UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001March 31, 2002
OR
[x][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to --------------------- -------------------------________________
Commission file number 1-16337
--------------------------
OIL STATES INTERNATIONAL, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 76-0476605
(StateState or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Allen Center, 333 Clay Street, Suite 3460,
77002
Houston, Texas (Zip Code)77002
(Address of principal executive offices) (Zip Code)
(713) 652-0582
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The Registrant had 48,232,20748,335,502 shares of common stock outstanding as of November
9, 2001.May 13,
2002.
OIL STATES INTERNATIONAL, INC.
INDEX
Part I -- FINANCIAL INFORMATION
PAGE NO.
--------
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Pro Forma
Consolidated and Combined Financial Statements
Unaudited Consolidated, Combined and Pro Forma Consolidated and Combined Statements of Operations for
the Three Months Ended September 30, 2000 4
Unaudited Pro FormaMarch 31, 2002 and 2001 3
Consolidated and Combined Statements of Operations
for the Nine Months Ended September 30, 2001 and 2000 5 - 6
Notes to Unaudited Pro Forma Consolidated and Combined Financial
Statements 7 - 8
Consolidated and Combined Financial Statements
Unaudited Consolidated and Combined Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and 2000 9
Consolidated and Combined Balance Sheets -- September 30, 2001March 31, 2002 (unaudited) and
December 31, 2000 102001 4
Unaudited Consolidated and Combined Statements of Cash Flows for the NineThree
Months Ended September 30,March 31, 2002 and 2001 5
Notes to Unaudited Consolidated, Combined and 2000Pro Forma Financial Statements 6 - 9
Unaudited Pro Forma Consolidated and Combined Financial Statement 10
Unaudited Pro Forma Consolidated and Combined Statement of Operations
for the Three Months Ended March 31, 2001 11
Notes to Unaudited Pro Forma Consolidated and Combined Financial StatementsStatement 12 - 1513
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 1614 - 2419
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2419
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Default Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
(a) Index of Exhibits 2520 - 2622
(b) Report on Form 8-K 2622
Signature Page 2723
2
OIL STATES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following tables set forth unaudited pro forma consolidated and
combined financial information for Oil States International, Inc. (Oil States)
giving effect to:
o 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 Combination);
o 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;
o 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
o the exchange of 4,275,555 shares of common stock for $36.0 million
of debt of Sooner and Oil States (the SCF Exchange); and
o our sale of 10,000,000 shares of common stock (the Offering) and
the application of the net proceeds to us.
The unaudited pro forma consolidated and combined statements of
operations for the three month and nine month periods ended September 30, 2001
and 2000, respectively, were prepared based upon the historical combined
financial statements of the Controlled Group, adjusted to conform accounting
policies, and give effect to:
o our acquisition of minority interests of the Controlled Group;
o our acquisition of Sooner;
o our exchange of shares of common stock for debt of Sooner and Oil
States; and
o our sale of shares in the Offering,
as if these transactions had occurred on January 1, 2000.
The unaudited pro forma consolidated and 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 consolidated and combined
financial statements should be read in conjunction with the historical combined
financial statements and notes thereto included in the Oil States' Annual Report
on Form 10-K.
3
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA
-----------------------------------------------------------------------------------------------
MINORITY
SOONER INC. INTEREST OFFERING COMBINED,
COMBINED ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
GROUP SOONER INC. (NOTE 2) (NOTE 3) (NOTES 1 AND 4) AND OFFERING
------------ -------------- ---------------- ---------------- ------------------ ------------
Revenue........................... $ 67,525 $58,925 $ $ $ $ 126,450
Costs and Expenses:
Cost of sales................... 48,618 53,252 101,870
Selling, general and
administrative................ 9,845 1,872 10(B) 11,727
Depreciation and amortization... 5,034 382 663 366 6,445
Other expense (income).......... (48) (2) (50)
-------- ------- ------ ------ ------ ---------
Operating income (loss)........... 4,076 3,421 (663) (366) (10) 6,458
-------- ------- ------ ------ ------ ---------
Interest income................... -- --
Interest expense.................. (2,892) (976) 1,533(A) (2,335)
Other income (expense)............ (70) (70)
-------- ------- ------ ------ ------ ---------
Income (loss) before income
taxes......................... 1,114 2,445 (663) (366) 1,523 4,053
Income tax (expense) benefit...... (1,983) (542) 1,950(D) (575)
-------- ------- ------ ------ ------ ---------
Net Income (loss) before
minority interests.............. (869) 1,903 (663) (366) 3,473 3,478
Minority interests, net
of taxes........................ (201) 198 (3)
-------- ------- ------ ------ ------ ---------
Net income (loss) before
preferred dividends............. (1,070) 1,903 (663) (366) 3,671 3,475
Preferred dividends............... (84) 84(C) --
-------- ------- ------ ------ ------ ---------
Net income (loss) attributable
to common shares................ $ (1,154) $ 1,903 $ (663) $ (366) $3,755 $ 3,475
======== ======= ====== ====== ====== =========
Net income (loss) per
common share
Basic........................... $ (.05) $ 0.07
======== =========
Diluted......................... $ (.05) $ 0.07
======== =========
Average shares outstanding
Basic........................... 24,665 48,181
======== =========
Diluted......................... 24,665 48,421
======== =========
4
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA
----------------------------------------------------------------------------------------------------
SOONER INC. MINORITY
(PERIOD FROM SOONER INC. INTEREST OFFERING CONSOLIDATED,
CONSOLIDATED JAN. 1, 2001 TO ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
GROUP FEB. 14, 2001) (NOTE 2) (NOTE 3) (NOTES 1 AND 4) AND OFFERING
----------------- ---------------- ----------------------------------------------- ---------------
Revenue........................ $ 491,820 $ 48,516 $ $ $ $540,336
Costs and Expenses:
Cost of sales................ 390,191 45,141 435,332
Selling, general and
administrative............. 38,412 1,133 39,545
Depreciation and
amortization............... 20,476 188 331 135 21,130
Other income................. (210) (1) (211)
--------- -------- ------ ------ ------ --------
Operating income (loss)........ 42,951 2,055 (331) (135) 44,540
--------- -------- ------ ------ ------ --------
Interest income................ 465 22 487
Interest expense............... (7,809) (586) 843(A) (7,552)
Other expense.................. (160) (160)
--------- -------- ------ ------ ------ --------
Income before income
taxes...................... 35,447 1,491 (331) (135) 843 37,315
Income tax (expense)
benefit...................... (1,471) (542) 438(D) (1,575)
--------- -------- ------ ------ ------ --------
Net income (loss) before
minority interests........... 33,976 949 (331) (135) 1,281 35,740
Minority interests, net of
taxes........................ (1,598) 1,601 3
--------- -------- ------ ------ ------ --------
Net income (loss) before
extraordinary item........... 32,378 949 (331) (135) 2,882 35,743
Extraordinary loss on debt
restructuring................ (784) (784)
--------- -------- ------ ------ ------ --------
Net income (loss) before
preferred dividends.......... 31,594 949 (331) (135) 2,882 34,959
Preferred dividends............ (41) 41(C) --
--------- -------- ------ ------ ------ --------
Net income (loss) attributable
to common shares............. $ 31,553 $ 949 $ (331) $ (135) $2,923 $ 34,959
========= ======== ====== ====== ====== ========
Net income per common share
Basic........................ $ .71 $ 0.73
========= ========
Diluted...................... $ .70 $ 0.72
========= ========
Average shares outstanding
Basic........................ 44,274 48,187
========= ========
Diluted...................... 45,228 48,660
========= ========
5
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA
-------------------------------------------------------------------------------------------------
MINORITY
SOONER INC. INTEREST OFFERING CONSOLIDATED,
COMBINED ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
GROUP SOONER INC. (NOTE 2) (NOTE 3) (NOTES 1 AND 4) AND OFFERING
------------ -------------- ---------------- ---------------- ------------------ --------------
Revenue.......................... $223,911 $ 213,495 $ $ $ $437,406
Costs and Expenses:
Cost of sales.................. 159,266 192,856 352,122
Selling, general and
administrative............... 29,132 5,983 484(B) 35,599
Depreciation and amortization.. 15,666 1,106 1,980 1,101 19,853
Other income................... (65) (65)
-------- --------- -------- ------ ------ --------
Operating income (loss).......... 19,912 13,550 (1,980) (1,101) (484) 29,897
-------- --------- -------- ------ ------ --------
Interest income.................. 13 338 351
Interest expense................. (8,552) (3,083) 4,598(A) (7,037)
Other income..................... 34 1 35
-------- --------- -------- ------ ------ --------
Income before income taxes..... 11,407 10,806 (1,980) (1,101) 4,114 23,246
Income tax (expense) benefit..... (8,416) (772) 5,850(D) (3,338)
-------- --------- -------- ------ ------ --------
Net Income (loss) before
minority interests............. 2,991 10,034 (1,980) (1,101) 9,964 19,908
Minority interests, net
of taxes....................... (2,873) -- 2,860 (13)
-------- --------- -------- ------ ------ --------
Net income (loss) before
preferred dividends............ 118 10,034 (1,980) (1,101) 12,824 19,895
Preferred dividends.............. (248) -- 248(C) --
-------- --------- -------- ------ ------ --------
Net income (loss) attributable
to common shares............... $ (130) $ 10,034 $ (1,980) $(1,101) $13,072 $ 19,895
======== ========= ======== ======= ======= ========
Net income per common share
Basic.......................... $ (.01) $ 0.41
======== ========
Diluted........................ $ (.01) $ 0.41
======== ========
Average shares outstanding
Basic.......................... 24,407 48,173
======== ========
Diluted........................ 24,407 48,421
======== ========
6
OIL STATES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED AND 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
consolidated and 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 consolidated and combined
statements of operations for the nine month period ended September 30, 2001 and
the three and nine month periods ended September 30, 2000 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 on February 14, 2001. 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 consolidated and 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 consolidated
and combined statements of operations for the nine month period ended September
30, 2001 and the three and nine month periods ended September 30, 2000 include
the historical financial statements of Sooner prior to the acquisition, for the
entire three and nine month periods ended September 30, 2000 and for the period
from January 1, 2001 to February 14, 2001. Subsequent to the acquisition,
Sooner's results are included with the results of the Consolidated Group.
