AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 2002
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
DRESSER, INC.
(Exact Name of Co-Registrant as Specified in Its Charter)
DELAWARE 3829 75-2795365
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
-------------------------------
15455 DALLAS PARKWAY
SUITE 1100
ADDISON, TEXAS 75001
(972) 361-9800
(Address, including zip code, and telephone number, including area code,
of co-registrant's principal executive offices)
-------------------------------
DRESSER INTERNATIONAL, INC. DRESSER RUSSIA, INC. DRESSER RE, INC.
DELAWARE DELAWARE DELAWARE
3829 3829 3829
75-2926785 75-2685272 75-2930337
15455 DALLAS PARKWAY 15455 DALLAS PARKWAY 15455 DALLAS PARKWAY
SUITE 1100 SUITE 1100 SUITE 1100
ADDISON, TEXAS 75001 ADDISON, TEXAS 75001 ADDISON, TEXAS 75001
(972) 361-9800 (972) 361-9800 (972) 361-9800
DRESSER ENTECH, INC. RING-O VALVE, LVF HOLDING
DELAWARE INCORPORATED CORPORATION
3829 TEXAS DELAWARE
76-0537989 3829 3829
15455 DALLAS PARKWAY 76-0386098 91-2100267
SUITE 1100 15455 DALLAS PARKWAY 15455 DALLAS PARKWAY
ADDISON, TEXAS 75001 SUITE 1100 SUITE 1100
(972) 361-9800 ADDISON, TEXAS 75001 ADDISON, TEXAS 75001
(972) 361-9800 (972) 361-9800
MODERN ACQUISITION, INC.
3829
03-0414535
15455 DALLAS PARKWAY
SUITE 1100
ADDISON, TEXAS 75001
(972) 361-9800
-------------------------------
FRANK P. PITTMAN
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
15455 DALLAS PARKWAY
SUITE 1100
ADDISON, TEXAS 75001
(972) 361-9880
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
-------------------------------
Copy:
KIRK A. DAVENPORT II, ESQ.
LATHAM & WATKINS
885 THIRD AVENUE
SUITE 1000
NEW YORK, NEW YORK 10022
(212) 906-1200
-------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------------
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED NOTE(1) PRICE(1) FEE(1)
- -----------------------------------------------------------------------------------------------------------------------------------
9-3/8% Senior Subordinated Notes due 2011(2).............. $250,000,000 102.5% $256,250,000 $23,575
- -----------------------------------------------------------------------------------------------------------------------------------
Guarantees of the 9-3/8% Senior Subordinated Notes due
2011(3)................................................ N/A N/A N/A
===================================================================================================================================
(1) The registration fee has been calculated pursuant to Rule 457(f)(2) under
the Securities Act of 1933 and reflects the book value of the notes as of
April 25, 2002. The Proposed Maximum Aggregate Offering Price is estimated
solely for the purpose of calculating the registration fee.
(2) The 9-3/8% Senior Subordinated Notes due 2011 will be the obligations of
Dresser, Inc.
(4) Each of Dresser International, Inc., Dresser Russia, Inc., Dresser RE,
Inc., Dresser Entech, Inc., Ring-O Valve, Incorporated and LVF Holding
Corporation will guarantee on an unconditional basis the obligations of
Dresser, Inc. under the 9-3/8% Senior Subordinated Notes due 2011.
Pursuant to Rule 457(n), no additional registration fee is being paid in
respect of the guarantees. The guarantees are not traded separately.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated April 25, 2002.
PROSPECTUS
- --------------------------------------------------------------------------------
DRESSER, INC.
OFFER TO EXCHANGE
$250,000,000 PRINCIPAL AMOUNT OF ITS
9-3/8% SENIOR SUBORDINATED NOTES DUE 2011, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 9-3/8%
SENIOR SUBORDINATED NOTES DUE 2011
- --------------------------------------------------------------------------------
We are offering to exchange all of our outstanding 9-3/8% Senior
Subordinated Notes due 2011 that were issued on March 25, 2002, which we refer
to as the "old notes," for our registered 9-3/8% Senior Subordinated Notes due
2011, which we refer to as the "exchange notes." We refer to the old notes and
the exchange notes collectively as the "notes." The terms of the exchange notes
are identical to the terms of the old notes except that the exchange notes have
been registered under the Securities Act of 1933 and, therefore, are freely
transferable. The exchange notes will represent the same debt as the old notes,
and we will issue the exchange notes under the same indenture.
PLEASE CONSIDER THE FOLLOWING:
- Our offer to exchange old notes for exchange notes will be open
until 5:00 p.m., New York City time, on ___________ __, 2002, unless
we extend the offer.
- You should also carefully review the procedures for tendering the
old notes beginning on page 20 of this prospectus.
- If you fail to tender your old notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
- No public market currently exists for the notes. We do not intend to
list the exchange notes on any securities exchange and, therefore,
no active public market is anticipated.
INFORMATION ABOUT THE NOTES:
- The notes will mature on April 15, 2011.
- We will pay interest on the notes semi-annually in arrears on April
15 and October 15 of each year at the rate of 9-3/8% per annum.
- We may redeem the notes on or after April 15, 2006 at the rates set
forth in this prospectus.
- We also have the option until April 15, 2004 to redeem up to 35% of
the original aggregate principal amount of the notes with the net
proceeds of certain types of qualified equity offerings.
- The notes are unsecured obligations and are subordinated to all
existing and future senior indebtedness and other liabilities of our
subsidiaries.
- If we undergo a change of control or sell some of our assets, we may
be required to offer to purchase notes from you.
-------------------------------
YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS BEGINNING ON PAGE 11 OF THIS
PROSPECTUS.
-------------------------------
Neither the U.S. Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the exchange notes or
determined if this prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
_________, 2002
TABLE OF CONTENTS
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION ................................... i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS ............ ii
PROSPECTUS SUMMARY .................................................... 1
RISK FACTORS .......................................................... 12
THE EXCHANGE OFFER .................................................... 21
USE OF PROCEEDS ....................................................... 27
CAPITALIZATION ........................................................ 28
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS .............. 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION ................ 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 33
BUSINESS .............................................................. 48
MANAGEMENT ............................................................ 60
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS .................. 69
DESCRIPTION OF OTHER INDEBTEDNESS ..................................... 72
DESCRIPTION OF THE EXCHANGE NOTES ..................................... 74
BOOK-ENTRY; DELIVERY AND FORM ......................................... 112
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES ........................ 114
PLAN OF DISTRIBUTION .................................................. 118
LEGAL MATTERS ......................................................... 118
EXPERTS ............................................................... 118
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ....... F-1
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with the Exchange Act, we file
annual, quarterly and special reports, proxy statements and other information
with the SEC. These documents and other information can be inspected and copied
at the public reference facilities that the SEC maintains at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a web site at
http://www.sec.gov, which contains reports and other information regarding
registrants that file electronically with the SEC. Copies of these materials can
be obtained at prescribed rates from the Public Reference Section of the SEC at
the principal offices of the SEC, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549.
We have filed a Registration Statement on Form S-4 to register with the
Commission the exchange notes to be issued in exchange for the old notes. This
prospectus is part of that Registration Statement. As allowed by the
Commission's rules, this prospectus does not contain all of the information you
can find in the Registration Statement or the exhibits to the Registration
Statement. This information is available free of charge to any holders of
securities of Dresser upon written or oral request to Frank P. Pittman, Dresser,
Inc., 15455 Dallas Parkway, Suite 1100, Addison, Texas 75001, telephone: (972)
361-9800. IN ORDER TO OBTAIN TIMELY DELIVERY OF SUCH DOCUMENTS,
i
HOLDERS MUST REQUEST THIS INFORMATION NO LATER THAN FIVE BUSINESS DAYS PRIOR TO
THE EXPIRATION DATE OF THE EXCHANGE OFFER FOR THE NOTES.
We have not authorized anyone to give you any information or to make any
representations about the transactions we discuss in this prospectus other than
those contained herein. If you are given any information or representations
about these matters that is not discussed, you must not rely on that
information. This prospectus is not an offer to sell or a solicitation of an
offer to buy securities anywhere or to anyone where or to whom we are not
permitted to offer or sell securities under applicable law. The information
contained in this prospectus is current only as of the date on the cover page of
this prospectus and may change after that date. The delivery of this prospectus
offered hereby does not, under any circumstances, mean that there has not been a
change in our affairs since the date hereof. It also does not mean that the
information in this prospectus is correct after this date.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act
including, in particular, the statements about our plans, strategies and
prospects. Although we believe that such statements are based on reasonable
assumptions, these forward-looking statements are subject to numerous factors,
risks and uncertainties that could cause actual outcomes and results to be
materially different from those projected. These factors, risks and
uncertainties include, among others, the following:
- the impact of general economic conditions in the regions in which we
do business;
- general industry conditions, including competition and product, raw
material and energy prices;
- changes in exchange rates and currency values;
- capital expenditure requirements;
- access to capital markets; and
- other factors described in this prospectus.
Our actual results, performance or achievements could differ materially
from those expressed in, or implied by, the forward-looking statements. We can
give no assurances that any of the events anticipated by the forward-looking
statements will occur or, if any of them do, what impact they will have on our
results of operations and financial condition. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this prospectus.
We do not undertake any responsibility to release publicly any revisions
to these forward-looking statements to take into account events or circumstances
that occur after the date of this prospectus. Additionally, we do not undertake
any responsibility to update you on the occurrence of any unanticipated events
which may cause actual results to differ from those expressed or implied by the
forward-looking statements contained or incorporated by reference to this
prospectus.
ii
PROSPECTUS SUMMARY
In this prospectus, the words "Dresser," the "Company," "we," or "us"
refer to Dresser, Inc., the issuer of the notes, and its subsidiaries. The
following summary contains basic information about Dresser and this exchange
offer. It does not contain all the information that is important to you. For a
more complete understanding of this exchange offer, we encourage you to read
this entire document and the documents we have referred you to.
OUR COMPANY
We are a worldwide leader in the design, manufacture and marketing of
highly engineered equipment and services sold primarily to customers in the
energy industry. Our products include valves, instruments, meters, natural gas
fueled engines, retail fuel dispensers and software and related control systems.
In 2001, approximately 83% of our revenues came from energy infrastructure
spending. Two of our largest end markets are natural gas and power generation.
We are a global business, with an established sales presence in over 100
countries and manufacturing or customer support facilities in over 22 countries.
Many of our businesses have been in operation for 100 years or more. As a result
of our long operating history and leading market positions, we have a
substantial installed base which provides us with significant recurring
aftermarket revenues. In 2001, we generated revenues of $1.55 billion, operating
income of $166.7 million and EBITDA (as defined) of $225.5 million.
We sell our products and services to more than 10,000 customers, including
most of the world's major oil companies, multinational engineering and
construction companies and other Fortune 500 firms, through a global sales and
service network of over 400 account representatives, 900 independent
distributors and 300 authorized service centers. Our top 10 customers in 2001
included Shell, ExxonMobil and BP. Our principal business segments are flow
control, measurement systems and power systems. Our total revenues by geographic
region in 2001 consisted of North America (58.1%), Europe/Africa (20.7%), Latin
America (7.7%), Asia (9.6%) and the Middle East (3.9%). We have pursued a
strategy of customer, geographic and product diversity to mitigate the impact on
our business of an economic downturn in any one part of the world or in any
single business segment.
We offer our customers highly engineered products and services used to
produce, transport, process, store and distribute oil and gas and their
by-products. Because many of our products are used in mission-critical
applications, our customers often require us to meet internal, government and
industry standards, an expensive process that can take years, in order to reduce
the likelihood of costly system failures. Our products are often developed and
engineered in cooperation with our customers for specific applications. The
purchasing decisions for these customized products are driven primarily by
product performance, technical specifications and the ability to deliver service
and support rather than solely by price. We are increasingly combining our
products and services to develop integrated solutions to meet our customers'
needs.
We believe that our installed base of energy infrastructure equipment is
one of the largest in the world in the markets we serve. This significant
installed base provides us with a recurring demand for replacement parts and
equipment upgrades and a substantial platform to expand our aftermarket service
business. A significant portion of replacement equipment, parts and maintenance
services in our businesses is awarded to the original equipment manufacturer.
Aftermarket parts and services typically carry higher margins than our original
equipment sales, and accounted for approximately 26% of our revenues in 2001.
BUSINESS OVERVIEW
We believe that our global presence and diversified product and service
offerings position us to improve our market share in developed markets, expand
our sales in emerging markets and capitalize on our customers' demand for
integrated solutions. Our principal business segments are flow control,
measurement systems and power systems.
Flow Control. Our flow control segment, which generated 40% of 2001
revenues, designs, manufactures and markets valves and actuators. These products
are used to start, stop and control the flow of liquids and gases and to protect
process equipment from excessive pressure. Our flow control segment markets its
products under well recognized brand names, including Masoneilan(R), Grove(R),
Consolidated(R) and Ledeen(TM). The critical
1
functions for which these products are used require them to be highly reliable
and often custom engineered. For example, we designed and built a unique valve
for emergency shutdown of high pressure gas for Statoil's Troll project -- the
premier natural gas development in the North Sea. This valve, which we believe
to be the largest ever built at a unit weight of 80 metric tons, is designed to
withstand a load value of 2,800 metric tons at maximum working pressure over a
50-year life cycle. Similar designs were subsequently used on Statoil's Aasgard
and Europipe II projects. We enhance our product offerings with service
capabilities including preliminary design, application engineering, design
testing, production and installation, project management, operation and
maintenance training, preventative/predictive maintenance programs and inventory
management services. Our flow control segment also provides aftermarket parts
and services through a global sales and service network of over 260 account
representatives, 80 independent local distributors, 100 Green Tag(R) and
Masoneilan(R) authorized repair centers and ten company-owned service centers.
Measurement Systems. The measurement systems segment, which generated 37%
of 2001 revenues, consists of two primary product groups. The first, retail
fueling, is a leading supplier of fuel dispensers, pumps, peripherals,
point-of-sale and site monitoring systems and software for the retail fueling
industry. The second, measurement, is a leading supplier of natural gas meters,
regulators, digital and analog pressure and temperature gauges and transducers
and specialty couplings and connectors. These systems and other products are
used to measure and monitor liquids and gases. Our measurement systems group
markets its products and services under well recognized brand names including
Wayne(R), Ashcroft(R), Mooney(TM), Roots(TM) and Dresser(R), and has a long
history of technical innovations. Our Dresser Wayne product group is a leading
manufacturer of retail fueling systems, and was the first to develop fuel
blending dispensers and pay-at-the-pump technologies, including Speedpass(R) (a
registered trademark of ExxonMobil). As a result of Wayne's advanced products
and systems, we have also become the leading supplier of retail fueling
solutions to domestic high volume retailers, including Sam's Club, Kroger and
Safeway. Our Roots(R) rotary natural gas meters are the industry standard for
high accuracy natural gas custody transfer. Our measurement systems segment also
offers a comprehensive array of services ranging from the design of integrated
natural gas regulating and metering stations to on-site maintenance and repair.
Power Systems. Our power systems segment, which generated 23% of 2001
revenues, designs, manufactures and markets natural gas fueled engines used
primarily in natural gas compression and power generation applications and
rotary blowers and vacuum pumps. Our power systems group markets its products
under well recognized brand names, including Waukesha(R) and Roots(TM). These
products are used in mission-critical applications such as providing standby
power for Chicago's 911 Emergency Communications Center and driving compressors
at a remote gas storage facility in Aitken Creek, British Columbia. Our
Waukesha(R) engines have set industry standards for reliability and low
lifecycle cost of ownership. For example, our VHP(TM) engine model typically
operates for over 40,000 hours between major overhauls at a rated uptime of 98%.
This reliability makes our products suitable for use in remote areas, critical
service applications and situations requiring long lifecycles. Our customers
typically spend many times the initial purchase price of one of our engines in
service upgrades and maintenance costs over its lifetime. We currently maintain
a significant market share on our aftermarket parts as customers tend to be more
focused on reliability and predictability versus price when servicing our
engines.
COMPETITIVE STRENGTHS
We believe the following competitive strengths position us to enhance our
growth and profitability:
- Worldwide Market Leader. Originally founded in 1880, Dresser has a
long history of leadership and innovation in the energy
infrastructure industry. We believe that we have a leading market
position in most of our served markets. We operate in over 100
countries worldwide through a global sales and service network of
over 400 account representatives, 900 independent distributors and
300 authorized service centers. Our brands are well-known for
superior quality and high performance. We have developed many of the
technological and product breakthroughs in our markets, and produce
some of the most advanced products available in each of our
businesses. These products typically command higher margins than our
other products and help us maintain a strong market position. Our
brand identities have earned customer loyalty in each business
segment, help us capture aftermarket business and assist us in
obtaining additional business, particularly as our customers look to
procure from fewer manufacturers who can supply and service them
globally.
2
- Established Approved Vendor Status. The majority of our revenues are
derived from products that are used in processes involving volatile
or hazardous gases and liquids where the consequences of product
failure can be severe. Because of the potential impact of failures,
our customers often limit the number of their approved vendors and
require that products complete extensive testing and qualification
programs before being used. Also, our customers are reluctant to
replace proven equipment designs with those of new or unknown
manufacturers. Completing the required testing and qualification for
placement on approved vendor or product lists can take several years
and require large capital expenditures. Our products hold over 120
regulatory and industry approvals or certifications worldwide and
are approved for use by almost all major energy customers. We
believe that our reputation and history of previous qualification
and certification as an approved vendor provides us with a
substantial competitive advantage.
- Benefits of a Large Installed Base. We believe that our global
installed base of products is among the largest in each of our
business segments. Many of our product lines require ongoing
maintenance and parts replacement, which provides us with a
recurring source of revenues that typically carry higher margins
than our original equipment sales. Our aftermarket business
accounted for approximately 26% of our revenues in 2001 and enables
us to maintain strong customer relationships and increase our
understanding of our customers' needs.
- Well Positioned to Provide Global Integrated Solutions. With a
manufacturing, sales or service presence in over 100 countries, we
believe that our global reach and broad product offering provide a
significant advantage in competing for business from large,
multinational customers. Our customers are increasingly seeking to
outsource the service, maintenance and management of their
facilities and equipment, as they redefine their core competencies
away from building and maintaining fixed assets and seek to reduce
their total costs of ownership. We believe that our comprehensive
array of products and services and global presence allow us to
compete more successfully for a broader range of multinational
projects and provide the design, engineering and aftermarket support
that our customers demand.
- Strong Relationships With Blue Chip Customers. We sell our products
globally to more than 10,000 customers. We have long-standing
relationships with the world's major oil companies, multinational
engineering and construction companies and other Fortune 500 firms.
Our top 10 customers for 2001 included Shell, ExxonMobil and BP. We
often work directly with our customers' design and engineering
departments to develop products to meet specific infrastructure
needs or other customer requirements. For example, we
collaboratively designed, engineered, fabricated and tested several
innovative high pressure control systems for the subsea pipelines
that transport oil and gas produced by TotalFinaElf and Shell
operated oil and gas fields in the North Sea.
BUSINESS STRATEGY
- Capitalize On Favorable Energy Infrastructure Trends. As a worldwide
market leader, we believe we are well positioned to benefit from the
expected long-term growth in energy infrastructure investment. In
particular, our product and service offerings for our natural gas
and power generation customers position us to benefit from increases
in demand in these sectors.
- Increase Operational Efficiency and Cash Flow. We believe that in
order to maintain our competitiveness, we need to continue to focus
on increasing operational efficiency and cash flow. This focus
includes our on-going initiatives to increase manufacturing
efficiencies, consolidate raw material sources, increase global
procurement and improve working capital efficiency. We believe these
initiatives offer us opportunities to improve our profitability and
cash flow.
- Expand Our Product Line and Exploit Recently Developed Products.
Throughout our long history, we have worked closely with our
customers to develop products that meet their specific requirements.
We are developing new technologies that transmit control and
measurement data generated by our products that allow our customers
to remotely monitor the performance of their plant and equipment.
These technologies can substantially lower operating costs for our
customers. For example, Transco/British Gas uses our LogMan(TM)
software and regulators to remotely monitor pressure and control
natural gas delivery in the United Kingdom. In addition, we are
developing products that remotely transmit predictive maintenance
information to our customers, thereby reducing unexpected downtime.
These
3
technologies are broadly applicable across our product lines and
represent an opportunity for increased revenues from both new
product sales and upgrades to our existing installed base.
THE RECAPITALIZATION TRANSACTION
In connection with a recapitalization in April 2001, we made payments to
Halliburton Company of approximately $1.3 billion to redeem our common equity
and purchase the stock of certain of our foreign subsidiaries. The
recapitalization transaction and related expenses were financed through the
issuance of $300.0 million of 9-3/8% Senior Subordinated Notes due 2011, or the
"2001 notes," $720.0 million of borrowings under the credit facility and
approximately $400.0 million of common equity contributed by DEG Acquisitions,
LLC, an entity owned by First Reserve Corporation and Odyssey Investment
Partners, LLC. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- The Recapitalization Transaction."
OUR SPONSORS
We are controlled by DEG Acquisitions, LLC, an entity owned by First
Reserve Corporation and Odyssey Investment Partners, LLC. First Reserve was one
of the first private equity firms to actively pursue building a broadly
diversified portfolio within the energy industry. First Reserve currently
manages four private equity funds with aggregate committed capital of $2.6
billion and has made investments totaling over $1.6 billion in over 35 core
companies. First Reserve invests solely in the energy industry and focuses its
activities on energy services and manufacturing businesses similar to Dresser.
The current management team has been in place since 1983 and, collectively, has
over 150 years of energy investment experience. Other past and present First
Reserve portfolio companies include Pride International, Inc., Weatherford
International, Inc., National Oilwell, Inc., Superior Energy Services, Inc., Cal
Dive International, Inc., Chicago Bridge & Iron N.V. and Maverick Tube
Corporation.
Odyssey Investment Partners is a private equity firm that invests in
management-backed leveraged acquisitions, growth financings and
recapitalizations of manufacturing, financial services and communications
companies. The principals of Odyssey collectively have been involved in over 65
private equity transactions including Williams Scotsman, Inc., Monarch Marking
Systems, Inc., TransDigm Inc., Western Wireless Corp. (the former parent of
VoiceStream Communications), Independent Wireless One Corporation (a Sprint PCS
affiliate) and Dayton Superior Corporation. Odyssey Investment Partners is the
successor firm to the private equity activities of Odyssey Partners, LP, which
was founded in 1982. Its current fund has over $760 million of committed
capital.
RECENT RESULTS
In 2001, energy demand and oil and natural gas prices declined
significantly. During the fourth quarter of 2001, there was no significant
improvement in the outlook for energy demand or natural gas prices, and the
general industrial economy remained soft. As a result, we believe there will be
surplus capacity in the natural gas compression industry and expect substantial
revenue declines and margin pressure in our power systems segment. We also
expect to see additional weakness in the instrument and gas metering business of
our measurement systems segment until the general industrial economy improves.
On the whole, we estimate that our EBITDA in the first quarter of 2002 will
decrease by at least 10% to 20% compared to the first quarter of 2001. We also
expect a decline in EBITDA in the second quarter of 2002 compared to the second
quarter of 2001.
We have not yet completed the preparation of our financial statements for
the first quarter of 2002 and the statements above are estimates only. Actual
results for the first quarter and for future periods may differ from our current
estimates in ways that could be material. See "Risk Factors."
4
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer...................... $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount
of old notes. The exchange notes are identical to the old notes in all respects,
except that the old notes were not registered under the Securities Act. Together, the
old notes and the exchange notes constitute an additional issuance of 9-3/8% Senior
Subordinated Notes due 2011 under the indenture, dated as of April 10, 2001, under
which $300.0 million of principal amount of notes were previously issued, or the "2001
notes." The exchange notes offered hereby are identical to our outstanding 2001 notes.
As of the date hereof, (i) $250.0 million in aggregate principal amount of old notes
are outstanding and (ii) $300.0 million in aggregate principal amount of 2001 notes
are outstanding.
Based on interpretations by the staff of the Commission, as set forth in no-action
letters issued to certain third parties unrelated to us, we believe that exchange
notes issued pursuant to the exchange offer in exchange for old notes may be offered
for resale, resold or otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the Securities Act, unless you:
- are an "affiliate" of ours within the meaning of Rule 405 under the Securities
Act;
- are a broker-dealer who purchased old notes directly from us for resale under
Rule 144A or Regulation S or any other available exemption under the
Securities Act;
- acquired the exchange notes other than in the ordinary course of your
business; or
- have an arrangement with any Person to engage in the distribution of exchange
notes.
However, the Commission has not considered the exchange offer in the context of a
no-action letter and we cannot be sure that the staff of the Commission would make a
similar determination with respect to the exchange offer as in such other
circumstances. Furthermore, in order to participate in the exchange offer, you must
make the representations set forth in the letter of transmittal that we are sending
you with this prospectus.
Registration Rights Agreement........... We sold the old notes on March 25, 2002, in a private placement in reliance on Section
4(2) of the Securities Act. The old notes were immediately resold by the placement
agents in reliance on Rule 144A and Regulation S under the Securities Act. At the
same time, we entered into a registration rights agreement with the placement agents
requiring us to make the exchange offer. The registration rights agreement also
requires us to use best efforts to:
- cause the registration statement filed with respect to the exchange offer to
be declared effective within 180 days after the issue date of the outstanding
notes; and
5
- consummate the exchange offer within 210 days after the issue date of the
outstanding notes.
See "The Exchange Offer -- Purpose and Effect." If we do not do so, the interest rate
on the old notes will increase, initially by 0.25%.
Expiration Date......................... The exchange offer will expire at 5:00 p.m., _____________, 2002, New York City time,
or a later date and time if we extend it (the "Expiration Date").
Withdrawal.............................. The tender of the old notes pursuant to the exchange offer may be withdrawn at any
time prior to the Expiration Date. Any old notes not accepted for exchange for any
reason will be returned without expense as soon as practicable after the expiration or
termination of the exchange offer.
Interest on the Exchange Notes and
the Old Notes........................... Interest on the exchange notes will accrue from the last interest payment date on
which interest was paid on the old notes, or if the old notes are surrendered for
exchange on a date in a period which includes the record date for an interest payment
date to occur on or after the date of such exchange and as to which interest will be
paid, the date of such interest payment date, whichever is later. No additional
interest will be paid on the old notes tendered and accepted for exchange.
Conditions to the Exchange Offer........ The exchange offer is subject to customary conditions, some of which may be waived by
us. See "The Exchange Offer -- Conditions to Exchange Offer."
Procedures for Tendering Old Notes...... If you wish to accept the exchange offer, you must complete, sign and date the letter
of transmittal, or a copy of the letter of transmittal, in accordance with the
instructions contained in this prospectus and in the letter of transmittal, and mail
or otherwise deliver the letter of transmittal, or the copy, together with the old
notes and any other required documentation, to the exchange agent at the address set
forth in this prospectus. If you are a person holding the old notes through the
Depository Trust Company and wish to accept the exchange offer, you must do so through
the Depository Trust Company's Automated Tender Offer Program, by which you will agree
to be bound by the letter of transmittal. By executing or agreeing to be bound by the
letter of transmittal, you will be making a number of important representations to us,
as described under "The Exchange Offer -- Purpose and Effect."
Under the circumstances specified in the registration rights agreement, we will be
required to file a "shelf" registration statement for the old notes for a continuous
offering under Rule 415 under the Securities Act.
We will accept for exchange any and all old notes that are properly tendered in the
exchange offer prior to the Expiration Date. The exchange notes issued in the
exchange offer will be delivered promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
6
Exchange Agent.......................... State Street Bank and Trust Company is serving as exchange agent in connection with
the exchange offer.
Federal Income Tax Considerations....... We believe the exchange of old notes for exchange notes in the exchange offer will not
constitute a sale or an exchange for federal income tax purposes. See "Certain United
States Federal Tax Consequences."
Effect of Not Tendering................. Old notes that are not tendered or that are tendered but not accepted will, following
the completion of the exchange offer, continue to be subject to their existing
transfer restrictions. We will have no further obligation to provide for registration
under the Securities Act of such old notes.
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
Securities Offered...................... $250,000,000 in aggregate principal amount of 9-3/8% Senior Subordinated Notes due
2011.
Maturity................................ April 15, 2011.
Interest................................ 9.375% per annum, payable semi-annually in arrears on April 15 and October 15. The
exchange notes will bear interest from the most recent interest payment date to which
interest has been paid.
Optional Redemption..................... We may redeem any of the exchange notes beginning on April 15, 2006. The initial
redemption price is 104.688% of their principal amount, plus accrued interest. The
redemption price will decline each year after 2006 and will be 100% of their principal
amount, plus accrued interest, beginning on April 15, 2009.
Optional Redemption after Equity
Offerings............................... In addition, before April 15, 2004, we may redeem up to 35% of the exchange notes at a
redemption price of 109.375% of their principal amount plus accrued interest, using
the proceeds from sales of certain kinds of capital stock. We may make such
redemption only if after such redemption, at least 65% of the aggregate principal
amount of exchange notes originally issued remains outstanding.
Change of Control....................... Upon a change of control, we will be required to make an offer to repurchase the
exchange notes at a price equal to 101% of their principal amount plus accrued
interest to the date of repurchase. We may not have sufficient funds available at the
time of any change of control to make any required payment for exchange notes that you
present us at the time of a change of control.
Guarantees.............................. The wholly owned domestic subsidiaries of Dresser, Inc. will guarantee the notes.
Each guarantor will provide a guarantee of the payment of the principal, premium and
interest on the notes on a senior subordinated unsecured basis. The guarantee by each
guarantor will be subordinated to all existing and future senior indebtedness of such
guarantor. A substantial portion of our business is conducted through our foreign
operating subsidiaries and non-wholly owned subsidiaries, none of which will be a
guarantor of the notes. See Note 18 to the consolidated financial statements in the
back of this prospectus.
7
Ranking................................. The exchange notes will be senior subordinated unsecured obligations.
