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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 1-16337
OIL STATES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0476605
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
THREE ALLEN CENTER, 333 CLAY STREET, SUITE 3460, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-0582
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant:
Voting common stock (as of March 23, 2001).................. $181,591,000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
As of March 23, 2001 Common Stock, par value $.01 per share 48,256,387
shares
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PART I.................................................................. 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II................................................................. 20
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 33
PART III................................................................ 33
Item 10. Directors and Executive Officers of Registrant.............. 33
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV................................................................. 47
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 47
SIGNATURES.............................................................. 50
INDEX TO COMBINED, PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS............................................................ 51
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PART I
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect our results, please refer to the Business section below, including Risk
Factors, and the financial statement line item discussions set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 1. BUSINESS
Our Company
We are a leading provider of specialty products and services to oil and gas
drilling and production companies throughout the world. We focus our business
and operations in a substantial number of the world's most active and fastest
growing oil and gas producing regions, including the Gulf of Mexico, Canada,
West Africa, the Middle East, South America and Southeast Asia. Our customers
include many of the major and independent oil and gas companies and other
oilfield service companies. We operate in three principal business segments,
offshore products, tubular services and well site services, and have established
a leadership position in each.
Our Background
Oil States International, Inc. (Oil States or the Company) was originally
incorporated in July 1995 as CE Holdings, Inc. On August 1, 1995, CE Holdings,
Inc. acquired Continental Emsco Company, an operator of oilfield supply stores,
including its then wholly owned subsidiary Oil States Industries, Inc. Oil
States Industries is a manufacturer of offshore products.
In May 1996, Oil States Industries purchased the construction division of
Hunting Oilfield Services, Ltd., which provided a variety of construction
products and services to the offshore oil and gas industry. In November 1996, CE
Holdings, Inc. changed its name to CONEMSCO, Inc. (Conemsco).
In July 1997, CONEMSCO, Inc. purchased HydroTech Systems, Inc., a full
service provider of engineered products to the offshore pipeline industry, and
SMATCO Industries Inc., a manufacturer of marine winches for the offshore
service boat industry. In December 1997, CONEMSCO, Inc. purchased Gregory Rig
Service & Sales Inc., a provider of drilling equipment and services.
In February 1998, CONEMSCO, Inc. acquired Subsea Ventures, Inc. Subsea
Ventures, Inc. designs, manufactures and services auxiliary structures for
subsea blowout preventors and subsea production systems. In April 1998,
CONEMSCO, Inc. acquired the assets of Klaper (UK) Limited, a provider of repair
and maintenance services for blowout preventors and drilling risers used in
offshore drilling.
In July 2000, CONEMSCO, Inc. changed its name to Oil States. In July 2000,
Oil States, HWC Energy Services, Inc. (HWC), PTI Group Inc. (PTI) and Sooner
Inc. (Sooner) entered into a Combination Agreement (the Combination Agreement)
providing that, concurrently with the closing of our recent initial public
offering, HWC, PTI and Sooner would merge with wholly owned subsidiaries of Oil
States (the Combination). As a result, HWC, PTI and Sooner became wholly owned
subsidiaries of Oil States in February 2001.
Our Industry
We operate in the oilfield service industry, which provides products and
services to oil and gas exploration and production companies for use in the
drilling for and production of oil and gas. Demand for our products and services
largely depends on the financial condition of our customers and their
willingness to spend capital on the exploration and development of oil and gas.
Oil and gas operators are increasingly focusing their exploration and
development efforts on frontier areas, particularly deepwater offshore areas.
According to OneOffshore, Inc., the number of wells drilled in water
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depths greater than 1,500 feet has increased from 39 in 1990 to 217 in 2000. The
number of hydrocarbon discoveries in water depths greater than 1,500 feet has
shown similar gains, increasing from nine in 1990 to 68 in 1999.
We believe that oil and gas exploration and production companies will
respond to sustained increases in demand by expanding their activities and
spending more capital, particularly in frontier areas that offer potentially
higher future production and that have not yet been exploited, including
deepwater Gulf of Mexico, Canada, West Africa, the Middle East, South America
and Southeast Asia. We have an established presence in each of these areas. In
addition to what we believe to be positive industry fundamentals, we believe the
following sector-specific trends enhance the growth potential of our business:
- Increased drilling in offshore areas, particularly deepwater areas, which
we believe will increase the need for floating exploration and production
systems and the demand for our offshore products. Our offshore products
segment provides technology critical to floating rigs such as drill ships
and semi-submersibles as well as floating production systems such as
tension leg platforms, Spars and floating production, storage and
offloading (FPSO) vessels.
- Increased drilling of deeper, horizontal and offshore wells, which we
believe will positively impact demand for our tubular products. Deeper
wells generate considerably more revenues for our tubular services
segment than shallower wells since deeper wells require more, higher
quality and larger diameter pipe. Generally, operators utilize higher
grade, premium tubulars and connectors for casing and tubing in deep
wells, horizontal wells and offshore wells since the cost of a pipe
failure is higher than in a shallow vertical land well and because the
mechanical stresses on the pipe in deeper, deviated or horizontal wells
are much greater.
- Rising offshore rig utilization and day rates, which we believe will
benefit our hydraulic workover and well control services and cause our
hydraulic units to become more competitive for offshore workovers. We
also expect to benefit from trends towards underbalanced workovers since
this technique results in less damage to reservoir formations than
conventional workovers, and towards underbalanced drilling since it
results in less formation damage, higher rates of penetration and longer
bit life. Underbalanced conditions exist when the pressure exerted by the
hydrocarbons in the reservoir is greater than the pressure introduced
into the well bore during drilling and workover operations. When working
over or drilling a well in an underbalanced condition, the operator can
use a snubbing unit on the well, such as the ones we own, to control
pressures in the well bore.
- Increased exploration and development activities in frontier areas, which
we believe will benefit our remote site accommodations, catering and
logistics services.
We have a proven history of growth through acquisitions. Over the last four
years, we have completed acquisitions of over 15 different companies or business
units. These acquisitions allowed us to strengthen our positions in the tubular
services and well site services markets and to broaden our product lines in our
offshore products segment. We believe that with our increased size and access to
the capital markets, we will be able to further expand our operations and
product offerings through strategic acquisitions.
Offshore Products
OVERVIEW
Through our offshore products segment, we design and manufacture
cost-effective, technologically advanced products for the offshore energy
industry. Our products are used in both shallow and deepwater producing regions
and include flex-element technology, advanced connector systems, blow-out
preventor stack integration and repair services, offshore equipment and
installation services and subsea pipeline products. We have facilities in
Arlington, Houston and Lampasas, Texas; Houma, Louisiana; Scotland; Brazil;
England and Singapore.
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OFFSHORE PRODUCTS MARKET
The market for our offshore products and services depends primarily upon
drilling rig refurbishments and upgrades, new rig construction and development
of infrastructure for offshore production activities. As demand for oil and gas
increases and related drilling and production increases in offshore areas
throughout the world, particularly in deeper water, we expect spending on these
activities to increase, resulting in improved demand for our offshore products
and services.
The upgrade of existing rigs to equip them with the capability to drill in
deeper water and the construction of new deepwater-capable rigs require
specialized products and services like the ones we provide. According to
information from OneOffshore, Inc., construction of deepwater-capable rigs,
tension leg platforms, Spars and FPSO vessels is currently expected to increase
significantly in the next three years. At December 31, 2000, there were
approximately 55 semisubmersible rigs and 29 drillship-type rigs worldwide
capable of drilling in greater than 2,450 feet of water. It is anticipated that
by the end of 2001 there will be 68 semi-submersible rigs and 30 drillship-type
rigs capable of this deepwater drilling. In addition, there are three new
tension leg platforms and eight new Spars scheduled for completion by the year
2003. At the end of 2000, there were only 11 tension leg platforms and three
Spars in operation worldwide. The number of FPSO vessels is currently expected
to increase from 62 FPSOs in operation worldwide at the end of 2000 to 87 by the
end of 2003, and the number of floating production semisubmersibles is
anticipated to increase from 36 to 43 over the same period. We believe that the
construction, installation, operation and refurbishment from time to time of
these facilities will result in increased demand for many of the products and
services provided by our offshore products segment.
PRODUCTS AND SERVICES
Our offshore products segment provides a broad range of highly engineered
technical products and services for use in offshore drilling and development
activities. In addition, this segment provides onshore oil and gas, defense and
general industrial products and services. Our offshore products segment has a
history of innovation and creative applications of existing technologies.
We have the capability to design and build manufacturing and testing
systems for many of our new products and services. These testing and
manufacturing facilities enable us to provide reliable, technologically advanced
products and services. Our Aberdeen facility provides a wide range of structural
testing including full-scale product simulations.
Offshore Development and Drilling Activities. We design, manufacture,
fabricate, inspect, assemble, repair, test and market subsea equipment and
offshore vessel and rig equipment. Our products are components of equipment used
on marine vessels, floating rigs and jack-ups, and for the drilling and
production of oil and gas wells on offshore fixed platforms and mobile
production units including floating platforms and FPSO vessels. We believe that
sales of our equipment for new rig building and offshore infrastructure
development will be important sources of future revenues. Our products and
services include:
- flexible bearings and connector products;
- subsea pipeline products;
- marine winches, mooring systems and rig equipment;
- blowout preventor stack assembly, integration, testing and repair
services; and
- fixed platform products and services.
FLEXIBLE BEARINGS AND CONNECTOR PRODUCTS. We are the principal supplier of
flexible bearings, or FlexJoints(TM), to the offshore oil and gas industry. We
also supply connections and fittings that join lengths of large diameter
conductor or casing used in offshore drilling operations. FlexJoints(TM) are
flexible bearings that permit movement of riser pipes or tension leg platform
tethers under high tension and pressure. They are used on drilling, production
and export risers and are used increasingly as offshore production moves to
deeper water areas. Drilling riser systems provide the vertical conduit between
the floating drilling vessel and the
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subsea wellhead. Through the drilling riser, equipment is guided into the well
and drilling fluids are returned to the surface. Production riser systems
provide the vertical conduit from the subsea wellhead to the floating production
platform. Oil and gas flows to the surface for processing through the production
riser. Export risers provide the vertical conduit from the floating production
platform to the subsea export pipelines. FlexJoints(TM) are a critical element
in the construction and operation of production and export risers on floating
production systems in deepwater.
Floating production systems, including tension leg platforms, Spars and
FPSO systems, are a significant means of producing oil and gas, particularly in
deepwater environments. We provide many important products for the construction
of these systems. A tension leg platform is a floating platform that is moored
by vertical pipes, or tethers, attached to both the platform and the sea floor.
Our FlexJoint(TM) tether bearings are used at the top and bottom connections of
each of the tethers, and our Merlin connectors are used to join shorter pipe
segments to form long pipes offshore. A Spar is a floating vertical cylindrical
structure which is approximately six to seven times longer than its diameter and
is anchored in place.
SUBSEA PIPELINE PRODUCTS. We design and manufacture a variety of fittings
and connectors used in offshore oil and gas pipelines. Our products are used for
new construction, maintenance and repair applications. New construction fittings
include:
- forged steel Y-shaped connectors for joining two pipelines into one;
- pressure-balanced safety joints for protecting pipelines from anchor
snags or a shifting sea-bottom;
- electrical isolation joints; and
- hot tap clamps that allow new pipelines to be joined into existing lines
without interrupting the flow of petroleum product.
We provide diverless connection systems for subsea flowlines and pipelines.
Our proprietary metal-to-metal sealing system is preferred by many oil
companies. Our HydroTech connectors are most commonly used for final hook-up of
subsea production systems and allow pipelines and flowlines to be connected to
production equipment on the sea floor. They also are used in diverless pipeline
repair systems and in future pipeline tie-in systems. Our lateral tie-in sled,
which is installed with the original pipeline, allows a subsea tie-in to be made
quickly and efficiently using proven HydroTech connectors without costly
offshore equipment mobilization and without shutting off product flow.
We provide pipeline repair hardware, including deepwater applications
beyond the depth of diver intervention. Our products include:
- repair clamps used to seal leaks and restore the structural integrity of
a pipeline;
- mechanical connectors used in repairing subsea pipelines without having
to weld;
- flanges used to correct misalignment and swivel ring flanges; and
- pipe recovery tools for recovering dropped or damaged pipelines.
MARINE WINCHES, MOORING SYSTEMS AND RIG EQUIPMENT. We design, engineer and
manufacture marine winches, mooring systems and rig equipment. Our Skagit
winches are specifically designed for mooring floating and semi-submersible
drilling rigs and positioning pipelay and derrick barges, anchor handling boats
and jack-ups. We also design and fabricate rig equipment such as automatic pipe
racking and blow-out preventor handling equipment. Our engineering teams and
manufacturing capability, coupled with skilled service technicians who install
and service our products, provide our customers with a broad range of equipment
and services to support their operations.
BOP STACK ASSEMBLY, INTEGRATION, TESTING AND REPAIR SERVICES. We design
and fabricate lifting and protection frames and offer system integration of
blow-out preventor stacks and subsea production trees. We can provide complete
turnkey and design fabrication services. We also design and manufacture a
variety of
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custom subsea equipment, such as riser flotation tank systems, guide bases,
running tools, and manifolds. We also offer blow-out preventor and drilling
riser testing and repair services.
FIXED PLATFORM PRODUCTS AND SERVICES. We provide equipment for securing
subsea structures and offshore platform jackets, including our Hydra-Lok
hydraulic system. The Hydra-Lok tool, which has been successfully used at depths
of 3,000 feet, does not require diver intervention or guidelines.
We also provide cost-effective, standardized leveling systems for offshore
structures that are anchored by foundation piles, including subsea templates,
subsea manifolds and platform jackets.
Other Products and Services. Our offshore products segment also produces a
variety of products for use in applications beyond the offshore oil and gas
industry. For example, we provide:
- downhole products for onshore drilling and production;
- elastomer products for use in both offshore and onshore oilfield
activities;
- metal-elastomeric FlexJoints(TM) used in a variety of military, marine
and aircraft applications; and
- technology used in drum-clutches and brakes for heavy-duty power
transmission in the mining, paper, logging and marine industries.
Backlog. Backlog in our offshore products segment at December 31, 2000 was
$38.1 million compared to backlog of $33.6 million at December 31, 1999. Our
backlog consists of firm customer purchase orders for which satisfactory credit
or financing arrangements exist and delivery is scheduled. Our backlog has
increased $2.9 million from December 31, 1999 due primarily to an increase in
our flexible bearings and connector products backlog, partially offset by
reductions in our subsea pipeline products and our marine winches, mooring
systems and drilling equipment backlog.
REGIONS OF OPERATIONS
Our offshore products segment provides products and services to customers
in the major offshore oil and gas producing regions of the world, including the
Gulf of Mexico, the North Sea, Brazil, Southeast Asia and West Africa.
CUSTOMERS AND COMPETITORS
Our three largest customers in the offshore products markets in 2000 were
Global Marine Inc., Shell Oil Company, Inc. and Modec International, LLC. None
of these customers accounted for greater than 5% of our combined revenues. Our
main competitors include AmClyde Engineered Products Company, Inc., Dril-Quip,
Inc., Cooper Cameron Corporation, Stolt Offshore and Coflexip Stena Offshore.
Tubular Services
On February 14, 2001, the Company completed its acquisition of Sooner.
Sooner's business is reported as our tubular services segment.
OVERVIEW
Through our tubular services segment, we are the largest distributor of oil
country tubular goods, or OCTG, and are a provider of associated finishing and
logistics services to the oil and gas industry. Oil country tubular goods
consist of casing, production tubing and line pipe. Through our tubular services
segment, we:
- distribute premium tubing and casing;
- provide threading, remediation, logistical and inventory services; and
- offer e-commerce pricing, ordering and tracking capabilities.
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In 1999, we acquired the tubular divisions of Continental Emsco, Wilson
Supply and National-Oilwell, Inc. These transactions expanded our presence in
key market segments and increased our coverage of the diversified marketplace
for OCTG. We serve a wide customer base, ranging from major oil companies to
small independents. Through our key relationships with more than 20
manufacturers of oilfield specialty and line pipe, we deliver tubular products
and ancillary services to oil and gas companies, drilling contractors and
consultants around the world. We estimate that we currently have the largest
OCTG distribution market share in the United States, based on tonnage shipped as
a percentage of estimated OCTG consumed in the marketplace. Despite being a
leading distributor of OCTG, we estimate that our U.S. market share is currently
between 15% and 20%.
OCTG MARKET
Our tubular services segment primarily provides casing and tubing. Casing
forms the structural wall in oil and gas wells to provide support and prevent
caving during drilling operations. Casing is used to protect water-bearing
formations during the drilling of a well. Casing is generally not removed after
it has been installed in a well. Production tubing, which is used to bring oil
and gas to the surface, may be replaced during the life of a producing well.
A key indicator of domestic demand for OCTG is the average number of
drilling rigs operating in the United States. According to Baker Hughes, the
average United States rig counts in 1997, 1998, 1999 and 2000 were 943, 843, 625
and 918, respectively. The active rig count in the United States fell to 488 in
April 1999. However, drilling activity accelerated in the second half of 1999,
and by year-end 771 rigs were active, compared to 621 at the end of 1998. As of
December 29, 2000, 1,114 rigs were active in the United States and, as of March
23, 2001, 1,163 were active in the United States. The OCTG market at any point
in time is also affected by the level of inventories maintained by
manufacturers, distributors and end users. In addition, in recent years the
focus of drilling activity has been shifting towards less explored, deeper
geological formations and deepwater locations which offer potentially prolific
reserves. Demand for tubular products is positively impacted by increased
drilling of deeper, horizontal and offshore wells. Deeper wells require
incremental tubular feet and enhanced mechanical capabilities to ensure the
integrity of the well. Deeper wells generate more revenues for our tubular
services segment than shallower wells since deeper wells require more, higher
quality and larger diameter pipe. Premium tubulars are used in horizontal
drilling to withstand the increased bending and compression loading associated
with a horizontal well. Since the cost of a pipe failure is typically higher in
an offshore well than in a land well, offshore operators typically specify
premium tubulars, which provide us with higher margins, for the completion of
offshore wells.
PRODUCTS AND SERVICES
Tubular Products and Services. We distribute all types of OCTG produced by
both domestic and foreign manufacturers to major and independent oil and gas
exploration and production companies and other OCTG distributors. We do not
manufacture any of the tubular goods that we distribute. We operate our tubular
services segment from a total of 11 facilities and have offices strategically
located near areas of oil and gas exploration and development activity in the
United States, Scotland and Nigeria.
We maintain the industry's largest on-the-ground inventory in more than 75
yards in the United States, Scotland and Nigeria, giving us the flexibility to
fill our customers' orders from our own stock or directly from the manufacturer.
We have a proprietary inventory management system, designed specifically for the
OCTG industry, that enables us to track our product shipments down to the
individual pipe stem. This proprietary system integrates our main domestic
facility, the A-Z Terminal in Crosby, Texas, with our overseas facilities in
Nigeria and Scotland.
The purchasing volumes, customer base and management experience of our
tubular services segment provides us with financial and commercial advantages in
our dealings with tubular manufacturers. As a leading distributor of tubular
goods, we believe that we are able to negotiate more favorable supply contracts
with manufacturers. We have distribution relationships with all major domestic
and international steel mills and
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believe we have good working relationships with leading mills such as U.S. Steel
Group, Lone Star Technologies, Inc. and Maverick Tube Corporation.
A-Z Terminal. Our A-Z Terminal pipe maintenance and storage facility in
Crosby, Texas is equipped to provide a full range of tubular services, giving us
a customer service capability that we believe is unique in the industry. Set on
109 acres, the ISO 9002-certified facility has more than 1,400 pipe racks and
two double-ended thread lines. We have exclusive use of a permanent third-party
inspection center within the facility. The facility also includes indoor chrome
storage capability and patented pipe cleaning machines.
We offer services at our A-Z Terminal facility typically outsourced by
other distributors, including the following: threading, inspection, cleaning,
cutting, logistics, rig returns, installation of float equipment and
non-destructive testing. In addition, we have the use of two rail spurs, one of
which allows us to deliver tubular products from our facility directly to the
Alaskan North Slope.
E-commerce. Our website www.soonerpipe.com allows customers to access the
features provided by our proprietary inventory management system which is
designed specifically to handle tubular products. The key features of
www.soonerpipe.com are as follows:
- real-time order tracking from the originating steel mill, through
logistical services to final delivery;
- confidential price and delivery quotation requests from up to five
different tubular distributors, which save the customer time and effort
in obtaining the best value for a particular order;
- our entire catalog of in-stock and special order OCTG and line pipe;
- product catalog searches by several different criteria, including size,
weight and grade of pipe;
- ability to select a number of value-added pipe logistics services,
including threading, third-party inspection, cleaning, cutting and
accessory equipment available from our A-Z Terminal facility; and
- extensive customer reporting features and financial information and
invoicing.
The operation of www.soonerpipe.com provides us with the capability to
serve customers around the world 24 hours a day, seven days a week.
Tubular Products and Services Sales Arrangements. We provide our tubular
products and logistics services through a variety of arrangements, including
spot market sales, alliances and international supply/ logistics agreements.
During 1999 and 2000, the spot market accounted for a majority of our sales of
tubular products and logistics services.
We also provide our tubular products and services to independent and major
oil and gas companies under alliance arrangements. Although our alliances are
not as profitable as the spot market, they provide us with more stable and
predictable revenues and an improved ability to forecast required inventory
levels, which allows us to manage our inventory more efficiently. These
arrangements also provide us with the opportunity to grow our tubular services
segment within our alliance customer base.
REGIONS OF OPERATIONS
Our tubular services segment provides tubular products and services to
customers in the United States, the Gulf of Mexico, Canada, Nigeria, Venezuela,
Ecuador, Colombia, Guatemala and the United Kingdom.
CUSTOMERS, SUPPLIERS AND COMPETITORS
Our three largest customers in the tubular distribution market in 2000 were
Conoco Inc., Union Oil of California and El Paso Corporation. None of these
customers accounted for greater than 5% of our combined revenues. Our three
largest suppliers were U.S. Steel Group, Maverick Tube Corporation and Lone Star
Technologies, Inc. The tubular services distribution market is fragmented, and
our main competitors are Vinson Supply Co., Red Man Pipe & Supply Co., Inc. and
Total Premier.
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Well Site Services
OVERVIEW
Our well site services segment provides a broad range of products and
services that are used to establish and maintain the flow of oil and gas from a
well throughout its lifecycle. Our services include workover services, drilling
services, rental equipment, remote site accommodations, catering and logistics
services and modular building construction services. We use our fleet of
workover and drilling rigs, rental equipment, remote site accommodation
facilities and related equipment to service well sites for oil and natural gas
companies. Our products and services are used in both onshore and offshore
applications through the exploration, development, production and abandonment
phases of a well's life. Additionally, our remote site accommodations, catering
and logistics services are employed in a variety of mining and related natural
resource applications.
WELL SITE SERVICES MARKET
Demand for our workover and drilling rigs, rental equipment and remote site
accommodations, catering and logistics services has increased due to improved
cash flow of oil and gas producers. We expect activity levels to continue to
improve with favorable oil and gas prices for producers.
Demand for our workover services is impacted significantly by offshore
activity both in the United States and international areas. Our hydraulic
workover units compete with jackup rigs for shallow water workover projects.
With the recent increases in dayrates of jackup rigs, our hydraulic workover
units are more attractive to operators due to their cost and performance
attributes relative to these larger units.
Demand for our drilling services is influenced by both oil and gas shallow
onshore United States drilling activity. According to Baker Hughes, the average
United States rig counts in 1997, 1998, 1999 and 2000 were 943, 843, 625 and
918, respectively. The active rig count in the United States fell to 488 in
April 1999. However, drilling activity accelerated in the second half of 1999,
and by year-end 771 rigs were active, compared to 621 at the end of 1998. As of
December 29, 2000, 1,114 rigs were active in the United States and, as of March
23, 2001, 1,163 were active in the United States. Increased drilling activity
typically leads to higher drilling rates. Given the cost advantages of our
semi-automated drilling rigs, we believe our drilling fleet is well positioned
to benefit from further increases in drilling activity.
Our hydraulic drilling and workover rigs are capable of providing
underbalanced drilling and workover services. Underbalanced drilling and
workover can lead to increased rates of penetration, longer drill bit life and
reduced risk of damage to the formation. In recent years, oil and gas operators
have increasingly utilized underbalanced services, a trend which we believe will
continue in the future.
Demand for our rental services benefits from increased exploration and
development activities in the U.S. Gulf Coast area and the Gulf of Mexico.
We expect a large portion of incremental spending by oil and gas producers
to be directed toward oil and gas development in the remote locations of Western
Canada and the deepwater areas of the Gulf of Mexico. Our remote accommodations,
catering and logistics business supplies products and services to companies
engaged in operations in these frontier areas.
PRODUCTS AND SERVICES
Workover Services. We provide a broad range of workover products and
services primarily to customers in the U.S., Canada, Venezuela, the Middle East
and West Africa. Workover products and services are used in operations on a
producing well to restore or increase production. Workover services are
typically used during the development, production and abandonment stages of the
well. These products and services include hydraulic workover units for offshore
workover operations and snubbing operations in pressure situations.
A hydraulic workover unit is a specially designed rig used for vertically
moving tubulars in and out of a wellbore using hydraulic pressure. This unit is
used for servicing wells with no pressure at the surface and also has the unique
ability of working safely on wells under pressure. This feature allows these
units to be used for
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underbalanced drilling and workover and also in well control applications. When
the unit is snubbing, it is pushing pipe or tubulars into the well bore against
well bore pressures. Because of their small size and ability to work on wells
under pressure, hydraulic workover units offer several advantages over larger
workover rigs and conventional drilling rigs, including:
- reduced mobilization and demobilization costs;
- reduced cost and time of retrofit to offshore platforms;
- reduced production shut-in time;
- reduced deck space requirement; and
- live well intervention capability for underbalanced drilling situations.
As of December 31, 2000 we had 27 "stand alone" hydraulic workover units.
Of these 27 units, 15 were located in the U.S., three were located in the Middle
East, five were located in Venezuela and four were located in West Africa.
Utilization of our hydraulic workover units varies from period to period. As of
December 31, 2000, eight of our hydraulic workover units were working or under
contract. Typically, our hydraulic workover units are contracted on a short-term
dayrate basis. The length of time to complete a job depends on many factors,
including the number of wells and the type of workover or pressure control
situation involved. Usage of our hydraulic workover units is also affected by
the availability of trained personnel. With our current level of trained
personnel, we estimate that we have the capability to crew and operate 12 to 14
simultaneous jobs involving our hydraulic workover units.
Our three largest customers in workover services in 2000 were Petroleos de
Venezuela S.A., Chevron Corporation, and TotalFinaElf S.A. None of these
customers accounted for greater than 5% of our combined revenues. We have also
entered into a non-exclusive preferred supplier alliance agreement with
Schlumberger Oilfield Services Group under which we provide hydraulic workover
services to Schlumberger, as and when deemed mutually beneficial, on a worldwide
basis. Our main competitors in workover services are Halliburton Company, Cudd
Pressure Control, Inc. and Nabors Industries, Inc.
Drilling Services. Our drilling services business is located in Odessa,
Texas and Wooster, Ohio and provides drilling services for shallow to medium
depths ranging from 2,000 to 9,000 feet. Drilling services are typically used
during the exploration and development stages of a field. We have a total of 12
semi-automatic drilling rigs with hydraulic pipe handling booms and lift
capacities ranging from 200,000 to 300,000 pounds. Nine of these drilling rigs
are located in Odessa, Texas and three are located in Wooster, Ohio. As of March
23, 2001, all 12 rigs were working or under contract.
We market our drilling services directly to a diverse customer base,
consisting of both major and independent oil companies. Our semi-automatic rigs
offer several competitive advantages, including:
- our rigs operate with a two-man crew rather than the four-man crew
typically required by others;
- our rigs require only 60 feet by 100 feet of deckspace;
- our rigs require significantly fewer truck loads for delivery to the well
site;
- our rigs do not require casing crews;
- our top drive units offer better drilling efficiency than conventional
rotary units; and
- our rigs offer various safety benefits, including minimal pipehandling,
no derrick man and no rotary table and chains.
Our largest customers in drilling services in 2000 included Anadarko
Petroleum Corporation, Chevron Corporation and Conoco, Inc. None of these
customers accounted for greater than 5% of our combined revenues. Our main
competitors are Nabors Industries, Inc., Patterson Energy Inc. and Key Energy
Services, Inc. The land drilling business is very fragmented and consists of a
small number of large companies and many smaller companies.
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Rental Services. Our rental services business provides a wide range of
products for use in the offshore and onshore oil and gas industry, including:
- wireline and coiled tubing pressure control equipment;
- pipe recovery systems; and
- surface-based pressure control equipment used in production operations.
Our rental services are used during the exploration, development,
production and abandonment stages. We provide rental services at 12 U.S.
distribution points in Texas, Louisiana and Oklahoma. We provide rental services
on a day rental basis with rates varying depending on the type of equipment and
the length of time rented.
Our three largest customers in rental services in 2000 were Schlumberger
Ltd., Halliburton Company and The Coastal Corporation. None of these customers
accounted for greater than 5% of our combined revenues.
Remote Site Accommodations, Catering and Logistics and Modular Building
Construction. We are a leading provider of fully integrated products and
services required to support a workforce at a remote location, including
workforce accommodations, food services, remote site management services and
modular building construction. We provide complete design, manufacture,
installation, operation and redeployment logistics services for oil and gas
drilling, oil sands mining, diamond mining, pipeline construction, offshore
construction, disaster relief services or any other industry that requires
remote site logistics projects. Our remote site products and services operations
are primarily focused in Canada and the Gulf of Mexico. During the peak of our
operating season, we typically provide logistics services in over 200 separate
locations throughout the world to remote sites with populations of 20 to 2,000
persons.
Our remote site logistics products and services business offers several
competitive advantages, including:
- an extensive inventory of over 2,400 building units in Canada and the
Gulf of Mexico;
- established field service infrastructure;
- extensive remote site logistics capabilities; and
- the ability to mobilize equipment to remote sites on short notice.
Remote Site Accommodations, Catering and Logistics Services. We sell and
lease portable living quarters, galleys, diners and offices and provide portable
generator, water sewage systems and catering services as part of our remote site
logistics services. We provide various client-specific building configurations
to customers for use in both onshore and offshore applications. We provide our
integrated remote site logistics services to customers under long-term and
short-term contractual arrangements which include the provision of:
- sanitation, janitorial and laundry services;
- security services;
- maintenance services;
- installation services and planning;
- transportation and communications; and
- power, fuel supply, lighting and refrigeration services.
Modular Building Construction. We design, construct and install a variety
of portable modular buildings, including housing, kitchens, recreational units
and offices for the Canadian and Gulf of Mexico markets. Our designers work
closely with our clients to build structures that best serve their needs.
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Our Canadian manufacturing operations primarily support our Canadian remote
site logistics business through the construction and refurbishing of remote site
rental units.
We also design and construct steel and ultra-light weight aluminum modular
buildings and accommodation units for lease or sale to the offshore oil and gas
industry located primarily in the Gulf of Mexico. These buildings are designed
to meet the challenges encountered in harsh saltwater environments and include
U.S. Coast Guard-approved buildings. These modular buildings save valuable deck
space because they can be stacked three high, while still maintaining their
structural integrity in high winds. The structural integrity of our metal
accommodation units provide significant safety advantages over the wood and
fiberglass composite units that some of our competitors provide.
In 2000, our three largest customers in remote site accommodations,
catering and logistics and modular building construction were Syncrude Canada,
Ltd., G.E. Capital Corporation and Precision Drilling Corporation. None of these
customers accounted for greater than 5% of our combined revenues. Our main
competitors are Atco Structures Limited, Great West Catering Ltd. and Abbeyville
Offshore Inc. However, we do not believe that any of our competitors provides
fully integrated remote site logistics services to the same extent as we
currently provide.
Employees
As of December 31, 2000, we had 2,805 full-time employees, 845 of whom are
in our offshore products segment, 91 of whom are in our tubular services segment
and 1,869 of whom are in our well site services segment. In addition, we are
party to collective bargaining agreements covering approximately 361 employees
located in Canada. We believe relations with our employees are good.
Government Regulation
Our business is significantly affected by foreign, federal, state and local
laws and regulations relating to the oil and natural gas industry, worker safety
and environmental protection. Changes in these laws, including more stringent
administrative regulations and increased levels of enforcement of these laws and
regulations, could significantly affect our business. We cannot predict changes
in the level of enforcement of existing laws and regulations or how these laws
and regulations may be interpreted or the effect changes in these laws and
regulations may have on us or our future operations or earnings. We also are not
able to predict whether additional laws and regulations will be adopted.
We depend on the demand for our products and services from oil and natural
gas companies. This demand is affected by changing taxes, price controls and
other laws and regulations relating to the oil and gas industry generally,
including those specifically directed to oilfield and offshore operations. The
adoption of laws and regulations curtailing exploration and development drilling
for oil and natural gas in our areas of operation could also adversely affect
our operations by limiting demand for our products and services. We cannot
determine the extent to which our future operations and earnings may be affected
by new legislation, new regulations or changes in existing regulations or
enforcement.
Some of our employees who perform services on offshore platforms and
vessels are covered by the provisions of the Jones Act, the Death on the High
Seas Act and general maritime law. These laws operate to make the liability
limits established under states' workers' compensation laws inapplicable to
these employees and permit them or their representatives generally to pursue
actions against us for damages or job-related injuries with no limitations on
our potential liability.
Our operations are subject to numerous foreign, federal, state and local
environmental laws and regulations governing the manufacture, management and/or
disposal of materials and wastes in the environment and otherwise relating to
environmental protection. Numerous governmental agencies issue regulations to
implement and enforce these laws, for which compliance is often costly and
difficult. The violation of these laws may result in the denial or revocation of
permits, issuance of corrective action orders, assessment of administrative and
civil penalties and even criminal prosecution. We believe that we are in
compliance in all material respects with applicable environmental laws and
regulations. Further, we do not
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anticipate that compliance with existing laws and regulations will have a
material effect on our consolidated financial statements.
We generate wastes, including hazardous wastes, that are subject to the
federal Resource Conservation and Recovery Act, or RCRA, and comparable state
statutes. The United States Environmental Protection Agency, or EPA, and state
agencies have limited the approved methods of disposal for some types of
hazardous and nonhazardous wastes. Some wastes handled by us in our field
service activities that currently are exempt from treatment as hazardous wastes
may in the future be designated as "hazardous wastes" under RCRA or other
applicable statutes. This would subject us to more rigorous and costly operating
and disposal requirements.
The federal Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA or the "Superfund" law, and comparable state statutes
impose liability, without regard to fault or legality of the original conduct,
on classes of persons that are considered to have contributed to the release of
a hazardous substance into the environment. These persons include the owner or
operator of the disposal site or the site where the release occurred and
companies that disposed of or arranged for the disposal of the hazardous
substances at the site where the release occurred. Under CERCLA, these persons
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. We
currently have operations on properties where activities involving the handling
of hazardous substances or wastes may have been conducted by third parties not
under our control. These properties may be subject to CERCLA, RCRA and analogous
state laws. Under these laws and related regulations, we could be required to
remove or remediate previously discarded hazardous substances and wastes or
property contamination that was caused by these third parties. These laws and
regulations may also expose us to liability for our acts that were in compliance
with applicable laws at the time the acts were performed.
Our operations may result in discharges of pollutants to waters. The
Federal Water Pollution Control Act and analogous state laws impose restrictions
and strict controls regarding the discharge of pollutants into state waters or
waters of the United States. The discharge of pollutants is prohibited unless
permitted by the EPA or applicable state agencies. In addition, the Oil
Pollution Act of 1990 imposes a variety of requirements on responsible parties
related to the prevention of oil spills and liability for damages, including
natural resource damages, resulting from such spills in waters of the United
States. A responsible party includes the owner or operator of a facility or
vessel, or the lessee or permittee of the area in which an offshore facility is
located. The Federal Water Pollution Control Act and analogous state laws
provide for administrative, civil and criminal penalties for unauthorized
discharges and, together with the Oil Pollution Act, impose rigorous
requirements for spill prevention and response planning, as well as substantial
potential liability for the costs of removal, remediation, and damages in
connection with any unauthorized discharges.
Although we believe that we are in substantial compliance with existing
laws and regulations, there can be no assurance that substantial costs for
compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as the adoption of stricter environmental laws,
regulations and enforcement policies, could result in additional costs or
liabilities that we cannot currently quantify.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We include the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us, or on our behalf. The factors
identified in this cautionary statement are important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us, or on our behalf. Where any such forward-looking statement includes a
statement of the assumptions or bases underlying such forward-looking statement,
we caution that, while we believe such assumptions or bases to be reasonable and
make them in good faith, assumed facts or bases almost always vary from actual
results. The differences between assumed facts or bases and actual results can
be material, depending upon the circumstances.
Where, in any forward-looking statement, Oil States, or our management,
expresses an expectation or belief as to the future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis.
However, there can be no assurance that the statement of expectation or belief
will result, or be achieved or accomplished. Taking this into account, the
following are identified as important risk factors that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, Oil States.
Risks Related to Oil States' Business Generally
DECREASED OIL AND GAS INDUSTRY EXPENDITURE LEVELS WILL ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We depend upon the oil and gas industry and its willingness to make
expenditures to explore for, develop and produce oil and gas. If these
expenditures decline, our business will suffer. The industry's willingness to
explore, develop and produce depends largely upon the prevailing view of future
product prices. Many factors affect the supply and demand for oil and gas and
therefore influence product prices, including:
- the level of production;
- the levels of oil and gas inventories;
- the expected cost of developing new reserves;
- the cost of producing oil and gas;
- the level of drilling activity;
- worldwide economic activity;
- national government political requirements, including the ability of the
Organization of Petroleum Exporting Companies to set and maintain
production levels and prices for oil;
- the cost of developing alternate energy sources;
- environmental regulation; and
- tax policies.
If demand for drilling services, cash flows of drilling contractors or drilling
rig utilization rates decrease significantly, then demand for our products and
services will decrease.
EXTENDED PERIODS OF LOW OIL PRICES MAY DECREASE DEEPWATER EXPLORATION AND
PRODUCTION ACTIVITY AND ADVERSELY AFFECT OUR BUSINESS.
Our offshore products segment depends on exploration and production
expenditures in deepwater areas. Because deepwater projects are more capital
intensive and take longer to generate first production than shallow water and
onshore projects, the economic analyses conducted by exploration and production
companies typically assume lower prices for production from such projects to
determine economic viability
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over the long term. If oil prices remain near or below those levels used to
determine economic viability for an extended period of time, deepwater activity
and our business will be adversely affected.
BECAUSE THE OIL AND GAS INDUSTRY IS CYCLICAL, OUR OPERATING RESULTS MAY
FLUCTUATE.