NOTE 1 -- COMBINING ADJUSTMENTS
Sooner's results from its February 14, 2001 acquisition date are included
with the historical results of the Controlled Group. Minority interest in income
(loss) and related tax effect of the Controlled Group are presented below (in
thousands):
TOTAL
Three Months Ended September 30, 2000 $ 198
=======
Nine Months Ended September 30, 2000 $ 2,860
=======
Nine Months Ended September 30, 2001 $ 1,601
=======
NOTE 2 -- ACQUISITION OF SOONER
Certain reclassifications have been made to conform the presentation of
Sooner's financial statements to that of the Controlled Group.
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 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 three months ended September 30, 2000.... $ .66
=======
Amortization for the nine months ended September 30, 2000..... $ 1.98
=======
Amortization for the period from January 1, 2001 to February
14, 2001...................................................... $ .33
=======
- ----------
(1) The purchase price for Sooner includes the estimated fair value of Sooner
stock options ($1.1 million) converted into Oil States stock options.
7
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 minority interests amounts reflected for the
Controlled Group (in millions):
Amortization of the additional goodwill for
the three months ended September 30, 2000...... $ .37
======
Amortization of the additional goodwill for the
nine months ended September 30, 2000 .......... $ 1.10
======
Amortization of the additional goodwill for
the period from January 1, 2001 to
February 14, 2001.............................. $ .13
======
NOTE 4 -- OFFERING
(A) To adjust interest expense for debt repaid with Offering proceeds and as a
result of the exchange of shares for subordinated debt.
(B) 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.
(C) To eliminate preferred stock dividends due to the conversion of the
preferred stock.
(D) To adjust income tax expense for the reduction in deferred taxes due to the
formation of the consolidated group.
8
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED, COMBINED AND COMBINEDPRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, NINEMARCH 31, 2001
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------------------
MARCH 31, 2002 CONSOLIDATED AND
CONSOLIDATED PRO FORMA (1) COMBINED
------------ ------------- -------- ---------- ----------
Revenues.........................................Revenues .................................................. $ 173,510 $67,525150,600 $ 491,820191,494 $ 223,911142,977
Costs and expenses:
Cost of sales.................................. 140,390 48,618 390,191 159,266sales ........................................... 120,153 153,321 108,179
Selling, general and administrative expenses... 12,974 9,845 38,412 29,132expenses ............ 12,228 13,437 12,304
Depreciation expense........................... 5,200 4,243 15,172 13,328expense .................................... 5,233 5,058 4,996
Amortization expense........................... 1,957 791 5,304 2,338expense .................................... 75 1,960 1,368
Other operating expense (income)............... (191) (48) (210) (65)
--------- --------income .................................. (283) (135) (135)
--------- --------- 160,330 63,449 448,869 203,999
---------
-------137,406 173,641 126,712
--------- --------- ---------
Operating income................................. 13,180 4,076 42,951 19,912income .......................................... 13,194 17,853 16,265
Interest expense................................. (2,124) (2,892) (7,809) (8,552)expense .......................................... (1,047) (2,970) (3,228)
Interest income.................................. 93 -- 465 13income ........................................... 108 316 294
Other income (expense)........................... 114 (70) (160) 34
--------- --------.............................................. 314 264 264
--------- --------- ---------
Income (loss) before income taxes, minority interest, and
extraordinary item............... 11,263 1,114 35,447 11,407item ...................................... 12,569 15,463 13,595
Income tax expense............................... (963) (1,983) (1,471) (8,416)expense ........................................ (2,766) (231) (180)
Minority interest in loss (income)income of combined companies and
consolidated subsidiaries........ 2 (201) (1,598) (2,873)subsidiaries ............................... 5 -- (1,600)
--------- ------- --------- ---------
Net income (loss) before extraordinary item and preferred dividends........................ 10,302 (1,070) 32,378 118...................... 9,808 15,232 11,815
Extraordinary loss on debt restructuring, net of
taxes............................................ --income taxes ............................................ -- (784) --(784)
--------- ------- --------- ---------
Net income (loss) before preferred dividends..... 10,302 (1,070) 31,594 118................................................ 9,808 14,448 11,031
Preferred dividends..............................dividends ....................................... -- (84)-- (41)
(248)
--------- ------- --------- ---------
Net income (loss) attributable to common shares..shares .................. $ 10,302 $(1,154)9,808 $ 31,55314,448 $ (130)10,990
========= ======= ========= ===================
Basic incomeearnings (loss) per share:
Income (loss)Earnings per share before extraordinary item.........................................item ............ $ .21.20 $ (.05).32 $ .73 $ (.01).32
Extraordinary loss on debt restructuring, net of
taxes..................................... --income taxes .......................................... -- (.02) --(.02)
Basic net income (loss) per share.............. .21 (.05) .71 (.01)share .............................. .20 .30 .30
Diluted incomeearnings (loss) per share:
Income (loss)Earnings per share before extraordinary item.............................................item ............ $ .21.20 $ (.04).32 $ .72 $ (.01).31
Extraordinary loss on debt restructuring, net of
taxes......................................... --income taxes .......................................... -- (.02) --(.02)
Diluted net income (loss) per share............ .21 (.04) .70 (.01)share ............................ .20 .30 .29
Weighted average number of common shares outstanding (in thousands):
Basic.......................................... 48,221 24,665 44,274 24,407
Diluted........................................ 48,536 26,665 45,228 24,407outstanding:
Basic ................................................... 48,233 48,156 36,418
Diluted ................................................. 48,637 48,634 38,337
(1) See detailed pro forma statement of income and related footnotes on
pages 10 to 13 of this Form 10-Q.
The accompanying notes are an integral part of
these financial statements.
3
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
----------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents............................... $ 3,336 $ 4,982
Accounts receivable, net................................ 104,036 116,790
Inventories, net........................................ 76,469 76,917
Prepaid expenses and other current assets............... 4,427 3,932
--------- --------
Total current assets.................................. 188,268 202,621
Property, plant, and equipment, net....................... 147,639 150,090
Goodwill, net............................................. 172,991 172,235
Other noncurrent assets................................... 5,439 4,937
--------- --------
Total assets......................................... $ 514,337 $529,883
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................ $ 74,533 $ 83,528
Income taxes............................................ 3,906 4,267
Current portion of long-term debt....................... 732 3,894
Deferred revenue........................................ 5,710 2,646
Other current liabilities............................... 1,569 509
--------- --------
Total current liabilities............................ 86,450 94,844
Long-term debt.......................................... 57,722 73,939
Deferred income taxes................................... 7,837 8,436
Postretirement healthcare benefits...................... 5,503 5,570
Other liabilities....................................... 3,009 2,897
--------- --------
Total liabilities.................................... 160,521 185,686
Stockholders' equity:
Common stock............................................ 483 483
Additional paid-in capital.............................. 326,143 326,031
Retained (earnings)..................................... 34,518 24,710
Accumulated other comprehensive loss.................... (7,328) (7,027)
--------- --------
Total stockholders' equity........................... 353,816 344,197
--------- --------
Total liabilities and stockholders' equity........... $ 514,337 $529,883
========= ========
The accompanying notes are an integral part of
these financial statements.
9
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS)
CONSOLIDATED COMBINED
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
------------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents......................... $ 4,988 $ 4,821
Accounts receivable, net.......................... 104,917 64,137
Inventories, net.................................. 99,126 30,826
Prepaid expenses and other current assets......... 4,166 1,715
--------- ---------
Total current assets............................ 213,197 101,499
Property, plant, and equipment, net................. 148,354 143,468
Goodwill, net....................................... 173,632 103,391
Other noncurrent assets............................. 5,521 5,160
--------- ---------
Total assets................................... $ 540,704 $ 353,518
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......... $ 78,782 $ 57,248
Income taxes...................................... 1,042 2,796
Current portion of long-term debt................. 4,493 37,629
Other current liabilities......................... 6,576 3,433
--------- ---------
Total current liabilities...................... 90,893 101,106
Long-term debt.................................... 92,102 102,614
Deferred income taxes............................. 14,201 19,977
Postretirement healthcare benefits................ 5,676 5,899
Other liabilities................................. 4,700 4,519
--------- ---------
Total liabilities.............................. 207,572 234,115
Minority interest................................... 154 37,561
Redeemable preferred stock.......................... -- 25,293
Stockholders' equity:
Convertible preferred stock....................... -- 1,625
Common stock...................................... 483 272
Additional paid-in capital........................ 325,472 83,810
Retained earnings (deficit)....................... 13,327 (25,854)
Accumulated other comprehensive loss.............. (6,304) (3,304)
--------- ---------
Total stockholders' equity..................... 332,978 56,549
--------- ---------
Total liabilities and stockholders' equity..... $ 540,704 $ 353,518
========= =========
The accompanying notes are an integral part of
these financial statements.