The exchange notes will rank equally in right of payment with our existing and future
senior subordinated unsecured indebtedness, including the 2001 notes. The exchange
notes will rank junior to indebtedness under the credit facility and any other
indebtedness we create in the future other than indebtedness that voluntarily agrees
to be subordinated to the notes. With the exception of the 2001 notes, we currently
have no other senior subordinated indebtedness and no subordinated indebtedness. The
exchange notes will be junior to all of our senior indebtedness, all liabilities of
our foreign subsidiaries and all liabilities (other than subordinated indebtedness) of
our domestic subsidiaries. The guarantees will be junior to all senior debt of the
guarantors.
As of December 31, 2001, after giving effect to the recapitalization, the offering of
the notes and the application of the proceeds therefrom, we would have had outstanding:
- $521.5 million of senior indebtedness consisting of $476.2 million of
long-term indebtedness, $39.3 million of short-term notes and $6.0 million of
capital lease obligations;
- $556.3 million of senior subordinated indebtedness (including a $6.3 million
premium on the old notes);
- $251.8 million of liabilities of foreign subsidiaries; and
- $356.5 million of liabilities (other than the subsidiary guarantees) of
domestic subsidiaries.
See "Description of Notes -- Brief Description of the Notes and the Guarantees."
Certain Covenants....................... We will issue the exchange notes under an indenture with State Street Bank and Trust
Company, as trustee. The indenture, among other things, restricts our ability and the
ability of our subsidiaries to:
- incur additional indebtedness;
- create liens;
- pay dividends and make distributions in respect of Capital Stock;
- pay dividends and make distributions in respect of the Capital Stock of our
subsidiaries;
- redeem Capital Stock;
- make investments or certain other restricted payments;
- sell assets;
- issue or sell stock of restricted subsidiaries;
8
- enter into transactions with affiliates; and
- effect a consolidation or merger.
The covenants contain a number of important qualifications and exceptions.
RISK FACTORS
You should carefully consider the factors discussed in detail under the
caption "Risk Factors" before investing in the exchange notes.
ADDITIONAL INFORMATION
We are a Delaware company formed in October 1998, after Dresser
Industries, Inc. was purchased by Halliburton Company in September 1998. Our
principal executive offices are located at 15455 Dallas Parkway, Suite 1100,
Addison, Texas 75001 and our telephone number is (972) 361-9800.
9
SUMMARY HISTORICAL CONSOLIDATED AND
PRO FORMA FINANCIAL INFORMATION
The following tables set forth our summary historical consolidated
financial information for each of the years in the five-year period ended
December 31, 2001 and our summary pro forma information for the year ended
December 31, 2001. Prior to 1998, we had a fiscal year-end of October 31. The
fiscal period ending October 31, 1997 reflects our financial information on a
fiscal year-end basis. Our operating results for November and December 1997 are
included as an adjustment to shareholders' equity. The pro forma statement of
operations and other financial data set forth below gives effect to (i) the
recapitalization transaction, including both the recapitalization of our
domestic businesses and the purchase of our foreign stock and assets from
Halliburton, (ii) the 2001 notes offering, (iii) the other financing
transactions related to the recapitalization transaction, and (iv) the offering
of the old notes and the application of the proceeds therefrom as if each had
occurred as of January l, 2001. The summary historical consolidated statement of
operations as of and for each of the years in the three-year period ended
December 31, 2001 has been derived from our consolidated financial statements,
which have been audited by Arthur Andersen LLP, independent public accountants.
Our summary historical consolidated statement of operations as of and for the
year ended (i) October 31, 1997 has been derived from our unaudited consolidated
financial statements and (ii) December 31, 1998 has been derived from our
audited consolidated financial statements, and the pro forma financial
information is not necessarily indicative of future results of operations or the
results that might have occurred if the foregoing transactions had been
consummated on such date. There can be no assurance that assumptions used in the
preparation of the pro forma financial data will prove to be correct. This data
should be read in conjunction with the Unaudited Pro Forma Consolidated
Statement of Operations, "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and the notes thereto included in this prospectus.
HISTORICAL PRO FORMA
----------------------------------------------------------------------- ------------
FOR THE
FISCAL YEAR
FOR THE FISCAL YEARS ENDED ENDED
----------------------------------------------------------------------- ------------
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997(1) 1998 1999 2000 2001 2001
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $1,581.7 $1,587.8 $1,432.6 $1,408.5 $1,545.8 $1,545.8
Cost of revenues ....................... 1,099.6 1,118.3 993.7 963.3 1,075.2 1,075.2
Selling, engineering,
administrative and general
expenses ............................. 331.6 342.5 293.9 274.7 303.9 305.1
Operating income ....................... 150.5 127.0 145.0 170.5 166.7 165.5
Net income ............................. 91.7 77.2 89.9 108.8 56.8 37.2
BALANCE SHEET DATA (AT PERIOD END):
Working capital ........................ $ 209.7 $ 227.9 $ 257.8 $ 286.1 $ 359.1 $ 379.0
Property, plant and equipment .......... 231.8 235.5 223.8 231.1 235.9 235.9
Intangible assets ...................... 247.3 267.7 264.0 258.1 414.5 414.5
Total assets ........................... 1,063.4 1,064.9 1,077.0 1,077.1 1,589.7 1,597.2
Total long-term debt (including current
portion)(2) .......................... 0.5 1.3 0.3 0.2 1,025.0 1,032.5
Shareholders' equity (deficit) ......... 492.4 536.7 542.0 562.6 (43.6) (43.6)
10
HISTORICAL PRO FORMA
----------------------------------------------------------------------- ------------
FOR THE
FISCAL YEAR
FOR THE FISCAL YEARS ENDED ENDED
----------------------------------------------------------------------- ------------
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997(1) 1998 1999 2000 2001 2001
-------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT RATIOS AND PERCENTAGES)
OTHER FINANCIAL DATA:
EBITDA(3) ................................. $ 200.8 $ 177.4 $ 193.5 $ 219.7 $ 225.5 $ 225.5
EBITDA margin(4) .......................... 12.7% 11.2% 13.5% 15.6% 14.6% 14.6%
Capital expenditures ...................... $ 44.8 $ 50.3 $ 38.4 $ 27.3 $ 36.0 $ 36.0
Depreciation and amortization ............. 50.3 50.4 48.5 49.2 58.8 60.0
Cash flows from operating activities ...... -- 48.1 141.4 91.5 136.7 --
Cash flows from investing activities ...... -- (71.5) (37.7) (28.9) (1,363.7) --
Cash flows from financing activities ...... -- 26.1 (95.3) (86.3) 1,305.8 --
Ratio of earnings to fixed charges(5) ..... 26.3x 20.6x 29.6x 25.6x 2.4x 1.6x
Pro forma cash interest expense(6) ........ -- -- -- -- -- $ 93.8
Pro forma ratio of EBITDA to cash
interest expense ........................ -- -- -- -- -- 2.4x
Pro forma ratio of total long-term debt
(including current portion) to EBITDA ... -- -- -- -- -- 4.6x
(1) The revenues and net income for the stub period (November and December
1997) were $243.0 and $13.5 million, respectively.
(2) Total long-term debt includes a $6.3 million premium on the old notes and
excludes $39.3 million of short-term notes and $6.0 million of capital
lease obligations.
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA and the related ratios are presented because we
believe they are frequently used by securities analysts, investors and
other interested parties in the evaluation of companies in our industry.
However, other companies in our industry may calculate EBITDA differently
than we do. Therefore, EBITDA is not necessarily comparable to similarly
titled measures of these companies. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to cash flow from operating
activities or as a measure of liquidity or an alternative to net income as
indicators of our operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles. See the Statements of Cash Flow included in our consolidated
financial statements.
(4) Represents EBITDA as a percentage of revenues.
(5) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include net income (loss)
before taxes and fixed charges (adjusted for interest capitalized during
the period). "Fixed charges" include interest, whether expensed or
capitalized, amortization of debt expense and the portion of rental
expense that is representative of the interest factor in these rentals.
(6) Represents total pro forma interest expense less $7.2 million of pro forma
non-cash interest expense associated with the amortization of deferred
financing costs.
11
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information contained in this prospectus, before making a decision to
tender your old notes in the exchange offer. The risks described below are not
the only ones facing us. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial may also materially and
adversely affect our business operations. Any of the following risks could
materially adversely affect our business, financial condition or results of
operations. In such case, you may lose all or part of your original investment.
RISKS RELATED TO THE SECURITIES OFFERED
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We are a highly leveraged company. As of December 31, 2001, we would have
had, after giving effect to the offering of the old notes and the application of
the proceeds therefrom, $1,032.5 million of outstanding long-term indebtedness,
including approximately $476.2 million of long-term senior indebtedness, $556.3
million of senior subordinated indebtedness and a stockholders' deficit of $43.6
million. In addition, as of December 31, 2001, we had $39.3 million of
short-term notes and $6.0 million of capital lease obligations. This level of
indebtedness could have important consequences for you, including the following:
- it may limit our ability to borrow money or sell stock to fund our
working capital, capital expenditures and debt service requirements;
- it may limit our flexibility in planning for, or reacting to,
changes in our business;
- we will be more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage;
- it may make us more vulnerable to a downturn in our business or the
economy;
- the debt service requirements of our other indebtedness could make
it more difficult for us to make payments on the notes;
- a substantial portion of our cash flow from operations could be
dedicated to the repayment of our indebtedness and would not be
available for other purposes; and
- there would be a material adverse effect on our business and
financial condition if we were unable to service our indebtedness or
obtain additional financing, as needed.
DESPITE OUR SUBSTANTIAL INDEBTEDNESS, WE MAY STILL INCUR SIGNIFICANTLY MORE
DEBT. THIS COULD INTENSIFY THE RISKS DESCRIBED ABOVE.
The terms of the indenture do not prohibit us from incurring significant
additional indebtedness in the future. As of December 31, 2001, we had $70.7
million available for additional borrowing under the revolving credit facility,
subject to certain conditions. All borrowings under the credit facility will be
senior to the notes.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES WILL BE JUNIOR TO THE BORROWINGS
UNDER THE CREDIT FACILITY AND POSSIBLY ALL FUTURE BORROWINGS.
These notes and the subsidiary guarantees rank behind all of our and the
subsidiary guarantors' existing senior indebtedness including the credit
facilities and will rank behind all of our and their future senior indebtedness,
except any future indebtedness that expressly provides that it ranks equal with,
or subordinated in right of payment to, the notes and the guarantees. As a
result, upon any distribution to our creditors or the creditors of the
subsidiary guarantors in a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the subsidiary guarantors or our or their property,
the holders of our senior indebtedness and senior indebtedness of the subsidiary
guarantors will be entitled to be paid in full in cash before any payment may be
made with respect to the notes or the subsidiary guarantees. In addition, the
credit facility is secured by substantially all of our assets and the assets of
our wholly owned domestic subsidiaries.
12
In addition, all payments on the notes and the subsidiary guarantees will
be blocked in the event of a payment default on senior debt and may be blocked
for up to 179 consecutive days in the event of certain nonpayment defaults on
senior indebtedness.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the subsidiary guarantors, holders of the notes
will participate with trade creditors and all other holders of our senior
subordinated indebtedness and the subsidiary guarantors in the assets remaining
after we and the subsidiary guarantors have paid all of the senior indebtedness.
However, because the indenture requires that amounts otherwise payable to
holders of the notes in a bankruptcy or similar proceeding be paid to holders of
senior indebtedness instead, holders of the notes may receive less, ratably,
than holders of trade payables in any such proceeding. In any of these cases, we
and the subsidiary guarantors may not have sufficient funds to pay all of our
creditors and holders of notes may receive less, ratably, than the holders of
senior indebtedness.
Assuming we had completed the offering of the old notes on December 31,
2001, the notes and the subsidiary guarantees would have been subordinated to
$476.2 million of long-term indebtedness, $39.3 million of short-term notes and
$6.0 million of capital lease obligations and approximately $70.7 million would
have been available for borrowing as additional senior indebtedness under the
credit facility, subject to certain conditions. We will be permitted to borrow
substantial additional indebtedness, including senior indebtedness, in the
future under the terms of the indenture.
RESTRICTIVE COVENANTS IN THE CREDIT FACILITY AND THE INDENTURE MAY RESTRICT
OUR ABILITY TO PURSUE OUR BUSINESS STRATEGIES.
The indenture and the credit facility limit our ability, among other
things, to:
- incur additional indebtedness or contingent obligations;
- pay dividends or make distributions to our stockholders;
- repurchase or redeem our stock;
- make investments;
- grant liens;
- make capital expenditures;
- enter into transactions with our stockholders and affiliates;
- sell assets; and
- acquire the assets of, or merge or consolidate with, other
companies.
In addition, the credit facility requires us to maintain financial ratios.
See "The Credit Facility." We may not be able to maintain these ratios.
Covenants in the credit facility may also impair our ability to finance future
operations or capital needs or to enter into acquisitions or joint ventures or
engage in other favorable business activities.
If we default under the credit facility, we could be prohibited from
making any payments on the notes. In addition, the lenders under the credit
facility could require immediate repayment of the entire principal. If those
lenders require immediate repayment, we will not be able to repay them and also
repay the notes in full.
TO SERVICE OUR INDEBTEDNESS, INCLUDING THE NOTES, WILL REQUIRE A SIGNIFICANT
AMOUNT OF CASH. THE ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND
OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the notes, and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available cash
and available borrowings under the credit facility will be adequate to meet our
future liquidity needs for at least the next few years.
13
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under the credit facility in an amount sufficient to enable us
to pay our indebtedness, including the notes, or to fund our other liquidity
needs. If we consummate an acquisition, our debt service requirements could
increase. We may need to refinance all or a portion of our indebtedness,
including the notes on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness, including the credit facility and the
notes, on commercially reasonable terms or at all.
CERTAIN SUBSIDIARIES ARE NOT INCLUDED AS SUBSIDIARY GUARANTORS.
The guarantors of the notes include only our wholly owned domestic
subsidiaries. However, the historical consolidated statement of operations
(including our consolidated financial statements) and the pro forma consolidated
statement of operations included in this prospectus are presented on a
consolidated basis, including both our wholly owned and non-wholly owned
domestic subsidiaries and our foreign subsidiaries. The aggregate revenues and
EBITDA for the year ended December 31, 2001 of our subsidiaries that are not
guarantors were $617.6 million and $87.6 million, respectively. As of December
31, 2001, those subsidiaries held 49.8% of our total assets. Each of the
subsidiary guarantors would be released from its guarantee of the notes if we
transfer 5% or more of its voting stock to a third party so that it is no longer
"wholly owned." The indenture does not restrict our ability to do so. See Note
18 to our consolidated financial statements included in the back of this
prospectus.
Because a substantial portion of our operations are conducted by foreign
and non-wholly owned subsidiaries, our cash flow and our ability to service
debt, including our and the subsidiary guarantors' ability to pay the interest
on and principal of the notes when due, are dependent to a significant extent on
interest payments, cash dividends and distributions and other transfers of cash
from our foreign and non-wholly owned subsidiaries. In addition, any payment of
interest, dividends, distributions, loans or advances by our foreign and
non-wholly owned subsidiaries to us and the subsidiary guarantors, as
applicable, could be subject to taxation or other restrictions on dividends or
repatriation of earnings under applicable local law, monetary transfer
restrictions and foreign currency exchange regulations in the jurisdiction in
which our foreign subsidiaries operate. Moreover, payments to us and the
subsidiary guarantors by the foreign and non-wholly owned subsidiaries will be
contingent upon these subsidiaries' earnings.
Our foreign and non-wholly owned subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the notes, or to make any funds available therefor,
whether by dividends, loans, distributions or other payments. Any right that we
or the subsidiary guarantors have to receive any assets of any of the foreign
subsidiaries upon the liquidation or reorganization of those subsidiaries, and
the consequent rights of holders of notes to realize proceeds from the sale of
any of those subsidiaries' assets, will be effectively subordinated to the
claims of that subsidiary's creditors, including trade creditors and holders of
debt of that subsidiary.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE ANY CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE GOVERNING THE NOTES.
If we undergo a Change of Control (as defined in the indenture governing
the notes), we may need to refinance large amounts of our debt, including the
notes, the 2001 notes and borrowings under the credit facility. If a Change of
Control occurs, we must offer to buy back the notes for a price equal to 101% of
the principal amount of the notes, plus any accrued and unpaid interest. We
cannot assure you that there will be sufficient funds available for us to make
any required repurchases of the notes upon a Change of Control. In addition, the
credit facility will prohibit us from repurchasing the notes until we first
repay the credit facility in full. If we fail to repurchase the notes in that
circumstance, we will go into default under both the indenture governing the
notes and the credit facility. Any future debt that we incur may also contain
restrictions on repayment upon a Change of Control. If any Change of Control
occurs, we cannot assure you that we will have sufficient funds to satisfy all
of our debt obligations. The buyback requirements also delay or make it harder
for others to effect a Change of Control. However, certain other corporate
events, such as a leveraged recapitalization that would increase our level of
indebtedness, would not constitute a Change of Control under the indenture
governing the notes. See "Description of Other Indebtedness -- The Credit
Facility" and "Description of the Notes -- Change of Control."
14
FEDERAL AND STATE LAWS PERMIT A COURT TO VOID THE SUBSIDIARY GUARANTEES UNDER
CERTAIN CIRCUMSTANCES.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims with respect to
a guarantee could be subordinated to all other debts of that subsidiary
guarantor under certain circumstances. While the relevant laws may vary from
state to state, under such laws, the issuance of a guarantee will be a
fraudulent conveyance if (1) any of our subsidiaries issued subsidiary
guarantees with the intent of hindering, delaying or defrauding creditors or (2)
any of the subsidiary guarantors received less than reasonably equivalent value
or fair consideration in return for issuing their respective guarantees, and, in
the case of (2) only, one of the following is also true:
- any of the subsidiary guarantors were insolvent, or became
insolvent, when they issued the guarantee;
- issuing the guarantees left the applicable subsidiary guarantor with
an unreasonably small amount of capital; or
- the applicable subsidiary guarantor intended to, or believed that it
would, be unable to pay debts as they matured.
If the issuance of any guarantee were a fraudulent conveyance, a court
could, among other things, void any of the subsidiary guarantors' obligations
under their respective guarantees and require the repayment of any amounts paid
thereunder.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater than the fair value of its property;
- the present fair value of its assets is less than the amount that it
will be required to pay on its existing debts as they become due; or
- it cannot pay its debts as they become due.
We believe, however, that immediately after issuance of the notes and the
subsidiary guarantees, we and each of the subsidiary guarantors will be solvent,
will have sufficient capital to carry on our respective businesses and will be
able to pay our respective debts as they mature. We cannot be sure, however, as
to what standard a court would apply in making such determinations or that a
court would reach the same conclusions with regard to these issues.
THE MARKET PRICE FOR THE NOTES MAY BE VOLATILE.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the notes offered hereby. The market for the notes, if any, may be
subject to similar disruptions. Any such disruptions may adversely affect the
value of your notes.
OUR FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE.
This prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act,
including statements about forecasts, our plans, strategies and prospects under
the headings "Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" in this prospectus. Although
we believe that our plans, intentions and expectations reflected in or suggested
by these forward-looking statements are reasonable, we can give no assurance
that they will be achieved. Important factors that could cause actual results to
differ materially from the forward-looking statements we make in this prospectus
are set forth above in this "Risk Factors" section and elsewhere in this
prospectus. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by these cautionary
statements.
Forecasts are particularly likely to be inaccurate, especially over longer
periods of time. For example, in 1983, the U.S. Department of Energy forecast
that oil would cost $74 per barrel in 1995. In 1995 however, the price of oil
was actually $17 per barrel. In addition, we do not know what assumptions
regarding general economic growth were used in preparing the forecasts we cite.
15
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS COULD BE HARMED DURING ECONOMIC OR INDUSTRY DOWNTURNS.
The businesses of most of our customers, particularly oil, gas and
chemical companies, are, to varying degrees, cyclical and have historically
experienced periodic downturns. Profitability in those industries is highly
sensitive to supply and demand cycles and volatile product prices, and our
customers in those industries historically have tended to delay large capital
projects, including expensive maintenance and upgrades, during industry
downturns. For example, due to the recent declines in oil and gas prices, some
of our key customers have reduced their capital spending, which will result in
reduced demand for our products. These industry downturns have been
characterized by diminished product demand, excess manufacturing capacity and
subsequent accelerated erosion of average selling prices. In addition, certain
of our customers may experience reduced access to capital during economic
downturns. Therefore, any significant downturn in our customers' markets or in
general economic conditions could result in a reduction in demand for our
products and services and could harm our business. In addition, because we only
compete in some segments of the energy infrastructure industry, a downturn in
the specific segments we serve may affect us more severely than our competitors
who compete in the industry as a whole.
THE LOSS OF ONE OF OUR LARGE CUSTOMERS, OR FAILURE TO WIN NATIONAL, REGIONAL AND
GLOBAL CONTRACTS FROM AN EXISTING CUSTOMER, COULD SIGNIFICANTLY REDUCE OUR CASH
FLOW, MARKET SHARE AND PROFITS.
Some of our customers contribute a substantial amount to our revenues. For
the year ended December 31, 2001, our largest customer represented approximately
3.1% of total revenues, and our top ten customers collectively represented
approximately 16.7% of total revenues. The loss of any of these customers, or
class of customers, or decreases in these customers' capital expenditures, could
decrease our cash flow, market share and profits. As a result of industry
consolidation, especially among natural gas compression and major oil companies,
our largest customers have become larger and, as a result, account for a larger
percentage of our sales. We could lose a large customer as a result of a merger
or consolidation. Recently, major oil companies and national oil companies have
moved toward creating alliances and preferred supplier relationships with
suppliers. In addition, these customers are increasingly pursuing arrangements
with suppliers that can meet a larger portion of their needs on a more global
basis. Typically, a customer can terminate these arrangements at any time. The
loss of a customer, or the award of a contract to a competitor, could
significantly reduce our cash flow, market share and profits.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Since we manufacture and sell our products worldwide, our business is
subject to risks associated with doing business internationally. Our sales
outside North America, as a percentage of our total sales, was 41.9% for the
year ended December 31, 2001. Accordingly, our future results could be harmed by
a variety of factors, including:
- changes in foreign currency exchange rates;
- exchange controls;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- hyperinflation;
- tariffs, other trade protection measures and import or export
licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- differing labor regulations;
- requirements relating to withholding taxes on remittances and other
payments by subsidiaries;
- different regimes controlling the protection of our intellectual
property;
- restrictions on our ability to own or operate subsidiaries, make
investments or acquire new businesses in these jurisdictions;
- restrictions on our ability to repatriate dividends from our
subsidiaries; and
- unexpected changes in regulatory requirements.
16
Our international operations are affected by global economic and
political conditions. Changes in economic or political conditions in any of the
countries in which we operate could result in exchange rate movement, new
currency or exchange controls or other restrictions being imposed on our
operations or expropriation. In addition, the financial condition of foreign
customers may not be as strong as that of our current domestic customers.
Fluctuations in the value of the U.S. dollar may adversely affect our
results of operations. Because our consolidated financial results are reported
in dollars, if we generate sales or earnings in other currencies the translation
of those results into dollars can result in a significant increase or decrease
in the amount of those sales or earnings. In addition, our debt service
requirements are primarily in U.S. dollars even though a significant percentage
of our cash flow is generated in euros or other foreign currencies. Significant
changes in the value of the euro relative to the U.S. dollar could have a
material adverse effect on our financial condition and our ability to meet
interest and principal payments on U.S. dollar denominated debt, including the
notes and borrowings under the credit facility.
In addition to currency translation risks, we incur currency transaction
risk whenever we or one of our subsidiaries enter into either a purchase or a
sales transaction using a currency other than the local currency of the
transacting entity. Given the volatility of exchange rates, we cannot assure you
that we will be able to effectively manage our currency transaction and/or
translation risks. It is possible that volatility in currency exchange rates
will have a material adverse effect on our financial condition or results of
operations. We have in the past experienced and expect to continue to experience
economic loss and a negative impact on earnings as a result of foreign currency
exchange rate fluctuations. We expect that the portion of our revenues
denominated in non-dollar currencies will continue to increase in future
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effects of Currency Fluctuations and Inflation."
Our expansion in emerging markets requires us to respond to rapid changes
in market conditions in these countries. Our overall success as a global
business depends, in part, upon our ability to succeed in differing economic,
social and political conditions. We cannot assure you that we will continue to
succeed in developing and implementing policies and strategies that are
effective in each location where we do business.
IF WE ARE NOT ABLE TO APPLY NEW TECHNOLOGY AND SOFTWARE IN OUR PRODUCTS OR
DEVELOP NEW PRODUCTS, WE MAY NOT BE ABLE TO GENERATE NEW SALES.
Our success depends, in significant part, on our ability to develop
products and services that customers will accept. We may not be able to develop
successful new products in a timely fashion. Our commitment to customizing
products to address particular needs of our customers could burden our resources
or delay the delivery or installation of products. If there is a fundamental
change in the energy industry, some of our products could become obsolete and we
may need to develop new products rapidly. Our products may not be marketed
properly or satisfy the needs of the worldwide market.
In addition, there is intense competition to establish proprietary rights
to these new products and the related technologies. The technology and software
in our products, including electronic components, point-of-sale systems and
related products, is growing increasingly sophisticated and expensive. Several
of our competitors have significantly greater financial, technical and marketing
resources than we do. These competitors may develop proprietary products that
are superior to ours or integrate new technologies more quickly than we do. We
may not be able to obtain rights to this technology. We may also face claims
that our products infringe patents that our competitors hold. Any of these
factors could harm our relationship with customers and reduce our sales and
profits.
WE FACE INTENSE COMPETITION.
We encounter intense competition in all areas of our business. Competition
in our primary business segments is based on a number of considerations
including product performance, customer service, product lead times, global
reach, brand reputation, breadth of product line, quality of aftermarket service
and support and price. Additionally, customers for our products are attempting
to reduce the number of vendors from which they purchase in order to increase
their efficiency. Our customers increasingly demand more technologically
advanced and integrated products and we must continue to develop our expertise
and technical capabilities in order to manufacture and market these products
successfully. To remain competitive, we will need to invest continuously in
research and development, manufacturing, marketing, customer service and support
and our distribution networks. We may have
17
to adjust the prices of some of our products to stay competitive. We cannot
assure you that we will have sufficient resources to continue to make such
investments or that we will maintain our competitive position. Some of our
competitors have greater financial and other resources than we do.
IF WE LOSE OUR SENIOR MANAGEMENT, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
The success of our business is largely dependent on our senior managers,
as well as on our ability to attract and retain other qualified personnel. We
cannot assure you that we will be able to attract and retain the personnel
necessary for the development of our business. The loss of the services of key
personnel or the failure to attract additional personnel as required could have
a material adverse effect on our business, financial condition and results of
operations. We do not currently maintain "key person" life insurance on any of
our key employees.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
Our operations and properties are subject to stringent laws and
regulations relating to environmental protection, including laws and regulations
governing the investigation and clean up of contaminated properties as well as
air emissions, water discharges, waste management, and workplace health and
safety. Such laws and regulations affect a significant percentage of our
operations, are constantly changing, are different in every jurisdiction and can
impose substantial fines and sanctions for violations. Further, they may require
substantial expenditures for the installation of costly pollution control
equipment or operational changes to limit pollution emissions and/or decrease
the likelihood of accidental hazardous substance releases. We must conform our
operations and properties to these laws, and adapt to regulatory requirements in
all jurisdictions as these requirements change.
We have experienced, and expect to continue to experience, both operating
and capital costs to comply with environmental laws and regulations, including
potentially substantial costs for remediation and investigation of some of our
properties (many of which are sites of long-standing manufacturing operations).
In addition, although we believe our operations are substantially in compliance
and that we will be indemnified by Halliburton for certain contamination and
compliance costs (subject to certain exceptions and limitations), new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination, the imposition of new clean-up
requirements, new claims for property damage or personal injury arising from
environmental matters, or the refusal and/or inability of Halliburton to meet
its indemnification obligations could require us to incur costs or become the
basis for new or increased liabilities that could have a material adverse effect
on our business, financial condition or results of operations, see "Business --
Legal Proceeds and Environmental Matters."
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS.
As of December 31, 2001, we had approximately 8,500 employees.
Approximately 40% of our U.S. workforce and 41% of our global workforce is
represented by labor unions. Of our ten material collective bargaining
agreements, two will expire in 2002, six will expire in 2003, one will expire in
2004 and one will expire in 2005. Although we believe that our relations with
our employees are good, we cannot assure you that we will be successful in
negotiating new collective bargaining agreements, that such negotiations will
not result in significant increases in the cost of labor or that a breakdown in
such negotiations will not result in the disruption of our operations.
WE ARE DEPENDENT ON THE AVAILABILITY OF RAW MATERIALS AND COMPONENTS.
We require substantial amounts of raw materials that we purchase from
outside sources. The availability and prices of raw materials may be subject to
curtailment or change due to, among other things, the supply of, and demand for,
such raw materials, new laws or regulations, suppliers' allocations to other
purchasers, interruptions in production by raw materials or component parts
suppliers, changes in exchange rates and worldwide price levels. Any change in
the supply of, or price for, these raw materials and components could materially
affect our operating results.
18
WE RELY ON INDEPENDENT DISTRIBUTORS.
In addition to our own direct sales force, we depend on the services of
independent distributors to sell our products and provide service and
aftermarket support to our customers. Many of these independent distributors are
not bound to us by exclusive distribution contracts and may offer products and
services that compete with ours to our customers. In addition, the majority of
the distribution contracts we have with these independent distributors are
cancelable by the distributor after a short notice period. The loss of a
substantial number of these distributors or the decision by many of these
distributors to offer competitors' products to our customers could materially
reduce our sales and profits.
WE ARE CONTROLLED BY FIRST RESERVE AND ODYSSEY, WHOSE INTERESTS MAY NOT BE
ALIGNED WITH YOURS.
