, installation or financing of pollution control or
abatement facilities or other forms of industrial revenue bond financing or
(ii) Indebtedness issued or guaranteed by the United States or any State
thereof or any department, agency or instrumentality of either;
(f) any Lien extending, renewing or replacing (or successive extensions,
renewals or replacements of) any Lien of any type permitted under clause (a),
(b), (d) or (e) above, provided that such Lien extends to or covers only the
property that is subject to the Lien being extended, renewed or replaced and
that the principal amount of the Indebtedness secured thereby shall not exceed
the principal amount of Indebtedness so secured at the time of such extension,
renewal or replacement; or
(g) Liens (exclusive of any Lien of any type otherwise permitted under
clauses (a) through (f) above) securing Indebtedness for borrowed money of the
Company or any Subsidiary of the Company in an aggregate principal amount
which, together with the aggregate amount of Attributable Indebtedness deemed
to be outstanding in respect of all Sale/Leaseback Transactions entered into
pursuant to clause (a) of the covenant described under "Limitation on
Sale/Leaseback Transactions" below (exclusive of any such Sale/Leaseback
Transactions otherwise permitted under clauses (a) through (f) above), does
not at the time such Indebtedness is incurred exceed 10% of the Consolidated
Net Worth of the Company (as shown in the most recent audited consolidated
balance sheet of the Company and its Subsidiaries).
Limitation on Sale/Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, enter into any Sale/Leaseback Transaction with any person
(other than the Company or a Subsidiary) unless:
(a) the Company or such Subsidiary would be entitled to incur Indebtedness,
in a principal amount equal to the Attributable Indebtedness with respect to
such Sale/Leaseback Transaction, secured by a Lien on the property subject to
such Sale/Leaseback Transaction pursuant to the covenant described under
"Limitation on Liens" above without equally and ratably securing the Notes
pursuant to such covenant;
(b) after the date on which the Notes are originally issued and within a
period commencing six months prior to the consummation of such Sale/Leaseback
Transaction and ending six months after the consummation thereof, the Company
or such Subsidiary shall have expended for property used or to be used in the
ordinary course of business of the Company and its Subsidiaries an amount
equal to all or a portion of the net proceeds of such Sale/Leaseback
Transaction and the Company shall have elected to designate such amount as a
credit against such Sale/Leaseback Transaction (with any such amount not being
so designated to be applied as set forth in clause (c) below); or
(c) the Company, during the 12-month period after the effective date of such
Sale/Leaseback Transaction, shall have applied to the voluntary defeasance or
retirement of Notes or any Pari Passu Indebtedness an amount
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equal to the greater of the net proceeds of the sale or transfer of the
property leased in such Sale/Leaseback Transaction and the fair value, as
determined by the Board of Directors of the Company, of such property at the
time of entering into such Sale/Leaseback Transaction (in either case adjusted
to reflect the remaining term of the lease and any amount expended by the
Company as set forth in clause (b) above), less an amount equal to the
principal amount of Notes and Pari Passu Indebtedness voluntarily defeased or
retired by the Company within such 12-month period and not designated as a
credit against any other Sale/Leaseback Transaction entered into by the
Company or any Subsidiary during such period.
Limitations on Mergers and Consolidations
The Indenture provides that neither the Company nor any Guarantor (other
than any Guarantor that shall have been released from its Guarantee pursuant
to the provisions of the Indenture) will consolidate with or merge into any
Person, or sell, lease, convey, transfer or otherwise dispose of all or
substantially all of its assets to any Person, unless: (i) the Person formed
by or surviving such consolidation or merger (if other than the Company or
such Guarantor, as the case may be), or to which such sale, lease, conveyance,
transfer or other disposition shall be made (collectively, the "Successor"),
is a corporation organized and existing under the laws of the United States or
any State thereof or the District of Columbia (or, alternatively, in the case
of a Guarantor organized under the laws of a jurisdiction outside the United
States, a corporation organized and existing under the laws of such foreign
jurisdiction), and the Successor assumes by supplemental indenture in a form
satisfactory to the Trustee all of the obligations of the Company or such
Guarantor, as the case may be, under the Indenture and under the Notes; and
(ii) immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing.
CERTAIN DEFINITIONS
The following is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms
and for the definitions of other capitalized terms used herein and not defined
below.
"Adjusted Net Assets" of a Guarantor at any date means the lesser of (x) the
amount by which the fair value of the property of such Guarantor at such date
exceeds the total amount of liabilities, including, without limitation, the
probable amount of contingent liabilities (after giving effect to all other
fixed and contingent liabilities incurred or assumed on such date) of such
Guarantor at such date, but excluding liabilities under the Guarantee of such
Guarantor, and (y) the amount by which the present fair saleable value of the
assets of such Guarantor at such date exceeds the amount that will be required
to pay the probable liability of such Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on
such date and after giving effect to any collection from any Subsidiary of
such Guarantor in respect of any obligations of such Subsidiary under the
Guarantee of such Guarantor), excluding debt in respect of the Guarantee of
such Guarantor, as they become absolute and matured.
"Attributable Indebtedness," when used with respect to any Sale/Leaseback
Transaction, means, as at the time of determination, the present value
(discounted at the rate set forth or implicit in the terms of the lease
included in such transaction) of the total obligations of the lessee for
rental payments (other than amounts required to be paid on account of property
taxes, maintenance, repairs, insurance, assessments, utilities, operating and
labor costs and other items which do not constitute payments for property
rights) during the remaining term of the lease included in such Sale/Leaseback
Transaction (including any period for which such lease has been extended).
"Capitalized Lease Obligation" of any Person means any obligation of such
Person to pay rent or other amounts under a lease of property, real or
personal, that is required to be capitalized for financial reporting purposes
in accordance with generally accepted accounting principles; and the amount of
such obligation shall be the capitalized amount thereof determined in
accordance with generally accepted accounting principles.
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"Consolidated Net Worth" of the Company means the consolidated stockholders'
equity of the Company and its Subsidiaries, as determined in accordance with
generally accepted accounting principles.
"Funded Indebtedness" means all Indebtedness (including Indebtedness
incurred under any revolving credit, letter of credit or working capital
facility) that matures by its terms, or that is renewable at the option of any
obligor thereon to a date, more than one year after the date on which such
Indebtedness is originally incurred.
"Hedging Obligations" of any Person means the net obligation (not the
notional amount) of such Person pursuant to any interest rate swap agreement,
foreign currency exchange agreement, interest rate collar agreement, option or
future contract or other similar agreement or arrangement relating to interest
rates or foreign exchange rates.
"Indebtedness" of any Person at any date means, without duplication, (i) all
indebtedness of such Person for borrowed money (whether or not the recourse of
the lender is to the whole of the assets of such Person or only to a portion
thereof), (ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) all obligations of such Person in
respect of letters of credit or other similar instruments (or reimbursement
obligations with respect thereto), other than standby letters of credit and
performance bonds issued by such Person in the ordinary course of business, to
the extent not drawn or, to the extent drawn, if such drawing is reimbursed
not later than the third Business Day following demand for reimbursement, (iv)
all obligations of such Person to pay the deferred and unpaid purchase price
of property or services, except trade payables and accrued expenses incurred
in the ordinary course of business, (v) all Capitalized Lease Obligations of
such Person, (vi) all Indebtedness of others secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person, (vii)
all Indebtedness of others guaranteed by such Person to the extent of such
guarantee and (viii) all Hedging Obligations of such Person.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law. For the
purposes of the Indenture, the Company or any Subsidiary of the Company shall
be deemed to own subject to a Lien any asset which it has acquired or holds
subject to the interest of a vendor or lessor under any conditional sale
agreement, Capitalized Lease Obligation or other title retention agreement
relating to such asset.
"Non-Recourse Indebtedness" means, at any date, the aggregate amount at such
date of Indebtedness of the Company or a Subsidiary of the Company in respect
of which the recourse of the holder of such Indebtedness, whether direct or
indirect and whether contingent or otherwise, is effectively limited to
specified assets, and with respect to which neither the Company nor any of its
Subsidiaries provides any credit support.
"Pari Passu Indebtedness" means any Indebtedness of the Company, whether
outstanding on the date on which the Notes are originally issued or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
be subordinated in right of payment to the Notes.
"Sale/Leaseback Transaction" means any arrangement with any Person providing
for the leasing by the Company or any Subsidiary of the Company, for a period
of more than three years, of any real or tangible personal property, which
property has been or is to be sold or transferred by the Company or such
Subsidiary to such Person in contemplation of such leasing.