104
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31,
-----------------------------------
2002 2001
2000
--------- --------------------- ----------------
CONSOLIDATED CONSOLIDATED AND
COMBINED
Cash flows from operating activities:
Net income before extraordinary item........................item .................................. $ 32,3789,808 $ 11811,815
Adjustments to reconcile net income from continuing operations
to net cash from operating activities:
Minority interest, net of distributions................... 1,599 2,860distributions ............................. (5) 1,600
Depreciation and amortization............................. 20,476 15,666amortization ....................................... 5,308 6,364
Deferred income tax benefit .............................. (6,820) (46)provision ....................................... (909) (4,577)
Other, net................................................ 1,608 613net .......................................................... 813 257
Changes in working capital................................ (20,016) 8,768capital .......................................... 7,169 (26,468)
-------- --------
Net cash flows provided by (used in) operating activities......... 29,225 27,979activities ......... 22,184 (11,009)
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired............ (2,999) (3,500)acquired ...................... (1,405) (2,120)
Capital expenditures........................................ (21,538) (11,325)expenditures .................................................. (3,568) (4,660)
Proceeds from sale of equipment............................. 5,410 1,121equipment ....................................... 573 2,425
Cash acquired in Sooner acquisition.........................acquisition ................................... -- 4,894
--
Payment of earn-out for acquired business................... (2,120) --
Other, net.................................................. 17 321net ............................................................ 32 (40)
-------- --------
Net cash flows used inprovided by (used in) investing activities............. (16,336) (13,383)activities ......... (4,368) 499
Cash flows from financing activities:
RevolvingBorrowings/(repayments) under revolving credit borrowings (repayments).................... (1,638) (5,557)facility ............... (15,965) 19,953
Debt repayments............................................. (65,617) (83,897)
Debt borrowings............................................. -- 88,030repayments ....................................................... (3,559) (64,038)
Preferred stock dividends...................................dividends ............................................. -- (844)
(502)
IssuanceProceeds from issuance of common stock.................................... 84,599 76stock ................................ 15 84,200
Repurchase of preferred stock...............................stock ......................................... -- (21,775) --
Payment of offering and financing costs..................... (5,353)costs ............................... -- (4,511)
Other, net.................................................. (2,200) (214)net ............................................................ (43) (1,665)
-------- --------
Net cash flows used inprovided by (used in) financing activities............. (12,828) (2,064)activities ......... (19,552) 11,320
Effect of exchange rate changes on cash....................... 22 (37)cash ................................. 253 (102)
-------- --------
Net increase in cash and cash equivalents from continuing operations.................................................. 83 12,495operations .... (1,483) 708
Net cash provided by (used in) discontinued operations........ 334 (10,427)
Extraordinary item............................................ (250) --operations .................. (163) 155
Cash and cash equivalents, beginning of period................year ............................ 4,982 4,821 3,216
-------- --------
Cash and cash equivalents, end of period......................period ................................ $ 4,9883,336 $ 5,2845,684
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
115
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED, COMBINED AND COMBINEDPRO FORMA
FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Oil States
International, Inc. (Oil States or the Company) and its consolidated
subsidiaries since February 14, 2001. On February 14, 2001, the Company acquired
the three companies (HWC Energy Services, Inc. - HWC; PTI Group, Inc. - PTI and
Sooner Inc. - Sooner) previously reported in the Combined and Pro Forma
financial statements presented herein. 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 orfor
the Company.period prior to February 14, 2001, utilizing reorganization accounting. The
reorganization accounting method, which yields results similar to the pooling of
interestinterests method, has been used in the preparation of the
consolidated and combined financial
statements of the Controlled Group (entities under common control of SCF-III
L.P. (SCF-III), 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 the three-month and nine-month periods ended September 30, 2000, and for the
period until February 14,
2001 when Oil States, HWC and PTI merged and Oil States acquired Sooner Inc. (Sooner) in
exchange for its common stock. After February 14, 2001, the consolidated
financial statements of Oil States include the results of all its subsidiaries
including HWC, PTI and Sooner. 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 consolidated, combined and combinedpro forma
financial statements.
The accompanying unaudited consolidated and combined financials statements
of the Company and its wholly ownedwholly-owned subsidiaries have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to these rules and regulations. The unaudited
financial statements included in this report reflect all the adjustments,
consisting of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the results of operations for the interim
periods covered and for the financial condition of the Company at the date of
the interim balance sheet. Results for the interim periods are not necessarily
indicative of results for the year.
The financial statements included in this report should be read in
conjunction with Oil States' audited combined financial statements and accompanying notes
included in its 20002001 Form 10-K, filed under the Securities Exchange Act of 1934,
as amended.
2. NEW ACCOUNTING PRONOUNCEMENT - GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 142 - "Goodwill and Other Intangible Assets" (FAS No.
142). In connection with the adoption of FAS No. 142, the Company ceased
amortizing goodwill. Also, as required by this statement, the Company has
completed its evaluation of goodwill for potential impairment. No provision for
goodwill impairment was required based on the evaluation performed.
6
Changes in the carrying amount of goodwill for the three months ended March
31, 2002, are as follows (in thousands):
OFFSHORE WELLSITE TUBULAR
PRODUCTS SERVICES SERVICES TOTAL
-------- -------- -------- -----
Balance as of January 1, 2002 $ 41,585 $ 81,156 $ 49,494 $ 172,235
Goodwill acquired -- 808 -- 808
Impairment losses -- -- -- --
Foreign currency translation and
other changes (101) (36) 85 (52)
--------- --------- --------- ---------
Balance as of March 31, 2002 $ 41,484 $ 81,928 $ 49,579 $ 172,991
========= ========= ========= =========
The following tables present what reported income before extraordinary items
and net income would have been in all periods presented exclusive of
amortization expense recognized in those periods related to goodwill.
FOR THE THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, 2002 MARCH 31, 2001
-------------- -----------------------------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED AND
CONSOLIDATED PRO FORMA COMBINED
------------ --------- --------
Reported net income before extraordinary item $ 9,808 $ 15,232 $ 11,815
Add: Goodwill amortization -- 1,879 1,288
----------- ---------- ----------
Adjusted net income before extraordinary item $ 9,808 $ 17,111 $ 13,103
=========== ========== ==========
Basic earnings per share:
Reported net income before extraordinary item $ .20 $ .32 $ .32
Goodwill amortization -- .04 .04
----------- ---------- ----------
Adjusted net income before extraordinary item $ .20 $ .36 $ .36
=========== ========== ==========
Diluted earnings per share:
Reported net income before extraordinary item $ .20 $ .32 $ .31
Goodwill amortization -- .03 .03
----------- ---------- ----------
Adjusted net income before extraordinary item $ .20 $ .35 $ .34
=========== ========== ==========
3. INITIAL PUBLIC OFFERING, MERGER TRANSACTIONS AND REFINANCING
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 (the Offering). On February 14, 2001, the Company closed the
business combination and the Offering thereby acquiring the minority interests
in PTI and HWC and 100% of the Sooner operations. The Company recorded
additional goodwill of $61.9 million as a result of the acquisition of these
minority interests.
Concurrent with the Offering, the Company acquired Sooner for $69.5 million.
The Company exchanged 7,597,152 shares of its common stock for all of the
outstanding common shares of Sooner. The Company accounted for the acquisition
using the purchase method of accounting and recorded approximately $40 million
in goodwill that is being amortized over a 15-year period.goodwill.
Concurrent with the closing of the Offering, the Company issued 4,275,555
shares of common stock to SCF-III and SCF-IV L.P. (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 (the SCF Exchange).
With the proceeds received in the Offering, the Company repaid $43.7 million
of outstanding subordinated debt of the Controlled Group and Sooner, redeemed
$21.8 million of preferred stock of Oil States, paid accrued interest on
subordinated debt and accrued dividends on preferred stock aggregating $7.1
million, and repurchased common
7
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.
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.
12
3.In connection with the debt refinancing discussed above, the Company
incurred prepayment penalties and wrote-off unamortized debt issue costs
totaling $0.8 million which is reported as an extraordinary item.
4. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts is
presented below (in thousands):
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2002 2001 2000
---- ----
Accounts receivable, net:
Trade.......................receivable:
Trade........................................................ $ 104,74498,140 $115,726
Unbilled revenue............................................. 6,708 2,674
Other........................................................ 1,381 1,123
Allowance for doubtful accounts.............................. (2,193) (2,733)
--------- -------
$ 61,809
Unbilled revenue............ 1,834 --
Other....................... 1,449 4,323
Allowance................... (3,110) (1,995)
--------- --------
$ 104,917 $ 64,137104,036 $116,790
========= ========
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2002 2001 2000
---- ----
Inventories, net:
FinishedInventories:
Tubular goods......................................................... $ 38,020 $41,882
Other finished goods and purchased products....... $ 83,541 $ 14,813products........................... 17,689 20,024
Work in progress............ 11,994 12,208process....................................................... 16,405 12,012
Raw materials............... 9,375 8,720materials......................................................... 9,698 8,696
--------- ---------------
Total inventories........ 104,910 35,741inventories.................................................... 81,812 82,614
Inventory reserves.......... (5,784) (4,915)reserves.................................................... (5,343) (5,697)
--------- ---------------
$ 99,126 $ 30,82676,469 $76,917
========= ===============
ESTIMATED SEPTEMBER 30,MARCH 31, DECEMBER 31,
USEFUL LIFE 2002 2001 2000
----------- ---- ----
Property, plant and equipment, net:
Land..........................equipment:
Land............................................. $ 4,2004,157 $ 3,6604,163
Buildings and leasehold improvements................improvements............. 2-50 years 27,282 25,50128,396 27,505
Machinery and equipment....... 2-29equipment.......................... 2-15 years 141,944 134,983147,838 147,183
Rental tools.................. 3-5tools..................................... 3-10 years 23,529 18,37025,852 24,876
Office furniture and equipmentequipment................... 1-10 years 10,566 8,724
Vehicles......................10,952 10,667
Vehicles......................................... 2-5 years 5,840 4,8535,669 6,197
Construction in progress...... 1,007 26progress......................... 300 1,033
--------- --------
Total property, plant and equipment................. 214,368 196,117equipment............ 223,164 221,624
Less: Accumulated depreciation... (66,014) (52,649)depreciation...................... (75,525) (71,534)
--------- --------
$ 148,354 $143,468147,639 $150,090
========= ========
SEPTEMBER 30,MARCH 31, DECEMBER 31,
2002 2001 2000
---- ----
Accounts payable and accrued liabilities:
Trade accounts payable........ $46,331payable....................................... $ 26,21548,431 $52,386
Accrued compensation.......... 10,039 7,685compensation......................................... 6,610 10,317
Accrued insurance............. 3,201 2,819insurance............................................ 3,392 3,498
Accrued interest.............. 995 6,646
Other......................... 18,216 13,883interest............................................. 243 248
Accrued taxes, other than income taxes....................... 2,413 3,314
Reserves related to discontinued operations, current portion. 4,862 4,976
Postretirement healthcare benefits current portion........... 1,100 1,100
Other........................................................ 7,482 7,689
--------- -------
--------
$78,782 $ 57,24874,533 $83,528
========= ======= ========
4.8
5. 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 and, since the
acquisition of Sooner, Tubular 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.