Oil prices have been volatile over the last three years, ranging from less
than $11 per barrel to over $37 per barrel. Spot gas prices have also been
volatile, ranging from less than $1.25 per MMBtu to above $10.00 per MMBtu.
These price changes have caused oil and gas companies and drilling contractors
to change their strategies and expenditure levels. Oil States, Sooner, HWC and
PTI have experienced in the past, and we may experience in the future,
significant fluctuations in operating results based on these changes.
WE MIGHT BE UNABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR
INDUSTRY.
We sell our products and services in competitive markets. In some of our
business segments, we compete with the oil and gas industry's largest oilfield
services providers. These companies have greater financial resources than we do.
In addition, our business, particularly our tubular services business, may face
competition from Internet business-to-business service providers. We expect the
number of these providers to increase in the future. Our business will be
adversely affected to the extent that these providers are successful in reducing
purchases of our products and services.
Our operations may be adversely affected if our current competitors or new
market entrants introduce new products or services with better prices, features,
performance or other competitive characteristics than our products and services.
Competitive pressures or other factors also may result in significant price
competition that could have a material adverse effect on our results of
operations and financial condition.
DISRUPTIONS IN THE POLITICAL AND ECONOMIC CONDITIONS OF THE FOREIGN COUNTRIES
IN WHICH WE OPERATE COULD ADVERSELY AFFECT OUR BUSINESS.
We have operations in various international areas, including parts of West
Africa and South America. Our operations in these areas increase our exposure to
risks of war, local economic conditions, political disruption, civil disturbance
and governmental policies that may:
- disrupt our operations;
- restrict the movement of funds or limit repatriation of profits;
- lead to U.S. government or international sanctions; and
- limit access to markets for periods of time.
Some areas, including West Africa and parts of South America, have experienced
political disruption in the past. Disruptions may occur in the future in our
foreign operations, and losses caused by these disruptions may occur that will
not be covered by insurance.
WE ARE SUSCEPTIBLE TO SEASONAL EARNINGS VOLATILITY DUE TO ADVERSE WEATHER
CONDITIONS IN OUR REGIONS OF OPERATIONS.
Our operations are directly affected by seasonal differences in weather in
the areas in which we operate, most notably in Canada and the Gulf of Mexico.
Our Canadian remote site logistics operations are significantly focused on the
winter months when the winter freeze in remote regions permits exploration and
production activity to occur. The spring thaw in these frontier regions
restricts operations in the spring months and, as a result, adversely affects
our operations and sales of products and services in the second and third
quarters. Our operations in the Gulf of Mexico are also affected by weather
patterns. Weather conditions in the Gulf Coast region generally result in higher
drilling activity in the spring, summer and fall months with the lowest activity
in the winter months. In addition, summer and fall drilling activity can be
restricted due to hurricanes and other storms prevalent in the Gulf of Mexico
and along the Gulf Coast. As a result, full year results are not likely to be a
direct multiple of any particular quarter or combination of quarters.
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WE MIGHT BE UNABLE TO EMPLOY A SUFFICIENT NUMBER OF TECHNICAL PERSONNEL.
Many of the products that we sell, especially in our offshore products
segment, are complex and highly engineered and often must perform in harsh
conditions. We believe that our success depends upon our ability to employ and
retain technical personnel with the ability to design, utilize and enhance these
products. In addition, our ability to expand our operations depends in part on
our ability to increase our skilled labor force. The demand for skilled workers
is high, and the supply is limited. A significant increase in the wages paid by
competing employers could result in a reduction of our skilled labor force,
increases in the wage rates that we must pay or both. If either of these events
were to occur, our cost structure could increase and our growth potential could
be impaired.
IF WE DO NOT DEVELOP NEW COMPETITIVE TECHNOLOGIES AND PRODUCTS, OUR BUSINESS
AND REVENUES MAY BE ADVERSELY AFFECTED.
The market for our offshore products is characterized by continual
technological developments to provide better performance in increasingly greater
depths and harsher conditions. If we are not able to design, develop and produce
commercially competitive products in a timely manner in response to changes in
technology, our business and revenues will be adversely affected.
THE LEVEL AND PRICING OF TUBULAR GOODS IMPORTED INTO THE UNITED STATES COULD
DECREASE DEMAND FOR OUR TUBULAR GOODS INVENTORY AND ADVERSELY IMPACT OUR
RESULTS OF OPERATIONS.
U.S. law currently restricts imports of low-cost tubular goods from a
number of foreign countries into the U.S. tubular goods market, resulting in
higher prices for tubular goods. If these restrictions were to be lifted or if
the level of imported low-cost tubular goods were to otherwise increase, our
tubular services segment could be adversely affected to the extent that we then
have higher-cost tubular goods in inventory. If prices were to decrease
significantly, we might not be able to profitably sell our inventory of tubular
goods. In addition, significant price decreases could result in a longer holding
period for some of our inventory, which could also have a material adverse
effect on our tubular services segment.
IF WE WERE TO LOSE A SIGNIFICANT SUPPLIER OF OUR TUBULAR GOODS, WE COULD BE
ADVERSELY AFFECTED.
During 2000, we purchased from a single supplier approximately 38% of the
tubular goods we distributed and from three suppliers approximately 66% of such
tubular goods. We do not have contracts with any of these suppliers. If we were
to lose any of these suppliers or if production at one or more of the suppliers
were interrupted, our tubular services segment and our overall business,
financial condition and results of operations could be adversely affected. If
the extent of the loss or interruption were sufficiently large, the impact on us
would be material.
WE ARE SUBJECT TO EXTENSIVE AND COSTLY ENVIRONMENTAL LAWS AND REGULATIONS THAT
MAY REQUIRE US TO TAKE ACTIONS THAT WILL ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our hydraulic well control and drilling operations and our offshore
products business are significantly affected by stringent and complex foreign,
federal, state and local laws and regulations governing the discharge of
substances into the environment or otherwise relating to environmental
protection. We could be exposed to liability for cleanup costs, natural resource
damages and other damages as a result of our conduct that was lawful at the time
it occurred or the conduct of, or conditions caused by, prior operators or other
third parties. Environmental laws and regulations have changed in the past, and
they are likely to change in the future. If existing regulatory requirements or
enforcement policies change, we may be required to make significant
unanticipated capital and operating expenditures.
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Any failure by us to comply with applicable environmental laws and
regulations may result in governmental authorities taking actions against our
business that could adversely impact our operations and financial condition,
including the:
- issuance of administrative, civil and criminal penalties;
- denial or revocation of permits or other authorizations;
- reduction or cessation in operations; and
- performance of site investigatory, remedial or other corrective actions.
WE MAY NOT HAVE ADEQUATE INSURANCE FOR POTENTIAL LIABILITIES.
Our operations are subject to many hazards. We face the following risks
under our insurance coverage:
- we may not be able to continue to obtain insurance on commercially
reasonable terms;
- we may be faced with types of liabilities that will not be covered by our
insurance, such as damages from environmental contamination;
- the dollar amount of any liabilities may exceed our policy limits; and
- we do not maintain full coverage against the risk of interruption of our
business.
Even a partially uninsured claim, if successful and of significant size, could
have a material adverse effect on our results of operations or consolidated
financial position.
WE ARE SUBJECT TO LITIGATION RISKS THAT MAY NOT BE COVERED BY INSURANCE.
In the ordinary course of business, we become the subject of various claims
and litigation. We maintain insurance to cover many of our potential losses, and
we are subject to various self-retentions and deductibles under our insurance.
It is possible, however, that an unexpected judgment could be rendered against
us in cases in which we could be uninsured and beyond the amounts that we
currently have reserved or anticipate incurring for such matters.
Risks Related to Oil States' Operations
WE HAVE INCURRED LOSSES IN THE PAST. WE MAY INCUR LOSSES IN THE FUTURE.
We incurred a loss from continuing operations in 1999. We cannot assure you
that we will be profitable in the future.
LOSS OF KEY MEMBERS OF OUR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS.
We depend on the continued employment and performance of Douglas E. Swanson
and other key members of management. If any of our key managers resign or become
unable to continue in their present roles and are not adequately replaced, our
business operations could be materially adversely affected. We do not maintain
any "key man" life insurance for any of our officers. See Item 10 -- Directors
and Executive Officers of Registrant.
IF WE HAVE TO WRITE OFF A SIGNIFICANT AMOUNT OF GOODWILL, OUR EARNINGS WILL BE
NEGATIVELY AFFECTED.
Our pro forma balance sheet as of December 31, 2000 included goodwill
representing 34% of our total assets. We have recorded goodwill because we paid
more for some of our businesses than the fair market value of the tangible and
separately measurable intangible net assets of those businesses. Generally
accepted accounting principles require us to amortize goodwill over the periods
we benefit from the acquired assets, to review unamortized goodwill for
impairment in value periodically and to charge against earnings portions of our
goodwill if circumstances indicate that the carrying amount will not be
recoverable. If we were to
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determine that the remaining balance of goodwill was impaired, we would be
required to take an immediate non-cash charge to earnings with a corresponding
decrease in stockholders' equity.
WE MIGHT BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We rely on a variety of intellectual property rights that we use in our
offshore products and well site services segments, particularly our patents
relating to our FlexJoint(TM) technology. We may not be able to successfully
preserve these intellectual property rights in the future and these rights could
be invalidated, circumvented or challenged. Technological developments may also
reduce the value of our intellectual property. In addition, the laws of some
foreign countries in which our products and services may be sold do not protect
intellectual property rights to the same extent as the laws of the United
States. The failure of our company to protect our proprietary information and
any successful intellectual property challenges or infringement proceedings
against us could adversely affect our competitive position.
BECAUSE WE ARE A NEWLY COMBINED COMPANY WITH NO COMBINED OPERATING HISTORY,
NEITHER OUR HISTORICAL NOR OUR PRO FORMA FINANCIAL AND OPERATING DATA MAY BE
REPRESENTATIVE OF OUR FUTURE RESULTS.
We are a newly combined company with a short period of combined operating
history. Our short combined operating history may make it difficult to forecast
our future operating results. The pro forma and combined financial statements
included in this Annual Report on Form 10-K reflect the separate historical
results of operations, financial position and cash flows of Oil States, Sooner,
HWC and PTI prior to the Combination. As a result, the pro forma and combined
information may not give you an accurate indication of what our actual results
would have been if the Combination had been completed at the beginning of the
periods presented or of what our future results of operations are likely to be.
In addition, our future results will depend on our ability to efficiently manage
our combined facilities and execute our business strategy.
WE MAY NOT BE ABLE TO INTEGRATE OUR OPERATIONS EFFECTIVELY AND EFFICIENTLY.
The Combination will require the integration of four management teams and
operations, a process that we expect to be complex and time-consuming. If we do
not successfully integrate the management and operations of Oil States, Sooner,
HWC and PTI, or if there is any significant delay in achieving this integration,
we may not fully achieve the expected benefits of the Combination, including
increased sales of products and services in broader geographical markets. As a
result, our business could suffer.
L.E. SIMMONS, THROUGH SCF-III, L.P. AND SCV-IV, L.P., PRIVATE EQUITY FUNDS
WHICH OWNED MAJORITY INTERESTS IN EACH OF THE COMPANIES IN THE COMBINATION
(SCF), CONTROLS THE OUTCOME OF STOCKHOLDER VOTING AND MAY EXERCISE THIS VOTING
POWER IN A MANNER ADVERSE TO OUR STOCKHOLDERS.
SCF holds approximately 63.1% of the outstanding common stock of our
company after the Combination. L.E. Simmons, the chairman of our board of
directors, is the sole owner of L.E. Simmons & Associates, Incorporated, the
ultimate general partner of SCF. Accordingly, Mr. Simmons, through his ownership
of the ultimate general partner of SCF, is in a position to control the outcome
of matters requiring a stockholder vote, including the election of directors,
adoption of amendments to our certificate of incorporation or bylaws or approval
of transactions involving a change of control. The interests of Mr. Simmons may
differ from those of our stockholders, and SCF may vote its common stock in a
manner that may adversely affect our stockholders.
SCF'S OWNERSHIP INTEREST AND PROVISIONS CONTAINED IN OUR CERTIFICATE OF
INCORPORATION AND BYLAWS COULD DISCOURAGE A TAKEOVER ATTEMPT, WHICH MAY REDUCE
OR ELIMINATE THE LIKELIHOOD OF A CHANGE OF CONTROL TRANSACTION AND, THEREFORE,
THE ABILITY OF OUR STOCKHOLDERS TO SELL THEIR SHARES FOR A PREMIUM.
In addition to SCF's controlling position, provisions contained in our
certificate of incorporation and bylaws, such as a classified board, limitations
on the removal of directors, on stockholder proposals at meetings of
stockholders and on stockholder action by written consent and the inability of
stockholders to call special meetings, could make it more difficult for a third
party to acquire control of our company. Our certificate of
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incorporation also authorizes our board of directors to issue preferred stock
without stockholder approval. If our board of directors elects to issue
preferred stock, it could increase the difficulty for a third party to acquire
us, which may reduce or eliminate our stockholders' ability to sell their shares
of common stock at a premium.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OF SCF. THE RESOLUTION OF THESE CONFLICTS OF INTEREST MAY NOT BE IN
OUR OR OUR STOCKHOLDERS' BEST INTERESTS.
Two of our directors, L.E. Simmons and Andrew L. Waite, are also current
directors or officers of L.E. Simmons & Associates, Incorporated, the ultimate
general partner of SCF. This may create conflicts of interest because these
directors have responsibilities to SCF and its owners. Their duties as directors
or officers of L.E. Simmons & Associates, Incorporated may conflict with their
duties as directors of our company regarding business dealings between SCF and
us and other matters. The resolution of these conflicts may not always be in our
or our stockholders' best interest.
WE HAVE RENOUNCED ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND SCF
AND ITS DIRECTOR NOMINEES ON OUR BOARD OF DIRECTORS GENERALLY HAVE NO
OBLIGATION TO OFFER US THOSE OPPORTUNITIES.
SCF has investments in other oilfield service companies that compete with
us, and SCF and its affiliates, other than our company, may invest in other such
companies in the future. We refer to SCF, its other affiliates and its portfolio
companies as the SCF group. Our certificate of incorporation provides that, so
long as SCF and its affiliates continue to own at least 20% of our common stock,
we renounce any interest in specified business opportunities. Our certificate of
incorporation also provides that if an opportunity in the oilfield services
industry is presented to a person who is a member of the SCF group, including
any of those individuals who also serves as SCF's director nominee of our
company:
- no member of the SCF group or any of those individuals has any obligation
to communicate or offer the opportunity to us; and
- such entity or individual may pursue the opportunity as that entity or
individual sees fit,
unless:
- it was presented to an SCF director nominee solely in that person's
capacity as a director of our company and no other member of the SCF
group independently received notice of or otherwise identified such
opportunity; or
- the opportunity was identified solely through the disclosure of
information by or on behalf of our company.
These provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock. As
a result of these charter provisions, our future competitive position and growth
potential could be adversely affected.
Risks Related to Ownership of Our Common Stock
THE AVAILABILITY OF SHARES OF OUR COMMON STOCK FOR FUTURE SALE COULD DEPRESS
OUR STOCK PRICE
Sales by SCF and other stockholders of a substantial number of shares of
our common stock in the public markets, or the perception that such sales might
occur, could have a material adverse effect on the price of our common stock or
could impair our ability to obtain capital through an offering of equity
securities.
18
21
ITEM 2. PROPERTIES
The following table presents information about our principal properties and
facilities. Except as indicated below, we own all of these properties or
facilities.
APPROXIMATE
SQUARE
LOCATION FOOTAGE/ACREAGE DESCRIPTION
-------- --------------- -----------
United States
Houston, Texas (lease).......... 3,095 Principal executive offices
Arlington, Texas................ 11,264 Offshore products business office
Arlington, Texas................ 55,853 Offshore products manufacturing
facility
Arlington, Texas (lease)........ 42,491 Offshore products manufacturing
facility
Arlington, Texas................ 44,780 Elastomer Technology Center
Arlington, Texas................ 60,000 Molding and aerospace facilities
Houston, Texas (lease).......... 16,000 Offshore products manufacturing
facility
Houston, Texas.................. 65,105 Offshore products manufacturing
facility
Houston, Texas (lease).......... 54,050 Offshore products manufacturing
facility
Lampasas, Texas................. 47,500 Molding facility for offshore
products
Crosby, Texas................... 109 acres Tubular yard
Belle Chasse, Louisiana 20,000 Accommodations manufacturing
(lease)...................... facility
Lafayette, Louisiana (lease).... 9 acres Accommodations equipment yard
Houma, Louisiana (lease)........ 24,000 Accommodations manufacturing
facility
Houma, Louisiana................ 24,000 Hydraulic well control yard and
office
Houma, Louisiana................ 8,400 Well control office and training
facility
Houma, Louisiana................ 64,659 Offshore products manufacturing
facility
Broussard, Louisiana............ 19,000 Rental tool warehouse
Odessa, Texas................... 14,240 Tubular warehouse
Odessa, Texas................... 7,500 Office and warehouse in support of
drilling operations
Alvin, Texas.................... 20,450 Rental tool warehouse
International
Nisku, Alberta.................. 33,000 Accommodations manufacturing
facility
Edmonton, Alberta............... 31,000 Accommodations office and
warehouse
Aberdeen, Scotland (lease)...... 56,021 Offshore products manufacturing
facility
Bathgate, Scotland.............. 28,000 Offshore products manufacturing
facility
Spruce Grove, Alberta........... 15,000 Accommodations facility and
equipment yard
Grande Prairie, Alberta......... 18,000 Accommodations facility and
equipment yard
Peace River, Alberta............ 80 acres Accommodations equipment yard
Aberdeen, Scotland (lease)...... 6,260 Tubular yard
19
22
APPROXIMATE
SQUARE
LOCATION FOOTAGE/ACREAGE DESCRIPTION
-------- --------------- -----------
Barrow, England................. 14,551 Offshore products manufacturing
facility
Singapore, Asia (lease)......... 13,411 Offshore products warehouse and
yard
Macae, Brazil (lease)........... 18,729 Offshore products manufacturing
facility
Port Harcourt, Nigeria 376,727 Tubular yard
(lease)......................
We have five tubular sales offices and a total of 12 rental supply and
distribution points in Texas, Louisiana and Oklahoma. Most of these office
locations provide sales, technical support and personnel services to our
customers. We also have various offices supporting our business segments which
are both owned and leased.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various pending or threatened claims, lawsuits and
administrative proceedings seeking damages or other remedies concerning our
commercial operations, products, employees and other matters. Although we can
give no assurance about the outcome of these or any other pending legal and
administrative proceedings and the effect such outcomes may have on us, we
believe that any ultimate liability resulting from the outcome of such
proceedings, to the extent not otherwise provided for or covered by insurance,
will not have a material adverse effect on our financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our authorized common stock consists of 200,000,000 shares of common stock.
There were 48,256,387 shares of common stock outstanding as of March 23, 2001,
including 3,572,099 shares of common stock issuable upon exercise of
exchangeable shares of one of our Canadian subsidiaries. These exchangeable
shares, which were issued to certain former shareholders of PTI in the
Combination, are intended to have characteristics essentially equivalent to our
common stock prior to the exchange. For purposes of this Annual Report on Form
10-K, we have treated the shares of common stock issuable upon exchange of the
exchangeable shares as outstanding. The approximate number of record holders of
our common stock as of March 23, 2001 was 100. Our common stock is traded on the
New York Stock Exchange under the ticker symbol OIS. There was no public market
for our common stock before February 9, 2001. The high sales price for our
common stock on the New York Stock Exchange for the period from February 9, 2001
(first trade after effective date) to March 23, 2001 was $12.50 per share and
the low sales price for the same period was $9.00 per share. The closing price
of our common stock on March 23, 2001 was $10.62 per share.
Oil States has not declared or paid cash dividends on its common stock
since its inception, although it declared a dividend payable in the form of a
promissory note. We do not intend to declare or pay any cash dividends on our
common stock in the foreseeable future. Instead, we currently intend to retain
our earnings, if any, to finance our business and to use for general corporate
purposes. Our board of directors has the authority to declare and pay dividends
on the common stock, in its discretion, as long as there are funds legally
available to do so. The payment of dividends is restricted by our revolving
credit facility.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data on the following pages include selected
historical and unaudited pro forma financial information of our company as of
and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996. The
following data should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's Pro Forma and Combined Financial
20
23
Statements, and related notes included in Item 8, Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.
The pro forma statements of operations for 1999 and 2000 and other
financial data give effect to:
- our initial public offering of 10,000,000 shares at $9.00 per share and
the application of the net proceeds to us;
- our issuance of 4,275,555 shares of common stock to SCF in exchange for
approximately $36.0 million of our indebtedness held by SCF;
- the three-for-one reverse stock split of Oil States common stock;
- the combination of Oil States, HWC and PTI, excluding the minority
interest of each company, as entities under common control from the dates
such common control was established using reorganization accounting,
which yields results similar to pooling of interest accounting;
- the acquisition of the minority interests of Oil States, HWC and PTI in
the Combination using the purchase method of accounting as if the
acquisition occurred on January 1, 1999 and 2000, respectively; and
- the acquisition of Sooner in the Combination using the purchase method of
accounting as if the acquisition occurred on January 1, 1999 and 2000,
respectively.
The unaudited pro forma balance sheet data give effect to the Combination
and our initial public offering as if each had been completed on December 31,
2000.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA(1) COMBINED(2) HISTORICAL
------------------- ----------------------------------------- ----------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 2000 1999 1998 1997 1996(3)
-------- -------- -------- -------- -------- -------- ----------
Combined Statement of Operations Data:
Revenue...................................... $595,647 $487,380 $304,549 $267,110 $359,034 $216,259 $580,255
Expenses
Costs of sales and operating expenses...... 482,662 405,652 217,601 199,865 264,658 151,012 484,403
Selling, general and administrative........ 46,146 43,815 37,816 33,624 45,414 23,718 88,147
Depreciation and amortization(4)........... 26,729 26,306 21,314 20,275 18,201 8,973 --
Other expense (income)..................... (69) 2,448 (69) 2,448 4,928 (122) --
-------- -------- -------- -------- -------- -------- --------
Operating income............................. 40,179 9,159 27,887 10,898 25,833 32,678 7,705
-------- -------- -------- -------- -------- -------- --------
Net interest expense......................... (9,260) (6,544) (11,504) (12,496) (15,301) (8,710) (5,988)
Other income (expense)....................... 89 (4,933) 89 (1,297) 115 (368) 750
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes............ 31,008 (2,318) 16,472 (2,895) 10,647 23,600 2,467
Income tax (expense) benefit................. (4,542) 3,979 (10,776) (4,654) (9,745) (11,319) (4,510)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before minority interest................... 26,466 1,661 5,696 (7,549) 902 12,281 (2,043)
Minority interest............................ (30) (31) (4,248) 610 2,988 (6,869) (1,807)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations..... $ 26,436 $ 1,630 $ 1,448 $ (6,939) $ 3,890 $ 5,412 $ (3,850)
======== ======== ======== ======== ======== ======== ========
Income (loss) from continuing operations
before extraordinary item per common
share(5)
Basic...................................... $ 0.55 $ .03 $ 0.05 $ (0.30) $ 0.17 $ 0.28
======== ======== ======== ======== ======== ========
Diluted.................................... $ 0.55 $ .03 $ 0.04 $ (0.30) $ 0.17 $ 0.28
======== ======== ======== ======== ======== ========
Average shares outstanding(5)
Basic...................................... 48,013 48,156 24,482 23,053 22,414 19,287
======== ======== ======== ======== ======== ========
Diluted.................................... 48,358 48,529 26,471 23,069 22,435 19,290
======== ======== ======== ======== ======== ========
21
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PRO FORMA(1) COMBINED(2) HISTORICAL
------------ ------------------------------------------ ----------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2000 2000 1999 1998 1997 1996(3)
------------ -------- --------- -------- -------- ----------
Other Data:
EBITDA as defined(6)............................ $66,908 $ 49,201 $ 31,173 $ 44,034 $ 41,651 $ 15,000
Net income (loss) before goodwill
amortization(7)............................... 33,897 3,979 (4,144) 6,698 6,415 (3,471)
Capital expenditures............................ 21,383 11,297 36,145 14,375 9,737
Net cash provided by (used in) operating
activities.................................... 33,937 5,170 7,469 19,348 (1,062)
Net cash provided by (used in) investing
activities.................................... (22,377) 112,227 (61,864) (67,217) (26,522)
Net cash provided by (used in) financing
activities.................................... 304 (116,122) 42,473 101,696 32,240
PRO FORMA(1) COMBINED(2) HISTORICAL
------------ ----------------------------------------- ----------
AT DECEMBER 31,
---------------------------------------------------------------------
2000 2000 1999 1998 1997 1996(3)
------------ -------- -------- -------- -------- ----------
(IN THOUSANDS)
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $ 6,251 $ 4,821 $ 3,216 $ 6,034 $ 21,039 $ 6,834
Net property and equipment........................ 146,994 143,468 142,242 138,374 95,033 37,905
Total assets...................................... 545,000 353,518 355,544 499,025 433,499 278,579
Long-term debt and capital leases, excluding
current portion................................. 101,560 102,614 120,290 109,495 171,002 75,606
Redeemable preferred stock of subsidiaries........ -- 25,293 25,064 20,150 22,650 14,300
Total stockholders' equity........................ 318,439 56,549 58,462 73,644 91,309 32,969
---------------
(1) Includes the results of Sooner, the acquisition of the minority interests of
Oil States, HWC and PTI in the Combination and our initial public offering
and use of proceeds on a pro forma basis assuming the transactions occurred
on January 1, 1999 and 2000, respectively, for statement of operations and
other data purposes and on December 31, 2000 for balance sheet purposes.
(2) Includes the results of Oil States, HWC and PTI on a combined basis using
the reorganization method of accounting for entities under common control
from the dates common control was established.
(3) Includes results of operations associated with entities sold in 1999.
Operations for these entities were segregated as discontinued operations in
the 1997, 1998 and 1999 statements of operations.
(4) Depreciation and amortization was not separately disclosed in the audited
consolidated statement of operations for the year ended December 31, 1996.
The amount of depreciation and amortization, as disclosed in the audited
consolidated statement of cash flows, was $7,295.
(5) Share and per share data have been retroactively restated to reflect a
three-for-one reverse stock split for Oil States and also to reflect the
effects of the Combination. Share and per share data are not presented for
the predecessor entities prior to the Combination as such data are not
meaningful.
(6) EBITDA as defined consists of operating income (loss) before depreciation
and amortization expense. EBITDA as defined is not a measure of financial
performance under generally accepted accounting principles. You should not
consider it in isolation from or as a substitute for net income or cash flow
measures prepared in accordance with generally accepted accounting
principles or as a measure of profitability or liquidity. Additionally, the
EBITDA as defined calculation herein may not be comparable to other
similarly titled measures of other companies. We have included EBITDA as
defined as a supplemental disclosure because it may provide useful
information regarding our ability to service debt and to fund capital
expenditures.
(7) Net income (loss) before goodwill amortization consists of net income (loss)
before amortization expense. Net income (loss) before goodwill amortization
is not a measure of financial performance under generally accepted
accounting principles. You should not consider it in isolation from or as a
substitute for net income or cash flow measures prepared in accordance with
generally accepted accounting principles or as a measure of profitability or
liquidity.
22
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis together with
Selected Financial Data and our Financial Statements and the notes to those
statements included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those indicated in these forward-looking
statements as a result of certain factors, as more fully described under
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995 in the Business section and elsewhere
in this Annual Report on Form 10-K. We undertake no obligation to update
publicly any forward-looking statements, even if new information becomes
available or other events occur in the future.
Overview
We provide a broad range of products and services to the oil and gas
industry through our offshore products, tubular services and well site services
business segments. Demand for our products and services is cyclical and
substantially dependent upon activity levels in the oil and gas industry,
particularly our customers' willingness to spend capital on the exploration and
development of oil and gas reserves. Demand for our products and services by our
customers is highly sensitive to current and expected oil and natural gas
prices. Our offshore products segment is a leading provider of highly engineered
and technically designed products for offshore oil and gas development and
production systems and facilities. Sales of our offshore products and services
depend upon repairs and upgrades of existing drilling rigs, construction of new
drilling rigs and the development of offshore production systems. We are
particularly influenced by deepwater drilling and production activities. Through
our tubular services division, we distribute premium tubing and casing. Sales of
tubular products and services depend upon the overall level of drilling activity
and the mix of wells being drilled. Demand for tubular products is positively
impacted by increased drilling of deeper horizontal and offshore wells that
generally require premium tubulars and connectors, large diameter pipe and
longer and additional tubular and casing strings. In our well site services
business segment, we provide hydraulic well control services, pressure control
equipment and rental tools and remote site accommodations, catering and
logistics services. Demand for our well site services depends upon the level of
worldwide drilling and workover activity.
Beginning in late 1996 and continuing through the early part of 1998,
stabilization of oil and gas prices led to increases in drilling activity as
well as the refurbishment and new construction of drilling rigs. In the second
half of 1998, crude oil prices declined substantially and reached levels below
$11 per barrel in early 1999. With this decline in pricing, many of our
customers substantially reduced their capital spending and related activities.
This industry downturn continued through most of 1999. The rig count in the
United States and Canada, as measured by Baker Hughes Incorporated, fell from
1,481 rigs in February 1998 to 559 rigs in April 1999. This downturn in activity
had a material adverse effect on demand for our products and services, and our
operations suffered as a result.
The price of crude oil has increased significantly over the last 18 months
due to improved demand for oil and supply reductions by OPEC member countries.
This improvement in crude oil pricing has led to increases in the rig count,
particularly in Canada and the United States. As of December 29, 2000, the rig
count in the United States and Canada, as measured by Baker Hughes, was 1,436.
Demand for our well site services has begun to recover with the overall
improvement in industry fundamentals. Our offshore products segment has not
recovered with the general market. We believe that our offshore products segment
lags the general market recovery because its sales related to offshore
construction and production facility development generally occur later in the
cycle. Worldwide construction activity continues at a very low level currently,
but we expect it to increase substantially as construction activity in the
shallow water regions of the Gulf of Mexico resumes and as the industry
increasingly pursues deeper water drilling and development projects.
Consolidation among both major and independent oil and gas companies has
affected exploration, development and production activities, particularly in
international areas. These companies have focused on integration activities and
cost control measures over recent periods. As a result, we believe that capital
spending within the industry has lagged the improvement in crude oil prices.
23
26
The Combination
Prior to our initial public offering in February 2001, SCF-III, L.P. owned
majority interests in Oil States, HWC and PTI, and SCF-IV, L.P. owned a majority
interest in Sooner. The following chart depicts the summary ownership structure
of Oil States, HWC, PTI and Sooner prior to the Combination:
[Chart depicting that SCF-III, L.P. owns 84.6%, 80.6% and 57.7% of Oil States,
HWC and PTI, respectively, and minority shareholders own 15.4%, 19.4% and 42.3%
of Oil States, HWC and PTI, respectively, in each case prior to the Combination.
The chart also depicts that SCF-IV, L.P. owns 81.7% of Sooner and minority
stockholders own 18.3% of Sooner, prior to the Combination.]
L.E. Simmons & Associates, Incorporated is the ultimate general partner of
SCF-III, L.P. and SCF-IV, L.P. L.E. Simmons, the chairman of our board of
directors, is the sole shareholder of L.E. Simmons & Associates, Incorporated.
See Item 13 -- Certain Relationships and Related Transactions -- The Combination
and the Initial Public Offering. Concurrently with the closing of our initial
public offering, the Combination closed, and HWC, PTI and Sooner merged with
wholly owned subsidiaries of Oil States. As a result, HWC, Sooner and PTI became
our wholly owned subsidiaries. Concurrently with the closing of our initial
public, we also issued 4,275,555 shares of common stock to SCF in exchange for
approximately $36.0 million of indebtedness of Oil States and Sooner which was
held by SCF. This exchange was based on the initial public offering price of
$9.00 per share less underwriting discounts and commissions. We refer to this
transaction in this Annual Report on Form 10-K as the SCF Exchange. The
following chart depicts the summary ownership structure of our company following
the Combination, the SCF Exchange and our initial public offering:
[Chart depicting that purchasers in the offering will own 20.7% of our company,
existing stockholders (other than SCF) will own 16.1%, SCF-III, L.P. will own
45.2% and SCF-IV, L.P. will own 17.9%, in each case following the Combination
and the offering. The chart also depicts that Oil States will own 100% of HWC,
100% (indirectly) of PTI and 100% of Sooner following the Combination and the
offering.]
The financial results of Oil States, HWC and PTI have been combined for the
three years in the period ended December 31, 2000 using reorganization
accounting, which yields results similar to pooling of interests method. The
combined results of Oil States, HWC and PTI form the basis for the discussion of
our results of operations, capital resources and liquidity provided below. The
operations of Oil States, HWC and PTI represent two of our business segments,
offshore products and well site services. Concurrent with the closing of our
initial public offering in February 2001, Oil States acquired Sooner, and the
acquisition was accounted for using the purchase method of accounting. The pro
forma financial statements for the year ended December 31, 1999 and 2000 reflect
the acquisition of Sooner. Following the acquisition of Sooner, we will report
under three business segments. The unaudited pro forma financial statements do
not reflect any cost savings or other financial synergies that may be realized
after the Combination. The pro forma financial statements include an adjustment
to the historical financial statements to include estimated annual incremental
corporate expenses of approximately $945,000 associated with the opening of an
office in Houston, Texas and the hiring of corporate personnel. These
incremental corporate expenses are expected to continue in the future.
24
27
Pro Forma Results of Operations
Following the acquisition of Sooner, we will report under three business
segments, offshore products, well site services and tubular services. Pro forma
information including these three segments is presented below.
PRO FORMA
YEARS ENDED
DECEMBER 31,
---------------
2000 1999
------ ------
Revenues
Offshore Products......................................... $114.6 $154.3
Well Site Services........................................ 189.9 121.1
Tubular Services.......................................... 291.1 212.0
------ ------
Total............................................. $595.6 $487.4
====== ======
Operating Income (Loss)
Offshore Products......................................... $ 14.6 $ 17.5
Well Site Services........................................ 51.1 28.5
Tubular Services.......................................... 20.6 6.9
Selling, General and Administrative Expense............... (46.1) (43.8)
------ ------
Total............................................. $ 40.2 $ 9.1
====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased by $108.2 million, or 22.2%, to $595.6
million for the year ended December 31, 2000 from $487.4 million for the year
ended December 31, 1999. Well site services revenues increased by $68.8 million,
or 56.8% and tubular services revenues increased $79.1 million, or 37.3%, during
the same period. These increases in revenue were partially offset by a decrease
in offshore products revenues of $39.7 million, or 25.7%. Of the $68.8 million
increase in well site services revenues, $41.5 million was generated from our
remote site accommodations, catering and logistics services and modular building
construction services, $9.1 million was generated from our hydraulic workover
units, $9.9 million was generated from our drilling operations and $8.3 million
was generated from our rental tool operations. The significant improvement in
revenues from our remote site accommodations, catering and logistics services
and modular building construction services was due to the strong level of
Canadian drilling activity during the first and fourth quarters of 2000, which
resulted in increased demand for our drilling camps and related catering
services. The increased revenues in our hydraulic workover units and drilling
rigs resulted from higher utilization during the period. The $8.3 million
increase in our rental tool revenues was largely due to increases in activity
levels. The increased tubular services revenues were directly attributable to
increases in drilling activity over the period. These revenue increases were
partially offset by declines in our offshore products segment due to a
significant downturn in construction related activity.
25
28
Cost of Sales. Cost of sales increased by $77.0 million, or 19.0%, to
$482.7 million for the year ended December 31, 2000 from $405.7 million for the
year ended December 31, 1999. Cost of sales increased in our well site services
and tubular services segments by $46.6 million and $63.9 million, respectively,
but was partially offset by a decrease of $33.5 million in our offshore products
segment. The changes from the 1999 period to the 2000 period were caused by the
same factors influencing revenues. Our gross profit margin improved from 16.8%
during the year ended December 31, 1999 to 19.0% during the year ended December
31, 2000 due to cost reductions in our offshore products segment made in
response to the market downturn in offshore construction activity.
Selling, General and Administrative Expenses. During the year ended
December 31, 2000, selling, general and administrative expenses increased $2.3
million, or 5.3%, to $46.1 million compared to $43.8 million during the year
ended December 31, 1999. Selling, general and administrative expenses in our
well site services segment increased $6.7 million, or 49%, due to increased
activity, acquisitions in late 1999 in our hydraulic workover business, and
certain nonrecurring charges totaling $.4 million in our remote site
accommodation business. This increase was partially offset by a $3.2 million
decrease in our offshore products segment and a $1.2 million decrease in our
tubular services segment. We reduced costs in our offshore products segment in
response to the market downturn in offshore construction activity. Our tubular
services segment benefited from cost synergies created from the market
consolidation during 1999.
Depreciation and Amortization. Depreciation and amortization totaled $26.7
million during the year ended December 31, 2000 compared to $26.3 million in the
year ended December 31, 1999. The 1.5% increase was primarily related to asset
acquisitions and capital expenditures made in our well site services segment
during 1999.
Operating Income. Our operating income equals revenues less cost of sales,
selling, general and administrative expense, depreciation and amortization and
other operating income (expense). Operating income is comprised of the operating
income of each of our segments and the portion of selling, general and
administrative expenses which are not allocated to the segments. Our operating
income increased by $31.1 million to $40.2 million for the year ended December
31, 2000 from $9.1 million for the same period in 1999. Operating income from
our well site services segment increased $22.6 million from $28.5 million for
the year ended December 31, 1999 to $51.1 million for the same period in 2000.
Operating income in our tubular services segment increased $13.7 million from
$6.9 million in 1999 to $20.6 million in 2000. Operating income in our offshore
products segment decreased $2.9 million from $17.5 million in 1999 to $14.6
million in 2000. Selling, general and administrative expense was $46.1 million
in the year 2000 compared to $43.8 million incurred during the year 1999.
Net Interest Expense. Net interest expense totaled $9.3 million during the
year ended December 31, 2000 compared to $6.5 million during the year ended
December 31, 1999. The $2.8 million decrease in net interest expense primarily
related to a reduction in average debt balances outstanding in our offshore
products segment with funds generated from asset sales.
Income Tax (Expense) Benefit. Income tax expense totaled $4.5 million
during the year ended December 31, 2000 compared to a benefit of $4.0 million
during the year ended December 31, 1999. The increase of $8.5 million was
primarily due to the increase in pre-tax income. In both periods, the effective
tax rate was benefited by a reduction in the allowance applied against tax
assets, primarily net operating losses, due to expected tax benefits resulting
from the Combination. We adjusted such tax assets because we determined that it
was more likely than not that the deferred tax assets would be realized.