"Significant Subsidiary" has the meaning set forth in Regulation S-X under
the Exchange Act.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as being: (i) default by the
Company or any Guarantor for 30 days in payment of any interest on the Notes;
(ii) default by the Company or any Guarantor in any payment
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of principal of or premium, if any, on the Notes; (iii) default by the Company
or any Guarantor in compliance with any of its other covenants or agreements
in, or provisions of, the Notes, the Guarantees or the Indenture which shall
not have been remedied within 60 days after written notice by the Trustee or
by the holders of at least 25% in principal amount of the Notes then
outstanding; (iv) the acceleration of the maturity of any Indebtedness (other
than the Notes or any Non-Recourse Indebtedness) of the Company or any
Subsidiary of the Company having an outstanding principal amount of $10
million or more individually or in the aggregate, or a default in the payment
of any principal or interest in respect of any Indebtedness (other than the
Notes or any Non-Recourse Indebtedness) of the Company or any Subsidiary of
the Company having an outstanding principal amount of $10 million or more
individually or in the aggregate and such default shall be continuing for a
period of 30 days without the Company or such Subsidiary, as the case may be,
effecting a cure of such default; (v) a judgment or order for the payment of
money in excess of $10 million (net of applicable insurance coverage) having
been rendered against the Company, a Guarantor or any Significant Subsidiary
of the Company and such judgment or order shall continue unsatisfied and
unstayed for a period of 30 days; or (vi) certain events involving bankruptcy,
insolvency or reorganization of the Company, a Guarantor or any Significant
Subsidiary of the Company. Pursuant to the Indenture, Guarantors may not be
released from their Guarantees if a Default or Event of Default has occurred
and is continuing. The obligations of any Subsidiary of the Company that
becomes a Guarantor are not dependent upon whether such Subsidiary becomes a
Guarantor prior to or after an Event of Default. The Indenture provides that
the Trustee may withhold notice to the holders of the Notes of any default
(except in payment of principal of or premium, if any, or interest on the
Notes) if the Trustee considers it in the interest of the holders of the Notes
to do so.
The Indenture provides that if an Event of Default occurs and is continuing
with respect to the Indenture, the Trustee or the holders of not less than 25%
in principal amount of the Notes outstanding may declare the principal of and
premium, if any, and accrued but unpaid interest on all the Notes to be due
and payable. Upon such a declaration, such principal, premium, if any, and
interest will be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company
or a Guarantor occurs and is continuing, the principal of and premium, if any,
and interest on all the Notes will become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders
of the Notes. The amount due and payable on the acceleration of any Note will
be equal to 100% of the principal amount of such Note, plus accrued interest
to the date of payment. Under certain circumstances, the holders of a majority
in principal amount of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences.
The Indenture provides that no holder of a Note may pursue any remedy under
the Indenture unless (i) the Trustee shall have received written notice of a
continuing Event of Default, (ii) the Trustee shall have received a request
from holders of at least 25% in principal amount of the Notes to pursue such
remedy, (iii) the Trustee shall have been offered indemnity reasonably
satisfactory to it and (iv) the Trustee shall have failed to act for a period
of 60 days after receipt of such notice and offer of indemnity; however, such
provision does not affect the right of a holder of a Note to sue for
enforcement of any overdue payment thereon.
The holders of a majority in principal amount of the Notes then outstanding
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee under the
Indenture, subject to certain limitations specified in the Indenture. The
Indenture requires the annual filing by the Company with the Trustee of a
written statement as to compliance with the covenants contained in the
Indenture.
MODIFICATION AND WAIVER
The Indenture provides that modifications and amendments to the Indenture or
the Notes may be made by the Company, the Guarantors and the Trustee with the
consent of the holders of a majority in principal amount of the Notes then
outstanding; provided that no such modification or amendment may, without the
consent of the holder of each Note then outstanding affected thereby, (i)
reduce the amount of Notes whose holders must
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consent to an amendment, supplement or waiver; (ii) reduce the rate of or
change the time for payment of interest, including default interest, on any
Note; (iii) reduce the principal of or change the fixed maturity of any Note
or alter the premium or other provisions with respect to redemption; (iv) make
any Note payable in money other than that stated in the Note; (v) impair the
right to institute suit for the enforcement of any payment of principal of, or
premium, if any, or interest on, any Note; (vi) make any change in the
percentage of principal amount of Notes necessary to waive compliance with
certain provisions of the Indenture; or (vii) waive a continuing Default or
Event of Default in the payment of principal of, or premium, if any, or
interest on the Notes. The Indenture will provide that modifications and
amendments of the Indenture may be made by the Company, the Guarantors and the
Trustee without the consent of any holders of Notes in certain limited
circumstances, including (a) to cure any ambiguity, omission, defect or
inconsistency, (b) to provide for the assumption of the obligations of the
Company or any Guarantor under the Indenture upon the merger, consolidation or
sale or other disposition of all or substantially all of the assets of the
Company or any such Guarantor, (c) to provide for uncertificated Notes in
addition to or in place of certificated Notes, (d) to reflect the release of
any Guarantor from its Guarantee, or the addition of any Subsidiary of the
Company as a Guarantor, in the manner provided by the Indenture, (e) to comply
with any requirement in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act of 1939 or (f) to make any change that
does not adversely affect the rights of any holder of Notes in any material
respect.
The Indenture provides that the holders of a majority in aggregate principal
amount of the Notes then outstanding may waive any past default under the
Indenture, except a default in the payment of principal, or premium, if any,
or interest.
DISCHARGE AND TERMINATION
Defeasance of Certain Obligations
The Indenture provides that the Company and the Guarantors may terminate
certain of their obligations under the Indenture, including those described
under the section "Certain Covenants," if (i) the Company irrevocably deposits
in trust with the Trustee cash or non-callable U.S. Government Obligations or
a combination thereof sufficient to pay principal of and interest on the Notes
to maturity, and to pay all other sums payable by it under the Indenture; (ii)
no Default or Event of Default shall have occurred and be continuing on the
date of such deposit; (iii) the Company shall have delivered to the Trustee an
Opinion of Counsel from nationally recognized counsel acceptable to the
Trustee or a tax ruling to the effect that the holders of the Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
the Company's exercise of its option under such section and will be subject to
Federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such option had not been exercised; (iv)
the Company delivers to the Trustee certain other documents called for by the
Indenture, including an Officers' Certificate and Opinions of Counsel; and (v)
certain other conditions are satisfied. The Company's payment obligations and
the Guarantors' Guarantees shall survive until the Notes are no longer
outstanding.
Discharge
The Indenture provides that the Indenture shall cease to be of further
effect (subject to certain exceptions relating to compensation and indemnity
of the Trustee and repayment to the Company of excess money or securities)
when (i) either (A) all outstanding Notes theretofore authenticated and issued
(other than destroyed, lost or stolen Notes that have been replaced or paid)
have been delivered to the Trustee for cancellation; or (B) all outstanding
Notes not theretofore delivered to the Trustee for cancellation (x) have
become due and payable or (y) will become due and payable at their stated
maturity within one year and the Company has deposited or caused to be
deposited with the Trustee as funds (immediately available to the holders in
the case of clause (x)) in trust for such purpose an amount which, together
with earnings thereon, will be sufficient to pay and discharge the entire
indebtedness on such Notes for principal and interest to the date of such
deposit (in the case of Notes which have become due and payable) or to the
stated maturity, as the case may be; (ii) the Company has paid all
54
<PAGE>
other sums payable by it under the Indenture; and (iii) the Company has
delivered to the Trustee an Officers' Certificate stating that all conditions
precedent to satisfaction and discharge of the Indenture have been complied
with, together with an Opinion of Counsel to the same effect.
GOVERNING LAW
The Indenture provides that it will be governed by and will be construed in
accordance with the laws of the State of New York.
THE TRUSTEE
The Bank of New York is the Trustee under the Indenture. Its address is
10161 Centurion Parkway, 3rd Floor, Jacksonville, Florida 32256. The Company
has also appointed the Trustee as the initial Registrar and as initial Paying
Agent under the Indenture.
The Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in
other transactions; however, if it acquires any conflicting interest (as
defined in the Trust Indenture Act of 1939, as amended), it must eliminate
such conflict or resign.