13
Financial information by industry segment for each of the three-month
and
nine-month periods ended September 30,March 31, 2002 and 2001 and 2000 is summarized in the following tablestable (in
thousands):
OFFSHORE WELLSITE TUBULAR CORPORATE AND
PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL
-------- -------- -------- ------------ -----
THREE MONTHS ENDED SEPTEMBER 30, 2001MARCH 31, 2002
Revenues from unaffiliated
customers........................customers ....................... $ 31,37132,737 $ 55,80066,593 $ 86,33951,270 $ -- $ 173,510
======== ========150,600
========= ======= ========= EBITDA........................... 3,659 15,429 2,827 (1,578) 20,337
======== ======== ========= ================ =========
EBITDA .......................... 4,361 15,227 117 (1,203) 18,502
========= ========= ========= ========= =========
Depreciation and amortization.... 1,583 4,094 535 945 7,157
======== ========amortization ... 1,345 3,807 144 12 5,308
========= ================ ========= ========= =========
Operating income (loss).......... 2,076 11,335 2,292 (2,523) 13,180
======== ======== ......... 3,016 11,420 (27) (1,215) 13,194
========= ================ ========= ========= =========
Capital expenditures............. 1,010 7,849 122 20 9,001
======== ========expenditures ............ 1,381 2,142 45 -- 3,568
========= ================ ========= ========= =========
Total assets..................... 137,919 222,199 119,680 60,906 540,704
======== ========assets .................... $ 142,358 $ 248,202 $ 120,098 $ 3,679 $ 514,337
========= ======= ========= THREE MONTHS ENDED SEPTEMBER 30, 2000========= ========= =========
MARCH 31, 2001 (Consolidated and
Combined)
Revenues from unaffiliated
customers........................customers...................... $ 28,20629,501 $ 39,31969,155 $ 44,321 $ -- $ -- $ 67,525
======== ========142,977
========= ======= ========= EBITDA........................... 1,085 8,190 -- (165) 9,110
======== ======== ========= ================ =========
EBITDA .......................... 1,787 19,879 2,101 (1,138) 22,629
========= ========= ========= ========= =========
Depreciation and amortization.... 1,624 3,411 -- (1) 5,034
======== ========amortization ... 1,610 4,076 202 476 6,364
========= ================= ========= ========= =========
Operating income (loss).......... (539) 4,779 -- (164) 4,076
======== ======== ......... 177 15,803 1,898 (1,613) 16,265
========= ================ ========= ========= =========
Capital expenditures............. 564 2,004expenditures ............ 800 3,721 139 -- -- 2,568
======== ========4,660
========= ================ ========= ========= =========
Total assets..................... 130,432 202,049 -- 14,673 347,154
======== ========assets .................... $ 136,821 $ 222,795 $ 131,273 $ 65,356 $ 556,245
========= ================ ========= ========= =========
OFFSHORE WELLSITE TUBULAR CORPORATE AND
PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL
-------- -------- -------- ------------ -----
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from unaffiliated
customers..................... $ 93,301 $181,448 $ 217,071 $ -- $ 491,820
======== ======== ========= ======= =========
EBITDA........................ 9,406 49,442 8,687 (4,108) 63,427
======== ======== ========= ======= =========
Depreciation and amortization. 4,727 12,150 1,235 2,364 20,476
======== ======== ========= ======= =========
Operating income (loss)....... 4,679 37,292 7,451 (6,471) 42,951
======== ======== ========= ======= =========
Capital expenditures.......... 2,457 18,526 456 99 21,538
======== ======== ========= ======= =========
Total assets.................. 137,919 222,199 119,680 60,906 540,704
======== ======== ========= ======= =========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from unaffiliated
customers..................... $ 84,117 $139,794 $ -- $ -- $ 223,911
======== ======== ========= ======= =========
EBITDA........................ 1,501 34,302 -- (225) 35,578
======== ======== ========= ======= =========
Depreciation and amortization. 4,925 10,742 -- (1) 15,666
======== ======== ========= ======== =========
Operating income (loss)....... (3,424) 23,560 -- (224) 19,912
======== ======== ========= ======= =========
Capital expenditures.......... 1,771 9,554 -- -- 11,325
======== ======== ========= ======= =========
Total assets.................. 130,432 202,049 -- 14,673 347,154
======== ======== ========= ======= =========
5. EXTRAORDINARY ITEM
In connection with the debt refinancing in February 2001 (Note 2), the
Company incurred prepayment penalties and wrote-off unamortized debt issue costs
totaling $0.8 million.
6. COMPREHENSIVE INCOME
(LOSS)
Comprehensive income (loss) for the three-monththree months ended March 31, 2002 and nine month periods ended
September 30, 2001 and 2000 was
as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------MARCH 31
2002 2001
2000 2001 2000
--------- --------- -------- ----------- ----
Comprehensive income:
Net income (loss)............. $10,302 $(1,070) $31,594income.......................... $ 1189,808 $ 11,031
Cumulative translation
adjustment.................. (1,468) 830 (3,000) (2,701)
------- ------- ------- -------adjustment........................ (301) (3,074)
--------- ---------
Total comprehensive income
(loss)......................income.......... $ 8,8349,507 $ (240) $28,594 $(2,583)
======= ======= ======= =======7,957
========= =========
7. COMMITMENTS AND CONTINGENCIES
LTV Corporation (LTV), the former owner of Oil States, under the terms of
the stock purchase agreement, has indemnified Oil States 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.
14
Oil States has warranted items related to the sale of two of its
subsidiaries, subject to threshold amounts defined in the respective sale
agreements. The Company believes all amounts have been properly reflected in the
accompanying consolidated financial statements.
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.
The Company is aware that certain energy service companies that have in the
past used asbestos in connection with the manufacture of equipment or otherwise
in the operation of their business have become the subject of increased asbestos
related litigation. Certain subsidiaries of the Company have been named as
defendants in four cases by plaintiffs seeking damages, including punitive
damages, alleging that our subsidiaries have responsibility for four individuals
developing mesothelioma, asbestosis, lung cancer or other lung diseases as a
result of exposure to asbestos. Although these are the only cases that
management is aware that are pending or threatened against the Company or its
subsidiaries involving allegations relating to asbestos exposure, there can be
no assurance that other asbestos related claims will not be made. Based on
management's preliminary investigation, management does not believe that these
cases or future claims relating to asbestos exposure will have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
9
UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENT
The consolidated financial statements of Oil States International, Inc.
reflect the Company's financial position, results of operations and changes in
stockholders' equity for periods subsequent to February 14, 2001, the date of
our initial public offering and the combination of Oil States International,
Inc. (Oil States), HWC Energy Services, Inc. (HWC) and PTI Group Inc. (PTI)
(collectively, the Controlled Group), among other things.
As more fully described below, and in footnotes that follow, the
combined financial statements reflect the financial position, results of
operations and changes in stockholders' equity of the predecessor entities that
now comprise Oil States International, Inc. based on reorganization accounting.
The pro forma financial information that follows reflect our historical
consolidated or combined statements of operations, depending upon the period
involved, and give effect to the pro forma transactions and adjustments more
fully described below.
The following tables set forth unaudited pro forma consolidated and
combined financial information for Oil States giving effect to:
o the combination of Oil States, HWC and PTI 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;
o 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;
o 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
o the exchange of 4,275,555 shares of our common stock for $36.0
million of debt of Sooner and Oil States; and
o our sale of 10,000,000 shares of common stock in our initial
public offering (the Offering) and the application of the net
proceeds totaling $84.1 million. With the proceeds received in the
Offering, the Company repaid $43.7 million of outstanding
subordinated debt of the Controlled Group and Sooner, redeemed
$21.8 million of preferred stock of Oil States, paid accrued
interest on subordinated debt and accrued dividends on preferred
stock aggregating $7.1 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 was used to reduce amounts outstanding under bank lines
of credit.
The unaudited pro forma consolidated and 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 consolidated and
combined financial statements and notes thereto included in our Annual Report on
Form 10-K.
10
PRO FORMA CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA
-----------------------------------------------------------------------------
SOONER INC. MINORITY COMBINED AND
CONSOLIDATED AND (PERIOD FROM SOONER INC. INTEREST OFFERING CONSOLIDATED,
COMBINED JAN. 1, 2001 TO ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
GROUP FEB. 14, 2001) (NOTE 2) (NOTE 3) (NOTES 1 AND 4) AND OFFERING
---------------- --------------- ----------- ------------ --------------- ------------
Revenue......................... $ 142,977 $ 48,517 $ $ $ $191,494
Expenses
Costs of sales................ 108,179 45,142 153,321
Selling, general and 12,304 1,133 13,437
administrative..................
Depreciation and amortization. 6,364 188 331 135 7,018
Other expense (income)........ (135) (135)
--------- -------- ------ ------ ------ --------
Operating income (loss)......... 16,265 2,054 (331) (135) 17,853
--------- -------- ------ ------ ------ --------
Interest income................. 294 22 316
Interest expense................ (3,228) (585) 843(A) (2,970)
Other income.................... 264 -- 264
--------- -------- ------ ------ ------ --------
Earnings before income taxes.. 13,595 1,491 (331) (135) 843 15,463
Income tax (expense) benefit.... (180) (542) 491(C) (231)
--------- -------- ------ ------ ------ --------
Net income (loss) before minority
interests..................... 13,415 949 (331) (135) 1,334 15,232
Minority interests, net of taxes (1,600) -- 1,600 --
--------- -------- ------ ------ ------ --------
Net income (loss) before
extraordinary item............ 11,815 949 (331) (135) 2,934 15,232
Extraordinary loss on debt
restructuring................. (784) -- (784)
--------- -------- ------ ------ ------ --------
Net income (loss)............... 11,031 14,448
Preferred dividends............. (41) -- 41(B) --
--------- -------- ------ ------ ------ --------
Net income attributable to common
shares........................ $ 10,990 $ 949 $ (331) $ (135) $2,975 $ 14,448
========= ======== ====== ====== ====== ========
Net income per common share.....
Basic......................... $ .30 $ .30
========== =========
Diluted....................... $ .29 $ .30
========== =========
Average shares outstanding......
Basic......................... 36,418 48,156
========= ========
Diluted....................... 38,337 48,634
========= ========
11
OIL STATES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED AND
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. 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. Note,
however, that accounting for goodwill will change prospectively under new
accounting pronouncements (See Note 3 to Consolidated and Combined Financial
Statements in the Company's Form 10-K for the year ended December 31, 2001).
