<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-18312
------------------------------
TUBOSCOPE INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0252850
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2835 Holmes Road, Houston, Texas 77051
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(713) 799-5100
------------------------------------------------------
(Registrant's telephone number, including area code)
None
------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
The Registrant had 44,323,688 shares of common stock outstanding as of
August 9, 1999.
<PAGE>
TUBOSCOPE INC.
INDEX
Page No.
---------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1999 (unaudited) and December 31, 1998 2
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended
June 30, 1999 and 1998 3
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1999 and 1998 4
Notes to Unaudited Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11-14
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
Exhibit Index 18-19
Appendix A - Financial Data Schedule 20
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
1
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ----------------
A S S E T S (In thousands)
-----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 7,465 $ 8,735
Accounts receivable, net.............................................. 109,201 123,480
Inventory, net........................................................ 82,954 86,776
Prepaid expenses and other............................................ 11,921 11,477
---------------- ----------------
Total current assets................................................ 211,541 230,468
---------------- ----------------
Property and equipment:
Land, buildings and leasehold improvements............................ 89,392 90,041
Operating equipment and equipment leased to customers................. 256,432 248,554
Accumulated depreciation and amortization............................. (105,259) (96,769)
---------------- ----------------
Net property and equipment.......................................... 240,565 241,826
Identified intangibles, net............................................. 22,232 22,916
Goodwill, net........................................................... 213,759 213,816
Other assets, net....................................................... 3,781 3,146
---------------- ----------------
Total assets....................................................... $691,878 $712,172
================ ================
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable...................................................... $ 33,099 $ 29,914
Accrued liabilities................................................... 46,139 50,719
Income taxes payable.................................................. 2,555 4,430
Current portion of long-term debt and short-term borrowings........... 32,940 31,306
---------------- ----------------
Total current liabilities........................................... 114,733 116,369
Long-term debt.......................................................... 206,762 219,438
Pension liabilities..................................................... 9,851 9,688
Deferred taxes payable.................................................. 23,983 26,270
Other liabilities....................................................... 1,770 1,333
---------------- ----------------
Total liabilities................................................... 357,099 373,098
---------------- ----------------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized,
45,722,339 shares issued and 44,297,639 shares outstanding
(45,516,010 shares issued and 44,091,310 outstanding at
December 31, 1998)................................................... 457 455
Paid in capital....................................................... 310,934 309,691
Retained earnings..................................................... 50,930 52,100
Accumulated other comprehensive income................................ (12,212) (7,842)
Less: treasury stock at cost (1,424,700 shares)....................... (15,330) (15,330)
---------------- ----------------
Total common stockholders' equity................................... 334,779 339,074
---------------- ----------------
Total liabilities and equity........................................ $691,878 $712,172
================ ================
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Revenue............................................. $92,711 $153,522 $187,923 $303,703
Costs and expenses:
Costs of services and products sold.............. 73,350 106,151 147,454 209,342
Goodwill amortization............................ 1,834 1,629 3,618 3,134
Selling, general and administration.............. 11,516 14,162 23,854 28,246
Research and engineering costs................... 2,776 3,173 5,722 6,586
----------- ----------- ----------- -----------
89,476 125,115 180,648 247,308
Operating profit.................................... 3,235 28,407 7,275 56,395
Other expense (income):
Interest expense................................. 4,570 4,616 9,062 8,969
Interest income.................................. (89) (195) (174) (284)
Foreign exchange................................. (384) 169 (1,434) 317
Other, net....................................... 490 (2) 664 801
----------- ----------- ----------- -----------
Income (loss) before income taxes.................. (1,352) 23,819 (843) 46,592
Provision for income taxes.......................... 123 8,932 327 17,472
----------- ----------- ----------- -----------
Net income (loss)................................... $(1,475) $14,887 $(1,170) $29,120
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic earnings (loss) per common share........... $(0.03) $0.33 $(0.03) $0.65
=========== =========== =========== ===========
Dilutive earnings (loss) per common share....... $(0.03) $0.31 $(0.03) $0.61
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic............................................ 44,271,667 45,153,058 44,200,714 44,732,628
=========== =========== =========== ===========
Dilutive......................................... 44,271,667 48,404,246 44,200,714 48,132,733
=========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................................... $(1,170) $ 29,120
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization......................................................... 17,106 14,911
Compensation related to employee 401(K) plan.......................................... 213 432
Provision for losses on accounts receivable........................................... 632 292
Provision for inventory reserve....................................................... 50 48
Provision (benefit) for deferred income taxes......................................... (2,217) 713
Changes in assets and liabilities, net of effects of acquired companies:
Accounts receivable............................................................... 14,046 (3,844)
Inventory......................................................................... 3,772 (16,383)
Prepaid expenses and other assets................................................. (526) 2,551
Accounts payable, accrued liabilities, and pension liabilities.................... (3,117) (17,970)
Federal and foreign income taxes payable.......................................... (1,864) (4,998)
----------- -----------
Net cash provided by operating activities............................................. 26,925 4,872
----------- -----------
Cash flows used for investing activities:
Capital expenditures.................................................................... (5,863) (20,759)
Business acquisitions, net of cash acquired............................................. (8,974) (23,691)
Other................................................................................... (1,775) (1,570)
----------- -----------
Net cash used for investing activities................................................ (16,612) (46,020)
----------- -----------
Cash flows provided by (used for) financing activities:
Borrowings under financing agreements................................................... 20,390 153,235
Principal payments under financing agreements........................................... (32,145) (115,935)
Proceeds from sale of common stock, net................................................. 1,034 375
Financing costs......................................................................... (862) --
----------- -----------
Net cash provided by (used for) financing activities.................................. (11,583) 37,675
----------- -----------
Net decrease in cash and cash equivalents................................................. (1,270) (3,473)
Cash and cash equivalents:
Beginning of period..................................................................... 8,735 12,593
----------- -----------
End of period........................................................................... $7,465 $9,120
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the six month period for:
Interest.............................................................................. $10,769 $7,108
=========== ===========
Taxes................................................................................. $3,873 $19,903
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
TUBOSCOPE INC.
Notes to Unaudited Consolidated Financial Statements
For the Six Months Ended June 30, 1999 and 1998
and as of December 31, 1998
1. Organization and Basis of Presentation of Interim Consolidated Financial
Statements
The accompanying unaudited consolidated financial statements of the Company
and its wholly-owned subsidiaries have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information in
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to these rules and regulations. The unaudited
consolidated financial statements included in this report reflect all the
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the results of operations for
the interim periods covered and for the financial condition of the Company at
the date of the interim balance sheet. Results for the interim periods are not
necessarily indicative of results for the year.
The financial statements included in this report should be read in conjunction
with the Company's 1998 audited consolidated financial statements and
accompanying notes included in the Company's 1998 Form 10-K, filed under the
Securities Exchange Act of 1934, as amended.
2. Inventory
At June 30, 1999 inventories consisted of the following (in thousands):
<TABLE>
<S> <C>
Components, subassemblies, and expendable parts...... $51,103
Equipment under production........................... 31,851
-----------
$82,954
===========
</TABLE>
3. Senior Credit Agreement and Dividend Restrictions
The Company's Senior Credit Agreement restricts the Company from paying
dividends on its capital stock unless the total funded debt to capital ratio
(as defined in the Senior Credit Agreement) is less than or equal to 40%. The
Company's total funded debt to capital ratio (calculated as defined under the
Senior Credit Agreement) was 41.8% at June 30, 1999. In March 1999, the
Senior Credit Agreement was amended to provide for increased flexibility by
increasing the maximum debt to equity ratio and decreasing the minimum
interest coverage ratio.
4. Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" which established new rules for the
reporting and display of comprehensive income. Comprehensive income is defined
by SFAS No. 130 as net income plus direct adjustments to shareholders' equity.
The cumulative translation adjustment of certain foreign entities is the only
such direct adjustment recorded by the Company. Comprehensive income for the
three and six months ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss)............................. $(1,475) $14,887 $(1,170) $29,120
Cumulative translation adjustment............. (1,583) (1,701) (4,369) (2,595)
---------- ---------- ---------- ----------
Total comprehensive income (loss)............. $(3,058) $13,186 $(5,539) $26,525
========== ========== ========== ==========
</TABLE>
5
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
5. Business Segments
The Company is organized based on the products and services it offers. Under
this organizational structure, the Company offers four product lines: Tubular
Services, Solids Control Products & Services, Coiled Tubing & Wireline
Products, and Pipeline and Other Industrial Services. Each of the product
lines qualifies as a reportable segment.
Tubular Services: This segment provides internal coating products and
services, inspection and quality assurance services for tubular goods and
fiberglass tubulars. Additionally, Tubular Services includes the sale and
leasing of proprietary equipment used to inspect tubular products at steel
mills. This segment operates in the oilfield tubular markets of North
America, Latin America, Europe, Africa, the Middle East and the Far East.
Customers include major oil and gas companies, independent producers, national
oil companies, drilling contractors, oilfield supply stores and steel mills.
Solids Control Products & Services: This segment 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 the oil and
gas drilling processes. The Solids Control Products & Services business
serves the oilfield drilling markets of North America, Latin America, Europe,
Africa, the Middle East and the Far East. Customers include major oil and gas
companies, independent producers, national oil companies and drilling
contractors.
Coiled Tubing & Wireline Products: This segment consists of the sale of
highly-engineered coiled tubing equipment, related pressure control equipment,
pressure pumping, wireline equipment and related tools to companies engaged in
providing oil and gas well drilling, and completion and remediation services.
Customers include major oil and gas coiled tubing service companies, as well
as major oil companies and large independents.
Pipeline and Other Industrial Services: This segment provides technical
inspection services and quality assurance services for in-service pipelines
used to transport oil and gas. Additionally, the segment provides a wide
variety of technical industrial inspection, monitoring and quality assurance
services for the construction, operation and maintenance of major projects in
energy related industries. Customers include major pipeline operators and
national oil and gas companies.
The Company evaluates the performance of its operating segments at the
operating profit level which consists of income before interest expense
(income), other expense (income), nonrecurring items and income taxes.
Intersegment sales and transfers are not significant.