A holding company controlled by First Reserve, Odyssey and their
affiliates owns approximately 92.5% of our outstanding common shares and,
therefore, has the power, subject to certain exceptions, to control our affairs
and policies. They also control the election of directors, appointment of
management, entering into of mergers, sales of substantially all of our assets
and other extraordinary transactions. The directors so elected will have
authority, subject to the terms of our debt, to issue additional stock,
implement stock repurchase programs, declare dividends and make other decisions
about our capital stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- The Recapitalization Transaction" and
"Certain Related Party Transactions."
The interests of First Reserve, Odyssey and their affiliates could
conflict with your interests. For example, if we encounter financial
difficulties or are unable to pay our debts as they mature, the interests of
First Reserve and Odyssey as equity holders might conflict with your interests
as a note holder. Affiliates of First Reserve and Odyssey may also have an
interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment, could enhance their equity investments,
even though such transactions might involve risks to you as a holder of notes.
In addition, our sponsors or their affiliates currently own, and may in the
future own, businesses that directly compete with ours.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE COMPARABLE TO FUTURE PERIODS.
The historical financial information included herein for periods prior to
the consummation of the recapitalization transaction may not necessarily reflect
our results of operations, financial position and cash flows in the future or
the results of operations, financial position and cash flows that would have
occurred if we had been a separate, independent entity during the periods
presented. The historical financial information included in this prospectus for
those periods does not fully reflect the many significant changes that occurred
in our capital structure, funding and operations as a result of the
recapitalization, the credit facility, the notes offering or the additional
costs we expect to incur in operating as an independent company. For example,
funds required for working capital and other cash needs for those periods were
obtained from Halliburton on an interest-free intercompany basis without any
debt service requirement.
WE MAY BE FACED WITH UNEXPECTED PRODUCT CLAIMS OR REGULATIONS.
Because some of our products are used in systems that handle toxic or
hazardous substances, a failure of any of our products could have material
adverse consequences, and alleged failures of certain of our products have
resulted in, and in the future could result in, claims against us for product
liability, including property damage, personal injury damage and consequential
damages. Further, we may be subject to potentially material liabilities relating
to claims alleging personal injury as a result of hazardous substances
incorporated into our products. Finally, our Dresser Wayne business faces
increasingly stringent regulations in California and elsewhere regarding vapor
recovery from gasoline dispensers. Some of Dresser Wayne's products have been
alleged to contain "defects" that adversely affect vapor recovery, requiring
retrofits, field modifications and/or the payment of administrative penalties in
connection with the affected products. Although the vapor recovery regulations
have not adversely affected us vis-a-vis our competitors to date, there can be
no assurance that changes in these regulations or in California's proposed Clean
Air Plan, or the development of more stringent regulations in other
jurisdictions where vapor recovery is required, will not have a material adverse
effect on our business, financial condition or results of operations.
19
RISKS RELATED TO THE EXCHANGE OFFER
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER OLD NOTES WILL BE ADVERSELY
AFFECTED.
We will only issue exchange notes in exchange for old notes that are
timely received by the exchange agent together with all required documents,
including a properly completed and signed letter of transmittal. Therefore, you
should allow sufficient time to ensure timely delivery of the old notes and you
should carefully follow the instructions on how to tender your old notes.
Neither we nor the exchange agent are required to tell you of any defects or
irregularities with respect to your tender of the old notes. If you do not
tender your old notes or if we do not accept your old notes because you did not
tender your old notes properly, then, after we consummate the exchange offer,
you may continue to hold old notes that are subject to the existing transfer
restrictions. In addition, if you tender your old notes for the purpose of
participating in a distribution of the exchange notes, you will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the exchange notes. If you are a
broker-dealer that receives exchange notes for your own account in exchange for
old notes that you acquired as a result of market-making activities or any other
trading activities, you will be required to acknowledge that you will deliver a
prospectus in connection with any resale of such exchange notes. After the
exchange offer is consummated, if you continue to hold any old notes, you may
have difficulty selling them because there will be less old notes outstanding.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES.
The exchange notes do not have an established trading market and will not
be listed on any securities exchange. The liquidity of the trading market in the
exchange notes, and the market price quoted for the exchange notes, may be
adversely affected by changes in the overall market for high-yield securities
and by changes in our financial performance or prospects or in the prospects for
companies in our industry generally. As a result, you cannot be sure that an
active trading market will develop for the exchange notes.
20
THE EXCHANGE OFFER
PURPOSE AND EFFECT
Together with the sale by us of the old notes on March 25, 2002, we
entered into a registration rights agreement, dated March 20, 2002, with the
placement agents, which requires that we file a registration statement under the
Securities Act with respect to the exchange notes and, upon the effectiveness of
that registration statement, offer to the holders of the old notes the
opportunity to exchange their old notes for a like principal amount of exchange
notes. The exchange notes will be issued without a restrictive legend and
generally may be reoffered and resold without registration under the Securities
Act. The registration rights agreement further provides that we must use best
efforts to cause the registration statement with respect to the exchange offer
to be declared effective by within 180 days of the issue date of the old notes
and use best efforts to consummate the exchange offer by within 210 days of the
issue date of the old notes.
Except as described below, upon the completion of the exchange offer, our
obligations with respect to the registration of the old notes and the exchange
notes will terminate. A copy of the registration rights agreement has been filed
as an exhibit to the registration statement of which this prospectus is a part,
and this summary of the material provisions of the registration rights agreement
does not purport to be complete and is qualified in its entirety by reference to
the complete registration rights agreement. As a result of the timely filing and
the effectiveness of the registration statement, we will not have to pay certain
additional interest on the old notes provided in the registration rights
agreement. Following the completion of the exchange offer, holders of old notes
not tendered will not have any further registration rights other than as set
forth in the paragraphs below, and those old notes will continue to be subject
to certain restrictions on transfer. Accordingly, the liquidity of the market
for the old notes could be adversely affected upon consummation of the exchange
offer.
In order to participate in the exchange offer, a holder must represent to
us, among other things, that:
- the exchange notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of the holder;
- the holder is not engaging in and does not intend to engage in a
distribution of the exchange notes;
- the holder does not have an arrangement or understanding with any
Person to participate in the distribution of the exchange notes; and
- the holder is not an "affiliate," as defined under Rule 405 under
the Securities Act, of ours.
Under certain circumstances specified in the registration rights
agreement, we may be required to file a "shelf" registration statement for a
continuous offering in connection with the old notes pursuant to Rule 415 under
the Securities Act. See " -- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in
no-action letters issued to third parties unrelated to us, we believe that, with
the exceptions set forth below, exchange notes issued in the exchange offer may
be offered for resale, resold and otherwise transferred by the holder of
exchange notes without compliance with the registration and prospectus delivery
requirements of the Securities Act, unless the holder:
- is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act;
- is a broker-dealer who purchased old notes directly from us for
resale under Rule 144A or Regulation S or any other available
exemption under the Securities Act;
- acquired the exchange notes other than in the ordinary course of the
holder's business; or
- the holder has an arrangement with any Person to engage in the
distribution of exchange notes.
Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives exchange notes
for its own account in exchange for old notes, where such old notes were
acquired by such broker-dealer as a result of market making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. See "Plan of Distribution."
Broker-dealers who acquired old notes directly from us and not as a result of
market making activities or other
21
trading activities may not rely on the staff's interpretations discussed above
or participate in the exchange offer and must comply with the prospectus
delivery requirements of the Securities Act in order to sell the old notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on or such
date and time to which we extend the offer. We will issue $1,000 in principal
amount of exchange notes in exchange for each $1,000 principal amount of
outstanding old notes accepted in the exchange offer. Holders may tender some or
all of their old notes pursuant to the exchange offer. However, old notes may be
tendered only in integral multiples of $1,000 in principal amount.
The exchange notes will evidence the same debt as the old notes and will
be issued under the terms of, and entitled to the benefits of, the indenture
relating to the old notes.
As of the date of this prospectus, old notes representing $250.0 million
in aggregate principal amount were outstanding and there was one registered
holder, a nominee of the Depository Trust Company. This prospectus, together
with the letter of transmittal, is being sent to the registered holder and to
others believed to have beneficial interests in the old notes. We intend to
conduct the exchange offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission promulgated under
the Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as,
and if we have given oral or written notice thereof to State Street Bank and
Trust Company, the exchange agent. The exchange agent will act as agent for the
tendering holders for the purpose of receiving the exchange notes from us. If
any tendered old notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth under the heading
"Conditions to the Exchange Offer" or otherwise, certificates for any such
unaccepted old notes will be returned, without expense, to the tendering holder
of those old notes as promptly as practicable after the expiration date unless
the exchange offer is extended.
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes in the
exchange offer. We will pay all charges and expenses, other than certain
applicable taxes, applicable to the exchange offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date shall be 5:00 p.m., New York City time, on __________
__, 2002, unless we, in our sole discretion, extend the exchange offer, in which
case the expiration date shall be the latest date and time to which the exchange
offer is extended. In order to extend the exchange offer, we will notify the
exchange agent and each registered holder of any extension by oral or written
notice prior to 9:00 a.m., New York City time, on the next business day after
the previously scheduled expiration date. We reserve the right, in our sole
discretion:
(A) to delay accepting any old notes, to extend the exchange offer
or, if any of the conditions set forth under "Conditions to Exchange
Offer" shall not have been satisfied, to terminate the exchange offer, by
giving oral or written notice of that delay, extension or termination to
the exchange agent, or
(B) to amend the terms of the exchange offer in any manner.
In the event that we make a fundamental change to the terms of the
exchange offer, we will file a post-effective amendment to the registration
statement.
PROCEDURES FOR TENDERING
Only a holder of old notes may tender the old notes in the exchange offer.
Except as set forth under "Book Entry Transfer," to tender in the exchange offer
a holder must complete, sign, and date the letter of transmittal, or a
22
copy of the letter of transmittal, have the signatures on the letter of
transmittal guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal or copy to the exchange agent prior
to the expiration date. In addition:
- certificates for the old notes must be received by the exchange
agent along with the letter of transmittal prior to the expiration
date;
- a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of the old notes, if that procedure is available,
into the exchange agent's account at the Depository Trust Company
(the "Book-Entry Transfer Facility") following the procedure for
book-entry transfer described below, must be received by the
exchange agent prior to the expiration date; or
- you must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the letter of transmittal and other
required documents must be received by the exchange agent at the address set
forth under "Exchange Agent" prior to the expiration date.
Your tender, if not withdrawn before the expiration date will constitute
an agreement between you and us in accordance with the terms and subject to the
conditions set forth herein and in the letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO US. YOU MAY REQUEST YOUR BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE
TRANSACTIONS FOR YOU.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivering the owner's
old notes, either make appropriate arrangements to register ownership of the old
notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless old notes tendered pursuant thereto are tendered:
(A) by a registered holder who has not completed the box entitled
"Special Registration Instruction" or "Special Delivery Instructions" on
the letter of transmittal or
(B) for the account of an Eligible Institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, the guarantee must be by any
eligible guarantor institution that is a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or an Eligible Institution.
If the letter of transmittal is signed by a Person other than the
registered holder of any old notes listed in the letter of transmittal, the old
notes must be endorsed or accompanied by a properly completed bond power, signed
by the registered holder as that registered holder's name appears on the old
notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
23
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the letter of transmittal
unless waived by us.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance, and withdrawal of tendered old notes will be determined by
us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all old notes not properly tendered
or any old notes our acceptance of which would, in the opinion of our counsel,
be unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old notes must be cured
within such time as we shall determine. Although we intend to notify holders of
defects or irregularities with respect to tenders of old notes, neither we, the
exchange agent, nor any other Person shall incur any liability for failure to
give that notification. Tenders of old notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any old
notes received by the exchange agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date, unless the exchange offer is extended.
In addition, we reserve the right in our sole discretion to purchase or
make offers for any old notes that remain outstanding after the expiration date
or, as set forth under "Conditions to the Exchange Offer," to terminate the
exchange offer and, to the extent permitted by applicable law, purchase old
notes in the open market, in privately negotiated transactions, or otherwise.
The terms of any such purchases or offers could differ from the terms of the
exchange offer.
By tendering, you will be representing to us that, among other things:
- the exchange notes acquired in the exchange offer are being obtained
in the ordinary course of business of the Person receiving such
exchange notes, whether or not such Person is the registered holder;
- you are not engaging in and do not intend to engage in a
distribution of the exchange notes;
- you do not have an arrangement or understanding with any Person to
participate in the distribution of such exchange notes; and
- you are not an "affiliate," as defined under Rule 405 of the
Securities Act, of ours.
In all cases, issuance of exchange notes for old notes that are accepted
for exchange in the exchange offer will be made only after timely receipt by the
exchange agent of certificates for such old notes or a timely Book-Entry
Confirmation of such old notes into the exchange agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed letter of
transmittal or, with respect to the Depository Trust Company and its
participants, electronic instructions in which the tendering holder acknowledges
its receipt of and agreement to be bound by the letter of transmittal, and all
other required documents. If any tendered old notes are not accepted for any
reason set forth in the terms and conditions of the exchange offer or if old
notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged old notes will be returned without
expense to the tendering holder or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at the Book-Entry Transfer
Facility according to the book-entry transfer procedures described below, those
non-exchanged old notes will be credited to an account maintained with that
Book-Entry Transfer Facility, in each case, as promptly as practicable after the
expiration or termination of the exchange offer.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where those old notes were acquired by such
broker-dealer as a result of market making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of those exchange notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the old notes at the Book-Entry Transfer Facility for purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the Book-Entry
24
Transfer Facility's systems may make book-entry delivery of old notes being
tendered by causing the Book-Entry Transfer Facility to transfer such old notes
into the exchange agent's account at the Book-Entry Transfer Facility in
accordance with that Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of old notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the letter of transmittal or copy
of the letter of transmittal, with any required signature guarantees and any
other required documents, must, in any case other than as set forth in the
following paragraph, be transmitted to and received by the exchange agent at the
address set forth under "Exchange Agent" on or prior to the expiration date or
the guaranteed delivery procedures described below must be complied with.
The Depository Trust Company's Automated Tender Offer Program ("ATOP") is
the only method of processing exchange offers through the Depository Trust
Company. To accept the exchange offer through ATOP, participants in the
Depository Trust Company must send electronic instructions to the Depository
Trust Company through the Depository Trust Company's communication system
instead of sending a signed, hard copy letter of transmittal. The Depository
Trust Company is obligated to communicate those electronic instructions to the
exchange agent. To tender old notes through ATOP, the electronic instructions
sent to the Depository Trust Company and transmitted by the Depository Trust
Company to the exchange agent must contain the character by which the
participant acknowledges its receipt of and agrees to be bound by the letter of
transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the old notes desires to tender old notes and
the old notes are not immediately available, or time will not permit that
holder's old notes or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if:
- the tender is made through an Eligible Institution;
- prior to the expiration date, the exchange agent receives from that
Eligible Institution a properly completed and duly executed letter
of transmittal or a facsimile of duly executed letter of transmittal
and notice of guaranteed delivery, substantially in the form
provided by us, by telegram, telex, fax transmission, mail or hand
delivery, setting forth the name and address of the holder of old
notes and the amount of old notes tendered and stating that the
tender is being made by guaranteed delivery and guaranteeing that
within three New York Stock Exchange, Inc. ("NYSE") trading days
after the date of execution of the notice of guaranteed delivery,
the certificates for all physically tendered old notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be,
will be deposited by the Eligible Institution with the exchange
agent; and
- the certificates for all physically tendered old notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be,
are received by the exchange agent within three NYSE trading days
after the date of execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
Tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the expiration date.
For a withdrawal of a tender of old notes to be effective, a written or,
for the Depository Trust Company participants, electronic ATOP transmission
notice of withdrawal, must be received by the exchange agent at its address set
forth under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date. Any such notice of withdrawal must:
- specify the name of the Person having deposited the old notes to be
withdrawn (the "Depositor");
- identify the old notes to be withdrawn, including the certificate
number or numbers and principal amount of such old notes;
- be signed by the holder in the same manner as the original signature
on the letter of transmittal by which such old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee register the
transfer of such old notes into the name of the Person withdrawing
the tender; and
25
- specify the name in which any such old notes are to be registered,
if different from that of the Depositor.
All questions as to the validity, form, eligibility and time of receipt of
such notices will be determined by us, whose determination shall be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the exchange offer. Any old
notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder of those old notes without cost to that
holder as soon as practicable after withdrawal, rejection of tender, or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures under "Procedures for Tendering"
at any time on or prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue exchange notes in exchange for, any
old notes and may terminate or amend the exchange offer if at any time before
the acceptance of those old notes for exchange or the exchange of the exchange
notes for those old notes, we determine that the exchange offer violates
applicable law, any applicable interpretation of the staff of the Commission or
any order of any governmental agency or court of competent jurisdiction.
The foregoing conditions are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. The failure by us at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any of those rights and each of those
rights shall be deemed an ongoing right which may be asserted at any time and
from time to time.
In addition, we will not accept for exchange any old notes tendered, and
no exchange notes will be issued in exchange for those old notes, if at such
time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939. In any of
those events we are required to use every reasonable effort to obtain the
withdrawal of any stop order at the earliest possible time.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. State Street Bank and Trust Company has been appointed as exchange agent
for the exchange offer. Questions, requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to the exchange agent addressed as follows:
By Registered or Certified Mail, Hand Delivery or Overnight
Courier: State Street Bank and Trust Company Corporate Trust
Department, 5th Floor 2 Avenue de Lafayette Boston, MA 02111 Attn:
Meaghan Haight
By Facsimile: (Eligible Institutions Only) (617) 662-1452 or For
Information or Confirmation by Telephone: (617) 662-1603
Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand or by overnight delivery service.
FEES AND EXPENSES
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail; however, additional solicitations may be made in Person or by telephone by
our officers and employees. The estimated cash expenses to be incurred in
connection with the exchange offer will be paid by us and will include
accounting, legal, printing, and related fees and expenses.
26
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with that tender or exchange, except that
holders who instruct us to register exchange notes in the name of, or request
that old notes not tendered or not accepted in the exchange offer be returned
to, a Person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax on those old notes.
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement dated as of March 20, 2002 by and among
Dresser, Inc., Dresser International, Inc., Dresser Russia, Inc., Dresser RE,
Inc., Dresser Entech, Inc., Ring-O Valve, Incorporated, LVF Holding
Corporation and Morgan Stanley & Co. Incorporated and Credit Suisse First
Boston Corporation, as placement agents. We will not receive any cash
proceeds from the issuance of the exchange notes. We will only receive old
notes with a total principal amount equal to the total principal amount of
the exchange notes issued in the exchange offer.
We used a portion of the net proceeds from the sale of the old notes,
which were estimated at approximately $248.8 million after deducting estimated
expenses from the sale of the old notes to (i) repay a portion of the term loans
under the credit facility and (ii) pay related transaction fees. As of December
31, 2001, Tranche A USD, Tranche A Euro and Tranche B loans under the credit
facility bore interest rates of 4.9%, 6.6% and 5.9%, respectively, and mature on
April 10, 2007, April 10, 2007 and April 10, 2009, respectively. The term loans
under the credit facility were incurred to finance a portion of the
recapitalization transaction. Certain of the placement agents who are lenders
under the credit facility will receive a proportional amount of the funds used
to repay the term loans. See "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- The
Recapitalization Transaction" and " -- Liquidity and Capital Resources" in this
prospectus.
27
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2001, on a historical basis and on a pro forma basis after giving
effect to the offering of the old notes and the application of the proceeds
therefrom as described in "Use of Proceeds" as if it had occurred on December
31, 2001. This table should be read in conjunction with the information
contained in "Use of Proceeds" as well as the Consolidated Financial Statements
and the notes thereto and the Unaudited Pro forma Consolidated Statement of
Operations in this prospectus.
AS OF DECEMBER 31, 2001
-----------------------------
ACTUAL PRO FORMA
-------- --------
(IN MILLIONS, EXCEPT SHARE AND
PER SHARE INFORMATION)
Long-term debt (including current portion):
Credit facility
Revolving credit facility(1) ................................................... $ -- $ --
Term loan A(2) ................................................................. 259.0 10.2
Term loan B(2) ................................................................. 452.7 452.7
9-3/8% Senior Subordinated Notes due 2011(3) ........................................ 300.0 556.3
Other long-term debt ................................................................ 13.3 13.3
-------- --------
Total long-term debt (including current portion)(4) ....................... $1,025.0 $1,032.5
Shareholders' equity (deficit):
Common stock, $0.001 par value, 15,000,000 shares authorized, 11,397,708
shares issued and outstanding
Additional paid-in capital ........................................................ 455.9 455.9
Accumulated deficit ............................................................... (466.9) (466.9)
Accumulated other comprehensive loss .............................................. (32.6) (32.6)
Total shareholders' equity (deficit) ...................................... (43.6) (43.6)
Total capitalization ................................................ $ 981.4 $ 988.9
======== ========
- -----------------
(1) $100.0 million total availability, subject to certain conditions, of which
$70.7 million was available and $29.3 million was reserved for letters of
credit.
(2) The credit facility permits each of the lenders under the Tranche B term
loan to decline their ratable share of any prepayment under such facility.
The lenders under the Tranche B term loan waived their right to receive
their ratable share of the net proceeds from the offering of the old notes
and the full amount of net proceeds was used to repay the Tranche A term
loan. See "The Credit Facility" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in this prospectus.
(3) Pro forma 9-3/8% Senior Subordinated Notes include a $6.3 million premium
on notes sold on March 25, 2002.
(4) In addition, we had $39.3 million of short-term notes and $6.0 million
of capital lease obligations.
28
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following pro forma consolidated statement of operations has been
derived by the application of pro forma adjustments to our historical
consolidated statement of operations for the year ended December 31, 2001. The
pro forma consolidated statement of operations gives effect to (i) the
recapitalization, including both the acquisition of our domestic businesses and
the purchase of our foreign stock and assets from Dresser Industries, (ii) the
2001 notes offering, (iii) the other financing transactions related to the
recapitalization transaction and (iv) the offering, of the old notes as if they
had been consummated on January 1, 2001. The adjustments necessary to fairly
present this pro forma consolidated statement of operations have been made based
on available information and in the opinion of management are reasonable and are
described in the accompanying notes. The pro forma consolidated statement of
operations should not be considered indicative of actual results that would have
been achieved had these transactions been consummated on the respective dates
indicated and do not purport to indicate results of operations as of any future
date or for any future period. We cannot assure you that the assumptions used in
the preparation of the pro forma consolidated statement of operations will prove
to be correct. You should read the pro forma consolidated financial statements
together with "Risk Factors," and "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the notes thereto included in this
prospectus.
We have prepared the unaudited pro forma consolidated statement of
operations as follows:
- The unaudited pro forma consolidated statement of operations
consists of an unaudited pro forma consolidated statement of
operations and accompanying explanatory notes. This information is
accompanied by an introduction which describes (i) the transactions
that we are giving pro forma effect to and (ii) the periods and
dates for which pro forma data is presented.
- The unaudited pro forma consolidated statement of operations
discloses income from operations attributable to the
recapitalization transaction, the 2001 offering, the related
financing transactions and the offering of the old notes and the use
of proceeds from the offering of the old notes. Material
nonrecurring charges or credits and related tax effects which result
directly from the recapitalization transaction, the 2001 offering,
the related financing transactions and the offering of the old notes
and the use of proceeds from the offering of the old notes and which
will be included in income or expenses within the twelve months
succeeding the recapitalization transaction have not been included
in the unaudited pro forma consolidated statement of operations.
- Pro forma adjustments related to the unaudited pro forma
consolidated statement of operations have been computed assuming the
recapitalization transaction, the 2001 offering, the related
financing transactions and the offering of the old notes and the use
of proceeds from the offering of the old notes were consummated at
the beginning of the periods presented and include adjustments which
give effect to the events that are (i) directly attributable to such
transactions, (ii) expected to have a continuing impact and (iii)
factually supportable. All pro forma adjustments have been explained
in the related notes to the unaudited pro forma consolidated
statement of operations.
- Tax effects of the pro forma adjustments have been calculated at the
effective rate in effect for the periods presented.
29
DRESSER, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS)
PURCHASE RECAPITALIZATION THE
HISTORICAL(1) ADJUSTMENTS(2) ADJUSTMENTS(3) OFFERING(4) PRO FORMA
------------- -------------- -------------- ----------- ---------
Revenues .................................... $1,545.8 $ -- $ -- $ -- $1,545.8
Cost of revenues ............................ 1,075.2 -- -- -- 1,075.2
-------- -------- -------- -------- --------
Gross profit ................................ 470.6 -- -- -- 470.6
Selling, engineering, administrative
and general expenses ..................... 303.9 1.2(a) -- -- 305.1
-------- -------- -------- -------- --------
Operating income ............................ 166.7 (1.2) 165.5
Interest expense ............................ 68.7 26.7(b) 5.6(d) 101.0
Other income ................................ (1.5) -- -- -- (1.5)
-------- -------- -------- -------- --------
Income before taxes ......................... 99.5 (1.2) (26.7) (5.6) 66.0
Income taxes ................................ 42.7 -- (11.5)(c) (2.4)(c) 28.8
-------- -------- -------- -------- --------
Net income(5) ............................... $ 56.8 $ (1.2) $ (15.2) $ (3.2) $ 37.2
======== ======== ======== ======== ========
(1) The amounts in this column represent the reported results of Dresser, Inc.
(2) The amounts in this column represent the adjustments to reflect the pro
forma impact of the purchase of certain of our foreign subsidiaries.
(a) The adjustment to amortization of intangibles relates to the
increase in goodwill associated with the purchase accounting
treatment of these stock acquisitions. Non-deductible goodwill
increased by $98.8 and is being amortized over a 20-year period.
(3) The amounts in this column represent the adjustments necessary to reflect
the pro forma impact of the recapitalization and the related financing
transactions, as follows:
(b) The adjustment to interest expense reflects the following:
YEAR ENDED
DECEMBER 31,
2001
----
Interest expense on our new term loan facilities (at a 17.0
weighted average rate of 8.48%).............................
Interest expense on the 2001 notes (at 9.375%).............. 7.8
Amortization of debt issuance costs......................... 1.8
Bank commitment fees........................................ 0.1
----
Interest expense on new indebtedness........................ 26.7
====
(c) The tax effect of annual pro forma adjustments to income before
income taxes is based on our effective tax rate of 42.9%.
(4) The amounts in this column represent the adjustments necessary to reflect
the pro forma impact of the note offering of $250.0.
(d) The adjustment to interest expense reflects the following:
Interest on credit facility to be repaid in connection with
the offering (at a weighted average rate of 7.24%)....... (17.9)
Amortization of debt issuance costs......................... 0.8
Interest expense on $250 notes (at 9.375%).................. 23.4
Amortization of premium..................................... (0.7)
------
Total Adjustment....................................... 5.6
======
A change of 25 basis points in interest rates on the aggregate amount
outstanding under the credit facility would change annual interest expense
by $1.2.
30
(5) Transaction fees related to the offering of the old notes of approximately
$7.5 have not been included on the face of the pro forma consolidated
statement of operations, but have been reflected as deferred debt issuance
costs on the pro forma consolidated balance sheet.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information as of and for each of the years in the five-year period ended
December 31, 2001. Prior to 1998, we had a fiscal year-end of October 31. The
fiscal period ending October 31, 1997 reflects our financial information on a
fiscal year-end basis. Our operating results for November and December 1997 are
included as an adjustment to shareholders' equity. The selected consolidated
financial information as of and for each of the years in the four-year period
ended December 31, 2001 has been derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, and our selected consolidated financial information as of and for
the period ended October 31, 1997 has been derived from our unaudited
consolidated financial statements. The financial information prior to March 31,
2001 has been derived from the consolidated financial statements of Dresser
Equipment Group, Inc. ("DEG"). The consolidated financial statements of DEG
exclude certain items, which were not transferred as a result of the
recapitalization agreement and any financial effects from Halliburton's decision
to discontinue the business unit. In addition, certain amounts have been
allocated and pushed down from Halliburton in a consistent manner in order to
depict the financial position, results of operations and cash flows of DEG on a
stand-alone basis. However, the financial position, results of operations and
cash flows may not be indicative of what would have been reported if DEG had
been a stand-alone entity or had been operated as part of the recapitalization
agreement during the periods presented. You should read the following table
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our Consolidated Financial Statements and the
accompanying notes included elsewhere in this prospectus.
FISCAL YEAR ENDED
-----------------------------------------------------------------------
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997(1) 1998 1999 2000 2001
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT RATIOS AND PERCENTAGES)
STATEMENT OF OPERATIONS DATA:
Revenues ............................................... $1,581.7 $1,587.8 $1,432.6 $1,408.5 $1,545.8
Cost of revenues ....................................... 1,099.6 1,118.3 993.7 963.3 1,075.2
Selling, engineering, administrative and general
expenses ........................................... 331.6 342.5 293.9 274.7 303.9
Operating income ....................................... 150.5 127.0 145.0 170.5 166.7
Net income ............................................. 91.7 77.2 89.9 108.8 56.8
BALANCE SHEET DATA
(AT PERIOD ENDED):
Working capital ........................................ $ 209.7 $ 227.9 $ 257.8 $ 286.1 $ 359.1
Property, plant and equipment .......................... 231.8 235.5 223.8 231.1 235.9
Intangible assets ...................................... 247.3 267.7 264.0 258.1 414.5
Total assets ........................................... 1,063.4 1,064.9 1,077.0 1,077.1 1,589.7
Total long-term debt (including current portion)(2) .... 0.5 1.3 0.3 0.2 1,025.0
Shareholders' equity (deficit) ......................... 492.4 536.7 542.0 562.6 (43.6)
OTHER FINANCIAL DATA:
EBITDA(3) .............................................. $ 200.8 $ 177.4 $ 193.5 $ 219.7 $ 225.5
EBITDA margin(4) ....................................... 12.7% 11.2% 13.5% 15.6% 14.6%
Capital expenditures ................................... $ 44.8 $ 50.3 $ 38.4 $ 27.3 $ 36.0
Depreciation and amortization .......................... 50.3 50.4 48.5 49.2 58.8
Cash flows from operating activities ................... -- 48.1 141.4 91.5 136.7
Cash flows from investing activities ................... -- (71.5) (37.7) (28.9) (1,363.7)
Cash flows from financing activities ................... -- 26.1 (95.3) (86.3) 1,305.8
Ratio of earnings to fixed charges(5) .................. 26.3x 20.6x 29.6x 25.6x 2.4x
31
- -----------------
(1) The revenues and net income for the stub period (November and December
1997) were $243.0 and $13.5 million, respectively.