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. 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. Note, however, that accounting for goodwill will change prospectively
under new accounting pronouncements (See Note 3 to Consolidated and Combined
Financial Statements in the Company's Form 10-K for the year ended December 31,
2001). The unaudited pro forma statements of operations for the three months
ended March 31, 2001, include the historical financial statements of Sooner,
adjusted for the effects of purchase accounting, as presented below.
NOTE 1. COMBINING ADJUSTMENTS
Minority interest in (income) loss and related tax effect of the
Controlled Group are presented below (in thousands):
OIL STATES HWC PTI TOTAL
---------- --- --- -----
Period from January 1, 2001 to
February 14, 2001................... $72 $ (129) $(1,543) $(1,600)
=== ====== ======= =======
NOTE 2. ACQUISITION OF SOONER
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 acquires...................................................... 29.7
-------
Goodwill..................................................................................... $ 39.8
=======
Amortization for the period from January 1, 2001 to February 14, 2001........................ $ 33
=======
- ---------
(1) The purchase price for Sooner includes the estimated fair value of Sooner
stock options ($1.1 million) converted into Oil States stock options.
12
Certain reclassifications have been made to conform the presentation of
Sooner's financial statements to the Controlled Group.
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
period from January 1, 2001 to February 14,
2001............................................. $ (.015) $ .020 $ .130 $ .135
=========== ========== =========== ===========
NOTE 4. OFFERING
(A) To adjust interest expense for debt repaid with Offering proceeds
and as a result of the exchange of shares for subordinated debt.
(B) To eliminate preferred stock dividends due to the redemption of the
preferred stock.
(C) To adjust income tax expense for the reduction of deferred taxes
due to the formation of the combined group.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AND
FINANCIAL CONDITIONYou should read the following discussion and analysis together with our
Financial Statements and the notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q. 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
described below in
the Overview section and as more fully described under Cautionary"Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation Reform Act of 19951995" in
the Business section of the Company's"Item 1, Business" and elsewhere in our Annual Report on Form 10-K. WeExcept to
the extent required by law, 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 ofprovides 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 the
development of offshore production systems, repairs and upgrades of existing
drilling rigs and construction of new drilling rigs and the development of offshore production systems.rigs. In this segment, 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.
Energy and oilfield service activities are highly cyclical depending upon
crude oil and natural gas pricing, among other things. Beginning in late 1996
and continuing though 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 the results of our operations suffered as a result.decreased
significantly. The price of crude oil hasand natural gas increased over 1999 levels
in 2000 and 2001 due to improved demand for oil, and supply reductions by OPEC
member countries. Thiscountries and reductions in natural gas storage levels. That improvement
in crude oil and natural gas pricing has led to increases in the rig count in 2000
and the first half of 2001, particularly in Canada and the United States, where
the rig count reached a high of 1,7171,698 rigs in February 2001. The average North
American rig count began to declinewas 1,263 and 1,498 during 2000 and 2001, respectively. Crude
oil and natural gas prices decreased significantly from levels reached in early
2001 by the end of 2001. The economic slowdown in the third quarterUnited States and the rest
of this year.the world, moderate weather and the resultant increased inventories of oil
and gas, especially in the United States, contributed to those price declines.
With those price reductions, our customers have responded with decreased
drilling activity and spending on exploration and development. As of November 2, 2001,March 31,
2002, the rig count in the United States and Canada, as measured by Baker
Hughes, was 1,339,1,012, a decline of 22%40.4% from the high reached earlier this year.in February 2001 and
a decline of 13.1% from 1,165 rigs working at December 29, 2001.
We have a diversified product and service offering which has exposure
throughout the oil and gas cycle. Demand for our tubular services is highly
correlated to movements in the rig count in the United States and began to
weaken with the overall deterioration of industry fundamentals. Our
offshore products segment has shown signsfundamentals since the first
quarter of recovery based on the growth2001. Certain of our backlogwell site services businesses have decreased in
this segmentthe first quarter of 2002 when the United States rig count declined 7.0%
14
compared to the fourth quarter of 2001 and 27.9% compared to the first quarter
of 2001. Although the Canadian rig count increased seasonally in the first
quarter of 2002 on average by 100 rigs or 36.3% compared to the fourth quarter
of 2001, it has decreased 133 rigs or 26.1% compared to the first quarter of
2001. Recently, oil and gas prices have increased and rig counts in the U.S.
have begun to increase. The U.S. rig count reached its lowest level since 1999
when it totaled 738 rigs on April 15, 2002. The U.S. rig count has risen since
then and totaled 812 as of customer inquiries currently being
received.May 10, 2002.
We believe that our offshore products segment has lagged the general market
recovery in 2000 and 2001 because its sales relatedprimarily relate to offshore
construction and production facility development which generally occur later in
the exploration and development cycle. Worldwide offshore construction and
development activity is improving currently and we expect it to increase
substantially whenas 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 majorBacklog in our offshore products segment increased
from $38.1 million at March 31, 2001 to $72.4 million at December 31, 2001 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 in international areas has lagged the industry recovery in 2000 and
2001. As a result, international spending$84.3 million at March 31, 2002. Approximately 95% of our backlog as of March
31, 2002 is expected to increase inbe completed by December 31, 2002.
Recently, there has been a significant decline in oil and natural gas
prices due to higher oil and gas inventories and a general economic slowdown in
the United States and in other economies. The economic slowdown coupled with
conservation efforts have affected energy supplies and related pricing. The rig
count has decreased and has now fallen below prior year levels.
Management believes this price uncertainty will impact near-term activity levels and could
have an adverse effect on the Company's profitability.
16
As a result, the Company has taken steps to reduce its tubular inventories. The
Company's profitability could suffer if pricing is reduced below inventory
carrying amounts. We believe longer-termthat fundamental oil and gas supply and demand fundamentals remain positive.factors
will lead to increased drilling activity in North America over time. However,
the timing of any such recovery is uncertain. We view the recent increases in
actual and forecasted oil and natural gas prices as an important step towards
increased demand for oilfield service activity. Although the diversified nature
of our businesses is expected to moderate the impact of North American drilling
activity declines, we are expecting a 15 -- 20% revenue decline in 2002 compared
to pro forma 2001 levels based upon our forecast of energy prices and drilling
activity levels.
The Combination
Prior to our initial public offeringthe 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:
[See Chart in 2000 Form 10-K 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.L. E. Simmons & Associates, Incorporated is the ultimate general
partner of SCF-III, L.P. and SCF-IV.SCF-IV, L.P. L.E. Simmons, the chairman of our
board of directors, is the sole shareholder of L.E. Simmons & Associates,
Incorporated. Concurrently with the closing of our initial public offering, the
Offering,Combination closed and HWC, PTI and Sooner merged with wholly owned subsidiaries
of Oil States combined with Sooner, HWC and PTI,
a transaction which we refer to as the Combination.States. As a result, HWC, Sooner and PTI became our wholly owned
subsidiaries. Concurrently with the closing the
Offering we also 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 (the SCF Exchange). This exchange was based on the
initial public offering price of $9.00 per share less underwriting discounts and
commissions. The following chart depicts the summary ownership structure of our
company following the Combination, the SCF Exchange and the Offering:
[See Chart in 2000 Form 10-K depicting that purchasers in the offering
own 20.7% of our company, existing stockholders (other than SCF) own 16.1%,
SCF-III, L.P. owns 45.2% and SCF-IV, L.P. owns 17.9%, in each case following the
Combination and the Offering. The chart also depicts that Oil States owns 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
nine months ended September 30, 2000 and forthree years in the period from January 1,ended December 31, 2000 as well as the beginning of
calendar 2001 tountil February 14, 2001 using reorganization accounting, which
yields results similar to the pooling of interests method. The combined results
of Oil States, HWC and PTI form the basis for the discussion of our historical results of
operations provided below.for those periods. 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 the Offering,our initial public offering on February
14, 2001, Oil States acquired Sooner, and the acquisition was accounted for
using the purchase method of accounting. The pro forma financial statements for
the three-month and nine month periodsquarter ended September 30,March 31, 2001 and 2000 reflect the acquisition of Sooner effective as
if such
acquisition occurred onof January 1, 2000. After2001. Following the acquisition of Sooner, we reportreported 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.
PRO FORMA15
RESULTS OF OPERATIONS Since the acquisition of Sooner, we have reported under three business
segments, offshore products, well site services and tubular services. Pro forma
information including these three segments is presented below.(IN MILLIONS, EXCEPT MARGIN PERCENTAGES)
PRO FORMA THREE MONTHS ENDED
MARCH 31,
--------------------------------------------------------
2002 2001 2001
---- ---- ----
CONSOLIDATED PRO FORMA THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000CONSOLIDATED AND COMBINED
------------ ------------ ----------- -------------------- -------------------------
Revenues
Offshore Products....... $ 31.4 $ 28.2 $ 93.3 $ 84.1
Well Site Services...... 55.8 39.3 181.4 139.8Services....................... $ 66.6 $ 69.2 $ 69.2
Offshore Products........................ 32.7 29.5 29.5
Tubular Services........ 86.3 58.9 265.6 213.5
-------Services......................... 51.3 92.8 44.3
-------- -------- -------
-------
Total................Total............................ $ 173.5150.6 $ 126.4191.5 $ 540.3 $ 437.4
=======143.0
======== ======== =======
Gross Margin
Well Site Services....................... $ 20.0 $ 25.5 $ 25.5
Offshore Products........................ 8.2 6.3 6.3
Tubular Services......................... 2.2 6.6 3.2
Corporate/Other.......................... -- (.2) (.2)
-------- -------- -------
Total............................ $ 30.4 $ 38.2 $ 34.8
======== ======== =======
Gross Margin as a Percent of Revenues
Well Site Services....................... 30.0% 36.8% 36.8%
Offshore Products........................ 25.1% 21.4% 21.4%
Tubular Services......................... 4.3% 7.1% 7.2%
Total............................ 20.2% 19.9% 24.3%
Operating Income (Loss)
Offshore Products....... $ 2.1 $ (0.5) $ 4.7 $ (3.4)
Well Site Services...... 11.3 4.8 37.3 23.6Services....................... $ 11.4 $ 15.8 $ 15.8
Offshore Products........................ 3.0 .2 .2
Tubular Services........ 2.3 3.4 9.5 13.5
Corporate and Eliminations (2.5)Services......................... -- 3.9 1.9
Corporate/Other.......................... (1.2) (7.0) (3.8)
-------(2.1) (1.6)
-------- -------- -------
-------
Total................Total............................ $ 13.2 $ 6.517.8 $ 44.5 $ 29.9
=======16.3
======== =============== =======
17
NINETHREE MONTHS ENDED SEPTEMBER 30, 2001MARCH 31, 2002 COMPARED TO THE NINEPRO FORMA THREE MONTHS ENDED
SEPTEMBER 30, 2000MARCH 31, 2001
Revenues. Pro forma revenues increased by 23.5% from $437.4Revenues decreased $40.9 million, or 21.4%, to $150.6 million
during the ninecurrent quarter compared to pro forma revenues of $191.5 million
during the quarter ended March 31, 2001. Tubular Services revenues decreased
$41.5 million, or 44.7%, in the three months ended September 30, 2000March 31, 2002 compared to
$540.3pro forma revenues in the three months ended March 31, 2001 as a result of
reduced drilling activity in the U.S. Well Site Services revenues declined $2.6
million, or 3.8%, and Offshore Products revenues increased $3.2 million, or
10.8%, during the same period. Well Site Services revenues declined compared to
the prior year primarily due to lower drilling and workover activity in North
America. Offshore Products revenues increased as a result of greater activity
supporting offshore production facility construction.