6
<PAGE>
Summarized information for the Company's reportable segments is contained in
the following table. Other revenue and operating profit (loss) include
revenue from insignificant operations, corporate expenses and certain goodwill
and identified intangible amortization not allocated to product lines.
<TABLE>
<CAPTION>
Solids Coiled Pipeline &
Control Tubing & Other
Tubular Products & Wireline Industrial
Services Services Products Services Other Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1999
Revenue....................................... $76,084 $55,469 $37,952 $18,418 $ -- $187,923
Operating Profit.............................. 9,689 3,996 4,510 568 (11,488) 7,275
Six Months Ended June 30, 1998
Revenue....................................... $123,659 $93,249 $58,289 $28,506 $ -- $303,703
Operating Profit.............................. 33,421 19,243 10,627 4,806 (11,702) 56,395
</TABLE>
6. Merger with Newpark Resources, Inc.
In June 1999, the Company agreed to a merger with Newpark Resources, Inc.
(Newpark), a leading provider of integrated drilling fluids management,
environmental and oilfield services to the natural gas exploration and
production industry. If the merger is completed, 0.65 shares of the Company's
common stock will be exchanged for each share of Newpark common stock. The
shares of the Company's common stock to be issued to Newpark common and
preferred stockholders is expected to represent approximately 50.8% of the
outstanding stock of the Company after the merger. The proposed merger is
subject to stockholder and regulatory approval and is expected to be
accounted for as a purchase.
7. $100.0 Million Senior Notes and Condensed Consolidating Financial Information
On February 25, 1998, the Company issued $100.0 million of 7.5% 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 Credit Agreement and with all existing and future
unsecured indebtedness of such Guarantor for borrowed money that is not, by
its terms, expressly subordinated in right of payment to such guarantee. The
remaining net proceeds have been used to finance acquisitions, working capital
and general corporate purposes. The following condensed consolidating balance
sheet as of June 30, 1999 and related condensed consolidating statements of
operations and cash flows for the six months ended June 30, 1999 should be
read in conjunction with the notes to these consolidated financial statements.
7
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
7. Condensed Consolidating Financial Information (cont'd)
Balance Sheet
<TABLE>
<CAPTION>
June 30, 1999
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents......... $ -- $ 483 $ 6,982 $ -- $ 7,465
Accounts receivable, net.......... 190,628 43,798 256,773 (381,998) 109,201
Inventory, net.................... -- 48,006 34,948 -- 82,954
Prepaid expenses and other........ 1,782 8,008 2,131 -- 11,921
----------- ----------- ----------- -------------- -----------
Total current assets........... 192,410 100,295 300,834 (381,998) 211,541
Investment in subsidiaries.......... 370,933 285,252 -- (656,185) --
Property and equipment, net......... -- 159,480 81,085 -- 240,565
Identified intangibles, net......... -- 22,232 -- -- 22,232
Goodwill, net....................... -- 104,967 108,792 -- 213,759
Other assets, net................... -- 836 2,945 -- 3,781
----------- ----------- ----------- -------------- -----------
Total assets................... $563,343 $673,062 $493,656 $(1,038,183) $691,878
=========== =========== =========== ============== ===========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.................. $ -- $242,897 $172,200 $(381,998) $33,099
Accrued liabilities............... 4,477 21,037 20,625 -- 46,139
Income taxes payable.............. -- 1,499 1,056 -- 2,555
Current portion of long-term
debt........................... 26,000 4,191 2,749 -- 32,940
----------- ----------- ----------- -------------- -----------
Total current liabilities...... 30,477 269,624 196,630 (381,998) 114,733
Long term debt...................... 198,087 7,579 1,096 -- 206,762
Pension liabilities................. -- -- 9,851 -- 9,851
Deferred taxes payable.............. -- 11,739 12,244 -- 23,983
Other liabilities................... -- -- 1,770 -- 1,770
----------- ----------- ----------- -------------- -----------
Total liabilities.............. 228,564 288,942 221,591 (381,998) 357,099
Common stockholders' equity:
Common stock...................... 457 -- -- -- 457
Paid in capital................... 310,934 304,196 187,917 (492,113) 310,934
Retained earnings................. 50,930 79,924 96,360 (176,284) 50,930
Cumulative translation
adjustment...................... (12,212) -- (12,212) 12,212 (12,212)
Treasury Stock.................... (15,330) -- -- -- (15,330)
----------- ----------- ----------- -------------- -----------
Total common stockholders'
equity....................... 334,779 384,120 272,065 (656,185) 334,779
----------- ----------- ----------- -------------- -----------
Total liabilities and equity... $563,343 $673,062 $493,656 $(1,038,183) $691,878
=========== =========== =========== ============== ===========
</TABLE>
8
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
7. Condensed Consolidating Financial Information (cont'd)
Statement of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue............................. $ -- $91,801 $113,707 $(17,585) $187,923
Operating costs..................... -- 96,690 94,752 (10,794) 180,648
----------- ----------- ----------- -------------- -----------
Operating profit (loss)............. -- (4,889) 18,955 (6,791) 7,275
Other expense (income).............. -- (2,073) 7,920 (6,791) (944)
Interest expense.................... 8,289 409 364 -- 9,062
----------- ----------- ----------- -------------- -----------
Income (loss) before taxes.......... (8,289) (3,225) 10,671 -- (843)
Provision for taxes................. -- (934) 1,261 -- 327
Equity in net income of
subsidiaries....................... 7,119 9,410 -- (16,529) --
----------- ----------- ----------- -------------- -----------
Net income (loss)................... $(1,170) $7,119 $9,410 $(16,529) $(1,170)
=========== =========== ============ ============== ===========
</TABLE>
9
<PAGE>
TUBOSCOPE INC,
Notes to Consolidated Financial Statements (cont'd)
7. Condensed Consolidating Financial Information(cont'd)
Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities............................. $8,114 $16,916 $1,895 $ -- $26,925
Net cash used for investing activities:
Capital expenditures................... -- (3,351) (2,512) -- (5,863)
Business acquisitions.................. -- (8,974) -- -- (8,974)
Other.................................. -- -- (1,775) -- (1,775)
----------- ----------- ----------- -------------- -----------
Net cash used for investing
activities.......................... -- (12,325) (4,287) -- (16,612)
Cash flows provided by (used for)
financing activities:
Net payments under financing
agreements............................ (9,148) (2,149) (458) -- (11,755)
Net proceeds from sale of common stock. 1,034 -- -- -- 1,034
Financing costs........................ -- (862) -- -- (862)
----------- ----------- ----------- -------------- -----------
Net cash used for financing
activities.......................... (8,114) (3,011) (458) -- (11,583)
----------- ----------- ----------- -------------- -----------
Net increase (decrease) in cash and cash
equivalents............................ -- 1,580 (2,850) -- (1,270)
Cash and cash equivalents:
Beginning of period.................... -- (1,097) 9,832 -- 8,735
----------- ----------- ----------- -------------- -----------
End of period.......................... $ -- $483 $6,982 $ -- $7,465
=========== =========== =========== ============== ===========
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General Operating Environment Overview:
The Company's financial results for the second quarter of 1999 continued to be
adversely affected by the depressed oil and gas industry as indicated by the
following factors:
. Worldwide rig activity declined 33% and 34% in the second quarter and first
half of 1999, respectively, compared to the same periods of 1998. The
worldwide rig activity in the second quarter of 1999 was at 1,224 rigs, down
from 1,462 rigs (16% decline) in the first quarter of 1999. This represented
the sixth consecutive quarter that the worldwide rig activity has declined.
Worldwide rig activity was at 2,262 rigs in the fourth quarter of 1997.
. The decline in worldwide rig activity was especially steep in North America,
where both U.S. (down 40%) and Canada (down 41%) rig activity declined
significantly in the second quarter of 1999 compared to the second quarter of
1998. The decline in rig activity continued during the first half of 1999 as
the U.S. rig activity dropped to only 523 rigs (down 5%) in the second quarter
of 1999 compared to 552 rigs in the first quarter of 1999 while Canada rig
activity declined to 104 rigs (down 64%) in the second quarter of 1999
compared to 290 rigs in the first quarter of 1999.
. The decline in North America and worldwide rig activity was precipitated by a
decline in worldwide oil and gas prices. The price of West Texas Intermediate
Oil, which was at $20.03 per barrel in the fourth quarter of 1997, declined
throughout 1998 and into the first quarter of 1999 ($12.97 per barrel
average).
West Texas Intermediate Oil prices began to recover in the second quarter of
1999 ($17.64 per barrel average). This recent recovery in oil prices is
primarily the result of an agreement between certain major oil producers to
limit worldwide oil production. There can be no assurances that these producers
will comply with the self-imposed limitations on oil production, and that the
improvement in oil prices will stabilize or continue. The recent improvement in
West Texas Intermediate Crude Oil prices did not have a significant impact on
financial results for the second quarter of 1999. However, through July 1999
rig activity in North America was up 28% from the second quarter average,
indicating that recent improvement in oil prices is beginning to have a positive
impact on rig activity. The Company does not expect this recent improvement in
rig activity will have a significant impact on its third quarter 1999 financial
results.
Results of Operations
Three and Six Months Ended June 30, 1999 and 1998
- -------------------------------------------------
Revenue. Revenue was $92.7 million and $187.9 million for the second quarter
and first half of 1999, respectively, representing decreases of $60.8 million
(40%) and $115.8 million (38%), respectively, from the same periods of 1998.
The second quarter and first half 1999 results were adversely impacted by the
decline in the oil and gas industry as indicated by the low worldwide rig
activity discussed above. The drop in second quarter and first half 1999 rig
activity was especially heavy in some of the Company's strongest markets,
including the U.S. (40% and 41%), Canada (41% and 38%), and Latin America (29%
and 32%).
Revenue from the Company's Tubular Services, comprised of Inspection, Coating,
and Mill Systems and Sales was $37.7 million and $76.1 million for the three and
six months ending June 30, 1999, respectively. These results represented
decreases of $24.6 million (39%) and $47.6 million (38%), respectively, compared
to the prior year periods. The majority of the decline was related to lower
revenue in North America operations due to the significant decline in U.S. and
Canada rig activity. Tubular Services operations were also adversely impacted
by weak market conditions in Europe, Latin America and the Far East.