Minority Interest. Minority interest expense was immaterial during the
years ended December 31, 2000 and 1999. The minority interests were acquired,
and therefore substantially reduced, in connection with the Combination.
26
29
Combined Results of Operations
Prior to the Sooner acquisition, we reported under two business segments,
offshore products and well site services. Information for these two segments,
which represent the combined results of Oil States, HWC and PTI using
reorganization accounting, is presented below.
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
Revenues
Offshore Products........................................ $114.6 $154.3 $230.0
Well Site Services....................................... 189.9 112.8 129.0
------ ------ ------
Total............................................ $304.5 $267.1 $359.0
====== ====== ======
Operating Income (Loss)
Offshore Products........................................ $ 14.6 $ 17.5 $ 43.8
Well Site Services....................................... 51.1 27.0 27.4
Selling, General and Administrative Expense.............. (37.8) (33.6) (45.4)
------ ------ ------
Total............................................ $ 27.9 $ 10.9 $ 25.8
====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999.
Revenues. Revenues increased by $37.4 million, or 14.0%, to $304.5 million
for the year ended December 31, 2000 from $267.1 million for the year ended
December 31, 1999. Well site services revenues increased by $77.1 million, or
68.4%, partially offset by a decrease in offshore products revenues of $39.7
million, or 25.7%. Of the $77.1 million increase in well site services revenues,
$41.5 million was generated from our remote site accommodations, catering and
logistics services and modular building construction services, $16.0 million was
generated from our hydraulic workover units, $9.9 million was generated from our
drilling operations and $9.7 million was generated from our rental tool
operations. The significant improvement in revenues from our remote site
accommodations, catering and logistics services and modular building
construction services was due to the strong level of Canadian drilling activity
during the first and fourth quarters of 2000, which resulted in increased demand
for our drilling camps and related catering services. The increased revenues in
our hydraulic workover units and drilling rigs resulted from higher utilization
during the period and contributions from the operation of various hydraulic
workover assets that were acquired in the fourth quarter of 1999 and were not,
therefore, in operation for the majority of 1999. The acquisitions contributed
$8.3 million of the $16.0 million revenue increase in our hydraulic workover
operations. The $9.7 million increase in our rental tool revenues was largely
due to increases in activity levels and the acquisition of additional rental
tool facilities on March 31, 1999. These revenue increases were partially offset
by declines in our offshore products segment due to a significant downturn in
construction related activity.
Cost of Sales. Cost of sales increased by $17.7 million, or 8.9%, to
$217.6 million for the year ended December 31, 2000 from $199.9 million for the
year ended December 31, 1999. Cost of sales increased in our well site services
segment by $51.2 million, but was partially offset by a decrease of $33.5
million in our offshore products segment. The changes from the 1999 period to
the 2000 period were caused by the same factors influencing revenues. Our gross
profit margin improved from 25.2% during the year ended December 31, 1999 to
28.5% during the year ended December 31, 2000 due to cost reductions in our
offshore products segment made in response to the market downturn in offshore
construction activity.
Selling, General and Administrative Expenses. During the year ended
December 31, 2000, selling, general and administrative expenses increased $4.2
million, or 12.5%, to $37.8 million compared to $33.6 million during the year
ended December 31, 1999. Selling, general and administrative expenses in our
well site services segment increased $6.9 million, or 50%, due to increased
activity, acquisitions in late 1999 in our hydraulic workover business and
certain nonrecurring charges totaling $.4 million in our remote site
accommodation business. This increase was partially offset by a $2.7 million
decrease in our offshore products
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segment. We reduced costs in our offshore products segment in response to the
market downturn in offshore construction activity.
Depreciation and Amortization. Depreciation and amortization totaled $21.3
million during the year ended December 31, 2000 compared to $20.3 million in the
year ended December 31, 1999. The 4.9% increase was primarily related to asset
acquisitions and capital expenditures made in our well site services segment
during 1999.
Operating Income. Our operating income equals revenues less cost of sales,
selling, general and administrative expense, depreciation and amortization and
other operating income (expense). Operating income is comprised of the operating
income of each of our segments and the portion of selling, general and
administrative expenses which are not allocated to the segments. Our operating
income increased by $17.0 million to $27.9 million for the year ended December
31, 2000 from $10.9 million for the same period in 1999. Operating income from
our well site services segment increased $24.2 million from $27.0 million for
the year ended December 31, 1999 to $51.2 million for the same period in 2000.
Operating income in our offshore products segment decreased $2.9 million from
$17.5 million in 1999 to $14.6 million in 2000. Selling, general and
administrative expense was $37.8 million in the year 2000 compared to $33.6
million incurred during the year 1999.
Net Interest Expense. Net interest expense totaled $11.5 million during
the year ended December 31, 2000 compared to $12.5 million during the year ended
December 31, 1999. The $1.0 million decrease in net interest expense primarily
related to a reduction in average debt balances outstanding in our offshore
products segment with funds generated from asset sales.
Income Tax (Expense) Benefit. Income tax expense totaled $10.8 million
during the year ended December 31, 2000 compared to $4.7 million during the year
ended December 31, 1999. The increase of $6.1 million was primarily due to the
increase in pre-tax income. In both periods, the effective tax rate was
adversely affected by losses incurred in our offshore products segment for which
tax assets were not recorded. We did not record such tax assets because we could
not determine that it was more likely than not that the deferred tax assets
would be realized.
Minority Interest. Minority interest expense totaled $4.2 million during
the year ended December 31, 2000 compared to $0.6 million of income during the
year ended December 31, 1999. The increase in expense was primarily due to
increased profitability within our business segments, particularly well site
services.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998.
Revenues. Revenues decreased by $91.9 million, or 25.6%, to $267.1 million
for the year ended December 31, 1999 from $359.0 million for the year ended
December 31, 1998. Offshore products revenues decreased by $75.7 million, or
32.9%, and well site services revenues decreased by $16.2 million, or 12.6%. The
decrease in our offshore products revenues resulted from an overall market
downturn during 1999 and affected all of our offshore products business lines,
including our connector products, marine construction activities and marine
winches. The decrease in our well site services revenues was primarily due to
lower demand for our remote accommodations, catering and logistics services.
Cost of Sales. Cost of sales decreased by $64.8 million, or 24.5%, to
$199.9 million for the year ended December 31, 1999 from $264.7 million for
1998. Cost of sales decreased by $51.9 million, or 29.0%, in our offshore
products segment and by $12.9 million, or 15.0%, in our well site services
segment. The changes in cost of sales were the same as the factors influencing
revenues. Our gross profit margin decreased from 26.3% in 1998 to 25.2% in 1999
due to the reduction in activity over the period. Margins deteriorated in
offshore products, but were offset somewhat by margin improvements in well site
services, particularly in our accommodations, catering and logistics services.
Selling, General and Administrative Expenses. During the year ended
December 31, 1999, selling, general and administrative expenses decreased $11.8
million, or 26.0%, to $33.6 million compared to $45.4 million incurred during
1998. Selling, general and administrative expenses in our offshore products
segment declined $9.7 million, or 32.3%, while expenses in our well site
services segment declined
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$2.1 million, or 13.8%. We reduced costs in all segments in response to the
general industry downturn that occurred during 1999.
Depreciation and Amortization. Depreciation and amortization totaled $20.3
million during 1999 compared to $18.2 million during 1998. The increase of $2.1
million, or 11.5%, was primarily related to an expansion of our well site
services operations. We acquired our rental tool operations during May 1998 and
expanded our operations through an acquisition in April 1999.
Operating Income (Loss). Our operating income decreased by $14.9 million
to $10.9 million during the year ended December 31, 1999 compared to $25.8
million for the same period in 1998. Operating income for our offshore products
segment during 1999 decreased $26.3 million to $17.5 million from $43.8 million
during 1998. Operating income for our well site services segment decreased $0.4
million during the same period. Selling, general and administrative expense was
$33.6 million during 1999 compared to $45.4 million during 1998, a decrease of
$11.8 million. Other expenses totaling $2.4 million during 1999 and $4.9 million
during 1998 reduced operating income. Expenses of $2.4 million incurred during
1999 related to a loss on disposal of assets in our offshore products segment.
Expenses of $4.9 million in 1998 related primarily to a $5.3 million write-down
of an investment in our Chilean operations by our well site services segment.
The Chilean assets consisted primarily of temporary living accommodations on
short-term rental to various mining contractors in Chile. As a result of
depressed copper prices, the majority of the projects were either delayed or
cancelled by September 1998, and no other significant markets were available for
these units. The fair value of the units was reassessed based on significantly
reduced future cash flows, resulting in the $5.3 million write-down.
Net Interest Expense. Net interest expense totaled $12.5 million during
1999 compared to $15.3 million during 1998. Of the $2.8 million decrease in net
interest expense, $2.5 million resulted from a decrease in average debt balances
outstanding in our offshore products segment due to the proceeds from asset
sales being used to repay debt.
Other Income and Expense. During 1999, $1.3 million of other expense was
recorded in our offshore products segment related to the net loss on sale of two
wholly owned subsidiaries and publicly traded securities of Smith International,
Inc..
Income Tax (Expense) Benefit. Income tax expense totaled $4.7 million
during 1999 compared to $9.7 million during 1998. The $5.0 million decrease in
income tax expense from 1998 to 1999 was primarily due to a reduction in pre-tax
income over the period. During 1999, we recorded a $1.1 million tax provision on
a pre-tax loss of $10.8 million incurred in our offshore products segment for
which no net tax asset was recorded.
Minority Interest. Minority interest totaled a credit of $0.6 million
during 1999 compared to $3.0 million during 1998. The $2.4 million net change in
minority interest was primarily due to an increase in income generated in our
well site services segment during 1999 compared to 1998, which offset losses in
our offshore products segment.
Liquidity and Capital Resources
Our primary liquidity needs are to fund capital expenditures, such as
expanding and upgrading our manufacturing facilities and equipment, increasing
our rental tool and workover assets, increasing our accommodation units, funding
new product developments, and to repay current maturities of long-term debt and
to fund general working capital needs. In addition, capital is needed to fund
strategic business acquisitions. Our primary sources of funds have been cash
flow from operations, proceeds from borrowings under our bank facilities and
private capital investments.
Cash was provided from operations during 2000, 1999 and 1998 in the amounts
of $33.6 million, $5.2 million and $7.5 million, respectively. Cash provided by
operations funded ongoing and increased needs for working capital over the
period. During 2000, cash was provided from operations primarily due to
operating income and working capital decreases in our well site services segment
generated primarily by our activities in Canada.
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Capital expenditures were $21.4 million, $11.3 million and $36.1 million in
2000, 1999 and 1998, respectively. Capital expenditures during the three year
period from 1998 to 2000 consisted principally of purchases of rental assets for
our well site services segment, the purchase of offshore products equipment and
the expansion of our offshore products facility in Houma, Louisiana. We expect
to spend approximately $30 million during 2001 to upgrade our equipment and
facilities and expand our product and service offerings. These capital
expenditures are expected to be funded with operating cash flow and with
borrowings under our $150 million credit facility discussed below.
During 1999, we sold all of the operating assets of CE Distribution
Services, Inc., CE Drilling Products, Inc., CE Mobile Equipment, Inc., and our
51.8% investment in CE Franklin. Accordingly, for the periods presented, the
results of CE Distribution, CE Drilling, CE Mobile and CE Franklin are shown as
discontinued operations. Proceeds from the sale of these discontinued operations
was $102.4 million. In addition, the marketable securities acquired in
connection with the sale of our investment in CE Franklin were sold for $24.4
million. Proceeds from these asset sales were applied to reduce outstanding bank
debt.
Net cash was used in investing activities in the amount of $22.4 million
during 2000, primarily to fund capital expenditures and acquisitions. Net cash
was provided by investing activities in the amount of $112.2 million during
1999, primarily as a result of the asset sales referred to above. Net cash was
used in investing activities in the amount of $61.9 million during 1998 to fund
capital expenditures and acquisitions.
Net cash of $0.3 million was provided by financing activities in 2000. Net
cash was used in financing activities in the amount of $116.1 million during
1999, primarily as a result of reductions in bank debt outstanding. Net cash was
provided by financing activities in 1998 in the amount of $42.5 million. Cash
raised during this period was used to fund capital expenditures and
acquisitions.
After completion of our initial public offering in February 2001, we repaid
$47.8 million of subordinated debt and accrued interest of Oil States and Sooner
that was outstanding at December 31, 2000. In addition, we redeemed a total of
$21.8 million of preferred stock of Oil States that was outstanding at December
31, 2000. Concurrently with the closing of our initial public offering, we
issued 4,275,555 shares of common stock to SCF in exchange for approximately
$36.0 million of our indebtedness held by SCF in the SCF Exchange.
Also concurrent with the closing of our initial public offering, we entered
into a $150 million senior secured revolving credit facility in February 2001.
Credit Suisse First Boston, New York branch, an affiliate of Credit Suisse First
Boston Corporation, is the administrative agent, collateral agent, book manager
and lead arranger. Credit Suisse First Boston Canada, an affiliate of Credit
Suisse First Boston Corporation, is the Canadian administrative agent,
collateral agent, book manager and lead arranger. Up to $45.0 million of the new
credit facility is available in the form of loans denominated in Canadian
dollars and may be made to our principal Canadian operating subsidiaries. This
new credit facility replaced our existing credit facilities. The facility
matures on February 14, 2004, unless extended for up to two additional one year
periods with the consent of the lenders. Amounts borrowed under this new
facility bear interest, at our election, at either:
- a variable rate equal to LIBOR (or, in the case of Canadian dollar
denominated loans, the Bankers' Acceptance discount rate) plus a margin
ranging from 1.5% to 2.5%; or
- an alternate base rate equal to the higher of Credit Suisse First
Boston's prime rate and the federal funds effective rate plus 0.5% (or,
in the case of Canadian dollar denominated loans, the Canadian Prime
Rate) plus a margin ranging from 0.5% to 1.5%, depending upon the ratio
of total debt to EBITDA (as defined in the new credit facility).
We will pay commitment fees ranging from 0.25% to 0.5% per year on the
undrawn portion of the facility, also depending upon the ratio of total debt to
EBITDA.
Subject to exceptions, commitments under our new credit facility will be
permanently reduced, and loans prepaid, by an amount equal to 100% of the net
cash proceeds of all non-ordinary course asset sales and the issuance of
additional debt and by 50% of the issuance of equity securities. Mandatory
commitment reductions will be allocated pro rata based on amounts outstanding
under the U.S. dollar denominated facility and the Canadian dollar denominated
facility. In addition, voluntary reductions in commitments will be permitted.
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Our new credit facility is guaranteed by all of our active domestic
subsidiaries and, in some cases, our Canadian and other foreign subsidiaries.
Our credit facility is secured by a first priority lien on all our inventory,
accounts receivable and other material tangible and intangible assets, as well
as those of our active subsidiaries. However, no more than 65% of the voting
stock of any foreign subsidiary is required to be pledged if the pledge of any
greater percentage would result in adverse tax consequences.
Our new credit facility contains negative covenants that will restrict our
ability to:
- incur additional indebtedness;
- prepay, redeem and repurchase outstanding indebtedness, other than loans
under the new credit facility;
- pay dividends;
- repurchase and redeem capital stock;
- sell assets other than in the ordinary course of business;
- make liens;
- engage in sale-leaseback transactions;
- make specified loans and investments;
- make acquisitions;
- enter into mergers, consolidations and similar transactions;
- enter into hedging arrangements;
- enter into transactions with affiliates;
- change the businesses we and our subsidiaries conduct; and
- amend debt and other material agreements.
In addition, our new credit facility will require us to maintain:
- a ratio of EBITDA to interest expense of not less than 3.0 to 1.0;
- a level of consolidated net tangible assets of not less than $120 million
plus 50% of each quarter's consolidated net income (but not loss);
- a maximum ratio of total debt to EBITDA of not greater than 3.5 to 1.0;
and
- a maximum ratio of total senior debt to EBITDA of not greater than 3.0 to
1.0.
Under our new credit facility, the occurrence of specified change of
control events involving our company would constitute an event of default that
would permit Credit Suisse First Boston to, among other things, accelerate the
maturity of the facility and cause it to become immediately due and payable in
full.
As of March 23, 2001, we had $109.1 million outstanding under this facility
and an additional $3.9 million of outstanding letters of credit leaving $37.0
million available to be drawn under the facility.
After giving effect to the initial public offering, the application of the
net proceeds to us, the SCF Exchange and the repayment of subordinated debt
since December 31, 2000, we have an aggregate of approximately $11.9 million of
subordinated debt outstanding following the initial public offering. This
subordinated debt will become due and payable at various times over the period
from June 2001 to November 2005.
We believe that the proceeds of the initial public offering, cash from
operations, and available borrowings under our new credit facility will be
sufficient to meet our liquidity needs for the foreseeable future. If our plans
or assumptions change or are inaccurate, or we make any acquisitions, we may
need to raise additional
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capital. We may not be able to raise additional funds or may not be able to
raise such funds on favorable terms.
Tax Matters
For the year ended December 31, 2000, we had deferred tax assets, net of
deferred tax liabilities, of approximately $29 million for federal income tax
purposes before application of valuation allowances. Our primary deferred tax
assets are net operating loss carry forwards, or NOLs, which total approximately
$122 million. A valuation allowance is currently provided against the majority
of our NOLs. The NOLs expire over the period through 2018. Our NOLs are
currently limited under Section 382 of the Internal Revenue Code due to a change
of control that occurred during 1995. However, approximately $55 million of NOLs
are available for use currently if sufficient income is generated. We anticipate
that the Combination will enable us to use a portion of our NOLs that have
previously been reserved with a valuation allowance.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
derivative instruments embedded in other contracts) be recorded on the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the statement as of the beginning of any fiscal
quarter after issuance; however, SFAS No. 133 cannot be applied retroactively.
We have adopted SFAS No. 133 effective January 1, 2001, and we believe that SFAS
No. 133 will not have a material impact on our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We have long-term debt and revolving lines of credit
subject to the risk of loss associated with movements in interest rates.
Currently, we have floating rate obligations totaling approximately $110.6
million for amounts borrowed under our revolving lines of credit. These
floating-rate obligations expose us to the risk of increased interest expense in
the event of increases in short-term interest rates. If the floating interest
rate were to increase by 1% from December 31, 2000 levels, our combined interest
expense would increase by a total of approximately $92,000 per month.
Foreign Currency Exchange Rate Risk. Our operations are conducted in
various countries around the world in a number of different currencies. As such,
our earnings are subject to change due to movements in foreign currency exchange
rates when transactions are denominated in currencies other than the U.S.
dollar, which is our functional currency. In order to mitigate the effects of
exchange rate risks, we generally pay a portion of our expenses in local
currencies and a substantial portion of our contracts provide for collections
from customers in U.S. dollars. As of December 31, 2000, we had Canadian
dollar-denominated debt totaling approximately $25 million.
We had not hedged any foreign currency exposure as of December 31, 2000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The combined, pro forma combined and consolidated financial statements and
supplementary data of the Company appear on pages 51 through 125 hereof and are
incorporated by reference into this Item 8. Selected quarterly financial data is
set forth in Note 17 of Notes to Combined Financial Statements, which is
incorporated herein by reference.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The financial statements of Oil States as of December 31, 1998 and 1999 and
for the three years ended December 31, 1999 were audited by Arthur Andersen LLP.
In connection with the Combination and following discussions with two accounting
firms, we engaged Ernst & Young LLP in May 2000 to audit our consolidated
financial statements in the future. Accordingly, Oil States' engagement of
Arthur Andersen LLP was terminated in May 2000. The reports of Arthur Andersen
LLP for the fiscal year ended December 31, 1998 did not contain an adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. The report of Arthur Anderson
LLP for the year ended December 31, 1999 did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified as to uncertainty, audit scope or
accounting principles. This report contains an explanatory paragraph related to
an uncertainty. Further, for this period and the five month period ended May 31,
2000, there were no disagreements over accounting principles, nor were any
material weaknesses in internal control reported. The engagement of Ernst &
Young LLP and the termination of Arthur Andersen LLP have been approved by our
board of directors. Ernst & Young LLP was not consulted on any matters involving
accounting principles of Oil States during the two year period ended December
31, 1999 or the five-month period ended May 31, 2000. Ernst & Young LLP has
audited the consolidated financial statements of Sooner Inc. as of and for the
two years in the period ended June 30, 2000 and of Sooner Pipe & Supply
Corporation as of July 2, 1998 and for the period from August 1, 1997 to July 2,
1998. Ernst & Young has audited the consolidated financial statements of HWC
Energy Services as of December 31, 2000 and for each of the three years in the
period then ended.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Executive Officers and Directors
The following table provides information regarding our executive officers
and directors as of March 23, 2001:
NAME AGE POSITION(S)
---- --- -----------
L.E. Simmons......................... 54 Chairman of the Board
Douglas E. Swanson................... 62 Director, President and Chief Executive Officer
Cindy B. Taylor...................... 39 Senior Vice President -- Chief Financial
Officer and Treasurer
Robert W. Hampton.................... 49 Vice President -- Finance and Accounting and
Secretary
Michael R. Chaddick.................. 53 Vice President -- Tubular Services
Christopher E. Cragg................. 39 Vice President -- Tubular Services
Howard Hughes........................ 58 Vice President -- Offshore Products
Sandy Slator......................... 56 Vice President -- Well Site Services
Jay Trahan........................... 54 Vice President -- Well Site Services
Martin Lambert....................... 45 Director
Mark G. Papa......................... 54 Director
Gary L. Rosenthal.................... 51 Director
Andrew L. Waite...................... 40 Director
Stephen A. Wells..................... 57 Director
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We describe briefly below the business experience of our executive officers
and directors.
L.E. Simmons is Chairman of the Board of our company. Mr. Simmons is the
founder, Chairman of the Board and President of L.E. Simmons & Associates,
Incorporated, a private equity fund manager and the ultimate general partner of
SCF. Mr. Simmons has held these positions since 1989. Prior to founding L.E.
Simmons & Associates, Incorporated, he co-founded Simmons & Company
International, an investment bank that specializes in the energy industry. Mr.
Simmons also serves as a director of Varco International, Inc., an oilfield
services and equipment company, Zions Bancorporation, a commercial banking
company, and Simmons Media Group, a media and entertainment company. He received
a M.B.A. from the Harvard University Graduate School of Business Administration.
Douglas E. Swanson is a director of our company and has served as President
and Chief Executive Officer since January 2000. From August 1999 to January
2000, Mr. Swanson pursued personal interests. From January 1992 to August 1999,
Mr. Swanson served as Chairman of the Board and Chief Executive Officer of
Cliffs Drilling Company, a contract drilling company. He currently serves as a
director of Varco International, Inc., an oilfield services and equipment
company. He holds a degree from Cornell College and is a Certified Public
Accountant.
Cindy B. Taylor is Senior Vice President -- Chief Financial Officer and
Treasurer of our company. She has held this position since May 2000. From August
1999 to May 2000, Mrs. Taylor was the Chief Financial Officer of L.E. Simmons &
Associates, Incorporated. Mrs. Taylor served as the Vice President -- Controller
of Cliffs Drilling Company from July 1992 to August 1999 and as a senior manager
with Ernst & Young, LLP, a public accounting firm, from January 1984 to July
1992. She received a B.B.A. from Texas A&M University and is a Certified Public
Accountant.
Robert W. Hampton was appointed Vice President -- Finance and Accounting
and Secretary of our company in February 2001. Mr. Hampton is Vice President and
Chief Financial Officer of HWC, a position he has held since February 1998. Mr.
Hampton joined HWC from Tidewater Inc., an offshore service vessel operator,
where he was based in Aberdeen and was Area Manager for the North Sea Operations
from March 1996 to February 1998. He served as Vice President, Treasurer and
Chief Financial Officer of Hornbeck Offshore, an offshore service vessel
operator, from 1990 to March 1996, when it was acquired by Tidewater. Mr.
Hampton worked at Price Waterhouse, a public accounting firm, from 1973 to 1986.
Mr. Hampton is a Certified Public Accountant and received his B.S. degree from
the Pennsylvania State University.
Michael R. Chaddick was appointed Vice President -- Tubular Services of our
company February 2001. Mr. Chaddick is Executive Vice President -- Chief
Operating Officer of Sooner, a position he has held since June 1999. From May
1992 to June 1999, he served as President of the Wilson Supply Company Division
of Wilson Industries, Inc., a general oilfield supplies distributor. He served
as Vice President -- Tubular Services for Wilson from February 1982 until May
1992 and was the General Manager of Tubular Services from November 1980 until
February 1982. Prior to joining Wilson, Mr. Chaddick spent 11 years with U.S.
Steel, a steel manufacturer, in various sales and management capacities. He
received a B.B.A. degree from the University of Texas at Arlington.
Christopher E. Cragg was appointed Vice President -- Tubular Services of
our company in February 2001. Mr. Cragg is Executive Vice President -- Chief
Financial Officer of Sooner, a position he has held since December 1999. From
June 1999 to December 1999, Mr. Cragg pursued personal interests. From April
1994 to June 1999, he was Vice President and Controller of Ocean Energy, Inc.,
an independent oil and gas exploration and production company, and its
predecessor companies. Mr. Cragg served as Manager -- Internal Audit with Cooper
Industries, a manufacturer of diversified products, from April 1993 to April
1994 and as a senior manager with Price Waterhouse, a public accounting firm,
from August 1983 to April 1993. He received a B.B.A. degree from Southwestern
University and is a Certified Public Accountant.
Howard Hughes was appointed Vice President -- Offshore Products of our
company in February 2001. Mr. Hughes is President of Oil States, a position he
has held since September 1989. Prior to that, Mr. Hughes served in various
managerial and executive positions with Oil States since April 1976. He holds a
B.S. degree from the University of Houston.
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Sandy Slator was appointed Vice President -- Well Site Services of our
company in February 2001. Mr. Slator joined PTI in November 1999 and has served
as its President and Chief Executive Officer since January 2000. From February
1999 to November 1999, Mr. Slator was a founding partner of River View Venture
Partners, an Edmonton-based venture capital group. From March 1998 to January
1999, Mr. Slator was an associate of Lambridge Capital Partners, an
Edmonton-based investment banking group. From May 1996 to March 1998, Mr. Slator
participated in a number of community-related volunteer activities. During that
time, Mr. Slator was also a founding partner of NetCovergence, Inc., a private
technology related company that was sold in the spring of 2000. From 1989 to
April 1996, Mr. Slator served as President and Chief Executive Officer of Vencap
Equities Alberta Ltd., a publicly traded venture capital company. Mr. Slator
served on the board of PTI from 1984 until 1994.
Jay Trahan was appointed Vice President -- Well Site Services of our
company in February 2001. Mr. Trahan is President and Chief Executive Officer of
HWC, a position he has held since January 1998. He has 30 years of experience in
the oil and gas industry. From 1996 to January 1998, Mr. Trahan served as
President of Baker Hughes Solutions; from 1993 to 1996, he served as President
of Baker Hughes Inteq; from 1990 to 1993, he served as President of Baker Sand
Control; and from 1988 to 1990 he served as Vice President of Worldwide
Operations for Baker Sand Control. Baker Hughes Solutions, Baker Hughes Inteq
and Baker Sand Control are divisions of Baker Hughes Incorporated, a diversified
oilfield services company.
Martin Lambert became a director of our company in February 2001. Mr.
Lambert has been a partner in the Canadian law firm Bennett Jones LLP since 1987
and served as its Chief Executive Officer from May, 1996 to January, 2000. Mr.
Lambert joined Bennett Jones LLP in 1979. He currently serves as a director of
IPEC, Ltd., a pipeline construction and production equipment and services
company, and Zed.i Solutions Inc., a technology company providing intelligent
wireless remote access for asset monitoring in the oil, natural gas and pipeline
industries. He has a L.L.B. degree from the University of Alberta.
Mark G. Papa became a director of our company in February 2001. Mr. Papa
has served as Chairman of the Board and Chief Executive Officer of EOG
Resources, Inc., an oil and gas exploration and production company, since August
1999. From February 1994 to August 1999, he held a number of management
positions with EOG Resources, Inc. He has a petroleum engineering degree from
the University of Pittsburgh and a M.B.A. degree from the University of Houston.
Gary L. Rosenthal became a director of our company in February 2001. Mr.
Rosenthal is co-founder and President of Heaney Rosenthal Inc., a private
investment company, a position he has held since October 1994. Since September
2000, he has served as President of AXIA Incorporated, a diversified
manufacturing company. From July 1998 to September 2000, he also served as
Chairman of the Board and Chief Executive Officer of AXIA Incorporated. He
currently serves as a director of Diamond Products International, Inc., a
drilling bit manufacturer, and Texas Petrochemical Holdings, Inc., a chemicals
manufacturer and distributor. He holds J.D. and A.B. degrees from Harvard
University.
Andrew L. Waite has been a director of our company since April 1997. Mr.
Waite is a Managing Director of L.E. Simmons & Associates, Incorporated and has
been an officer of that company since October 1995. He was previously Vice
President of Simmons & Company International, where he served from August 1993
to September 1995. From 1984 to 1991, Mr. Waite held a number of engineering and
management positions with the Royal Dutch/Shell Group, an integrated energy
company. He currently serves as a director of WorldOil.com Inc., an online
oilfield services portal, Canyon Offshore, Inc., a provider of remotely operated
vehicle services, and Hornbeck Leevac Marine Services, Inc., an operator of
offshore supply vessels and other marine assets. He received a M.B.A. from the
Harvard University Graduate School of Business Administration and a M.S. degree
from the California Institute of Technology.
Stephen A. Wells has been a director of our company since April 1997. Mr.
Wells is the president of Wells Resources, Inc., a privately owned oil, gas and
ranching company, and has served in that position since 1983. From April 1999 to
October 1999, Mr. Wells served as a director and Chief Executive Officer of
Avista Resources, Inc., an oil recycling technology company. From October 1993
to February 1996, he was a director and Chief Executive Officer of Coastwide
Energy Services, Inc., a Gulf Coast marine terminal operator. From March 1992 to
September 1994, he was a director and Chief Executive Officer of Grasso
Corporation, an oil
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and gas production management services company. Mr. Wells currently is a
director of Pogo Producing Company, an oil and gas exploration and production
company, the Chairman of the Board of GRT Inc., a hydrocarbon research and
technology company, and a director of DFB Pharmaceuticals, Inc., a
pharmaceuticals and health care products manufacturer.
Classified Board
Our board of directors is divided into three classes. The directors serve
staggered three-year terms. Terms of the Class I directors will expire at the
annual meeting of stockholders to be held in 2002. The terms of the directors of
the other two classes will expire at the annual meetings of stockholders to be
held in 2003 (Class II) and 2004 (Class III). At each annual meeting of
stockholders, one class of directors will be elected for a full term of three
years to succeed that class of directors whose terms are expiring. The directors
so elected may be removed only for cause. The classification of directors is
currently as follows:
- Class I -- Mr. Simmons and Mr. Swanson;
- Class II -- Mr. Rosenthal and Mr. Waite;
- Class III -- Mr. Papa, Mr. Wells and Mr. Lambert.
Our certificate of incorporation does not provide for the cumulative voting
of shares in the election of directors. Because SCF owns a majority of the
outstanding shares of our common stock, SCF will have the power to elect all of
the directors standing for election at each annual meeting of stockholders.
Committees of the Board of Directors
Our board of directors has established an audit committee and a
compensation committee.
The functions of the audit committee are to:
- recommend annually to our board of directors the appointment of our
independent auditors;
- discuss and review in advance the scope and the fees of our annual audit
and review the results of the annual audit with our independent auditors;
- review and approve non-audit services of our independent auditors;
- review the adequacy of and compliance with our major accounting and
financial reporting policies;
- review our management's procedures and policies relating to the adequacy
of our internal accounting controls and compliance with applicable laws
relating to accounting practices; and
- review our risk management policies and activities.
The audit committee consists solely of independent directors.
The functions of the compensation committee are to review and approve:
- annual salaries;
- bonuses;
- grants of restricted stock and stock options under our 2001 Equity
Participation Plan and other stock incentive plans adopted from time to
time for all executive officers and key members of our management staff;
and
- the terms and conditions of all employee benefit plans or changes to
these plans.
The compensation committee consists solely of non-employee directors.
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Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires our officers and directors, and persons who own more than ten percent
of a registered class of our equity securities, to file reports of ownership on
Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and
Exchange Commission (the "SEC"). Such officers, directors and ten-percent
stockholders are also required by SEC rules to furnish us with copies of all
Section 16(a) forms they file. During fiscal year 2000, none of our equity
securities were registered under Section 12 of the Exchange Act, therefore, none
of our officers, directors or holders of more than ten percent of our equity
securities were required to file reports of ownership under Section 16(a) of the
Exchange Act with respect to the ownership of our equity securities.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents information regarding the compensation of our
Chief Executive Officer and our four other most highly compensated executive
officers during 2000. These five persons are collectively referred to in this
Annual Report on Form 10-K as the "named executive officers."
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION
--------------------------- -------- -------- ------------
Douglas E. Swanson(2).............................. $225,481 $250,000 --
President and Chief Executive Officer
Cindy B. Taylor(3)................................. $100,000 $ 70,000 --
Senior Vice President -- Chief Financial Officer
and Treasurer
Howard Hughes...................................... $225,000 $ 45,000 $12,665(4)
Vice President -- Offshore Products
Jay Trahan......................................... $200,000 156,250 3,000(4)
Vice President -- Well Site Services
Michael R. Chaddick................................ $159,600 $ 44,996 --
Vice President -- Tubular Services
---------------
(1) Amounts reflect bonuses paid in March 2001 with respect to 2000 other than
$36,100 of Mr. Chaddick's bonus which was paid in 2000 with respect to the
six months ended June 30, 2000.
(2) Mr. Swanson joined our company in January 2000.
(3) Ms. Taylor joined our company in May 2000.
(4) Reflects payments made to the Oil States and HWC 401(k) plans on behalf of
Messrs. Hughes and Trahan, respectively, to fund base retirement
contributions, 401(k) matching contributions and discretionary profit
sharing contributions.
2001 Equity Participation Plan
We have adopted an Equity Participation Plan. The plan provides for the
grant of any combination of:
- stock options, which include both incentive stock options and
nonqualified stock options;
- restricted stock;
- performance awards;
- dividend equivalents;
- deferred stock; and
- stock payments.
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The purpose of the plan is to strengthen our ability to attract, motivate and
retain directors and employees. The principal features of the plan are described
below.
Reservation of Shares. We have reserved 3,700,000 shares of common stock
for issuance under the plan. The shares available under the plan may be either
previously unissued shares or treasury shares. In the event of stock splits,
reorganizations, recapitalizations or other specified corporate transactions
affecting us or our common stock, proportionate adjustments may be made to the
number of shares available for grant under the plan, the applicable maximum
share limitations under the plan, and the number of shares and prices under
outstanding awards at the time of the event. If any portion of an award expires,
lapses or is canceled without being fully exercised, the shares which were
subject to the unexercised portion of the award will continue to be available
for issuance under the plan. The maximum number of shares which may be subject
to options, restricted stock or deferred stock granted under the plan to any
individual in any calendar year is 400,000. The maximum value of any performance
awards which may be granted under the plan to any individual in any calendar
year is $2,500,000. As of December 31, 2000, giving effect to the Combination,
options to purchase 1,211,920 shares at a weighted average exercise price of
$7.34 per share were outstanding. In connection with our initial public
offering, we granted under the plan additional options to purchase an aggregate
of 845,000 shares at an exercise price of $9.00 and 100,000 shares of restricted
stock.
Administration. The plan is administered by the compensation committee.
Subject to limitations, the compensation committee has the authority to
determine:
- the persons to whom awards are granted,
- the types of awards to be granted,
- the time at which awards will be granted,
- the number of shares, units or other rights subject to each award,
- the exercise, base or purchase price of an award, if any,
- the time or times at which the award will become vested, exercisable or
payable, and
- the duration of the award.
The compensation committee also has the power to interpret the plan and make
factual determinations and may provide for the acceleration of the vesting or
exercise period of an award at any time prior to its termination or upon the
occurrence of specified events.
Change of Control. Unless otherwise provided in a particular award
agreement, in the event of a "change of control," as defined in the plan:
- all outstanding awards automatically will become fully vested immediately
prior to the change of control, or at an earlier time set by the
committee;
- all restrictions, if any, with respect to all outstanding awards will
lapse; and
- all performance criteria, if any, with respect to all outstanding awards
will be deemed to have been met at their target level.
Amendment. Stockholder approval is required to amend the plan to increase
the number of shares as to which awards may be granted, except for adjustments
resulting from stock splits and the like. The compensation committee can amend,
modify, suspend or terminate the plan in all other respects, unless the action
would otherwise require stockholder approval. Amendments of the plan will not,
without the consent of the participant, materially affect a participant's rights
under an award previously granted, unless the award itself otherwise expressly
so provides. The plan expires in 2011.
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Deferred Compensation Plan
We have adopted a nonqualified deferred compensation plan that will permit
our directors and selected key employees to elect to defer all or a part of
their cash compensation from us until the termination of their status as a
director or employee. The plan is administered by the compensation committee.
Our directors are eligible to participate in the plan, and we expect that all of
our officers will be eligible to participate. Participating employees are
eligible to receive from us a matching deferral under the nonqualified deferred
compensation plan that will compensate them for contributions they could not
receive from us under our 401(k) plan due to the various limits imposed on
401(k) plans by the U.S. federal income tax laws.
Participants in our nonqualified deferred compensation plan are able to
invest contributions made to the nonqualified deferred compensation plan in
investment funds selected by the compensation committee. We plan to establish a
grantor trust to hold the amounts deferred under the plan by our officers and
directors. All amounts deferred under the plan will remain subject to the claims
of our creditors.
Each participant will receive, at the participant's election, a lump sum
distribution or installment payments only upon termination of the participant's
service with us and our affiliates. The compensation committee may, however,
approve in-service withdrawals by participants to cover an unforeseen financial
emergency of the participant.
Change of Control Severance Plan
We have also adopted a change of control severance plan for selected key
management employees. Under the terms of this plan, if a qualified termination
occurs during the 12-month period following a change of control, specified key
management employees, other than our named executive officers, will be entitled
to receive a lump sum payment equal to a multiple ranging from one-half to two
times their respective annual base salaries and corresponding portions of their
target annual bonus amount. In addition, the terminated key management employees
are entitled to health benefits and outplacement services. No key management
employee are entitled to severance benefits under this plan following a change
of control if the employee is offered comparable employment with the acquiring
entity. To receive benefits under this plan, the terminated key management
employees are required to execute a release of certain employment-related claims
against us.
Aggregated Option Exercises in 2000 and Fiscal Year-End Option Values
The following table contains information concerning stock options held by
the named executive officers as of December 31, 2000, giving effect to the
Combination. No stock options were exercised in 2000 by any named executive
officer.