Cost of Sales. Cost of sales decreased by $33.2 million, or 21.6%, to $120.2
million in the three months ended March 31, 2002 compared to $153.3 million in
the three month period ended March 31, 2001. Decreased Tubular Services revenues
were the principal reason for the ninecorresponding decrease in cost of sales during
the period. Tubular Services cost of sales decreased from $86.2 million in the
first quarter of 2001 to $49.1 million in the first quarter of 2002, a decrease
of $37.1 million, or 43.0%.
Gross Margin. Our gross margins, which we calculate before a deduction for
depreciation expense, decreased $7.8 million, or 20.4%, from $38.2 million in
the three months ended September 30, 2001. Revenues from our well site services segment
increased $41.6March 31, 2001 to $30.4 million in the three months ended
March 31, 2002. Well Site Services gross margins decreased $5.5 million, or
29.8%21.6%, to $20 million in the three months ended March 31, 2002 compared to the
three months ended March 31, 2001. Within our Well Site Services segment,
shallow drilling and specialty rental tool businesses' gross margins declined
$1.1 million, or 50%, and $0.8 million, or 19.3%, respectively, in the three
months ended March 31, 2002 compared to the three months ended March 31, 2001 as
a result of which $19.7 million was generated fromlower utilization and pricing for our drilling and rental tool
assets. Also in Well Site Services, our remote site accommodations, catering and
logistics services and modular building
16
construction services $6.8gross margins decreased by $3.6 million, wasor 21.1%, in the
three months ended March 31, 2002 compared to the three months ended March 31,
2001 because a greater mix of revenues were generated from to our rental tool business,
$9.4 million was generated from our land drilling operations and $5.7 million
was generated from our hydraulic workover business. Increases in Canadian
drilling activity, oil sands development activity and strong Gulf of Mexico
accommodations activity drove the increase in revenues in our remote site
accommodations,lower-margin
catering and logistics services and modular building construction services. The increases in revenues from ouractivities and because of lower U.S.
Gulf of Mexico rental tool operations
and land drilling services were due to improvements in utilization and pricing
from the first nine months of 2000 to the first nine months of 2001. Our tubular
services revenuesrevenues.
Offshore Products gross margins increased $52.1$1.9 million, or 24.4%23.2%, overfrom $6.3
million in the period as a direct
result of the increased drilling activity over the period. The remaining $9.2
million increase in revenues was generated by our offshore products segment.
This year over year increase in revenues was generated by increased demand for
our bearings and connector products and certain fabrication work.
Cost of sales. Cost of sales increased $83.2 million, or 23.6%, to
$435.3 million for the ninethree months ended September 30,March 31, 2001 from $352.1to $8.2 million forin the ninethree
months ended September 30, 2000. The cost of sales increase wasMarch 31, 2002 primarily due to increased revenues at eachand a favorable
mix of our operating segments. Costhigher-margin connector products versus our lower-margin fabrication
work. Tubular Services gross margins declined to $2.2 million, or 4.3% of
sales increasedTubular Services revenues in the three months ended March 31, 2002 compared to
$6.6 million, or 7.1% of Tubular Services revenues, in the three months ended
March 31, 2001 as a result of decreased oil and gas company drilling which
decreased demand for our well site services, tubular servicesTubular products and offshore products segments by
$23.9 million, $55.6 million and $2.9 million, respectively. Our gross profit
margin for the period decreased slightly from 19.5% in 2000 to 19.4% in 2001.
Gross margin improvements in our well site services and offshore products
segments were offset by margin declines in our tubular services segments.services.
Selling, General and Administrative Expenses. During the ninethree months ended
September 30, 2001,March 31, 2002, selling, general and administrative expenses increased
$3.9(SG&A) totaled
$12.2 million or 11.0%,compared to $39.5SG&A of $13.4 million from $35.6 millionon a pro forma basis for the
ninethree months ended September 30, 2000. Selling, generalMarch 31, 2001. Special nonrecurring severance and
administrative expensesrestructuring costs totaling $0.7 million were charged to SG&A in the first
three months of 2002. These increased costs were more than offset by $2.9cost
containment measures taken because of lower activity levels in 2002 compared to
2001 and the absence of certain nonrecurring charges, totaling $0.3 million, or 19.7%, in
our wellremote site services segment due to headcount
increases in support of increased market activity. This increase was partially
offset by a $1.7 million decrease in our offshore products segment as we reduced
costs inaccommodations business that were recorded during the second half of 2000 to improve profitability. Corporate headquarter
charges were up $2.5 million due to the establishment of a new corporate
headquarters office in connection with the Offering.three
months ended March 31, 2001.
Depreciation and Amortization. Depreciation and amortizationexpense increased $1.3$0.2 million
in the first quarter 2002 compared to a total of $21.1the first quarter 2001 due primarily to
capital expenditures made in our Well Site Services segment during 2001.
Amortization expense decreased from $2.0 million forin the nine months ended September 30,
2001. The 6.4% increase was primarilyfirst quarter 2001 to
$0.1 million in the first quarter 2002 due to acquisitions and capital
expenditures in our well site services segment during 2000.the adoption of a new accounting
standard that discontinued goodwill amortization (See Note 2 to Financial
Statements contained herein).
Operating Income. Our operating income represents revenues less (i) cost of
sales, (ii) selling, general and administrative expenses and (iii) depreciation
and amortization expense plus other operating income. Our operating income
increased $14.6decreased $4.6 million, or 48.8%25.8%, to $44.5$13.2 million for the ninethree months ended
September 30,March 31, 2002 from $17.8 million in the three month period ended March 31,
2001. Well Site Services operating income decreased from $15.8 million during
the three months ended March 31, 2001 from $29.9to $11.4 million for the ninethree months
ended September 30,
2000. OperatingMarch 31, 2002. Offshore Products operating income increased from our well site services segment increased $13.7$0.2
million from $23.6during the three months ended March 31, 2001 to $3.0 million for the
ninethree months ended September 30, 2000March 31, 2002. Tubular Services operating income was
approximately break-even for the three months ended March 31, 2002 compared to
$37.3operating income of $3.9 million during the nine months ended September 30, 2001. Operating incomeThe accounting change affecting
goodwill amortization for our tubular services segment decreased $4.0company impacted "Corporate / Other" operating
income and contributed to the operating loss being reduced from $2.1 million to $9.5 million for the nine
months ended September 30,in
2001 from $13.5 million during the nine months ended
September 30, 2000. Operating income in our offshore products segment increased
$8.1 million to $4.7 million for the nine months ended September 30, 2001 from an operating loss of $3.4$1.2 million in the three months ended March 31,
2002.
Interest Expense. Interest expense decreased $1.9 million, or 64.0%, to $1.0
million for the nine monthsquarter ended September 30, 2000.
Net Interest Expense. Net interest expense totaled $7.1March 31, 2002 compared to $2.9 million for the
nine monthsquarter ended September 30, 2001 compared to $6.7 million for the nine
months ended September 30, 2000. The $0.4 million increase in netMarch 31, 2001. Decreased interest expense was primarily relatedis attributable to
an increase in averagelower debt balances
outstanding, partially offset by lowerlevels and interest rates.
Income Tax Expense. Income tax expense totaled $1.6 million during the
nine months ended September 30, 2001 compared to $3.3 million during the same
period in 2000. The decrease of $1.7 million, and the corresponding low
effective tax rate, was primarily due to a reduction in the allowance applied
against tax assets, primarily net operating losses (NOL's), 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 in the period.
Minority Interest. Minority interest expense was immaterial during the
nine months ended September 30, 2001 and 2000. Substantially all of the minority
interests were acquired, and therefore reduced, in connection with the
Combination.
18
COMBINED AND CONSOLIDATED RESULTS OF OPERATIONS.
Prior to the Sooner acquisition, which was effective February 14, 2001,
we reported under two business segments, offshore products and well site
services. With the Sooner acquisition, we added the tubular services segment.
Information for these segments, which represent the combined results of Oil
States, HWC and PTI using reorganization accounting through the Sooner
acquisition date and consolidated results of Oil States, HWC, PTI and Sooner
after February 14, 2001 is presented below.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues
Offshore Products....... $ 31.4 $ 28.2 $ 93.3 $ 84.1
Well Site Services...... 55.8 39.3 181.4 139.8
Tubular Services........ 86.3 -- 217.1 --
------- ----- ------- -------
Total................ $ 173.5 $ 67.5 $ 491.8 $ 223.9
======= ====== ======= =======
Operating Income (Loss)
Offshore Products....... $ 2.1 $ (0.5) $ 4.7 $ (3.4)
Well Site Services...... 11.3 4.8 37.3 23.6
Tubular Services........ 2.3 -- 7.5 --
Corporate and Eliminations (2.5) (0.2) (6.5) (0.3)
------- ------ ------- -------
Total................ $ 13.2 $ 4.1 $ 43.0 $ 19.9
======= ====== ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenues. Revenues increased $106.0$2.8 million, or 157.0%, during the
three months ended September 30, 2001 compared to the three months ended
September 30, 2000. This revenue increase was primarily attributable to the
acquisition22.0% of
Sooner in February 2001 which contributed $86.3 million revenues.