The Indenture provides that in case an Event of Default shall occur (and be
continuing), the Trustee will be required to use the degree of care and skill
of a prudent man in the conduct of his own affairs. The Trustee will be under
no obligation to exercise any of its powers under the Indenture at the request
of any of the holders of the Notes, unless such holders shall have offered the
Trustee indemnity reasonably satisfactory to it.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Tuboscope Inc.,
2835 Holmes Road, Houston, Texas 77051, Attention: Secretary.
55
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE BANK CREDIT FACILITY
On February 9, 1998, the Company and a group of participating lenders,
including affiliates of certain of the Initial Purchasers, agreed to amend the
Bank Credit Facility. See "Plan of Distribution." The Bank Credit Facility, as
amended, is a $235 million facility which includes a $130 million advance/term
loan facility ("term loans") due over six years, a $100 million revolving
credit facility ("revolving loans") due over five years, and a $5 million
agent swingline facility due over five years. The Bank Credit Facility, as
amended, will rank pari passu in right of payment with all existing and future
senior unsecured obligations of the Company, including the Company's
obligations under the Notes and senior in right of payment to all future
indebtedness of the Company that is, by its terms, expressly subordinated to
the Bank Credit Facility, as amended. The Company's obligations under the Bank
Credit Facility, as amended, are guaranteed by all current and future material
United States subsidiaries. All outstanding stock pledges of the Company's
subsidiaries under the Bank Credit Facility were released in connection with
the amendment to the Bank Credit Facility, although the participating lenders
may request stock pledges from any foreign subsidiary which is a direct
material subsidiary. Under the terms of the Indenture, the Notes are equally
and ratably secured by any such stock pledges. The Company does not currently
have any foreign subsidiaries which are direct material subsidiaries.
As of December 31, 1997, the Company had borrowed approximately $196.8
million under the Bank Credit Facility. The Company retired $81.5 million
under the Bank Credit Facility with proceeds from the Offering. Following the
consummation of the offering of the Private Notes, the Company had
approximately $99.3 million available for borrowing under the Bank Credit
Facility, as amended.
The revolving loans and the swingline facility may be repaid in whole or in
part, at any time prior to August 6, 2001. 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.
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 Bank Credit
Facility, as amended, requires interest rate protection agreements be
maintained on at least 50% of the term loan outstanding balance, for not less
than three years.
The Bank Credit Facility, as amended, restricts the Company from paying
dividends on its capital stock unless the total funded debt to capital ratio
(as defined in the Bank Credit Facility, as amended) is less than 40%. The
Company's total funded debt to capital ratio was 42.5% at December 31, 1997.
The Bank Credit Facility, as amended, also currently restricts the optional
redemption of the Notes. In addition, the Bank Credit Facility, as amended,
contains financial covenants with respect to interest coverage ratio, total
funded debt to capital ratio, and a minimum net worth. Management believes it
is in compliance with all covenants in the Bank Credit Facility, as amended,
at December 31, 1997.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income of the Exchange Offer to holders of the Private Notes. This
discussion is a summary for general information only and does not consider all
aspects of the Private Notes in light of such holder's personal circumstances.
This discussion also does not address the federal income tax consequences to
holders subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities, or foreign currency, tax-exempt entities,
banks, thrifts, insurance companies, persons that hold the Notes as part of a
"straddle," a "hedge" against currency risk or a "conversion transaction;"
persons that have a "functional currency" other than the U.S. dollar, and
investors in pass-through entities. In addition, this discussion does not
prescribe any tax consequences arising out of the tax laws of any state, local
or foreign jurisdiction.
56
<PAGE>
This discussion is based upon the Code, existing and proposed regulations
thereunder, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decisions now in effect, all of which are subject to change (possibly
on a retroactive basis). The Company has not and will not seek any rulings or
opinions from the IRS or counsel with respect to the matters discussed below.
There can be no assurance that the IRS will not take positions concerning the
tax consequences of the Exchange Offer which are different from those
discussed herein.
HOLDERS OF THE PRIVATE NOTES SHOULD CONSULT THEIR OWN ADVISORS CONCERNING
THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY
STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THE EXCHANGE OFFER IN LIGHT OF
THEIR PARTICULAR SITUATIONS.
The exchange of Private Notes for Exchange Notes pursuant to the Exchange
Offer should not constitute a taxable exchange. As a result, a holder (i)
should not recognize taxable gain or loss as a result of exchanging Private
Notes for Exchange Notes pursuant to the Exchange Offer; (ii) the holding
period of the Exchange Notes should include the holding period of the Private
Notes exchanged therefor and (iii) the adjusted tax basis of the Exchange
Notes should be the same as the adjusted tax basis of the Private Notes
exchanged therefor immediately before the exchange.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resale of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that for
a period not less than 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale. In addition, until August 6, 1998 all dealers effecting
transactions in Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Company's performance of, or compliance with, the Registration Rights
Agreement (including the expenses of one counsel for the holders of the
Private Notes) and will indemnify the holders of Private Notes (including any
broker-dealers), and certain parties related to such holders, against certain
liabilities, including liabilities under the Securities Act.
57
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by James F. Maroney, III, Vice President, Secretary and General
Counsel of the Company.
EXPERTS
The consolidated financial statements of Tuboscope Inc. at December 31, 1997
and 1996, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon, appearing elsewhere herein, and are included in reliance upon
the authority of such firm as experts in accounting and auditing.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1996................. F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995..................................................... F-4
Consolidated Statements of Common Stockholders' Equity and Redeemable
Preferred Stock for the years ended December 31, 1997, 1996, and 1995.... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tuboscope Inc.
We have audited the accompanying consolidated balance sheets of Tuboscope
Inc. as of December 31, 1997 and 1996 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, 1997.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also 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 Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
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 4, 1998
except for Note 13, as to which the date is
February 25, 1998
F-2
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1997 1996
------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 12,593 $ 10,407
Accounts receivable, net........................... 144,067 96,083
Inventory, net..................................... 78,317 47,170
Deferred income taxes.............................. 984 776
Prepaid expenses and other......................... 11,755 11,797
-------- --------
Total current assets............................. 247,716 166,233
-------- --------
Property and equipment:
Land, buildings and leasehold improvements......... 79,581 73,499
Operating equipment and equipment leased to
customers......................................... 208,052 167,440
Accumulated depreciation and amortization.......... (77,072) (59,559)
-------- --------
Net property and equipment....................... 210,561 181,380
Identified intangibles, net.......................... 23,315 22,583
Goodwill, net........................................ 202,301 132,125
Other assets, net.................................... 2,274 2,844
-------- --------
Total assets..................................... $686,167 $505,165
======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C>
Current liabilities:
Accounts payable................................... $ 43,350 $ 28,896
Accrued liabilities................................ 76,596 41,554
Income taxes payable............................... 15,902 4,876
Current portion of long-term debt and short-term
borrowings........................................ 30,574 16,514
-------- --------
Total current liabilities........................ 166,422 91,840
Long-term debt....................................... 187,803 168,229
Pension liabilities.................................. 8,916 9,846
Deferred taxes payable............................... 22,239 15,364
Other liabilities.................................... 754 984
-------- --------
Total liabilities................................ 386,134 286,263
-------- --------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares au-
thorized, 44,235,591 shares issued and outstanding
(41,612,495 at December 31, 1996)................... 442 416
Paid-in capital.................................... 294,402 261,932
Retained earnings (deficit)........................ 10,155 (42,949)
Cumulative translation adjustment.................. (4,966) (497)
-------- --------
Total common stockholders' equity................ 300,033 218,902
-------- --------
Total liabilities and equity..................... $686,167 $505,165
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Sale of services and rental of equipment. $ 335,339 $ 248,415 $ 182,171
Sale of products......................... 189,892 93,016 7,844
---------- ---------- ----------
525,231 341,431 190,015
---------- ---------- ----------
Costs and expenses:
Cost of services sold and rental of
equipment............................... 236,510 183,101 132,799
Cost of products sold.................... 120,460 58,127 4,258
Amortization of goodwill................. 5,281 2,626 1,310
Selling, general and administrative...... 51,475 35,662 20,732
Research and engineering costs........... 10,580 6,595 3,456
Write-off of long-lived assets........... -- 63,061 --
Drexel transaction costs................. -- 11,306 --
Write-off of Italian operations.......... -- 2,234 --