OPTION VALUES AT DECEMBER 31, 2000
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS (NUMBER OF SHARES) IN-THE-MONEY OPTIONS(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Douglas E. Swanson............................ -- -- -- --
Cindy B. Taylor............................... -- -- -- --
Howard Hughes................................. 37,634 4,584 $ 65,203 --
Jay Trahan.................................... 104,012 104,012 336,104 $336,104
Michael R. Chaddick........................... 39,712 66,186 132,405 220,673
---------------
(1) The values of each unexercised in-the-money stock option is calculated as
the product of (a) the number of options and (b) the difference between the
initial public offering price of $9.00 per share and the exercise price of
the stock option.
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Director Compensation
Directors who are also our employees do not receive a retainer or fees for
service on our board of directors or any committees. Directors who are not
employees receive an annual fee of $15,000 and fees of $1,500 for attendance at
each meeting of our board of directors, $1,000 for each committee meeting
attended in person and $500 for each committee meeting attended telephonically.
In addition, each non-employee director who serves as committee chairman
receives an annual fee of $10,000 for each committee on which he serves as
chairman. Directors who are not employees receive options to purchase 5,000
shares of our common stock upon election to the board of directors and our
non-employee directors who continue on the board of directors receive additional
options to purchase 5,000 shares at each annual meeting after which they
continue to serve. These options were or will be granted under the 2001 Equity
Participation Plan, will vest in four annual installments and will expire ten
years from the date of grant. In the event of a change in control, the options
will vest in accordance with the plan. The exercise price of these options is
the fair market value at the date of grant. All of our directors are reimbursed
for reasonable out-of-pocket expenses incurred in attending meetings of our
board of directors or committees and for other reasonable expenses related to
the performance of their duties as directors.
Employment Contracts
As of February 2001, we have entered into separate executive agreements
with each of the named executive officers other than Mr. Trahan, who had a
preexisting employment agreement with one of our subsidiaries. These agreements
provide protection in the event of a qualified termination, which is defined as
an involuntary termination of the executive officer by us other than for cause
or a voluntary termination by the executive for good reason. If the qualified
termination occurs during the 24-month period following a change of control, the
agreements will provide for a lump sum payment to the executive officer based on
the executive officer's base salary and target annual bonus amount. In addition,
in that circumstance, the agreements provide that all restricted stock awards
will become vested, that all restrictions on such awards will lapse and that
outstanding stock options will vest and, except for incentive stock options
granted prior to the completion of the initial public offering, remain
exercisable for the remainder of their terms. The executive officer is also
entitled to health benefits, vesting of all deferred compensation amounts,
outplacement services and to be made whole for any excise taxes incurred with
respect to severance payments that are excess parachute payments under the
Internal Revenue Code. If a qualified termination occurs other than during the
24-month period following a change of control, the executive agreements provide
for payments based on the executive officer's base salary and target annual
bonus amount.
The executive agreements have an initial term of three years and will be
extended automatically for one additional day on a daily basis for a maximum
additional period of three years, unless notice of non-extension is given, in
which case the agreement will terminate on the third anniversary of the date
notice is given. To receive benefits under the executive agreement, the
executive officer is required to execute a release of certain employment-related
claims against us. The terms of the executive agreements are summarized below.
Douglas E. Swanson. Under the terms of Mr. Swanson's executive agreement,
he is entitled to receive a lump sum payment equal to three times his base
salary and target annual bonus amount if a qualified termination occurs during
the 24-month period following a change of control. If a qualified termination
occurs other than during the 24-month period following a change of control, Mr.
Swanson is entitled to receive a lump sum payment equal to two times his base
salary and target annual bonus amount. In addition, we awarded Mr. Swanson
restricted stock with a value of approximately $900,000 in connection with the
closing of our initial public offering in February 2001. This restricted stock
award vests in three equal installments on each of the first three anniversaries
of the effective date of the restricted stock agreement. In addition, the entire
restricted stock award will vest if there is a change in control of our company
or if Mr. Swanson's employment is terminated for a reason that entitles him to
receive benefits under any of our long term disability plans.
Cindy B. Taylor. Under the terms of Ms. Taylor's executive agreement, she
is entitled to receive a lump sum payment equal to two and a half times her base
salary and target annual bonus amount if a qualified
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termination occurs during the 24-month period following a change of control. If
a qualified termination occurs other than during the 24-month period following a
change of control, Ms. Taylor is entitled to receive a lump sum payment equal to
one and a half times her base salary and target annual bonus amount.
Howard Hughes and Michael Chaddick. Under the terms of the executive
agreements with Messrs. Hughes and Chaddick, each is entitled to receive a lump
sum payment equal to two times his base salary and target annual bonus amount if
a qualified termination occurs during the 24-month period following a change of
control. If a qualified termination occurs other than during the 24-month period
following a change of control, the executive officer is entitled to receive a
lump sum payment equal to his base salary and target annual bonus amount.
Jay Trahan. Mr. Trahan has a compensation agreement with HWC, a subsidiary
of Oil States. Mr. Trahan, as President and Chief Executive Officer of HWC, is
entitled to an annual salary of $200,000, plus a bonus of up to 100% of his
salary based on HWC's performance. Mr. Trahan is entitled to receive a payment
equal to one year's salary, plus a bonus equal to one-half of such salary, upon
a termination of his employment with HWC without cause. Upon a termination of
his employment due to a sale or a change of control of HWC resulting in a
substantial reduction in Mr. Trahan's responsibilities, he is entitled to
receive a payment equal to two times his salary, plus a bonus equal to one-half
of such salary, as well as a continuation of medical benefits for a two-year
period following such sale or change of control. No further compensation is
payable upon termination of Mr. Trahan's employment for cause.
Compensation Committee Interlocks and Insider Participation
Our compensation committee consists of Messrs. Rosenthal, Papa and Simmons,
each of whom is a non-employee director. There were no compensation committee
interlock relationships or insider participation in compensation arrangements
for the year ended December 31, 2000.
See "Certain Relationships and Related Transactions" for information
regarding certain transactions between Oil States and Mr. Simmons.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 23, 2001, information regarding
shares beneficially owned by:
- each person who we know to be the beneficial owner of more than five
percent of our outstanding shares of common stock;
- each of the named executive officers;
- each of our directors; and
- all current directors and executive officers as a group.
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To our knowledge, except as indicated in the footnotes to this table or as
provided by applicable community property laws, the persons named in the table
have sole voting and investment power with respect to the shares of common stock
indicated.
BENEFICIAL OWNERSHIP
-----------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) SHARES PERCENTAGE
---------------------------------------- ---------- ----------
SCF-III, L.P(2)............................................. 21,825,275 45.2%
600 Travis, Suite 6600
Houston, Texas 77002
SCF-IV, L.P(2).............................................. 8,645,085 17.9%
600 Travis, Suite 6600
Houston, Texas 77002
L.E. Simmons................................................ 30,470,460 63.1%
Douglas E. Swanson.......................................... 100,000 --
Cindy B. Taylor............................................. -- --
Michael R. Chaddick(3)...................................... 39,712 *
Howard Hughes(3)............................................ 75,484 *
Jay Trahan(3)............................................... 249,949 *
Martin Lambert.............................................. -- --
Mark G. Papa................................................ 2,000 --
Gary L. Rosenthal(3)........................................ 15,868 *
Andrew L. Waite(4).......................................... -- --
Stephen A. Wells(3)......................................... 18,679 *
All directors and executive officers as a group (14
persons)(2)(3)(4)......................................... 31,157,400 64.1%
---------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each beneficial owner is c/o Oil
States International, Inc., Three Allen Center, 333 Clay Street, Suite 3460,
Houston, Texas 77002.
(2) The shares indicated as being beneficially owned by Mr. Simmons, except for
100 shares, are owned directly by SCF-III, L.P. and SCF-IV, L.P. Mr. Simmons
serves as Chairman of the Board and President of L.E. Simmons & Associates,
Incorporated, the ultimate general partner of both SCF-III, L.P. and SCF-IV,
L.P. As such, Mr. Simmons may be deemed to have voting and dispositive power
over the shares owned by SCF-III, L.P. and SCF-IV, L.P.
(3) Includes shares that may be acquired within 60 days through the exercise of
options to purchase shares of our common stock as follows: Messrs.
Chaddick -- 39,712; Hughes -- 42,218; Trahan -- 156,017; Rosenthal -- 1,734;
Wells -- 2,384 and other executive officers -- 121,049.
(4) Mr. Waite serves as Managing Director of L.E. Simmons & Associates,
Incorporated, the ultimate general partner of both SCF-III, L.P. and SCF-IV,
L.P. As such, Mr. Waite may be deemed to have voting and dispositive power
over the shares beneficially owned by SCF-III, L.P. and SCF-IV, L.P. Mr.
Waite disclaims beneficial ownership of the shares owned by SCF-III, L.P.
and SCF-IV, L.P.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Offering by Selling Stockholders
We paid the expenses of our selling stockholders in connection with the
underwriters' over-allotment options in our recent initial public offering,
other than the underwriting discounts, commissions and transfer taxes with
respect to shares of stock sold by the selling stockholders and certain fees and
expenses of any attorneys, accountants and other advisors separately retained by
them.
The Combination and the Initial Public Offering
The Combination closed concurrently with the closing of our initial public
offering in February 2001. The boards of directors of Oil States, HWC, Sooner
and PTI approved the Combination on July 31, 2000, and the
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requisite number of shareholders of each of Oil States, HWC, Sooner and PTI
consented to the Combination on or before August 9, 2000. Prior to the
Combination, SCF owned a majority interest in each of Oil States, HWC, Sooner
and PTI. In the Combination, subsidiaries of Oil States were merged into each of
HWC and Sooner. Most of the current shareholders of HWC and Sooner, including
SCF, received shares of Oil States common stock, and five non-accredited
shareholders received cash. In addition, PTI merged into a Canadian subsidiary
of Oil States. Two of the former PTI shareholders that were located in the
United States, including SCF, received shares of Oil States common stock, and
one non-accredited shareholder received cash. Most of the current PTI
shareholders that were located in Canada received exchangeable shares of that
Canadian subsidiary that are exchangeable for shares of our common stock. One
Canadian shareholder of PTI who would have been entitled to receive 47,849
exchangeable shares exercised his right to dissent to the PTI exchangeable share
transaction and therefore received cash. Following the closing of the
Combination, the SCF Exchange and our initial public offering, none of HWC,
Sooner or PTI or any of their shareholders have any obligations to indemnify us
for losses that we suffer relating to the Combination. Following the closing of
the Combination, the SCF Exchange and our initial public offering:
- HWC, Sooner and PTI became our wholly owned subsidiaries;
- the former shareholders of HWC, Sooner and PTI, other than those that
received cash, hold shares of our common stock or shares of one of our
Canadian subsidiaries exchangeable for shares of our common stock; and
- SCF holds approximately 63.1% of our outstanding common stock.
Prior to the Combination, SCF owned 7,657,326 shares of Oil States common stock,
or 84.6% of the outstanding shares, after taking into account a three-for-one
reverse stock split. In addition, prior to the Combination, SCF owned:
- 80.6% of the outstanding shares of HWC common stock;
- 57.7% of the outstanding common shares of PTI; and
- 81.7% of the outstanding shares of Sooner common stock.
In the Combination, SCF received 18,537,479 additional shares in
consideration of its ownership interests in HWC, PTI and Sooner. In the SCF
Exchange, SCF received 4,275,555 additional shares in exchange for approximately
$36.0 million of our indebtedness held by SCF. Following the Combination and the
SCF Exchange, SCF holds a total of 30,470,360 shares, or 63.1% of the total
shares outstanding after the Combination and our initial public offering on a
fully diluted basis.
L.E. Simmons, the chairman of our board of directors, is the chairman,
president and sole shareholder of L.E. Simmons & Associates, Incorporated. L.E.
Simmons & Associates, Incorporated is the general partner of SCF-II, L.P., which
is the general partner of SCF-III, L.P. Prior to the Combination, SCF-III, L.P.
owned a majority interest in each of Oil States, HWC and PTI. L.E. Simmons &
Associates, Incorporated is also the general partner of SCF-IV, G.P., Limited
Partnership, which is the general partner of SCF-IV, L.P. Prior to the
Combination, SCF-IV, L.P. owned a majority interest in Sooner.
L.E. Simmons and his brother, Matthew Simmons, co-founded Simmons & Company
International, one of the underwriters of the initial public offering. In early
1993, L.E. Simmons sold substantially all of his economic interest in Simmons &
Company International and currently holds only a 3.6% ownership position. L.E.
Simmons does not currently serve Simmons & Company International as a director,
officer, consultant or otherwise. Other than indirectly through this ownership
position, L.E. Simmons did not receive any underwriting fees, advisory fees or
other such compensation as a result of the initial public offering.
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The following table sets forth the shares of our common stock received in
the Combination by SCF-III, L.P. and SCF-IV, L.P. for their ownership positions
in HWC, Sooner and PTI:
SHARES RECEIVED IN THE COMBINATION
------------------------------------
HWC SOONER PTI
---------- ---------- ----------
SCF-III, L.P..................................... 6,397,753 -- 5,659,650
SCF-IV, L.P...................................... -- 6,480,076 --
Because of his ownership of L.E. Simmons & Associates, Incorporated, Mr. Simmons
may be deemed to beneficially own such shares following the completion of the
Combination. See Item 12 -- Security Ownership of Certain Beneficial Owners and
Management. As a non-employee director, Mr. Simmons also received stock option
awards to which all of our non-employee directors were entitled. See Item 11 --
Executive Compensation -- Director Compensation.
In connection with the Combination and the initial public offering,
indebtedness owed to certain related parties was prepaid. See Item 13 -- Certain
Relationships and Related Transactions -- Transactions Before the Combination
for a discussion of this indebtedness.
Transactions Before the Combination
TRANSACTIONS WITH OUR DIRECTORS AND OFFICERS
L.E. Simmons, the Chairman of our board of directors, is also the majority
owner, Chairman of the Board and President of L.E. Simmons & Associates,
Incorporated, the ultimate general partner of SCF, our majority shareholder.
Andrew L. Waite, one of our directors, is also a Managing Director and an
officer of L.E. Simmons & Associates, Incorporated. Cindy B. Taylor, our Chief
Financial Officer, was previously the Chief Financial Officer of L.E. Simmons &
Associates, Incorporated from August 1999 until May 2000. As a majority
shareholder of each of Oil States, HWC, Sooner and PTI prior to the Combination,
SCF has been involved in a number of transactions with each of these companies,
as described further below.
TRANSACTIONS WITH SIGNIFICANT SHAREHOLDERS
Oil States. During 1997, Oil States entered into loan agreements for
unsecured promissory notes totaling $24.8 million with EnSerCo, L.L.C., a
limited liability company that is owned 50% by SCF. Oil States also paid
commitment fees totaling $400,000 to EnSerCo during 1997. These notes, which
were paid in full in March 1998, accrued interest at rates ranging from 10% to
12% per year.
Effective December 31, 1997, Oil States acquired from SCF and other
stockholders options to purchase from Oil States its common shares of CE
Franklin, Ltd., a former majority-owned subsidiary of Oil States that was sold
in 1999. Oil States issued 500,000 shares, before consideration of the proposed
three-for-one reverse stock split, of its common stock, valued at $5.0 million,
in exchange for these options. The aggregate consideration paid by SCF and the
other stockholders in November 1995 for such options was $2.0 million. Oil
States issued an additional 500,000 shares, before consideration of the proposed
three-for-one reverse stock split, of its common stock to SCF and the other
stockholders in March 2000 due to performance conditions specified in the
transaction which were not attained.
In August and December 1997, SCF acquired 2,001,550 shares, before
consideration of the proposed three-for-one reverse stock split, of Oil States
at a weighted average price of $7.94 per share through two rights offerings
extended to all Oil States shareholders. In February and March 1998, SCF
acquired 910,600 shares, before consideration of the proposed three-for-one
reverse stock split, of Oil States common stock at a weighted average price of
$10.00 per share through two rights offerings extended to all Oil States
shareholders. In 2000, Oil States issued 3,642,400 shares, before consideration
of the proposed three-for-one reverse stock split, of its common stock to SCF
due to performance conditions specified in the 1998 rights offerings which were
not attained.
In December 1998, Oil States declared a $25.0 million dividend to the
holders of Oil States common stock in the form of a subordinated note payable to
SCF-III, L.P., acting as agent for such holders.
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47
SCF-III, L.P. was entitled to approximately 85% of the payments made on such
note. Interest accrued at the rate of 6% per year. Principal and interest were
due on December 31, 2005. At December 31, 2000, the outstanding balance of the
note, including principal and accrued interest, was approximately $28.0 million.
This note was extinguished as a result of the SCF Exchange and the use of a
portion of the proceeds from our initial public offering.
L.E. Simmons & Associates, Incorporated, the ultimate general partner of
SCF, has served as financial advisor to Oil States from time to time before the
Combination. Oil States paid out-of-pocket expenses of approximately $83,000 in
2000, $118,000 in 1999 and $11,000 in 1998 to L.E. Simmons & Associates,
Incorporated. In addition, Oil States paid investment advisory fees of
approximately $200,000 in 1997 to L.E. Simmons & Associates, Inc. in connection
with Oil States' purchase of HydroTech Systems, Inc. We do not anticipate that
we will continue to use these services following the initial public offering and
the Combination.
Between May 1996 and June 1997, Oil States issued three subordinated
promissory notes, totaling $10.9 million, to entities affiliated with Hunting
Oilfield Services (International), Ltd. in connection with the acquisition of
assets. Prior to the Combination, an affiliate of Hunting Oilfield Services was
the holder of greater than 5% of the common stock of Oil States. Of the total of
$10.9 million, $10.4 million was due on May 17, 2001, and the remaining $500,000
was due September 30, 2001. These notes accrued interest at rates of 7.75% in
1998, 8.25% in 1999, and 8.50% thereafter. Accrued interest was payable on March
31 of each year; however, interest payments on two of the notes totaling $10.5
million were only required to be made if specified cumulative EBITDA thresholds
were met. Oil States did not meet such EBITDA thresholds for 1999. As of
December 31, 2000, interest of $1.8 million had been accrued but not paid.
Interest on these two notes did not accrue on any accrued interest that was not
paid due to the failure to meet any such EBITDA threshold. All unpaid accrued
interest was payable on the maturity date of the notes. We paid the entire
balance of the notes with proceeds from our initial public offering in February
2001.
In November 1997, Oil States issued 1,000,000 shares, before consideration
of the proposed three-for-one reverse stock split, of its common stock to the
Huntfield Trust Limited, an affiliate of Hunting Oilfield Services, in
consideration for the purchase of 400 shares of the common stock of a wholly
owned subsidiary which were issued to Huntfield in partial consideration for the
purchase of assets from Huntfield in May 1996. In January 1998, Huntfield
purchased an additional 44,900 shares, before consideration of the proposed
three-for-one reverse stock split, of Oil States common stock at $10.00 per
share pursuant to the November 1997 rights offering. In February and March 1998,
Huntfield purchased 104,867 shares, before consideration of the proposed
three-for-one reverse stock split, of Oil States common stock at a weighted
average price of $10.00 per share through two rights offerings extended to all
Oil States shareholders. In February 2000, Oil States issued 419,468 shares,
before consideration of the proposed three-for-one reverse stock split, of its
common stock to Huntfield due to performance conditions specified in the two
rights offerings which were not attained.
During 1999, Hunting Oilfield Services provided indemnification payments to
Oil States in the amount of $1.8 million for a liability incurred in 1998
relating to assets sold to Oil States in 1996.
During 1998, Oil States acquired assets from Sooner Pipe & Supply
Corporation, the predecessor of Sooner and an entity under common control with
Oil States, for $3.8 million. Oil States issued a promissory note in the amount
of $2.0 million to Sooner Pipe & Supply in connection with the acquisition. In
May 1999, Oil States sold all of its tubular assets to Sooner Pipe & Supply for
$7.4 million in cash and $2.0 million of noncash consideration related to the
cancellation of a promissory note.
HWC. In November 1997, HWC issued 20,400 shares of its common stock to SCF
for an aggregate purchase price of $20.4 million. HWC issued an additional 6,667
shares of common stock to SCF in May and June 1998 for an aggregate purchase
price of $10.0 million.
In April 1999, HWC issued 2,000 shares of its Series A Convertible
Preferred Stock to SCF for an aggregate purchase price of $2.0 million. The
preferred stock accrued dividends at an annual rate of 6.5%. SCF could convert
the preferred stock, including accrued but unpaid dividends through June 30,
2000, at any
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time into shares of HWC common stock. In connection with the Combination, SCF
converted the preferred stock, including accrued but unpaid dividends through
June 30, 2000, into shares of HWC common stock, which were converted into
751,610 shares of Oil States common stock.
In November 1999, HWC issued 2,650 shares of its Series B Convertible
Preferred Stock to SCF for an aggregate purchase price of $2.7 million. The
preferred stock accrued dividends at an annual rate of 6.5%. SCF could convert
the preferred stock, including accrued but unpaid dividends through June 30,
2000, at any time into shares of HWC common stock. In connection with the
Combination, SCF converted the preferred stock, including accrued but unpaid
dividends through June 30, 2000, into shares of HWC common stock, which were
converted into 954,010 shares of Oil States common stock.
Sooner. In July 1998, Sooner issued to SCF a junior subordinated
promissory note in the original principal amount of $15.1 million, 15,137 shares
of common stock and 15,137 warrants to purchase common stock in return for $30.2
million from SCF. In May and June 1999, Sooner issued additional promissory
notes to SCF in the aggregate principal amount of $6.3 million, 6,250 shares of
common stock and 6,250 warrants to purchase common stock in return for $12.5
million from SCF. The notes were scheduled to mature on June 30, 2008 and
accrued interest annually at the rate of 6%. As of December 31, 2000, the
outstanding balance owed to SCF, including principal and accrued interest, was
$24.4 million. These notes were extinguished as a result of the SCF Exchange and
the use of a portion of the proceeds from our initial public offering.
In 1998 and 1999, Sooner issued warrants to SCF to purchase shares of
Sooner common stock. The warrants are exercisable into an aggregate of 21,387
shares of Sooner common stock at an exercise price of $1,000 per share, subject
to adjustment upon the occurrence of specified events. In connection with the
Combination, the SCF warrants were exchanged on a cashless basis for shares of
Sooner common stock, which were converted into 2,705,363 shares of Oil States
common stock.
Other. In 1999, we sold all of the operating assets of CE Drilling and CE
Mobile for aggregate consideration of $65.0 million. Simmons & Company
International provided financial advisory services to us in connection with
these transactions and received fees totaling $650,000.
Registration Rights
Former Shareholders of Oil States, HWC, Sooner and PTI. Upon completion of
the initial public offering, we entered into an amended and restated
registration rights agreement with SCF, other stockholders of Oil States and the
former shareholders of HWC and Sooner that held registration rights with respect
to their shares of common stock of these companies. This agreement gives SCF the
right, on five occasions, to demand that we register all or any portion of their
shares of our common stock for sale under the Securities Act. SCF may not make a
demand prior to the expiration of the 180 day lock-up period following the
completion of the initial public offering. The shares to be included in any
demand registration by SCF must have an estimated aggregate gross offering price
of at least $50.0 million. Despite a registration demand by SCF, we may delay
filing of the registration statement to register its shares of our common stock
for a maximum of 45 days from the date we receive the registration demand if:
- at the time we receive the registration demand, we are engaged in
confidential negotiations or other confidential business activities that
we would be required to disclose in the registration statement and that
we would not otherwise be required to disclose, and our board of
directors determines in good faith that such disclosure would not be in
our best interests or the best interests of our stockholders; or
- prior to receiving the registration demand, our board of directors has
determined to undertake a registered public offering of our securities
and we have taken substantial steps and are proceeding with reasonable
diligence to effect the offering.
In addition, SCF may not require us to file a registration statement within 180
days after the effectiveness of a registration statement related to a demand
registration made by SCF. Further, if we propose to register any of our common
stock under the Securities Act, except for shares of common stock issued in
connection with
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49
acquisitions and benefits plans, or if SCF exercises a demand, the other holders
of registration rights under the registration rights agreement will have the
right to include their shares of common stock in the registration, subject to
limitations. The registration rights agreement also gives the holders of the
exchangeable shares of our Canadian subsidiary the right to register their
shares of our common stock issuable upon the exchange of the exchangeable shares
in the registration, subject to the same limitations.
The agreement provides customary registration procedures. We have agreed to
pay all costs and expenses, other than fees, discounts and commissions of
underwriters, brokers and dealers and capital gains, income and transfer taxes,
if any, related to the registration and sale of shares of our common stock by
any holder of registration rights under the registration rights agreement in any
registered offering. The rights of the holders of registration rights under the
registration rights agreement are assignable under limited circumstances and
terminate, other than the demand rights held by SCF, at any time when they and
their affiliates own less than 2% of our outstanding common stock and are
eligible to sell such common stock pursuant to Rule 144(k) under the Securities
Act or, in the case of the former shareholders of PTI, when a registration
statement for their benefit has been declared effective by the Securities and
Exchange Commission. The demand rights held by SCF terminate on the tenth
anniversary of the agreement.
The registration rights agreement contains customary indemnification and
contribution provisions by us for the benefit of the selling stockholders and
any underwriters. Each selling stockholder has agreed to indemnify us and any
underwriter solely with respect to information provided by the stockholder, with
such indemnification being limited to the net proceeds from the offering
received by the stockholder.
Former Shareholders of PTI. We have agreed with the former shareholders of
PTI that if any of our shares of common stock to be issued to them in exchange
for the exchangeable shares of our Canadian subsidiary require us to take any
action under any Canadian or United States law before those shares of common
stock may be issued or in order that those shares of common stock may be freely
traded after issuance, other than any restrictions on transfer by reason of a
holder being a "control person" under Canadian law or an "affiliate" under
United States law, we will, beginning after the first anniversary date of the
closing of the initial public offering or earlier under limited circumstances,
take all such actions as are necessary and permitted by law.
Conflicts of Interest
Generally, directors and officers have a fiduciary duty to manage their
company in a manner beneficial to the company and its stockholders. Two of our
directors, L.E. Simmons and Andrew L. Waite, are current directors or officers
of L.E. Simmons & Associates, Incorporated, the ultimate general partner of SCF.
An action beneficial to the general partner of SCF may be detrimental to our
interests, which may create conflicts of interest. Although we have not adopted
formal procedures to address actions by our board of directors when one or more
directors have a conflict of interest, we anticipate that directors who have a
conflict of interest in a matter would disclose to our other directors that
there is a conflict. Depending on the facts and circumstances, our conflicted
directors may or may not participate in discussions regarding the matter, and we
anticipate that our conflicted directors would recuse themselves from voting on
that matter. See Item 1 -- Business -- Risk Related to Oil States Operations.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits
(1) Financial Statements: Reference is made to the index set forth on
page 51 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules: No schedules have been included
herein because the information required to be submitted has been included
in the Combined, Pro Forma Combined and Consolidated Financial Statements
or the Notes thereto, or the required information is inapplicable.
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(3) Index of Exhibits: See Index of Exhibits, below, for a list of
those exhibits filed herewith, which index also includes and identifies
management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Annual Report on Form 10-K by Item 601(10)(iii)
of Regulation S-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
(c) Index of Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1* -- Amended and Restated Certificate of Incorporation
3.2* -- Amended and Restated Bylaws
3.3* -- Certificate of Designations of Special Preferred Voting
Stock of Oil States International, Inc.
4.1 -- Form of common stock certificate (incorporated by
reference to Exhibit 4.1 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
4.2* -- Amended and Restated Registration Rights Agreement
10.1 -- Combination Agreement dated as of July 31, 2000 by and
among Oil States International, Inc., HWC Energy
Services, Inc., Merger Sub-HWC, Inc., Sooner Inc., Merger
Sub-Sooner, Inc. and PTI Group Inc. (incorporated by
reference to Exhibit 10.1 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.2* -- Plan of Arrangement of PTI Group Inc.
10.3* -- Support Agreement between Oil States International, Inc.
and PTI Holdco
10.4* -- Voting and Exchange Trust Agreement by and among Oil
States International, Inc., PTI Holdco and Montreal Trust
Company of Canada
10.5*,** -- 2001 Equity Participation Plan
10.6** -- Form of Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.7*,** -- Annual Incentive Compensation Plan
10.8*,** -- Executive Agreement between Oil States International,
Inc. and Douglas E. Swanson
10.9*,** -- Executive Agreement between Oil States International,
Inc., and Cindy B. Taylor
10.10** -- Form of Executive Agreement between Oil States
International, Inc. and other Named Executive Officers
(Messrs. Hughes and Chaddick) (incorporated by reference
to Exhibit 10.10 of Oil States' Registration Statement
No. 333-43400 on Form S-1).
10.11** -- Form of Change of Control Severance Plan for Selected
Members of Management (incorporated by reference to
Exhibit 10.11 of Oil States' Registration Statement No.
333-43400 on Form S-1).
10.12 -- Credit Agreement among Oil States International, Inc.,
PTI Group Inc., the Lenders named therein, Credit Suisse
First Boston, Credit Suisse First Boston Canada, Hibernia
National Bank and Royal Bank of Canada. (incorporated by
reference to Exhibit 10.12 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.13** -- Form of Restricted Stock Agreement between Oil States
International, Inc. and Douglas E. Swanson (incorporated
by reference to Exhibit 10.13 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
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EXHIBIT NO. DESCRIPTION
----------- -----------
10.14** -- Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.14 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.15*,** -- Compensation Letter Agreement between HWC Energy
Services, Inc. and Jay Trahan
16.1 -- Letter Regarding Change in Certifying Accountant
(incorporated by reference to Exhibit 16.1 of Oil States'
Registration Statement No. 333-43400 on Form S-1).
21.1 -- List of subsidiaries of the Company (incorporated by
reference to Exhibit 21.1 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
24.1* -- Powers of Attorney for Directors
---------------
* Filed herewith
** Management contracts or compensatory plans or arrangements.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OIL STATES INTERNATIONAL, INC.
By /s/ DOUGLAS E. SWANSON
-----------------------------------
Douglas E. Swanson
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated on March 29, 2001.
SIGNATURE TITLE
--------- -----
L.E. SIMMONS* Chairman of the Board
-----------------------------------------------------
L.E. Simmons
/s/ DOUGLAS E. SWANSON Director, President and Chief Executive
----------------------------------------------------- Officer (Principal Executive Officer)
Douglas E. Swanson
/s/ CINDY B. TAYLOR Senior Vice President, Chief Financial
----------------------------------------------------- Officer and Treasurer (Principal Financial
Cindy B. Taylor Officer)
/s/ ROBERT W. HAMPTON Vice President -- Finance and Accounting and
----------------------------------------------------- Secretary (Principal Accounting Officer)
Robert W. Hampton
MARTIN LAMBERT* Director
-----------------------------------------------------
Martin Lambert
MARK G. PAPA* Director
-----------------------------------------------------
Mark G. Papa
GARY L. ROSENTHAL* Director
-----------------------------------------------------
Gary L. Rosenthal
ANDREW L. WAITE* Director
-----------------------------------------------------
Andrew L. Waite
STEPHEN A. WELLS* Director
-----------------------------------------------------
Stephen A. Wells
*By: /s/ CINDY B. TAYLOR
------------------------------------------------
Cindy B. Taylor, pursuant to a power of attorney
filed as Exhibit 24.1 to this Annual Report on Form
10-K.
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO COMBINED, PRO FORMA COMBINED AND
CONSOLIDATED FINANCIAL STATEMENTS
Oil States International, Inc.
Unaudited Pro Forma Combined Balance Sheet at December 31,
2000................................................... 54
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended December 31, 2000....................... 55
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended December 31, 1999....................... 56
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. 57
Combined Oil States International, Inc. and Subsidiaries
Reports of Independent Auditors
Ernst and Young, LLP................................... 61
PricewaterhouseCoopers LLP............................. 62
Arthur Andersen LLP.................................... 63
PricewaterhouseCoopers LLP............................. 64
Combined Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998....................... 65
Combined Balance Sheets at December 31, 2000 and 1999..... 66
Combined Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended
December 31, 2000, 1999 and 1998....................... 67
Combined Statements of Cash Flow for the Years Ended
December 31, 2000, 1999 and 1998....................... 68
Notes to the Combined Financial Statements................ 69
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
On February 14, 2001, Oil States International, Inc.
acquired Sooner Inc. The following financial statements
are provided in accordance with Rule 3-05 of Regulation
S-X of the Securities and Exchange Commission.
Sooner Inc.
Report of Independent Auditors............................ 98
Consolidated Balance Sheets at June 30, 2000 and 1999 and
December 31, 2000...................................... 99
Consolidated Statements of Operations for the Years Ended
June 30, 2000 and 1999 and the Six Month Periods Ended
December 31, 2000 and 1999............................. 100
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2000 and 1999 and the Six Months
Ended December 31, 2000................................ 101
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000 and 1999 and the Six Month Periods Ended
December 31, 2000 and 1999............................. 102
Notes to Consolidated Financial Statements................ 103
Sooner Pipe & Supply Corporation
Report of Independent Auditors............................ 114
Consolidated Balance Sheet at July 2, 1998................ 115
Consolidated Statement of Operations for the Period from
August 1, 1997 through July 2, 1998.................... 116
Consolidated Statement of Stockholders' Equity for the
Period from August 1, 1997 through July 2, 1998........ 117
Consolidated Statement of Cash Flows for the Period from
August 1, 1997 through July 2, 1998.................... 118
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following tables set forth unaudited pro forma combined financial
information for Oil States International, Inc. (Oil States) giving effect to:
- the combination of Oil States, HWC Energy Services, Inc. (HWC) and PTI
Group Inc. (PTI) (collectively, the Controlled Group) as entities under
the common control of SCF-III L.P. (SCF III), based upon reorganization
accounting, which yields results similar to pooling of interest
accounting, effective from the dates each of these entities became
controlled by SCF III;
- the conversion of the common stock held by the minority interests of each
entity in the Controlled Group into shares of our common stock, based on
the purchase method of accounting;
- the conversion of all of the outstanding common stock of Sooner Inc.
(Sooner) into shares of our common stock, based on the purchase method of
accounting; and
- the exchange of 4,275,555 shares of common stock for $36.0 million of
debt of Sooner and Oil States; and
- our sale of 10,000,000 shares of common stock (the Offering) and the
application of the net proceeds to us as described in Note 4(a).
The unaudited pro forma combined balance sheet as of December 31, 2000 was
prepared based upon the historical combined financial statements of the
Controlled Group and gives effect to:
- our acquisition of minority interests of the Controlled Group;
- our acquisition of Sooner;
- the proposed three-for-one reverse stock split of Oil States common
stock;
- the exchange of shares of common stock for debt of Sooner and Oil States;
and
- our sale of shares in the Offering,
as if these transactions had occurred on December 31, 2000. The unaudited pro
forma combined statements of operations for the years ended December 31, 2000
and 1999 were prepared based upon the historical combined financial statements
of the Controlled Group, adjusted to conform accounting policies, and give
effect to:
- our acquisition of minority interests of the Controlled Group;
- our acquisition of Sooner;
- our exchange of shares of common stock for debt of Sooner and Oil States;
and
- our sale of shares in the Offering,
as if these transactions had occurred on January 1, 1999 and 2000, respectively.
The pro forma adjustments represent management's preliminary determination
of purchase accounting adjustments and are based upon available information and
assumptions that management considers reasonable under the circumstances. We
will update or obtain appraisals for major assets, where appropriate, and will
evaluate the recorded amounts of liabilities on the closing date balance sheet.
The purchase accounting allocation is expected to be finalized within one year
of the closing date. Consequently, the amounts reflected in the unaudited pro
forma combined financial information are subject to change. Management does not
expect that differences between the preliminary and final purchase price
allocation will have a material impact on the Oil States combined financial
position or results of operations. In addition, the unaudited pro forma combined
financial statements do not reflect any cost savings or other financial
synergies which may be realized in the future as a result of these transactions.
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The unaudited pro forma combined financial statements do not purport to be
indicative of the results that would have been obtained had the transactions
described above been completed on the indicated dates or that may be obtained in
the future. The unaudited pro forma combined financial statements should be read
in conjunction with the historical combined financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K.
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56
OIL STATES INTERNATIONAL, INC.