(2) Total long-term debt includes a $6.3 premium on the old notes and excludes
$39.3 million of short-term notes and $6.0 million of capital lease
obligations.
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA and the related ratios are presented because we
believe they are frequently used by securities analysts, investors and
other interested parties in the evaluation of companies in our industry.
However, other companies in our industry may calculate EBITDA differently
than we do. Therefore, EBITDA is not necessarily comparable to similarly
titled measures of those companies. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to cash flow from operating
activities or as a measure of liquidity or an alternative to net income as
indicators of our operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles.
(4) Represents EBITDA as a percentage of revenues.
(5) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include net income (loss)
before taxes and fixed charges (adjusted for interest capitalized during
the period). "Fixed charges" include interest, whether expensed or
capitalized, amortization of debt expense and the portion of rental
expense that is representative of the interest factor in these rentals.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this discussion constitute "forward-looking
statements" as that term is defined under Section 21E of the Securities and
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995. The words "believe," "expect," "anticipate," "intend," "estimate"
and other expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements. Although forward-looking statements reflect
management's good faith beliefs, reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which may cause our actual results, performance
or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. These forward-looking statements are subject to numerous risks and
uncertainties, including, but not limited to, the impact of general economic
conditions in the regions in which we do business; general industry conditions,
including competition and product, raw material and energy prices; changes in
exchange rates and currency values; capital expenditure requirements; access to
capital markets and the risks and uncertainties described in the "Risk Factors"
section. You should read the following discussion together with the section
entitled "Risk Factors" and the Consolidated Financial Statements and notes
thereto included elsewhere in this prospectus.
OVERVIEW
We are a worldwide leader in the design, manufacture and marketing of
highly engineered equipment and services sold primarily to customers in the
energy industry. Our primary business segments are flow control, measurement
systems and power systems. We are a global business, with an established sales
presence in over 100 countries and manufacturing or customer support facilities
in over 22 countries. Many of our businesses have been in operation for 100
years or more. We sell our products and services to more than 10,000 customers,
including most of the world's major oil companies, multinational engineering and
construction companies and Fortune 500 firms, through a global sales and service
network of over 400 account representatives, 900 independent distributors and
300 authorized service centers. Our total revenues by geographic region in 2001
consisted of North America (58.1%), Europe/Africa (20.7%), Latin America (7.7%),
Asia (9.6%) and the Middle East (3.9%). We have pursued a strategy of customer,
geographic and product diversity to mitigate the impact of an economic downturn
on our business in any one part of the world or in any single business segment.
For the year ended December 31, 2001, we generated revenue of $1.55
billion, operating income of $166.7 million and EBITDA of $225.5 million.
MARKET FORCES; OUTLOOK
Our product offerings include valves, instruments, meters, natural gas
fueled engines, retail fuel dispensing systems, blowers and natural gas fueled
power generation systems. These products are used to produce, transport,
process, store and deliver oil and gas and their related by-products.
Long-term demand for energy infrastructure equipment and services is
driven by increases in worldwide energy consumption, which is a function of
worldwide population growth and the levels of energy consumption per capita. In
the short term, demand for our products is affected by overall worldwide
economic conditions and by fluctuations in the level of activity and capital
spending by major, national and independent oil and gas companies, gas
distribution companies, pipeline companies, power generation companies and
petrochemical processing plants. The level of oil and gas prices affects all of
these activities and is a significant factor in determining our primary
customers' level of cash flow. Prices for oil and natural gas declined
significantly in 2001. In addition, we see surplus capacity in the natural gas
compression industry and expect substantial declines and margin pressure in our
power system segment. We also expect to see additional weakness in the
instrument and gas metering business of our measurement systems segment until
the general industrial economy improves. In light of the difficult market
environment we will be focused throughout 2002 on actions to reduce our cost
structure, improve working capital efficiency and improve margins in flow
control.
33
During the fourth quarter 2001, there was no significant improvement in
the outlook for energy demand or natural gas prices, and the general industrial
economy remained soft. On the whole we estimate that our EBITDA in the first
quarter 2002 will be decreased by at least 10% to 20% compared to the first
quarter of 2001. We also expect a decline in EBITDA in the second quarter of
2002 compared to the second quarter of 2001.
We have not yet completed the preparation of our financial statements for
the first quarter of 2002 and the statements above are estimates only. Actual
results for the first quarter and for future periods may differ from our current
estimates in ways that could be material. See "Risk Factors."
We believe that in order to maintain our competitiveness, we need to
continue to focus on increasing operational efficiency and cash flow. This focus
includes our on-going initiatives to increase manufacturing efficiencies,
consolidate raw material sources, increase global procurement and improve
working capital efficiency. We believe these initiatives offer us opportunities
to improve our profitability and cash flow, although we may incur significant
charges to implement these initiatives.
THE RECAPITALIZATION TRANSACTION
In connection with a recapitalization transaction in April 2001, we made
payments to Halliburton Company of approximately $1.3 billion to redeem our
common equity and purchase the stock of certain of our foreign subsidiaries. The
recapitalization transaction and related expenses were financed through the
issuance of $300.0 million of 9-3/8% Senior Subordinated Notes due 2011, $720.0
million of borrowings under the credit facility and approximately $400.0 million
of common equity contributed by DEG Acquisitions, LLC, an entity owned by First
Reserve Corporation and Odyssey Investment Partners, LLC.
The following table contains the actual sources and uses of funds for the
recapitalization transaction:
SOURCES OF FUNDS
----------------
(IN MILLIONS)
Revolver(l)............... $ --
Term loan A............... 265.0
Term loan B............... 455.0
2001 notes................ 300.0
---------
Total Debt....... 1,020.0
Common equity............. 400.0
Rollover equity(3)........ 21.5
---------
Total Sources.... $ 1,441.5
=========
USES OF FUNDS
-------------
(IN MILLIONS)
Cash purchase price(2)........... $ 1,296.3
Rollover equity(3)............... 21.5
Cash ........................... 52.4
Transaction fees(4).............. 71.3
----------
Total Uses............ $ 1,441.5
==========
(1) Total availability of $100.0 million, subject to certain conditions, of
which $70.7 million was available as of December 31, 2001.
(2) Includes $1,038.4 million to redeem 94.9% of our common equity held by
Halliburton and $257.9 million to purchase the stock of certain of our
foreign subsidiaries.
(3) Attributable to the common equity interests in us that were retained by
Halliburton.
(4) Includes transaction fees paid to affiliates of First Reserve
Corporation and Odyssey Investment Partners, LLC. See "Certain
Relationships and Related Party Transactions."
STAND-ALONE COMPANY
The consolidated financial information for periods presented prior to
March 31, 2001 has been derived from the consolidated financial statements of
the Dresser Equipment Group business unit of Halliburton. The preparation of
this information was based on certain assumptions and estimates including
allocations of costs from Halliburton, which we believe are reasonable. This
financial information may not, however, necessarily reflect the results of
operations, financial positions and cash flows that would have occurred if we
had been a separate, stand-alone entity during the periods presented or our
future results of operations, financial position and cash flows.
34
In connection with the recapitalization transaction, we incurred
substantial indebtedness, interest expense and repayment obligations. The
interest expense relating to this debt adversely affect our net income. In
addition, the acquisition of certain of our foreign subsidiaries was accounted
for under the purchase method of accounting, which resulted in an increase in
depreciation and amortization above historical levels. Upon consummation of the
recapitalization transaction, we incurred a number of one-time fees and expenses
of approximately $71.3 million.
EFFECTS OF CURRENCY FLUCTUATIONS AND INFLATION
We conduct operations in over 100 countries around the world. Therefore,
our results of operations are subject to both currency transaction risk and
currency translation risk. We incur currency transaction risk whenever we or one
of our subsidiaries enter into either a purchase or sales transaction using a
currency other than the functional currency of the transacting entity. With
respect to currency translation risk, our financial condition and results of
operations are measured and recorded in the relevant local currency and then
translated into U.S. dollars for inclusion in our consolidated financial
statements. Exchange rates between these currencies and U.S. dollars in recent
years have fluctuated significantly and may do so in the future. The majority of
our revenues and costs are denominated in U.S. dollars, with Euro-related and
other currencies also being significant. Historically, we have engaged in
hedging strategies from time to time to reduce the effect of currency
fluctuations on specific transactions.
We have not, however, sought to hedge currency translation risk. We expect
to continue these hedging policies going forward. Significant depreciation in
the value of the Euro relative to the U.S. dollar could have a material adverse
effect on our financial condition and our ability to meet interest and principal
payments on U.S. dollar denominated debt, including the notes and borrowings
under the credit facility, if not offset by pricing in those markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including bad
debts, inventories, intangible assets, warranty obligations, income taxes,
pensions and other post-retirement benefits, and contingencies and litigation.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue as products are shipped and services
are rendered. We do not provide our distributors with price protection rights.
If items are shipped with rights to return, revenue is not recorded until the
customer has approved and written acceptance is received. We maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality from our
suppliers, our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty liability
would be required.
35
We record a valuation allowance to reduce our deferred tax assets to the
amount that is likely to be realized. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of our
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine
that we would not be able to realize all or part of our net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
REVENUES
Our revenues are primarily generated through the sale of new equipment,
replacement parts and services. Revenues are recognized as products are shipped
and services are rendered. Revenues have historically been driven by volume,
rather than price, and are sensitive to foreign currency fluctuations. Prices
have generally remained stable.
COST OF REVENUES
Cost of revenues is comprised of the cost of raw materials, plant and
related work force costs and freight and warehousing expense.
GROSS MARGIN
Certain of our products tend to carry higher gross margins than others,
and therefore product mix can impact our overall gross margins. For example, our
custom engineered valve products typically carry a significantly higher gross
margin than our retail fuel dispensing products. As a result, an increase in
custom engineered valve sales will result in a disproportionately higher
increase in our gross profit. In addition, sales of aftermarket parts and
services typically carry a significantly higher gross margin than original
product sales.
SELLING, ENGINEERING, ADMINISTRATIVE AND GENERAL EXPENSES
Selling expenses consist of costs associated with marketing and sales.
Engineering expenses are costs attributable to research and development and
engineering. Administrative and general expenses are primarily management,
accounting, treasury and legal costs. Selling, engineering, administrative and
general expenses also include costs associated with health, safety and
environmental administration and retiree medical and pension benefits. Research
and development expenses are costs associated with product or customer
initiatives or with projects that seek improvements in manufacturing processes.
Research and development expenses are expensed as incurred. Our distributors are
typically compensated through a discount from the list price of our products
they purchase. These discounts are accounted for as a reduction in revenues
versus classifying them as selling expenses.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are reported at cost less accumulated
depreciation, which is generally provided using the straight-line method over
the estimated useful lives of the assets. Expenditures for improvements that
extend the life of the asset are generally capitalized. Intangible assets
primarily consist of goodwill and patents. Goodwill resulting from business
acquisitions represents the excess of purchase price over fair value of net
assets acquired and is amortized over a period from 4 to 40 years using the
straight-line method. Patents are amortized over their estimated useful lives.
Depreciation and amortization was $58.8 million, $49.2 million and $48.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively. In 2002, we
will adopt Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill
and Other Intangible Assets." The statement, among other items, will eliminate
the amortization of goodwill. The amortization expense for goodwill was $14.2
million for the year ended December 31, 2001.
36
INCOME TAXES
Historically, our operations have been included in the tax returns
submitted by various Halliburton operating companies. The tax amounts reflected
in our historical results have been allocated based on the amounts expected to
be paid to or received from the various Halliburton operating companies filing
tax returns in which our operations were included. In connection with the
recapitalization transaction, we made a Section 338(h)(10) election to allow the
recapitalization of our domestic businesses to be treated as an acquisition of
assets for tax purposes. Accordingly, for tax purposes our U.S. assets were
stepped up to their fair market value and we will be able to depreciate those
assets using a higher basis than the historical amount. We expect that these tax
assets will result in a substantial decrease in our cash taxes, and therefore
increase our cash available for debt service or investment in our business over
the next few years.
INTEREST EXPENSE
As part of Halliburton, no third party debt was allocated to us except for
operational accounts payable. As a result, we did not have any significant
interest expense prior to the second quarter of 2001. As part of the
recapitalization transaction, we incurred a significant amount of debt.
Accordingly, we incurred significant interest expense beginning in the second
quarter of 2001 and will continue to incur significant interest expense going
forward.
RESULTS OF OPERATIONS
YEARLY INFORMATION
The following table presents selected financial information regarding each
of our segments for the years ended 1999, 2000 and 2001. Revenue and operating
income by segment are also presented as a percentage of their respective totals.
The four columns under year-to-year change show the dollar and percentage change
from 1999 to 2000 and from 2000 to 2001.
YEAR ENDED DECEMBER 31, YEAR-TO-YEAR CHANGE
----------------------------------------------------- -----------------------------------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
--------------------------------------------------------------------------------------------------------
1999 TO % 2000 TO %
1999 % 2000 % 2001 % 2000 CHANGE 2001 CHANGE
-------- ----- -------- ----- -------- ----- ------- ------- ------- ------
REVENUES
Flow Control ...... $ 557.6 38.9% $ 549.3 39.0% $ 622.8 40.3% $ (8.3) (1.5)% $ 73.5 13.4%
Measurement Systems 605.2 42.2 562.8 40.0 573.3 37.1 (42.4) (7.0) 10.5 1.9
Power Systems...... 274.3 19.2 301.2 21.4 355.3 23.0 26.9 9.8 54.1 18.0
Corporate.......... (4.5) (0.3) (4.8) (0.4) (5.6) (0.4) (0.3) 6.7 (0.8) 16.7
Total Revenues.. $1,432.6 100.0% $1,408.5 100.0% $1,545.8 100.0% $ (24.1) (1.7)% $ 137.3 9.7%
OPERATING INCOME
Flow Control....... $ 74.3 51.2% $ 77.1 45.2% $ 67.4 40.4% $ 2.8 3.8% $ (9.7) (12.6)%
Measurement Systems 62.3 43.0 64.0 37.5 56.7 34.0 1.7 2.7 (7.3) (11.4)
Power Systems...... 19.9 13.7 42.0 24.6 59.8 35.9 22.1 111.1 17.8 42.4
Corporate.......... (11.5) (7.9) (12.6) (7.3) (17.2) (10.3) (1.1) 9.6 (4.6) 36.5
Total Operating
Income........... $ 145.0 100.0% $ 170.5 100.0% $ 166.7 100.0% $ 25.5 17.6% $ (3.8) (2.2)%
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Consolidated
Revenues. Revenues increased by $137.3 million, or 9.7%, to $1,545.8
million in 2001 from $1,408.5 million in 2000. Revenues increased in all three
of our business segments. Our flow control segment revenue was positively
impacted by acquisitions we made in 2001 and 2000. Entech and Elliot Valve,
which were acquired in the second and third quarter of 2001, accounted for
approximately $39.5 million of the increase in revenue. The purchase of the
remaining 50% interest in the NIMCO joint venture in April 2000, accounted for
an $8.5 million increase in revenue. Prior to its acquisition in April 2000, we
owned 50% of that joint venture and accounted for it on an equity basis, so that
only a 50% share of NIMCO's earnings were reflected in our revenue. In addition,
we experienced strong growth in our power systems segment, resulting from
increased demand for natural gas engines used for gas compression and power
generation.
37
Cost of Revenues. Cost of revenues as a percentage of revenues increased
to 69.6% in 2001 from 68.4% in 2000. Manufacturing inefficiencies and an
unfavorable product mix adversely affected margins in our flow control segment.
In addition, the acquisition of Entech, which positively impacted revenues, had
product margins lower than the existing flow control business. We also
experienced lower margins in our measurement segment due to lower price levels
as a result of the weakness in the general industrial economy.
Gross Profit. Gross profit increased by $25.4 million, or 5.7%, to $470.6
from $445.2 million in 2000 and decreased to 30.4% of revenues in 2001 from
31.6% in 2000, due to the factors mentioned above.
Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses increased as a percentage of
revenues and in dollar terms, accounting for 19.7% of revenues in 2001 and 19.5%
of revenues in 2000. In dollar terms, selling, engineering, administrative and
general expenses increased by $29.2 million to $303.9 million from $274.7
million in 2000 due to the acquisition of Entech which accounted for $8.0
million of the increase and the remainder primarily resulting from higher
selling, engineering, administrative and general expenses associated with
increased sales volume.
Operating Income. Operating income decreased by $3.8 million, or 2.2%, to
$166.7 million in 2001 from $170.5 million in 2000. The decrease is primarily
attributable to the factors contributing to the decreased gross margin and
higher selling, engineering, administrative and general expenses, as discussed
above.
Income Tax Expense. Our effective tax rate was 42.9% for 2001 and 38.5% in
2000. The effective tax rate utilized in 2000, and for part of 2001 was
reflective of our operations being reported as part of Halliburton's
consolidated tax returns.
Bookings and Backlog. Bookings include orders placed during the period
whether or not filled. Backlog as of any date represents the number of orders
left unfilled as of that date. Bookings during the period of $1,598.7 million
were 10.9% above 2000, and backlog at the end of 2001 was $419.5 compared to
$362.7 million at the end of 2000, a 15.7% increase. Backlog as of December 31,
2001 was $21.0 million lower than backlog as at September 30, 2001.
SEGMENT ANALYSIS
Flow Control
Revenues increased by $73.5 million, or 13.4%, to $622.8 million in 2001
from $549.3 million in 2000. Revenues were positively affected by acquisitions
we made in both 2000 and 2001. Entech and Elliot Valve, which were acquired in
the second and third quarter of 2001, accounted for approximately $39.5 million
of the increase. In addition, the purchase of the remaining 50% interest in the
NIMCO joint venture in April 2000, accounted for an $8.5 million increase in
revenues. Prior to its acquisition in April 2000, we owned 50% of that joint
venture and accounted for it on an equity basis, so that only a 50% share of
NIMCO's earnings were reflected in our revenues. The remaining increase in
revenues can be attributed to favorable market conditions.
Although revenues increased, operating income decreased by $9.7 million,
or 12.6%, to $67.4 million in 2001 from $77.1 million in 2000. As a percentage
of segment revenues, operating income decreased to 10.8% in 2001 from 14.0% in
2000. Although the acquisition of Entech increased revenues significantly, its
impact to operating income was marginal because its product margins were lower
than those of our existing flow control business. In addition, operating income
was impacted by an unfavorable product mix and manufacturing inefficiencies.
Bookings during the period of $702.1 million were 28.6% above 2000, and
backlog at the end of the year was $295.2 million, or 45.6% above 2000. Both
were positively impacted by the acquisitions described above in addition to
favorable market conditions.
38
Measurement Systems
Revenues increased by $10.5 million, or 1.9%, to $573.3 million in 2001
from $562.8 million in 2000. Revenues remained relatively stable between periods
with increases in revenues in our retail fueling business offsetting lower
revenues in our instrument and gas metering businesses. We expect to see
continuing weakness in this segment which could negatively impact our revenues
for 2002 until market conditions improve.
Operating income decreased by $7.3 million, or 11.4%, to $56.7 million in
2001 from $64.0 million in 2000. Operating income was negatively impacted by
lower margins due in part to competitive pricing. Operating income was also
impacted by a charge of $4.0 million in 2001 related to the closure and
relocation of the Salisbury, Maryland retail fuel dispenser facility to Austin,
Texas. This was offset in part by a reduction in head count and improved
efficiency following closure of that plant.
Bookings during the period of $579.8 million were 1.9% above 2000, and
backlog at year-end was $76.5 million, or 7.9% above 2000. Backlog primarily
reflects the unfilled orders of retail fuel dispensers as the meter and
instrument product lines consist primarily of products that are shipped within
days of a customer's order.
Power Systems
Revenues increased by $54.1 million, or 18.0%, to $355.3 million from
$301.2 million in 2000. Revenues were positively impacted by increased sales to
the gas compression market. However, in 2001, energy demand and natural gas
prices declined significantly. During the fourth quarter of 2001, there was no
significant improvement in the outlook for energy demand or natural gas prices
and the general industrial economy remained soft. As a result, we see surplus
capacity in the natural gas compression industry and expect to see substantial
revenue declines and margin pressure in this segment for 2002.
Operating income increased by $17.8 million, or 42.4%, to $59.8 million in
2001 from $42.0 million in 2000. As a percentage of revenues, operating income
increased to 16.8% in 2001 from 13.9% in 2000. Operating income was positively
impacted by increased volumes in our higher margin products and services and
favorable volume related reductions in manufacturing costs.
Bookings during 2001 were $316.8 million or 2.8% below 2000, and bookings
in the fourth quarter of 2001 declined substantially from bookings in the fourth
quarter of 2000, as a result of the decline in the market outlook for the
natural gas compression industry described above. Backlog at the end of 2001 was
$51.4 million, or 42.3% below 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Consolidated
Revenues. Revenues decreased by $24.1 million, or 1.7%, to $1,408.5
million in 2000 from $1,432.6 million in 1999. Sales volume for many of our
valve and measurement systems products decreased during this period due to
reduced capital spending by our customers and a delay in new project
initiatives. These decreases were partially offset by an increase in demand for
our power systems products and the impact of our purchase of the remaining 50%
interest in the NIMCO joint venture in April 2000, which increased revenues in
2000 by $52.6 million. Prior to April 2000, our interest in the NIMCO joint
venture was accounted for using the equity method and only our share of its
earnings was included in our revenues.
Cost of Revenues. Cost of revenues as a percentage of revenues improved to
68.4% in 2000 from 69.4% in 1999. This improvement was due to a more favorable
product mix and increased manufacturing efficiencies achieved through
outsourcing, manufacturing productivity initiatives, work force and capacity
rationalization efforts and favorable raw material costs. Cost of revenues in
2000 includes approximately $4.0 million related to facility closures, primarily
consisting of our facility in Connersville, Indiana.
39
Gross Profit. Gross profit increased by $6.3 million, or 1.4%, to $445.2
million in 2000 from $438.9 million in 1999 and increased to 31.6% of revenues
in 2000 from 30.6% in 1999, due to the factors mentioned above.
Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses improved as a percentage of
revenues and in dollar terms accounted for 19.5% of revenues in 2000 and 20.5%
of revenues in 1999. In dollar terms, selling, engineering, administrative and
general expenses fell by $19.2 million to $274.7 million in 2000 from $293.9
million in 1999 due to increased efficiencies.
Operating Income. Operating income increased by $25.5 million, or 17.6%,
to $170.5 million in 2000 from $145.0 million in 1999. The increase is primarily
attributable to the factors contributing to the increased gross margin and lower
selling, engineering, administrative and general expenses, as discussed above.
Income Tax Expense. Our effective tax rate was 38.5% in both 2000 and
1999. The effective tax rate utilized was reflective of our operations being
reported as part of Halliburton's consolidated tax returns.
Bookings and Backlog. Bookings include orders placed during the period
whether or not filled. Backlog as of any date represents the number of orders
left unfilled as of that date. Bookings during the period of $1,441.0 million
were 0.6% above 1999, and backlog at the end of 2000 was $362.7 million compared
to $317.7 million at the end of 1999, a 14.2% increase.
SEGMENT ANALYSIS
Flow Control. Revenues decreased by $8.3 million, or 1.5%, to $549.3
million in 2000 from $557.6 million in 1999. Strong results in aftermarket parts
and services were more than offset by reduced valve sales, which was due to
reduced energy industry spending. Flow control was positively affected by our
purchase of the remaining 50% of interest in the NIMCO joint venture and the May
2000 acquisition of a small valve company, which together accounted for $59.4
million of 2000 revenues. The closure of our manufacturing operations in
Scotland in December 1999 accounted for a $21.6 million reduction in revenues
versus 1999. Currency fluctuations, primarily reflected by continued
depreciation in the euro, caused revenues on a U.S. dollar basis to decrease by
$21.5 million.
Operating income increased by $2.8 million, or 3.8%, to $77.1 million in
2000 from $74.3 million in 1999. As a percentage of segment revenues, operating
income increased to 14.0% in 2000 from 13.3% in 1999, primarily due to the
impact of higher aftermarket parts and service sales and benefits of the
restructuring activities implemented in 1999.
Bookings during the period of $545.9 million were 1.8% above 1999, and
backlog at the end of the year was $202.7 million, or 9.6% above 1999. Bookings
were affected negatively by industry factors, but were offset by contributions
from the acquired NIMCO operations.
Measurement Systems. Revenues decreased by $42.4 million, or 7.0%, to
$562.8 million in 2000 from $605.2 million in 1999. This decrease reflects a
decline in sales of retail fuel dispensers, partially offset by an increase in
sales of meters. Sales of retail fuel dispensers were impacted by lower volumes
due to recent merger activity by a few of our top customers, such as ExxonMobil,
as orders for pumps and related systems were delayed pending the consolidation
of capital spending budgets. Lower revenue from our traditional retail fuel
dispenser customers, particularly in international markets, was partially offset
by an increase in unit sales to high volume retailers. The meters business
experienced an increase in sales volume due to growth in the demand for natural
gas and the ongoing effects of utility industry deregulation which resulted in
an increased demand for gas meters and related products to meet increased
custody transfer requirements.
Operating income increased by $1.7 million, or 2.7% to $64.0 million in
2000 from $62.3 million in 1999. Despite the decline in revenues, operating
income as a percentage of segment revenues increased to 11.4% in 2000 from 10.3%
in 1999 due to cost control initiatives, manufacturing and operating
efficiencies, a more favorable product mix and favorable currency translation
adjustments.
40
Bookings during the period of $569.0 million were 5.2% below 1999, and
backlog at year-end was $70.9 million, or 3.9% below 1999. Backlog primarily
reflects the unfilled orders of retail fuel dispensers as the meter and
instrument product lines consist primarily of products that are shipped within
days of a customer's order.
Power Systems. Revenues increased by $26.9 million, or 9.8%, to $301.2
million in 2000 from $274.3 million in 1999. Revenues were positively affected
by increased prices for natural gas that drove higher levels of customer
spending. Revenues were particularly strong for aftermarket parts and upgrade
kits as customers in the gas compression industry experienced increased
utilization in their engines. Demand for new engines and aftermarket parts used
in distributed power applications also experienced growth.
Operating income increased by $22.1 million, or 111.1%, to $42.0 million
in 2000 from $19.9 million in 1999. As a percentage of revenues, operating
income increased to 13.9% in 2000 from 7.3% in 1999 due almost entirely to the
increase in gross profit, as well as increased cost control initiatives.
Bookings during the period of $326.0 million were 10.2% above 1999, and
backlog ended the year at $89.1 million, or 50.9% above 1999. Bookings were
affected positively by increased demand for natural gas engines used for gas
compression and power generation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of cash has been from operations. Prior
to the recapitalization transaction, we participated in Halliburton's
centralized treasury management system whereby all of our cash receipts were
remitted to Halliburton and Halliburton funded all of our cash disbursements.
Our primary cash disbursements were for capital expenditures and working
capital. Following the consummation of the recapitalization transaction, this
practice ceased and we have established our own cash management system.
Our primary cash uses are to fund principal and interest payments on our
debt, working capital and capital expenditures. We fund these cash needs with
operating cash flow and borrowings under the revolving credit portion of the
credit facility.
Cash and cash equivalents were $97.2 million, $19.7 million and $33.7
million for the years ended December 31, 2001, 2000, and 1999, respectively. A
significant portion of our cash and cash equivalent balances is utilized in our
international operations and may not be immediately available for debt service
in the United States.
Net cash flow provided by operating activities was $136.7 million, $91.5
million and $141.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively, mainly from profitable results of operations and changes in
working capital.
Net cash flow used in investing activities for the year ended December 31,
2001 was $1,363.7 million resulting from capital expenditures of $36.0 million
and cash used to complete the recapitalization transaction. Net cash flow used
in investing activities was $28.9 million and $37.7 million for the years ended
2000 and 1999, respectively, resulting mainly from capital expenditures of $27.3
million and $38.4 million in 2000 and 1999, respectively.
Net cash flow provided by financing activities was $1,305.8 million for
the year ended December 31, 2001, resulting from the proceeds of the 2001 notes
and borrowings under the credit facility, along with cash from the investors,
which were used to complete the recapitalization transaction. Net cash flow used
in financing activities was $86.3 million and $95.3 million for the years ended
December 31, 2000 and 1999, respectively, representing the impact of net
distributions to Halliburton and receipts from Halliburton.
In April 2001, we incurred approximately $1,020.0 million in debt, which
was used primarily to finance the recapitalization transaction and pay certain
related costs and expenses.
On April 10, 2001, we sold $300.0 million of 9-3/8% Senior Subordinated
Notes due 2011 in a private placement. The notes bear interest at 9.375% per
annum, payable semi-annually in arrears on April 15 and October
41
15. The notes may be redeemed beginning April 15, 2006. The initial redemption
price is 104.688% of the principal amount plus accrued interest. The redemption
price will decline each year after 2006 and will be 100.0% of the principal
amount, plus accrued interest, beginning on April 15, 2009. In addition, before
April 15, 2004, we may redeem up to 35% of the notes at a redemption price of
109.375% of their principal amount, plus accrued interest, with the net proceeds
of certain equity offerings. Upon a change of control, we will be required to
make an offer to repurchase the notes at a price equal to 101% of their
principal amount plus accrued interest. Our wholly owned domestic subsidiaries
guarantee the notes.
We also obtained $720.0 million in term loans under the credit facility.
The credit facility provides for the following:
(1) a six-year $165.0 million Tranche A U.S. term loan facility, a
six-year Tranche A Euro term loan facility in an amount equivalent, as of the
closing date, to $100.0 million which was borrowed by a foreign subsidiary of
ours, and an eight-year $455.0 million Tranche B term loan facility. The
Tranche A term loans will amortize with annual reductions of 5% in year 1,
10% in year 2, 15% in year 3, 20% in year 4 and 25% in each of years 5 and 6.