---------- ---------- ----------
424,306 362,712 162,555
---------- ---------- ----------
Operating profit (loss).................... 100,925 (21,281) 27,460
Other expense (income):
Interest expense......................... 14,456 13,414 12,328
Interest income.......................... (331) (470) (210)
Foreign exchange (gains) losses.......... 69 (1,221) (440)
Minority interest........................ 629 741 652
Other, net............................... 1,153 1,243 (75)
---------- ---------- ----------
Income (loss) before income taxes and
extraordinary loss........................ 84,949 (34,988) 15,205
Provision for income taxes................. 31,845 8,238 6,386
---------- ---------- ----------
Income (loss) before extraordinary loss.... 53,104 (43,226) 8,819
Extraordinary loss, net of income tax
benefits of $3,431,000 in 1996............ -- (6,373) --
---------- ---------- ----------
Net income (loss).......................... 53,104 (49,599) 8,819
Dividends applicable to preferred stock.... -- -- 700
---------- ---------- ----------
Net income (loss) applicable to common
stock..................................... $ 53,104 $ (49,599) $ 8,119
========== ========== ==========
Basic earnings (loss) per common share:
Income (loss) before extraordinary item.. $ 1.22 $ (1.17) $ 0.44
Extraordinary loss....................... -- (.17) --
---------- ---------- ----------
Net income (loss) per common share....... $ 1.22 $ (1.35) $ 0.44
========== ========== ==========
Dilutive earnings (loss) per common share:
Income (loss) before extraordinary item.. $ 1.14 $ (1.17) $ 0.44
Extraordinary loss....................... -- (.17) --
---------- ---------- ----------
Net income (loss) per common share-
assuming dilution....................... $ 1.14 $ (1.35) $ 0.44
========== ========== ==========
Weighted average number of common shares
outstanding:
Basic.................................... 43,575,458 36,809,126 18,530,338
========== ========== ==========
Dilutive................................. 46,946,432 36,809,126 18,530,338
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON
STOCK RETAINED CUMULATIVE REDEEMABLE
$.01 PAID-IN EARNINGS TRANSLATION PREFERRED
PAR CAPITAL (DEFICIT) ADJUSTMENT STOCK
------ -------- --------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
Net Income.................. -- -- 8,819 -- --
Translation adjustment...... -- -- -- (500) --
---- -------- -------- ------- --------
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)
Net Loss.................... -- -- (49,599) -- --
Translation adjustment...... -- -- -- 1,276 --
---- -------- -------- ------- --------
Balance, December 31, 1996.... 416 261,932 (42,949) (497) --
Common stock issued, 124,766
shares in exchange for
outstanding debt of
$1,871,490................. 1 1,870 -- -- --
Common stock issued, 820,698
shares at an average price
of $6.71 per share......... 8 5,499 -- -- --
Common stock issued in
acquisition of Fiber Glass
Systems Inc., 1,689,542
shares at $13.00 per share. 17 21,947 -- -- --
Tax benefit of options
exercised.................. -- 3,154 -- -- --
Net Income.................. -- -- 53,104 -- --
Translation adjustment...... -- -- -- (4,469) --
---- -------- -------- ------- --------
Balance, December 31, 1997.... $442 $294,402 $ 10,155 $(4,966) $ --
==== ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 53,104 $ (49,599) $ 8,819
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 26,110 17,606 15,037
Compensation related to employee 401(K)
plan....................................... 676 229 239
Provision (recovery) for losses on accounts
receivable................................. 2,421 628 (272)
Provision (recovery) for losses on
inventory.................................. 1,996 329 (275)
Write-off of long-lived assets.............. -- 63,061 --
Write-off of unamortized debt fees.......... -- 2,231 --
Provision (benefit) for deferred income
taxes...................................... 5,976 (4,894) 3,057
Pension amortization benefit................ (352) (485) (315)
Changes in current assets and liabilities,
net of effects from various acquisitions:
Accounts receivable....................... (39,339) (4,374) (731)
Inventory................................. (27,118) (2,163) (1,658)
Prepaid expenses and other................ 256 (4,373) (762)
Accounts payable, accrued liabilities and
other.................................... 11,319 (7,671) (2,594)
Federal and foreign income taxes payable.. 11,819 (424) 158
Pension liabilities....................... (578) 462 878
-------- --------- --------
Net cash provided by operating activities... 46,290 10,563 21,581
-------- --------- --------
Cash flows used for investing activities:
Capital expenditures.......................... (35,190) (18,681) (7,645)
Proceeds from sale-leaseback transactions..... -- 2,973 12,500
Business acquisitions, net of cash acquired... (36,856) (43,236) (5,373)
Other......................................... (963) (1,513) (566)
-------- --------- --------
Net cash used for investing activities...... (73,009) (60,457) (1,084)
-------- --------- --------
Cash flows provided by (used for) financing
activities:
Borrowings under financing agreements, net.... 60,567 175,090 1,844
Principal payments under financing agreements. (36,428) (157,244) (20,825)
Cash received in Drexel merger................ -- 2,101 --
Debt issuance costs........................... -- (785) (95)
Purchase of foreign currency options.......... -- -- (258)
Dividends paid on Redeemable Series A
Convertible Preferred Stock.................. -- (175) (700)
Issuance of common stock under employee stock
plan......................................... 479 128 125
Net proceeds from sale of common stock........ 4,351 31,350 34
-------- --------- --------
Net cash provided by (used for) financing
activities................................. 28,969 50,465 (19,875)
-------- --------- --------
Effect of exchange rate changes on cash......... (64) 442 241
-------- --------- --------
Net increase in cash and cash equivalents....... 2,186 1,013 863
Cash and cash equivalents:
Beginning of period........................... 10,407 9,394 8,531
-------- --------- --------
End of period................................. $ 12,593 $ 10,407 $ 9,394
======== ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TUBOSCOPE INC.
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 Inc. (the Company) and D.O.S. Ltd. (Drexel)
was consummated (the "Drexel Merger"). The 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 51% of the
Company's 1997 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,
Argentina, Indonesia, and Thailand 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.
The Company's common stock became listed on the New York Stock Exchange
under the symbol "TBI" on September 9, 1997. Prior to that date, the Company
was listed on the Nasdaq Stock Market.
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.
F-7
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $3,560,000, and $2,382,000 in 1997 and 1996, 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>
1997 1996
------- -------
<S> <C> <C>
Components, subassemblies and expendable parts............. $52,354 $42,689
Equipment under production................................. 34,484 13,475
Inventory reserve.......................................... (8,521) (8,994)
------- -------
Inventory, net........................................... $78,317 $47,170
======= =======
</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 accelerated costs
recovery systems for income tax reporting purposes. Estimated useful lives are
33 years for buildings and 5-12 years for machinery and equipment. The cost of
repairs and maintenance is charged to income as incurred. Major repairs and
improvements are capitalized and depreciated over the remaining useful life of
the asset. The depreciation of fixed assets recorded under capital lease
agreements is included in depreciation expense. Property and equipment
depreciation expense was $19,142,000, $13,118,000, and $10,515,000 for
December 31, 1997, 1996, and 1995, 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 $9,998,000 and $9,059,000 at
December 31, 1997 and 1996, 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 (See Note 3). Such excess costs are being
amortized on a straight-line basis over lives ranging from ten to forty years
depending on the estimated economic life. Accumulated amortization at December
31, 1997 and 1996 was approximately $13,052,000 and $7,771,000 respectively.
F-8
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121).
Impairment losses are recognized when indicators of impairment are present and
the estimated discounted cash flows are not sufficient to recover the asset's
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 $63,061,000 including a writedown of approximately $50,761,000
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.
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,
1997, the Company had an interest rate cap and various swap transactions in
place (see Note 6).
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, because gains and losses
on these contracts offset losses and gains on the transactions being hedged.
At December 31, 1997 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.
F-9
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assets and liabilities of certain foreign subsidiaries are translated at
current exchange rates and the related translation adjustments are recorded
directly in stockholders equity. For subsidiaries which operate in countries
which have highly inflationary economies, certain assets are translated at
historical exchange rates and all translation adjustments are reflected in the
statements of operations.
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 SFAS No. 128,
"Earnings per Share" (SFAS No. 128), which was issued by the Financial
Accounting Standards Board in 1997. The statement, which was effective for
fiscal years ending after December 15, 1997, replaces the presentation of
primary and fully diluted earnings per common share with a presentation of
basic and diluted earnings per common share. Basic earnings per common share
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. The
Company's diluted earnings per common share is calculated by adjusting the
income available to common stockholders for after-tax interest expense on
convertible debt ($219,000 in 1997 and $0 in 1996 and 1995) and dividing that
number by the weighted average number of common shares plus shares which would
be assumed outstanding assuming conversion of convertible debt, vested stock
options and outstanding stock warrants under the treasury stock method, and
shares to be issued pursuant to earnout provisions. Results for 1996 and 1995
have been restated to be consistent with the 1997 presentation.
Reclassification of prior year amounts
Certain reclassifications of 1996 and 1995 amounts have been made to conform
to the 1997 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.
F-10
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 its strategic plan by completing ten acquisitions and two
equity investments.