PRO FORMA COMBINED BALANCE SHEET
AT DECEMBER 31, 2000
(IN THOUSANDS)
(UNAUDITED)
PRO FORMA
HISTORICAL -------------------------------------------------------------
---------------------- MINORITY
INTEREST COMBINED,
SOONER INC. ADJUSTMENTS OFFERING ACQUISITIONS
COMBINED ADJUSTMENTS (NOTES 1 ADJUSTMENTS AND
GROUP SOONER INC. (NOTE 2) AND 3) (NOTE 4) OFFERING
-------- ----------- ----------- ------------- ----------- ------------
Current assets
Cash and cash equivalents...... $ 4,821 $ 1,430 $ $ $ 6,251
Accounts receivable, net....... 64,137 32,239 96,376
Deferred taxes................. -- 526 526
Inventories.................... 30,826 71,761 102,587
Prepaid expenses and other
current assets............... 1,715 472 $ 755 2,942
-------- -------- ------- ------- --------- --------
Total current assets..... 101,499 106,428 755 -- -- 208,682
-------- -------- ------- ------- --------- --------
Accounts and notes receivable.... -- 1,524 1,524
Debt issuance costs, net of
accumulated amortization....... -- 74 (74)
Property plant and equipment,
net............................ 143,468 4,526 (1,000) 146,994
Goodwill, net.................... 103,391 13,262 39,800 26,400 182,853
Investments, at cost............. 172 2,208 2,380
Other long-term assets........... 4,988 260 74 (2,755)(H) 2,567
-------- -------- ------- ------- --------- --------
Total assets............. $353,518 $128,282 $40,555 $25,400 $ (2,755) $545,000
======== ======== ======= ======= ========= ========
Current liabilities
Accounts payable and accrued
liabilities.................. $57,248 $ 37,522 $ 670 $ -- $ (6,905)(A) $ 88,535
Postretirement healthcare and
other benefits............... 1,100 1,100
Income taxes payable........... 2,427 311 2,738
Deferred income taxes.......... 369 369
Current portion of long-term
debt......................... 37,629 (27,049)(A) 10,580
Other current liabilities...... 2,333 2,333
-------- -------- ------- ------- --------- --------
Total current
liabilities............ 101,106 37,833 670 -- (33,954) 105,655
-------- -------- ------- ------- --------- --------
Long term debt................... 102,614 60,787 (61,841)(A) 101,560
Deferred income taxes............ 19,977 (11,289)(E) 8,688
Postretirement healthcare and
other benefits................. 5,899 85 5,984
Other liabilities................ 4,519 4,519
-------- -------- ------- ------- --------- --------
Total liabilities........ 234,115 98,620 755 -- (107,084) 226,406
-------- -------- ------- ------- --------- --------
Minority interest................ 37,561 (37,406) 155
Redeemable preferred stock....... 25,293 (25,293)(AB) --
Stockholders' equity
Convertible preferred stock.... 1,625 (1,625)(A) --
Common stock................... 272 70 141(ABG) 483
Additional paid-in capital..... 83,810 26,176 43,286 56,408 119,817(ABGH) 329,497
Retained earnings (deficit).... (25,854) 3,486 (3,486) 6,328 11,289(E) (8,237)
Accumulated other comprehensive
loss......................... (3,304) (3,304)
-------- -------- ------- ------- --------- --------
Total stockholders'
equity................. 56,549 29,662 39,800 62,806 129,622 318,439
-------- -------- ------- ------- --------- --------
Total liabilities and
stockholders' equity... $353,518 $128,282 $40,555 $25,400 $ (2,755) $545,000
======== ======== ======= ======= ========= ========
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PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA
-------------------------------------------------------------
HISTORICAL MINORITY
---------------------- SOONER INC. INTEREST OFFERING COMBINED,
COMBINED ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
GROUP SOONER INC. (NOTE 2) (NOTE 3) (NOTES 1, 3 AND 4) AND OFFERING
-------- ----------- ----------- ----------- ------------------ ------------
Revenue................... $304,549 $291,098 $ $ $ $595,647
Expenses
Costs of sales.......... 217,601 265,061 482,662
Selling, general and
administrative....... 37,816 7,845 485(D) 46,146
Depreciation and
amortization......... 21,314 1,485 2,650 1,280 26,729
Other income............ (69) (69)
-------- -------- ------- ------- -------- --------
Operating income (loss)... 27,887 16,707 (2,650) (1,280) (485) 40,179
-------- -------- ------- ------- -------- --------
Interest income........... 95 428 523
Interest expense.......... (11,599) (4,048) 5,864(C) (9,783)
Other income.............. 89 -- 89
-------- -------- ------- ------- -------- --------
Earnings (loss) before
income taxes......... 16,472 13,087 (2,650) (1,280) 5,379 31,008
Income tax (expense)
benefit................. (10,776) (1,274) 7,508(I) (4,542)
-------- -------- ------- ------- -------- --------
Net income (loss) before
minority interests...... 5,696 11,813 (2,650) (1,280) 12,887 26,466
Minority interests........ (4,248) -- 4,218 (30)
-------- -------- ------- ------- -------- --------
Net income (loss)......... 1,448 11,813 (2,650) (1,280) 17,105 26,436
Preferred dividends....... (332) -- 332(F) --
-------- -------- ------- ------- -------- --------
Net income attributable to
common shares........... $ 1,116 $ 11,813 $(2,650) $(1,280) $ 17,437 $ 26,436
======== ======== ======= ======= ======== ========
Net income per common
share
Basic................... $ .05 $ 0.55
======== ========
Diluted................. $ .04 $ 0.55
======== ========
Average shares outstanding
Basic................... 24,482 48,013
======== ========
Diluted................. 26,471 48,358
======== ========
55
58
OIL STATES INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA HISTORICAL PRO FORMA
-------------------------- ---------- ---------------------------------------
GROUP SOONER INC. MINORITY
ACQUISITION COMBINED SOONER INC. ACQUISITION INTEREST
COMBINED ADJUSTMENTS GROUP WITH SOONER ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
GROUP (NOTE 5) ACQUISITIONS INC. (NOTE 2) (NOTE 6) (NOTE 3)
-------- ----------- ------------ ---------- ----------- ----------- -----------
Revenue........................... $267,110 $8,296 $275,406 $159,256 $ $52,718 $
Expenses
Costs of sales.................. 199,865 4,639 204,504 148,847 52,301
Selling, general and
administrative................ 33,624 222 33,846 7,297 1,727
Depreciation and amortization... 20,275 809 21,084 1,058 2,650 234 1,280
Other expense................... 2,448 -- 2,448 -- --
-------- ------ -------- -------- ------- ------- -------
Operating income (loss)........... 10,898 2,626 13,524 2,054 (2,650) (1,544) (1,280)
-------- ------ -------- -------- ------- ------- -------
Interest income................... 300 300 --
Interest expense.................. (12,796) (410) (13,206) --
Other expense..................... (1,297) (1,297) (3,636)
-------- ------ -------- -------- ------- ------- -------
Earnings (loss) before income
taxes......................... (2,895) 2,216 (679) (1,582) (2,650) (1,544) (1,280)
Income tax (expense) benefit...... (4,654) (753) (5,407) (627) 540
-------- ------ -------- -------- ------- ------- -------
Net income (loss) before minority
interests....................... (7,549) 1,463 (6,086) (2,209) (2,650) (1,004) (1,280)
Minority interests................ 610 -- 610 -- -- -- --
-------- ------ -------- -------- ------- ------- -------
Net income (loss) from continuing
operations attributable to
common shares................... (6,939) 1,463 (5,476) (2,209) (2,650) (1,004) (1,280)
Preferred dividends............... (121) -- (121) --
-------- ------ -------- -------- ------- ------- -------
Net income (loss) from continuing
operations attributable to
common shares................... $(7,060) $1,463 $ (5,597) $ (2,209) $(2,650) $(1,004) $(1,280)
======== ====== ======== ======== ======= ======= =======
Net income (loss) per common share
Basic........................... $ (0.62)
========
Diluted......................... $ (0.62)
========
Average shares outstanding
Basic........................... 23,053
========
Diluted......................... 23,069
========
PRO FORMA
--------------------------
OFFERING COMBINED,
ADJUSTMENTS ACQUISITIONS
(NOTES 1, 3 AND
AND 4) OFFERING
----------- ------------
Revenue........................... $ $487,380
Expenses
Costs of sales.................. 405,652
Selling, general and
administrative................ 945(D) 43,815
Depreciation and amortization... 26,306
Other expense................... 2,448
------- --------
Operating income (loss)........... (945) 9,159
------- --------
Interest income................... 300
Interest expense.................. 6,362(CF) (6,844)
Other expense..................... (4,933)
------- --------
Earnings (loss) before income
taxes......................... 5,417 (2,318)
Income tax (expense) benefit...... 9,473(I) 3,979
------- --------
Net income (loss) before minority
interests....................... 14,890 1,661
Minority interests................ (641) (31)
------- --------
Net income (loss) from continuing
operations attributable to
common shares................... 14,249 1,630
Preferred dividends............... 121(F) --
------- --------
Net income (loss) from continuing
operations attributable to
common shares................... $14,370 $ 1,630
======= ========
Net income (loss) per common share
Basic........................... $ .03
========
Diluted......................... $ .03
========
Average shares outstanding
Basic........................... 48,156
========
Diluted......................... 48,529
========
56
59
OIL STATES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The purchase method of accounting has been used to reflect the acquisition
of the minority interests of each company in the Controlled Group concurrent
with the closing of the Offering. The purchase price is based on the fair value
of the shares owned by the minority interests, valued at the initial public
offering price of $9.00 per share. Under this accounting method, the excess of
the purchase price over the fair value of the assets and liabilities allocable
to the minority interests acquired has been reflected as goodwill. Where book
value of minority interests exceeded the purchase price, such excess reduced
property, plant and equipment. The estimated fair values of assets and
liabilities are preliminary and subject to change. For purposes of the pro forma
combined financial statements, the goodwill recorded in connection with this
transaction is being amortized over 20 years using the straight-line method
based on management's evaluation of the nature and duration of customer
relationships and considering competitive and technological developments in the
industry. The unaudited pro forma combined balance sheet as of December 31, 2000
and statements of operations for the years ended December 31, 2000 and 1999 have
been adjusted for the effects of purchase accounting, as described below.
The purchase method of accounting also has been used to reflect the
acquisition of the outstanding common stock of Sooner concurrent with the
closing of the Offering. The purchase price is based on the fair value of the
shares of Sooner, valued at the initial public offering price of $9.00 per
share. The excess of the purchase price over the fair value of the assets and
liabilities of Sooner has been reflected as goodwill. The estimated fair values
of assets and liabilities are preliminary and subject to change. For purposes of
the pro forma combined financial statements, the goodwill recorded in connection
with this transaction is being amortized over 15 years using the straight-line
method based on management's evaluation of the nature and duration of customer
relationships and considering competitive and technological developments in the
industry. The unaudited pro forma combined balance sheet as of December 31, 2000
and statements of operations for the years ended December 31, 2000 and 1999
include the historical financial statements of Sooner, converted to a calendar
year end and adjusted for the effects of purchase accounting, as presented
below.
NOTE 1. COMBINING ADJUSTMENTS
Historical minority interests in the combined balance sheet as of December
31, 2000 were recorded, as follows (in thousands):
OIL STATES HWC PTI TOTAL
---------- ------ ------- -------
Retained earnings.............................. $(6,534) $ 203 $12,659 $ 6,328
Additional paid-in capital..................... 20,288 7,503 3,287 31,078
------- ------ ------- -------
$13,754 $7,706 $15,946 $37,406
======= ====== ======= =======
Minority interest in income (loss) and related tax effect of the Controlled
Group are presented below (in thousands):
OIL STATES HWC PTI TOTAL
---------- ----- ------- -------
Year Ended December 31, 1999.................... $ 3,019 $ 430 $(2,808) $ 641
======= ===== ======= =======
Year Ended December 31, 2000.................... $ 1,463 $(557) $(5,124) $(4,218)
======= ===== ======= =======
NOTE 2. ACQUISITION OF SOONER
Certain reclassifications have been made to conform the presentation of
Sooner's financial statements to the Controlled Group.
57
60
OIL STATES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
To reflect the acquisition of all outstanding common shares of Sooner in
exchange for 7,597,152 shares of Oil States common stock valued at the estimated
offering price per share of $9.00 (in millions):
Purchase price.............................................. $69.5(1)
Less: fair value of net assets acquired..................... 29.7
-----
Goodwill.................................................... $39.8
-----
Amortization for the years ended December 31, 2000 and
1999...................................................... $2.65
=====
---------------
(1) The purchase price for Sooner includes the estimated fair value of Sooner
stock options ($1.1 million) converted into Oil States stock options.
NOTE 3. ACQUISITION OF MINORITY INTERESTS
To reflect the acquisition of the minority interests of each company in the
Controlled Group in exchange for shares of Oil States common stock and
elimination of the historical amounts reflected for the combined group (in
millions, except share and per share information):
OIL STATES HWC PTI COMBINED
---------- ---------- ---------- ----------
Common stock issued to minority
interests.......................... 1,418,729 1,359,603 4,204,058 6,982,390
Estimated offering price per share... $ 9.00 $ 9.00 $ 9.00 $ 9.00
---------- ---------- ---------- ----------
Purchase price of the minority
interests.......................... 12.8 12.2 37.8 62.8
Minority interests in fair value of
net assets acquired................ 13.8 7.7 15.9 37.4
---------- ---------- ---------- ----------
Additional goodwill.................. $ (1.0) $ 4.5 $ 21.9 $ 25.4
========== ========== ========== ==========
Amortization of the additional
goodwill for the years ended
December 31, 2000 and 1999......... $ (.05) $ .23 $ 1.10 $ 1.28
========== ========== ========== ==========
NOTE 4. OFFERING
(A) To record the exchange of 4,275,555 shares for subordinated debt held
by SCF III and SCF-IV L.P. (SCF IV) totaling $36.0 million and to reflect the
sale of 10,000,000 shares of Oil States common stock in the Offering with net
proceeds of $80.5 million. Net proceeds were used to reduce outstanding
subordinated debt by $40.9 million, redeem preferred stock of $21.8 million, pay
accrued interest on subordinated debt and accrued dividends on preferred stock
aggregating $6.9 million, and repurchase common stock from non-accredited
shareholders and shareholders holding pre-emptive stock purchase rights for $1.6
million. The balance of the proceeds were assumed to repay $9.3 million of
borrowings outstanding under bank lines of credit.
(B) To reflect the conversion of $5.1 million of HWC preferred stock into
Oil States common stock.
(C) To adjust interest expense for debt repaid with Offering proceeds and
as a result of the exchange of shares for subordinated debt.
(D) To adjust for costs associated with the new corporate office, including
executives hired in connection with the Offering, which costs are not fully
reflected in the historical financial statements. These costs will have a
continuing impact on our operations.
(E) To adjust deferred income tax liabilities for the impact of the
combination of the Controlled Group, the minority interests of the Controlled
Group and the acquisition of Sooner on the valuation allowance
58
61
OIL STATES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
applied to net operating losses. A portion of the previously reserved net
operating losses of Oil States are being utilized to reduce deferred tax
liabilities of the acquired companies due to expected tax benefits to be derived
from the combination of entities.
(F) To eliminate preferred stock dividends due to the elimination of the
preferred stock (see A above).
(G) To adjust for the par value of $.01 of Oil States common stock and
reflect the effect of the three-for-one reverse stock split.
(H) To record transaction costs associated with the Offering.
(I) To adjust income tax expense for the elimination of deferred taxes due
to the formation of the combined group.
A summary of the effect of these adjustments on common stock and additional
paid-in capital follows (in thousands):
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
------ ----------
(A) Sale of stock in offering................................. $100 $ 84,050
(A) Record repurchase of shares............................... (2) (1,612)
(A) Exchange of shares for subordinated debt.................. 43 35,936
(B) Conversion of HWC preferred............................... 18 5,125
Adjust par value and reflect three-for-one reverse
(G) split..................................................... (18) 18
(H) Transaction costs associated with offering................ -- (3,700)
---- --------
$141 $119,817
==== ========
NOTE 5. GROUP ACQUISITIONS
To reflect the following acquisitions as if such acquisitions had occurred
on January 1, 1999:
On March 31, 1999, HWC acquired all of the outstanding stock of C&H Rental
Tools, Inc., and C&H Specialty Company, Inc. (collectively, C&H). C&H provided
rental equipment for drilling and workover operations in Louisiana and offshore
in the Gulf of Mexico. We paid cash of approximately $2.4 million and $820,000
in principal amount of subordinated promissory notes. Funding for the
transaction was received from the issuance of preferred stock.
On November 30, 1999, HWC acquired 12 snubbing units and related equipment
from Schlumberger Limited (Schlumberger) and Target Snubbing Company (Target).
Consideration paid for the acquisitions included $3.7 million of cash and
subordinated notes in aggregate principal amount of $4.5 million. Funding for
the transactions was received from the issuance of preferred stock.
59
62
OIL STATES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the pro forma adjustments for HWC are as follows (in thousands):
SCHLUMBERGER TARGET C&H TOTAL
------------ ------ ------ ------
Revenue............................................. $6,025 $894 $1,377 $8,296
Expenses
Cost of sales..................................... 3,324 528 787 4,639
Selling, general and administrative............... -- 222 -- 222
Depreciation and amortization..................... 530 158 121 809
------ ---- ------ ------
Operating income (loss)............................. 2,171 (14) 469 2,626
------ ---- ------ ------
Interest expense.................................... (341) (56) (13) (410)
------ ---- ------ ------
Income (loss) from continuing operations before
income taxes...................................... 1,830 (70) 456 2,216
Income tax (expense) benefit........................ (622) 24 (155) (753)
------ ---- ------ ------
Income from continuing operations................... $1,208 $(46) $ 301 $1,463
====== ==== ====== ======
The Schlumberger and Target acquisitions consisted of asset purchases. The
C&H acquisition was a stock purchase. The difference between the C&H purchase
price and the fair market value of the assets and liabilities acquired was not
material to the combined group.
NOTE 6. SOONER ACQUISITION ADJUSTMENT
To reflect the acquisitions by Sooner in May and June 1999 of the tubular
distribution businesses of Continental Emsco, Wilson Supply and
National-Oilwell, Inc. Total consideration paid for these acquisitions was $36.6
million.
Details of the pro forma adjustments for Sooner are as follows (in
thousands):
CONTINENTAL NATIONAL-
EMSCO WILSON SUPPLY OILWELL, INC. TOTAL
----------- ------------- --------------- -------
Revenue................................... $11,639 $18,705 $22,374 $52,718
Expenses
Costs of sales.......................... 11,544 17,795 22,962 52,301
Selling, general and administrative..... 400 650 677 1,727
Depreciation and amortization(1)........ 69 83 83 235
------- ------- ------- -------
Operating income (loss)................... (374) 177 (1,348) (1,545)
Income tax (expense) benefit.............. 131 (62) 472 541
------- ------- ------- -------
Net Income (loss)......................... $ (243) $ 115 $ (876) $(1,004)
======= ======= ======= =======
---------------
(1) Substantially all of this adjustment results from incremental amortization
of goodwill recorded for these acquisitions as if such acquisitions occurred
on January 1, 1999.
60
63
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Oil States International, Inc.
We have audited the accompanying combined balance sheets of Oil States
International, Inc. as of December 31, 2000 and 1999, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. We did not audit the
financial statements of PTI Group Inc., for any period, which represented 32%
and 27% of total assets in 2000 and 1999 and 36%, 26% and 24% of total revenue
in 2000, 1999 and 1998, respectively, nor did we audit Oil States International,
Inc. for 1999 and 1998, which represented 44% of total assets in 1999 and 58%
and 64% of total revenue in 1999 and 1998, respectively. These financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for Oil
States International, Inc. or PTI Group Inc., for the periods noted, is based
solely on the report of the other auditors. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of Oil States International, Inc. at December
31, 2000 and 1999, and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States
ERNST & YOUNG LLP
Houston Texas
March 19, 2001
61
64
AUDITORS' REPORT
TO THE SHAREHOLDERS AND DIRECTORS OF
PTI GROUP INC.
We have audited the consolidated balance sheets of PTI Group Inc. as at December
31, 2000 and 1999 and the consolidated statements of earnings, shareholders'
equity and cash flows for the years ended December 31, 2000, 1999 and 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2000
and 1999 and the results of its operations and its cash flows for the years
ended December 31, 2000, 1999 and 1998 in accordance with United States
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
Edmonton, Alberta
February 26, 2001
62
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Oil States International, Inc.:
We have audited the accompanying consolidated balance sheets of Oil States
International, Inc. (a Delaware corporation) and subsidiaries (the "Company")
(formerly Conemsco, Inc.) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of CE Franklin Ltd., a majority-owned
subsidiary, which represented 6% and 5% of total consolidated assets in 1998 and
1997, respectively. CE Franklin Ltd. was sold on May 28, 1999, and was
classified as discontinued operations prior to its sale. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for CE Franklin Ltd., is
based solely on the report of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
As discussed in Note 20, on July 21, 2000, the Company obtained a waiver
from the holder of the Series A Cumulative Preferred Stock totaling $14.4
million, extending the optional redemption date to the earlier of April 30, 2001
or upon the occurrence of a registered public offering of capital stock. On July
29, 2000 and July 31, 2000, the Company renegotiated terms with the holders of
certain subordinated debt totaling $7.0 million and $7.0 million, respectively.
Original maturities of the subordinated debt extending through February 2003
were accelerated to the earlier of April 30, 2001 or upon the occurrence of a
registered public offering of capital stock, in exchange for the holders waiving
their rights to scheduled maturities of principal and interest which were due
prior to April 30, 2001. Additionally, scheduled principal payments on other
long-term debt totaling $15.5 million become due during 2001. Management's
current projections indicate that there will not be sufficient cash flow from
operations to fund these obligations. Management is currently developing a plan
whereby the Company will be combined with other companies under common majority
ownership, and the stock of the combined company would be sold in an initial
public offering. The proceeds of the offering would be used, in part, to reduce
the existing debt obligations. If management is unsuccessful in that effort,
then management's plans would be to restructure its debt obligations as well as
generate additional cash flow through asset sales.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Oil States International, Inc., and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
July 31, 2000
63
66
AUDITORS' REPORT
To the Shareholders of CE Franklin Ltd.:
We have audited the consolidated balance sheets of CE Franklin Ltd. as at
December 31, 1998 and 1997 and the consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly the
financial position of the company as at December 31, 1998 and 1997 and the
results of its operations, the changes in shareholders' equity and the changes
in its cash flows for each of the years in the three-year period ended December
31, 1998 in accordance with accounting principles generally accepted in Canada.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta, Canada
January 29, 1999
64
67
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Product................................................... $104,233 $128,128 $187,568
Service and other......................................... 200,316 138,982 171,466
-------- -------- --------
304,549 267,110 359,034
Costs and expenses:
Product costs............................................. 82,516 101,680 147,988
Service and other costs................................... 135,085 98,185 116,670
Selling, general and administrative expenses.............. 37,816 33,624 45,414
Depreciation expense...................................... 18,187 16,779 14,845
Amortization expense...................................... 3,127 3,496 3,356
Other operating expense (income).......................... (69) 2,448 4,928
-------- -------- --------
276,662 256,212 333,201
-------- -------- --------
Operating income............................................ 27,887 10,898 25,833
Interest expense............................................ (11,599) (12,796) (15,859)
Interest income............................................. 95 300 558
Other income (expense)...................................... 89 (1,297) 115
-------- -------- --------
Income (loss) from continuing operations before income
taxes, minority interest, discontinued operations, and
extraordinary item........................................ 16,472 (2,895) 10,647
Income tax provision........................................ (10,776) (4,654) (9,745)
Minority interest in income of combined companies and
consolidated subsidiaries................................. (4,248) 610 2,988
-------- -------- --------
Net income (loss) from continuing operations before
discontinued operations and extraordinary item............ 1,448 (6,939) 3,890
Discontinued operations:
Income from discontinued operations (net of income tax
expense of $549 in 1998)................................ -- -- 1,733
Estimated and realized losses on sales of discontinued
operations including pretax provision of $12,977 in 1998
for operating losses during phaseout period (net of
income tax expense of $215 in 1999 and income tax
benefit of $115 in 1998)................................ -- (6,416) (22,099)
-------- -------- --------
Net income (loss) before extraordinary item................. 1,448 (13,355) (16,476)
Extraordinary loss on debt restructuring.................... -- (927) (617)
-------- -------- --------
Net income (loss)........................................... 1,448 (14,282) (17,093)
Preferred dividends......................................... (332) (121) --
-------- -------- --------
Net income (loss) attributable to common shares............. $ 1,116 $(14,403) $(17,093)
======== ======== ========
Basic earnings (loss) per share:
Earnings (loss) per share from continuing operations
before extraordinary item............................... $ .05 $ (.30) $ .17
Discontinued operations, net of income taxes.............. -- (.28) (.91)
Extraordinary loss on debt restructuring, net of income
taxes................................................... -- (.04) (.02)
Basic net income (loss) per share......................... .05 (.62) (.76)
Diluted earnings (loss) per share:
Earnings (loss) per share from continuing operations
before extraordinary item............................... $ .04 $ (.30) $ .17
Discontinued operations, net of income taxes.............. -- (.28) (.91)
Extraordinary loss on debt restructuring, net of income
taxes................................................... -- (.04) (.02)
Diluted net income (loss) per share....................... .04 (.62) (.76)
Weighted average number of common shares outstanding (in
thousands):
Basic..................................................... 24,482 23,053 22,414
Diluted................................................... 26,471 23,069 22,435
The accompanying notes are an integral part of these financial statements.
65
68
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,821 $ 3,216
Accounts receivable, net.................................. 64,137 68,699
Inventories, net.......................................... 30,826 29,954
Prepaid expenses and other current assets................. 1,715 4,016
-------- --------
Total current assets.............................. 101,499 105,885
Property, plant and equipment, net.......................... 143,468 142,242
Goodwill, net............................................... 103,391 104,796
Other noncurrent assets..................................... 5,160 2,621
-------- --------
Total assets...................................... $353,518 $355,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 57,248 $ 62,883
Postretirement healthcare benefits........................ 1,100 1,300
Income taxes.............................................. 2,427 --
Deferred income taxes..................................... 369 333
Current portion of long-term debt......................... 37,629 19,937
Other current liabilities................................. 2,333 194
-------- --------
Total current liabilities......................... 101,106 84,647
Long-term debt............................................ 102,614 120,290
Deferred income taxes..................................... 19,977 21,201
Postretirement healthcare benefits........................ 5,899 7,741
Other liabilities......................................... 4,519 4,726
-------- --------
Total liabilities................................. 234,115 238,605
Minority interest........................................... 37,561 33,413
Redeemable preferred stock.................................. 25,293 25,064
Stockholders' equity:
Convertible preferred stock............................... 1,625 1,625
Common stock.............................................. 272 224
Additional paid-in capital................................ 83,810 84,887
Retained deficit.......................................... (25,854) (26,970)
Accumulated other comprehensive loss...................... (3,304) (1,304)
-------- --------
Total stockholders' equity........................ 56,549 58,462
-------- --------
Total liabilities and stockholders' equity........ $353,518 $355,544
======== ========
The accompanying notes are an integral part of these financial statements.
66
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
ACCUMULATED
OTHER
ADDITIONAL RETAINED COMPREHENSIVE
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE (LOSS) TREASURY
STOCK STOCK CAPITAL (DEFICIT) INCOME INCOME STOCK
--------- ------ ---------- --------- ------------- ------------- --------
Balance, December 31, 1997............... 1,625 211 $ 86,379 $ 6,152 $(3,110) $ --
Net loss............................... (17,093) $(17,093)
Currency translation adjustment........ 2,065
Other comprehensive loss............... (1,509)
--------
Total other comprehensive income....... 556 556
--------
Comprehensive loss..................... $(16,537)
========
Issuance of common stock for cash...... 13 16,550
Common shares issued for acquisition
transactions......................... 13,464
Common shares repurchased for cash..... (655) (1,626)
Redeemable preferred stock dividends... (1,230)
Common stock dividends................. (25,000)
Minority interest...................... (2,434)
Purchase of common stock held in
treasury at cost..................... (158)
----- --- -------- -------- ------- -----
Balance, December 31, 1998............... 1,625 224 87,074 (12,567) (2,554) (158)
Net loss............................... (14,282) $(14,282)
Currency translation adjustment........ (521)
Other comprehensive income............. 1,771
--------
Total other comprehensive income....... 1,250 1,250
--------
Comprehensive loss..................... $(13,032)
========
Preferred stock dividends.............. (121)
Redeemable preferred stock dividends... (1,308)
Minority interest...................... (386)
Issuance of shares from treasury....... (493) 789
Purchase of common stock held in
treasury at cost..................... (631)
----- --- -------- -------- ------- -----
Balance, December 31, 1999............... 1,625 224 84,887 (26,970) (1,304) --
Net income............................. 1,448 $ 1,448
Currency translation adjustment........ (1,508)
Other comprehensive loss............... (492)
--------
Total other comprehensive loss......... (2,000) (2,000)
--------
Comprehensive loss..................... $ (552)
========
Issuance of common stock for cash...... 48 154
Preferred stock dividends.............. (332)
Redeemable preferred stock dividends... (1,518)
Compensatory stock options............. 600
Unearned compensation.................. (313)
----- --- -------- -------- ------- -----
Balance, December 31, 2000............... 1,625 272 $ 83,810 $(25,854) $(3,304) $ --
===== === ======== ======== ======= =====
The accompanying notes are an integral part of these financial statements.
67
70
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- --------- ---------
Cash flows from operating activities:
Net income (loss)........................................ $ 1,448 $ (6,939) $ 3,890
Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by
operating activities:
Minority interest, net of distributions............... 4,148 (610) (3,108)
Depreciation and amortization......................... 21,314 20,275 18,201
Deferred income tax provision (benefit)............... 840 (519) 1,071
(Gain) loss on disposal of assets..................... (18) 2,472 (34)
Writedown of assets................................... -- -- 5,263
Loss on sale of other businesses...................... -- 975 --
Loss on sale of marketable securities................. -- 334 --
Other, net............................................ (606) 1,119 1,522
Changes in operating assets and liabilities, net of
effect from acquired and divested businesses:
Accounts receivable................................. 1,238 (5,219) (14,981)
Inventories......................................... (774) 9,653 (2,291)
Accounts payable and accrued liabilities............ 5,461 (16,355) 2,187
Other current assets and liabilities, net........... 886 (16) (4,251)
-------- --------- ---------
Net cash flows provided by operating
activities..................................... 33,937 5,170 7,469
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired......... (3,500) (7,217) (27,545)
Capital expenditures..................................... (21,383) (11,297) (36,145)
Proceeds from sale of equipment.......................... 2,391 1,358 2,129
Proceeds from sale of discontinued operations............ -- 102,439 --
Proceeds from sale of other businesses................... -- 1,976 --
Proceeds from sale of marketable securities.............. -- 24,408 --
Other, net............................................... 115 560 (303)
-------- --------- ---------
Net cash flows provided by (used in) investing
activities..................................... (22,377) 112,227 (61,864)
Cash flows from financing activities:
Debt borrowings.......................................... 22,967 52,758 264,289
Debt repayments.......................................... (21,227) (170,090) (244,583)
Payments on capitalized lease obligations................ -- (505) (285)
Preferred stock dividends................................ (1,681) (1,568) (1,230)
Issuance of common stock................................. 268 4,839 26,563
Repurchase of common stock............................... -- -- (2,281)
Other, net............................................... (23) (1,556) --
-------- --------- ---------
Net cash flows provided by (used in) financing
activities..................................... 304 (116,122) 42,473
Effect of exchange rate changes on cash.................... (77) 66 59
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents from
continuing operations.................................... 11,787 1,341 (11,863)
Net cash used in discontinued operations................... (10,182) (4,159) (3,142)
Cash and cash equivalents, beginning of year............... 3,216 6,034 21,039
-------- --------- ---------
Cash and cash equivalents, end of year..................... $ 4,821 $ 3,216 $ 6,034
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
68
71
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the activities of Oil States
International, Inc. (Oil States), HWC Energy Services, Inc. (HWC) and PTI Group,
Inc. (PTI), collectively the Controlled Group or the Company. The reorganization
accounting method, which yields results similar to the pooling of interest
method, has been used in the preparation of the combined financial statements of
the Controlled Group (entities under common control of SCF-III L.P., a private
equity fund that focuses on investments in the energy industry). Under this
method of accounting, the historical financial statements of HWC and PTI are
combined with Oil States for each year in the three-year period ended December
31, 2000, in each case from the date each became under common control of
SCF-III, L.P. (January 8, 1997 for PTI and November 14, 1997 for HWC). The
combined financial statements have been adjusted to reflect minority interests
in the Controlled Group. All significant intercompany accounts and transactions
between the consolidated entities have been eliminated in the accompanying
combined and pro forma financial statements.
Oil States International, Inc.
Oil States was formerly named CONEMSCO, Inc. On July 20, 2000, an amendment
to the Certificate of Incorporation for CONEMSCO, Inc. was filed with the State
of Delaware to change the corporate name from CONEMSCO, Inc. to Oil States
International, Inc. Oil States' subsidiaries include CECO Holdings, Inc. (CECO)
and CECO's wholly-owned subsidiaries: Oil States Industries, Inc. and its
subsidiaries (collectively, OSI) and Continental Emsco Company and its
subsidiaries (collectively, Continental Emsco). OSI's wholly-owned subsidiaries
are Oil States MCS, Inc., Oil States HydroTech Systems, Inc. (HydroTech), Oil
States Subsea Ventures, Inc., Oil States Skagit SMATCO, Inc. (SMATCO), Oil
States Industries (UK) Limited (OSI-UK), Oil States Industries (Asia) Pte. Ltd.,
and Oil States Industries do Brasil Instalacoes Maritimas Ltda. OSI also owns a
60% interest in Elastomeric Actuators, Inc., a joint venture with a third party.
OSI-UK's wholly-owned subsidiaries include Oil States MCS Limited (MCS Limited),
and Oil States Klaper Limited.
OSI is a leading designer and manufacturer of a diverse range of products
for offshore platforms, subsea pipelines, and defense and general industrial
applications. Major product lines include flexible bearings, advanced
connectors, mooring systems, winches, services for installing and removing
offshore platforms, downhole production equipment, and custom molded products.
Sales are made primarily to major oil companies, large and small independent oil
and gas companies, drilling contractors, and well service and workover
operators.
During 1999, OSI sold all of the operating assets of CE Distribution
Services, Inc. (CE Distribution), CE Drilling Products, Inc. (CE Drilling), CE
Mobile Equipment, Inc. (CE Mobile), and its 51.8% investment in CE Franklin,
Ltd. (CE Franklin). Accordingly, for the periods presented, the results of CE
Distribution, CE Drilling, CE Mobile, and CE Franklin are shown as discontinued
operations. Charges for the estimated and realized losses on sale of
discontinued operations of $6.4 million and $22.1 million were recorded during
1999 and 1998, respectively (see Note 15). The 1998 charge of $22.1 million
includes losses from operations of $13.0 million. During the year ended December
31, 1999, OSI sold two wholly-owned subsidiaries: H.O. Mohr Research and
Engineering, Inc. (H.O. Mohr) and Oil States Martec Crane Services, Inc.
(Martec).
During 1998, OSI completed acquisitions of Subsea Ventures, Inc. (SVI),
subsequently renamed Oil States Subsea Ventures, Inc., and Klaper (UK) Limited
(Klaper), subsequently renamed Oil States Klaper Limited.
69
72
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PTI Group, Inc.
PTI was formed on January 8, 1997 as a result of the amalgamation of PTI
Group, Inc. and 712955 Alberta Ltd. (Alberta), a special purpose company formed
to acquire PTI.
PTI is a supplier of integrated housing, food, site management and
logistics support services to remote sites utilized by natural resources and
other industries primarily in Canada and the United States.
HWC Energy Services, Inc.
HWC provides worldwide well control services and drilling and rental
equipment to the oil and gas industry. The headquarters of HWC are in Houston,
Texas, and HWC operates primarily in Texas, Louisiana, Ohio, Oklahoma and New
Mexico, along with foreign operations conducted in Venezuela, the Middle East,
and Africa. Its hydraulic well control operations provide, globally, hydraulic
workover (snubbing) units for emergency well control situations and, in selected
markets, various hydraulic well control solutions involving well drilling and
workover and completion activities. In West Texas and Ohio, HWC's Capstar
Drilling, Inc., subsidiary operates shallow well drilling rigs with automated
pipe handling capabilities. Specialty Rental Tools and Supply, Inc., a
subsidiary of HWC, operates from 12 locations in Texas, Louisiana and Oklahoma
to provide rental equipment for drilling and workover operations. HWC utilizes
underbalanced drilling techniques to enhance drilling performance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
investments, receivables, payables, and debt instruments. The Company believes
that the carrying values of these instruments on the accompanying consolidated
balance sheets approximate their fair values.
Inventories
Inventories consist of oilfield products, manufactured equipment, and spare
parts for manufactured equipment. Inventories include raw materials, work in
process, finished goods, labor, and manufacturing overhead. Approximately 37%
and 24% of combined inventories at December 31, 2000 and 1999, respectively, is
valued at the lower of cost or market with cost determined by the last-in,
first-out (LIFO) method. Cost for the remaining inventories is determined on an
average cost or specific-identification method. If the LIFO method had not been
used for particular inventories, total inventories would have been approximately
the same at December 31, 2000 and approximately $522,000 higher than reported at
December 31, 1999. During 2000 and 1999, the Company experienced reductions in
inventories carried on a LIFO basis. The cost of these liquidated LIFO
inventories did not differ from the current cost by a material amount.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreci-
70
73
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ated. Upon retirement or disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in the statements of operations.
Goodwill
Goodwill represents the excess of the purchase price for acquired
businesses over the allocated value of the related net assets. Goodwill is
amortized on a straight-line basis over a 40-year life. Goodwill is stated net
of accumulated amortization of $9,974,000 and $6,772,000 at December 31, 2000
and 1999, respectively.
Impairment of Long-Lived Assets
In compliance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the recoverability of the carrying values of
property, plant and equipment, goodwill, and other intangible assets is assessed
at a minimum annually, or whenever, in management's judgment, events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable based on estimated future cash flows. If this assessment indicates
that the carrying values will not be recoverable, as determined based on
undiscounted cash flows over the remaining useful lives, an impairment loss is
recognized. The impairment loss equals the excess of the carrying value over the
fair value of the asset. The fair value of the asset is based on prices of
similar assets, if available, or discounted cash flows. Based on the Company's
review, the carrying value of its assets are recoverable and no impairment
losses have been recorded for the periods presented except in the third quarter
of 1998, when PTI recorded an asset impairment provision of $5,263,000 with
respect to its Chilean assets. The Chilean assets consist primarily of temporary
living accommodations on short-term rental to various mining contractors in
Chile. As a result of depressed copper prices, the majority of the projects were
either delayed or cancelled by September 1998, and no other significant markets
were available for these units. The fair value of the units was reassessed based
on significantly reduced future cash flows, resulting in the writedown which is
shown in other operating expense.
Foreign Currency
Gains and losses resulting from balance sheet translation of foreign
operations where a foreign currency is the functional currency are included as a
separate component of accumulated other comprehensive income within
stockholders' equity. Gains and losses resulting from balance sheet translation
of foreign operations where the U.S. dollar is the functional currency are
included in the consolidated statements of operations as incurred.
Revenue and Cost Recognition
Revenue from the sale of products is recognized upon shipment to the
customer or when all significant risks of ownership have passed to the customer,
except for significant fabrication projects built to customer specifications
that have a production cycle greater than six months. Revenues from such
contracts are recognized under the percentage-of-completion method, measured by
the percentage of costs incurred to date to estimated total costs for each
contract (cost-to-cost method). Management believes this method is the most
appropriate measure of progress on large fabrication contracts. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Cost of goods sold includes all direct material and labor costs and those
costs related to contract performance, such as indirect labor, supplies, tools,
and repairs. Selling, general, and administrative costs are charged to expense
as incurred.
In the case of certain larger, long lead time orders, the percentage of
completion method is used. Under this method, revenue is recognized as work
progresses in the ratio that costs incurred bear to estimated total
71
74
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
costs. The aggregate of costs incurred reduces net inventories while the revenue
recognized is shown as a receivable (unbilled revenue). Billings in excess of
costs and estimated earnings on uncompleted contracts represent customer
billings in excess of revenues recognized and such balances are classified as
deferred revenue. Expected losses on contracts in progress are charged to
operations currently.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are recorded based upon the differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the underlying
assets or liabilities are recovered or settled.
When the Company's earnings from foreign subsidiaries are considered to be
indefinitely reinvested, no provision for US income taxes is made for these
earnings. If any of the subsidiaries have a distribution of earnings in the form
of dividends or otherwise, the Company would be subject to both US income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries.
In accordance with SFAS No. 109, the Company records a valuation reserve in
each reporting period when management believes that it is more likely than not
that any deferred tax asset created will not be realized, due to historical and
anticipated results of operations. Management will evaluate the appropriateness
of the reserve in the future based upon the operating results of the Company.
Receivables and Concentration of Credit Risk
Based on the nature of its customer base, the Company does not believe that
it has any significant concentrations of credit risk other than its
concentration in the oil and gas industry. The Company evaluates the credit
worthiness of its new and existing customers' financial condition and,
generally, the Company does not require significant collateral from its domestic
customers.