Solids Control revenue was $26.9 million and $55.5 million for the second
quarter and first half of 1999, respectively, representing decreases of $17.7
million (40%) and $37.8 million (41%), respectively, compared to the same
periods of 1998. Lower drilling activity, pricing erosion, and lower levels of
capital equipment sales caused the decline, which affected operations worldwide
especially in North America, Latin America, and Europe.
11
<PAGE>
Coiled Tubing & Wireline Products revenue was $18.4 million and $38.0 million
for the three and six months ending June 30, 1999, respectively. These results
represented decreases of $11.9 million (39%) and $20.3 million (35%),
respectively, compared to the same periods of 1998. The decrease was due to the
decline in spending by the Company's customers on new coiled tubing and wireline
units in response to the depressed oilfield market. The decline in Coiled
Tubing & Wireline Products revenue was partially offset by the acquisition of
Eastern Oil Tools, Pte. Ltd. in June 1998 and Weston Oilfield Engineering
Limited in December 1998. As of June 30, 1999, the Company's backlog of Coiled
Tubing & Wireline Products was $27.9 million, a decline of 29% from $39.1
million at December 31, 1998.
Pipeline & Other Industrial Services revenue was $9.7 million and $18.4 million
for the three and six months ended June 30, 1999, respectively. These results
represented decreases of $6.5 million (40%) and $10.1 million (35%),
respectively, compared to the same periods of 1998. These decreases were due to
lower industrial inspection revenue in Saudi Arabia and lower Pipeline
inspection revenue in Latin America.
Gross Profit. Gross profit was $17.5 million (19% of revenue) and $36.9 million
(20% of revenue) for the second quarter and first half of 1999, respectively,
compared to $45.7 million (30% of revenue) and $91.2 million (30% of revenue),
respectively, for the same periods of 1998. The decline in the 1999 gross
profit dollars and percentages was due to the lower revenue discussed above.
Selling, General, and Administrative Costs. Selling, general and administrative
costs were $11.5 million and $23.9 million in the second quarter and first half
of 1999, respectively, representing decreases of $2.6 million (19%) and $4.4
million (16%), respectively, from the same periods of 1998. Selling, general
and administrative costs were down 7% in the second quarter of 1999 compared to
the first quarter of 1999. Lower selling, general, and administrative costs
were due to cost controls and reductions, which were implemented in 1998 and
continued in 1999 in response to market conditions.
Research and Engineering Costs. Research and engineering costs were $2.8
million and $5.7 million for the three and six months ended June 30, 1999,
respectively, compared to $3.2 million and $6.6 million in the second quarter
and first half of 1998, respectively. The decline was due to the completion of
certain engineering projects in 1998 and cost control measures implemented in
1998 and continued in 1999.
Operating Profit. Operating profit was $3.2 million and $7.3 million in the
second quarter and first half of 1999, respectively, compared to operating
profit of $28.4 million and $56.4 million, respectively, in the same periods of
1998. The decrease in operating profit in 1999 was due to the factors discussed
above.
Interest Expense. Interest expense was $4.6 million and $9.1 million in the
three and six months ended June 30, 1999, respectively, even with the $4.6
million and $9.0 million recorded in the same periods of 1998.
Other Expense (Income). Other expense (income), which includes interest income,
foreign exchange, minority interest, and other expense (income), resulted in
other expense of $17,000 in the second quarter of 1999 and other income of $0.9
million the first half of 1999. The second quarter of 1998 other income was
$28,000 and the first half of 1998 other expense was $0.8 million. The second
quarter and first half of 1999 both benefited from foreign exchange gains as a
result of a stronger U.S. dollar and related U.S. dollar receivables on the
books of foreign subsidiaries. The second quarter 1999 results also included a
$2.0 million insurance refund gain related to former Italian operations and $2.4
million of non-recurring charges in Venezuela.
Provision for Income Taxes. The Company recorded a tax provision of $123,000
and $327,000 in the second quarter and first six months of 1999, respectively,
on pre-tax losses of $1.4 million and $0.8 million for the same periods,
respectively. These tax provisions are higher than expected based on a domestic
tax 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 (loss) for the second quarter and first half of
1999 was a net loss of $1.5 million and $1.2 million, respectively, compared to
second quarter and first half of 1998 net income of $14.9 million and $29.1
million, respectively. The decline in the 1999 periods was due to the factors
discussed above.
12
<PAGE>
Financial Condition and Liquidity
June 30, 1999
- -------------
For the six months ended June 30, 1999, cash provided by operating activities
was $26.9 million compared to cash provided by operating activities of $4.9
million for the six months ended June 30, 1998. Cash was provided by operations
through a net loss of $1.2 million plus non-cash charges of $18.0 million, a
decrease in accounts receivable of $14.0 million, and a decrease in inventory of
$3.8 million. These items were offset to some extent during the first six
months of 1999 by a reduction in accounts payable and accrued liabilities of
$3.1 million, and a reduction in current taxes payable of $1.9 million. The
decrease in accounts receivable was due to a 25% reduction in revenue in the
second quarter of 1999 compared to the fourth quarter of 1998. Inventory
declined by $3.8 million due to lower activity and concentrated efforts to
reduce inventory levels. Accounts payable and accrued liabilities were down due
to lower activity and 1999 severance payments.
For the six months ended June 30, 1999, the Company used $16.6 million of cash
for investing activities compared to $46.0 million for the same period of 1998.
Capital expenditures of $5.9 million for the first six months of 1999 were
primarily related to the Company's new thermal drill-cuttings desorption unit in
Colombia and additional "high-resolution" Pipeline inspection tools. Business
acquisitions of $9.0 million were related to the acquisition of Geo-Ray Oilfield
Inspection Ltd. (a Canadian based inspection company), Manufacturas Rowi, C.A.
(a Venezuelan based solids control company), Energy Environmental LLC (a U.S.
Gulf Coast-based oilfield waste management operator), and the assets of a
Norwegian inspection operation.
For the six months ended June 30, 1999, the Company used $11.6 million of cash
for financing activities compared to cash generated from financing activities of
$37.7 million in the same period of 1998. The main use of cash for financing
activities was for the reduction of outstanding debt.
Current and long-term debt was $239.7 million at June 30, 1999, a decrease of
$11.0 million from the $250.7 million outstanding at December 31, 1998. The
decrease in debt was due to cash flow from operations plus the collection of
accounts receivable exceeding capital spending, acquisitions, and the reduction
in accounts payable and accrued liabilities. The Company's outstanding debt at
June 30, 1999 consisted of $100.0 million of Notes, $82.1 million of term loans
due under the Company's Senior Credit Agreement, $43.2 million due under the
Company's $100.0 million revolving credit facility, and $14.4 million of other
debt.
At June 30, 1999, the Company had outstanding letters of credit of $6.3 million.
The available facility on the Company's $100.0 million revolving credit facility
and $5 million swingline facility was $52.1 million and $3.4 million,
respectively, at June 30, 1999.
Forward Looking Statements
This Quarterly Report on Form 10Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are those that
do not state historical facts and are inherently subject to risk and
uncertainties. The forward-looking statements contained herein are based on
current expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others, the cyclical
nature of the oilfield services industry, risks associated with growth through
acquisitions and other factors discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 under the caption "Factors Affecting
Future Operating Results."
Year 2000
General
The Year 2000 (Y2K) issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failure or miscalculations causing disruptions to various activities
and operations. The Company has assessed how it may be
13
<PAGE>
impacted by the Y2K issue and has formulated and commenced implementation of a
comprehensive plan to address all known aspects of the issue.
The Plan
The Company has completed an evaluation of the effects the Y2K problem could
have on the products and services the Company provides, the processing
capabilities of the Company's computers and other internal information systems,
as well as non-informational systems which affect the Company's operational
capabilities. Based on the hardware and software changes made to date, and the
planned changes expected to be made prior to December 31, 1999, the Company is
expected to have addressed all material internal issues concerning the Y2K issue
before January 1, 2000.
In addition, the Company is in the process of evaluating the Y2K compliance
capabilities of major customers and suppliers. The majority of the Company's
major customers and suppliers have been contacted regarding the Y2K issue. The
Company anticipates this evaluation process will be in effect for all of 1999
and will include follow-up telephone interviews and on-site meetings as
considered necessary in the circumstances. The Company is not currently aware
of any customer or supplier circumstances that may have a material adverse
impact on the Company. The Company will be looking for alternative suppliers
where circumstances warrant.
Cost
The Company's estimate of the total cost for Y2K compliance is approximately
$750,000, of which approximately $360,000 has been incurred through June 30,
1999. The majority of these costs are being expensed as incurred and are not
expected to have a material impact on the Company's results of operations or
financial position.
Risks
The Company believes that the Y2K issue will not pose significant operational
problems for the Company. However, if all Y2K problems are not identified or
corrected in a timely manner, there can be no assurance that the Y2K issue will
not have a material adverse impact on the Company's results of operations or
adversely affect the Company's relationships with customers, suppliers, or other
parties. In addition, there can be no assurance that outside third parties,
including customers, suppliers, utility and governmental entities, will be in
compliance with all Y2K issues. The Company believes that the most likely worst
case Y2K scenario, if one were to occur, would be the inability of third party
suppliers such as utility providers, telecommunication companies, and other
critical suppliers to continue providing their products and services. The
failure of these third party suppliers to provide on going services could have a
material adverse impact on the Company's results of operations.
Contingency Plan
The Company is considering contingency plans relating to key third parties.
These include identifying alternative suppliers and working with major customers
that may be affected by Year 2000 issues.
The foregoing analysis contains forward-looking information. See cautionary
statement regarding "Forward Looking Statements" in the Management's Discussion
and Analysis section.
Quantitative & Qualitative Disclosure About Market Risk
The Company does not believe it has a material exposure to market risk. The
Company manages its exposure to interest rate changes by using a combination of
fixed rate debt and interest rate swap agreements for almost all variable rate
debt. At June 30, 1999, the Company had $239.7 million of outstanding debt.