Well site services revenues increased $16.5 million, or 42.0%, and offshore
products revenues increased $3.2 million, or 11.3%, during the same period. Of
the $16.5 million increase in well site services, $8.8 million was generated by
our remote site accommodations, catering and logistics services and modular
building construction services, $3.0 million was from our drilling operations,
$2.7 million was generated from our hydraulic workover units and $2.0 million
was generated from our rental tool operations. The improvement in revenues from
our remote site accommodations, catering and logistics services and modular
building construction services was primarily due to an increase in headcount
served in support of increased construction activity in the oil sands
developments in Northern Alberta, Canada. The increase in drilling revenues was
attributable to increased utilization and footage rates charged in both Texas
and Ohio. The hydraulic workover units' increased revenuespretax income, in the three months ended September 30, 2001March 31, 2002 compared to the same period in the prior year was
attributable to higher utilization (847 revenue days vs. 731 revenue days) and
higher revenues per day worked. Increased activity for our hydraulic workover
units was noted in all geographic areas, but it was most significant in
Venezuela and the Middle East regions. Our rental tool operations benefited from
increased activity and additional tools purchased for rent since the third
quarter of 2000. Offshore products revenues increased in the quarter ended
September 30, 2001 compared to the same period in the prior year because of
increased volumes in its bearing and connector products and higher activity in
fabrication and repair operations.
Cost of Sales. Cost of sales increased $91.8with $0.2
million, or 188.9%, to
$140.4 million1.5% of pretax income, in the three months ended September 30, 2001March 31, 2001.
Decreased amounts of net operating loss carryforwards available to offset
currently taxable income has resulted in a higher estimated annual effective tax
rate for the year 2002 compared to $48.62001.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2001
Refer to Pro Forma Statement of Operations and Related Footnotes on Pages 10
to 14 of this Form 10Q for details of pro forma adjustments made to the
Company's consolidated and combined statement of operations for the three month
period ended March 31, 2001.
Differences between the March 31, 2001 Consolidated and Combined Statement
of Operations and the March 31, 2001 Pro Forma Consolidated and Combined
Statement of Operations appearing on Page 3 and Page 12 can be
17
summarized as follows:
1. The Pro Forma Consolidated and Combined Statement of Operations
include the results of operations for Sooner for the period from
January 1, 2001 until its acquisition date of February 14, 2001.
Sooner's revenues, gross margin, gross margin as a percent of
revenues and operating income during this period were $48.5
million, $3.4 million, 7.0% and $2.0 million, respectively.
2. The Pro Forma Consolidated and Combined Statement of Operations
include an additional $0.3 million of goodwill amortization
related to the Sooner acquisition.
3. The Pro Forma Consolidated and Combined Statement of Operations
include an additional $0.1 million of Sooner minority interests in
income for the period.
4. The Pro Forma Consolidated and Combined Statement of Operations
include adjustments to decrease interest expense by $0.9 million,
eliminate minority interests in earnings totaling $1.6 million and
eliminate preferred stock dividends of $0.04 million in the first
three months ended September 30, 2000. The acquisition of Sooner's tubular services business accounted for $81.5 million of this increase.
Our gross margins decreased2001 to 19.1% inreflect the three months ended September 30,
2001 from 28.0% during the same period in 2000 primarily due to the addition of
our tubular services segment beginning February 2001, whose business is
characterized by lower gross margins than are realized in our offshore services
and well site services business.
Selling, General and Administrative Expenses. During the three months
ended September 30, 2001, selling general and administrative expenses increased
$3.2 million to $13.0 million compared to $9.8 million for the three months
ended September 30, 2000. The newly acquired tubular services division added
$2.0 millionpro forma impact of the
increase. Selling, generalOffering and administrative expenses in
our well site services segment increased $0.8 million, or 14.6%, due to
headcount increases in support of increased market activity. This increase was
partially offset by a $0.5 million decrease in our offshore products segment,
where costs were reduced in response to the market downturn in offshore
construction activity during 2000 and early 2001. Additionally, there was an
increase in selling, general and administrative expenses of $0.9 million
attributable toCombination as if each had occurred at the
establishment of our corporate headquarters office.
Depreciation and Amortization. Depreciation and amortization totaled
$7.2 million for the three months ended September 30, 2001 compared to $5.0
million for the three months ended September 30, 2000. The addition of our
tubular services segment accounted for $0.5 millionbeginning of the increase. The
remaining increaseperiod. Additionally, the related income tax
effect for these adjustments was due to asset acquisitions and capital expenditures made
in our well site
19
services segment during 2000, as well as amortization of goodwill recorded in
connection with our acquisitions of Sooner and minority interests in February
2001.
Operating Income. Operating income increased by $9.1 million to $13.2
million for the three months ended September 30, 2001 from $4.1 million for the
same period in 2000. Operating income from our well site services segment
increased $6.5 million from $4.8 million for the three months ended September
30, 2000 to $11.3 million for the same period in 2001. Operating income in our
offshore products segment increased $2.6 million from a loss of $0.5 million in
2000 to income of $2.1 million in 2001. The tubular services segment contributed
operating income of $2.3 million during the three months ended September 30,
2001.
Income Tax (Expense) Benefit. Income tax expense totaled $1.0 million
during the three months ended September 30, 2001 compared to $2.0 million during
the three months ended September 30, 2000. The decrease of $1.0 million, and the
correspondingly low effective tax rate, was primarily due to a reduction in the
allowance applied against tax assets, primarily net operating losses (NOL's),
due to expected tax benefits resulting from the Combination.
Minority Interest. Minority interests decreased in 2001 to zero from
$0.2 million during the three months ended September 30, 2000. Substantially all
of the minority interests were acquired, and therefore reduced, in connection
with the Offering.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenues. Revenues increased $267.9 million, or 119.7%, during the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000. This revenue increase was primarily due to the acquisition of Sooner in
February 2001, which contributed $217.1 million in revenues. Revenues from our
well site services segment increased $41.6 million, or 29.8%, of which $19.7
million was generated from our remote site accommodations, catering and
logistics services and modular building construction services, $6.8 million was
generated from our rental tool business, $9.4 million was generated from our
land drilling operations and $5.7 million was generated from our hydraulic
workover business. Increases in Canadian drilling activity, oil sands
development activity and strong Gulf of Mexico accommodations activity drove the
increase in revenues in our remote site accommodations, catering and logistics
services and modular building construction services. The increases in revenues
from our rental tool operations and land drilling services were due to
improvements in utilization and pricing from the first nine months of 2000 to
the first nine months of 2001. The remaining $9.2 million increase in revenues
was generated by our offshore products segment. This year over year increase in
revenues was generated by increased demand for our bearings and connector
products and certain fabrication work.
Cost of sales. Cost of sales increased $230.9 million, or 144.9%, to
$390.2 million for the nine months ended September 30, 2001 from $159.3 million
for the nine months ended September 30, 2000. The acquisition of Sooner
accounted for $203.3 million of this increase. The remaining increase in cost of
sales was primarily due to the increased revenues at each of our operating
segments. Cost of sales increased in our well site services and offshore
products segments by $23.9 million and $2.9 million, respectively. Our gross
profit margin decreased to 20.7% in the nine months ended September 30, 2001
from 28.9% during the same period in 2000 primarily due to the addition of our
tubular services segment, whose business is characterized by lower margins than
are realized in our other two operating segments.
Selling, General and Administrative Expenses. During the nine months
ended September 30, 2001, selling, general and administrative expenses increased
$9.3 million to $38.4 million from $29.1 million during the nine months ended
September 30, 2000. The acquisition of our tubular services segment contributed
$5.1 million of this increase. Selling, general and administrative expenses
increased by $2.9 million, or 19.7%, in our well site services segment due to
headcount increases in support of increased market activity. This increase was
partially offset by a $1.7 million decrease in our offshore products segment as
we reduced costs in the second half of 2000 to improve profitability. Corporate
headquarter charges were up $3.0 million due to the establishment of a new
corporate headquarters office in connection with the Offering.
Depreciation and Amortization. Depreciation and amortization increased
$4.8 million to a total of $20.5 million for the nine months ended September 30,
2001. The addition of our tubular services segment caused $1.2 million of this
increase. The remaining increase was due to asset acquisitions and capital
expenditures made in our well site services segment during 2000, as well as
amortization of goodwill recorded in connection with our acquisitions of Sooner
and minority interests in February 2001.
Operating Income. Operating income increased $23.1 million, or 116.1%,
to $43.0 million during the nine months ended September 30, 2001 from $19.9
million during the nine months ended September 30, 2000. Operating income from
our well site services segment increased $13.7 million from $23.6 million for
the nine months ended September 30, 2000 to $37.3 million for the nine months
ended September 30, 2001. Our tubular services segment contributed operating
income of $7.5 million during the period
20
from acquisition in February 2001 to September 30, 2001. Operating income in our
offshore products segment increased $8.1 million to $4.7 million for the nine
months ended September 30, 2001 from a operating loss of $3.4 million for the
nine months ended September 30, 2000.
Income Tax Expense. Income tax expense totaled $1.5 million during the
nine months ended September 30, 2001 compared to $8.4 million during the same
period in 2000. The decrease of $6.9 million, and the corresponding low
effective tax rate, was primarily due to a reduction in the allowance applied
against tax assets, primarily net operating losses (NOL's), 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 in the period.
Minority Interest. Minority interests decreased by $1.3 million during
the nine months ended September 30, 2001 to $1.6 million from $2.9 million
during the nine months ended September 30, 2000. Substantially all of the
minority interests were acquired, and therefore reduced, in connection with the
Combination.million.
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 development 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 and public capital investments.debt and equity offerings.
Cash was provided by (used in) operations during the ninethree months ended
September
30,March 31, 2002 and 2001 and 2000 in the amounts of $29.2$22.2 million and $28.0($11.0) million,
respectively. Cash was provided by operations in 2000 as a result of decreased
seasonal working capital needs, primarily in Canada. Cash provided by operations in 2001 reflects2002 was generated by our net
income before extraordinary item,and lower working capital invested in our tubular services segment,
partially offset by the seasonal use of working capital to reduce accounts payablein our Canadian
operations. During the three months ended March 31, 2001, there were significant
investments in working capital as a result of tubular inventory increases and
accrued expensesrelatively high Canadian seasonal working capital needs.