Earnings per Share
The Company's basic income (loss) per share (EPS) amounts have been
computed based on the average number of common shares outstanding. Diluted EPS
amounts include the effect of the Company's outstanding stock options under the
treasury stock method and the effect of convertible preferred stock shares.
Reclassifications
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform with the current year presentation.
Use of Estimates
The preparation of combined financial statements in conformity with
accounting principles generally accepted in the United States requires the use
of estimates and assumptions by management in determining the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the combined financial statements and the reported amounts of
revenues and expenses during the reporting period. Examples of a few such
estimates include the costs associated with the disposal of discontinued
operations, including potential future adjustments as a result of contractual
agreements, revenue and income recognized on the percentage-of-completion
method, and the valuation allowance recorded on net deferred tax assets. Actual
results could differ from those estimates.
72
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives in the
statement of financial position and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133, an amendment of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 for one year. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," which amended SFAS No.
133. The Company will adopt SFAS No. 133, as amended by SFAS No. 137 and SFAS
No. 138, in the first quarter of 2001, and does not expect the adoption to have
a material effect on its financial condition or results of operations.
3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts at
December 31, 2000 and 1999, is presented below (in thousands):
2000 1999
------- -------
Accounts receivable:
Trade..................................................... $61,809 $62,002
Unbilled revenue.......................................... -- 5,838
Other..................................................... 4,323 3,142
Allowance for doubtful accounts........................... (1,995) (2,283)
------- -------
$64,137 $68,699
======= =======
2000 1999
------- -------
Inventories:
Finished goods and purchased products..................... $14,813 $15,206
Work in process........................................... 12,208 9,870
Raw materials............................................. 8,720 9,498
------- -------
Total inventories................................. 35,741 34,574
Inventory reserves........................................ (4,915) (4,620)
------- -------
$30,826 $29,954
======= =======
ESTIMATED
USEFUL LIFE 2000 1999
----------- -------- --------
Property, plant and equipment:
Land.............................................. $ 3,660 $ 4,743
Buildings and leasehold improvements.............. 2-50 years 25,501 23,302
Machinery and equipment........................... 2-29 years 134,983 122,480
Rental tools...................................... 3-5 years 18,396 16,130
Office furniture and equipment.................... 1-10 years 8,724 8,229
Vehicles.......................................... 2-5 years 4,853 5,779
-------- --------
Total property, plant and equipment....... 196,117 180,663
Less: Accumulated depreciation.................... (52,649) (38,421)
-------- --------
$143,468 $142,242
======== ========
73
76
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED
-----------------
2000 1999
------- -------
Accounts payable and accrued liabilities:
Trade accounts payable.................................... $26,215 $19,684
Accrued compensation...................................... 7,685 6,710
Accrued insurance......................................... 2,819 3,650
Accrued interest.......................................... 6,646 3,234
Deferred revenue.......................................... 4,456 5,359
Accrued losses associated with discontinued operations.... 2,509 13,237
Other..................................................... 6,918 11,009
------- -------
$57,248 $62,883
======= =======
4. ACQUISITIONS
OSI
On February 27, 1998, OSI acquired 100% of the stock of SVI for
consideration totaling $12.5 million in cash, debt and common stock. SVI is a
Houston, Texas-based company that manufactures and services auxiliary structures
for subsea blowout preventors and subsea production systems. The SVI purchase
was accounted for using the purchase method of accounting. Accordingly, the
purchase price paid was allocated to the net assets acquired based on their
estimated fair values with the balance of the purchase price, $8.4 million,
included in goodwill.
On April 1, 1998, the Company acquired a portion of the assets and
liabilities of Klaper, a company located in the United Kingdom (UK), for a
purchase price of $5.7 million. Klaper provides repair and maintenance services
for blowout preventors and drilling risers used in offshore marine drilling. The
Klaper purchase was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values with the balance of the purchase price, $2.8
million, included in goodwill.
PTI
On June 16, 1998, PTI acquired all outstanding shares of General Marine
Leasing, Inc. (GML), a company located in Houma, Louisiana, for a purchase price
of $14.7 million. GML manufactures and leases accommodation facilities primarily
to the oil and gas industry. The GML acquisition was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the net assets acquired based on their estimated fair values with the balance of
the purchase price, $8.2 million, included as goodwill.
On February 28, 2000, the Company acquired substantially all the operating
assets and business of International Quarters, L.L.C. (IQ), a company located in
Houma, Louisiana, for a purchase price of $4.5 million. IQ manufactures and
leases accommodation facilities primarily to the oil and gas industry. The IQ
acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values with the balance of the purchase price, $1.3
million, included as goodwill.
In 1999, contingent consideration of $750,000, based on the achievement of
specified earnings levels, was recorded in full satisfaction of the acquisition
of GML. This additional consideration was recorded as goodwill.
HWC
On May 1, 1998, HWC acquired all of the outstanding shares of Specialty
Rental Tools & Supply, Inc. (Specialty), an affiliated company, for
approximately $24.3 million, including transaction costs. The
74
77
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
consideration for the shares was funded by a senior bank note of $12.5 million,
approximately $2.8 million of subordinated promissory notes payable to the
existing Specialty stockholders, assumption of approximately $1.2 million of
debt and cash proceeds from the sale of stock of $6.0 million. Existing
Specialty stockholders were also issued shares of the Company's common stock
valued at $1.5 million.
On June 14, 1998, Capstar Drilling, Inc. (Capstar) acquired the assets of
Peek and Rowan, Inc. and an affiliated company (Peek and Rowan), companies in a
similar line of business as Capstar, for approximately $5.7 million, including
transaction costs. The purchase price was funded by approximately $1.2 million
in subordinated promissory notes payable to Peek and Rowan, a convertible
promissory note in the amount of $0.5 million and cash proceeds from the sale of
stock of $4.0 million.
On December 31, 1998, Specialty acquired the assets of A & B Rental Tools,
Inc. (A & B), a company in a similar line of business as Specialty, for $1.8
million. The purchase price was funded by a subordinated promissory note payable
to the former A & B stockholders and $0.9 million in cash. For the year ended
December 31, 1998, the operations of Peek and Rowan and Specialty have been
included in the consolidated financials statements for the periods from their
acquisition dates.
On March 31, 1999, Specialty completed the acquisition of all of the
outstanding stock of C&H Rental Tools, Inc., and C&H Specialty Company, Inc.
(collectively C&H). Specialty paid cash of approximately $2.4 million and $0.82
million in subordinated promissory notes. C&H provides rental equipment for
drilling and workover operations in Louisiana and offshore in the Gulf of
Mexico. In addition, the C&H purchase agreement provides for the payment of
contingent consideration based on the earnings of the acquired business during
the period from January 1, 1999 through December 31, 2000. The contingent
consideration was earned based on earnings through December 31, 2000 and, as a
result, an additional payment of $2.1 million is due to the sellers by March 31,
2001. The contingent consideration is reflected in the December 31, 2000 balance
sheet as a current liability and the additional purchase consideration was
recorded as goodwill.
Effective on November 30, 1999, the Company completed the acquisition of 12
snubbing units and related equipment from two unrelated vendors for total
consideration of $8.2 million, consisting of $3.7 million cash and subordinated
notes held by one of the companies in the amount of $4.5 million. The snubbing
units are similar to those currently operated by the Company and were located in
Europe, Africa, the Middle East and Canada when acquired. The purchase agreement
contained a preestablished rate which would be charged to the buyers upon future
leasing of the equipment and such amounts paid by the buyers will be applied as
payment of the related debt obligations.
5. LONG-TERM DEBT
As of December 31, 2000 and 1999, long-term debt consisted of the following
(in thousands):
2000 1999
-------- --------
OSI
US revolving credit facility, up to $21 million; secured by
substantially all assets; commitment fee on unused portion
is 0.375% per annum; variable interest rate payable
monthly based on prime plus 2.25%; weighted average rate
is 9.5% and 7.9% for 2000 and 1999, respectively.......... $ 6,624 $ --
US term bank loan -- Payable in monthly principal
installments of $81,740 with the remainder due March 1,
2003; secured by substantially all assets; variable
interest rate payable monthly based on prime plus 0.25%;
weighted average rate of 9.6% and 7.3% for 2000 and 1999,
respectively.............................................. 4,169 --
75
78
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
-------- --------
UK revolving overdraft credit facility of $7.9
million -- Payable on demand; interest payable quarterly
at a margin of 1.90% per annum over the bank's variable
base rate; weighted average rate is 9.7% and 7.9% for 2000
and 1999, respectively.................................... 3,777 4,539
Subordinated debt issued in conjunction with
acquisition -- Payable to the stockholders of the acquired
company in installments through July 2002; terms were
renegotiated during 2000 with full payment due upon
closing of the offering; interest rate is prime plus 4%
payable annually; weighted average rate is 10.3% and 8.0%
for 2000 and 1999, respectively........................... 7,000 7,000
Subordinated debt issued in conjunction with
acquisition -- Payable to the stockholders of the acquired
company in installments through August 2003; terms were
renegotiated during 2000 with full payment due upon
closing of the offering; interest rate is prime plus 4%
payable annually; weighted average rate is 9.8% and 6.0%
for 2000 and 1999, respectively........................... 7,000 7,000
Subordinated note payable to shareholders -- Principal and
accrued interest at 6% are due December 2005.............. 25,000 25,000
Subordinated note payable to related party -- $10.4 million
is due on May 17, 2001 with the remaining $500,000 due on
September 1, 2001; rate of 8.5% and 8.25% for 2000 and
1999, respectively........................................ 10,949 10,949
Obligations under capital leases............................ 558 917
Other debt.................................................. -- 100
PTI
Canadian revolving operating credit facility -- A portion of
the facility is designated as overdraft and the remainder
is restricted by a margin limit based on the level of
trade accounts receivable and inventories................. 1,816 7,373
PTI US revolving credit facility............................ 1,560 200
Canadian term revolving bank facility -- Payable in
quarterly installments of $834,000........................ 23,506 31,842
Mortgages at an interest rate of 7.5%....................... -- 972
Notes payable issued in conjunction with acquisitions....... 2,549 2,540
PTI U.S. term loan facility -- Payable in monthly
installments of $100,000 from September 2000 through
February 2005, at which time the remaining balance is
due....................................................... 7,000 1,005
Obligations under capital leases............................ 730 457
HWC
Bank line of credit -- up to $20.0 million available based
upon a borrowing base consisting of a percentage of
eligible accounts receivable, real estate and fixed
assets; interest payable monthly at the bank's prime rate
or LIBOR plus from 1.00% to 3.00% and an unused commitment
fee ranging from 0.25% to 0.50% based on the ratio of debt
to earnings before depreciation, interest and taxes; the
weighted average interest rate for 2000 was 8.7%; amounts
outstanding are due May 1, 2003........................... $ 12,250 $ 10,750
Bank term debt -- interest is the same rate as the above
bank line of credit; principal of $762 is repayable
quarterly through March 31, 2003; balance due at maturity
May 1, 2003............................................... 11,940 14,986
76
79
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
-------- --------
Bank line of credit -- up to $500 (Canadian dollars)
available at HWC's option; interest is payable monthly at
the bank's prime rate plus 0.25%; amounts outstanding are
due on demand............................................. 87 --
Bank term debt -- interest is payable monthly at the bank's
prime rate plus 0.50%; principal of $300 (Canadian
dollars) is repayable consisting of $200 due at the end of
April and $50 at the end of July and October each year;
balance due at maturity, December 2, 2004................. 799 1,038
Subordinated unsecured notes payable due March 31, 2000;
interest payable annually at 7.00%........................ -- 690
Subordinated unsecured notes payable due January 31, 2001;
interest payable quarterly at 7.00%....................... 4,215 4,215
Subordinated unsecured note payable due May 1, 2002;
interest payable quarterly at 7.00%....................... 2,750 2,750
Subordinated notes payable due November 30, 2005; interest
accrues at 7.00% annually; principal and interest are
payable at a fixed amount for each day the acquired
equipment is utilized..................................... 4,488 4,500
Subordinated note payable due September 30, 2003; interest
payable quarterly at 6.50%................................ 820 820
Convertible subordinated unsecured note payable due June 15,
2001; interest payable quarterly at 5.00%; convertible by
holder into 200 shares of common stock.................... 500 500
Other notes payable in monthly installments of principal and
interest at various interest rates, maturing through
fiscal year 2001.......................................... 156 84
-------- --------
Total debt........................................ 140,243 140,227
Less: current maturities.................................... 37,629 19,937
-------- --------
Total long-term debt.............................. $102,614 $120,290
======== ========
OSI Debt
On March 31, 1998, OSI entered into a new credit agreement (the 1998
Agreement) with a consortium of lenders providing for borrowings totaling $175.0
million. The 1998 Agreement provided for $35.0 million of term advances and up
to $120.0 million of borrowings on a revolving basis to OSI. The 1998 Agreement
also provided for $5.0 million of term advances and up to $15.0 million of
borrowings on a revolving basis to UK operations. The loans to UK operations are
denominated and payable in British pounds. The 1998 Agreement provided for the
issuance of letters of credit, such issuance reducing the amount available for
borrowing under the revolving portion of the credit facility. The 1998 Agreement
also contained several additional options to borrow funds for temporary cash
management purposes. The 1998 Agreement had a scheduled termination date of June
30, 2000.
The term advances under the 1998 Agreement contained required repayments of
$1.6 million per calendar quarter, beginning on June 30, 1998. Borrowings under
the 1998 Agreement carried variable interest rates based upon prime, eurodollar,
or sterling rates plus a spread based upon OSI's senior debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) ratio. The commitment
fee on the unused portion of the facility was 0.375% at December 31, 1999, and
was subject to change based upon OSI's senior debt to EBITDA ratio. Borrowings
under the 1998 Agreement were secured by a security interest in substantially
all accounts receivable and inventory of OSI in the US and the UK, and a pledge
of the stock of specified subsidiaries. Among other requirements, OSI was
required to maintain financial ratios and meet net worth and indebtedness tests
specified in the 1998 Agreement.
77
80
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, OSI and the banks party thereto entered into three separate
amendments (the 1999 Amendments) to the 1998 Agreement. The 1999 Amendments
resulted in, but were not limited to, the following actions. The banks agreed to
forbear from exercising, through March 31, 2000, any of their rights as a result
of OSI's failure to comply with all of the financial covenants set forth in the
1998 Agreement. The scheduled termination date of the 1998 Agreement was also
changed to March 31, 2000. The interest rate was increased to the bank base rate
plus 0.5%. The lending commitments were incrementally reduced to $15.0 million
of borrowings on a revolving basis to US operations and $10.0 million of
borrowings to UK operations. Substantially all of OSI's fixed assets were
pledged as additional security for the borrowings. The divestiture transactions
discussed in Note 15 were approved and guidelines were established for payment
of debt with the proceeds of the divestitures and the sales of the marketable
securities. As a result of the divestitures and sales of the marketable
securities, all of OSI's U.S. borrowings and the UK term borrowings under the
1998 Agreement were paid in full by September 1999.
On March 1, 2000, OSI entered into a new credit agreement (the 2000
Agreement) providing for borrowings totaling $25.9 million for US operations.
From the proceeds of the initial borrowings, all US borrowings during 2000 under
the 1998 Agreement described above were repaid on March 1, 2000. The 2000
Agreement provides for $4.9 million of term advances and up to $21.0 million of
borrowings on a revolving basis to OSI. The 2000 Agreement provides for the
issuance of letters of credit, such issuance reducing the amount available for
borrowing under the revolving portion of the facility. On March 1, 2000, $12.4
million was available to borrow under the revolving portion of the 2000
Agreement. The 2000 Agreement has a scheduled termination date of March 1, 2003.
The term advances are payable in 59 monthly principal installments of $81,740
with the remainder due March 1, 2003. Borrowings under the 2000 Agreement carry
variable interest rates payable monthly based upon prime, or eurodollar rate
plus 2.25%, for the revolving loans and prime plus 0.25%, or eurodollar rate
plus 2.5%, for the term loans. The commitment fee on the unused portion of the
revolving facility is 0.375% per annum. The 2000 Agreement is secured by
substantially all of OSI's assets and contains customary representations and
warranties and events of default. The 2000 Agreement also requires compliance
with a number of affirmative, negative and financial covenants, including a
limitation on the incurrence of indebtedness and a requirement that OSI maintain
a specified net worth.
On March 3, 2000, OSI entered into a new overdraft credit facility
providing for borrowings totaling L5.0 million for UK operations, which
converted to approximately $7.9 million. Interest is payable quarterly at a
margin of 1.90% per annum over the bank's variable base rate. All borrowings
under this facility are payable on demand.
In conjunction with executing the 1998 Agreement on March 31, 1998, OSI
recognized an extraordinary charge, net of tax benefit, of $617,000. In
conjunction with executing the 1999 Amendments during the year, OSI recognized
an extraordinary charge of $927,000. These extraordinary charges are due to the
write-off of deferred financing costs related to OSI's credit facilities.
OSI has subordinated notes payable to Hunting Oilfield Services
(International), Ltd. (Hunting), a related party of the OSI, totaling $10.9
million. $10.4 million is due on May 17, 2001, and the remaining $0.5 million is
due September 30, 2001. These notes carry an interest rate of 7.75% in 1998,
8.25% in 1999, and 8.50% thereafter. Accrued interest is payable on March 31 of
each year; however, interest payments are only required to be made if specified
cumulative EBITDA thresholds are met. OSI did not meet EBITDA thresholds for
1999 and 2000. As of December 31, 2000, interest of $1.8 million had been
accrued but not paid. Interest does not accrue on any accrued interest that is
not payable due to the failure to meet any EBITDA threshold. All unpaid accrued
interest will be payable on the maturity date of the notes.
On July 31, 1997, OSI issued subordinated promissory notes totaling $7.0
million payable to the stockholders of an acquired company. Principal of $2.0
million was paid on July 31, 2000, with $2.0 million due on July 31, 2001, and
$3.0 million due on July 31, 2002. These notes carry an interest rate of 8.0%
with interest payable on July 31 of each year, beginning July 31, 1998. If OSI
is in default under any of its senior
78
81
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
debt, the noteholders may not receive any principal or interest payments for 180
days following the default or event of default.
On February 28, 1998, OSI issued subordinated promissory notes totaling
$7.5 million payable to former SVI stockholders in conjunction with the SVI
acquisition. Principal on these notes is payable in the amounts of $0.5 million
on February 28, 2001, $1.5 million on August 31, 2001, $1.5 million on February
2002, $1.5 million on August 31, 2002 and $1.5 million on February 28, 2003.
Payments of $0.95 million have been made as of December 31, 2000. These notes
carry an interest rate of 8.0% with interest payable on the last day of February
1999 and 2000, and on each payment date thereafter. If OSI is in default under
any of its senior debt, the noteholders may not receive any principal or
interest payments for 180 days following the default or event of default.
On July 29, 2000 and July 31, 2000, OSI renegotiated terms with the holders
of subordinated debt totaling $7.0 million and $7.0 million, respectively.
Original maturities of the subordinated debt extending through February 2003
were accelerated to the earlier of April 30, 2001 or upon the occurrence of a
registered public offering of capital stock, in exchange for the holders waiving
their rights to scheduled maturities of principal and interest which were due
prior to April 30, 2001. Interest increased from 8% to prime plus 4% until
principle was paid in full in February 2001.
On July 31, 1998, OSI issued a subordinated promissory note payable in the
amount of $2.0 million to Sooner Pipe & Supply Corporation, a company controlled
by SCF IV, in conjunction with an acquisition of assets. Principal and accrued
interest was paid on this note in two installments of $1.0 million plus accrued
interest at 6.0% on July 31, 1999 and 2000. During 1999, this note was canceled
in conjunction with the sale of assets to Sooner.
On December 31, 1998, OSI declared a dividend in the form of a subordinated
note payable to SCF III, acting as agent for all of the common stockholders of
OSI, in the amount of $25.0 million. Principal and accrued interest at 6.0% are
due on December 31, 2005.
PTI Debt
On July 5, 2000, PTI signed an Amended and Restated Credit Agreement (PTI
Amended Agreement) that includes a revolving operating credit facility with
Canadian banks. A portion of the facility is designated as the overdraft
facility and the remainder of the facility is restricted by a margin limit based
on the level of trade accounts receivable and inventories. Amounts outstanding
under this facility were $1.8 million and $7.4 million as of December 31, 2000
and 1999, respectively. This facility is available to the Company through direct
advances, subject to the limits, and at the interest rates as described.
2000 1999
----------------------- -------------
Applicable interest rates:
Canadian prime based rate................ 7.50% + (0.00% - 0.50)% 6.50%
Bankers' acceptances based rate.......... 5.80% + (1.00% - 1.50)% 5.20% + 1.00%
LIBOR advance rate....................... N/A 5.80% + 1.00%
Included in bank indebtedness at December 31, 1999 is a $1.0 million
revolving credit facility with a US bank. This facility was available through
direct advances with applicable U.S. interest rates being either prime based
(8.50% +/- 0.25%) or LIBOR based (5.80% + 2.25% to 3.25%). At December 31, 1999,
$0.2 million was drawn under this facility. On August 16, 2000, this facility
was replaced by a new credit agreement (PTI U.S. Credit Agreement), which
includes a $2.0 million revolving line of credit facility and a $2.0 million
non-revolving line of credit facility. The PTI U.S. Credit Agreement is with the
same bank with applicable U.S. interest rates being prime based (at December 31,
2000, 9.50% +/- 0.25%) or LIBOR based (at
79
82
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000, 6.80% + 1.75% to 2.50%). At December 31, 2000, $1.6 million
was drawn under the revolving line of credit facility.
Under the PTI Amended Agreement, the scheduled loan repayments on the term
revolving facility bank loan consist of quarterly installments of $0.8 million,
with payment commencing on August 31, 2000. The current portion as of December
31, 1999 has been presented based on the terms of the PTI Amended Agreement. PTI
can apply surplus cash to the outstanding loan balance at any time. The unused
portion of this facility was $8.2 million at December 31, 2000 and $2.8 million
at December 31, 1999.
Amounts drawn against the term revolving facility are available through
direct advances and bankers' acceptances. The interest rate depends on the ratio
of PTI's total debt to its earnings before interest, taxes, depreciation and
amortization for the preceding 12 months and ranges from the Canadian prime rate
(7.50% at December 31, 2000, 6.50% at December 31, 1999) plus 0.50% to 1.00% for
direct advances, and market rate (5.80% at December 31, 2000, 5.20% at December
31, 1999) plus stamping fees of 1.50% to 2.00% for bankers' acceptances.
PTI fixed the interest rate at approximately 6.80% at December 31, 1999 on
a portion of the term revolving facility bank loan utilizing an interest rate
swap agreement. The arrangement, for a notional amount of $1.7 million at
December 31, 1999, reduced to $0 on March 31, 2000. The fair value of this
arrangement approximated the carrying value.
Collateral provided against the operating credit facility and term
revolving facility is a general security agreement, a fixed and floating charge
debenture on the assets of PTI, pledge of all shares directly held in the
capital stock of subsidiaries, joint and several guarantees from subsidiaries,
assignment of accounts receivable, postponement of claims by the shareholders
and assignment of insurance proceeds.
Mortgages incur interest at approximately 7.50%, had annual payments of
$0.2 million and collateral was provided by related land and buildings, which
had a net book value of $1.9 million at December 31, 1999.
In connection with an acquisition, PTI issued a promissory note in the
amount of $0.2 million, repayable in ten equal semi-annual payments of $20,000
commencing May 7, 2000. This note bears interest at a floating rate of Canadian
prime plus 1.00% and PTI has not provided collateral.
In connection with an acquisition, PTI issued a promissory note in the
amount of $3.5 million, repayable in three equal annual installments commencing
June 16, 1999. At December 31, 2000, the balance outstanding was $1.2 million.
This notes bears interest at 7.00% and PTI has not provided collateral.
In connection with an acquisition, PTI issued a promissory note in the
amount of $1.0 million, repayable in two equal annual payments of $0.5 million
commencing February 8, 2001. This note bears interest at 7.50% and PTI has not
provided collateral.
In connection with the purchase of rental equipment, PTI issued a
promissory note in the amount of $0.4 million, repayable monthly over three
years commencing February 15, 2000. At December 31, 2000, the balance
outstanding was $0.2 million. This note bears interest at 8.14% and PTI has not
provided collateral.
On August 16, 2000, under the PTI U.S. Credit Agreement, a term loan was
replaced by a $6.5 million term loan facility. The scheduled loan repayments
consist of monthly installments of $0.1 million, from September 1, 2000 through
February 1, 2005, at which time the remaining balance is due. At December 31,
2000, the balance outstanding was $6.0 million. This loan bears interest at
United States prime (at December 31, 2000, 9.50% +/- 0.25%) or LIBOR (at
December 31, 2000, 6.80% + 1.75% to 2.50%).
The previous term loan incurred interest at 7.50%, and was repayable
monthly over three years, commencing June 1999, with annual payments of $0.3
million. Certain assets in the US are provided as collateral.
80
83
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On December 7, 2000, an additional term loan under the PTI U.S. Credit
Agreement was established for $1.0 million with repayment scheduled for March 7,
2001. This loan bears interest at the bank's prime (at December 31, 2000,
9.50%). Collateral provided is a first charge on specified U.S. assets. Certain
assets in the US are provided as collateral.
Obligations under capital leases bear interest ranging from 8.00% to 13.33%
and collateral provided is the related equipment, which has a net book value
approximating the obligation.
HWC Debt
Amounts owed the bank are secured by substantially all the assets of HWC.
Each of HWC's subsidiaries as well as HWC are guarantors under the bank credit
agreements. The bank credit agreement contains financial and other covenants
that, among other things, restrict the amount of dividends HWC may pay and the
amount of debt HWC can incur. HWC is required to pay an unused commitment fee
ranging from 0.25% to 0.5% per annum of the amount of the unused commitment from
the bank line of credit.
Scheduled maturities of combined long-term debt as of December 31, 2000,
are as follows (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
2001...................................................... $ 37,629
2002...................................................... 20,715
2003...................................................... 17,721
2004...................................................... 34,458
2005...................................................... 29,720
--------
$140,243
========
As of December 31, 2000, the Company had outstanding letters of credit
totaling $5.6 million.
Subsequent to year end, the Company entered into a $150.0 million senior
secured revolving credit facility. Up to $45.0 million of the new credit
facility is made available in the form of loans denominated in Canadian dollars
and may be made to Canadian operating subsidiaries. This new credit facility
replaced our existing bank credit facilities. The facility matures on February
14, 2004 unless extended for up to two additional one year periods with the
consent of the lenders. Amounts borrowed under the new facility bear interest,
at the Company's election, at either:
- a variable rate equal to LIBOR (or, in the case of Canadian dollar
denominated loans, the bankers' acceptance discount rate) plus a margin
ranging from 1.5% to 2.5%; or
- an alternate base rate equal to the higher of Credit Suisse First
Boston's prime rate and the federal funds effective rate plus 0.5% (or,
in the case of Canadian dollar denominated loans, the Canadian Prime
Rate) plus a margin ranging from 0.5% to 1.5%, depending upon the ratio
of total debt to EBITDA (as defined in the new credit facility).
Commitment fees ranging from 0.25% to 0.5% per year are paid on the undrawn
portion of the facility, also depending upon the ratio of total debt to EBITDA.
Subject to exceptions, commitments under our new credit facility will be
permanently reduced, and loans prepaid, by an amount equal to 100% of the net
cash proceeds of all non-ordinary course asset sales and the issuance of
additional debt and by 50% of the issuance of equity securities. Mandatory
commitment reductions will be allocated pro rata, based on amounts outstanding
under the U.S. dollar denominated facility and the Canadian dollar denominated
facility. In addition, voluntary reductions in commitments will be permitted.
81
84
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The new credit facility is guaranteed by all of our active domestic
subsidiaries and, in some cases, Canadian and other subsidiaries. The credit
facility is secured by a first priority lien on all of the Company's inventory,
accounts receivable and other material tangible and intangible assets, as well
as those of our active subsidiaries. No more than 65% of the voting stock of any
foreign subsidiary is required to be pledged if the pledge of any greater
percentage would result in adverse tax consequences.
The new credit facility contains negative covenants that will restrict the
Company's ability to: incur additional indebtedness; prepay, redeem and
repurchase outstanding indebtedness, other than loans under the new credit
facility; pay dividends; repurchase and redeem capital stock; make specified
loans and investments; enter into mergers, consolidations and similar
transactions; and, enter certain other material transactions.
In addition, the new credit facility will require the Company to maintain:
- a ratio of EBITDA to interest expense of not less than 3.0 to 1.0;
- a level of consolidated net tangible assets of not less than $120 million
plus 50% of each quarter's consolidated net income (but not loss);
- a maximum ratio of total debt to EBITDA of not greater than 3.5 to 1.0;
and
- a maximum ratio of total senior debt to EBITDA of not greater than 3.0 to
1.0.
Under the credit facility, the occurrence of specified change of control
events involving the Company would constitute an event of default that would
permit the bank to, among other things, accelerate the maturity of the facility
and cause it to become immediately due and payable in full.
6. POSTRETIREMENT HEALTHCARE AND OTHER INSURANCE BENEFITS
The Company provides healthcare and other insurance benefits, primarily
life, for eligible active and retired employees. The healthcare plans are
contributory and contain other cost-sharing features such as deductibles,
lifetime maximums, and co-payment requirements.
2000 1999
------- -------
(IN THOUSANDS)
Changes in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year................... $ 9,973 $ 9,663
Service cost, benefits earned during the period........... -- 24
Interest cost on accumulated postretirement benefit
obligation............................................. 849 615
Benefits paid............................................. (1,299) (1,271)
Prior service cost........................................ -- 942
Actuarial loss............................................ 1,154 --
Settlement of life benefits............................... (1,619) --
------- -------
Benefit obligation at end of year........................... $ 9,058 $ 9,973
======= =======
2000 1999 1998
------- ---- ----
Components of net periodic benefit cost:
Service cost, benefits earned during the period........... $ -- $ 24 $ 27
Interest cost on accumulated postretirement benefit
obligation............................................. 849 615 690
Amortization of net loss (gain)........................... 51 -- (43)
Amortization of prior service cost........................ 78 10 --
Gain due to settlement of life benefits................... (1,720) -- --
------- ---- ----
Total net periodic benefit cost (benefit)................... $ (742) $649 $674
======= ==== ====
82
85
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
------- -------
Accumulated postretirement benefit obligation:
Retirees and dependent spouses............................ $ 8,337 $ 9,159
Fully eligible active plan participants................... 721 814
------- -------
Total accumulated postretirement benefit obligation....... 9,058 9,973
Unrecognized prior service cost........................... (855) (932)
Unrecognized net gain..................................... (1,204) --
------- -------
Total liability included in the consolidated
combined balance sheets........................ 6,999 9,041
Less: Current portion....................................... (1,100) (1,300)
------- -------
Noncurrent liability.............................. $ 5,899 $ 7,741
======= =======
The healthcare plans are not funded, and the Company's policy is to pay
these benefits as they are incurred.
In 2000, the Company amended the postretirement plan which resulted in a
$1.6 million benefit obligation reduction. This amount was credited to expense
in 2000.
The accumulated benefit obligation was determined under an actuarial
assumption using a healthcare cost trend rate of 8% in 2000, gradually declining
to 5% in the year 2001 and thereafter over the projected payout period of the
benefits. The accumulated benefit obligations were determined using an assumed
discount rate of 7.50% and 7.75% at December 31, 2000 and 1999, respectively.
Under the plan's provisions, the Company's prescription costs are capped at
annual benefit limits. Retirees are assumed to pay the portion of future
prescription costs above the capped limit.
A one percentage-point increase or decrease in the assumed healthcare cost
trend rates would be immaterial to the accumulated postretirement benefit
obligation and net periodic benefit cost at December 31, 2000.
7. RETIREMENT PLANS
The Company sponsors a number of defined contribution plans. Participation
in these plans is available to substantially all employees.
The Company recognized expense of $1.7 million, $2.2 million and $1.8
million related to its various defined contribution plans during the years ended
December 31, 2000, 1999 and 1998, respectively on a combined basis.
83
86
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock outstanding as of December 31, 2000 and 1999, is
as follows (dollar amounts in thousands):
SHARES
OUTSTANDING 2000 1999
----------- ------- -------
OSI
Series A Cumulative Preferred Stock................... 143,000 $14,300 $14,300
Series A Exchangeable Cumulative Preferred Stock...... 20,000 2,000 2,000
Series B Exchangeable Cumulative Preferred Stock...... 38,500 3,850 3,850
HWC
Series A Convertible Preferred Stock.................. 2,145 2,322 2,249
Series B Convertible Preferred Stock.................. 2,717 2,821 2,665
------- -------
$25,293 $25,064
======= =======
Series A Cumulative Preferred Stock
As of December 31, 2000 and 1999, OSI had 143,000 shares of Series A
Cumulative Preferred Stock (Series A Preferred Stock), issued and outstanding
with a par value of $100 per share. The stock was issued to LTV Corporation
(LTV) in conjunction with the acquisition of OSI (formerly Continental Emsco
Company) in 1995. Holders of the Series A Preferred Stock are entitled to
cumulative quarterly dividends which commenced on September 15, 1995, at the
annual rate of 7.0% ($7.00 per share). As of December 31, 2000, dividends of
$70,000 had been accrued but not paid. This amount is reported on the balance
sheet as an accrued liability. The holders of Series A Preferred Stock are not
entitled to vote, except as specified in the Series A Preferred Stock
designation. The holders (voting separately as a class) are entitled to elect
additional directors of OSI if, at any time, dividends of OSI are in arrears in
an amount equal to six quarterly dividends. OSI or the holders of the Series A
Preferred Stock may, at either party's option, redeem all or any part of the
Series A Preferred Stock at $100 per share (plus accrued and unpaid dividends),
commencing September 15, 2000. On July 21, 2000, OSI obtained a waiver from LTV
whereby LTV waived its rights to the optional redemption on September 15, 2000.
LTV could request redemption at the earlier of April 30, 2001 or after
completion of a registered public offering. Dividends increased from 7% to 12%
effective as of September 15, 2001 as consideration for LTV executing the
waiver. On September 15, 2005, OSI is required to redeem all of the then
outstanding Series A Preferred Stock at $100 per share (plus accrued and unpaid
dividends). In the event of involuntary liquidation, the holders of the Series A
Preferred Stock would be entitled, after the payment of all debts, to $100 per
share, plus accrued and unpaid dividends, before any distribution or payments to
the common stockholders. If, upon liquidation, the remaining assets of OSI are
insufficient to pay the holders of the Series A Preferred Stock the full amount
to which they are entitled, the holders shall share ratably among themselves in
any distributions according to the respective amounts payable if shares were
paid in full. This preferred stock and accrued dividends were paid in full or
converted to common stock in February 2001 (see Note 19).
Series A Exchangeable Cumulative Preferred Stock
On July 15, 1997, OSI issued 45,000 shares of preferred stock having a par
value of $0.0001 per share, in connection with the acquisition of HydroTech.
These shares, designated as Series A Exchangeable Cumulative Preferred Stock
(Series A Exchangeable Preferred Stock), have a liquidation value of $100 per
share, plus any accrued and unpaid dividends, less any amounts due from former
HydroTech stockholders. The acquisition agreement with HydroTech provided that
25,000 shares of the Series A Exchangeable Preferred Stock be placed in escrow
and be released in accordance with earn-out requirements specified in the
84
87
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition agreement. Holders of the Series A Exchangeable Preferred Stock are
entitled to cumulative annual dividends commencing on July 15, 1998, at the
annual rate of 7.0% ($7.00 per share). As of December 31, 2000, dividends of
$204,000 had been accrued but not paid. This amount is reported on the balance
sheet as an accrued liability. Each share of Series A Exchangeable Preferred
Stock is exchangeable, provided written notice is given between June 13, 2002
and July 13, 2002, into a number of shares of OSI's Class A common stock
determined by dividing the liquidation value as of the conversion date by the
exchange price. The exchange price is defined as $15.00 plus 80% times the
excess of the fair market value of OSI's common stock on the date of exchange
over $15.00. All unexchanged shares of Series A Exchangeable Preferred Stock
outstanding on July 15, 2002 will automatically be redeemed at a redemption
price equal to liquidation value. OSI also has the option, upon the occurrence
of events specified in the Series A Exchangeable Preferred Stock certificate of
designation, to redeem all or any portion of the Series A Exchangeable Preferred
Stock at a redemption price equal to liquidation value. The holders of Series A
Exchangeable Preferred Stock are not entitled to vote. During 1998, OSI
purchased 25,000 shares, placed in escrow for $0.01 per share, in accordance
with the provisions of the acquisition agreement as HydroTech failed to meet the
specified earn-out requirements. The difference of $2.5 million was treated as a
reduction in goodwill. This preferred stock and accrued dividends were paid in
full or converted to common stock in February 2001 (see Note 19).
Series B Exchangeable Cumulative Preferred Stock
On July 15, 1997, OSI issued 38,500 shares of preferred stock having a par
value of $0.0001 per share in connection with the acquisition of HydroTech.
These shares, designated as Series B Exchangeable Cumulative Preferred Stock
(Series B Exchangeable Preferred Stock), have a liquidation value of $100 per
share, plus any accrued and unpaid dividends, less any amounts due from former
HydroTech stockholders. Holders of the Series B Exchangeable Preferred Stock are
entitled to cumulative annual dividends commencing on July 15, 1998, at the
annual rate of 3.1% ($3.10 per share). As of December 31, 2000, dividends of
$174,000 had been accrued but not paid. This amount is reported on the balance
sheet as an accrued liability. Each share of Series B Exchangeable Preferred
Stock is exchangeable, prior to July 15, 2004, into a number of shares of OSI's
Class A common stock determined by dividing the liquidation value as of the
conversion date by the exchange price of $12.80 per share. All unexchanged
shares of Series B Exchangeable Preferred Stock outstanding on July 15, 2004
will automatically be redeemed at a redemption price equal to liquidation value.
OSI also has the option, upon the occurrence of events specified in the Series B
Exchangeable Preferred Stock certificate of designation, to redeem all or any
portion of the Series B Exchangeable Preferred Stock at a redemption price equal
to liquidation value. The holders of Series B Exchangeable Preferred Stock are
not entitled to vote. This preferred stock and accrued dividends were paid in
full or converted to common stock in February 2001 (see Note 19).