Fixed rate debt included $100.0 million of Senior Notes at a fixed interest rate
of 7 1/2%. An additional $90.0 million of outstanding variable rate debt was
effectively converted to fixed rate debt through the use of interest rate swap
agreements and $40.0 million of variable rate debt was protected through the use
of a collar agreement. With respect to foreign currency fluctuations, the
Company uses 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 had no forward foreign
exchange contracts outstanding at June 30, 1999. The Company does not enter
into foreign currency or interest rate transactions for speculative purposes.
14
<PAGE>
Item 1. Legal Proceedings
On or about August 3, 1999, a stockholder of Newpark Resources, Inc., Jason
Golz, filed a purported class action complaint in United States District Court,
Eastern District of Louisiana, against Newpark Resources, Inc. ("Newpark"); the
Board of Directors of Newpark; Tuboscope; SCF-IV, L.P., a limited partnership
the general partner of which is SCF Partners, L.P.; and L.E. Simmons, a
principal of SCF Partners, L.P. Mr. Simmons is the Chairman of Tuboscope. The
complaint alleges, among other things, that Tuboscope breached its purported
fiduciary duties as a major stockholder to the Newpark public stockholders by
negotiating an unfair and inadequate price to be paid to Newpark stockholders,
encouraging the Newpark Board of Directors to recommend the proposed merger and
improperly placing undue pressure on Newpark and its public stockholders to
approve the merger. The complaint seeks an injunction against the proposed
merger of Newpark and Tuboscope, compensatory damages and/or recissory damages.
Tuboscope does not currently own any shares of Newpark stock. However, SCF-IV,
L.P. owns 150,000 shares of Newpark's Series A Cumulative Perpetual Preferred
Stock and holds a warrant to purchase 2,400,000 shares of Newpark common stock
(approximately 3% of the outstanding shares of Newpark common stock).
Tuboscope believes that this complaint is without merit and will aggressively
defend against the suit.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held May 13, 1999 for the following
purposes:
1. Proposal One: The election of the members of the Tuboscope Board of
------------
Directors.
<TABLE>
<CAPTION>
Name For Against
---- --- -------
<S> <C> <C>
Jerome R. Baier 36,731,613 145,327
John F. Lauletta 36,731,613 145,327
Eric L. Mattson 36,731,568 145,372
L.E. Simmons 36,730,813 146,127
Jeffrey A. Smisek 36,730,813 146,127
Douglas E. Swanson 36,731,013 145,927
</TABLE>
2. Proposal Two: Approval of an amendment to the Company's 1999 Equity
------------
Participation Plan which (i) increases the number of shares of the Company's
Common Stock available for issuance thereunder and (ii) increases the maximum
annual award limit for purposes of Section 162(m) of the Internal Revenue Code
of 1986, as amended.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
28,366,329 2,850,934 40,518
</TABLE>
3. Proposal Three: The ratification of the selection of Ernst & Young LLP as
--------------
the Company's independent auditors.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
36,855,435 8,145 13,360
</TABLE>
15
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -- Reference is hereby made to the Exhibit Index commencing
on page 18.
(b) A Report on Form 8-K was filed on June 29, 1999 regarding the proposed
merger of Tuboscope Inc. and Newpark Resources, Inc.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUBOSCOPE INC.
--------------
(Registrant)
Date: August 13, 1999 /s/ Joseph C. Winkler
- ------------------------- -----------------------------------------
Joseph C. Winkler
Executive Vice President, Chief Financial Officer
and Treasurer (Duly Authorized Officer,
Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Note No.
- ----------- ----------- --------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated as of June 24, 1999 between the Company (Note 22)
and Newpark Resources, Inc.
2.2 Agreement dated as of June 24, 1999 among the Company, Newpark Resources, Inc. (Note 22)
and SCF-IV, L.P.
3.1 Amended and Restated Bylaws. (Note 2)
3.2 Restated Certificate of Incorporation, dated March 12, 1990. (Note 7)
3.3 Certificate of Amendment to Restated Certificate of Incorporation dated May 12, (Note 8)
1992.
3.4 Certificate of Amendment to Restated Certificate of Incorporation dated May 10, (Note 10)
1994.
3.5 Certificate of Amendment to Restated Certificate of Incorporation dated April 24, (Note 17)
1996.
3.6 Certificate of Amendment to Restated Certificate of Incorporation dated June 3, (Note 18)
1997.
4.1 Registration Rights Agreement dated May 13, 1988 among the Company, (Note 1)
Brentwood Associates, Hub Associates IV, L.P. and the investors listed
therein.
4.2 Purchase Agreement dated as of October 1, 1991 between the Company (Note 3)
and Baker Hughes Incorporated regarding certain registration rights.
4.3 Exchange Agreement, dated as of January 3, 1996, among the Company (Note 11)
and Baker Hughes Incorporated.
4.4 Registration Rights Agreement dated April 24, 1996 among the Company, (Note 15)
SCF III, L.P., D.O.S. Partners L.P., Panmell (Holdings), Ltd. and Zink
Industries Limited.
4.5 Registration Rights Agreement dated March 7, 1997 among the Company and (Note 16)
certain stockholders of Fiber Glass Systems, Inc.
4.6 Warrant for the Purchase of Shares of Common Stock Expiring December 31, 2000 (Note 15)
between the Company and SCF III, L.P. regarding 2,533,000 shares,
dated January 3, 1996.
4.7 Warrant for the Purchase of Shares of Common stock expiring December 31, 2000 (Note 11)
between the Company and Baker Hughes Incorporated regarding 1,250,000
shares, dated January 3, 1996.
4.8 Indenture, dated as February 25, 1998, between the Company, the Guarantors (Note 19)
named therein and The Bank of New York Trust Company of Florida as trustee,
relating to $100,000,000 aggregate principal amount of 7 1/2% Senior Notes due
2008 Specimen Certificate of 7 1/2% Senior Notes due 2008 (the "Private Notes");
and Specimen Certificate at 7 1/2% Senior Notes due 2008 (the "Exchange Notes").
10.1 Amended and Restated Secured Credit Agreement, dated as of February 9, 1998, (Note 19)
between Tuboscope Inc., and Chase Bank of Texas, National Association, ABN
Amro Bank N.V., Houston Agency, and the other Lenders Party Thereto, and ABN
Amro Bank N.V., Houston Agency as Administrative Agent (includes form of
Guarantee).
10.1.1 Form of Amendment No. 1 to Amended and Restated Secured Credit Agreement (Note 21)
dated as of March 29, 1999.
10.1.2 Form of Reaffirmation of Guarantee relating to Amended and Restated Secured (Note 21)
Credit Agreement dated as of March 29, 1999.
10.3 Deferred Compensation Plan dated November 14, 1994; Amendment thereto dated (Note 20)
May 11, 1998.
10.4 Employee Qualified Stock Purchase Plan; and First Amendment to Employee (Note 6)
Qualified Stock Purchase Plan dated March 10, 1994.
10.5 1996 Equity Participation Plan; Form of Non-qualified Stock Option Agreement (Note 13)
for Employees and Consultants; Form of Non-qualified Stock Option Agreement
for Independent Directors.
10.6 DOS Ltd. 1993 Stock Option Plan; Form of D.O.S. Ltd. Non Statutory Stock (Note 14)
Option Agreement.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Note No.
- ----------- ----------- --------
<C> <S> <C>
10.7 Amended and Restated Stock Option Plan for Key Employees of Tuboscope (Note 4)
Vetco International Corporation; Form of Revised Incentive Stock Option
Agreement; and Form of Revised Non-Qualified Stock Option Agreement.
10.8 Stock Option Plan for Non-Employee Directors; Amendment to Stock Option (Note 5)
Plan for Non-Employee Directors; and Form of Stock Option Agreement.
10.9 Master Leasing Agreement, dated December 18, 1995 between the Company and (Note 11)
Heller Financial Leasing, Inc.
21 Subsidiaries (Note 21)
27 Financial Data
99.1 Complaint in Jason Golz V. James D. Cole, William Thomas Ballantine, Dibo
Attar, William W. Goodson, David P. Hunt, Dr. Alan Kaufman, James H. Stone,
L.E. Simmons, Newpark Resources, Inc., Tuboscope Inc. and SCF-IV, L.P.
filed in United States District Court, Eastern District of Louisiana on or
about August 3, 1999.
Note 1 Incorporated by reference to the Company's Registration Statement on Form S-1 (No.33-31102).
Note 2 Incorporated by reference to the Company's Registration Statement on Form S-1 (No.33-33248).
Note 3 Incorporated by reference to the Company's Registration Statement on Form S-1 (No.33-43525).
Note 4 Incorporated by reference to the Company's Registration Statement on Form S-8 (No.33-72150).
Note 5 Incorporated by reference to the Company's Registration Statement on Form S-8 (No.33-72072).
Note 6 Incorporated by reference to the Company's Registration Statement on Form S-8 (No.33-54337).
Note 7 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
Note 8 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.
Note 9 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
Note 10 Incorporated by reference to the Company's Proxy Statement for the 1994 Annual Meeting of
Stockholders.
Note 11 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
Note 12 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
Ended December 31, 1997.
Note 13 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-05233).
Note 14 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-05237).
Note 15 Incorporated by reference to the Company's Current Report on Form 8-K filed on January 16, 1996.
Note 16 Incorporated by reference to the Company's Current Report on 8-K Filed on March 19, 1997, as
amended by Amendment No. 1 filed on May 7, 1997.
Note 17 Incorporated by reference to Appendix E in the Company's Registration Statement on Form S-4
(No. 333-01869).
Note 18 Incorporated by reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders.
Note 19 Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-51115).
Note 20 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
Note 21 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
Note 22 Incorporated by reference to the Company's Current Report on Form 8-K filed on June 29, 1999.