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:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Fair value of assets acquired.................. $103,083 $ 257,938 $ 6,373
Cash paid...................................... (36,856) (43,890) (5,373)
Common stock issued in Drexel Merger........... -- (102,143) --
Common stock issued in other acquisitions...... (21,964) (1,935) --
-------- --------- -------
Liabilities assumed and debt issued.......... $ 44,263 $ 109,970 $ 1,000
======== ========= =======
</TABLE>
The purchase price of the fiscal 1997 acquisitions exceeded the preliminary
allocation of the fair value of assets acquired by $66,449,000. The purchase
price of the fiscal 1996 acquisitions exceeded the allocation of the fair
value of assets acquired by $105,185,000, principally as a result of the
Drexel Merger.
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 1996. 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 1996.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue.................................................. $559,213 $479,458
Income (loss) before extraordinary loss.................. $ 55,145 $(36,358)
Net income (loss)........................................ $ 55,145 $(42,731)
Earnings (loss) per share................................ $ 1.17 $ (0.96)
</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 $32,244,000 and pro forma earnings per share
would have been $0.72 in 1996.
A discussion of the significant acquisitions follows for each of the
respective years:
Fiscal 1997
On March 7, 1997, the Company acquired Fiber Glass Systems, Inc. ("FGS"), a
manufacturer of premium fiberglass tubulars used in corrosive oilfield
applications, for an aggregate purchase price of $32,668,270. The purchase
price includes 1,689,542 shares of Common Stock of the Company valued at
$13.00 per share and $906,869 in cash. Approximately $9.8 million of the
purchase price was accrued at December 31, 1997, and such payment is expected
to be made substantially in common stock in the first half of 1998. The
Company also assumed debt of $5,250,000 as part of the acquisition of FGS.
In addition to the acquisition of FGS, the Company completed ten additional
acquisitions and two equity investments for an aggregate purchase price of
$48,675,000 consisting of cash of $35,949,000, notes payable of $4,276,000 and
accrued cash payments of $8,450,000. In addition, the Company assumed debt of
$1,989,000 as part of these acquisitions.
F-11
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal 1996
During 1996, the Company executed seven acquisitions, including the Drexel
Merger. Upon consummation of 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 ("Baker Hughes") 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 connection with the Drexel Merger, the
Company recorded $11,306,000 of transaction costs, including severance costs
of former executive officers and consolidation costs of personnel and
facilities.
The Company completed seven additional acquisitions in 1996 for total
consideration of $53,312,000. The consideration included cash of $43,236,000
notes payable of $8,141,000 and 129,967 shares of Company Common Stock valued
at $1,935,000. In addition, the Company assumed debt of $7,493,000 as part of
these acquisitions.
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.
4. ACCRUED LIABILITIES
At December 31, accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Compensation................................................ $14,580 $13,466
Insurance................................................... 4,678 4,211
Real estate, sales and other taxes.......................... 4,045 3,346
Payable to sellers for acquisitions......................... 18,247 --
Other....................................................... 35,046 20,531
------- -------
$76,596 $41,554
======= =======
</TABLE>
5. INCOME TAXES
The components of income (loss) before income taxes and extraordinary loss
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Domestic.......................................... $52,769 $(54,022) $(2,610)
Foreign........................................... 32,180 19,034 17,815
------- -------- -------
$84,949 $(34,988) $15,205
======= ======== =======
</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.
F-12
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes before extraordinary loss consists
of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current provision:
Domestic......................................... $15,996 $ 4,034 $ 2,179
Foreign.......................................... 9,873 9,098 1,150
------- ------- -------
Total current provision........................ 25,869 13,132 3,329
------- ------- -------
Deferred provision (benefit):
Domestic......................................... 934 (5,492) (2,481)
Foreign.......................................... 5,042 598 5,538
------- ------- -------
Total deferred provision (benefit)............. 5,976 (4,894) 3,057
------- ------- -------
Total provision................................ $31,845 $ 8,238 $ 6,386
======= ======= =======
</TABLE>
In 1996 the Company recorded a current tax benefit of $3,431,000 related to
the extraordinary loss of $9,804,000. The reconciliation of the expected to
the computed tax provision (benefit) is as follows at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- ------
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate... $29,732 $(12,246) $5,322
Incremental effect of foreign operations.......... 1,582 3,729 163
Nondeductible goodwill amortization............... 1,004 591 266
Nondeductible write-off of long-lived assets and
Drexel transaction costs......................... -- 16,071 --
State income taxes, net of federal benefit........ 228 130 33
Other, net........................................ (701) (37) 602
------- -------- ------
$31,845 $ 8,238 $6,386
======= ======== ======
</TABLE>
F-13
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Gross deferred tax assets:
Receivables......................................... $ 4,567 $ --
Domestic and foreign net operating losses........... 1,997 3,276
Accrued liabilities and other reserves.............. 2,310 3,104
Inventory reserves.................................. 3,055 2,791
Other deferred tax assets........................... 527 1,056
-------- --------
Subtotal gross deferred tax assets................ 12,456 10,227
Valuation allowance................................. (1,651) (1,171)
-------- --------
Net deferred tax assets............................... 10,805 9,056
-------- --------
Gross deferred tax liabilities:
Property and equipment.............................. (17,194) (15,012)
Intangible assets................................... (1,112) (1,015)
Reserve for foreign earnings........................ (6,500) (4,402)
Pension liability................................... (1,142) (1,290)
All other........................................... (6,112) (1,925)
-------- --------
Gross deferred tax liabilities........................ (32,060) (23,644)
-------- --------
Total net deferred tax liability...................... $ 21,255 $ 14,588
======== ========
</TABLE>
The total net deferred tax liability is comprised of $984,000 of net current
tax assets and $22,239,000 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 $41,754,000 at December 31, 1997. If such
earnings were repatriated, foreign withholding taxes of approximately
$2,370,000 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, 1997 the Company has $2,188,000 of domestic net operating
losses which will be carried forward and will expire between 2007 and 2011.
The Company also has approximately $3,372,000 of foreign net operating loss
carryforwards.
The Company has a valuation allowance of $1,651,000 against these net
operating losses as the Company believes that the corresponding deferred tax
asset may not be fully realizable. The Company's valuation allowance for these
loss carryforwards increased from $1,171,000 at December 31, 1996 to
$1,651,000 at December 31, 1997. This increase is principally related to
current year net operating losses.
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.
F-14
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$130,000,000 Term Notes payable to lenders, interest at
6.625% at December 31, 1997. Principal and interest payable
as described below through August 6, 2002................... $115,282 $130,000
$100,000,000 Revolving Facility expiring August 6, 2001.
Interest ranging from 6.5% to 6.625% at December 31, 1997
payable as described below.................................. 79,020 28,520
$5,000,000 Unsecured convertible subordinated Promissory
Notes, interest at 7.0%. Principal and interest payable
beginning January 31, 1998 and each January 31 thereafter
through January 31, 2002.................................... 5,000 5,000
$5,000,000 Swingline Facility expiring August 6, 2001.
Interest of 8.5% at December 31, 1997 payable as described
below....................................................... 2,500 3,000
Other........................................................ 16,575 18,223
-------- --------
Total debt................................................... 218,377 184,743
Less: Current maturities..................................... 30,574 16,514
-------- --------
Long-term debt due after one year.......................... $187,803 $168,229
======== ========
</TABLE>
Principal payments of long-term debt for years subsequent to 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999............................................................. $ 29,527
2000............................................................. 30,337
2001............................................................. 113,333
2002............................................................. 12,532
Thereafter....................................................... 2,074
--------
$187,803
========
</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 six 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 these loans were 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 1996 the $75,000,000 10 3/4% Senior Subordinated Notes ("the Notes")
of the Company. In connection with the retirement 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, 1997 the Company
had outstanding letters of credit amounting to approximately $4,494,400 and an
available facility of approximately $16,485,600 on the $100,000,000 revolving
line of credit. Outstanding letters of credit on the Swingline were
approximately $1,236,202 and availability under the facility was $1,263,798.
The outstanding balance on the term loans became fixed on June 30, 1997. The
term loan facility requires quarterly installments through August 6, 2002.
Mandatory prepayment is required when the Company generates excess cash flow
as defined, or upon transfer of certain assets. An excess cash flow payment of
$4,968,000 was made on December 31, 1997.
F-15
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 by entering into
interest rate swap, cap, floor, and collar agreements to reduce the impact of
changes in interest rates on its floating rate debt. 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, the other) ("the counterparties") having the option to extend
the termination date to February 13, 2000. In addition, on December 27, 1996
the Company entered into two additional swap transactions with the same
counterparties with notional amounts of $20,000,000 each, ("Swap2"), effective
February 13, 1997 and expiring February 14, 2000. The Company also entered
into a $40,000,000 zero cost collar agreement with ABN Bank N.V. on May 14,
1997.