Series A Redeemable Convertible Preferred Stock
In connection with the 1999 acquisition of C&H, HWC issued 2,145 shares of
a new Series A class of redeemable convertible preferred stock (Redeemable
Series A Preferred Stock). The shares are redeemable with a liquidation
preference of $1,000 per share. The preferred shares accrue dividends at the
rate of 6.5% per annum. As of December 31, 2000 and 1999, 2,145 shares were
outstanding. HWC accrued the cumulative unpaid dividends totaling $177,000 and
$106,000 at December 31, 2000 and 1999, respectively. The Redeemable Series A
Preferred Stock shall be redeemed as a whole by HWC on March 31, 2004, at a
redemption price of $1,000 per share, plus all accrued and unpaid dividends to
the date of the redemption. The holders of the Redeemable Series A Preferred
Stock had the right to convert, at any time, all or any shares into common stock
of HWC based on the liquidation value of the preferred stock, including accrued
but unpaid dividends, on such date based upon preestablished formulas defined in
the agreement. This preferred stock and accrued dividends were converted into
common stock in February 2001 (see Note 19).
85
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Series B Redeemable Convertible Preferred Stock
In connection with the 1999 acquisition of two unrelated companies, HWC
issued 2,650 shares of a new Series B class of redeemable convertible preferred
stock (Redeemable Series B Preferred Stock). The shares are redeemable with a
liquidation preference of $1,000 per share. The preferred shares accrue
dividends at the rate of 6.5% per annum. As of December 31, 2000 and 1999, 2,717
and 2,650 shares were outstanding, respectively. HWC accrued the cumulative
unpaid dividends totaling $104,000 and $15,000 at December 31, 2000 and 1999,
respectively. The Redeemable Series B Preferred Stock shall be redeemed as a
whole by HWC on October 30, 2004, at a redemption price of $1,000 per share,
plus all accrued and unpaid dividends to the date of the redemption. The holders
of the Redeemable Series B Preferred Stock had the right to convert, at any
time, all or any shares into common stock of HWC based on the liquidation value
of the preferred stock, including accrued but unpaid dividends, on such date
based upon preestablished formulas defined in the agreement. This preferred
stock and accrued dividends were converted into common stock in February 2001
(see Note 19).
9. CONVERTIBLE PREFERRED STOCK
On July 31, 1997, OSI issued 16,250 shares of preferred stock, having a par
value of $0.0001 per share, in connection with the acquisition of SMATCO. These
shares, designated as Series A Convertible Cumulative Preferred Stock
(Convertible Preferred Stock), have a liquidation value of $100 per share, plus
any accrued and unpaid dividends. Holders of the Convertible Preferred Stock are
entitled to cumulative annual dividends commencing on July 31, 1998, at the
annual rate of 3.0% ($3.00 per share). As of December 31, 2000, dividends of
$69,000 had been accrued but not paid. This amount is reported on the balance
sheet as an accrued liability. Each share of Convertible Preferred Stock was
convertible into a number of shares of OSI's Class A common stock determined by
dividing the liquidation value as of the conversion date by the conversion price
of $15.00 per share. Conversion was optional, prior to August 1, 2002, subject
to the occurrence of events specified in the Convertible Preferred Stock
certificate of designation. On August 1, 2002, each share of Convertible
Preferred Stock outstanding would automatically convert as described above. Upon
the occurrence of events specified in the Convertible Preferred Stock
certificate of designation, OSI had the option to redeem all or any portion of
unconverted Convertible Preferred Stock at liquidation value. The holders of
Convertible Preferred Stock are not entitled to vote. This preferred stock and
accrued dividends were converted into common stock in February 2001 (see Note
19).
10. INCOME TAXES
Consolidated pre-tax income (loss) from continuing operations for the years
ended December 31, 2000, 1999 and 1998 consists of the following (in thousands):
2000 1999 1998
------- -------- -------
US operations.......................................... $(2,915) $(13,808) $ 5,168
Foreign operations..................................... 19,387 10,913 5,479
------- -------- -------
Total........................................ $16,472 $ (2,895) $10,647
======= ======== =======
86
89
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision for continuing operations before
extraordinary items for the years ended December 31, 2000, 1999 and 1998 consist
of the following (in thousands):
2000 1999 1998
------- ------ ------
Current:
Federal................................................. $ 2,085 $1,009 $1,572
State................................................... 54 (65) 226
Foreign................................................. 9,523 4,229 6,876
------- ------ ------
11,662 5,173 8,674
------- ------ ------
Deferred:
Federal................................................. (839) (940) 56
State................................................... -- -- --
Foreign................................................. (47) 421 1,015
------- ------ ------
(886) (519) 1,071
------- ------ ------
Total Provision................................. $10,776 $4,654 $9,745
======= ====== ======
The provision for taxes for continuing operations, before extraordinary
items, differs from an amount computed at statutory rates as follows for the
years ended December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998
------- ------ ------
Federal tax expense (benefit) at statutory rates.......... $ 5,600 $ (984) $3,624
Foreign income tax rate differential...................... 1,700 631 (32)
Nondeductible expenses.................................... 1,670 1,550 1,346
Net operating loss (utilized) not benefited............... (187) 2,741 --
State tax expense (benefit), net of federal benefits...... (161) (121) 29
Manufacturing and processing profits deduction............ (620) (295) (882)
Foreign losses not recognized on asset impairment......... -- 33 3,928
Adjustment of valuation allowance......................... 2,876 1,279 1,250
Other, net................................................ (102) (180) 482
------- ------ ------
Net income tax provision........................ $10,776 $4,654 $9,745
======= ====== ======
87
90
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The significant items giving rise to the deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------- --------
Deferred tax assets
Net operating loss carryforward........................... $ 46,909 $ 40,094
Allowance for doubtful accounts........................... 453 570
Inventory................................................. 961 798
Employee benefits......................................... 2,407 2,799
Depreciation.............................................. 924 960
Other, net................................................ 6,005 3,530
-------- --------
Total deferred tax assets................................. 57,659 48,751
Less: valuation allowance................................. (55,043) (45,966)
-------- --------
Net deferred tax assets................................... 2,616 2,785
-------- --------
Deferred tax liabilities
Depreciation.............................................. (22,232) (23,255)
Other intangibles......................................... (182) (192)
Inventories............................................... (369) (333)
Other..................................................... (179) (539)
-------- --------
Total deferred tax liabilities.................... (22,962) (24,319)
-------- --------
Net deferred tax liabilities...................... $(20,346) $(21,534)
======== ========
For US federal income tax purposes, the Company has net operating loss
carryforwards of approximately $136.1 million for regular income taxes that will
expire in the years 2005 through 2020. The Company's net operating loss
carryforwards are subject to limitations under Section 382 of the Internal
Revenue Code of 1986, as amended. Based on these limitations and the uncertainty
in achieving levels of taxable income during the net operating loss carryforward
period, the Company has provided a valuation allowance on this deferred tax
asset.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3 million at December 31, 2000. Those earnings are considered
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided. If these foreign earnings were repatriated
in the form of dividends, it is anticipated that any residual net U.S. income
tax would be immaterial.
Certain deferred tax assets relating to property, plant and equipment and
loss carryforwards relate to our Canadian subsidiary's Chilean operation. Since
the deferred tax asset relating to the net operating loss carryforward can only
be realized against income earned in Chile, a valuation allowance has been
provided on this deferred tax asset. The operating loss carryforwards of
approximately $2.9 million are available to reduce future years taxable income,
with no expiration date.
Also with respect to our Canadian subsidiary, undistributed earnings of Oil
States US subsidiaries amounted to $5.1 million and $3.1 million at December 31,
2000 and 1999, respectively. Those earnings are considered indefinitely
reinvested, and accordingly, no tax provision has been provided. Repatriation of
these earnings in the form of dividends or otherwise may result in both Canadian
federal taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable in the U.S.
88
91
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years ended December 31, 2000, 1999 and 1998, for
interest and income taxes was as follows (in thousands):
2000 1999 1998
------ ------- -------
Interest................................................. $7,828 $11,610 $14,292
Income taxes, net of refunds............................. $9,187 $ 8,107 $17,875
Components of cash used for acquisitions as reflected in the consolidated
statements of cash flows for the years ended December 31, 2000, 1999 and 1998,
are summarized as follows (in thousands):
2000 1999 1998
------- ------- --------
Fair value of assets acquired.......................... $ 4,500 $14,945 $ 78,418
Liabilities assumed.................................... -- (2,168) (15,220)
Noncash consideration.................................. (1,000) (5,522) (34,904)
Less: cash acquired.................................... -- (38) (749)
------- ------- --------
Cash used in acquisition of businesses................. $ 3,500 $ 7,217 $ 27,545
======= ======= ========
Other noncash transactions included the receipt of noncash consideration in
1999 for businesses sold by OSI totaling $57.4 million.
12. COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its equipment, office space, computer
equipment, automobiles and trucks under leases which expire at various dates.
Minimum future operating lease obligations in effect at December 31, 2000,
are as follows (in thousands):
OPERATING
LEASES
---------
2001...................................................... $ 2,439
2002...................................................... 1,701
2003...................................................... 932
2004...................................................... 766
2005...................................................... 710
Thereafter................................................ 3,724
-------
Total........................................... $10,272
=======
Rental expense under operating leases was $3.0 million, $3.0 million and
$2.6 million for the years ended December 31, 2000, 1999 and 1998, respectively.
LTV Corporation, the former owner of OSI, under the terms of the stock
purchase agreement, has indemnified OSI of all claims and contingencies,
threatened or pending, relating to business activities prior to August 1, 1995.
Specifically, claims involving environmental remediation, product warranty,
legal actions, workers' compensation issues and various federal, state and sales
tax matters related to pre-August 1995 business transactions are the financial
responsibility of LTV. The financial responsibilities are initially satisfied
through the reserves assumed as part of the acquisition. To the extent that
claims exceed $2.2 million, the original allowance, all amounts will be paid by
LTV.
89
92
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OSI has warranted items related to the sale of CE Drilling and CE
Distribution (see Note 15), subject to threshold amounts defined in the
respective agreements. The Company believes all amounts have been properly
reflected in the accompanying consolidated financial statements.
As of December 31, 2000, OSI had entered into forward purchase contracts
through March 30, 2001 with a bank totaling $3.2 million for the purchase of
foreign currency as a hedge to existing receivable balances. The contract
purchase rates were not significantly different from the December 31, 2000
currency exchange rates.
The Company is involved in various claims, lawsuits and other proceedings
relating to a wide variety of matters. While uncertainties are inherent in the
final outcome of such matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
13. RELATED-PARTY TRANSACTIONS
L.E. Simmons & Associates Incorporated, from time to time, has served as
financial advisor to the Company as it explored opportunities for mergers,
acquisitions or divestitures. Professional advisory fees and out-of-pocket
expenses totaling approximately $83,000, $118,000 and $11,000 were paid to L.E.
Simmons & Associates, Incorporated, in 2000, 1999 and 1998, respectively.
In the normal course of business, OSI transacts with Hunting. However,
these amounts were insignificant for the years presented.
On December 31, 1998, OSI declared a $25.0 million dividend in the form of
a subordinated note payable to SCF III, acting as agent for all common
stockholders of OSI (see Note 5).
During 1999, Hunting indemnified OSI for a liability incurred in 1998
relating to assets sold to OSI in 1996 for $1.8 million.
In accordance with prior purchase agreements, HWC made debt payments in
1998 of $0.8 million to a former owner of Hydraulic Well Control, Inc., a
subsidiary of HWC. Additionally, HWC also paid consulting fees of approximately
$0.4 million and $0.1 million in 1999 and 1998, respectively, to three former
owners of Hydraulic Well Control, Inc., pursuant to the purchase agreement.
14. STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires the Company to record stock-based compensation at
fair value. The Company has adopted the disclosure requirements of SFAS No. 123
and has elected to record employee compensation expense in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees."
The Company accounts for its employee stock-based compensation plan under
APB Opinion No. 25 and its related interpretations. Accordingly, any deferred
compensation expense is recorded for stock options based on the excess of the
market value of the common stock on the date the options were granted over the
aggregate exercise price of the options. This deferred compensation is amortized
over the vesting period of each option. The Company is authorized to grant
3,700,000 stock options under the 2001 Equity Participation Plan (the Stock
Option Plan) to employees, consultants and directors with amounts, exercise
prices and vesting schedules determined by the Company's compensation committee.
As the exercise price of options granted under the Stock Option Plan have been
equal to or greater than the market price of the Company's stock on the date of
grant, no compensation expense related to this plan has been recorded. Had
compensation expense for its Stock Option Plan been determined consistent with
SFAS No. 123, the Company's net income
90
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(loss) and earnings per share at December 31, 2000, 1999 and 1998, would have
been as follows (in thousands, except per share amounts):
2000 1999 1998
------ -------- --------
Net income (loss):
As reported.......................................... $1,448 $(14,282) $(17,093)
Pro forma............................................ 836 (14,357) (18,065)
Pro forma income (loss) per share -- basic and
diluted.............................................. $ 0.02 $ (0.63) $ (0.81)
STOCK OPTION PLAN
--------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Balance at December 31, 1997................................ 681,766 $12.10
Granted................................................... 464,158 9.61
Exercised................................................. (1,250) 6.27
Forfeited................................................. (123,801) 19.75
---------
Balance at December 31, 1998................................ 1,020,873 10.05
Granted................................................... 114,795 6.13
Exercised................................................. (85,880) 6.27
Forfeited................................................. (288,835) 14.03
---------
Balance at December 31, 1999................................ 760,953 8.37
Granted................................................... 118,377 8.95
Exercised................................................. (14,562) 8.65
Forfeited................................................. (27,897) 12.36
---------
Balance at December 31, 2000................................ 836,871 8.31
=========
Exercisable at December 31, 1998............................ 300,123 8.39
Exercisable at December 31, 1999............................ 294,679 8.93
Exercisable at December 31, 2000............................ 435,616 8.64
The following table summarizes information for stock options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------- --------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICES 12/31/2000 LIFE PRICE 12/31/2000 PRICE
--------------- ----------- ----------- -------- ----------- --------
$2.6012 - $5.2024 50,311 1.76 $ 2.9914 40,245 $ 2.7638
$5.7686 - $5.7686 422,295 3.38 $ 5.7686 190,967 $ 5.7686
$6.2700 - $8.6529 200,163 4.03 $ 7.2485 120,436 $ 6.8337
$9.8148 - $19.8000 140,766 4.34 $15.7610 68,130 $18.3909
$30.0000 - $30.0000 23,336 4.46 $30.0000 15,838 $30.0000
------- ---- -------- ------- --------
$2.6012 - $30.0000 836,871 3.63 $ 8.3121 435,616 $ 8.6406
At December 31, 2000, 2,761,437 options were available for future grant
under the Stock Option Plan.
The weighted average fair values of options granted during 2000, 1999 and
1998 were $1.98, $1.66 and $1.56 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
2000,
91
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1999 and 1998, respectively: risk-free interest rates of 4.9%, 6.3% and 7.2%, no
expected dividend yield, expected lives of 5.3, 5.6, and 5.9 years, and no
expected volatility.
15. DISCONTINUED OPERATIONS
On May 28, 1999, in one transaction, CE Distribution sold all of its
distribution net assets for two senior subordinated notes receivable totaling
$30.0 million, and OSI sold its 51.8% investment in CE Franklin for marketable
securities with a fair market value of $24.7 million on the date of sale. The
combined transaction resulted in a loss on sale of approximately $17.2 million,
net of income tax benefit of $185,000. Included in the loss on sale is a
provision for operating losses of $12.4 million, net of income tax benefit of
$805,000, recorded during the phaseout period. In June 1999, one of the senior
subordinated notes in the amount of $14.5 million, plus accrued interest at
LIBOR plus 2.75%, was paid in full. In July 1999, the second senior subordinated
note in the amount of $15.5 million, plus accrued interest at LIBOR plus 2.75%,
was paid in full. Subsequent to May 28, 1999, all of the marketable securities
were sold at a loss of $334,000. On June 21, 2000, OSI returned $1.8 million of
the purchase price to the buyer for indemnification of specified post-closing
liabilities. Additional adjustments to the purchase price are possible and
management believes the amounts accrued are adequate to cover any exposure.
On May 28, 1999, in a separate transaction, CE Distribution sold all of its
"oil country tubular" related assets to Sooner for cash of $7.4 million and $2.0
million of noncash consideration for the cancellation of the subordinated
promissory note discussed in Note 5, resulting in a loss on sale of $701,000. As
a result of the above-mentioned transactions, CE Distribution ceased operations
in 1999.
On July 7, 1999, CE Drilling sold all of its operating net assets, which
included the net assets of CE Mobile, for $65.0 million in cash resulting in a
loss on sale of $4.9 million, net of income tax expense of $70,000. Included in
the loss on sale is operating income of $261,000, net of income tax expense of
$12,000, recorded during the phase out period. The purchase price was subject to
adjustments as defined in the agreement. During 1999, an additional accrual of
$5.7 million, net of income tax expense of $215,000, was recorded primarily to
accrue for a revision of the purchase price. On April 17, 2000, OSI settled the
purchase price adjustment and returned $6.9 million of the purchase price to the
buyer; however, there are some outstanding claims which remain to be settled and
management believes the amounts accrued are adequate to cover any exposure. As a
result of the above-mentioned transaction, CE Drilling and CE Mobile ceased
operations in 1999.
The results of CE Distribution, CE Franklin, CE Drilling, and CE Mobile are
shown as discontinued operations with 1998 restated. Components of amounts
reflected in the accompanying combined statements of
92
95
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operations and cash flows as of and for the years ended December 31, 1999 and
1998, are presented in the following table (in thousands):
1999 1998
-------- --------
Operations data:
Revenues.................................................. $141,489 $564,691
Costs and expenses........................................ 147,385 554,090
-------- --------
Operating (loss) income................................... (5,896) 10,601
Interest expense............................................ 2,371 8,041
Other expense............................................... 4,710 278
Income tax (benefit) expense................................ (793) 549
Amount reserved in 1998 for 1999 losses..................... (12,184) --
-------- --------
Income from discontinued operations......................... $ -- $ 1,733
======== ========
Cash flow data:
Cash flows from operations................................ $(12,251) $ 13,655
Cash flows from investing activities...................... -- (10,834)
Cash flows from financing activities...................... 8,092 (5,963)
-------- --------
Net cash used in discontinued operations.................... $ (4,159) $ (3,142)
======== ========
16. SEGMENT AND RELATED INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified the following
reportable segments: Offshore Products and Wellsite Services. The Company's
reportable segments are strategic business units that offer different products
and services. They are managed separately because each business requires
different technology and marketing strategies. Most of the businesses were
acquired as a unit, and the management at the time of the acquisition was
retained.
Financial information by industry segment for each of the three years ended
December 31, 2000, 1999 and 1998, is summarized in the following table in
thousands. The Company evaluates performance and allocates resources based on
EBITDA as defined, which is calculated as operating income adding back
depreciation and amortization. Calculations of EBITDA as defined should not be
viewed as a substitute to calculations under accounting principles generally
accepted in the US, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another company. The
net assets of discontinued operations of $129.5 million are included in the
Corporate and Eliminations
93
96
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounts in 1998. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
CORPORATE
OFFSHORE WELLSITE AND
PRODUCTS SERVICES ELIMINATIONS TOTAL
-------- -------- ------------ --------
2000
Revenues from unaffiliated customers... $114,594 $189,955 $ -- $304,549
======== ======== ======== ========
EBITDA as defined...................... 4,946 45,514 (1,259) 49,201
Depreciation and amortization.......... 6,568 14,740 6 21,314
-------- -------- -------- --------
Operating income (loss)................ (1,622) 30,774 (1,265) 27,887
======== ======== ======== ========
Capital expenditures................... 2,476 18,907 -- 21,383
======== ======== ======== ========
Total assets................... 140,846 208,641 4,031 353,518
======== ======== ======== ========
1999
Revenues from unaffiliated customers... 154,330 112,780 -- 267,110
======== ======== ======== ========
EBITDA as defined...................... 4,788 26,385 -- 31,173
Depreciation and amortization.......... 7,476 12,799 -- 20,275
-------- -------- -------- --------
Operating (loss) income................ (2,688) 13,586 -- 10,898
======== ======== ======== ========
Capital expenditures................... 2,638 8,659 -- 11,297
======== ======== ======== ========
Total assets................... 157,718 197,826 -- 355,544
======== ======== ======== ========
1998
Revenues from unaffiliated customers... 229,984 129,050 -- 359,034
======== ======== ======== ========
EBITDA as defined...................... 21,684 22,350 -- 44,034
Depreciation and amortization.......... 7,739 10,462 -- 18,201
-------- -------- -------- --------
Operating income (loss)................ 13,945 11,888 -- 25,833
======== ======== ======== ========
Capital expenditures................... 18,124 18,021 -- 36,145
======== ======== ======== ========
Total assets................... 194,457 175,029 129,539 499,025
======== ======== ======== ========
94
97
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by geographic segment for each of the three years
ended December 31, 2000, 1999 and 1998, is summarized below in thousands.
Revenues in the US include export sales. Revenues are attributable to countries
based on the location of the entity selling the products or performing the
services. Total assets are attributable to countries based on the physical
location of the entity and its operating assets and do not include intercompany
balances and the net assets of discontinued operations.
UNITED UNITED OTHER
STATES CANADA KINGDOM NON-US TOTAL
-------- -------- ------- ------- --------
2000
Revenues from unaffiliated
customers.................... $154,746 $101,624 $29,149 $19,030 $304,549
Long-lived assets............... 170,105 52,200 19,162 13,373 254,840
1999
Revenues from unaffiliated
customers.................... 171,221 56,221 26,995 12,673 267,110
Long-lived assets............... 160,748 56,408 21,455 11,048 249,659
1998
Revenues from unaffiliated
customers.................... 219,860 73,520 48,332 17,322 359,034
Long-lived assets............... 166,337 52,760 26,263 1,666 247,026
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 2000 and 1999 as follows (in
thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2000
Revenues..................................... $88,227 $68,160 $67,525 $80,637
Gross profit*................................ 28,204 17,535 18,904 22,305
Net income (loss)............................ 3,028 (1,840) (1,071) 1,331
Basic earnings (loss) per share.............. .12 (0.08) (0.04) 0.05
Diluted earnings (loss) per share............ .11 (0.08) (0.04) 0.05
1999
Revenues..................................... 71,314 64,328 63,658 67,810
Gross profit*................................ 19,729 14,815 17,688 15,013
Loss from continuing operations.............. (622) (3,232) (221) (2,864)
Loss from discontinued operations............ -- (701) -- (5,715)
Extraordinary loss........................... -- (349) (578) --
Net loss..................................... (622) (4,282) (799) (8,579)
Basic and diluted loss per share:
Continuing operations........................ (0.03) (0.14) (0.01) (0.12)
Discontinued operations...................... -- (0.03) -- (0.25)
Extraordinary loss........................... -- (0.02) (0.02) --
Net loss..................................... (0.03) (0.19) (0.03) (0.37)
---------------
* Represents revenues less costs of sales.
95
98
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
18. VALUATION ALLOWANCES
Activity in the valuation accounts was as follows (in thousands):
BALANCE AT CHARGED TO TRANSLATION BALANCE AT
BEGINNING COST AND AND END
OF PERIOD EXPENSES DEDUCTIONS OTHER, NET OF PERIOD
---------- ---------- ---------- ----------- ----------
Year Ended December 31, 2000:
Allowance for doubtful accounts
receivable...................... $ 2,283 $ 402 $ (646) $(44) $ 1,995
Reserve for inventories............ 4,620 778 (447) (36) 4,915
Estimated loss on sale of
discontinued operations......... 13,237 -- (10,728) -- 2,509
Year Ended December 31, 1999:
Allowance for doubtful accounts
receivable...................... 1,757 1,180 (581) (73) 2,283
Reserve for inventories............ 4,554 773 (729) 22 4,620
Provision for operating loss during
phaseout period included in net
assets of discontinued
operations...................... 12,977 -- (12,977) -- --
Estimated loss on sale of
discontinued operations......... 9,237 4,000 -- -- 13,237
Year Ended December 31, 1998:
Allowance for doubtful accounts
receivable...................... 1,252 1,570 (1,251) 186 1,757
Reserve for inventories............ 1,912 2,645 (334) 331 4,554
Provision for operating loss during
phaseout period included in net
assets of discontinued
operations...................... -- 12,977 -- -- 12,977
Estimated loss on sale of
discontinued operations......... -- 9,237 -- -- 9,237
19. SUBSEQUENT EVENTS
On February 9, 2001, the Company began trading its common stock on the New
York Stock Exchange under the symbol "OIS" pursuant to completion of its initial
public offering. On February 14, 2001, the Company closed the business
combination and the offerings thereby acquiring the minority interests and the
Sooner operations.
Concurrent with the offering, the Company acquired Sooner Inc. for $69.5
million. The Company exchanged 7,597,152 shares of its common stock for all of
the outstanding common shares of Sooner Inc. The Company will account for the
acquisition under the purchase method and will record approximately $39 million
in goodwill, that will be amortized over a 15-year period.
Concurrently with the closing of the offering, the Company issued 4,275,555
shares of common stock to SCF III and SCF IV in exchange for approximately $36.0
million of indebtedness of Oil States and Sooner which was held by SCF III and
SCF IV.
With the proceeds received in the offering, the Company repaid outstanding
debt of the Controlled Group and Sooner of $40.9 million, redeemed preferred
stock of Oil States of $21.8 million, paid accrued interest on subordinated debt
and accrued dividends on preferred stock aggregating $6.9 million, and
repurchased common stock from non-accredited shareholders and shareholders
holding pre-emptive stock purchase rights for $1.6 million. The balance of the
proceeds were used to reduce amounts outstanding under bank lines of credit.
Preferred stock redeemed with offering proceeds included the Series A Preferred
Stock, the Series A
96
99
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Exchangeable Cumulative Preferred Stock, the Series B Exchangeable Cumulative
Preferred Stock and the Convertible Preferred Stock, all instruments of OSI.
On February 14, 2001, the Company entered into a $150 million senior
secured revolving credit facility. This new credit facility replaced existing
bank credit facilities. (see Note 5.)
97
100
SOONER INC.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Sooner Inc.
We have audited the accompanying balance sheets of Sooner Inc. as of June
30, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sooner Inc. at
June 30, 2000 and 1999, and the consolidated results of its operations and its
cash flows for the years in then ended in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
August 14, 2000
98
101
SOONER INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
JUNE 30,
DECEMBER 31, -------------------
2000 2000 1999
------------ -------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,430 $ 1,878 $ 4,852
Accounts receivable -- trade, net of allowance for
doubtful accounts of $249 (unaudited), $250 and
$196.................................................. 32,239 32,278 16,955
Tubular goods inventories................................ 71,761 52,039 56,928
Refundable income taxes.................................. -- -- 32
Deferred taxes........................................... 526 779 802
Prepaid expenses and other............................... 472 746 1,339
-------- -------- --------
Total current assets............................. 106,428 87,720 80,908
-------- -------- --------
Property, plant and equipment.............................. 5,805 5,768 5,497
Accumulated depreciation................................... (1,279) (974) (412)
-------- -------- --------
4,526 4,794 5,085
-------- -------- --------
Goodwill, net of accumulated amortization of $2,008
(unaudited), $1,491 and $526............................. 13,262 14,066 13,953
Accounts and notes receivable.............................. 1,524 1,014 1,609
Investments, at cost....................................... 2,208 2,204 2,204
Debt issuance costs, net of accumulated amortization of $74
(unaudited), $60 and $30................................. 74 89 119
Deposits and other assets.................................. 260 381 273
-------- -------- --------
Total assets..................................... $128,282 $110,268 $104,151
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................ $ 35,348 $ 25,546 $ 9,802
Income taxes payable..................................... 311 309 203
Accrued liabilities...................................... 927 1,544 1,147
Accrued taxes other than income taxes.................... 1,247 917 1,257
Current portion of long-term notes payable............... -- 156 156
Current portion of subordinated long-term notes payable
to related parties.................................... -- 2,155 4,000
-------- -------- --------
Total current liabilities........................ 37,833 30,627 16,565
-------- -------- --------
Long-term notes payable.................................... 33,881 27,545 41,093
Long-term subordinated notes payable to related parties.... 26,906 26,116 33,243
-------- -------- --------
Total long-term liabilities...................... 60,787 53,661 74,336
-------- -------- --------
Stockholders' equity:
Common stock, $.01 per value; 100,000 shares authorized,
26,178 and 23,703 shares issued and outstanding....... -- -- --
Capital in excess of par value........................... 26,176 26,176 23,701
Retained earnings (accumulated deficit).................. 3,486 (196) (10,451)
-------- -------- --------
Total stockholders' equity....................... 29,662 25,980 13,250
-------- -------- --------
Total liabilities and stockholders' equity....... $128,282 $110,268 $104,151
======== ======== ========
See accompanying notes.
99
102
SOONER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND EARNINGS PER SHARE)
SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------
2000 1999 2000 1999
----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
Net sales....................................... $136,529 $104,416 $258,985 $108,768
Operating costs and expenses:
Cost of sales................................. 125,457 95,530 235,134 108,613
Selling, general and administrative
expenses................................... 4,494 4,485 9,306 7,365
-------- -------- -------- --------
129,951 100,015 244,440 115,978
-------- -------- -------- --------
Operating income (loss)......................... 6,578 4,401 14,545 (7,210)
-------- -------- -------- --------
Other income (expense):
Investment and other income................... 87 198 538 613
Interest expense.............................. (1,939) (2,460) (4,583) (4,450)
-------- -------- -------- --------
(1,852) (2,262) (4,045) (3,837)
-------- -------- -------- --------
Income (loss) before income taxes............... 4,726 2,139 10,500 (11,047)
-------- -------- -------- --------
Provision for (benefit from) income taxes:
Current....................................... 875 15 223 173
Deferred...................................... 169 -- 22 (769)
-------- -------- -------- --------
1,044 15 245 (596)
-------- -------- -------- --------
Net income (loss)............................... $ 3,682 $ 2,124 $ 10,255 $(10,451)
======== ======== ======== ========
Income (loss) per common share:
Basic and diluted............................. $ 140.65 $ 89.66 $ 421.88 $(589.62)
======== ======== ======== ========
Weighted average shares outstanding........... 26,178 23,690 24,308 17,725
======== ======== ======== ========
See accompanying notes.
100
103
SOONER INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RETAINED
EARNINGS
COMMON ADDITIONAL (ACCUMULATED
STOCK PAID-IN DEFICIT) TOTAL
------ ---------- ------------ --------
Issuance of 17,183 shares of common stock at
formation of Company............................ $-- $17,182 $ -- $ 17,182
Issuance of 6,520 shares of common stock.......... -- 6,519 -- 6,519
Net loss.......................................... -- -- (10,451) (10,451)
--- ------- -------- --------
Balance at June 30, 1999.......................... -- 23,701 (10,451) 13,250
Issuance of 25 shares of common stock............. -- 25 -- 25
Repurchase and cancellation of 50 shares of common
stock........................................... -- (50) -- (50)
Exercise of warrants to purchase 2,500 shares of
common stock.................................... -- 2,500 -- 2,500
Net income........................................ -- -- 10,255 10,255
=== ======= ======== ========
Balance at June 30, 2000.......................... $-- $26,176 $ (196) $ 25,980
=== ======= ======== ========
Net income (unaudited)............................ -- -- 3,682 3,682
--- ------- -------- --------
Balance at December 31, 2000 (unaudited).......... $-- $26,176 $ 3,486 $ 29,662
=== ======= ======== ========
See accompanying notes.
101
104
SOONER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SIX-MONTH PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------
2000 1999 2000 1999
----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
Operating activities
Net income (loss)............................. $ 3,682 $ 2,124 $ 10,255 $(10,451)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization expense...... 866 798 1,641 1,055
(Gain) loss on disposition of assets....... 58 40 (345) (256)
Noncash interest expense recorded as
additional notes payable principal due
related parties.......................... 790 712 2,161 2,065
Changes in assets and liabilities:
Accounts and accrued interest
receivable............................ (1,268) (3,670) (14,728) 5,382
Tubular goods inventories................ (19,722) 4,632 4,889 36,428
Accounts payable and accrued
liabilities........................... 10,314 9,329 15,802 (16,111)
Income taxes............................. 255 38 160 (630)
Prepaid expenses and other............... 393 141 466 296
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... (4,632) 14,144 20,301 17,778
-------- -------- -------- --------
Investing activities
Purchases of property, plant and equipment...... (136) (304) (782) (622)
Proceeds from sale of assets.................... 15 93 791 2,905
Purchases of businesses, less cash acquired of
$459.......................................... -- -- -- (96,235)
Other........................................... (3) -- -- 84
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................... (124) (211) 9 (93,868)
-------- -------- -------- --------
Financing activities
Proceeds from issuance of notes payable and
draws on line of credit....................... -- -- 4,000 53,921
Proceeds from issuance of notes payable from
related parties............................... -- -- -- 34,548
Payment of debt issuance costs.................. -- -- -- (149)
Issuance of shares of common stock.............. -- 25 25 21,486
Repurchase and cancellation of shares of common
stock......................................... -- (50) (50) --
Debt payments on notes payable and line of
credit........................................ 6,176 (11,068) (17,548) (25,494)
Debt payments on notes payable to related
parties....................................... (1,868) (4,895) (9,711) (3,370)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................... 4,308 (15,988) (23,284) 80,942
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... (448) (2,055) (2,974) 4,852
Cash and cash equivalents at beginning of
period........................................ 1,878 4,852 4,852 --
-------- -------- -------- --------
Cash and cash equivalents at end of period...... $ 1,430 $ 2,797 $ 1,878 $ 4,852
======== ======== ======== ========
Cash paid during year for interest.............. $ 1,142 $ 1,743 $ 2,467 $ 2,355
======== ======== ======== ========
Cash paid during year for income taxes.......... $ 700 $ -- $ 85 $ --
======== ======== ======== ========
See accompanying notes.
102
105
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Sooner Inc. is a distributor of oilfield tubular products and was formed to
acquire Sooner Pipe and Supply Corporation and subsidiaries (collectively the
"Company"). The Company's operations are located primarily in the United States
("U.S."). In addition, the Company has sales and marketing subsidiaries located
in the United Kingdom ("U.K."), Canada, Nigeria and Venezuela. The majority of
sales are to large fully integrated and independent oil companies headquartered
in the U.S. The Company generally does not require collateral on trade
receivables from these companies.
Recent Developments
On July 31, 2000, the Company entered into a Combination Agreement with Oil
States International, Inc. ("OSII") whereby OSII would acquire the Company in a
stock-for-stock merger and the Company would become a wholly-owned subsidiary of
OSII. The merger closed on February 14, 2001.
Consolidation
The accompanying financial statements include Sooner Inc. and all
wholly-owned subsidiaries. All significant intercompany balances and
transactions, including any profits in inventory, are eliminated in
consolidation.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash Equivalents
The Company includes as cash equivalents all certificates of deposit and
U.S. treasury securities with original maturities of 90 days or less.
Inventories
Inventories are priced at lower of cost or market using the first-in,
first-out (FIFO) cost method.
Property, Plant and Equipment
Depreciation is computed on the straight-line method at varying rates by
asset classification. Assets of foreign subsidiaries are depreciated on
straight-line and accelerated methods over their estimated useful lives.
Amortization of leasehold improvements is computed on the straight-line method
over the life of the lease. Depreciation expense was $626,000 and $499,000 for
the years ended June 30, 2000 and 1999, respectively.
Capital additions and major renewals and betterments are capitalized as
incurred and are depreciated over the estimated useful lives of the assets. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed, and any resulting gain or loss is reflected in other
income for the period. Normal repairs and maintenance are expensed to current
operations as incurred.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over fair value of assets of
businesses acquired, is amortized on a straight-line basis over a 15-year
period. Debt issuance costs are amortized as interest expense on a
103
106
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
straight-line basis, which does not differ materially from the results had the
interest method been used, over the life of the Company's revolving credit
agreement which expires on July 2, 2003. Total amortization costs were
$1,015,000 and $556,000 for the years ended June 30, 2000 and 1999,
respectively.
Impairment of Long-Lived Assets
The Company evaluates the long-lived assets, including related intangibles,
of identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether an impairment
has occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
Incentive Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB No. 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Foreign Currency Translation
The Company has foreign subsidiaries operating in the United Kingdom,
Canada, Nigeria and Venezuela. For its foreign subsidiaries, the functional
currency is considered to be the U.S. dollar. The foreign currency transaction
adjustments are included in determining net income or loss.
Income Taxes
The Company provides deferred income taxes on temporary differences between
the financial statement and tax bases of assets and liabilities. No deferred
U.S. income taxes have been provided on the undistributed earnings
(approximately $6,191,000 and $4,320,000 at June 30, 2000 and 1999,
respectively) of the foreign subsidiaries since it is the Company's intention to
indefinitely reinvest those earnings to finance the continued growth and
development of those entities. Under present tax law, such an amount would be
subject to U.S. income taxes at prevailing tax rates less foreign tax credits if
remitted to the parent company.
Revenue Recognition
Net sales are recognized when oilfield tubular products are shipped or, if
terminal services are also provided by the Company, when risk of ownership has
passed to a customer. Terminal fees of $3,819,000 and $2,500,000 were recognized
for the years ended June 30, 2000 and 1999, respectively, on a monthly basis as
earned.
104
107
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Basic earnings per share is computed by dividing the net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is determined on the assumption that outstanding
stock options have been converted using the treasury stock method. For purposes
of computing earnings per share in a loss period, common stock equivalents are
excluded from the computation of weighted average common shares outstanding
because their effect is antidilutive.
New Accounting Standards
In March 1998, Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Software Developed or Obtained for Internal Use," was issued. This SOP
requires capitalization of specified costs incurred in connection with an
internal-use software project. The Company adopted the SOP on July 1, 1999.
Neither the Company's financial position, results of operations nor cash flows
were significantly impacted by this SOP.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities." The SOP is effective for fiscal years beginning after December 15,
1998, and requires start-up costs capitalized prior to that date be written off
and any future start-up costs to be expensed as incurred. The Company adopted
the SOP on July 1, 1999. The adoption of the SOP did not have a material impact
on the Company's financial position, results of operations or cash flows.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued which requires that all derivative instruments
be recorded as assets or liabilities on the balance sheet at fair value. The
Company adopted SFAS No. 133 on July 1, 2000. The Company's financial position,
results of operations or cash flows were not significantly impacted by the
adoption of this SFAS.
2. ACQUISITIONS
During 1999, the Company acquired four oilfield tubular products
distribution businesses for $115,627,000. The acquisitions were accounted for
using the purchase method in which the Company allocated the purchase price
based on the estimated fair values of the assets acquired. The excess of the
purchase price over the fair value of the acquired net assets of $14,479,000 was
recorded as goodwill. Results of operations from the acquisitions are included
in the accompanying consolidated financial statements from the dates of
acquisition.
The following selected unaudited pro forma information (in thousands,
except per share amounts) is provided to present a summary of the combined
results of the Company as if the acquisitions discussed above had occurred at
the beginning of 1999, giving effect to purchase accounting adjustments. The pro
forma data is for informational purposes only and may not necessarily reflect
the results of operations had the acquired businesses operated as part of the
Company for the full year ended June 30, 1999.