The Tranche B term loans will be repaid in the final year of the loans in
equal quarterly amounts, subject to amortization of approximately 1% per year
in each prior year. Interest rates range from LIBOR or Euribor plus margins
of 2.0% to 3.25% for the Tranche A term loans and LIBOR plus 3.0% to 3.75%
for the Tranche B term loans, depending on our leverage ratio, and
(2) a six-year $100.0 million revolving credit facility to be utilized
solely for our and our subsidiaries' working capital requirements and other
general corporate purposes. As of December 31, 2001, we had $70.7 million
available under the revolving credit facility as we had $29.3 million
outstanding under letters of credit.
At our request, and so long as (a) no default or event of default has
occurred and is continuing under the credit facility and (b) our lenders or
other financial institutions are willing to lend such incremental amounts, the
Tranche B term loan facility may be increased from time to time in an amount, in
the aggregate, not to exceed $195.0 million.
The credit agreement documentation contains certain customary
representations and warranties and contains customary covenants restricting our
ability to, among others: (i) declare dividends or redeem or repurchase capital
stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in
sale-leaseback transactions; (iv) make loans and investments; (v) incur
additional indebtedness; (vi) amend or otherwise alter debt and other material
agreements; (vii) make capital expenditures; (viii) engage in mergers,
acquisitions and asset sales; (ix) transact with affiliates; and (x) alter the
business we conduct. We are required to indemnify the agent and lenders and
comply with specified financial and affirmative covenants including a total debt
to EBITDA ratio and an Interest Coverage Ratio (as defined). As of December 31,
2001, we were in compliance with these covenants.
On March 25, 2002, we sold an additional $250.0 million of 9-3/8% Senior
Subordinated Notes due 2011 under the indenture that governs the 2001 notes.
These notes rank pari passu with the 2001 notes and are treated as a single
class of notes with the 2001 notes under the indenture. The net proceeds from
the offering which were estimated at approximately $248.8 million, net of
expenses and excluding accrued interest to be paid to us on the closing date in
connection with the scheduled interest payment on the notes due April 15, 2002
(with interest accruing from October 15, 2001). The net proceeds were used to
repay a portion of the term loans under the credit facility. The credit facility
permits each of the lenders under the Tranche B term loan to decline their
ratable share of any prepayment under such facility. The lenders under the
Tranche B term loan waived their right to receive their ratable share of the net
proceeds from the offering of the old notes, which enabled us to use the full
amount of net proceeds to repay the Tranche A term loan. The prepayment was
credited first to repay the next four quarterly installments of principal in
order of maturity and thereafter to the remaining amortization of principal on a
pro rata basis.
In connection with the issuance of old notes, we sought, and obtained, an
amendment to the credit facility to revise certain financial covenants to
provide us with greater operating flexibility.
42
The following tables set forth debt and lease obligations and commitments
for the next several years giving effect to (i) the offering of the old notes
and (ii) the use of net proceeds from the offering to repay a significant
portion of the Tranche A term loan:
2007 AND
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
(IN MILLIONS)
DEBT/LEASE OBLIGATIONS:
Long-Term Debt (1) .................. $ 5.1 $ 15.5 $ 7.4 $ 7.9 $ 8.2 $ 982.1 $1,026.2
Capital Lease Obligations ........... 1.3 2.0 0.9 0.7 0.7 0.4 6.0
Operating Leases .................... 13.3 11.4 8.9 7.8 4.7 13.0 59.1
-------- -------- -------- -------- -------- -------- --------
Total Debt/Lease Obligations ..... $ 19.7 $ 28.9 $ 17.2 $ 16.4 $ 13.6 $ 995.5 $1,091.3
======== ======== ======== ======== ======== ======== ========
COMMITMENTS:
Letters of Credit ................... $ 27.2 $ 1.9 $ 0.2 $ -- $ -- $ -- $ 29.3
-------- -------- -------- -------- -------- -------- --------
- -------------------
(1) Excludes a $6.3 million premium which will be amortized over the term of
the notes.
Our capital expenditures were $36.0 million, $27.3 million and $38.4
million for the years ended December 31, 2001, 2000 and 1999. The credit
agreement limits our ability to make capital expenditures; the limitation for
the fiscal year end 2001 was $48.0 million plus a defined percentage. The
limitation increases each year reaching $62.0 million plus a defined percentage
in 2006. In light of the current economic climate, we anticipate making capital
expenditures of approximately $25.0 million in fiscal year 2002 primarily for
maintenance expenditures. We have budgeted significantly higher capital
expenditures for fiscal year 2003 and subsequent years to support anticipated
revenue growth.
Our ability to make payments on and to refinance our indebtedness and to
fund planned capital expenditures and research and development efforts will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Based on our current level of
operations and anticipated cost savings and operating improvements, we believe
our cash flow from operations, available cash and available borrowings under the
credit facility will be adequate to meet our future liquidity needs for at least
the next few years. We cannot assure you, however, that our business will
generate sufficient cash flow from operations, that currently anticipated cost
savings and operating improvements will be realized on schedule or that future
borrowings will be available to us under the revolving credit portion of the
credit facility in an amount sufficient to enable us to pay our indebtedness or
to fund our other liquidity needs. If we consummate an acquisition, our debt
service requirements could increase. We may need to refinance all or a portion
of our indebtedness on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness on commercially reasonable terms or at
all. See "Risk Factors."
EURO CONVERSION
On January 1, 1999, eleven European Union member states (Germany, France,
the Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the euro as their common national currency. On January 1,
2001, Greece adopted the euro as its common national currency. Until January 1,
2002, either the euro or a participating country's national currency were
accepted as legal tender. Beginning January 1, 2002, euro-denominated bills and
coins were issued, and beginning February 28, 2002, only the euro is accepted as
legal tender. We do not expect the euro conversion to materially affect our
consolidated position, results of operations or cash flow.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
two new statements, SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets."
SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16,
"Business Combinations" and eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of
43
the purchase accounting method. SFAS No. 141 is effective for all transactions
completed after June 30, 2001, except transactions using the
pooling-of-interests method that were initiated prior to July 1, 2001. As we
have no business combination transaction in process or otherwise initiated that
contemplated pooling-of-interests, adoption of SFAS No. 141 will not have an
impact on our consolidated financial statements.
SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets" and eliminates the requirement to amortize goodwill and
indefinite-lived assets, addresses the amortization of intangible assets with a
defined life and requires impairment testing and recognition of goodwill and
intangible assets. SFAS No. 142 became effective for us beginning January 1,
2002. As a result of the adoption of SFAS No. 142, amortization will decrease by
approximately $14.2 million. We are currently evaluating the impact this
statement will have on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity shall recognize
the cumulative effect of adoption of SFAS No. 143 as a change in accounting
principle. We are currently evaluating the impact this statement will have on
our financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 primarily addresses significant issues
relating to the implementation of SFAS No. 121 and develops a single accounting
model for long-lived assets to be disposed of, whether previously held and used
or newly acquired. The provisions of SFAS No. 144 will be effective for fiscal
years beginning after December 15, 2001. We are currently evaluating the impact
this statement will have on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we use forward exchange contracts to
manage our exposures to movements in the value of foreign currencies and
interest rates. It is our policy to utilize these financial instruments only
where necessary to finance our business and manage such exposures. The use of
these financial instruments modifies the exposure of these risks with the intent
to reduce the risk and variability to us. We do not enter into these
transactions for speculative purposes.
We are exposed to foreign currency fluctuation as a result of our
international sales, production and investment activities. Our foreign currency
risk management objective is to reduce the variability in the amount of expected
future cash flows from sales and purchases that are the result of changes in
exchange rates relative to the business unit's functional currency. We use
forward exchange contracts to hedge certain firm commitments and the related
receivables and payables. Generally, all firmly committed and forecasted
transactions that are hedged are to be recognized within twelve months. Through
December 31, 2001, hedged transactions are principally denominated in French
Franc, South African Rand, Italian Lira and British Pound. Effective January 1,
2002, the French Franc and Italian Lira contracts are denominated in euros.
Our financial performance is also exposed to movements in short-term
floating market interest rates. Our objective in managing this interest rate
exposure is to limit the impact of interest rate changes on earnings and cash
flows, and to reduce overall borrowing costs.
The following tables provide information about our derivative instruments
and other financial instruments that are sensitive to foreign currency exchange
rates and changes in interest rates. For foreign currency forward exchange
contracts, the table presents the notional amounts and weighted-average exchange
rates by expected (contractual) maturity dates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average variable rates are based on the
implied forward rate in the yield curve. For interest rates swaps, the table
presents notional amounts and weighted average interest
44
rates by contractual maturity dates. Notional amounts are used to calculate the
contractual cash flows to be exchanged under the contract.
45
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
------- ------- ------- ------- ------- ---------- ------- -------
RELATED FORWARD CONTRACTS TO SELL USD:
British Pound
Notional Amount ................ $ 5.1 -- -- -- -- -- $ 5.1 $ (0.1)
Avg. Contract Rate ............. 1.45 -- -- -- -- --
Euro
Notional Amount ................ $ 10.3 -- -- -- -- -- $ 10.3 $ (0.2)
Avg. Contract Rate ............. 0.91 -- -- -- -- --
RELATED FORWARD
CONTRACTS TO SELL EURO:
United States Dollar
Notional Amount ................ $ 72.8 $ 0.1 -- -- -- -- $ 72.9 $ 0.9
Avg. Contract Rate ............. 0.89 0.96 -- -- -- --
British Pound
Notional Amount ................ $ 3.4 -- -- -- -- -- $ 3.4 --
Avg. Contract Rate ............. 0.62 -- -- -- -- --
Canadian Dollar
Notional Amount ................ $ 1.0 -- -- -- -- -- $ 1.0 --
Avg. Contract Rate ............. 1.37 -- -- -- -- --
RELATED FORWARD
CONTRACTS TO SELL ZAR:
United States Dollar
Notional Amount ................ $ 0.5 -- -- -- -- -- $ 0.5 $ 0.2
Avg. Contract Rate ............. 9.21 -- -- -- -- --
Euro
Notional Amount ................ $ 0.6 -- -- -- -- -- $ 0.6 $ 0.1
Avg. Contract Rate ............. 9.05 -- -- -- -- --
LONG TERM DEBT:
U.S. Dollar Functional Currency
Fixed Rate ..................... $ -- $ -- $ -- $ -- $ -- $ 300.0 $ 300.0 $ 304.5
Average Interest Rate .......... 9.38% 9.38% 9.38% 9.38% 9.38% 9.38%
Variable Rate .................. $ 16.9 $ 25.2 $ 33.4 $ 41.7 $ 45.8 $ 450.6 $ 613.6 $ 613.6
Average Interest Rate .......... 5.86% 6.76% 7.47% 7.97% 8.34% 8.62%
Euro Functional Currency
Variable Rate .................. $ 7.5 $ 12.6 $ 17.6 $ 22.6 $ 25.2 $ 12.6 $ 98.1 $ 98.1
Average Interest Rate .......... 5.49% 6.37% 7.06% 7.53% 7.86% 8.12%
Lira Functional Currency
Variable Rate .................. $ 0.3 $ 8.6 $ 0.5 $ 0.5 $ 0.5 $ 0.7 $ 11.1 $ 11.1
Average Interest Rate .......... 3.53% 4.40% 5.09% 5.09% 5.88% 6.14%
Fixed Rate ..................... $ 0.2 $ 0.8 $ 0.3 $ 0.2 $ 0.2 $ -- $ 1.7 $ 1.8
46
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
------- ------- ------- ------- ------- ---------- ------- -------
Average Interest Rate .......... 5.44% 6.95% 7.17% 7.19% 7.19% --
Dutch Guilder Functional Currency
Fixed Rate ..................... $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 -- $ 0.5 $ 0.5
Average Interest Rate .......... 3.75% 3.75% 3.75% 3.75% 3.75% --
INTEREST RATE SWAPS:
Pay Fixed/Receive Variable ........ $ 6.9 $ 207.4 -- -- -- -- $ 214.3 $ (4.7)
Average Pay Rate .................. 4.48% 4.48% -- -- -- --
Average Receive ................... 2.49% 3.31%
- -- -- -- --
47
BUSINESS
GENERAL BUSINESS DEVELOPMENT
In connection with a recapitalization in April 2001, we made payments
to Halliburton Company of approximately $1.3 billion to redeem our common equity
and purchase stock of certain of our foreign subsidiaries. The recapitalization
transaction and related expenses were financed through the issuance of $300.0
million of senior subordinated notes, or the "2001 notes," $720.0 million of
borrowings under the credit facility, and approximately $400.0 million of common
equity contributed by DEG Acquisition, LLC, an entity owned by First Reserve
Corporation and Odyssey Investment Partners, LLC. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- The
Recapitalization Transaction."
OVERVIEW
We are a worldwide leader in the design, manufacture and marketing of
highly engineered equipment and services sold primarily to customers in the
energy industry. Our products include valves, instruments, meters, natural gas
fueled engines, retail fuel dispensers and software and related control systems.
In 2001, approximately 83% of our revenues came from energy infrastructure
spending. Two of our largest end markets are natural gas and power generation.
We are a global business, with an established sales presence in over 100
countries and manufacturing or customer support facilities in over 22 countries.
Many of our businesses have been in operation for 100 years or more. As a result
of our long operating history and leading market positions, we have a
substantial installed base which provides us with significant recurring
aftermarket revenues. In 2001, we generated revenues of $1.55 billion, operating
income of $166.7 million and EBITDA (as defined) of $225.5 million.
We sell our products and services to more than 10,000 customers,
including most of the world's major oil companies, multinational engineering and
construction companies and other Fortune 500 firms, through a global sales and
service network of over 400 account representatives, 900 independent
distributors and 300 authorized service centers. Our top 10 customers in 2001
included Shell, ExxonMobil and BP. Our principal business segments are flow
control, measurement systems and power systems. Our total revenues by geographic
region in 2001 consisted of North America (58.1%), Europe/Africa (20.7%), Latin
America (7.7%), Asia (9.6%) and the Middle East (3.9%). We have pursued a
strategy of customer, geographic and product diversity to mitigate the impact on
our business of an economic downturn in any one part of the world or in any
single business segment.
We offer our customers highly engineered products and services used to
produce, transport, process, store and distribute oil and gas and their
by-products. Because many of our products are used in mission-critical
applications, our customers often require us to meet internal, government and
industry standards, an expensive process that can take years, in order to reduce
the likelihood of costly system failures. Our products are often developed and
engineered in cooperation with our customers for specific applications. The
purchasing decisions for these customized products are driven primarily by
product performance, technical specifications and the ability to deliver service
and support rather than solely by price. We are increasingly combining our
products and services to develop integrated solutions to meet our customers'
needs.
We believe that our installed base of energy infrastructure equipment
is one of the largest in the world in the markets we serve. This significant
installed base provides us with a recurring demand for replacement parts and
equipment upgrades and a substantial platform to expand our aftermarket service
business. A significant portion of replacement equipment, parts and maintenance
services in our businesses is awarded to the original equipment manufacturer.
Aftermarket parts and services typically carry higher margins than our original
equipment sales, and accounted for approximately 26% of our revenues in 2001.
BUSINESS OVERVIEW
We believe that our global presence and diversified product and service
offerings position us to improve our market share in developed markets, expand
our sales in emerging markets and capitalize on our customers'
48
demand for integrated solutions. Our principal business segments are flow
control, measurement systems and power systems.
Flow Control. Our flow control segment, which generated 40% of our
revenues, designs, manufactures and markets valves and actuators. These products
are used to start, stop and control the flow of liquids and gases and to protect
process equipment from excessive pressure. Our flow control segment markets its
products under well recognized brand names, including Masoneilan(R), Grove(R),
Consolidated(R) and Ledeen(TM). The critical functions for which these products
are used require them to be highly reliable and often custom engineered. For
example, we designed and built a unique valve for emergency shutdown of high
pressure gas for Statoil's Troll project -- the premier natural gas development
in the North Sea. This valve, which we believe to be the largest ever built at a
unit weight of 80 metric tons, is designed to withstand a load value of 2,800
metric tons at maximum working pressure over a 50-year life cycle. Similar
designs were subsequently used on Statoil's Aasgard and Europipe II projects. We
enhance our product offerings with service capabilities including preliminary
design, application engineering, design testing, production and installation,
project management, operation and maintenance training, preventative /predictive
maintenance programs and inventory management services. Our flow control segment
also provides aftermarket parts and services through a global sales and service
network of over 260 account representatives, 80 independent local distributors,
100 Green Tag(R) and Masoneilan(R) authorized repair centers and ten
company-owned service centers.
Measurement Systems. The measurement systems segment, which generated
37% of our revenues, consists of two primary product groups. The first, retail
fueling, is a leading supplier of fuel dispensers, pumps, peripherals,
point-of-sale and site monitoring systems and software for the retail fueling
industry. The second, measurement, is a leading supplier of natural gas meters,
regulators, digital and analog pressure and temperature gauges and transducers
and specialty couplings and connectors. These systems and other products are
used to measure and monitor liquids and gases. Our measurement systems group
markets its products and services under well recognized brand names including
Wayne(R), Ashcroft(R), Mooney(TM), Roots(TM) and Dresser(R), and has a long
history of technical innovations. Our Dresser Wayne product group is a leading
manufacturer of retail fueling systems, and was the first to develop fuel
blending dispensers and pay-at-the-pump technologies, including Speedpass(R) (a
registered trademark of ExxonMobil). As a result of Wayne's advanced products
and systems, we have also become the leading supplier of retail fueling
solutions to domestic high volume retailers, including Sam's Club, Kroger and
Safeway. Our Roots(R) rotary natural gas meters are the industry standard for
high accuracy natural gas custody transfer. Our measurement systems segment also
offers a comprehensive array of services ranging from the design of integrated
natural gas regulating and metering stations to on-site maintenance and repair.
Power Systems. Our power systems segment, which generated 23% of our
revenues, designs, manufactures and markets natural gas fueled engines used
primarily in natural gas compression and power generation applications and
rotary blowers and vacuum pumps. Our power systems group markets its products
under well recognized brand names, including Waukesha(R) and Roots(TM). These
products are used in mission-critical applications such as providing standby
power for Chicago's 911 Emergency Communications Center and driving compressors
at a remote gas storage facility in Aitken Creek, British Columbia. Our
Waukesha(R) engines have set industry standards for reliability and low
lifecycle cost of ownership. For example, our VHP(TM) engine model typically
operates for over 40,000 hours between major overhauls at a rated uptime of 98%.
This reliability makes our products suitable for use in remote areas, critical
service applications and situations requiring long lifecycles. Our customers
typically spend many times the initial purchase price of one of our engines in
service upgrades and maintenance costs over its lifetime. We currently maintain
a significant market share on our aftermarket parts as customers tend to be more
focused on reliability and predictability versus price when servicing our
engines.
COMPETITIVE STRENGTHS
We believe the following competitive strengths position us to enhance
our growth and profitability:
- - Worldwide Market Leader. Originally founded in 1880, Dresser has a long
history of leadership and innovation in the energy infrastructure
industry. We believe that we have a leading market position in most of
our served markets. We operate in over 100 countries worldwide through
a global sales and service network of over 400 account representatives,
900 independent distributors and 300 authorized service centers. Our
brands are well-known for superior quality and high performance. We
have developed many
49
of the technological and product breakthroughs in our markets, and
produce some of the most advanced products available in each of our
businesses. These products typically command higher margins than our
other products and help us maintain a strong market position. Our brand
identities have earned customer loyalty in each business segment, help
us capture aftermarket business and assist us in obtaining additional
business, particularly as our customers look to procure from fewer
manufacturers who can supply and service them globally.
- - Established Approved Vendor Status. The majority of our revenues are
derived from products that are used in processes involving volatile or
hazardous gases and liquids where the consequences of product failure
can be severe. Because of the potential impact of failures, our
customers often limit the number of their approved vendors and require
that products complete extensive testing and qualification programs
before being used. Also, our customers are reluctant to replace proven
equipment designs with those of new or unknown manufacturers.
Completing the required testing and qualification for placement on
approved vendor or product lists can take several years and require
large capital expenditures. Our products hold over 120 regulatory and
industry approvals or certifications worldwide and are approved for use
by almost all major energy customers. We believe that our reputation
and history of previous qualification and certification as an approved
vendor provides us with a substantial competitive advantage.
- - Benefits of a Large Installed Base. We believe that our global
installed base of products is among the largest in each of our business
segments. Many of our product lines require ongoing maintenance and
parts replacement, which provides us with a recurring source of
revenues that typically carry higher margins than our original
equipment sales. Our aftermarket business accounted for approximately
26% of our revenues in 2001 and enables us to maintain strong customer
relationships and increase our understanding of our customers' needs.
- - Well Positioned to Provide Global Integrated Solutions. With a
manufacturing, sales or service presence in over 100 countries, we
believe that our global reach and broad product offering provide a
significant advantage in competing for business from large,
multinational customers. Our customers are increasingly seeking to
outsource the service, maintenance and management of their facilities
and equipment, as they redefine their core competencies away from
building and maintaining fixed assets and seek to reduce their total
costs of ownership. We believe that our comprehensive array of products
and services and global presence allow us to compete more successfully
for a broader range of multinational projects and provide the design,
engineering and aftermarket support that our customers demand.
- - Strong Relationships With Blue Chip Customers. We sell our products
globally to more than 10,000 customers. We have long-standing
relationships with the world's major oil companies, multinational
engineering and construction companies and other Fortune 500 firms. Our
top 10 customers for 2001 included Shell, ExxonMobil and BP. We often
work directly with our customers' design and engineering departments to
develop products to meet specific infrastructure needs or other
customer requirements. For example, we collaboratively designed,
engineered, fabricated and tested several innovative high pressure
control systems for the subsea pipelines that transport oil and gas
produced by TotalFinaElf and Shell operated oil and gas fields in the
North Sea.
BUSINESS STRATEGY
- - Capitalize On Favorable Energy Infrastructure Trends. As a worldwide
market leader, we believe we are well positioned to benefit from the
expected long-term growth in energy infrastructure investment. In
particular, our product and service offerings for our natural gas and
power generation customers position us to benefit from increases in
demand in these sectors.
- - Increase Operational Efficiency and Cash Flow. We believe that in order
to maintain our competitiveness, we need to continue to focus on
increasing operational efficiency and cash flow. This focus includes
our on-going initiatives to increase manufacturing efficiencies,
consolidate raw material sources, increase global procurement and
improve working capital efficiency. We believe these initiatives offer
us opportunities to improve our profitability and cash flow.
50
- - Expand Our Product Line and Exploit Recently Developed Products.
Throughout our long history, we have worked closely with our customers
to develop products that meet their specific requirements. We are
developing new technologies that transmit control and measurement data
generated by our products that allow our customers to remotely monitor
the performance of their plant and equipment. These technologies can
substantially lower operating costs for our customers. For example,
Transco/British Gas uses our LogMan(TM) software and regulators to
remotely monitor pressure and control natural gas delivery in the
United Kingdom. In addition, we are developing products that remotely
transmit predictive maintenance information to our customers, thereby
reducing unexpected downtime. These technologies are broadly applicable
across our product lines and represent an opportunity for increased
revenues from both new product sales and upgrades to our existing
installed base.
PRODUCTS AND SERVICES
We have three business segments: flow control, measurement systems, and
power systems. Our businesses are organized around the products and services
provided to the customers they serve.
FLOW CONTROL
Our flow control segment manufactures control valves, on/off valves,
pressure relief valves and actuators. We serve the oil and gas production,
transportation, storage, refining, petrochemical and power generation sectors of
the energy industry. We believe we produce one of the most complete valve
product lines for the energy infrastructure industry, including both standard
and customized product offerings. Our broad portfolio of products, combined with
a global sales and service network, positions us as one of the preferred global
flow control solutions providers. In addition, our technical expertise and
product knowledge allow us to be one of a select few global vendors who can meet
the needs of our most demanding energy customers, including specially-designed
products for deep-water and severe service applications. Our valve products
compete at unit price levels ranging from $200 to over $500,000.
Historically, demand for our flow control products has been driven by
the dynamics of the energy industry and in particular by energy infrastructure
spending. Demand for valve products has therefore been greatest in
industrialized nations throughout North America and Europe. In the future, we
expect that growth will primarily be driven by upgrading existing products, the
development of new applications and increasing demand in developing regions such
as Latin America, Asia and Africa.
Control valves, which are sold under the Masoneilan(R), Grove(R) and
BPET(TM) brands, are used primarily in applications that require continuous and
accurate control of flow rates. Control valves adjust flow passage size at the
direction of remote signals emanating from an external control system. We are
developing new "smart" technologies that transmit control and measurement data
generated by our products to our customers' service systems that remotely
monitor the performance of their plant and equipment. These technologies can
substantially lower operating costs for our customers. In addition, we are
developing products that remotely transmit predictive maintenance information,
thereby avoiding unexpected downtime. We believe providing smart capabilities to
enhance our existing product lines will be an important driver of growth in our
valve business over the next several years, and a majority of the control valves
we sell are smart units. We are currently marketing smart valve products with
both analog and digital communication interfaces. Approximately 125,000 analog
units are shipped annually, and we expect demand to increase over the next few
years. In parallel, we expect demand for digital products to grow in the future
as this relatively new communication interface matures. We have established a
product development and marketing alliance with Yokogawa Electric Corporation, a
leading Japanese process control systems provider, in order to offer our
customers integrated valve and control system solutions. These integrated
solutions and smart products typically command higher margins than our standard
valve product offerings.
On/off valves, which are sold under the Control Seal(TM), Grove(R),
Ring-O(TM), TKO, Wheatley(R) and Texsteam(TM) brand names, are typically used in
applications that either require flow to be completely on or off or have limited
flow adjustment capabilities. Included in this category are: ball, gate, globe,
check and butterfly valves. We have designed and patented hundreds of
specialized on/off valve products. In conjunction with Statoil's Troll project,
the premier natural gas development in the North Sea, we produced what we
believe is the largest valve ever built, with a unit weight of 80 metric tons.
Among other new product development programs, we are
51
designing subsea ball and check valves for deep-water oil and gas development,
fire-proof valves, severe service valves, liquefied natural gas valves and more
cost-effective rising-stem ball valves. Many of these valves are custom
manufactured from specialty materials to handle the demanding environments in
which they will be used and to meet our customers' stringent specifications.
Pressure relief valves, including both safety and safety relief valve
types, are used to protect process equipment from excessive pressure. We sell
our pressure relief valves to the power generation, oil and gas, and refining
and petrochemical industries under the Consolidated(R) brand name. We are
developing new products for use in growing applications, including enhanced
pilot operated safety valves for use in offshore and liquefied natural gas
applications.
Our flow control segment's other products, sold under the Ledeen(TM),
Texsteam(TM) and Nil-Cor(R) brands, include chemical injection pumps; high-alloy
gate, globe, check and ball valves; compact and linear electric actuators; and
composite ball, butterfly and check valves. Our actuator products, which are
used to control valve movement, are often sold in packages for use with our
other products, such as our subsea actuators used in conjunction with our subsea
on/off valve technology.
Our flow control segment's strength as a product leader is enhanced by
its service capabilities. These services include preliminary design, application
engineering, design testing, production and installation, project management,
operation and maintenance training, preventive/predictive maintenance programs
and inventory management services.
MEASUREMENT SYSTEMS
Our measurement systems segment consists of two primary product groups.
The first, retail fueling, is a leading supplier of fuel dispensers, pumps,
peripherals, point-of-sale and site monitoring systems and software for the
retail fueling industry. The second, measurement, is a leading supplier of
measurement and control products for the energy industry and other end markets.
Retail Fueling
We have marketed our retail fuel systems for approximately 100 years
under the Wayne(R) brand. As an industry pioneer, we were the first to introduce
self-service consoles and fuel blending dispensers to service stations. More
recently, we introduced the first in-pump card readers and cash acceptors, the
first use of microcomputers in fuel processing systems, the first in-pump radio
frequency identification payment systems such as Speedpass(R) (a registered
trademark of ExxonMobil) and the first dispenser mounted touchscreen
payment/communication systems. We also produce regulatory agency approved vapor
recovery systems that reduce gasoline vapor emissions into the atmosphere during
the fueling process. We continue to develop and market innovative technologies
that allow our customers to reduce costs, increase throughput and improve
profits at their locations.
Demand for our systems and other products over recent years has been
affected by a reduced level of capital spending by our customers. We typically
expect our customers to upgrade, reimage or replace their equipment prior to the
end of its useful life. New technology can also drive demand in this market
since technological sophistication and customer convenience features can be a
competitive edge for fuel retailers. Companies with outdated hardware and
under-powered software often elect to replace their equipment in order to remain
competitive, or to comply with new government regulations. Moreover, high volume
retailers, such as Sam's Club, Kroger and Safeway have entered the domestic
retail fuel market, further driving equipment, software and service demand.
These retailers typically utilize twice as many fuel dispensers per location as
traditional retail fueling stations.
Our core product line consists of a wide variety of fuel dispensers.
Our basic fuel dispenser design supports single and multiple hose configurations
that can measure and dispense dedicated or blended fuel. Our fuel dispensing
platforms can be expanded to include card processing terminals, cash acceptors,
bar code scanners, radio frequency identification payment systems, keypads,
printers and graphic displays to allow consumers to purchase and pay for fuel
and other items at the pump. In addition, our dispensers are usually designed
and graphically detailed in collaboration with our customers to meet their
precise image standards. For example, we have been
52
awarded a significant role in the development of a new fueling dispenser
introduced by BP in connection with its new image campaign. We believe that we
are well positioned to be the primary vendor for this BP program. Our retail
fuel dispensers range in price from $2,800 to over $15,000 per unit.
We also design and market self-service control and point-of-sale
systems for the retail fueling industry. These enterprise software solutions are
designed to support our retail customers' efforts to improve back office
efficiency and record keeping, reduce labor hours and improve retail margins.