Cash was used by investing activities in the amount of $4.4 million during
the ninethree months ended September 30, 2001.March 31, 2002 primarily as a result of capital
expenditures which totaled $3.6 million and one rental tool acquisition made in
our well site services segment totaling $1.4 million, partially offset by cash
proceeds from asset sales.
Capital expenditures totaled $21.5$3.6 million and $11.3$4.7 million during the ninethree
months ended September 30,March 31, 2002 and 2001, and 2000, respectively. Capital expenditures during
both these periods consisted principally of purchases of assets for our well
site services businesses. We currently expect to spend a total of approximately
$27$22.8 million during 20012002 to upgrade our equipment and facilities and expand our
product and service offerings. The balance ofWe expect to fund these capital expenditures are expected to be funded with
operating cash flow and with
borrowings available under our $150 million credit facility.
Cash was used by investing activities in the amount of $16.3 million
during the nine months ended September 30, 2001 primarily as a result of capital
expenditures which totaled $21.5 million and two rental tool acquisitions in our
well site services segment totaling $3.0 million, partially offset by cash
acquired in connection with the Sooner acquisition and proceeds from asset
sales. Net cash was used in investing activities in the amount of $13.4 million
during the nine months ended September 30, 2000, primarily to fund capital
expenditures and acquisitions.internally generated funds.
Net cash of $12.8 million and $2.1$19.6 million was used in financing activities during the ninethree
months ended September 30, 2001 and September 30,
2000, respectively. Net cash was used in financing activities in 2001March 31, 2002, primarily as a result of elective debt and preferred stock repayments offset by net proceeds of the
Offering. Net cash used in financing activities during the nine months ended
September 30, 2000 was primarily for debt repayments.
With the proceeds received in the Offering, the Company repaid $43.7
million of outstanding subordinated debt of the Controlled Group and Sooner,
redeemed $21.8 million of preferred stock of Oil States, paid accrued interest
on subordinated debt and accrued dividends on preferred stock aggregating $7.1
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. Concurrently with the closing of our initial public offering, we
issued 4,275,555 shares of common stock in the SCF Exchange.
Also concurrent with the 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.
21
This 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:
o 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
o 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 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 bank 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.
Our 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 credit facility contains negative covenants that restrict our
ability to:
o incur additional indebtedness;
o prepay, redeem and repurchase outstanding indebtedness, other than
loans under the new credit facility;
o pay dividends;
o repurchase and redeem capital stock;
o sell assets other than in the ordinary course of business;
o make liens;
o engage in sale-leaseback transactions;
o make specified loans and investments;
o make acquisitions;
o enter into mergers, consolidations and similar transactions;
o enter into hedging arrangements;
o enter into transactions with affiliates;
o change the businesses we and our subsidiaries conduct; and
o amend debt and other material agreements.
22
In addition, our credit facility requires us to maintain:
o a ratio of EBITDA to interest expense of not less than 3.0 to 1.0;
o 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);
o a maximum ratio of total debt to EBITDA of not greater than 3.5 to
1.0; and
o a maximum ratio of total senior debt to EBITDA of not greater than
3.0 to 1.0.
Under our 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 September 30, 2001,March 31, 2002, we had $82.8$50.8 million outstanding under thisour debt
facility and an additional $6.3$7.1 million of outstanding letters of credit,
leaving $60.9$92.1 million available to be drawn under the facility. WeIn addition, we
have another floating rate bank credit facility in the UK that had an aggregatea balance of
approximately $9$2.4 million at March 31, 2002. Our total debt represented 14.2% of subordinated debt
outstandingour total
capitalization at September 30, 2001. This subordinated debt will become due and
payable at various times over the period from October 2001 to November 2005.March 31, 2002.
We believe that cash from operations and available borrowings under our
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 capital. We may notHowever, there
is no assurance that we will be able to raise additional funds or may not be able to
raise such funds on favorable terms.
Tax Matters18
TAX MATTERS
For the year ended December 31, 2000,2001, we had deferred tax assets, net of
deferred tax liabilities, of approximately $35$19.7 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
$136.1$93.7 million. A valuation allowance is currently provided against the majority
of our NOLs. The NOLs expire over a period through 2020. Our NOLs are currently
limited under Section 382 of the Internal Revenue Code due to a change of
control that occurred during 1995. However in 2002, approximately $85$40 million of
NOLs are available for use currently if sufficient income is generated.
Our 2001 effective tax rate approximatesapproximated 4%. This low effective tax rate iswas
due to the partial utilization of net operating losses which benefitbenefited the
consolidated group after the merger. We currently estimate our 2002 effective
tax rate atwill be approximately 22%.
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.
We adopted SFAS No. 133 effective January 1, 2001, and the adoption did
not have a material impact on our results of operations.RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets (the Statements), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
23
The Company will applyhas applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the StatementStatements is expected to result in an
increase in net income of approximately $8.0 million ($.16 per diluted share)
per year. During the first quarter of 2002, the Company will performperformed the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002. The Company has completed its evaluation of goodwill and
indefinite lived intangible assets and there was no impairment of assets
recorded.
In June of 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This Statement is effective
for fiscal years beginning after June 15, 2002 and has not yet determined what the effect of these testsCompany expects to adopt
the Statement effective January 1, 2003. It is expected that this Statement will
behave an immaterial effect on the earningsCompany's consolidated financial statements.
In August of 2001 the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company was required to adopt this Statement effective January 1, 2002 and it
did not have an impact on the consolidated financial position of the Company.statements.
ITEM 3. 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 $86.3$53.2
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 September 30, 2001March 31, 2002 levels, our combined interest
expense would increase by a total of approximately $70,000 per month.$0.5 million annually.
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 September 30, 2001,March 31, 2002, we had Canadian
dollar-denominated debt totaling approximately $17$18.8 million. 24We had no interest
rate hedges or forward foreign exchange contracts at March 31, 2002.
19
PART II -- OTHER INFORMATION
ITEM 1. 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, including claims
relating to matters occurring prior to our acquisition of businesses and also
relating to businesses we have sold. In certain cases, we are entitled to
indemnification from the sellers of businesses and in other cases, we have
indemnified the buyers of businesses from us. 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 consolidated financial position, results of operations or
liquidity.
The Company is aware that certain energy service companies that have in the
past used asbestos in connection with the manufacture of equipment or otherwise
in the operation of their business have become the subject of increased asbestos
related litigation. Certain subsidiaries of the Company have been named as
defendants in four cases by plaintiffs seeking damages, including punitive
damages, alleging that our subsidiaries have responsibility for four individuals
developing mesothelioma, asbestosis, lung cancer or other lung diseases as a
result of exposure to asbestos. Although these are the only cases that
management is aware that are pending or threatened against the Company or its
subsidiaries involving allegations relating to asbestos exposure, there can be
no assurance that other asbestos related claims will not be made. Based on
management's preliminary investigation, management does not believe that these
cases or future claims relating to asbestos exposure will have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, as filed with the Commission on
March 30, 2001).
3.2 -- Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).
3.3 -- Certificate of Designations of Special Preferred
Voting Stock of Oil States International, Inc.
(incorporated by reference
20
EXHIBIT NO. DESCRIPTION
----------- -----------
to Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).
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
(incorporated by reference to Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, as filed with the Commission on
March 30, 2001).
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. (incorporated by
reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended December 31,
2000, as filed with the Commission on March 30, 2001).
10.3 -- Support Agreement between Oil States International,
Inc. and PTI Holdco (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).
10.4 -- Voting and Exchange Trust Agreement by and among Oil
States International, Inc., PTI Holdco and Montreal
Trust Company of Canada (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
10.5** -- 2001 Equity Participation Plan (incorporated by
reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31,
2000, as filed with the Commission on March 30, 2001).
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).
25
10.7** -- Annual Incentive Compensation Plan (incorporated by
reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended December 31,
2000, as filed with the Commission on March 30, 2001).
10.8** -- Executive Agreement between Oil States International,
Inc. and Douglas E. Swanson (incorporated by
reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31,
2000, as filed with the Commission on March 30, 2001).
10.9** -- Executive Agreement between Oil States International,
Inc. and Cindy B. Taylor (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).
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).
21
EXHIBIT NO. DESCRIPTION
----------- -----------
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).
10.13A** -- Restricted Stock Agreement, dated February 8, 2001,
between Oil States International, Inc. and
Douglas E. Swanson (incorporated by reference to Exhibit
10.13A of Oil States Report on Form 10Q filed May 15,
2001).Swanson.
10.13B** -- Restricted Stock Agreement, dated February 22, 2001,
between Oil States International, Inc. and
Douglas E. Swanson (incorporated by reference to Exhibit 10.13B
of Oil States Report on Form 10Q filed May 15, 2001).Swanson.
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 LetterForm of Executive Agreement between HWC Energy
Services,Oil States
International, Inc. and Jay Trahan (incorporatedAnd named Executive Officer
(Mr. Slator) (Incorporated by referenceReference to Exhibit 10.1510.16
to the Company's Annual Report onOn Form 10-K10K for the year
ended December 31, 2000,2001, as filed withWith the Commission
on March 30, 2001)4, 2002.
10.16*,** -- Form of Executive Agreement between Oil States
International, Inc. and named executive officer
(Mr. 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).
- --------------------
* Filed herewith
** Management contracts or compensatory plans or arrangements.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the period
covered by this report.
2622
SIGNATURES
Pursuant to the requirements of the Securities Exchanges 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.
Date: November 13, 2001May 15, 2002 By /s/ CINDY B. TAYLOR
------------------------ ---------------------------------------------------------- -----------------------------
Cindy B. Taylor
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: November 13, 2001May 15, 2002 By /s/ ROBERT W. HAMPTON
------------------------ ---------------------------------------------------------- ------------------------------
Robert W. Hampton
Vice President -- Finance and Accounting
and Secretary (Principal
Accounting Officer)
2723
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.16 -- Form of Executive Agreement between Oil States
International, Inc. and named executive officer
(Mr. Trahan).