The swap transactions and collar are used to hedge $130,000,000 of the
Company's variable interest rate risk. Swap 1 sets a fixed rate of 5.82% for
the swap transaction with ABN Amro and 5.81% for the swap transaction with the
Chase Manhattan Bank. Swap 2 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 a margin as defined in the term loan agreement. 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
termination. The swap transactions can be canceled by the Company paying a
cancellation fee based upon prevailing market conditions and remaining life of
the agreement.
The $40,000,000 Collar Agreement requires the counterparty to pay the
Company if Libor exceeds 7.77% at each six month reset period. The payment due
the Company is calculated by multiplying the notional amount by the portion of
the rate which is greater than 7.77%. If Libor is less than 5.95%, the Company
pays the counterparty the notional amount multiplied by the amount the rate is
less than 5.95% at the six month reset period. This effectively establishes a
Libor ceiling at 7.77% on $40,000,000 of the Company's variable rate debt.
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 and collar transactions at December 31, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997
--------------
NOTIONAL CARRYING FAIR
COUNTERPARTY AMOUNT AMOUNT VALUE
------------ -------- -------- -----
<S> <C> <C> <C>
ABN AMRO......................................... $25,000 -- $ (48)
ABN AMRO......................................... $20,000 -- $(102)
CHASE BANK....................................... $25,000 -- $ (43)
CHASE BANK....................................... $20,000 -- (104)
ABN AMRO......................................... $40,000 -- $(233)
</TABLE>
F-16
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total debt includes $9,982,104 of promissory notes to former owners of
businesses acquired who remain employed by the Company.
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 42.5% at December 31, 1997. The credit agreement also contains
financial covenants with respect to interest coverage ratio, total funded debt
to capital ratio, and a minimum net worth. The Company believes it is in
compliance with all covenants in the credit agreement at December 31, 1997.
Subsequent to December 31, 1997, the Company reached an agreement in
principle to amend the Credit Agreement with a group of participating lenders.
The Credit Agreement, as amended, will rank pari passu with all existing and
future senior unsecured obligations of the Company. The agreement, as amended,
will include a $130,000,000 advance/term loan facility due over six years, a
$100,000,000 revolving credit facility due over five years and a $5,000,000
swingline facility due over five years. The Credit Agreement, as amended, will
be guaranteed by the Company's material United States subsidiaries. All
outstanding stock pledges of the Company's subsidiaries under the Credit
Agreement will be released in connection with the amendment to the Credit
Agreement, although the participating lenders under the amended agreement will
be able to request stock pledges from material direct foreign subsidiaries.
Under the Credit Agreement, as amended, unlike the current Credit Agreement,
the Company will not be required to make mandatory prepayments out of excess
cash flow.
7. 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. Prior to January 1, 1997, options granted were
generally exercisable in installments over five year periods. The options
granted in 1997 are exercisable in installments over three year periods
starting one year from the date of grant and generally expire ten years from
the date of grant.
F-17
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes options activity:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Shares under option at beginning of
year................................ 2,200,670 1,505,624 1,325,653
Drexel Merger grants................. -- 962,915 --
Granted.............................. 363,306 183,200 245,000
Canceled............................. (47,398) (3,339) (55,096)
Exercised............................ (748,732) (447,730) (9,933)
----------- ----------- -----------
Shares under option at end of year... 1,767,846 2,200,670 1,505,624
----------- ----------- -----------
Average price of outstanding options. $ 7.35 $ 5.71 $ 6.45
=========== =========== ===========
Price range of options outstanding... $.32-$28.75 $.32-$12.75 $.32-$6.875
=========== =========== ===========
Exercisable at end of year........... 887,171 1,412,732 772,374
=========== =========== ===========
Options available for grant at end of
year................................ 1,188,222 1,504,130 455,333
=========== =========== ===========
</TABLE>
Substantially all outstanding options were priced between $3.55 and $14.00
per share at December 31, 1997. The weighted average of the remaining
contractual life for the outstanding options at December 31, 1997 was 5.7
years. The weighted average fair value of options granted during 1997 and 1996
was $5.32 and $2.83, respectively. 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'
respective vesting periods, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Net Income (loss):
As reported............................................. $53,104 $(49,599)
======= ========
Pro forma SFAS 123...................................... $52,663 $(49,909)
======= ========
Diluted Earnings (loss) per share:
As reported............................................. $ 1.14 $ (1.35)
======= ========
Pro forma SFAS 123...................................... $ 1.13 $ (1.36)
======= ========
</TABLE>
The fair value of each option grant was estimated on the date of grant using
a Black Scholes option pricing model with the following assumptions for 1997
and 1996, respectively; risk free interest rates of 5.5% for both years;
expected lives of contracts of 3 and 5 years; and volatility of 48.1 percent
and 47.1 percent.
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 41,288, 20,042, and 24,179, shares were issued at an
average price of $11.58 per share, $6.37 per share, and $5.16 per share in
1997, 1996, and 1995, respectively.
In 1997 the Company established the Executive Stock Match Program (SMP) for
certain executive and key employees. Based on certain formulas, the Company
agreed to match stock ownership of these employees as of
F-18
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
June 30, 1997. The total shares to be matched were 342,327 shares with a value
of $6,805,461. This compensation cost is being amortized over the vesting life
associated with the plan of ten years. All matched stock will be held by the
Company until the earlier of 100% vesting by the employee, the expiration of
the SMP, or termination of employment from the Company. The matched stock will
also vest 100% due to a change in control of the Company.
8. RETIREMENT AND OTHER BENEFIT PLANS
On May 13, 1988, TVI adopted a defined contribution retirement plan, which
covers substantially all domestic employees. Employees may voluntarily
contribute up to 20% of compensation, as defined, to the plan. The
participants' contributions are matched in common stock by the Company up to a
maximum of 1 1/2% of compensation. Contributions were approximately $676,000
(31,915 shares at an average transfer price of $21.17), $229,000 (20,537
shares at an average transfer price of $11.13), and $239,000 (36,680 shares at
an average transfer price of $6.51) for 1997, 1996, and 1995 respectively.
The Company has 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, 1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost............................................ $ 225 $ 260 $ 292
Interest cost........................................... 522 561 564
Net amortization........................................ (352) (485) (315)
----- ----- -----
Pension expense....................................... $ 395 $ 336 $ 541
===== ===== =====
</TABLE>
The following table sets forth the amounts recognized in the Company's
consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested...................................................... $6,689 $7,162
Non-Vested.................................................. 268 296
------ ------
Accumulated benefit obligation................................ 6,957 7,458
Additional amounts related to projected pay increases......... 507 556
------ ------
Total projected benefit obligations........................... 7,464 8,014
Unrecognized net gain......................................... 1,609 1,961
------ ------
Pension liability............................................. 9,073 9,975
Less--amount included in current liabilities.................. 157 129
------ ------
Noncurrent portion of pension liability....................... $8,916 $9,846
====== ======
</TABLE>
The rate of increase in future compensation levels used in determining the
projected benefit obligations was 2% for December 31, 1997 and 1996, and 3%
for December 31, 1995. The discount rate was 7% for December 31, 1997, 1996,
and 1995. The unrecognized net gain from the change in projected compensation
levels is being amortized over ten years.
F-19
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. 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 $15,437,000,
$12,940,000, and $8,258,000 in 1997, 1996, and 1995, respectively.
Future minimum lease commitments under noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1997 are
payable as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 9,721
1999................................................................ 7,000
2000................................................................ 5,926
2001................................................................ 4,722
2002................................................................ 3,406
Thereafter.......................................................... 9,259
-------
Total future lease commitments.................................... $40,034
=======
</TABLE>
10. CONSOLIDATED STATEMENT OF CASH FLOWS
During 1997 the Company issued 124,766 shares of common stock to retire
approximately $1,871,000 of outstanding notes related to the acquisition of
SSR. 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 1995.