</TABLE>
19
<PAGE>
EXHIBIT 99.1
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
JASON GOLZ, on behalf of himself and * CIVIL ACTION
all others similarly situated, * NO. 99-2331
*
Plaintiff * SECTION
* SECT BMAG 5
*
VERSUS *
* MAG. DIV. ( )
JAMES D. COLE, WILLIAM THOMAS BALLANTINE, *
DIBO ATTAR, WILLIAM W. GOODSON, *
DAVID P. HUNT, DR. ALAN KAUFMAN, *
JAMES H. STONE, L.E. SIMMONS, *
NEWPARK RESOURCES, INC., TUBOSCOPE, INC. *
and SCF-IV, L.P., *
*
Defendants *
* * * * * * * * * * * * * * * * * * * * * * *
CLASS ACTION COMPLAINT
----------------------
Plaintiff, by and through his attorneys, alleges the following upon
information and belief, except as to paragraph 8 which is alleged upon personal
knowledge:
Nature Of The Action
--------------------
1. This is a stockholder's class action on behalf of the public
stockholders of Newpark Resources, Inc. ("Newpark" or the "Company"). The action
is brought against Newpark and its Board of Directors, Tuboscope, Inc.
("Tuboscope"), SCF-IV, L.P. ("SCF"), a Delaware partnership and a major
shareholder of Newpark controlled by defendant L.E. Simmons ("Simmons"), in
connection with the proposed merger and acquisition ("merger and acquisition")
<PAGE>
by Tuboscope of the publicly owned shares of Newpark common stock which SCF does
not already own, at a negative premium to the closing price of Newpark common
stock prior to the announcement of the merger and acquisition.
2. The action arises out of an announcement released by Tuboscope over the
Business Wire on June 24, 1999 which stated:
- -------------
the companies have agreed to merge, creating a worldwide supplier of highly
engineered products and services to the oil and gas industry with over $800
million in combined sales in 1998. Under the terms of a definitive merger
agreement approved by both boards of directors and executed today, Newpark
common shareholders would receive 0.65 common shares of Tuboscope for each
common share of Newpark. At that ratio each shareholder group will own
approximately 50% of the combined company. Tuboscope will be the surviving
company with its name likely to be changed to reflect the integrated
services to be provided.
The June 24, 1999 press release further announced that defendant James D. Cole
("Cole"), President, CEO and Chairman of Newpark will become Chairman of the
combined company, thus giving Cole a motive to approve what is an inadequate and
unfair transaction to plaintiff and the Class, as set forth herein. In addition,
according to the Tuboscope Form 8-K filed with the Securities and Exchange
Commission on or about June 29, 1999, defendant William Thomas Ballantine
("Ballantine") will assume a senior management position with continued
responsibility for key Newpark operating companies, thus giving Ballantine, as
well, a motive to approve this inadequate and unfair merger and acquisition.
L.E. Simmons, current Chairman of Tuboscope, will chair an executive committee
of the new board of directors which will be composed of directors from both
companies.
-2-
<PAGE>
3. The June 24, 1999 press release did not disclose the fact that L. E.
Simmons & Associates, an entity controlled by defendant Simmons (who is
currently Chairman of the Board of Tuboscope) recently purchased 150,000 shares
of Newpark preferred stock at $10.00 per share and warrants to purchase an
additional 2,400,000 shares of Newpark common stock at an exercise price of
$8.50 per share, all in a private Purchase Agreement ("Private Purchase
Agreement") between Newpark and SCF dated April 18, 1999. Accordingly,
immediately prior to the June 24, 1999 press release, SCF owned 100% of the
outstanding preferred shares of Newpark. According to the Agreement and Plan of
Merger ("Merger Agreement") governing the merger and acquisition, SCF's
preferred shares shall be converted into the right to receive 965,347 shares of
Tuboscope common stock. This along with its ability to exercise the warrants to
purchase an additional 2,400,000 shares of Newpark common stock, make it and
Tuboscope and defendant Simmons even more influential in the affairs of Newpark
and enable Tuboscope to wrongfully exert undue pressure on the Newpark Board of
Directors to enter into the merger and acquisition. As set forth hereafter,
Tuboscope, by way of the merger and acquisition seeks to purchase all of the
public shareholders' outstanding shares of Newpark at an unfair and inadequate
price.
4. The Merger Agreement contains the following further terms, all of which
are designed to ensure that the merger and acquisition is consummated to the
unfair advantage of Tuboscope and to the detriment of the class as defined
below:
(a) Tuboscope and Newpark have agreed that neither will:
(i) solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or
-3-
<PAGE>
offer for an Alternative Transaction... involving such party or
any of its Subsidiaries...
(ii) engage in negotiations or discussions concerning, or
provide any non-public information to any person or entity
relating to any Acquisition Proposal, or
(iii) agree to or recommend any Acquisition Proposal.
Accordingly, the Newpark Board of Directors is in agreement to breach its
fiduciary duties to actively seek the best possible price for Newpark's common
shares, e.g. by a public action.
---
(b) In the event of a termination of the Merger Agreement, Newpark
shall pay Tuboscope up to $5,000,000 as reimbursement for Tuboscope's expenses
and $25,000,000 as a "Termination Fee." Accordingly, other bona fide bids have
- ---
been discouraged and avoided.
5. Tuboscope, by encouraging the Newpark Board of Directors to recommend
acceptance of the merger and acquisition agreement and by negotiating the unfair
and inadequate price, is in breach of its fiduciary duties as a major
shareholder to Newpark's public shareholders, in not taking all steps necessary
to offer and/or to ensure a fair and adequate price for Newpark's shares
(including an auction) and by improperly placing undue pressure on Newpark and
its public shareholders to accept the proposal. Given that SCF, controlled by
Simmons, the Tuboscope Chairman, already owns approximately 100% of Newpark's
outstanding preferred stock which will be converted into common shares of
Newpark and voted in favor of the merger and acquisition, and warrants to
purchase an additional approximately 3% of Newpark common shares at just $8.50
per share, Tuboscope and Simmons owed and owes a fiduciary duty to Newpark's
shareholders to deal
-4-
<PAGE>
fairly with the shareholders and to ensure that the price offered to Newpark
shareholders is fair and adequate.
6. The consideration that SCF has offered to members of the class (as
defined below) in the proposed transaction is unfair and inadequate because,
among other things, the intrinsic value of Newpark's common stock is materially
in excess of the amount offered, giving due consideration to, among other
things, the Company's growth and anticipated operating results, net asset value
and profitability, the negative premium to the Company's shares' market price
immediately prior to the announcement of the merger and acquisition and the
wrongful and undue pressure brought to bear on the Company's Board of Directors
by Tuboscope, Simmons and SCF.
7. As a result of the June 24, 1999 announcement of the proposed deal,
the market price of Newpark crashed, falling $2.1875 to close at $8.5625 or a
decline of approximately 20%. According to an article in The New Orleans Times
---------------------
Picayune on June 26, 1999, investors had anticipated a merger price of $13 to
- --------
$14 per share. "People just sort of anticipated a 20 or 30 percent premium,"
said Peter Richiuti ("Richiuti"), director of research at Tulane's A.B. Freeman
School of Business. Richiuti also said he was somewhat puzzled by Newpark's
move, considering the Company was primed to benefit in the upcoming recovery.
"Our feeling was that they were in pretty good shape," Richiuti said. "It seems
like remaining independent would have been a fine place to be."
8. In addition, in light of the factors set forth herein, the Board of
Directors of Newpark is incapable of negotiating an offer fair and adequate to
the Newpark shareholders and/or
-5-
<PAGE>
arriving at a genuinely independent decision regarding acceptance and
recommendation of the proposal.
Jurisdiction and Venue
----------------------
9. This Court has jurisdiction over the subject matter of this action
pursuant to 28 U.S.C. (S)1332(a)(2). The plaintiff is a citizen of the State of
California. None of the Defendants are domiciled or reside in the state of
California. The amount in controversy between plaintiffs and the defendants
exceeds $75,000. This is not a collusive action brought to confer jurisdiction
on this Court which it would not otherwise have.
10. Venue is proper in this district pursuant to 28 U.S.C. (S)1391(a).
Many of the acts and transactions complained of herein, including meetings of
Newpark's Board of Directors, occurred in part in this district. The principal
executive offices of Newpark are located in this district. Many of the
individual defendants, who are the officers and/or directors of Newpark live in,
and/or conduct business in this district.
The Parties
-----------
11. Plaintiff is a citizen of the State of California and has been at all
relevant times the owner of shares of the common stock of Newpark.
12. (a) Defendant James D. Cole ("Cole") is, and at all relevant times
has been, Chairman of the Board, President and Chief Executive Officer of
Newpark. As of April 21, 1999, Cole owned 1,242,624 shares or 1.80% of the
common stock of Newpark. In addition, Cole will become Chairman of the Board of
the surviving corporation, giving him a motive to approve this inadequate and
unfair merger and acquisition.
-6-
<PAGE>
(b) Defendant William Thomas Ballantine ("Ballantine") is, and at all
relevant times has been, a member of the Board of Directors of Newpark and its
Executive Vice President. As of April 21, 1999, Ballantine owned 120,666 shares
of common stock of Newpark. In addition, Ballantine will take on a senior
management position, giving him a motive to approve this inadequate and unfair
merger and acquisition.
(c) Defendant Dibo Attar is, and at all relevant times has been, a
member of the Newpark Board of Directors. As of April 21, 1999, Attar owned
184,676 shares of the common stock of Newpark.
(d) Defendant William W. Goodson ("Goodson") is, and at all relevant
times has been, a member of the Board of Directors of Newpark.
(e) Defendant David P. Hunt ("Hunt") is, and at all relevant times
has been, a member of the Board of Directors of Newpark. As of April 21, 1999,
Hunt owned 59,468 shares of the common stock of Newpark.
(f) Defendant Dr. Alan Kaufman ("Kaufman") is and at all relevant
times has been a member of the Board of Directors of Newpark. As of April 21,
1999, Kaufman owned 774,060 shares, or 1.12% of the common stock of Newpark.
(g) Defendant James H. Stone ("Stone") is, and at all relevant times
has been, a member of the Board of Directors of Newpark. As of April 21, 1999,
Stone owned 824,168 shares or 1.20% of the common stock of Newpark.
13. The defendants identified in the above paragraph are referred to
collectively herein as the Newpark Director Defendants.
-7-
<PAGE>
14. (a) Newpark is a Delaware corporation with its principal executive
offices located at 3850 North Causeway, Suite 1700, Metairie, Louisiana 70002.