FOR THE
YEAR ENDED
JUNE 30,
1999
----------
Net sales................................................ $271,784
Net loss................................................. (8,554)
Basic and diluted loss per share......................... (360.90)
105
108
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisitions were financed with cash and noncash proceeds from the
issuance of debt and equity. Cash proceeds were as follows (in thousands):
Revolving line of credit.................................. $48,921
Term note payable......................................... 5,000
Junior subordinated notes payable......................... 21,387
Issuance of 21,386 shares of common stock of the
Company................................................. 21,386
-------
$96,694
=======
Noncash proceeds reflect debt and equity issued to the former owner of one
of the acquired companies and were as follows (in thousands):
Senior subordinated note payable.......................... $10,000
Senior subordinated contingent note payable............... 4,840
Junior subordinated note payable.......................... 2,047
Issuance of 2,046 shares of common stock of the Company... 2,046
-------
$18,933
=======
One of the acquisitions included a contingent payment provision. The
Company estimated the total contingent payment at the acquisition date to be
$4,840,000. At June 30, 2000, the Company reevaluated its estimate of the total
contingent payment and increased the senior subordinated contingent note payable
by $1,000,000 as a non-cash transaction. Goodwill was also increased $1,000,000
and will be amortized over 13 years, which is the remaining amortization period
related to this acquisition.
3. INVESTMENTS
Investments consist primarily of a 20% interest in common stock of an
oilfield tubular products company. The investment is carried at cost ($2,059,000
at June 30, 2000 and 1999), as the Company does not have the ability to exercise
significant influence over the operating and financial policies of the company.
The investment was obtained by the Company in the year ended June 30, 1999 in a
noncash transaction in exchange for a note receivable and accrued interest owed
the Company from a related party who purchased inventory and real estate from
the Company for $3,804,000. A cash payment of $1,850,000 was made by the related
party on August 31, 1998 with the remaining balance represented by a $1,954,000
subordinated 6% note receivable.
106
109
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, and related estimated useful lives
consists of the following (in thousands):
DECEMBER 31, JUNE 30, JUNE 30, ESTIMATED
2000 2000 1999 USEFUL LIVES
------------ -------- -------- ------------
(UNAUDITED)
Land....................................... $ 544 $ 544 $ 689
Land improvements.......................... 144 132 134 20
Buildings.................................. 901 901 1,012 9-40
Machinery and equipment.................... 1,951 1,948 1,978 6-10
Office equipment and software.............. 1,647 1,602 961 6-10
Automotive equipment....................... 205 227 380 5
Improvements to leased premises............ 413 414 343 9
------ ------ ------
$5,805 $5,768 $5,497
====== ====== ======
5. COMMITMENTS
The Company leases office space for periods to 2002. The related rent
expense for the year ended June 30, 2000 and 1999 totaled $1,080,000 and
$815,000, respectively. At June 30, 2000, minimum annual rentals under
noncancelable leases are as follows (in thousands):
2001........................................................ $ 404
2002........................................................ 3
-----
407
Less: noncancelable sublease to stockholder................. (138)
-----
$ 269
=====
6. STOCK AGREEMENTS
The Company adopted a Stock Option Plan (the "Plan") that provides for the
issuance of options to key employees to purchase the Company's common stock. The
exercise price of all the outstanding options is $1,000, which has been
determined to be not less than the fair value of a share of common stock at the
grant date. Options under the Plan vest and become exercisable in four annual
installments beginning one year after the grant date, and expire six years after
the grant date. The Company granted 1,300 and 875 options in the years ended
June 30, 2000 and 1999, respectively. The Company canceled 400 options in the
year ended June 30, 2000. The weighted average remaining life of the options is
5.1 years. There were 119 options exercisable at June 30, 2000. At June 30,
2000, there were 1,225 shares of the Company's common stock reserved for future
grants of options.
The Company also issued during the years ended June 30, 2000 and 1999
common stock options to key employees to purchase 350 and 325 shares,
respectively, of common stock of the Company for $1,000 per share. These options
vested upon grant. Two employees purchased a total of 100 shares of common stock
during the year ended June 30, 1999 for $100,000. Options to purchase a total of
225 shares expired unexercised in July 1999. At June 30, 2000, options to
purchase a total of 350 shares were outstanding and expire during 2001 if not
exercised.
SFAS No. 123 requires pro forma disclosures of net income as if the Company
has accounted for employee stock options under the fair value method of SFAS No.
123. The fair value of these options are estimated at the date of grant using
the "minimum value" option pricing model with the following weighted
107
110
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average assumptions for the years ended June 30, 2000 and 1999, respectively:
risk-free interest rate of 5.78% and 5.75%, dividend yield of zero and expected
life of each option of four years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Using the "minimum
value" option valuation model, the weighted average grant date value of options
granted during the years ended June 30, 2000 and 1999 was $206.40 and $205.45
per option, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income (loss) and basic and diluted earnings (loss) per share for
the years ended June 30, 2000 and 1999 is as follows:
2000 1999
----------- ------------
Pro forma net income (loss)............................... $10,176,000 $(10,480,000)
Basic and diluted earnings (loss) per share............... $ 418.63 $ (591.26)
During 1999, the Company issued 26,104 warrants to purchase common stock to
its stockholders. These warrants were issued in conjunction with other
stockholder transactions, including the funding of the junior subordinated notes
payable and the modifications to the senior subordinated notes payable and the
senior subordinated contingent note payable. The warrants are exercisable at
$1,000 per share and expire between July 2, 2000 and June 30, 2008. In April
2000, a shareholder of the Company exercised warrants to acquire 2,500 shares of
common stock. The shareholder paid for the shares in a non-cash exchange for
$2,500,000 in outstanding senior subordinated notes payable, including interest
and principal due the shareholder.
7. PROFIT SHARING PLANS
The Company has a contributory profit sharing plan in which substantially
all U.S. employees are eligible to participate. The plan provides for annual
Company contributions of a discretionary amount determined by the Board of
Directors, provided however that the amount of such contribution shall not
exceed the maximum amount deductible by the Company under the provisions of the
Internal Revenue Code. Company contributions to the plan were $128,000 and
$104,000 during the years ended June 30, 2000 and 1999, respectively.
8. INCOME TAXES
The components of the provision for (benefit from) income taxes for the
year ended June 30, are as follows (in thousands):
2000 1999
---- -----
Current:
Federal................................................... $154 $ --
State..................................................... 29 --
Foreign................................................... 40 173
---- -----
223 173
Deferred.................................................... 22 (769)
---- -----
Total provision (benefit)................................... $245 $(596)
==== =====
108
111
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the U.S. statutory tax rate for the year ended June 30
to the consolidated provision for (benefit from) income taxes is as follows (in
thousands):
2000 1999
------- -------
Expected federal income tax provision (benefit) at current
statutory rates........................................... $ 3,570 $(3,756)
Increase (decrease) in valuation allowance.................. (3,700) 3,700
State income tax (benefit), net of federal benefit.......... 415 (582)
Income of foreign subsidiaries taxed at different rates,
including foreign net operating loss carryforwards
utilized.................................................. (93) (40)
Other....................................................... 53 82
------- -------
Provision for (benefit from) income taxes................... $ 245 $ (596)
======= =======
Significant components of the Company's deferred tax liabilities and assets
as of June 30 are as follows (in thousands):
2000 1999
---- -------
Deferred tax assets:
Book over tax accrued liabilities......................... $212 $ 245
Book over tax reserves for inventory and accounts
receivable............................................. 531 2,114
Tax over book inventory capitalization.................... 36 112
Net operating loss carryforward........................... -- 2,031
---- -------
Total deferred tax assets................................. 779 4,502
Less valuation allowance.................................... -- (3,700)
---- -------
Net deferred tax assets..................................... $779 $ 802
==== =======
The Company had a U.S. net operating loss carryforward of $5,109,000 which
was utilized in 2000. The Company reversed the valuation allowance of $3,700,000
in 2000 as the Company expects the deferred tax assets at June 30, 2000 to be
fully realizable.
9. LONG-TERM NOTES PAYABLE
Long-term debt and notes payable consist of the following (in thousands):
DECEMBER 31, JUNE 30, JUNE 30,
2000 2000 1999
------------ -------- --------
(UNAUDITED)
Revolving line of credit............................. $33,881 $27,545 $41,093
Term note payable.................................... -- 156 156
Senior subordinated notes payable.................... -- 1,160 9,772
Senior subordinated contingent note payable.......... -- 995 2,845
Junior subordinated notes payable.................... 26,906 26,116 24,626
------- ------- -------
60,787 55,972 78,492
Less current portion................................. -- 2,311 4,156
------- ------- -------
$60,787 $53,661 $74,336
======= ======= =======
The Company has a $50,000,000 credit agreement, with priority to the senior
subordinated notes payable, senior subordinated contingent note payable and
junior subordinated notes payable. Total borrowings under the revolving line of
credit, the term note payable and any letters of credit cannot exceed
$50,000,000. Aggregate letters of credit cannot exceed $5,000,000. The amounts
available under the line of credit at
109
112
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 2000 and 1999 were approximately $13,200,000 and $3,000,000,
respectively. The credit agreement is secured by all of the accounts receivable,
inventory and property, plant and equipment of the Company as defined in the
credit agreement ($89,111,000 and $78,968,000 at June 30, 2000 and 1999,
respectively) plus all common stock of the subsidiaries of the Company. The
credit agreement terminates on July 2, 2003 and bears interest at the First
Union National prime rate (7.75% at June 30, 2000), or adjusted Eurodollar rate
as defined in the agreement plus, in either case, 1.75% (8.4% at June 30, 2000).
The credit agreement also requires the Company to maintain a minimum net worth
and restricts the payment of cash dividends, incurrence of additional debt or
sale of property, plant and equipment as defined in the credit agreement. A
1/4% per annum unused commitment fee is charged monthly on the unused portion
of the credit agreement plus a $2,000 monthly service fee.
The Company had a $10,000,000 senior subordinated note payable and a
$7,500,000 senior subordinated contingent note payable as defined in the stock
purchase agreement ("Agreement") between the former owner of Sooner Pipe &
Supply Corporation and the Company. The senior subordinated note payable was
subsequently amended and restated later in the year ended June 30, 1999 into two
senior subordinated notes payable (Notes A and B) of $5,000,000 each. Principal
payments on Note A are due in five equal quarterly installments of $1,000,000 on
the first day of January, April, July and October, commencing July 1, 1999.
Accrued interest is payable on October 1, 2000. At June 30, 2000, $119,000 was
outstanding on Note B and is due on July 31, 2000. The senior subordinated notes
payable have priority over the senior subordinated contingent note payable and
junior subordinated notes payable and bear interest at a rate dependent upon the
existence of outstanding borrowings on the credit agreement discussed above. If
a balance is outstanding on the credit agreement, the senior subordinated note
payable bears interest at that rate plus .25% (8% at June 30, 2000). If no
amounts are outstanding against the credit agreement, the notes bear interest at
an annual rate of 7.7%. However, the interest rate shall never be lower than
that of any indebtedness incurred in conjunction with a designated transaction
as defined by the Agreement. In the event of default, the notes will bear an
interest rate of 9.7%.
The senior subordinated contingent note payable bears interest at a
non-compounding rate of 6% per annum and has priority over the junior
subordinated notes payable. Principal and interest payments on the senior
subordinated contingent note payable are limited to 37.5% of the quarterly
proceeds from the previous calendar quarter's sale of any portion of $20,000,000
of designated inventory, as defined in the Agreement. The other 62.5% of the
proceeds from the sale of the designated inventory must be applied as payment
against the senior subordinated Note B as identified above. The lender has the
option, with ten days written notice, of demanding final payment of $150,000 on
the senior subordinated contingent note payable when the value of the designated
inventory has been reduced to $2,000,000. The value of the designated inventory
at June 30, 2000 for purposes of this note was $2,038,000.
At formation, the Company entered into two junior subordinated notes
payable with its stockholders for $17,184,000. During May and June 1999, the
Company entered into additional junior subordinated notes payable to its
stockholders for $6,250,000. All junior subordinated notes bear an interest rate
of 6% compounded annually and are due on June 30, 2008. A $169,000 junior
subordinated note payable and 170 shares of $.01 par value common stock were
issued in exchange for a portion of the scheduled July 1, 1999 payment on the
senior subordinated Note A described above and represents a noncash transaction.
The unpaid interest on the senior and junior subordinated notes payable is
capitalized as additional principal in a noncash transaction until due.
110
113
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 2000, annual maturities of long-term notes payable were as
follows (in thousands):
2001...................................................... $ 2,311
2002...................................................... --
2003...................................................... --
2004...................................................... 27,545
2005...................................................... --
Thereafter................................................ 26,116
-------
$55,972
=======
10. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair-value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet approximate fair value due to the short-term maturity of
these instruments.
Noncurrent accounts and notes receivable: As the maturity of these
receivables is less than three years, fair value is estimated to
approximate historically recorded amounts.
Investments at cost: Fair value is estimated to approximate
historically recorded amounts as the investments are primarily in a
non-publicly traded company for which it is not practicable to estimate its
fair value.
Long-term notes payable: The fair value of the Company's long-term
notes payable is based on the prices of similar securities with similar
terms and credit ratings. The carrying amount and fair value of the
Company's long-term notes payable is $55,972,000 and $55,391,000,
respectively, at June 30, 2000 and $78,492,000 and $79,197,000,
respectively, at June 30, 1999.
11. LEGAL CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management does not believe that the ultimate
resolution of these matters will have a material impact on the Company's
financial position, results of operations or cash flows.
12. SEGMENT DISCLOSURES
The Company evaluates performance based upon segment income (loss) before
income taxes which includes revenues from external and internal customers,
operating costs and expenses, and depreciation and amortization. The accounting
policies of the segments are the same as those described in Note 1. Intersegment
sales are generally accounted for at the cost of the selling segment.
The Company's geographical reporting segments are based on product shipment
origin for revenues and physical location for other items. Other includes
operations in Venezuela and Canada. Long-lived assets are
111
114
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprised of property, plant and equipment, goodwill and other intangible and
non-current assets (in thousands).
AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
---------------------------------------------------------------
U.S. NIGERIA U.K. OTHER ELIMINATIONS TOTAL
-------- ------- ------- ------ ------------ --------
(UNAUDITED)
Revenues:
External.............. $131,185 $ 3,267 $ 2,082 $ (5) $ -- $136,529
Intersegment.......... 2,046 -- -- -- (2,046) --
-------- ------- ------- ------ -------- --------
Total......... 133,231 3,267 2,082 (5) (2,046) 136,529
Income before income
taxes................. 9,523 575 237 25 (5,634) 4,726
Total assets............ 187,614 7,589 3,381 2,094 (72,396) 128,282
Long-lived assets....... 89,145 1,573 376 -- (69,240) 21,854
Additions to long-lived
assets................ 125 -- 11 -- -- 136
Depreciation and
amortization.......... 777 78 11 -- -- 866
AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
---------------------------------------------------------------
U.S. NIGERIA U.K. OTHER ELIMINATIONS TOTAL
-------- ------- ------- ------ ------------ --------
(UNAUDITED)
Revenues:
External.............. $ 99,723 $ 1,846 $ 2,466 $ 381 $ -- $104,416
Intersegment.......... 1,517 -- -- -- (1,517) --
-------- ------- ------- ------ -------- --------
Total......... 101,240 1,846 2,466 381 (1,517) 104,416
Income before income
taxes................. 5,166 55 166 13 (3,261) 2,139
Total assets............ 143,819 8,864 2,982 2,669 (57,961) 100,373
Long-lived assets....... 70,751 2,736 151 -- (50,018) 23,620
Additions to long-lived
assets................ 248 25 31 -- -- 304
Depreciation and
amortization.......... 713 77 8 -- -- 798
AS OF AND FOR THE YEAR ENDED JUNE 30, 2000
---------------------------------------------------------------
U.S. NIGERIA U.K. OTHER ELIMINATIONS TOTAL
-------- ------- ------- ------ ------------ --------
Revenues:
External.............. $242,582 $12,263 $ 3,759 $ 381 $ -- $258,985
Intersegment.......... 3,414 -- -- -- (3,414) --
-------- ------- ------- ------ -------- --------
Total......... 245,996 12,263 3,759 381 (3,414) 258,985
Income before income
taxes................. 22,943 1,555 300 55 (14,353) 10,500
Total assets............ 166,233 11,659 2,442 2,112 (72,178) 110,268
Long-lived assets....... 84,635 1,245 276 -- (63,608) 22,548
Additions to long-lived
assets................ 1,715 37 30 -- -- 1,782
Depreciation and
amortization.......... 1,455 170 16 -- -- 1,641
112
115
SOONER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 1999
---------------------------------------------------------------
U.S. NIGERIA U.K. OTHER ELIMINATIONS TOTAL
-------- ------- ------- ------ ------------ --------
Revenues:
External.............. $ 77,256 $14,726 $12,134 $4,652 $ -- $108,768
Intersegment.......... 3,421 -- -- -- (3,421) --
-------- ------- ------- ------ -------- --------
Total......... 80,677 14,726 12,134 4,652 (3,421) 108,768
Income (loss) before
income taxes.......... (20,647) 2,894 645 (21) 6,082 (11,047)
Total assets............ 142,063 10,844 5,554 4,010 (58,320) 104,151
Long-lived assets....... 67,819 2,152 29 -- (46,757) 23,243
Additions to long-lived
assets................ 21,913 2,338 45 2 -- 24,298
Depreciation and
amortization.......... 851 185 16 3 -- 1,055
The Company had net sales greater then 10% of total net sales to the
following customers by segment:
2000 1999
---- -------
Nigeria -- Mobil Producing Nigeria.......................... -- $14,723
U.K. -- Mobil North Sea..................................... -- 12,134
U.S. -- ARCO Alaska, Inc. .................................. -- 11,925
U.S. -- UNOCAL.............................................. -- 11,072
113
116
SOONER PIPE & SUPPLY CORPORATION
REPORT OF INDEPENDENT AUDITORS
To the Stockholder of
Sooner Pipe & Supply Corporation
We have audited the accompanying consolidated balance sheet of Sooner Pipe
& Supply Corporation as of July 2, 1998 and the related consolidated statements
of operations, stockholder's equity, and cash flows for the period from August
1, 1997 to July 2, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Sooner Pipe &
Supply Corporation at July 2, 1998 and the consolidated results of its
operations and its cash flows for the period from August 1, 1997 to July 2,
1998, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
August 14, 1998
114
117
SOONER PIPE & SUPPLY CORPORATION
CONSOLIDATED BALANCE SHEET
JULY 2, 1998
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 459
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$250.................................................. 19,809
Affiliates............................................. 57
Accrued interest receivable............................... 3
Deferred income taxes..................................... 76
Income tax receivable..................................... 491
Inventories............................................... 27,695
Prepaid expenses and other................................ 1,599
--------
Total current assets.............................. 50,189
Property, plant and equipment............................... 17,664
Accumulated depreciation and amortization................... (12,297)
--------
5,367
Investments and other assets:
Accounts and notes receivable............................. 3,037
Deposits and other assets................................. 502
--------
3,539
--------
Total assets...................................... $ 59,095
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable -- trade................................. $ 23,215
Accrued liabilities....................................... 1,343
Accrued taxes other than income taxes..................... 1,589
--------
Total current liabilities......................... 26,147
Stockholder's equity:
Common stock, $100 par value; 10,000 shares authorized,
7,000 shares issued.................................... 700
Capital in excess of par value............................ 1
Retained earnings......................................... 34,017
Treasury stock............................................ (1,770)
--------
Total stockholder's equity........................ 32,948
--------
Total liabilities and stockholder's equity........ $ 59,095
========
See accompanying notes.
115
118
SOONER PIPE & SUPPLY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 1, 1997 TO JULY 2, 1998
(IN THOUSANDS, EXCEPT SHARES AND EARNINGS PER SHARE)
Net sales................................................... $185,098
Operating costs and expenses:
Cost of sales............................................. 161,774
Terminal operating expenses............................... 3,725
Selling, general and administrative expenses.............. 21,828
--------
187,327
--------
Operating loss.............................................. (2,229)
Other income (expense):
Investment income......................................... 863
Interest expense.......................................... (52)
Other..................................................... 498
--------
1,309
--------
Loss before income taxes.................................... (920)
Provision for income taxes:
Current................................................... (334)
Deferred.................................................. 338
--------
4
--------
Net loss.................................................... $ (924)
========
Loss per common share:
Basic and diluted......................................... $(132.00)
Weighted average shares outstanding....................... 7,000
See accompanying notes.
116
119
SOONER PIPE & SUPPLY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD AUGUST 1, 1997 THROUGH JULY 2, 1998
(IN THOUSANDS)
CAPITAL IN
EXCESS OF
COMMON PAR RETAINED TRANSLATION TREASURY
STOCK VALUE EARNINGS ADJUSTMENT STOCK TOTAL
------ ---------- -------- ----------- -------- -------
Balance at August 1, 1997......... $700 $1 $54,024 $14 $(1,770) $52,969
Net loss.......................... -- -- (924) -- -- (924)
Dividends Declared................ -- -- (19,083) -- -- (19,083)
Currency Translation Adjustment... -- -- -- (14) -- (14)
---- -- ------- --- ------- -------
Balance at July 2, 1998........... $700 $1 $34,017 $-- $(1,770) $32,948
==== == ======= === ======= =======
See accompanying notes.
117
120
SOONER PIPE & SUPPLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 1, 1997 TO JULY 2, 1998
(IN THOUSANDS)
Operating activities
Net loss from operations.................................. $ (924)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 889
Gain on disposition of assets.......................... (53)
Changes in assets and liabilities:
Accounts and accrued interest receivable............. 1,660
Inventories.......................................... (10,461)
Accounts payable and accrued liabilities............. 1,717
Income taxes......................................... 328
Other................................................ (1,246)
--------
Net cash used in operating activities............. (8,090)
Investing activities
Purchases of investment securities........................ (13,507)
Maturities and sales of investment securities............. 8,512
Purchases of property, plant and equipment................ (2,180)
Proceeds from sale of assets.............................. 1,019
Other..................................................... (2,280)
--------
Net cash used in investing activities............. (8,436)
Financing activities
Dividends paid............................................ (5,000)
--------
Net decrease in cash and cash equivalents................. (21,526)
Cash and cash equivalents at beginning of period.......... 21,985
--------
Cash and cash equivalents at end of period................ $ 459
========
Supplemental disclosure of cash flows:
Income taxes refunded, net................................ $ 618
Noncash dividends declared and paid....................... $ 14,083
See accompanying notes.
118
121
SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is a distributor of oilfield tubular and general products. The
Company's operations are located primarily in the United States ("U.S."). In
addition, the Company has sales and marketing subsidiaries located in the United
Kingdom ("U.K."), Canada, Nigeria and Barbados. The majority of sales are to
large fully-integrated and independent oil companies headquartered in the U.S.
The Company generally does not require collateral on trade receivables from
these companies.
Consolidation
The accompanying financial statements include Sooner Pipe & Supply
Corporation and all subsidiaries (collectively the "Company"). All significant
intercompany balances and transactions, including any profits in inventory, are
eliminated in consolidation.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash Equivalents
The Company includes as cash equivalents all certificates of deposit and
U.S. treasury securities with original maturities of 90 days or less.
Inventories
Inventories are priced at lower of cost or market. Inventories held in the
U.S. are valued primarily at LIFO and those held outside the U.S. are valued
primarily at FIFO.
Property, Plant and Equipment
Depreciation is computed on the straight-line and declining balance methods
at varying rates by asset classification. Assets of foreign subsidiaries are
depreciated on straight-line and accelerated methods over their estimated useful
lives. Amortization of leasehold improvements is computed on the straight-line
method over the life of the lease.
Capital additions and major renewals and betterments are capitalized as
incurred and are depreciated over the estimated useful lives of the assets. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed, and any resulting gain or loss is reflected in other
income for the period. Normal repairs and maintenance are expensed to current
operations as incurred.
Impairment of Long-Lived Assets
The Company evaluates the long-lived assets of identifiable business
activities for impairment when events or changes in circumstances indicate, in
management's judgment, that the carrying value of such assets may not be
recoverable. The determination of whether an impairment has occurred is based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets. If an impairment has
occurred, the amount of the impairment recognized is determined by estimating
the fair value for the assets and recording a provision for loss if the carrying
value is greater than fair value.
119
122
SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
Foreign Currency Remeasurement
The Company has foreign subsidiaries operating in the United Kingdom,
Canada, Nigeria and Barbados. For its foreign subsidiaries, the functional
currency is considered to be the U.S. dollar, and therefore inventory, fixed
assets and stockholder's equity are translated into U.S. dollars at historical
exchange rates while other balance sheet accounts are remeasured into U.S.
dollars at exchange rates in effect at year-end. The resulting remeasurement
adjustments are included in determining net income or loss. Income and expense
accounts are remeasured at average rates of exchange during the period, except
depreciation, which is translated at historical exchange rates. The foreign
currency transaction adjustments are also included in determining net income or
loss. Included in loss before income taxes is net foreign exchange remeasurement
and transaction expense of $186,000 for the period from August 1, 1997 to July
2, 1998.
Income Taxes
The Company is included in its ultimate parent's consolidated U.S. federal
income tax return. Provision for income taxes is computed at existing statutory
rates without regard to separate return limitations.
The Company provides deferred income taxes on temporary differences between
the financial statement and tax bases of assets and liabilities. No deferred
U.S. income taxes have been provided on the undistributed earnings
(approximately $833,000 at July 2, 1998) of the foreign subsidiaries since it is
the Company's intention to indefinitely reinvest those earnings to finance the
continued growth and development of those entities. Under present tax law, such
an amount would be subject to U.S. income taxes at prevailing tax rates less
foreign tax credits if remitted to the parent company.
Revenue Recognition
Net sales are recognized when oilfield tubular products are shipped or, if
terminal services are also provided by the Company, when risk of ownership has
passed to a customer. Terminal fees of $3,395,000 were recognized in the period
from August 1, 1997 to July 2, 1998 on a monthly basis as earned.
Investment Securities
Management determines the appropriate classification of government debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are designated as held-to-maturity as the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Interest on securities classified
as held-to-maturity is also included in investment income. All of the Company's
investment securities were paid to the Company's parent as a noncash dividend in
the period from August 1, 1997 to July 2, 1998.
Earnings Per Share
Basic earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is determined on the assumption that outstanding stock
options have been converted using the treasury stock method. For purposes of
computing earnings per share in a loss year, common stock equivalents are
excluded from the computation of weighted average common shares outstanding
because their effect is antidilutive.
120
123
SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Standards
In March 1998, Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Software Developed or Obtained for Internal Use," was issued. This SOP
requires capitalization of specified costs incurred in connection with an
internal-use software project. Adoption of this SOP is not required until fiscal
2000. Neither the Company's financial position, results of operations nor cash
flows are expected to be significantly impacted by this SOP.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities." The SOP is effective for fiscal years beginning after December 15,
1998, and requires start-up costs capitalized prior to that date be written off
and any future start-up costs to be expensed as incurred. The Company has
determined that the impact of the adoption of the SOP will not materially impact
the Company's financial position, results of operations or cash flows.
In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued which
requires that all derivative instruments be recorded as assets or liabilities on
the balance sheet at fair value. SFAS No. 133 is not required to be adopted by
the Company until July 1, 2000. The Company's financial position, results of
operations or cash flows are not expected to be significantly impacted by this
SFAS when adopted.
2. INVENTORIES
Inventories consist of the following at July 2, 1998 (in thousands):
Tubular goods............................................. $26,429
Oilfield supplies......................................... 1,266
-------
$27,695
=======
During the period from August 1, 1997 to July 2, 1998, LIFO inventory
quantities were reduced resulting in a partial liquidation of the LIFO bases,
the effect of which decreased the net loss, after income taxes, by $1,912,000.
Inventories stated under the LIFO method were $14,996,000 at July 2, 1998. If
the FIFO method had been used, inventories would have been $45,405,000 higher
than reported at July 2, 1998.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, and related estimated useful lives
consists of the following at July 2, 1998:
COST ESTIMATED
(IN THOUSANDS) USEFUL LIVES
-------------- ------------
Land........................................................ $ 1,295
Land improvements........................................... 2,096 20
Buildings................................................... 3,729 9-40
Machinery and equipment..................................... 6,088 6-10
Office equipment............................................ 2,764 6-10
Automotive equipment........................................ 1,286 5
Improvements to leased premises............................. 406 9
-------
$17,664
=======
121
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SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS
The Company leases office space, store buildings and land for periods to
2002. The related rent expense for the period from August 1, 1997 to July 2,
1998 totaled $1,328,000. At July 2, 1998 minimum annual rentals under
noncancellable leases are as follows (in thousands):
1999....................................................... $1,004
2000....................................................... 920
2001....................................................... 685
2002....................................................... 74
------
$2,683
======
5. PROFIT SHARING PLANS
The Company has a contributory profit sharing plan in which substantially
all U.S. employees are eligible to participate. The plan provides for annual
Company contributions of a discretionary amount determined by the Board of
Directors, provided however that the amount of such contribution shall not
exceed the maximum amount deductible by the Company under the provisions of the
Internal Revenue Code. Company contributions to the plan of $256,000 were
charged against earnings in the period from August 1, 1997 to July 2, 1998.
6. FOREIGN OPERATIONS
The following is a summary of the financial data of the foreign
subsidiaries as of July 2, 1998 and for the period from August 1, 1997 to July
2, 1998 (in thousands):
Current assets............................................ $19,136
Intercompany receivable................................... 612
Property, plant and equipment, net of accumulated
depreciation............................................ 529
Other assets.............................................. 3,197
-------
Total assets.................................... $23,474
=======
Current liabilities....................................... $ 3,262
Intercompany payable...................................... 18,252
Stockholder's equity...................................... 1,960
-------
Total liabilities and stockholder's equity...... $23,474
=======
Sales (net of intercompany)............................... $22,927
=======
Net income................................................ $ 1,101
=======
7. FOREIGN CURRENCY HEDGES
The Company enters into forward exchange contracts to hedge some of its
foreign currency transactions for periods consistent with the terms of the
underlying transactions. The Company does not engage in speculation, nor does
the Company hedge non-transaction related balance sheet exposure. While the
forward contracts affect the Company's results of operations, they do so only in
connection with the underlying transactions. As a result, they do not subject
the Company to risk from exchange rate movements because gains and losses on
these contracts offset losses and gains on the transactions being hedged. At
July 2, 1998, the Company had $1,700,000 of foreign exchange contracts
outstanding in Canadian dollars.
The forward exchange contracts generally have maturities that do not exceed
six months. Based on July 2, 1998 exchange rates and the various maturity dates
of the foreign currency forward contracts, the
122
125
SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company estimates the aggregate contract value to be representative of the fair
value of these items at July 2, 1998.
8. INCOME TAXES
The components of the provision (benefit) for income taxes for the period
from August 1, 1997 to July 2, 1998 is as follows (in thousands):
Current:
Federal................................................... $(691)
State..................................................... 3
Foreign................................................... 354
-----
(334)
Deferred -- federal......................................... 338
-----
Total provision............................................. $ 4
=====
Significant components of the Company's deferred tax liabilities and assets
at July 2, 1998 consist of the following (in thousands):
Deferred tax assets:
Book over tax accrued liabilities......................... $71
Other..................................................... 5
---
Total deferred tax assets......................... $76
===
A reconciliation of the U.S. Statutory tax rate at July 2, 1998 to the
consolidated provision for income taxes is as follows (in thousands):
Expected federal income tax benefit at current statutory
rates..................................................... $(313)
State income tax provision, net of federal impact........... 1
Nondeductible expenses...................................... 155
Income of foreign subsidiaries, taxed at different rates.... 234
Other....................................................... (73)
-----
Provision for income taxes.................................. $ 4
=====
9. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet approximate fair value due to the short-term maturity of
these instruments.
Noncurrent accounts and notes receivable: As the maturity of these
receivables is less than three years, fair value is estimated to
approximate historically recorded amounts.
10. LEGAL CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management does not believe that the ultimate
resolution of these matters will have a material impact on the Company's
financial position, results of operations or cash flows.
123
126
SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT DISCLOSURES
The Company evaluates performance based upon segment income (loss) before
income taxes which includes revenues from external and internal customers,
operating costs and expenses, and depreciation and amortization. The accounting
policies of the segments are the same as those described in Note 1. Intersegment
sales are generally accounted for at the cost of the selling segment.
The Company's geographical reporting segments are based on product shipment
origin for revenues and physical location for other items. Long-lived assets are
comprised of property, plant and equipment and other non-current assets.
U.S. NIGERIA U.K. CANADA BARBADOS ELIMINATIONS TOTAL
-------- ------- ------ ------- -------- ------------ --------
(IN THOUSANDS)
Revenues:
External...................... $162,172 $ 2,766 $3,323 $16,837 $ -- $ -- $185,098
Intersegment.................. 9,409 -- -- -- -- (9,409) --
-------- ------- ------ ------- ---- -------- --------
Total................. 171,581 2,766 3,323 16,837 -- (9,409) 185,098
Income (loss) before income
taxes......................... (1,679) 297 (95) 677 778 (898) (920)
Total assets.......... 60,101 14,783 6,257 2,365 68 (24,479) 59,095
Long-lived assets............... 10,910 3,578 93 21 -- (5,696) 8,906
Additions to long-lived
assets........................ 1,504 2,934 7 15 -- -- 4,460
Depreciation and amortization... 708 164 12 5 -- -- 889
During fiscal 1998, the Company had net sales greater than 10% of total
sales to the following customers by segment (in thousands):
U.S. -- G.B. Tubulars, Inc................................ $23,990
U.S. -- UNOCAL............................................ 23,480
12. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Various computer and
other equipment may also have embedded Year 2000 issues.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The Company estimates
that approximately 91% of the required conversions are complete, and based on
the current plan of action, the Company does not believe the Year 2000 project
costs will be significant.
Management estimates that the Year 2000 project will be completed no later
than December, 1998, which is prior to any anticipated impact on its operating
systems.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
In addition, communications are ongoing with other companies with which the
Company's systems interface or rely on to determine the extent to which those
companies are addressing their Year 2000 compliance.
124
127
SOONER PIPE & SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS
As a result of the sale of the Company on July 2, 1998, the Company has
entered into or guaranteed various debt agreements to finance the acquisition of
the Company by the new owners ("Sooner Inc."). The Company entered into a
$50,000,000 credit agreement which is guaranteed by Sooner Inc. and includes a
$40,000,000 revolving line of credit (a borrowing of $35,000,000 occurred on
July 2, 1998), a $5,000,000 term note payable in monthly installments with final
maturity on June 30, 2000, and $5,000,000 in letter of credit accommodations.
Interest is payable at the First Union National Bank Prime Rate, or adjusted
Eurodollar rate as defined in the agreement plus 1.75%, per annum depending on
whether the revolver loans are Prime Rate or Eurodollar Rate loans when
borrowed, as defined in the agreement. The revolving line of credit and letter
of credit accommodations expire on July 2, 2003.
The Company also guaranteed and assumed a $10,000,000 senior subordinated
note and a $7,500,000 senior subordinated contingent note, as defined in the
sale agreement, between Sooner Inc. and the Company's parent. The $10,000,000
note bears interest at the same rate as the $50,000,000 credit agreement noted
above and matures on July 2, 1999. The $7,500,000 note bears interest at 6% per
annum and is payable in quarterly installments based on 37.5% of the quarterly
proceeds from the sale of $20,000,000 of designated inventory as identified in
the sale agreement. The other 62.5% of the quarterly proceeds from the sale of
such inventory must be applied as payment against the $5,000,000 term note and
the $10,000,000 note as identified above.
The Company also sold inventory and real estate to a related party of
Sooner Inc. on July 31, 1998 for $3,804,000. This amount is contingent upon
settlement of the valuation of the inventory sold. A payment of $1,850,000 will
be made on August 31, 1998 with the remainder being represented by a $1,954,000
subordinated 6% note due to the Company in annual installments of $977,000, plus
interest, with final maturity on July 31, 2000.
125
128
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1* -- Amended and Restated Certificate of Incorporation
3.2* -- Amended and Restated Bylaws
3.3* -- Certificate of Designations of Special Preferred Voting
Stock of Oil States International, Inc.
4.1 -- Form of common stock certificate (incorporated by
reference to Exhibit 4.1 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
4.2* -- Amended and Restated Registration Rights Agreement
10.1 -- Combination Agreement dated as of July 31, 2000 by and
among Oil States International, Inc., HWC Energy
Services, Inc., Merger Sub-HWC, Inc., Sooner Inc., Merger
Sub-Sooner, Inc. and PTI Group Inc. (incorporated by
reference to Exhibit 10.1 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.2* -- Plan of Arrangement of PTI Group Inc.
10.3* -- Support Agreement between Oil States International, Inc.
and PTI Holdco
10.4* -- Voting and Exchange Trust Agreement by and among Oil
States International, Inc., PTI Holdco and Montreal Trust
Company of Canada
10.5*,** -- 2001 Equity Participation Plan
10.6** -- Form of Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.7*,** -- Annual Incentive Compensation Plan
10.8*,** -- Executive Agreement between Oil States International,
Inc. and Douglas E. Swanson
10.9*,** -- Executive Agreement between Oil States International,
Inc., and Cindy B. Taylor
10.10** -- Form of Executive Agreement between Oil States
International, Inc. and other Named Executive Officers
(Messrs. Hughes and Chaddick) (incorporated by reference
to Exhibit 10.10 of Oil States' Registration Statement
No. 333-43400 on Form S-1).
10.11** -- Form of Change of Control Severance Plan for Selected
Members of Management (incorporated by reference to
Exhibit 10.11 of Oil States' Registration Statement No.
333-43400 on Form S-1).
10.12 -- Credit Agreement among Oil States International, Inc.,
PTI Group Inc., the Lenders named therein, Credit Suisse
First Boston, Credit Suisse First Boston Canada, Hibernia
National Bank and Royal Bank of Canada. (incorporated by
reference to Exhibit 10.12 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.13** -- Form of Restricted Stock Agreement between Oil States
International, Inc. and Douglas E. Swanson (incorporated
by reference to Exhibit 10.13 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.14** -- Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.14 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
10.15*,** -- Compensation Letter Agreement between HWC Energy
Services, Inc. and Jay Trahan
16.1 -- Letter Regarding Change in Certifying Accountant
(incorporated by reference to Exhibit 16.1 of Oil States'
Registration Statement No. 333-43400 on Form S-1).
21.1 -- List of subsidiaries of the Company (incorporated by
reference to Exhibit 21.1 of Oil States' Registration
Statement No. 333-43400 on Form S-1).
24.1* -- Powers of Attorney for Directors
---------------
* Filed herewith
** Management contracts or compensatory plans or arrangements.