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest.......................................... $12,876 $14,836 $12,978
======= ======= =======
Taxes (net of refunds)............................ $13,629 $ 9,749 $ 3,306
======= ======= =======
</TABLE>
F-20
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
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
-------- ------- -------- ------- ------- ------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED 12/31/97:
Total revenue:
Unaffiliated
customers............ $276,651 $49,146 $ 85,144 $23,586 $21,259 $67,190 $ 2,255 $525,231
U.S. export sales..... (80,647) 11,008 18,084 8,213 4,851 27,899 10,592 --
-------- ------- -------- ------- ------- ------- ------- --------
TOTAL................... $196,004 $60,154 $103,228 $31,799 $26,110 $95,089 $12,847 $525,231
======== ======= ======== ======= ======= ======= ======= ========
Operating profit........ $ 17,719 $21,257 $ 20,825 $ 8,080 $ 4,395 $26,447 $ 2,202 $100,925
======== ======= ======== ======= ======= ======= ======= ========
Identifiable assets..... $448,916 $57,042 $ 85,687 $21,122 $10,498 $62,802 $ 100 $686,167
======== ======= ======== ======= ======= ======= ======= ========
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........ $(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
======== ======= ======== ======= ======= ======= ======= ========
</TABLE>
F-21
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
BASIC DILUTIVE
EARNINGS EARNINGS
(LOSS) (LOSS)
OPERATING NET PER PER
PROFIT INCOME COMMON COMMON
REVENUE (LOSS) (LOSS) SHARE SHARE
-------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1997
First Quarter................... $105,501 $ 18,174 $ 8,599 $ 0.20 $ 0.19
Second Quarter.................. 125,995 25,154 12,947 0.30 0.28
Third Quarter................... 141,411 27,780 15,037 0.34 0.32
Fourth Quarter.................. 152,324 29,817 16,521 0.37 0.34
-------- -------- -------- ------ ------
Total Year.................... $525,231 $100,925 $ 53,104 $ 1.22 $ 1.14
======== ======== ======== ====== ======
1996
First Quarter................... $ 47,018 $(57,244) $(55,589) $(2.97) $(2.97)
Second Quarter.................. 94,643 4,910 (1,187) (0.02) (0.02)
Third Quarter................... 94,672 15,405 6,796 0.16 0.16
Fourth Quarter.................. 105,098 15,648 381 0.01 0.01
-------- -------- -------- ------ ------
Total Year.................... $341,431 $(21,281) $(49,599) $(1.35) $(1.35)
======== ======== ======== ====== ======
1995
First Quarter................... $ 43,686 $ 4,661 $ 1,042 $ 0.05 $ 0.05
Second Quarter.................. 45,652 5,784 1,872 0.09 0.09
Third Quarter................... 47,067 7,012 2,002 0.10 0.10
Fourth Quarter.................. 53,610 10,003 3,903 0.20 0.20
-------- -------- -------- ------ ------
Total Year.................... $190,015 $ 27,460 $ 8,819 $ 0.44 $ 0.44
======== ======== ======== ====== ======
</TABLE>
The first three quarters of 1997, 1996, and 1995 per share amounts have been
restated to comply with SFAS No. 128 (See Note 2).
The fourth quarter 1996 results included an extraordinary charge 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.
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On February 25, 1998, the Company issued $100.0 million of 7 1/2% Senior
Notes due 2008 ("Notes"). The Notes are fully and unconditionally guaranteed,
on a joint and several basis, by certain wholly-owned subsidiaries of the
Company (collectively "Guarantor Subsidiaries" and individually "Guarantor").
Each of the guarantees is an unsecured obligation of the Guarantor and ranks
pari passu with the guarantees provided by and the obligations of such
Guarantor Subsidiaries under the Bank Credit Facility and with all existing
and future unsecured indebtedness of such Guarantor for borrowed money that is
not, by its terms, expressly subordinated
F-22
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in right of payment to such guarantee. A portion of the net proceeds from the
issuance of the Notes was used by the Company to repay indebtedness
outstanding under the Company's Credit Agreement. The remaining net proceeds
will be used to finance future acquisitions, working capital and general
corporate purposes. The following condensed consolidating balance sheets as of
December 31, 1997 and 1996 and the related condensed consolidating statements
of operations and cash flows for each of the three years in the period ended
December 31, 1997 should be read in conjunction with the notes to these
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
NON-
TUBOSCOPE GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
BALANCE SHEET
Current assets:
Cash and cash
equivalents.......... $ -- $ (876) $ 13,469 $ -- $ 12,593
Accounts receivable,
net.................. 522 98,863 168,007 (123,325) 144,067
Inventory, net........ -- 47,731 30,586 -- 78,317
Other current assets.. -- 7,519 5,220 -- 12,739
-------- -------- -------- --------- --------
Total current
assets............. 522 153,237 217,282 (123,325) 247,716
Investment in
subsidiaries........... 317,955 202,672 -- (520,627) --
Property and equipment,
net.................... -- 133,414 77,147 -- 210,561
Identified intangibles,
net.................... -- 23,315 -- -- 23,315
Goodwill, net........... -- 97,049 105,252 -- 202,301
Other assets, net....... -- 1,249 1,025 -- 2,274
-------- -------- -------- --------- --------
Total assets........ $318,477 $610,936 $400,706 $(643,952) $686,167
======== ======== ======== ========= ========
Current liabilities:
Accounts payable...... $ 8,647 $ 23,157 $134,871 $(123,325) $ 43,350
Accrued liabilities... 9,797 41,228 25,571 -- 76,596
Income taxes payable.. -- 9,268 6,634 -- 15,902
Current portion of
long-term debt....... -- 27,853 2,721 -- 30,574
-------- -------- -------- --------- --------
Total current
liabilities........ 18,444 101,506 169,797 (123,325) 166,422
Long-term debt.......... -- 184,018 3,785 -- 187,803
Pension liabilities..... -- -- 8,916 -- 8,916
Deferred taxes payable.. -- 4,725 17,514 -- 22,239
Other liabilities....... -- -- 754 -- 754
-------- -------- -------- --------- --------
Total liabilities... 18,444 290,249 200,766 (123,325) 386,134
Common stock............ 442 -- -- -- 442
Paid in capital......... 294,402 304,196 170,006 (474,202) 294,402
Retained earnings
(deficit).............. 10,155 16,491 34,900 (51,391) 10,155
Cumulative translation
adjustment............. (4,966) -- (4,966) 4,966 (4,966)
-------- -------- -------- --------- --------
Total common
stockholders'
equity............. 300,033 320,687 199,940 (520,627) 300,033
-------- -------- -------- --------- --------
Total liabilities
and equity......... $318,477 $610,936 $400,706 $(643,952) $686,167
======== ======== ======== ========= ========
</TABLE>
F-23
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
BALANCE SHEET
Current assets:
Cash and cash
equivalents.......... $ 9 $ 637 $ 9,761 $ -- $ 10,407
Accounts receivable,
net.................. 17 141,162 119,508 (164,604) 96,083
Inventory, net........ -- 31,215 15,955 -- 47,170
Other current assets.. -- 5,262 7,311 -- 12,573
-------- -------- -------- --------- --------
Total current
assets............. 26 178,276 152,535 (164,604) 166,233
Investment in
subsidiaries........... 228,502 159,545 -- (388,047) --
Property and equipment,
net.................... -- 87,867 93,513 -- 181,380
Identified intangibles,
net.................... -- 22,583 -- -- 22,583
Goodwill, net........... -- 46,370 85,755 -- 132,125
Other assets, net....... -- 1,836 1,008 -- 2,844
-------- -------- -------- --------- --------
Total assets........ $228,528 $496,477 $332,811 $(552,651) $505,165
======== ======== ======== ========= ========
Current liabilities:
Accounts payable...... $ 7,068 $ 59,201 $127,231 $(164,604) $ 28,896
Accrued liabilities... 45 22,735 18,774 -- 41,554
Income taxes ......... -- (1,996) 6,872 -- 4,876
Current portion of
long-term debt....... -- 13,397 3,117 -- 16,514
-------- -------- -------- --------- --------
Total current
liabilities........ 7,113 93,337 155,994 (164,604) 91,840
Long-term debt.......... 2,513 165,716 -- -- 168,229
Pension liabilities..... -- -- 9,846 -- 9,846
Deferred taxes payable.. -- 2,668 12,696 -- 15,364
Other liabilities....... -- 105 879 -- 984
-------- -------- -------- --------- --------
Total liabilities... 9,626 261,826 179,415 (164,604) 286,263
Common stock............ 416 -- -- -- 416
Paid in capital......... 261,932 282,577 141,577 (424,154) 261,932
Retained earnings
(deficit).............. (42,949) (47,926) 12,316 35,610 (42,949)
Cumulative translation
adjustment............. (497) -- (497) 497 (497)
-------- -------- -------- --------- --------
Total common
stockholders'
equity............. 218,902 234,651 153,396 (388,047) 218,902
-------- -------- -------- --------- --------
Total liabilities
and equity......... $228,528 $496,477 $332,811 $(552,651) $505,165
======== ======== ======== ========= ========
</TABLE>
F-24