Newpark describes itself as a leading provider of proprietary environmental
services to the oil and gas exploration and production industry, primarily in
the U.S. Gulf Coast market. Services provided by the Company, either
individually or as part of a comprehensive package, include: (1) processing and
disposal of oilfield exploration and production ("E&P") waste; (ii) drilling
fluids and associated engineering and technical services; (iii) fluids
processing and recycling services at the rig site; (iv) installation, rental and
sale of temporary access roads and work sites ("mat rental") in oilfield and
other construction applications; and, (v) other related on-site environmental
and oilfield construction services. As of April 21, 1999, Newpark had over
68,000,000 shares of common stock issued and outstanding, trading on the New
York Stock Exchange. Approximately 3% of Newpark common stock may be purchased
by virtue of the warrants sold to SCF in the Private Purchase Agreement, making
Tuboscope, through its affiliation with SCF, potentially one of the largest, if
not the largest, common shareholder of Newpark.
(b) Tuboscope is a Delaware corporation with its principal executive
offices at 2835 Holmes Road, Houston, Texas 77051. Tuboscope describes itself
as the world's leading supplier of oilfield internal tubular coating and tubular
inspection services; oilfield solids control equipment and services; and coiled
tubing and pressure control equipment to the petroleum industry. Additionally,
it provides in-service inspection of pipelines, manufactures high pressure
fiberglass tubulars; sells and leases advanced in-line inspection equipment to
makers of oil country tubular goods; and provides quality assurance and
inspection services to a diverse range of industries.
-8-
<PAGE>
15. Defendant SCF is a Delaware limited partnership of which, upon
information and belief, the general partner is L.E. Simmons & Associates,
Incorporated, of which defendant Simmons is the president and sole stockholder.
Accordingly, Simmons controls the affairs of SCF.
16. Defendant Simmons, aside from his aforementioned position and role
with SCF, also is Chairman of the Board of Tuboscope and will become chairman of
an executive committee of the Board of Directors of the surviving company. As
of March 25, 1999, Simmons was the largest holder of shares of common stock of
Tuboscope, owning 11,621,516 or 32.1% of Tuboscope's outstanding common stock.
17. On or about April 8, 1999, Newpark and SCF entered into the Private
Purchase Agreement whereby, SCF purchased 150,000 shares of preferred stock at a
total price of $15,000,000 or $10 per preferred share. Pursuant to the terms of
the Private Purchase Agreement:
(a) SCF was granted access to and the opportunity to review the
Company's properties, assets, financial statements, contracts and other books
and records and has made such investigation with respect thereto as it deems
necessary to enter into the Private Purchase Agreement;
(b) has been afforded the opportunity to ask appropriate
representatives of the Company questions concerning the business, assets,
financial condition and prospects of the Company and has been furnished, to its
Knowledge, with all requested information;
(c) SCF obtained the right to seat its own nominee as a director
on the Newpark Board of Directors;
-9-
<PAGE>
(d) SCF will not, and will not permit any of its Affiliates to,
acquire or agree to acquire, directly or indirectly, by purchase or otherwise
(including by joining a "group" within the meaning of Section 13(d)(3) of the
Exchange Act), any of the Voting Stock of the Company, any securities directly
or indirectly convertible into or exchangeable for Voting Stock of the Company,
any direct or indirect rights, warrants or options to acquire any Voting Stock
of the Company or any right to vote Voting Stock of the Company if, after giving
effect to such purchase or other acquisition, Purchaser and its Affiliates
together would hold in the aggregate, or have the right to vote, more than 15%
of the Voting Stock of the Company determined on a fully diluted basis; and
(e) SCF Purchaser agrees that it will not form, or encourage the
formation of, a "group" within the meaning of Section 13(d)(3) of the Exchange
Act, to effect or acquire control of the Company. Accordingly, it is clear that
in order to effect the merger and acquisition, Tuboscope will cause, and Newpark
and the Newpark Director Defendants will permit Tuboscope to cause, SCF to
breach terms (d) and (e) above.
CLASS ACTION ALLEGATIONS
------------------------
18. Plaintiff brings this action on behalf of himself and as a class
action on behalf of all stockholders of Newpark, and their successors in
interest, who are or will be threatened with injury arising from defendants'
actions as more fully described herein (the "Class"). Excluded from the Class
are defendants herein and any person, firm, trust, corporation, or other entity
related to or affiliated with any of the defendants.
-10-
<PAGE>
19. This action is properly maintainable as a class action because:
(a) The Class is so numerous that joinder of all members is
impracticable. There are over 68 million shares of Newpark common stock
outstanding, held by hundreds, if not thousands, of record and beneficial
stockholders.
(b) There are questions of law and fact which are common to the Class
and which predominate over questions affecting any individual Class member. The
common questions include, inter alia, the following:
----- ----
(i) Whether defendants have engaged in and are continuing to
engage in conduct which unfairly benefits any of the Newpark Director
Defendants, Tuboscope, Simmons and/or SCF at the expense of the members of the
Class;
(ii) Whether the Newpark Director Defendants, as officers
and/or directors of the Company, are violating their fiduciary duties to
plaintiff and the other members of the Class;
(iii) Whether plaintiff and the other members of the Class would
be irreparably damaged were defendants not enjoined from the conduct described
herein;
(iv) Whether Tuboscope has initiated and timed its buy-out of
Newpark shares at a point in time when Newpark was suffering from a temporary
cyclical downturn in the industry in order to unfairly benefit any of the
Newpark Director Defendants, Tuboscope, Simmons and/or SCF at the expense of
Newpark shareholders; and
(v) whether the Newpark Director Defendants are in breach of
their fiduciary duties of full faith and candor to Newpark's shareholders.
-11-
<PAGE>
(c) The claims of plaintiff are typical of the claims of the other
members of the Class in that all members of the Class will be damaged alike
from defendants' actions.
(d) Plaintiff is committed to the prosecution of this action and has
retained competent counsel experienced in litigation of this nature.
Accordingly, plaintiff is an adequate representative of the Class and will
fairly and adequately protect the interests of the Class.
SUBSTANTIVE ALLEGATIONS
-----------------------
20. Plaintiff repeats and realleges the allegations set forth above as
though fully set forth hereinafter.
21. Defendants are taking wrongful advantage of a general downturn in the
fortunes of oil and oil service companies and the world economy affecting
Newpark in order to freeze out the public shareholders of Newpark. Until very
recently, Newpark's outlook was strong. Indeed, as set forth below, its
fundamentals are still strong. Prior to the downturn in the fortunes of the oil
industry, the price of Newpark's common stock traded above $25 per share,
substantially higher than the inadequate price to be paid now by Tuboscope
pursuant to the merger and acquisition.
22. In addition, as a result of the interconnected nature of Newpark's
and Tuboscope's corporate and capital structure, including an SCF nominee
sitting on the Board of Directors of Newpark, the new positions offered to
certain of the Individual Defendants with the surviving company, and other
factors set forth below, any decision by the Board of Directors of Newpark to
accept or recommend the acceptance of the proposal, cannot be an independent
one.
-12-
<PAGE>
23. Just three months ago on or about March 31, 1999, Newpark filed with
the Securities and Exchange Commission its Form 10-K for the fiscal year ended
December 31, 1998. Throughout this public filing, the defendants continuously
made glowing remarks regarding the Company and explained that the downturn in
its fortunes was merely temporary and cyclical in nature. The following is just
a small portion of that glowing description:
Demand for Newpark's services has historically been driven by several
factors:
(i) commodity pricing, (ii) oil and gas exploration and production
expenditures and activity; (iii) the desire to drill in more
environmentally difficult environments, such as the coastal marsh and
inland waters near the coastline ("transition zone") of the Gulf Coast,
(iv) use of more complex drilling techniques, which tend to generate more
waste; and (v) increasing environmental regulation of E&P waste and NORM.
The demand for most of Newpark's services is related to the level of oil
and gas drilling activity as measured by the Baker-Hughes Rotary Rig Count.
During the fourth quarter of 1997, the number of drilling rigs working in
-------------------------------------------------------------------------
the U.S. Gulf Coast region reached its highest level since 1990, then began
---------------------------------------------------------------------------
a decline that has continued into the first quarter of 1999. The rig count
--------------------------------------------------------------------------
in the Company's principal market peaked in the first quarter of 1998 and
-------------------------------------------------------------------------
had declined 36% by the end of the fourth quarter. That decline has
-------------------------------------------------------------------
continued during the first quarter of 1999, recently reaching the lowest
------------------------------------------------------------------------
level ever recorded in the history of the indicator, which began over 50
------------------------------------------------------------------------
years ago.
----------
Newpark believes that technological advances that have reduced the risk and
cost of finding oil and gas are an important factor in the economics faced
by the industry. These advances include the use of three-dimensional
seismic data and the computer-enhanced interpretation of that data, which
increases the likelihood of drilling a successful well, and improved
drilling tools and fluids, which facilitate faster drilling and reduce the
overall cost. These advances also have increased the willingness of
-----------------------------------------------------
exploration companies to drill in coastal marshes and inland waters and to
--------------------------------------------------------------------------
drill deeper wells. Such
------------------------
-13-
<PAGE>
projects rely heavily on services such as those provided by Newpark. Deeper
-------------------------------------------------------------------
wells require the construction of larger locations to accommodate larger
drilling rigs and the equipment for handling drilling fluids and associated
wastes. Such locations are generally in service for significantly longer
periods, generating additional mat rental revenues. Deeper wells also
require more complex drilling fluid programs, which generate wastes that
are more difficult and costly to dispose of than those from simpler systems
used in shallower wells.
The oilfield market for environmental services has grown due to
increasingly stringent regulations restricting the discharge of exploration
and production wastes into the environment. Louisiana, Texas and other
states have enacted comprehensive laws and regulations governing the proper
handling of E&P waste and NORM, and regulations have been proposed in other
states. As a result, generators of waste and landowners have become
increasingly aware of the need for proper treatment and disposal of such
waste in both the drilling of new wells and the remediation of production
facilities.