For example, our Nucleus(R) system, which is an open architecture, PC based
point-of-sale system, is designed to support larger convenience store formats
that feature a wide selection of in-store merchandise and services. As the hub
of all store operations, the Nucleus(R) system interfaces with a wide variety of
peripherals and systems, enabling cashiers and managers to monitor and manage
store operations efficiently. The Nucleus(R) system also supports back office
functions including inventory control, price book management, employee
management and site administration. In addition, we were one of the first to
introduce a fully integrated point-of-sale system that combined the
functionality of a self-service control console, electronic cash acceptor and
card processing system into a single countertop terminal. Called the Wayne
Plus/3(TM) terminal, we have deployed 10,000 of these systems in over 9,000
locations. Our software systems range in price from $7,000 to over $16,000.
In connection with our product development initiatives, we have entered
into a number of important strategic alliances with technology partners to
enhance and broaden our retail product offerings. For example, our alliance with
Texas Instruments was important in our development of advanced pay-at-the-pump
technologies, including Speedpass(R), which allows consumers to buy fuel with
the wave of a radio frequency key fob.
In order to help our customers derive maximum value from their
investment in our retail fuel solutions, we offer a comprehensive suite of
services. These services include product rollout management, installation, user
training and a 24/7 help desk. We also offer 24/7 onsite maintenance and repair,
including one hour response to site emergencies, four hour response to critical
problems and 24 hour response to all other concerns. Onsite services are
provided by a mix of our own field support technicians and independent service
organizations. All field support technicians and independent service
organizations receive ongoing technical training and carry an extensive
inventory of service parts and diagnostic equipment.
Measurement
Our measurement group designs, manufactures and markets four primary
product lines: meters, instruments, integrated flow systems and piping
specialties. Demand for these products is driven primarily by natural gas
consumption and infrastructure spending in the hydrocarbon and chemical process
industries. Customer trends such as integration of information technology
systems with "smart" equipment and increased outsourcing of metering and
monitoring services are also expected to drive demand in this market. Demand has
historically been strongest in North America and Europe, with future growth
expected in Latin America, Asia and the Middle East as industrialization
continues.
Meters, pressure regulators and piping specialties, which are sold
primarily to customers in the natural gas industry under the Roots(R),
Mooney(TM) and Dresser(R) brand names, are used for volume measurement and
pressure regulation. These products are sold at unit prices ranging from
approximately $400 to over $82,500. We sell complete, integrated natural gas
control stations that can be used by a utility to regulate distribution of
low-pressure natural gas from high-pressure transmission pipelines. These
control stations typically combine a number of our products such as valves,
meters, pressure sensors and regulators into a complete system solution.
Historically, a utility would have performed the engineering and design
necessary to build these stations to regulate gas pressure and flow, bid out the
component parts and contracted for the assembly and installation. We can provide
utilities with a total system solution at a lower overall cost.
Instrument products consist primarily of pressure and temperature
instrumentation manufactured for oil and gas, refining, chemical, industrial and
commercial customers worldwide. These products are used by our customers to
monitor pressure, temperature, pH levels, and flow rates of gases and liquids.
Our key instrument brands and related products are Ashcroft(R) pressure and
temperature instruments, Heise(R) precision testing and calibration devices and
digital and analog transducers, Ebro(TM) portable electronic instruments and
Ashcroft(R) utility gauges,
53
which are designed specifically for high reliability of service. Our instrument
products range in price from $1 to over $5,500 per unit.
POWER SYSTEMS
Our power systems segment is a leader in the design, manufacture and
marketing of natural gas fueled engines used primarily for natural gas
compression and distributed power generation. Most natural gas compression
applications involve pressurizing gas for delivery from one point to another,
typically from lower pressure wells to higher pressure gathering and pipeline
systems. Compression is also used to reinject natural gas into oil wells to help
lift liquids to the surface and to inject gas into underground reservoirs.
Distributed power generation is the use of onsite electric generators for
primary, supplemental or back-up power in areas where existing power sources are
unreliable or costly. Our product offering ranges from 85 to 4,500 horsepower
(60-3,300 kilowatts) engines and power generation packages with a base wholesale
price range of $21,000 to over $900,000. We also manufacture a line of rotary
blowers. Our products are sold under the Waukesha(R) and Roots(TM) brand names
both directly to end users and through a network of independent distributors
worldwide. We believe we have the largest installed base of natural gas fueled
industrial engines in the world as a result of our long history and leading
market position.
Demand for our power system products is primarily a function of
worldwide energy consumption and infrastructure spending. We view distributed
power generation as a significant opportunity for future revenue growth in this
segment. We believe favorable environmental, regulatory and cost characteristics
of natural gas compared to other energy sources and the relatively wide
dispersion of gas reserves throughout the world will favor its use in power
generation. The need for "clean" power for high tech equipment, uncertainty
about electrical utility deregulation and lack of infrastructure in
underdeveloped nations are potential sources for growth in demand.
We believe we have developed some of the most reliable and durable
engines in our industry. These products provide our customers with low total
cost of ownership through long intervals between overhauls, high equipment
uptimes and predictable service schedules. We typically expect our VHP(TM)
engine model to operate in excess of 40,000 hours at 98% rated uptime before
requiring a major overhaul. Engine reliability is essential because they are
frequently used in mission-critical applications or in remote locations where
the cost of failure is extremely high. For example, two of our engines provide
standby power for Chicago's 911 Emergency Communications Center and seven of our
top-of-the-line engines drive compressors at a remote gas storage facility in
Aitken Creek, British Columbia.
The aftermarket in both the natural gas compression and distributed
power generation markets is substantial. Our natural gas engines typically run
continuously for years at a time, creating a regular need for maintenance
services and replacements parts. Our customers typically spend many times the
initial purchase price of one of our engines in service, upgrades and
maintenance costs over its lifetime. As a result, our aftermarket parts and
services revenues are an important part of our business, representing
approximately 37% of our total natural gas engine related revenues in 2001 and
are a higher percentage of our margin and EBITDA. We currently maintain a
significant market share for our aftermarket parts as our customers tend to be
more focused on reliability than price when servicing our engines.
In addition to selling stand-alone engines, we provide our customers
with a variety of services and equipment packages. For example, we offer
complete power generation systems in which we integrate our engines with
generators, switchgear and controls manufactured by other vendors in order to
deliver a total solution to our customers. We also offer our customers technical
training, subcontracted turnkey installation and field troubleshooting
worldwide.
COMPETITION
As one of a small group of major competitors in each of our business
lines, we encounter intense competition in all areas of our business. Our
businesses typically are characterized by fewer than ten manufacturers that
together account for the majority of each market and a large number of smaller
competitors who divide the remainder. The primary bases of competition include
product performance, customer service, product lead times, global reach, brand
reputation, breadth of product line, quality of aftermarket service and support
and price. We believe the significant capital required to construct new
manufacturing facilities, the production volumes required to
54
maintain low unit costs, the need to secure a broad range of reliable raw
material and intermediate material supplies, the significant technical knowledge
required to develop high performance products, applications and processes and
the need to develop close, integrated relationships with customers serve as
disincentives for new market entrants. Some of our existing competitors,
however, have greater financial and other resources than we do.
SALES AND MARKETING
We market our products and services worldwide through our established
sales presence in over 100 countries and a manufacturing or support facility
presence in over 22 countries. We believe our proximity to customers has
historically been an important sales advantage.
Our sales force is comprised of over 400 direct sales and service
representatives and an extensive global network of over 900 independent
distributors and over 300 authorized service centers who sell our products and
provide service and aftermarket support to our installed base. Due to the long
operating history of our business, many of our distributor relationships are
longstanding and exclusive to us. For example, our flow control business is
supported by an independent global network of over 100 Green Tag(TM) and
Masoneilan(R) repair centers, the majority of which represent long-term
relationships. We also offer extensive training programs for our independent
distributors, allowing them to reach increasingly higher levels of
certification. Our most highly qualified independent distributors are often able
to command higher aftermarket service margins as a result of their expertise and
tend to be our most loyal distributors. Most of our distributor agreements are
terminable at any time by either us or the distributor, subject to short notice
periods.
We believe the performance driven nature of our products has fostered
close working relationships with our customers. Our marketing strategy is to
leverage our strong brand reputations and technical expertise to develop new
products and achieve qualification and certification as an approved vendor. For
example, our measurement systems segment has successfully targeted the domestic
high volume retail market for gasoline through a systematic marketing and
technology development effort, securing a majority share of this market. We have
recently begun to enhance our competitive position by aggressively pursuing
alliance relationships with our key customers whereby we work directly with our
customers' design and engineering departments to develop products to meet
specific infrastructure needs or other customer-specific requirements. The power
systems segment has strategically positioned itself with certain customers in
the gas compression market by selling engines directly to them. These customers
include four major gas compression packagers and seven medium size packagers.
All four of the major packagers operate gas compressor lease fleets of their own
or provide contract compression services.
CUSTOMERS
We sell our products and services to more than 10,000 customers,
including most of the world's major oil companies, multinational engineering and
construction companies and other Fortune 500 firms. Many of our customers
purchase products and services from each of our three operating segments. Our
customer base is geographically diverse with 58.1% of 2001 revenues in North
America, 20.7% in Europe/Africa, 7.7% in Latin America, 9.6% in Asia and 3.9% in
the Middle East. Our top 10 customers in 2001 accounted for 16.7% of our
revenues and included Shell, ExxonMobil and BP. Our largest customer accounted
for approximately 3.1% of our revenues in 2001.
BACKLOG
Backlog at the end of 2001 was $419.5 million, a 15.7% increase over a
backlog of $362.7 million at the end of 2000. Of our backlog at year-end 2001,
we expect approximately 99% to be filled within the current fiscal year.
RAW MATERIALS
The main raw materials we use are commodity metals, forgings, castings,
fasteners, and electronic circuitry. Substantially all our raw materials are
purchased from outside sources and are readily available. We seek to purchase
raw materials globally to benefit from low cost sources.
55
MANUFACTURING
Our manufacturing processes generally consist of fabrication,
machining, component assembly and testing. Many of our products are designed,
manufactured and produced to order and are often built in compliance with
specific customer requirements. To improve quality and productivity we are
implementing a variety of manufacturing strategies including cellular
manufacturing and just-in-time process engineering. In addition, we outsource
the fabrication of some subassemblies and components of our products,
particularly in our flow control segment. Our manufacturing operations are
conducted in 47 locations around the world. We typically own the plants and
equipment at our facilities and the underlying real property. We believe that we
have sufficient production capacity to meet demand over the next several years.
We strive to produce the highest quality products and are committed to
continuous quality and efficiency improvement of our products and processes. To
help achieve our quality goals, we carefully control our manufacturing processes
and materials and have satisfied the standards for ISO-9001 certification at
most of our manufacturing facilities. The International Organization for
Standardization awards ISO-9001 certification on a facility-by-facility basis to
manufacturers who adhere to strict quality standards. Companies must maintain
these standards and supply supporting documentation to retain their ISO
certification, and certified facilities are audited regularly.
RESEARCH AND DEVELOPMENT
It is our policy to invest in research and development each year in
order to maintain or improve the competitiveness of our products. We have
developed many of the technological and product innovations in our markets, and
produce some of the most advanced products available in each of our businesses.
We believe we have significant opportunities for growth by developing new
products and services that offer our customers greater performance and
significant cost savings. These opportunities include developing "smart" valves,
instruments and meters, new retail fuel point-of-sale payment technologies and
additional natural gas fueled engine models operating at greater efficiencies.
Potential end users for these technologies include most of our existing customer
base as well as customers of our competitors.
We are also actively engaged in research and development programs
designed to advance the design of products to meet specific functional and
economic requirements and to improve manufacturing methods. These engineering
efforts span all of our businesses. We have also placed special emphasis on
ensuring that newly developed products are compatible with, and build upon, our
existing manufacturing and marketing capabilities.
Each of our business segments maintains its own research and
development staff. Our research and development expense was $23.9 million, $24.9
million, $25.7 million for the years ended December 31, 2001, 2000, and 1999
respectively. We believe current expenditures are adequate to sustain ongoing
research and development activities.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trademark, copyright and trade
secret protection, employee and third-party nondisclosure agreements and license
arrangements to protect our intellectual property. We sell most of our products
under a number of registered trade names, which we believe are widely recognized
in the industry. In addition, many of our products and technologies are
protected by patents. No single patent, trademark or trade name is material to
our business as a whole. We anticipate we will apply for additional patents in
the future as we develop new products and processes.
Any issued patents that cover our proprietary technology may not
provide us with substantial protection or be commercially beneficial to us. The
issuance of a patent is not conclusive as to its validity or its enforceability.
Competitors may also be able to design around our patents. If we are unable to
protect our patented technologies, our competitors could commercialize our
technologies.
With respect to proprietary know-how, we rely on trade secret
protection and confidentiality agreements. Monitoring the unauthorized use of
our technology is difficult, and the steps we have taken may not prevent
56
unauthorized use of our technology. The disclosure or misappropriation of our
intellectual property could harm our ability to protect our rights and our
competitive position.
EMPLOYEES
We had approximately 8,500 employees worldwide as of December 31, 2001.
Of our employees, approximately 56% are located in the U.S. and 44% are outside
the U.S.
Approximately 40% of our employees in the United States and 41% of our
employees worldwide are covered by collective bargaining agreements. We
currently have long-term labor agreements with Teamsters Local 145 in
Connecticut, with PACE Local 5-0399 in Kentucky, Local 470 of the United
Automobile, Aerospace and Agricultural Implement Workers of America in
Massachusetts, District No. 10 of the International Association of Machinists
and Aerospace Workers in Wisconsin, United Steelworkers of America Local 8040 in
Texas, Local 1644 of the International Association of Machinists in Pennsylvania
and Local 1118 of United Automobile, Aerospace and Agricultural Implement
Workers of America in Indiana. In addition, we have labor agreements with Office
& Professional Employees International Union on behalf of Local 465 and Local
Lodge 2518 International Association of Machinists and Aerospace Workers in
Louisiana. Of these agreements, two will expire in 2002, six will expire in
2003, one will expire in 2004 and one will expire in 2005. We believe that our
relations with each of these unions are good. See "Risk Factors -- Our Business
Could Suffer If We Are Unsuccessful In Negotiating New Collective Bargaining
Agreements."
PROPERTIES
Our corporate headquarters are located in Addison, Texas. The following
are the locations of our principal facilities, the facility types and their
square footage for our industry segments.
PRINCIPAL
LOCATION USE BUSINESS UNIT LEASED/OWNED SIZE (SQ. FT.)
- ----------------------------------------------------------------------------------------------------------------------
Alexandria, Louisiana.................. Manufacturing Flow Control Owned 300,000
Al Jubail, Saudi Arabia................ Service Flow Control Leased 38,100
Alliance, Ohio......................... Manufacturing Flow Control Leased 64,000
Anrath, Germany........................ Service Flow Control Leased 14,035
Avon, Massachusetts.................... Manufacturing Flow Control Owned 137,000
Bergamo, Italy......................... Manufacturing Flow Control Leased 34,200
Burlington, Canada..................... Manufacturing Flow Control Owned 53,000
Channelview, Texas..................... Service Flow Control Leased 18,000
Colico, Italy.......................... Manufacturing Flow Control Owned 117,251
Colico, Italy.......................... Manufacturing Flow Control Leased 46,500
Coimbatore, India...................... Manufacturing Flow Control Leased 26,994
Conde, France.......................... Manufacturing Flow Control Owned 206,602
Edenvale, South Africa................. Service Flow Control Leased 7,500
Edmonton, Canada....................... Manufacturing Flow Control Owned 51,224
Hammond, Louisiana..................... Manufacturing Flow Control Owned 68,060
Houston, Texas......................... Manufacturing Flow Control Owned 178,080
Houston, Texas......................... Manufacturing Flow Control Owned 53,000
Kariwa, Japan.......................... Manufacturing Flow Control Leased 171,216
Lyon, France........................... Service Flow Control Leased 3,580
Mexico City, Mexico.................... Manufacturing Flow Control Owned 6,277
Naples, Italy.......................... Manufacturing Flow Control Owned 83,605
Sao Paulo, Brazil...................... Manufacturing Flow Control Owned 120,000
Singapore.............................. Service Flow Control Leased 15,080
Skelmersdale, United Kingdom........... Manufacturing Flow Control Leased 160,000
Stafford, Texas........................ Manufacturing Flow Control Owned 130,000
Sugarland, Texas....................... Manufacturing Flow Control Leased 10,000
Voghera, Italy......................... Manufacturing Flow Control Owned 270,000
Voghera, Italy......................... Manufacturing Flow Control Owned 93,180
57
PRINCIPAL
LOCATION USE BUSINESS UNIT LEASED/OWNED SIZE (SQ. FT.)
- ----------------------------------------------------------------------------------------------------------------------
Austin, Texas.......................... Manufacturing Measurement Owned 103,000
Austin, Texas.......................... Manufacturing Measurement Leased 208,691
Baesweiler, Germany.................... Manufacturing Measurement Owned 24,000
Basingstoke, United Kingdom............ Manufacturing Measurement Leased 3,000
Berea, Kentucky........................ Manufacturing Measurement Owned 96,784
Bonnyrigg, United Kingdom.............. Manufacturing Measurement Owned 63,000
Bradford, Pennsylvania................. Manufacturing Measurement Owned 450,000
Cape Town, South Africa................ Assembly Measurement Leased 26,221
Einbeck, Germany....................... Manufacturing Measurement Owned 99,835
Foerde, Rud, Norway.................... Service Measurement Leased 22,776
Houston, Texas......................... Manufacturing Measurement Owned 108,483
Huddersfield, United Kingdom........... Manufacturing Measurement Owned 160,000
Ingolstadt, Germany.................... Manufacturing Measurement Owned 22,300
Jacarei, Brazil........................ Manufacturing Measurement Owned 72,000
Malmo, Sweden.......................... Manufacturing Measurement Owned 309,850
Markham, Canada........................ Assembly Measurement Leased 51,324
Mississauga, Canada.................... Distribution Measurement Leased 25,000
Nursling, United Kingdom............... Manufacturing Measurement Leased 15,000
Panningen, The Netherlands............. Manufacturing Measurement Leased 10,000
Rio de Janeiro, Brazil................. Manufacturing Measurement Owned 106,632
Salisbury, Maryland.................... Manufacturing Measurement Owned 360,000
Salt Lake City, Utah................... Manufacturing Measurement Leased 15,000
Sao Paulo, Brazil...................... Manufacturing Measurement Owned 69,830
Singapore.............................. Assembly Measurement Leased 2,959
Shelton, Connecticut................... Manufacturing Measurement Leased 55,000
Stratford, Connecticut................. Manufacturing Measurement Owned 320,168
Tlalnepantia, Mexico................... Distribution Measurement Leased 1,500
Zurich, Switzerland.................... Service Measurement Leased 19,171
Appingedam, Netherlands................ Manufacturing Power Owned 150,000
Connersville, Indiana.................. Manufacturing Power Owned 300,000
Houston, Texas......................... Manufacturing Power Owned 59,562
Houston, Texas......................... Service Power Owned 15,000
Huddersfield, United Kingdom........... Assembly Power Owned 160,000
Waukesha, Wisconsin.................... Manufacturing Power Owned 935,700
Waukesha, Wisconsin.................... Manufacturing Power Owned 29,300
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
During the ordinary course of our business, we are from time to time
threatened with, or may become a party to, legal actions and other proceedings.
While we are currently involved in a number of legal proceedings, we believe the
results of these proceedings will not have a material effect on our business,
financial condition or results of operations. In addition, pursuant to the
recapitalization agreement, we are indemnified by Halliburton for losses arising
out of all legal actions initiated prior to the closing of the recapitalization
transaction and certain legal actions arising after the closing.
Our businesses and some of our products are subject to regulation under
various and changing federal, state, local and foreign laws and regulations
relating to the environment and to employee safety and health. These
environmental laws and regulations govern the generation, storage,
transportation, handling, disposal and emission of various substances. Permits
are required for operation of our businesses, and these permits are subject to
renewal, modification and, in certain circumstances, revocation.
These environmental laws also impose liability for personal injury or
property damage related to releases of hazardous substances. We believe we are
substantially in compliance with these laws and permitting requirements. Our
businesses also are subject to regulation under substantial, various and
changing federal, state, local and foreign
58
laws and regulations which allow regulatory authorities and private parties to
compel (or seek reimbursement for) cleanup of environmental contamination at
sites now or formerly owned or operated by our businesses and at facilities
where their waste is or has been disposed. Going forward, we expect to incur
ongoing capital and operating costs for investigation and remediation and to
maintain compliance with currently applicable environmental laws and
regulations; however, we do not expect those costs, in the aggregate, to be
material.
In April 2001, we completed the recapitalization transaction.
Halliburton originally acquired our businesses as part of its acquisition of
Dresser Industries, Inc. ("Dresser Industries") in 1998. Dresser Industries'
operations consisted of our businesses, as well as other operating units. As
Halliburton has publicly disclosed, it has been subject to numerous lawsuits
involving asbestos claims associated with, among other things, the operating
units of Dresser Industries that were retained by Halliburton or disposed of by
Dresser Industries or Halliburton prior to the recapitalization transaction.
These lawsuits have resulted in significant expense for Halliburton. We have not
historically incurred, and in the future we do not believe that we will incur,
any material liability as a result of the past use of asbestos in products
manufactured by these other units of Dresser Industries, or as a result of the
past use of asbestos in products manufactured by our businesses or any
predecessor entities of our businesses.
Pursuant to the recapitalization agreement, all liabilities related to
asbestos claims arising out of events occurring prior to the consummation of the
recapitalization transaction, are defined to be "excluded liabilities," whether
they resulted from activities of Halliburton, Dresser Industries or any
predecessor entities of any of our businesses. The recapitalization agreement
further provides, subject to certain limitations and exceptions, that
Halliburton will indemnify us and hold us harmless against losses and
liabilities that we actually incur which arise out of or result from "excluded
liabilities," as well as certain other liabilities in existence as of the
closing of the recapitalization transaction. The maximum aggregate amount of
losses indemnifiable by Halliburton pursuant to the recapitalization agreement
is $950.0 million. All indemnification claims are subject to notice and
procedural requirements which may result in Halliburton denying indemnification
claims for some losses. See "Risk Factors -- Risks Related to Our Business --
Environmental Compliance Costs and Liabilities Could Adversely Affect Our
Financial Condition" and " -- We May Be Faced With Unexpected Product Claims Or
Regulations."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Patrick M. Murray is President, Chief Executive Officer and a Director
of Dresser, Inc. Mr. Murray previously served as President of Dresser Equipment
Group Inc., Vice President, Strategic Initiatives of Dresser Industries, and
Vice President, Operations of Dresser Industries. Mr. Murray has also served as
the President of Sperry-Sun Drilling Services and the Controller of NL
Industries. Mr. Murray joined NL Industries in 1973 as a Systems Application
Consultant and has served in a variety of increasingly senior management
positions with NL Industries, Baroid Corporation and Dresser Industries. Mr.
Murray is currently a director of Benton Oil and Gas Company. Mr. Murray is 58
years old.
James A. Nattier is Executive Vice President, Chief Financial Officer
and a Director of Dresser, Inc. Mr. Nattier previously served as Vice President
Shared Services for Dresser Equipment Group Inc., Vice President, Shared
Services for Halliburton Energy Services and Vice President, Industrial Products
for Baroid Drilling Fluids. Mr. Nattier joined NL Industries in 1978 and has
served in a variety of technical, operations, marketing and senior management
positions with NL Industries, Baroid Corporation, Dresser Industries and
Halliburton. Mr. Nattier is 40 years old.
Stuart M. Brightman is a Vice President of Dresser, Inc. and President
of Dresser Flow Control. Mr. Brightman previously held the position of
President, Americas Operations for Dresser Flow Control. In 1993, Mr. Brighton
joined Wheatley TXT Corporation as senior vice president of operations.
Following the acquisition of Wheatley TXT by Dresser Industries, Inc. in 1994,
he was appointed senior vice president of the Dresser Oilfield Valve Division.
In 1995, Mr. Brightman was promoted to president of the division, and
subsequently president of US operations of Dresser Energy Valve Division, which
later became part of Dresser Flow Control. Mr. Brightman is 45 years old.
William E. O'Connor is a Vice President of Dresser, Inc. and President
of Waukesha Engine. Mr. O'Connor previously served as President of the Dresser
Waukesha Engine Division and as Managing Director of Mono Pumps. He has worked
in the industry since 1969 in application engineering, sales, and marketing. Mr.
O'Connor is 55 years old.
John P. Ryan is a Vice President of Dresser, Inc. and President of
Dresser Wayne. Mr. Ryan previously served as President of Dresser Wayne. Mr.
Ryan joined us as a National Accounts Sales Manager in 1987, worked in Field
Sales and National Sales and became the Vice President of Sales in 1991. Prior
to working at Dresser Wayne, Mr. Ryan worked for 10 years with Goulds Pumps Inc.
in various sales capacities in Singapore and the United States. Mr. Ryan is 49
years old.
Charles S. Wolley is a Vice President of Dresser, Inc. and President of
Dresser Measurement. In 1996, Mr. Wolley joined Dresser Valve and Controls and
served in several positions in the division. From 1999 until 2001, Mr. Wolley
served as president and chief executive officer of Van Leeuwen Pipe and Tube. In
2001, Mr. Wolley joined Dresser Measurement as a senior vice president. Mr.
Wolley is 47 years old.
Frank P. Pittman is Vice President, General Counsel and Secretary of
Dresser, Inc. Mr. Pittman previously served as Vice President -- Law for Dresser
Equipment Group, Inc., Vice President & Associate General Counsel of Halliburton
Energy Services, Inc., and as Senior Counsel of Dresser Industries and its
affiliate, Dresser-Rand Company. Mr. Pittman joined Dresser Industries in 1979.
Mr. Pittman is 55 years old.
Dale B. Mikus is Vice President-Finance and Chief Accounting Officer of
Dresser, Inc. Mr. Mikus previously served as Vice President and Chief Financial
Officer of Dresser Equipment Group, Inc. Mr. Mikus joined Dresser Industries in
1997 as Manager -- Corporate Accounting. Prior to joining Dresser Industries,
Mr. Mikus was Director of Audit and Business Advisory Services for
PricewaterhouseCoopers. Mr. Mikus is 37 years old.
60
J. Scott Matthews is a Senior Vice President of Corporate Development
for Dresser, Inc. Mr. Matthews has served in various roles in the domestic and
international oil and gas industry for over 22 years. Since 1996, Mr. Matthews
was involved with private investments. From 1987 to 1996, Mr. Matthews was
President and CEO of Compressor Systems, Inc. In 1982 he was a founding partner
in an independent oil &gas production company in Midland, TX. Mr. Matthews is 56
years old.
James F. Riegler is Vice President -- Human Resources of Dresser, Inc.
Mr. Riegler previously served as Director -- Human Resources of Dresser
Equipment Group, Inc., and Director of Employee Relations of Dresser Industries.
Mr. Riegler joined Dresser Industries in 1981. Mr. Riegler is 52 years old.
William E. Macaulay is Chairman of the Board of Directors of Dresser,
Inc. Mr. Macaulay is the Chairman and Chief Executive Officer of First Reserve
Corporation and has been with that firm since 1983. Prior to joining First
Reserve in 1983, Mr. Macaulay was a co-founder of Meridien Capital Company, a
private equity buyout firm. From 1972 to 1982, Mr. Macaulay was with Oppenheimer
& Co., Inc., where he served as Director of Corporate Finance, with
responsibility for investing Oppenheimer's capital in private equity
transactions, as a General Partner and member of the Management Committee of
Oppenheimer & Co., as well as President of Oppenheimer Energy Corporation. Mr.
Macaulay is currently a director of Weatherford International, Inc. National
Oilwell, Inc., Pride International, Inc., Maverick Tube Corporation and Chicago
Bridge & Iron Company N.V. Mr. Macaulay is 57 years old.
Paul D. Barnett is a Director of Dresser, Inc. Mr. Barnett was one of
the founders of and has been a Managing Principal with Odyssey Investment
Partners, LLC since 1997. Mr. Barnett was also a Principal in the equity
investing group at Odyssey Partners from 1993 to 1997. Prior to joining Odyssey
Partners, Mr. Barnett was a Managing Director of Mancuso & Company, a New
York-based private equity investor, from 1990 to 1993. From 1984 to 1990, Mr.
Barnett was in the corporate finance department of Kidder, Peabody & Co., where
he was involved primarily in structured finance, high yield capital markets and
merchant banking. Mr. Barnett is 40 years old.
Bernard J. Duroc-Danner is a Director of Dresser, Inc. Mr. Duroc-Danner
currently holds the position of Chairman, President and Chief Executive Officer
of Weatherford International, Inc. Prior to Weatherford's merger with EVI, Inc.,
Mr. Duroc-Danner was the President and Chief Executive Officer of EVI, Inc. In
prior years, Mr. Duroc-Danner held positions at Arthur D. Little and Mobil Oil,
Inc. (now ExxonMobil). In addition, Mr. Duroc-Danner is a director of Grant
Prideco, Inc., Universal Compression Holdings, Inc., Cal Dive International,
Inc. and Parker Drilling Company. Mr. Duroc-Danner is 48 years old.
Ben A. Guill is a Director of Dresser, Inc. Mr. Guill is President of
First Reserve Corporation and joined that firm in 1998. Prior to joining First
Reserve, Mr. Guill spent 18 years with Simmons & Company International, an
investment banking firm, where he served as Managing Director and Co-Head of
Investment Banking. Prior to that time he was with Blyth Eastman Dillon &
Company. Mr. Guill is a director of National Oilwell, Inc., Superior Energy
Services, Inc., TransMontaigne, Inc., Chicago Bridge & Iron Company N.V. and T-3
Energy Services, Inc. Mr. Guill is 51 years old.
Will Honeybourne is a Director of Dresser, Inc. Mr. Honeybourne is a
Managing Director of First Reserve Corporation and joined that firm in 1999.