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS
Revenue................. $ -- $291,236 $279,130 $(45,135) $525,231
Operating costs......... 120 246,564 211,521 (33,899) 424,306
-------- -------- -------- -------- --------
Operating profit (loss). (120) 44,672 67,609 (11,236) 100,925
Other expenses (income). (43) (27,795) 29,358 -- 1,520
Interest expense........ -- 13,704 752 -- 14,456
-------- -------- -------- -------- --------
Income (loss) before
taxes.................. (77) 58,763 37,499 (11,236) 84,949
Provision for taxes..... -- 16,930 14,915 -- 31,845
Equity in net income
(loss) of subsidiaries. 53,181 22,584 -- (75,765) --
-------- -------- -------- -------- --------
Net income (loss)....... $ 53,104 $ 64,417 $ 22,584 $(87,001) $ 53,104
======== ======== ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS
Revenue................. $ -- $197,165 $167,579 $(23,313) $341,431
Operating costs......... 57 216,879 165,749 (19,973) 362,712
-------- -------- -------- -------- --------
Operating profit (loss). (57) (19,714) 1,830 (3,340) (21,281)
Other expenses (income). 171 4,378 (4,256) -- 293
Interest expense........ 45 12,257 1,112 -- 13,414
-------- -------- -------- -------- --------
Income (loss) before
taxes.................. (273) (36,349) 4,974 (3,340) (34,988)
Provision (benefit) for
taxes.................. -- (1,458) 9,696 -- 8,238
Extraordinary loss, net
of income tax benefits. -- 6,373 -- -- 6,373
Equity in net income
(loss) of subsidiaries. (49,326) (4,722) -- 54,048 --
-------- -------- -------- -------- --------
Net income (loss)....... $(49,599) $(45,986) $ (4,722) $ 50,708 $(49,599)
======== ======== ======== ======== ========
</TABLE>
F-25
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS
Revenue................. $ -- $ 97,486 $ 96,760 $ (4,231) $190,015
Operating costs......... 55 82,433 82,552 (2,485) 162,555
-------- -------- -------- -------- --------
Operating profit (loss). (55) 15,053 14,208 (1,746) 27,460
Other expenses (income). -- (3,001) 6,956 (4,028) (73)
Interest expense........ -- 11,292 1,036 -- 12,328
-------- -------- -------- -------- --------
Income (loss) before
taxes.................. (55) 6,762 6,216 2,282 15,205
Provision (benefit) for
taxes.................. -- (302) 6,688 -- 6,386
Equity in net income
(loss) of subsidiaries. 8,874 (472) -- (8,402) --
-------- -------- -------- -------- --------
Net income (loss)....... $ 8,819 $ 6,592 $ (472) $ (6,120) $ 8,819
======== ======== ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
STATEMENT OF CASH FLOWS
Net cash provided by
(used in) operating
activities............. $ 11,425 $ 2,829 $ 48,300 $(16,264) $ 46,290
Cash flows provided by
(used for) investing
activities:
Capital expenditures.. -- (14,313) (20,877) -- (35,190)
Business acquisitions,
net of cash acquired. -- (10,507) (26,349) -- (36,856)
Investments in
subsidiaries......... (16,264) -- -- 16,264 --
Other................. -- -- (963) -- (963)
-------- -------- -------- -------- --------
Net cash provided by
(used for) investing
activities........... (16,264) (24,820) (48,189) 16,264 (73,009)
Cash flows provided by
financing activities:
Net borrowings under
financing agreements. -- 20,478 3,661 -- 24,139
Issuance of common
stock under employee
stock plan........... 479 -- -- -- 479
Net proceeds from sale
of common stock...... 4,351 -- -- -- 4,351
-------- -------- -------- -------- --------
Net cash provided by
financing activities. 4,830 20,478 3,661 -- 28,969
Effect of exchange
rate changes on cash. -- -- (64) -- (64)
Net increase in cash
and cash equivalents. (9) (1,513) 3,708 -- 2,186
Cash and cash
equivalents:
Beginning of period... 9 637 9,761 -- 10,407
-------- -------- -------- -------- --------
End of period......... $ -- $ (876) $ 13,469 $ -- $ 12,593
======== ======== ======== ======== ========
</TABLE>
F-26
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
STATEMENT OF CASH FLOWS
Net cash provided by
(used in) operating
activities............. $ 6,163 $ (5,061) $ 46,927 $(37,466) $ 10,563
Cash flows provided by
(used for) investing
activities:
Capital expenditures.. -- (11,189) (7,492) -- (18,681)
Proceeds from sale-
leaseback
transactions......... -- 2,973 -- -- 2,973
Business acquisitions,
net of cash acquired. -- (8,824) (34,412) -- (43,236)
Investments in
subsidiaries......... (37,466) -- -- 37,466 --
Other................. -- -- (1,513) -- (1,513)
-------- -------- -------- -------- --------
Net cash provided by
(used for) investing
activities........... (37,466) (17,040) (43,417) 37,466 (60,457)
Cash flows provided by
(used for) financing
activities:
Net borrowings
(payments) under
financing agreements. -- 21,212 (3,366) -- 17,846
Cash received in
Drexel merger........ -- 2,101 -- -- 2,101
Debt issuance costs... -- (785) -- -- (785)
Dividends paid on
Redeemable Series A
convertible Preferred
Stock................ (175) -- -- -- (175)
Issuance of common
stock under employee
stock plan........... 128 -- -- -- 128
Net proceeds from sale
of common stock...... 31,350 -- -- -- 31,350
-------- -------- -------- -------- --------
Net cash provided by
(used for) financing
activities........... 31,303 22,528 (3,366) -- 50,465
Effect of exchange
rate changes on cash. -- -- 442 -- 442
Net increase in cash
and cash equivalents. -- 427 586 -- 1,013
Cash and cash
equivalents:
Beginning of period. 9 210 9,175 -- 9,394
-------- -------- -------- -------- --------
End of period....... $ 9 $ 637 $ 9,761 $ -- $ 10,407
======== ======== ======== ======== ========
</TABLE>
F-27
<PAGE>
TUBOSCOPE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
TUBOSCOPE GUARANTOR NON-GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATING
STATEMENT OF CASH FLOWS
Net cash provided by
operating activities... $ 541 $ 9,317 $11,723 $-- $ 21,581
Cash flows provided by
(used for) investing
activities:
Capital expenditures.. -- (5,268) (2,377) -- (7,645)
Proceeds from sale-
leaseback
transactions......... -- 12,500 -- -- 12,500
Business acquisitions,
net of cash acquired. -- -- (5,373) -- (5,373)
Other................. -- -- (566) -- (566)
----- -------- ------- ---- --------
Net cash provided by
(used for) investing
activities........... -- 7,232 (8,316) -- (1,084)
Cash flows used for
financing activities:
Net payments under
financing agreements. -- (17,045) (1,936) -- (18,981)
Debt issuance costs... -- (95) -- -- (95)
Purchase of foreign
currency options..... -- (258) -- -- (258)
Dividends paid on
Redeemable Series A
convertible Preferred
Stock................ (700) -- -- -- (700)
Issuance of common
stock under employee
stock plan........... 125 -- -- -- 125
Net proceeds from sale
of common stock...... 34 -- -- -- 34
----- -------- ------- ---- --------
Net cash used for
financing activities. (541) (17,398) (1,936) -- (19,875)
Effect of exchange
rate changes on cash. -- -- 241 -- 241
Net increase in cash
and cash equivalents. -- (849) 1,712 -- 863
Cash and cash
equivalents:
Beginning of period.. 9 1,059 7,463 -- 8,531
----- -------- ------- ---- --------
End of period........ $ 9 $ 210 $ 9,175 $-- $ 9,394
===== ======== ======= ==== ========
</TABLE>
F-28
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS OR THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL NOR OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements................................................ ii
Available Information..................................................... ii
Incorporation Of Certain Documents By Reference........................... iii
Summary................................................................... 1
Risk Factors.............................................................. 9
The Exchange Offer........................................................ 13
Use Of Proceeds........................................................... 22
Capitalization............................................................ 22
Selected Historical Consolidated Financial Data........................... 23
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations............................................................... 24
Business.................................................................. 33
Management................................................................ 43
Description of the Notes.................................................. 45
Description Of Certain Indebtedness....................................... 56
Certain United States Federal Income Tax Considerations................... 56
Plan Of Distribution...................................................... 57
Legal Matters............................................................. 58
Experts................................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
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OFFER TO EXCHANGE
7 1/2% SENIOR NOTES DUE 2008
FOR ALL OUTSTANDING
7 1/2% SENIOR NOTES DUE 2008
OF
[LOGO OF TUBOSCOPE, INC.]
----------------
PROSPECTUS
----------------
MAY 8, 1998
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