For many years, prior to current regulation, industry practice was to allow
E&P waste to remain in the environment. Onshore, surface pits were used for
the disposal of E&P waste; offshore or in inland waters, E&P waste was
discharged directly into the water. Since 1990, E&P waste has become
subject to increased public scrutiny and increased federal and state
regulation. These regulations have imposed strict requirements for ongoing
drilling and production activities in certain geographic areas, as well as
for the remediation of sites contaminated by past disposal practices and,
in many respects, have prohibited the prior disposal practices. In
addition, operators have become increasingly concerned about long-term
liability for remediation, and landowners have become more aggressive in
requiring land restoration. For these reasons, operators are increasingly
---------------------------------------------
retaining service companies such as Newpark to devise and implement
-------------------------------------------------------------------
comprehensive waste management techniques to handle waste on an ongoing
-----------------------------------------------------------------------
basis and to remediate past contamination of oil and gas properties.
-------------------------------------------------------------------
The Clean Water Act is the primary legislation resulting in these
regulations. Between 1990 and 1995, substantially all discharges of waste
from drilling and production operations on land (the "onshore subcategory")
and in the transition zone (the "coastal subcategory")
-14-
<PAGE>
were prohibited. This "zero discharge" standard has become the expected
------------------------------------------------------
pattern for the industry. Effective December 4, 1997, discharges of waste
------------------------
from drilling operations in state territorial waters of the Gulf of Mexico
(the "territorial waters subcategory"), were prohibited. Newpark
immediately noticed an increase in waste volume received from this
subcategory in its daily operations. However, as drilling projects in
progress as of that date were completed, most of the rigs subsequently
moved outside of the area covered by those regulations. Since December 4,
1997, the offshore waters of the Gulf of Mexico have been the only surface
waters of the United States into which such waste discharges are allowed.
Recent EPA rulemaking efforts have been directed towards the further
--------------------------------------------------------------------
restriction of discharges into those waters. Recent Federal Register
--------------------------------------------------------------------
notices indicate that such restrictions are expected by January, 2000. More
---------------------------------------------------------------------------
strict enforcement of the requirements of the Clean Water Act is expected
-------------------------------------------------------------------------
to ultimately result in similar "zero discharge" regulations affecting the
--------------------------------------------------------------------------
offshore waters of the Gulf of Mexico. However, the timing of the
-----------------------------------------------------------------
implementation of these regulations is uncertain.
------------------------------------------------
NORM regulations require more stringent worker protection, handling and
storage procedures than those required of E&P waste under Louisiana
regulations. Equivalent rules governing the disposal of NORM have also been
adopted in Texas, and similar regulations have been adopted in Mississippi,
New Mexico, and Arkansas.
Proprietary Products and Services. Over the past 15 years, Newpark has
acquired, developed, and continues to improve its patented or proprietary
technology and know-how which has enabled the Company to provide innovative
and unique solutions to oilfield construction and waste disposal problems.
The Company has developed and expects to continue to introduce similarly
innovative products in its drilling fluids business. Newpark believes that
---------------------
increased customer acceptance of its proprietary products and services will
---------------------------------------------------------------------------
enable it to take advantage of any upturn in drilling and production
--------------------------------------------------------------------
activity.
--------
Injection of Waste. Since 1993, Newpark has developed and used proprietary
technology to dispose of E&P waste by low-pressure injection into unique
geologic structures deep underground. In December 1996, Newpark was issued
patents covering its waste processing and injection operations. Newpark
-------
believes that its
-----------------
-15-
<PAGE>
injection technology is currently the most cost-effective method for the
------------------------------------------------------------------------
offsite disposal of oilfield wastes and that this technology is suitable
------------------------------------------------------------------------
for disposal of other types of waste, Newpark was recently granted a new
------------------------------------------------------------------------
permit to construct and operate a non-hazardous industrial waste injection
--------------------------------------------------------------------------
disposal facility in Texas.
--------------------------
Patented Mats. Newpark owns or licenses several patents that cover its
wooden mats and subsequent improvements. To facilitate entry into new
markets and reduce the Company's dependence on the supply of hardwoods,
Newpark has obtained the exclusive license for a new patented composite
mat manufactured from recycled plastics and other materials. Through a 49%
owned joint venture that owns and operates the manufacturing facility,
Newpark began taking delivery of these mats in the fourth quarter of 1998.
-------------------------------------------------------------------------
The Company expects that over the next three years it will convert the
----------------------------------------------------------------------
majority of its mat fleet to the new composite product. However, a portion
--------------------------------------------------------------------------
of the fleet will continue to be made up of the wooden mats.
-----------------------------------------------------------
Low Cost Infrastructure. Newpark has assembled an infrastructure in the
U.S. Gulf Coast region that includes injection disposal sites, transfer
stations, barges, mat inventories, mat service centers, a hardwood sawmill
to produce lumber for the construction of mats, drilling fluids
distribution centers, service facilities and barite mills to supply raw
materials for the make-up of drilling fluids.
Integration of Services. Newpark believes it is one of the few companies in
--------------------------------------------------
the U.S. Gulf Coast able to provide a package of integrated services and
------------------------------------------------------------------------
offer a "one-stop shop" approach to solving customers' problems.
---------------------------------------------------------------
Beginning in mid-1998, Newpark has offered a unique integrated package of
services that include the provision of the fluids, the on-site processing
of the material returned from the well bore to better separate the cuttings
or tailings from the fluids, and the disposal of the tailings and
associated waste products. Newpark believes that its separation technology
-----------------------------------------------
is significantly more effective than conventional equipment, resulting in
-------------------------------------------------------------------------
more complete separation of fluids from waste, reducing both the quantity
-------------------------------------------------------------------------
of fluids needed to drill the well and the total volume of waste taken off
--------------------------------------------------------------------------
site for disposal, thereby reducing the customer's well cost.
------------------------------------------------------------
-16-
<PAGE>
Newpark's mats provide the access roads and work sites for a majority of
the land drilling in the Gulf Market. Its on-site and off-site waste
management services are frequently sold in combination with mat rental
services. Newpark's entry into the drilling fluids business has created the
opportunity for it to market drilling fluids with other related services,
including technical and engineering services, disposal of used fluids and
other waste material, construction services, site cleanup and site closure.
Consequently, Newpark believes that it is uniquely positioned to take
---------------------------------------------------------------------
advantage of the industry trend towards outsourcing and vendor
--------------------------------------------------------------
consolidation.
-------------
Experience in the Regulatory Environment. Newpark believes that its
-------------------------
operating history provides it with a competitive advantage in the highly
------------------------------------------------------------------------
regulated oilfield waste disposal business. As a result of working closely
--------------------------------------------------------------------------
with regulatory officials and citizens' groups, Newpark has gained
------------------------------------------------------------------
acceptance for its proprietary injection technology and has received a
----------------------------------------------------------------------
series of permits for the Company's disposal facilities, including a permit
--------------------------------------------------------
allowing the disposal of NORM at Newpark's Big Hill, Texas facility. These
-----
permits enable Newpark to expand its business and operate cost-effectively.
---------------------------------------------------------------------------
Newpark believes that its proprietary injection method is superior to
---------------------------------------------------------------------
alternative methods of disposal of oil field wastes, including landfarming,
---------------------------------------------------------------------------
because injection provides greater assurance that the waste is permanently
isolated from the environment and will not contaminate adjacent property or
groundwater. Newpark further believes that increasing environmental
------------------------------------------------------
regulation and activism will inhibit the widespread acceptance of other
-----------------------------------------------------------------------
disposal methods and the permitting of additional disposal facilities.
----------------------------------------------------------------------
Experienced Management Team. Newpark's executive and operating management
-------------------------------------------------------------------------
team has built and augmented Newpark's capabilities over the past ten
---------------------------------------------------------------------
years, allowing it to develop a base of knowledge and a unique
--------------------------------------------------------------
understanding of the oilfield construction and waste disposal markets.
----------------------------------------------------------------------
Newpark's executive and operating management team has an average of 22
----------------------------------------------------------------------
years of industry experience, and an average of 10 years with Newpark,
---------------------------------------------------------------------
including several who have been with Newpark for 20 years or more. Newpark
--------------------------------------------------------------------------
has strengthened its management team by retaining key management personnel
--------------------------------------------------------------------------
of the companies it has acquired and by attracting additional experienced
-------------------------------------------------------------------------
personnel. (Emphasis added.)
----------
-17-
<PAGE>
24. It is clear that Newpark's business and prospects are favorable and
that the Company suffered from a general downturn in the oil and gas industry.
This cycle is now improving and Tuboscope seeks to take advantage of this upturn
in the oil and gas industry for a grossly inadequate, unfair, and negative
premium to the Company's current market price. It is this temporary, cyclical
downturn in the industry as a whole, which arose not out of any fundamental
deficiency in the operations of Newpark but out of circumstances beyond its
control, that Tuboscope now wrongfully seeks to exploit and take advantage of
Newpark and its shareholders by purchasing the outstanding shares held by
Newpark public shareholders at an unfair and bargain basement price. Indeed, on
May 12, 1999, in an article appearing in AP Online, it was reported:
---------
Oil Industry Gets Good News
Oil prices will likely rise now that oil ministry representatives from
Saudi Arabia, Iran, Venezuela and Mexico have agreed to cut production. The
cut is meant to bolster prices. The agreement is effective April 1, Saudi
Oil Minister Ali Naimi said. The pact was reached after two days of
meetings ahead of a March 23 meeting of OPEC oil ministers in Vienna,
Austria.
25. This was the result of an announcement appearing that same day in BBC
Summary of World Broadcasts:
Within the framework of the continuous consultations between the Gulf
Cooperation Council [GCC] member states on various oil issues, the oil and
energy ministers of the Sultanate of Oman, Kuwait, Qatar and the Kingdom of
Saudi Arabia met in the region of Shaybah, in the Empty Quarter, on
Wednesday 22/11/1419 AH, corresponding to 10th March 1999, and after
consultations between the ministers, the latter issued the following Shibah
Declaration:
1. The current situation of the oil market, with falling prices and
increasing reserves, will not be in the interest of producing countries.
-18-
<PAGE>
or the oil industry in the short and long terms. Furthermore, this
situation has negative repercussions on the world economy as oil
investments are decreasing. This will lead to a fall in oil supplies in the
future. This is unacceptable and should not be allowed to go on.