Prior to joining First Reserve, Mr. Honeybourne served as Senior Vice President
of Western Atlas International. Prior to that time, he served as President and
Chief Executive Officer of Alberta based Computalog. Mr. Honeybourne's earlier
career was primarily with Baker Hughes, including positions as Vice President
and General Manager at INTEQ and President of EXLOG. Mr. Honeybourne is a
director of CiDRA Corporation, CNOOC Limited and several foreign public and
private companies. Mr. Honeybourne is 50 years old.
Muzzafar Mirza is a Director of Dresser, Inc. Mr. Mirza was one of the
founders of and has been a Managing Principal with Odyssey Investment Partners,
LLC since 1997. Mr. Mirza also was a Principal in the private equity investing
group at Odyssey Partners from 1993 to 1997. Prior to joining Odyssey Partners,
Mr. Mirza was head of merchant banking at GE Capital Corp., where he was
responsible for all the company's cash flow lending and investing. Mr. Mirza
spent five years at Marine Midland Bank and was a member of the bank's first LBO
finance group. Mr. Mirza is a director of TransDigm Inc. and Velocita Corp. Mr.
Mirza is 43 years old.
61
Gary L. Rosenthal is a Director of Dresser, Inc. Mr. Rosenthal is
co-founder and President of Heaney Rosenthal Inc., a private investment company,
a position he has held since October 1994. From July 1998 to September 2000, Mr.
Rosenthal also served as Chairman of the Board and Chief Executive Officer of
AXIA Incorporated, a diversified manufacturing company, and until May 2001 as
President. In prior years, Mr. Rosenthal served as Chairman and then President
and Chief Executive Officer of Wheatley TXT Corp., as a Senior Vice President of
Cain Chemical Inc., and as a partner in The Sterling Group, Inc., a private
equity firm. He currently serves as a director of Oil States International, Inc.
Pioneer Companies, Inc., Jackson Products, Inc. and Texas Petrochemicals L.P.
Mr. Rosenthal is 52 years old.
Salvatore Ruggeri's employment with us as Vice President and President,
Dresser Flow Control terminated in October, 2001. We are in the process of
exploring management alternatives for our flow control segment. Among the
alternatives under consideration is a realignment of product lines between our
flow control segment and our measurement systems segment.
BOARD COMMITTEES
Our Board of Directors has an Executive Committee, Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee. The
Executive Committee may exercise any of the Board's authority between meetings
of the Board. The members of the Executive Committee are Mr. Murray, Mr.
Macaulay and Mr. Barnett. The Audit Committee recommends the engagement of the
independent public accountants; reviews the professional services provided by,
and the fees charged by, the independent public accountants; reviews the scope
of the internal and external audit; and reviews financial statements and matters
pertaining to the audit. The members of the Audit Committee are Mr. Barnett and
Mr. Rosenthal. The Compensation Committee is responsible for assuring that the
executive officers and other key management are effectively compensated and that
compensation is internally equitable and externally competitive. The members of
the Compensation Committee are Mr. Guill and Mr. Mirza. The Nominating and
Corporate Governance Committee oversees the nomination of candidates for the
Board and delegates authority to the various committees of the Board. The
members of the Nomination and Governance Corporate Committee are Mr. Macaulay
and Mr. Duroc-Danner.
BOARD COMPENSATION
The members of the Board of Directors of Dresser, Inc. will be
reimbursed for their out-of-pocket expenses. In addition, non-employee
non-affiliate members of the Board of Directors will be compensated for $5,000
for each Board meeting and $1,000 for each Committee meeting attended by such
director. Compensation will be in the form of class A common stock.
EXECUTIVE COMPENSATION
The following table sets forth the 2001, 2000 and 1999 compensation of
our Chief Executive Officer and each of our four other most highly compensated
executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- -------------------------------------
AWARDS PAYOUTS
--------------------- -----------
RESTRICTED
STOCK SECURITIES LTIP ALL OTHER
BONUS (1) AWARDS (2) UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($) ($) OPTIONS (#) (3) ($) (4) ($)
- --------------------------- ----- ---------- ---------- ---------- ---------- --------- ------------
Patrick M. Murray.......... 2001 $476,788 $1,299,617 - 135,000 $258,258 $29,018
President and 2000 400,000 500,028 584,501 - 121,433 6,652
Chief Executive Officer 1999 400,000 - - 45,000 - 6,400
James A. Nattier .......... 2001 206,583 536,342 - 50,000 - 8,970
Executive Vice President 2000 163,350 201,563 59,438 - 36,607 7,657
1999 148,811 - - 16,500 - 2,711
62
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- -------------------------------------
AWARDS PAYOUTS
--------------------- -----------
RESTRICTED
STOCK SECURITIES LTIP ALL OTHER
BONUS (1) AWARDS (2) UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($) ($) OPTIONS (#) (3) ($) (4) ($)
- --------------------------- ----- ---------- ---------- ---------- ---------- --------- ------------
Albert G. Luke (6)......... 2001 254,382 728,097 - 36,000 - 13,190
President, 2000 242,468 303,089 79,250 - - -
Dresser IDR Division 1999 224,500 - 197,500 31,500 - -
William E. O'Connor ....... 2001 221,886 726,194 - 36,000 - 30,103
President, 2000 213,885 267,360 79,250 - 90,592 6,800
Dresser Waukesha 1999 203,700 - 197,500 10,200 - 6,400
Division
John P. Ryan............... 2001 203,280 632,994 - 36,000 - 17,341
President 2000 203,280 253,595 59,438 - 59,916 6,533
Dresser Wayne Division 1999 176,000 - 197,500 22,200 - 6,400
Salvatore Ruggeri (5)...... 2001 199,211 657,714 - 12,000 - -
President 2000 217,135 259,032 79,250 - 110,915 -
Dresser Valve Division 1999 254,234 - 197,500 18,000 - -
(1) Bonuses with respect to 2001 includes a sales and retention bonus
associated with the sale of DEG; a Halliburton business performance
incentive paid for in the first quarter of 2001, and a Dresser business
performance incentive for the final nine months. Bonuses reported with
respect to 2000 were paid pursuant to Halliburton Company's incentive
bonus plan in February 2001 based on financial performance in 2000. The
reported 2000 bonuses were paid in restricted stock of Halliburton at a
value of $43.1505 per share when awarded in 2001.
(2) In connection with the recapitalization transaction, we have agreed to
assume the value of Halliburton's liability with respect to cash
payments for the value of Halliburton restricted stock held by Messrs.
Murray, Nattier, O'Connor, and Ryan as to which the restrictions had
not lapsed as of April 10, 2001. See " -- Treatment of Halliburton
Restricted Stock" below.
(3) Payouts were made under Performance Stock Unit Plans, Incentive Stock
Unit Plans and the Long Term Performance Incentive Plan of Baroid
Corporation in 2001 and 2000 based on plan cycles partially applicable
to prior years.
(4) Amounts in this column for 2001 represent company match on qualified
and nonqualified plans; pension plan equalization award, patent award,
tax preparation fees, and premiums paid for executive life insurance.
Amounts for 2000 and 1999 represent matching contributions paid under
Halliburton 401(k) plans.
(5) Mr. Ruggeri's compensation was paid in Italian lira, which has been
converted to U.S. dollars at a rate of 2,149.9778 lira per $1.00 for
2001 stated compensation. For previous years, appropriate exchange
rates from these time periods were utilized. Mr. Ruggeri's employment
with us terminated on October 26, 2001. Mr. Ruggeri's compensation in
2001 does not include amounts payable pursuant to the severance
agreement entered into at the time of his termination of employment.
(6) Mr. Luke's employment with us terminated on February 28, 2002.
63
OPTION GRANTS IN THE LAST FISCAL YEAR
# OF PERCENTAGE OF POTENTIAL REALIZABLE
SECURITIES TOTAL OPTIONS ASSUMED RATES ANNUAL RATES
UNDERLYING GRANTED TO EXERCISE OR OF STOCK OPTION
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION APPRECIATION TERM (2)
NAME GRANTED FISCAL YEAR (1) ($/SH) DATE ------------- ------------
5% 10%
- -------------------- ---------- -------------- ----------- ------------- ------------ ------------
Patrick M. Murray... 135,000 21.0% $40.00 April 11, 2011 $3,396,031 $8,606,209
James A. Nattier ... 50,000 7.8% $40.00 April 11, 2011 $1,257,789 $3,187,485
Albert G. Luke...... 36,000 5.6% $40.00 April 11, 2011 $ 905,608 $2,294,989
William E. O'Connor. 36,000 5.6% $40.00 April 11, 2011 $ 905,608 $2,294,989
John P. Ryan........ 36,000 5.6% $40.00 April 11, 2011 $ 905,608 $2,294,989
Salvatore Ruggeri... 12,000 1.9% $40.00 April 11, 2011 $ 301,869 $ 764,996
(1) Options to purchase a total of 642,000 shares of common stock were
granted to employees in 2001, of which 618,000 remain outstanding as of
December 31, 2001.
(2) The amounts under the columns labeled "5%" and "10%" are included by
Dresser pursuant to certain rules promulgated by the Securities and
Exchange Commission (the "Commission") and are not intended to forecast
future appreciation, if any, in the price of the common stock. Such
amounts are based on the assumption that the named person holds the
options for the full term of the options. The actual value of the
options will vary in accordance with the value of the common stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table shows aggregate exercises of options to purchase
Dresser, Inc. common stock in the fiscal year ended December 31, 2001 by the
executive officers named in the Summary Compensation Table.
NUMBER OF SECURITIES
SHARES VALUE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON REALIZED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
NAME EXERCISE (#) ($) (1) YEAR-END (SHARES) FISCAL YEAR-END ($) (2)
----------------------------- -----------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE (3) UNEXERCISABLE (3)
- -------------------- ------------ --------- ----------- ------------- --------------- -----------------
Patrick M. Murray.... - - - 135,000 - -
James A. Nattier .... - - - 50,000 - -
Albert G. Luke....... - - - 36,000 - -
William E. O'Connor.. - - - 36,000 - -
John P. Ryan......... - - - 36,000 - -
Salvatore Ruggeri.... - - - 12,000 - -
(1) Values are determined by aggregating, for each option exercise in 2001,
the amount calculated by multiplying (i) an amount calculated by
subtracting the exercise price paid for each such exercise from the
closing price of the common stock as of the date of such exercise by
(ii) the number of shares acquired upon such exercise.
(2) Based upon a price per common share of $40.00 on December 31, 2001.
(3) None of the options are in the money.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of the executive
officers named in the Summary Compensation Table. These agreements became
effective as of April 10, 2001. Each of the employment agreements provides
generally:
- The annual base salary, which may be increased by our Board of
Directors in its discretion for each of the executive officers
named in the Summary Compensation Table, is as follows:
64
Patrick M. Murray...................................................... $500,000
James A. Nattier....................................................... 220,000
Albert G. Luke......................................................... 255,000
William E. O'Connor.................................................... 225,000
John P. Ryan........................................................... 214,000
- Each executive officer is entitled to participate in our
annual incentive plan and in our various other employee
benefit plans and arrangements that are applicable to senior
officers.
- If an executive officer is terminated without "cause", or if
he resigns for "good reason" (each as defined in the
respective employment agreements), he is entitled to receive
his incentive bonus and annual base salary for 24 months and
to continue coverage under our medical, dental and life
insurance programs for 18 months on the same basis as he was
entitled to participate prior to his termination. In addition,
all unvested options, other than performance based options,
will become immediately vested upon the date of such
termination and the restrictions will lapse on previously
awarded shares of restricted stock.
- Each executive officer has agreed not to compete with us
during the term of his employment and for one year following
termination of his employment.
Mr. Murray's employment agreement is substantially identical to the
other agreements described above, although it differs in the following respects:
- If he is terminated without cause, he is entitled to receive
his incentive bonus and annual base salary for 36 months.
- He has agreed not to compete with us for two years following
termination of his employment.
We have also entered into severance agreements with approximately 29 of
our executives, not including the 11 executive officers with whom we have signed
employment agreements. Generally, the severance agreements provide that if the
executive's employment is terminated under certain circumstances described in
the agreements within two years after the completion of the recapitalization
transaction, the executive is entitled to receive various benefits, including
the following:
- Cash payments equal to 100% of the executive's then current
base salary;
- the executive's full prior year bonus, if not already paid,
and the executive's targeted bonus for the year in which the
termination occurs; and
- continuation of basic medical, dental, life and disability
insurance for six months.
Additionally, each executive has agreed not to compete with us during
the six month period following a termination of the executive's employment, if
it occurs within the period during which benefits are payable under the
severance agreements.
STOCK PLAN
We adopted the Dresser, Inc. 2001 Stock Incentive Plan effective as of
April 10, 2001. This stock plan permits the grant of a variety of equity based
compensation awards, including non-qualified stock options, incentive stock
options, restricted stock awards, phantom stock, stock appreciation rights and
other rights with respect to our common stock. Common stock shares of 710,101
(which may be either Class A common stock, par value $0.001, or Class B common
stock, par value $0.001) are issuable under the stock plan (subject to
adjustment for events such as stock dividends, stock splits, recapitalizations,
mergers and reorganizations). Our employees, consultants and directors are
eligible to receive awards under the stock plan.
We granted options to purchase common stock to certain management
employees, including the executives named in the management table. The per share
exercise price of each such option is anticipated to be 100% of the fair market
value of shares of common stock as of the date of grant. The options shall
generally have one of the following three vesting schedules.
- Certain options will vest 20% on the first anniversary of the
date of the grant and 1/48 of the remaining 80% per month for
each month thereafter until the option is fully vested.
Vesting of these options will
65
accelerate if the employee leaves for good reason, is
terminated by us without cause, dies or suffers a permanent
disability.
- Other options will vest, if at all, if our majority
shareholder realizes a 35% annualized internal rate of return
on their initial investment in us and is able to liquidate
their initial investment in us at a price equal to at least
450% of the price paid for their initial investment (as
adjusted for stock splits and other recapitalizations).
- The final group of options will vest if the employee is still
employed after nine and one-half years, but vesting will
accelerate if we achieve predetermined financial performance
milestones. The vesting of these options will also be
accelerated if the options discussed in the preceding
paragraph vest.
If the employee retires, is terminated for cause, or resigns (without
good reason) then the option is immediately terminated with respect to all
unvested shares, and with respect to all vested shares is terminated at the end
of the later of: (i) 60 days, or (ii) the minimum time period the employee has
to cause us to repurchase the vested shares at fair market value under the terms
of his or her employment agreement and the investor rights agreement. See
"Certain Relationships and Related Party Transactions."
Certain terms of options which may be granted to our non-employee
directors are set forth in the stock plan. In particular, the stock plan
contains a maximum limit on the number of options that may be granted to an
independent director in any year. In addition, each non-employee director option
will generally have a per share exercise price equal to the fair market value
per share of common stock as of the date of grant and will generally vest upon
the occurrence of certain corporate transactions.
Shares of common stock purchased or acquired under the stock plan are
generally subject to restrictions on transfer, repurchase rights, and other
limitations set forth in the investor rights agreement (or in an option
agreement, stockholders' agreement or other similar agreement that we may enter
into with the stock plan participant). See "Certain Relationships and Related
Party Transactions."
2001 MANAGEMENT EMPLOYEE EQUITY PURCHASE PLAN
In connection with the consummation of the recapitalization
transaction, we have adopted the new 2001 Management Employee Equity Purchase
Plan effective as of April 10, 2001. The new equity purchase plan provides for
certain of our employees, directors and consultants to purchase shares of common
stock. Up to 87,500 shares of our Class A common stock, par value $.001, and up
to 762,523 shares of our Class B common stock, par value $0.001, may be
purchased under the plan.
Our board of directors (or a committee of the board authorized to
administer the plan) will authorize certain of our employees, directors and
consultants to purchase common stock under the plan. Each purchaser will enter
into a subscription agreement, which will set forth certain terms related to the
purchase and sale of shares of common stock, including the number of shares of
common stock that a purchaser elects to purchase, the date on which such
purchase will take place and the purchase price per share of common stock.
Each purchaser will also enter into an investor rights agreement upon
the purchase of common stock under the plan, which will set forth certain terms
and conditions relating to the resale of the common stock, including
restrictions on a participant's transfer of the common stock to third parties,
rules relating to our repurchase of the common stock following a participant's
termination of employment, and terms of a participant's inclusion in sales of
common stock to third parties. See "Certain Relationships and Related Party
Transactions."
The per share purchase price for such shares will be $40.00, which
equaled fair market value on the date of the transaction. The $40.00 per share
strike price was determined by dividing total equity value by the number of
shares to be issued. The number of shares that each employee will be eligible to
purchase will be between 625 and 25,000, subject to the overall limitation on
the number of shares that may be purchased under the plan.
DEFERRED COMPENSATION PLANS
We adopted the Dresser, Inc. Senior Executives' Deferred Compensation
Plan, the Dresser, Inc. Management Deferred Compensation Plan, and the
66
Dresser, Inc. Short Term Deferred Compensation Plan and the Dresser, Inc.
Elective Deferral Plan effective as of April 10, 2001. The new deferred
compensation plans are not tax qualified retirement plans. The new deferred
compensation plans allow certain of our employees to elect to defer salary or
other compensation. In connection with the establishment of such plans,
liabilities from certain Halliburton deferred compensation plans and
supplemental executive retirement plans and certain existing Dresser deferred
compensation plans have been transferred to the newly established plans. In
addition, certain of our employees who were eligible to receive retention
bonuses, cash payments pursuant to Halliburton restricted stock, or other
payments from Halliburton elected, in advance to defer the receipt of such
payments under the new deferred compensation plans. Amounts deferred under the
new deferred compensation plans shall be general liabilities of Dresser and
shall be represented by bookkeeping accounts maintained on behalf of the
participants. Participants will generally be able to elect to have such accounts
deemed to be invested either in units which are valued based upon the value of
our common stock or in an interest bearing account. Distributions shall
generally be made from the new deferred compensation plans to a participant over
time following his or her retirement or other termination of employment.
In addition to establishing the new deferred compensation plans, we
adopted the Dresser, Inc. ERISA Excess Benefit Plan, the Dresser, Inc. Senior
Executives' Excess Plan and the Dresser, Inc. Elective Deferral Plan effective
as of April 10, 2001 for the benefit of certain of our employees. These plans
provide accruals to certain highly paid employees based on the benefits those
employees would have received under our retirement plans, except for certain
Internal Revenue Code limitations.
RETIREMENT PLANS
In connection with the recapitalization transaction, we adopted, as of
April 10, 2001, the Dresser, Inc. Consolidated Salaried Retirement Plan (the
"Pension Plan"). The purpose of the Pension Plan is to preserve accrued benefits
made available to certain of our employees under the Dresser Industries, Inc.
Consolidated Salaried Retirement Plan, which was frozen to new participants and
benefit accruals on May 31, 1995. The Pension Plan generally provides a benefit
equal to a certain percentage of final average earnings, adjusted to reflect,
among other things, variations among participants in social security benefits,
credited service, retirement dates, and participation in other defined benefit
pension plans.
We adopted, as of April 10, 2001, the Dresser, Inc. Retirement and
Savings Plan (the "401(k)" Plan), which is intended to be the primary plan to
provide retirement benefits to our participating employees. The 401(k) Plan
provides a dollar of company matching contributions for every dollar of employee
contributions up to a maximum of 4% of the "compensation" any employee elects to
defer. "Compensation" for this purpose was limited to $170,000 in 2001 by
Internal Revenue Code Section 401(a)(17). In connection with the
recapitalization transaction, we have agreed to make additional contributions to
the 401(k) Plan. Such additional contributions mirror contributions made to
certain of our employees under the Halliburton Retirement and Savings Plan, and
are intended to make up for benefits lost pursuant to the freezing of the
Dresser Industries, Inc. Consolidated Salaried Retirement Plan, as described
above.
TREATMENT OF HALLIBURTON OPTIONS
We have not agreed to assume, replace, roll-over, or otherwise
reimburse our employees for any options to purchase Halliburton stock that they
held prior to the recapitalization transaction. Accordingly, any such options
outstanding as of April 10, 2001 will remain outstanding until they expire
according to the terms of the Halliburton option plans and option agreements
governing such options. As discussed in more detail above, we provided certain
employees with options to purchase our stock under a new stock incentive plan,
which we have adopted in accordance with the recapitalization transaction. No
options to purchase Halliburton stock were granted to any of the executive
officers named in the Summary Compensation Table during the fiscal years ended
December 31, 2000 and December 31, 2001.
TREATMENT OF HALLIBURTON RESTRICTED STOCK
In connection with the recapitalization transaction, we agreed to
assume the value of Halliburton's liability for certain individuals with respect
to cash payments for the value of Halliburton's restricted stock as to which the
restrictions had not lapsed as of April 10, 2001. Certain of our employees,
including Messrs. Murray, Nattier,
67
O'Connor, and Ryan, have elected to roll over these cash payments into new
deferred compensation arrangements which we have adopted in accordance with the
recapitalization transaction.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common shares immediately following the
recapitalization transaction with respect to each Person who is a beneficial
owner of more than 5% of our outstanding common stock and beneficial ownership
of our common stock by each director and each executive officer named in the
Summary Compensation Table and all directors and executive officers as a group:
To calculate a shareholder's percentage of beneficial ownership, we
must include in the numerator and denominator those shares underlying certain of
the options beneficially owned by that shareholder. Options held by other
shareholders, however, are disregarded in this calculation. Therefore, the
denominator used in calculating beneficial ownership among our shareholders may
differ.
# OF COMMON % OF CLASS OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES SHARES OUTSTANDING
- ------------------------------------ ----------- ------------------
DEG Acquisitions, LLC(1) ......................................... 9,700,000 92.5
c/o First Reserve Corporation
411 West Putnam
Suite 109
Greenwich, CT 06830
Dresser Industries, Inc ......................................... 537,408 5.1
c/o Halliburton Company
4100 Clinton Drive P.O. Box 3
Houston, TX 77020-6299
Patrick M. Murray ................................................ * *
James A. Nattier................................................. * *
Albert G. Luke ................................................... * *
William E. O'Connor .............................................. * *
Salvatore Ruggeri ............................................... * *
John P. Ryan..................................................... * *
Frank P. Pittman................................................. * *
Dale B. Mikus.................................................... * *
James F. Riegler................................................. * *
William E. Macaulay .............................................. * *
Paul D. Barnett................................................... * *
Bernard J. Duroc-Danner .......................................... * *
Ben A. Guill...................................................... * *
Will Honeybourne.................................................. * *
Muzzafar Mirza.................................................... * *
Gary L. Rosenthal................................................. * *
All directors and executive officers as a group (18 persons)...... * *
* Signifies less than 1%. Also, does not include shares held by DEG
Acquisitions, LLC, which could be attributed to certain of these
individuals.
(1) 75% of the equity interests in DEG Acquisitions, LLC are held by First
Reserve Corporation and its affiliates and co-investors, and 25% are
held by Odyssey Investment Partners, LLC and its affiliates and
co-investors.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
TRADEMARK ASSIGNMENT AND LICENSE AGREEMENT
Pursuant to agreements with Halliburton, we own all right, title and
interest in and to the marks "Dresser" and "Dresser and Design" and other
trademarks and servicemarks in the U.S. and in various jurisdictions throughout
the world. We have granted back to Halliburton a non-exclusive license to use
these marks during a transition period of up to three years while various
Halliburton entities are re-named or liquidated. We have also granted back to
Halliburton a perpetual, exclusive license to use the name "Dresser Industries"
provided the name is not used in connection with raising capital, or the sale,
promotion, design or manufacture of goods or services that would create market
confusion affecting Dresser. We also granted to Halliburton the use of the name
"Dresser Industries, Inc." for use as a holding company name. In addition, we
have agreed not to use the Dresser name for seven years in certain businesses
where Halliburton operates, or to directly compete with Halliburton for three
years.
SPONSOR RIGHTS AGREEMENT
The Sponsor Rights Agreement, among affiliates of First Reserve and
Odyssey who hold all of the equity interests in DEG Acquisitions, LLC, which in
turn holds 92.5% of our equity, provides that there will be a board of directors
of DEG Acquisitions consisting of nine directors, five of whom will be
designated by First Reserve, two of whom will be designated by Odyssey and two
of whom will be members of our management. The Sponsor Rights Agreement also
provides that unless at least one director nominated by each of First Reserve
and Odyssey agrees, the board will be prohibited from allowing us to take
certain actions including incurring certain indebtedness, consummating certain
acquisitions or asset dispositions, and making certain changes in our
management. The Sponsor Rights Agreement also contains other customary
provisions, including registration rights.
TAX SHARING AGREEMENT
Pursuant to a tax sharing agreement between us and DEG Acquisitions,
LLC, (a) DEG Acquisitions will file consolidated, combined or unitary federal,
state, local and foreign income tax returns on behalf of itself and its
subsidiaries, including us, to the extent it is permitted to do so under the
relevant law, and (ii) we are obligated to pay to DEG Acquisitions a portion of
the total income tax liability of DEG Acquisitions and its subsidiaries, in an
amount equal to the excess of (a) the relevant income tax liability of DEG
Acquisitions and its subsidiaries for a taxable period over (b) the
corresponding consolidated, combined or unitary income tax liability of DEG
Acquisitions and its subsidiaries that DEG Acquisitions would have incurred if
we and our subsidiaries had not been subsidiaries of DEG Acquisitions.
INVESTOR RIGHTS AGREEMENT
In April 2001, we entered into an Investor Rights Agreement with DEG
Acquisitions, LLC, Halliburton and certain members of our management who are
also shareholders. Material provisions of that agreement that relate to us are
as follows:
Registration Rights. Under the terms of the Investor Rights Agreement,
we have agreed to register the shares of our common stock owned by DEG
Acquisitions, LLC, Halliburton and those members of our management who are
parties to the agreement under the following circumstances:
- Demand Rights. Upon written request from DEG Acquisitions, LLC
or Halliburton, we will register shares of common stock
specified in such request for resale under an appropriate
registration statement filed and declared effective by the
SEC. No demand may be made until 180 days after our initial
public offering. DEG Acquisitions, LLC is entitled to six such
requests, and Halliburton is entitled to one such request. We
may defer a demand for registration by 90 days if our Board of
Directors deems it to be materially detrimental for us to file
a registration statement. We may only make such a deferral
twice in any 12-month period.
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- Piggyback Rights. If at any time we file a registration
statement for the purposes of making a public offering of our
common stock, or register outstanding shares of common stock
for resale on behalf of any holder of our common stock, the
other parties to the Investor Rights Agreement may elect to
include in such registration any shares of common stock such
person holds. If the offering is an underwritten offering, the
managing underwriter may exclude all or a part of the shares
if market factors dictate.
- Lockup. In consideration of these registration rights, DEG
Acquisitions, LLC, Halliburton and the members of management
who are parties to the agreement have agreed not to sell
shares of common stock for a period of 90 days following any
exercise of the registration rights.
- Termination. Our obligations to register the shares of common
stock of any of these stockholders terminates with respect to
such stockholder on the date on which all remaining shares of
common stock can be sold in any single transaction in reliance
on Rule 144 of the Securities Act.
Right of First Offer. Until the closing of our initial public offering,
if Halliburton desires to sell any of its shares of us to a third party,
then it must give us a notice of such intent to sell and an opportunity to
buy those shares on the same terms as were offered to the third party. If
we do not decide to purchase such shares, Halliburton must give the same
notice and opportunity to buy the shares to DEG Acquisitions, LLC and those
members of management who are parties to the agreement.
Repurchase of Employee Shares. If a member of management who is a party
to this agreement leaves for good reason, is terminated by us without
cause, dies or suffers a permanent disability, then such employee will,
pursuant to a right granted in the employee's employment agreement, be
permitted to cause us to repurchase their vested shares that they have held
for at least six months at fair market value. If an employee retires, is
terminated for cause, or resigns (without good reason), or leaves for the
reasons enumerated in the prior sentence but fails to "put" their shares to
us for repurchase, then we will have the right to repurchase their shares
at fair market value (with a discount for minority ownership in the case of
a retirement, termination by us for cause, or resignation without good
reason).
Corporate Opportunity. The Investor Rights Agreement includes an
acknowledgment by us and our stockholders that our stockholders and their
affiliates may engage in other businesses that compete with ours.
THE ENTECH ACQUISITION
In the second quarter of 2001, we completed the acquisition of Entech
Industries, Inc., a valve manufacturer with operations based in four west
European countries, for approximately $74.4 million. The acquisition was valued
at approximately $70.0 million not including approximately $4.4 million in
incremental costs. Entech consists of five business units engaged in the design,
manufacture and distribution of valves engineered for the oil & gas production
and transmission, petrochemical and power industries. The Entech business lines
were merged into our flow control segment. Entech was acquired from an affiliate
of First Reserve Corporation.
TRANSITION AGREEMENTS
On April 10, 2001, Halliburton executed a transition services agreement
with us whereby Halliburton provided us with certain transition services at its
cost, which we believe did not exceed the fair market value of those services.
This transition services agreement has expired. The services covered by this
agreement included certain human resources and employee benefit administration
services, certain information technology services and certain real estate
support services at facilities that we shared with Halliburton.
Certain of the foreign operations that we acquired pursuant to the
recapitalization transaction are located in jurisdictions where governmental
consents are required for the transfer of ownership and were not obtained by the
time of closing of the recapitalization transaction. Pursuant to a closing
agreement and waiver executed on April 10, 2001, Halliburton has agreed to
operate these entities for our benefit and to effect the transfer as soon as
practicable. In the event that Halliburton cannot effect the transfer of these
entities within one year, the purchase price for our
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foreign subsidiaries will be adjusted accordingly. The operations in these
jurisdictions are not material to our financial condition or results of
operations taken as a whole. In addition, Halliburton has agreed to operate
certain foreign facilities for our benefit until the leases related to these
facilities can be assigned to us. These facilities are not, individually or in
the aggregate, material to our financial condition or results of operations
taken as a whole.
LEASE AGREEMENT
Pursuant to a lease agreement with Halliburton Energy Services, Inc.
that expired on February 28, 2002, we leased approximately 76,000 square feet of
office space in Houston, Texas to Halliburton for a period of twelve months.