2. The countries present at the Shaybah meeting will endeavour, in close
consultation with OPEC and non-OPEC oil producing countries, to take every
measure, foremost cutting oil output by quantities which are deemed liable
to take out the surplus reserve from the market which would in turn lead to
a price rise.
3. As a result of the consultations which have been held so far, the
countries present at the Shaybah meeting express their optimism about the
possibility of reaching, in the next few weeks, an effective agreement
which would restore stability to the [oil] market and help achieve a
tangible improvement in prices.
26. In an analysis of the prospects for the oil industry, in general, in
an article appearing in The Washington Post on March 2, 1999, it was stated:
-------------------
Likely OPEC Cutback Helps Push Oil Prices Up
Oil prices are beginning to recover from low levels that produced inflation
relief and record-low pump prices, and so are oil industry stock prices,
which contributed to the run-up in the Dow Jones industrial average
yesterday.
The rally, which has pushed crude oil prices up 33 percent from a 12-year
low of $10.72 in December, resulted from different developments, according
to oil industry experts. The prospect of further cuts in production when
the Organization of Petroleum Exporting Companies meets on March 23, a
reduction in inventories and heavy demand for heating oil in Germany in
advance of an increase in tariffs have all fed the trend.
Yesterday the rally stalled and prices fell slightly, with April crude oil
futures on the New York Mercantile Exchange dropping 38 cents to $14.31 a
barrel. But many analysts continue to believe that the signs point to a
production cutback by OPEC nations, which were meeting in preliminary
sessions yesterday and today in Amsterdam.
-19-
<PAGE>
In the past, many oil-producing nations doubted Saudi Arabia's commitment
to reducing production, several analysts said. But meetings over the past
10 days between Saudi Arabia and Iran have begun to remove those doubts,
said Roger Diwan, director of global oil markets for the D.C.-based
Petroleum Finance Corp.
Diwan said OPEC might agree to cut about 2.3 million barrels a day from
production.
But industry analyst Constantine Fliakos of Merrill Lynch & Co. said that
Venezuela, which also is a member of OPEC, is under pressure from its
unions to maintain production at current levels, which might threaten an
agreement.
But he noted that the huge inventories that have kept prices low are
beginning to be reduced. Oil inventories were high because of warmer than
normal winters in the United States and Western Europe and because demand
declined as Asia's economic crisis spread .
"Ultimately, inventories correct," Fliakos said.
Philip K. Verleger Jr., who runs an oil industry research firm in Boston,
said that several anomalies also put upward pressure on prices. One is
heavy demand for the oil used by industry and for home heating in Germany.
Verleger
27. And in a similar review appearing in the Sun-Sentinel on that same
day, it was stated:
OIL PRICE REBOUND BOOSTS GAS PRICES
The cheap gas prices that drivers have been enjoying for months are heading
higher.
Crude oil prices have rallied in recent days on hopes that major producers
such as Saudi Arabia and Iran will agree to cut output and ease the world's
oil glut. The surge means a few more cents per gallon at the pump for
drivers, but relief to beleaguered U.S. oil companies.
-20-
<PAGE>
Crude oil futures slipped Thursday after three days of gains, down 38 cents
to $14.31 per barrel. Despite that decline, crude is still at levels not
seen since November and is up 33 percent from a 12-year low of $10.72 in
December.
In addition to hopes for reduced output, oil prices have been aided by a
harsh winter in some parts of the United States and increased industrial
demand, said George Gaspar, an analyst with Robert W. Baird & Co.
The surge has carried over to Wall Street, where stocks in oil companies
such as Exxon, Mobil, Chevron and BP Amoco have been rising in hopes that
their slumping profits would be revived by a turnaround in oil prices.
And the results are already showing at the pump, where gasoline prices rose
last week for the first time since September. The average price of self-
serve regular gasoline was 94 cents per gallon, up a penny from two weeks
earlier, according to the Lundberg Survey, which polls 10,000 gas stations
nationwide.
"It seems the last couple of days all the major companies went up a penny
or two," said Demitri Karavokiris, owner of a Shell service station on
State Road 84 in Fort Lauderdale. Karavokiris said he raised prices 2 cents
a gallon to 99 cents for regular grade gas and $1.19 for premium grade.
In Boca Raton, Mobil station owner Ron Pearson raised prices 2 cents on
Wednesday to $1.08 for regular grade and $1.28 for premium.
Pearson said retailers usually don't share in the gain when prices rise or
lose money when prices decline. "Whether it goes up or whether it goes
down, we've got to make enough to pay the rent," Pearson said.
If oil production cuts are announced and sustained, analysts said, crude
oil could rise to $17 or $18 per barrel in the next several months--adding
another 10 to 20 cents per gallon to average gasoline prices.
Increased demand during the spring and summer travel season historically
adds a few cents per gallon to pump prices as well.
-21-
<PAGE>
28. Indeed, on July 6, 1999 crude oil rose to a 19-month high, to
$19.78 a barrel, the highest price since November 1997. Oil has gained 66% this
year. Accordingly, the oil industry already is in an upturn.
AS AND FOR A CAUSE OF ACTION
AGAINST ALL DEFENDANTS
----------------------------
29. As a result of the interconnected nature of Tuboscope's and
Newpark's corporate structure, including a shared member of the Newpark Board
of Directors, stock and warranty ownership between the two companies, the
positions to be accepted by Cole and Ballantine, the existence of the
Termination Fee, the agreement by SCF to vote its share in favor of the merger
and acquisition, the non-solicitation clause preventing an auction and the
failure of the Board to appoint an Independent Committee, any decision by the
Board of Directors of Newpark to accept or recommend the acceptance of the
merger and acquisition, cannot be an independent one.
30. Upon plaintiff's information and belief, no Independent Committee
of the Newpark Board of Directors was ever appointed to evaluate the adequacy
and fairness of the merger and acquisition.
31. Any transaction to acquire the Company at the price being
considered does not represent the true value of the Company and is unfair and
inadequate. Prior to the downturn in the fortunes of the oil industry, the
Company's shares traded at values far exceeding the price offered in the merger
and acquisition.
-22-
<PAGE>
32. The price that Tuboscope has offered has been dictated by Tuboscope to
serve its own interests, and is being forced upon Newpark and its public
shareholders by Tuboscope to force Newpark's public shareholders to relinquish
their Newpark shares at a grossly unfair price.
33. Tuboscope, for all the reasons set forth herein is in a position to
ensure effectuation of the transaction without regard to its fairness Newpark's
public shareholders.
34. Because Tuboscope is in possession of non-public corporate
information concerning Newpark's future financial prospects, the degree of
knowledge and economic power between Tuboscope and the class members is unequal,
making it grossly and inherently unfair for Tuboscope to obtain the remaining
Newpark shares at the unfair and inadequate price that it has proposed.
35. By offering a grossly inadequate price for Newpark's shares and by
using its control as a means to force the consummation of the transaction,
Tuboscope is violating its duties as a controlling shareholder.
36. Any purported review of the transaction by a special committee of
"independent directors" would be a sham, given the connections with, and/or
domination and control of, the Company in Tuboscope.
37. Any vote by Newpark's shareholders would be a sham, given Tuboscope's
connections and/or domination and control of the Company.
38. Any buy-out of Newpark's public shareholders by Tuboscope on the terms
offered, will deny class members their right to share proportionately and
equitably in the true value
-23-
<PAGE>
of Newpark's valuable and profitable business, and further growth in profits and
earnings, at a time when the Company is fundamentally and financially strong and
poised for greater progress.
39. For the reasons set forth herein above, no auction or market check can
be effected to establish Newpark's worth through arm's-length bargaining. Thus,
Tuboscope has the power and is exercising its power to acquire Newpark's shares
and dictate terms which are in Tuboscope's best interest, without competing bids
and regardless of the wishes or best interests of the class members or the
intrinsic value of Newpark's stock.
40. By reason of the foregoing, defendants have breached and will continue
to breach their fiduciary duties to the shareholders of Newpark and are engaging
in improper, unfair dealing and wrongful and coercive conduct.
41. Plaintiff and the Class will suffer irreparable harm unless defendants
are enjoined from breaching their fiduciary duties and from carrying out the
aforesaid plan and scheme.
42. Plaintiff and the other class members are immediately threatened by
the acts and transactions complained of herein, and lack an adequate remedy at
law.
WHEREFORE, plaintiff demands judgment and preliminary and permanent relief,
including injunctive relief, in their favor and in favor of the Class and
against defendants as follows:
A. Declaring that this action is properly maintainable as a class action,
and certifying plaintiff as class representative;
B. Enjoining the merger acquisition and, if the merger and acquisition are
consummated, rescinding the transaction:
C. Awarding plaintiff and the Class compensatory damages and/or rescissory
damages;
-24-
<PAGE>
D. Awarding plaintiff the costs and disbursements of this action,
including a reasonable allowance for plaintiff attorneys' and experts' fees; and
E. Granting such other, and further relief as this Court may deem to be
just and proper.
Dated: July 30, 1999
--
Respectfully submitted,
/s/ Randall A. Smith
---------------------------
RANDALL A. SMITH, T.A. (#2117)
ANDREW L. KRAMER (#23817)
DAVID GARLAND (#25680)
Of
SMITH, JONES & FAWER, L.L.P.
201 St. Charles Avenue, Suite 3702
New Orleans, Louisiana 70170
Telephone: (504)525-2200
Counsel for Plaintiff
-25-
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 0
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<INVENTORY> 82,954
<CURRENT-ASSETS> 211,541
<PP&E> 345,824
<DEPRECIATION> (105,259)
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<CURRENT-LIABILITIES> 114,733
<BONDS> 206,762
0
0
<COMMON> 457
<OTHER-SE> 334,322
<TOTAL-LIABILITY-AND-EQUITY> 691,878
<SALES> 54,925
<TOTAL-REVENUES> 187,923
<CGS> 38,756
<TOTAL-COSTS> 147,454
<OTHER-EXPENSES> 3,618
<LOSS-PROVISION> 632
<INTEREST-EXPENSE> 9,062
<INCOME-PRETAX> (843)
<INCOME-TAX> 327
<INCOME-CONTINUING> (1,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,170)
<EPS-BASIC> (0.03)
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