TRANSACTION FEES
First Reserve and Odyssey did not engage any investment banking firm in
connection with the recapitalization transaction and received a $30.4 million
fee for their assistance in evaluating, structuring and facilitating these
transactions. Additionally, they were reimbursed for all reasonable
out-of-pocket expenses incurred in connection with the transactions and will be
reimbursed for reasonable expenses incurred in connection with the ongoing
ownership and management of Dresser.
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DESCRIPTION OF OTHER INDEBTEDNESS
THE CREDIT FACILITY
In connection with the recapitalization transaction, we entered into a
credit facility with Morgan Stanley Senior Funding, Inc., as administrative
agent, Credit Suisse First Boston, Cayman Islands Branch, as syndication agent,
and a syndicate of financial institutions and institutional lenders. The credit
facility provides for the following:
(1) a six-year $165.0 million Tranche A U.S. term loan
facility, a six-year Tranche A Euro term loan facility in an amount
equivalent, as of the closing date, to $100.0 million which was
borrowed by a foreign subsidiary of ours, and an eight-year $455.0
million Tranche B term loan facility, each of which was drawn to
partially finance the recapitalization transactions and pay certain
related costs and expenses; and
(2) a six-year $100.0 million revolving credit facility to be
utilized solely for our and our subsidiaries' working capital
requirements and other general corporate purposes. We did not borrow
under the revolving credit facility to finance the recapitalization
transaction.
At our request, and so long as (a) no default or event of default has
occurred and is continuing under the credit facility and (b) our lenders or
other financial institutions are willing to lend such incremental amounts, the
Tranche B term loan facility may be increased from time to time in an amount, in
the aggregate, not to exceed $195.0 million.
PREPAYMENTS
The term loans under the credit facility are required to be prepaid
(subject to certain exceptions) with, and after the repayment in full of such
loans, reductions to the revolving credit facility are required in an amount
equal to, (a) 100% of the net cash proceeds of all property and asset sales by
us, by our parent and by our subsidiaries, subject to certain exceptions, (b)
100% of the net cash proceeds of all Extraordinary Receipts (as defined),
subject to certain exceptions, (c) 100% of the net cash proceeds from the
issuance of additional debt or equity by us, by our parent or by any of our
subsidiaries, subject to certain exceptions, (d) 75% of our and our
subsidiaries' annual Excess Cash Flow (as defined) at any time when our ratio of
total debt to EBITDA is greater than 4:1, and, (e) 50% of our and our
subsidiaries' annual Excess Cash Flow (as defined) when our ratio of total debt
to EBITDA is less than or equal to 4:1 but greater than 2.5:1. Such mandatory
prepayments and reductions will be allocated ratably to the principal repayment
installments of each of the Tranche A U.S., Tranche A Euro and Tranche B term
loan facilities on a pro rata basis and then to the revolving credit facility,
subject to certain exceptions.
Voluntary prepayments and commitment reductions will be permitted in
whole or in part, subject to certain minimum prepayment requirements and certain
other exceptions as set forth in the credit agreement.
INTEREST AND FEES
The interest rates under the credit facility are as follows:
(a) Tranche A U.S. term loan facility and loans under the
revolving credit facility at our option, the base rate or the
Eurodollar rate (as defined) plus, in each case, a margin;
(b) Tranche A Euro term loan facility denominated in euros:
the Euribor rate (as defined) plus a margin, plus Associated Costs (as
defined) related to the maintenance of Euro rate loans; and
(c) Tranche B term loan facility: at our option, the base rate
or the Eurodollar rate, plus, in each case, a margin.
We may elect interest periods of 1, 2, 3 or 6 months for the Eurodollar
rate and Euribor rate loans.
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The revolving credit facility has an unused line of credit fee of 50
basis points, subject to pricing based on our total debt to EBITDA ratio (as
defined).
AMORTIZATION OF PRINCIPAL
Both the Tranche A and Tranche B term loans are subject to amortization
of principal. The Tranche A term loans will amortize with annual reductions of:
5% in year 1, 10% in year 2, 15% in year 3, 20% in year 4 and 25% in each of
years 5 and 6. The Tranche B term loans will be repaid in the final year of the
loans in equal quarterly amounts, subject to amortization of approximately 1%
per year in each prior year. See "Use of Proceeds," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in this prospectus.
COLLATERAL AND GUARANTEES
The loans and other obligations under the credit facilities are
guaranteed by our parent and all of our existing and future direct and indirect
wholly owned domestic subsidiaries. Our obligations and the guarantees will be
secured by (a) all or substantially all of the material property and assets,
real or personal, now owned or hereafter acquired by us or the guarantors, and
(b) all proceeds and products of the property and assets described in clause (a)
above.
REPRESENTATIONS AND WARRANTIES AND COVENANTS
The credit agreement documentation contains certain customary
representations and warranties and contains customary covenants restricting our
ability to, among others: (i) declare dividends or redeem or repurchase capital
stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in
sale-leaseback transactions; (iv) make loans and investments; (v) incur
additional indebtedness; (vi) amend or otherwise alter debt and other material
agreements; (vii) make capital expenditures; (viii) engage in mergers,
acquisitions and asset sales; (ix) transact with affiliates; and (x) alter the
business we conduct. We are required to indemnify the agent and lenders and
comply with specified financial and affirmative covenants including a total debt
to EBITDA ratio and an Interest Coverage Ratio (as defined).
EVENTS OF DEFAULT
Events of default under the credit agreement include, but are not
limited to: (i) our failure to pay principal or interest when due; (ii) our
material breach of any representation or warranty; (iii) covenant defaults; (iv)
events of bankruptcy; (v) a change of control; (vi) cross-defaults to other
indebtedness in an amount to be agreed in certain loan documents; (vii) monetary
judgment defaults; (viii) impairment of loan documentation or security; and (ix)
customary ERISA defaults.
AMENDMENT TO THE CREDIT FACILITY
In connection with the issuance of the notes, we sought, and obtained,
an amendment to the credit facility to revise certain financial covenants to
provide us with greater operating flexibility.
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DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
Dresser issued the old notes pursuant to the Indenture, dated as of
April 10, 2001, as supplemented on June 4, 2001 and June 12, 2001, among itself,
the Guarantors and State Street Bank and Trust Company, as trustee (the
"Indenture"). An aggregate of $300.0 million principal amount of 9-3/8% Senior
Subordinated Notes due 2011 were previously issued on April 10, 2001 pursuant to
the Indenture. The old notes, as an additional issuance of 9-3/8% Senior
Subordinated Notes due 2011, are "Additional Notes" as defined in the Indenture.
The old notes are identical to, and are pari passu with and treated identically
with, the notes issued in April 2001, except that the old notes are subject to
transfer restrictions until we consummate this exchange offer and the old notes
are exchanged for exchange notes, or the old notes are resold under a shelf
registration statement. The terms of the old notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 ("TIA") as in effect on the date of the Indenture.
You can find definitions of certain capitalized terms used in this
description under the subheading "--Certain Definitions." For purposes of
this description:
- references to "Dresser" mean Dresser, Inc. and not its
Subsidiaries; and
- "notes" means the exchange notes and the old notes, in each
case outstanding at any given time and issued under the
Indenture.
The old notes were, and the exchange notes will be, issued under an
Indenture. The terms of the exchange notes are identical in all material
respects to the old notes except that, upon completion of the exchange offer,
the exchange notes will be:
- registered under the Securities Act, and
- free of any covenants regarding exchange registration rights.
The terms of the notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act.
The following is a summary of the material provisions of the Indenture.
It does not include all of the provisions of the Indenture. We urge you to read
the Indenture because it, and not this description, defines your rights as a
holder of notes. We have filed a copy of the Indenture as an exhibit to the
registration statement which includes this prospectus.
The registered holder of a note (a "Holder") will be treated as the
owner of it for all purposes. Only registered Holders will have rights under the
Indenture.
Dresser will issue the notes in fully registered form in denominations
of $1,000 and integral multiples of $1,000. The trustee will initially act as
paying agent and registrar. The notes may be presented for registration of
transfer and exchange at the offices of the registrar. Dresser may change any
paying agent and registrar without notice to Holders.
Dresser will pay principal (and premium, if any) on the notes at the
trustee's corporate office in New York, New York. At Dresser's option, interest
also may be paid by mailing a check to the Holders' registered address.
Any notes that remain outstanding after the completion of the exchange
offer, together with the exchange notes issued in connection with the exchange
offer and the notes issued in April 2001, will be treated as a single class of
securities under the Indenture.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES THE NOTES:
- are unsecured obligations of Dresser; and
- are subordinated in right of payment to all Senior Debt of
Dresser; and
- are guaranteed by all of Dresser's wholly owned domestic
subsidiaries.
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Each guarantee of the notes:
- is an unsecured obligation of the guarantor; and
- is subordinated in right of payment to all Senior Debt of that
guarantor.
PRINCIPAL, MATURITY AND INTEREST
Notes in an aggregate principal amount of $250.0 million were issued in
the notes offering. Additional Notes in an unlimited amount may be issued under
the Indenture from time to time, subject to the limitations set forth under " --
Certain Covenants -- Limitation on Incurrence of Additional Indebtedness." The
notes offered in the notes offering, the exchange notes and any Additional Notes
subsequently issued would be treated as a single class for all purposes under
the Indenture. The notes will mature on April 15, 2011. Interest on the notes
will accrue at the rate per annum of 9.375% and will be payable semiannually in
cash on each April 15 and October 15, commencing April 15, 2002 and accruing
from October 15, 2001. Dresser will make interest payments to the persons who
are registered Holders at the close of business on the April 1 and October 1
immediately preceding the applicable interest payment date. Interest on the
notes will accrue from the most recent date on which interest on the notes was
paid.
The notes do not contain any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION
Except as described below, the notes are not redeemable before April
15, 2006. Thereafter, Dresser may redeem the notes at its option, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve month period commencing on April 15 of the year set
forth below.
YEAR PERCENTAGE
- ---- ----------
2006........................................................................ 104.688%
2007........................................................................ 103.125%
2008........................................................................ 101.563%
2009 and thereafter......................................................... 100.000%
In addition, Dresser must pay all accrued and unpaid interest on the
notes redeemed.
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS
On one or more occasions prior to April 15, 2004, Dresser may use the
net cash proceeds of one or more Equity Offerings to redeem up to 35% of the
principal amount of the notes (including any Additional Notes) issued under the
Indenture at a redemption price of 109.375% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of redemption; provided
that:
(1) at least 65% of the aggregate principal amount of notes (including
any Additional Notes) issued under the Indenture remains outstanding
immediately after any such redemption; and
(2) Dresser makes such redemption not more than 90 days after the
consummation of such Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that Dresser chooses to redeem less than all of the notes,
selection of the notes for redemption will be made by the trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or
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(2) on a pro rata basis, by lot or by such method as the trustee shall
deem fair and appropriate. No notes of a principal amount of $1,000 or
less shall be redeemed in part.
If a partial redemption is made with the proceeds of an Equity
Offering, the trustee will select the notes only on a pro rata basis or on as
nearly a pro rata basis as is practicable. Notice of redemption will be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of notes to be redeemed at its registered address. On and
after the redemption date, interest will cease to accrue on notes or portions
thereof called for redemption as long as Dresser has deposited with the Paying
Agent funds in satisfaction of the applicable redemption price.
SUBORDINATION
The payment of all Obligations on the notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt of Dresser, including its obligations under the New
Credit Facility.
The holders of Senior Debt will be entitled to receive payment in full
in cash or Cash Equivalents of all Obligations due in respect of Senior Debt
(including interest accruing after the commencement of any bankruptcy or other
like proceeding at the rate specified in the applicable Senior Debt whether or
not such interest is an allowed claim in any such proceeding) before the Holders
of notes will be entitled to receive any payment with respect to the notes in
the event of any distribution to creditors of Dresser:
(1) in a liquidation or dissolution of Dresser;
(2) in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to Dresser or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshalling of Dresser's assets and liabilities.
Dresser also may not make any payment in respect of the notes if:
(1) a payment default on Designated Senior Debt occurs and is
continuing; or
(2) any other default occurs and is continuing on Designated Senior
Debt that permits holders of the Designated Senior Debt to accelerate its
maturity and the trustee receives a notice of such default (a "Payment
Blockage Notice") from the Representative of any Designated Senior Debt.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such
default is cured or waived; and
(2) in the case of a nonpayment default, upon the earliest of (x) the
date on which such nonpayment default is cured or waived (so long as no
other event of default exists), (y) 180 days after the date on which the
applicable Payment Blockage Notice is received, and (z) the date on which
the trustee receives notice from the Representative for the applicable
Designated Senior Debt rescinding the Payment Blockage Notice, unless the
maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360
days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been cured or waived for a period of not less than 90 days.
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Dresser must promptly notify holders of Senior Debt if payment of the
notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the
event of a bankruptcy, liquidation or reorganization of Dresser, Holders of the
notes may recover less ratably than creditors of Dresser who are holders of
Senior Debt or trade creditors. See "Risk Factors -- Your right to receive
payments on the notes will be junior to the credit agreement and possibly all
future borrowings."
After giving effect to the offering of the old notes and the
application of the net proceeds from the offering of the old notes, on a pro
forma basis, at December 31, 2001, the aggregate principal amount of Senior Debt
outstanding of Dresser would have been approximately $476.2 million of long-term
indebtedness, $39.3 million of short-term notes and $6.0 million of capital
lease obligations and an additional $70.7 million would have been available for
borrowing under the revolver facility under the New Credit Facility, all of
which would be senior to the notes.
SUBSIDIARY GUARANTEES
The obligations of Dresser under the notes and the Indenture will be
guaranteed (the "Guarantees") on a senior subordinated basis by the Wholly Owned
Domestic Restricted Subsidiaries (each, a "Guarantor"). A form of such Guarantee
will be attached as an exhibit to the Indenture. The Guarantees will be
subordinated in right of payment to all Senior Debt of the Guarantors to the
same extent that the notes are subordinated to Senior Debt of Dresser. The
obligations of each Guarantor under its Guarantee will be limited as necessary
to prevent the Guarantee from constituting a fraudulent conveyance or fraudulent
transfer under applicable law.
Each Guarantor may consolidate with or merge into or sell its assets to
Dresser or another Guarantor without limitation, or with other Persons upon the
terms and conditions set forth in the Indenture. See "Certain Covenants --
Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock
of a Guarantor is sold by Dresser and the sale complies with the provisions set
forth in "Certain Covenants -- Limitation on Asset Sales," the Guarantor's
Guarantee will be released.
CHANGE OF CONTROL
If a Change of Control occurs, each Holder will have the right to
require that Dresser purchase all or a portion of such Holder's notes pursuant
to the offer described below (the "Change of Control Offer"), at a purchase
price equal to 101% of the principal amount thereof plus accrued interest to the
date of purchase. Within 90 days following the date upon which the Change of
Control occurred (or, at Dresser's option, prior to the occurrence of such
Change of Control), Dresser must send, by first-class mail, a notice to each
Holder, which notice shall govern the terms of the Change of Control Offer. Such
notice shall state, among other things, the purchase date, which must be no
earlier than 30 days nor later than 60 days from the date such notice is mailed,
other than as may be required by law (the "Change of Control Payment Date");
provided that any Change of Control Offer made prior to any date of such Change
of Control shall be made only in the reasonable anticipation of such Change of
Control; and provided, further, that Dresser shall not be required to purchase
any notes tendered pursuant to such Change of Control Offer if such Change of
Control does not occur. Holders electing to have a note purchased pursuant to a
Change of Control Offer will be required to surrender the note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
Prior to the mailing of the notice referred to above, but in any event
within 30 days following any Change of Control, Dresser covenants to:
(1) repay in full and terminate all commitments under all Indebtedness
under the New Credit Facility and all other Senior Debt the terms of which
require repayment upon a Change of Control; or
(2) obtain the requisite consents under the New Credit Facility and all
other such Senior Debt to permit the repurchase of the notes as provided
below.
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Dresser's failure to comply with the covenant described in the
immediately preceding sentence shall constitute an Event of Default described in
clause (3) and not in clause (2) under "Events of Default" below. Dresser will
not be required to make a Change of Control Offer upon a Change of Control if a
third party makes the Change of Control Offer in the manner provided for in the
Indenture.
Dresser will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent such laws and regulations are applicable in
connection with the repurchase of notes pursuant to a Change of Control Offer.
To the extent that compliance by Dresser with the provisions of any such
securities laws or regulations conflicts with the provisions of the Indenture,
such compliance shall be deemed not to be a breach of Dresser's obligations
under the "Change of Control" provisions of the Indenture.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
Dresser will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee,
acquire, become liable, contingently or otherwise, with respect to, or otherwise
become responsible for payment of (collectively, "incur") any Indebtedness
(other than Permitted Indebtedness) and Dresser will not permit any of its
Restricted Subsidiaries to issue any Preferred Stock; provided, however, that if
no Default or Event of Default shall have occurred and be continuing at the time
of or as a consequence of the incurrence of any such Indebtedness, Dresser or
any of its Restricted Subsidiaries may incur Indebtedness (including, without
limitation, Acquired Indebtedness) and Restricted Subsidiaries of Dresser may
issue Preferred Stock, in each case if on the date of the incurrence of such
Indebtedness or issuance of such Preferred Stock, after giving effect thereto,
the Consolidated Fixed Charge Coverage Ratio of Dresser would have been greater
than 2.0 to 1.0.
LIMITATION ON RESTRICTED PAYMENTS
Dresser will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of Dresser)
on or in respect of shares of Dresser's Capital Stock to holders of such
Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of Dresser or any direct or indirect parent of Dresser or any
warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock;
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of Dresser that is subordinate or junior in right of payment
to the notes; or
(4) make any Investment (other than Permitted Investments)
(each of the foregoing actions set forth in clauses (1), (2), (3) and (4) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto:
(i) a Default or an Event of Default shall have occurred and be
continuing;
(ii) Dresser is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (other than
Restricted Payments made pursuant to clauses (2) (i), (3) through (13)
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of the following paragraph) (the amount expended for such purposes, if
other than in cash, being the fair market value of such property) shall
exceed the sum, without duplication, of:
(w) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss) of Dresser earned subsequent to the beginning of the first fiscal
quarter commencing after the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date") (treating such period
as a single accounting period); plus
(x) 100% of the aggregate net proceeds (including the fair
market value of property other than cash that would constitute
Marketable Securities or a Permitted Business) received by Dresser from
any Person (other than a Subsidiary of Dresser) from the issuance and
sale subsequent to the Issue Date and on or prior to the Reference Date
of Qualified Capital Stock of Dresser or other securities of Dresser
that have been converted into such Qualified Stock; plus
(y) without duplication of any amounts included in clause
(iii) (x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by Dresser from a holder of Dresser's Capital
Stock; plus
(z) 100% of the aggregate net proceeds (including the fair
market value of property other than cash that would constitute
Marketable Securities or a Permitted Business) of any (A) sale or other
disposition of any Investment (other than a Permitted Investment) made
by Dresser and its Restricted Subsidiaries subsequent to the Issue Date
or (B) dividend from, or the sale of the stock of, an Unrestricted
Subsidiary of Dresser made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of such dividend or
notice of redemption if the dividend or payment of the redemption price, as
the case may be, would have been permitted on the date of declaration or
notice;
(2) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, the acquisition of any
shares of Capital Stock of Dresser (the "Retired Capital Stock") either (i)
solely in exchange for shares of Qualified Capital Stock of Dresser (the
"Refunding Capital Stock") or (ii) through the application of net proceeds
of a substantially concurrent sale for cash (other than to a Subsidiary of
Dresser) of shares of Qualified Capital Stock of Dresser and, in the case
of subclause (i) of this clause (2), if immediately prior to the retirement
of the Retired Capital Stock the declaration and payment of dividends
thereon was permitted under clause (4) of this paragraph, the declaration
and payment of dividends on the Refunding Capital Stock in an aggregate
amount per year no greater than the aggregate amount of dividends per annum
that was declarable and payable on such Retired Capital Stock immediately
prior to such retirement; provided that at the time of the declaration of
any such dividends on the Refunding Capital Stock, no Default or Event of
Default shall have occurred and be continuing or shall occur as a
consequence thereof,
(3) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, the acquisition of any
indebtedness of Dresser that is subordinate or junior in right of payment
to the notes either (i) solely in exchange for shares of Qualified Capital
Stock of Dresser or (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary of
Dresser) of (A) shares of Qualified Capital Stock of Dresser or (B)
Refinancing Indebtedness;
(4) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, the declaration and
payment of dividends to holders of any class or series of Disqualified
Capital Stock issued after the Issue Date (including, without limitation,
the declaration and payment of dividends on Refunding Capital Stock in
excess of the dividends declarable and payable thereon pursuant to clause
(2) of this paragraph); provided that, at the time of such issuance,
Dresser, after giving effect to such issuance on a pro forma basis, would
have been able to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the proviso of the "Limitation on
Incurrence of Additional Indebtedness" covenant;
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(5) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, the redemption or
repurchase of Dresser's common equity or options in respect thereof, in
each case in connection with the repurchase provisions of employee stock
option or stock purchase agreements or other agreements to compensate
management employees; provided that all such redemptions or repurchases
pursuant to this clause (5) shall not exceed $5.0 million (with unused
amounts in any fiscal year being carried over to succeeding fiscal years
subject to a maximum of $10.0 million in any fiscal year) in any fiscal
year (which amount shall be increased by the amount of any net cash
proceeds received from the sale since the Issue Date of Capital Stock
(other than Disqualified Capital Stock) to members of Dresser's management
team that have not otherwise been applied to the payment of Restricted
Payments pursuant to the terms of clause (iii) of the immediately preceding
paragraph and by the cash proceeds of any "key-man" life insurance policies
that are used to make such redemptions or repurchases) since the Issue
Date; provided, further that the cancellation of Indebtedness owing to
Dresser from members of management of Dresser or any of its Restricted
Subsidiaries in connection with any repurchase of Capital Stock of Dresser
(or warrants or options or rights to acquire such Capital Stock) will not
be deemed to constitute a Restricted Payment under the Indenture;
(6) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof,
(7) all payments and transactions provided for in the Transaction
Agreements as the same are in effect on the Issue Date;
(8) distributions or payments of Receivable Fees;
(9) any purchase or repayment of Subordinated Indebtedness upon a
Change of Control or an Asset Sale to the extent required by the agreement
governing such Subordinated Indebtedness but only if:
(a) in the case of a Change of Control, Dresser shall have
complied with all of its obligations described under " -- Change of
Control" and purchased all the notes tendered pursuant to the Offer to
Purchase required thereby prior to purchasing or repaying such
Subordinated Indebtedness or (b) in the case of an Asset Sale, Dresser
shall have applied the Net Cash Proceeds from such Asset Sale in
accordance with the covenant described under " -- Limitation on Asset
Sales;" provided that (i) in either case the purchase price (stated as
a percentage of principal amount or issue price plus accrued original
discount, if less) of such Subordinated Indebtedness shall not be
greater than the price (stated as a percentage of principal amount) of
the notes pursuant to any Offer to Purchase, and (ii) in the case of an
Asset Sale, the aggregate amount of such Subordinated Indebtedness that
Dresser may purchase or repay shall not exceed the amount of unutilized
Net Cash Proceeds, if any, remaining after Dresser has purchased all
notes tendered pursuant to such Offer to Purchase;
(10) any other Investment made in a Permitted Business which, together
with all other Investments made pursuant to this clause (10) since the date
of the Indenture, does not exceed $5.0 million (in each case, after giving
effect to all subsequent reductions in the amount of any Investment made
pursuant to this clause (10), either as a result of (i) the repayment or
disposition thereof for cash or (ii) the redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary (valued, proportionate to Dresser's
equity interest in that Subsidiary at the time of that redesignation, at
the fair market value of the net assets of that Subsidiary at the time of
that redesignation), in the case of clauses (i) and (ii), not to exceed the
amount of the Restricted Investment previously made pursuant to this clause
(10)); provided that no Default or Event of Default shall have occurred and
be continuing immediately after making that Investment;
(11) distributions to DEG Acquisitions, LLC provided for in the Tax
Sharing Agreement;
(12) distributions to DEG Acquisitions, LLC to pay administrative and
other operating expenses in an aggregate amount not to exceed $500,000 per
fiscal year; and
(13) if no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof, other Restricted
Payments in an aggregate amount not to exceed $25.0 million.
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In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the immediately
preceding paragraph, (a) amounts expended pursuant to clauses (1) and (2) (ii)
shall be included in such calculation, and (b) amounts expended pursuant to
clauses (2) (i), (3) through (13) shall be excluded from such calculation.
LIMITATION ON ASSET SALES
Dresser will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Dresser or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of,
(2) at least 75% of the consideration received by Dresser or the
applicable Restricted Subsidiary, as the case may be, from such Asset Sale
shall be in the form of Productive Assets, cash and/or Cash Equivalents and
shall be received at the time of such disposition, provided that the amount
of:
(A) liabilities (as shown on Dresser's or such Restricted
Subsidiary's most recent balance sheet) of Dresser or any such
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the notes) that are assumed by the transferee of any
such assets and for which Dresser and its Restricted Subsidiaries
receive a written release from all creditors;
(B) any notes or other obligations received by Dresser or any
such Restricted Subsidiary from such transferee that are converted by
Dresser or such Restricted Subsidiary into cash within 180 days of the
receipt thereof (to the extent of the cash received); and
(C) any Designated Noncash Consideration received by Dresser
or any of its Restricted Subsidiaries in such Asset Sale having an
aggregate fair market value, when taken together with all other
Designated Noncash Consideration received pursuant to this clause (C)
that is at that time outstanding, not to exceed 15% of Total Assets at
the time of the receipt of such Designated Noncash Consideration (A)
with the fair market value of each item of Designated Noncash
Consideration being measured at the time received and without giving
effect to subsequent changes in value and (B) with respect to any
Designated Noncash Consideration in excess of $50.0 million, the Board
of Directors' determination of the fair market value of such Designated
Noncash Consideration must be based upon an opinion or appraisal issued
by an accounting, appraisal or investment banking firm of national
standing shall be deemed to be cash solely for the purposes of this
provision or for purposes of the second paragraph of this covenant; and
(3) upon the consummation of an Asset Sale, Dresser shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating
to such Asset Sale within 365 days of receipt thereof:
(A) to prepay any Senior Debt or Indebtedness of a Restricted
Subsidiary of Dresser that is not a Guarantor and, in the case of any
such Indebtedness under any revolving credit facility, effect a
corresponding reduction in the availability under such revolving credit
facility (or effect a permanent reduction in the availability under
such revolving credit facility regardless of the fact that no
prepayment is required in order to do so),
(B) to reinvest in Productive Assets, or
(C) a combination of prepayment and investment permitted by
the foregoing clauses (A) and (B).
Pending the final application of any such Net Cash Proceeds, Dresser or
such Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Cash Proceeds in Cash
Equivalents. On the 366th day after an Asset Sale or such earlier date, if any,
as the Board of Directors of Dresser or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clause (3)(A), (3)(B) or (3)(C) of the next preceding paragraph (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been so applied on or before such Net Proceeds Offer Trigger Date
(each, a "Net Proceeds Offer Amount") shall be applied by Dresser or such
Restricted
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Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 60 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on a
pro rata basis, the maximum amount of notes that may be purchased with the Net
Proceeds Offer Amount at a price equal to 100% of the principal amount of the
notes to be purchased, plus accrued and unpaid interest thereon, if any, to the
date of purchase; provided, however, that if at any time any non-cash
consideration (including any Designated Noncash Consideration) received by
Dresser or any Restricted Subsidiary of Dresser, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. Notwithstanding the foregoing, if a
Net Proceeds Offer Amount is less than $15.0 million, the application of the Net
Cash Proceeds constituting such Net Proceeds Offer Amount to a Net Proceeds
Offer may be deferred until such time as such Net Proceeds Offer Amount plus the
aggregate amount of all Net Proceeds Offer Amounts arising subsequent to the Net
Proceeds Offer Trigger Date relating to such initial Net Proceeds Offer Amount
from all Asset Sales by Dresser and its Restricted Subsidiaries aggregate at
least $15.0 million, at which time Dresser or such Restricted Subsidiary shall
apply all Net Cash Proceeds constituting all Net Proceeds Offer Amounts that
have been so deferred to make a Net Proceeds Offer (the first date the aggregate
of all such deferred Net Proceeds Offer Amounts is equal to $15.0 million or
more shall be deemed to be a Net Proceeds Offer Trigger Date).
Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 30 days following the Net Proceeds Offer
Trigger Date, with a copy to the trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
notes in an amount exceeding the Net Proceeds Offer Amount, notes of tendering
Holders will be purchased on a pro rata basis (based on amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 business days or such longer
period as may be required by law. To the extent that the aggregate amount of
notes tendered pursuant to a Net Proceeds Offer is less than the Net Proceeds
Offer Amount, Dresser may use any remaining Net Proceeds Offer Amount for
general corporate purposes or for any other purpose not prohibited by the
Indenture. Upon completion of any such Net Proceeds Offer, the Net Proceeds
Offer Amount shall be reset at zero.
Dresser will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Net Proceeds Offer. To the extent that
compliance by Dresser with the provisions of any securities laws or regulations
conflicts with the "Asset Sale" provisions of the Indenture, such compliance
shall be deemed not to be a breach of Dresser's obligations under the "Asset
Sale" provisions of the Indenture.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES
Dresser will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or consensual restriction
on the ability of any Restricted Subsidiary of Dresser to:
(1) pay dividends or make any other distributions on or in respect of
its Capital Stock;
(2) make loans or advances or pay any Indebtedness or other obligation
owed to Dresser or any other Restricted Subsidiary of Dresser; or
(3) transfer any of its property or assets to Dresser or any other
Restricted Subsidiary of Dresser, except for such encumbrances or
restrictions existing under or by reason of
(A) applicable law;
(B) the notes or the Indenture;
(C) non-assignment provisions of any contract or any lease of
any Restricted Subsidiary of Dresser entered into in the ordinary
course of business;
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(D) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired;
(E) the New Credit Facility;
(F) agreements existing on the Issue Date to the extent and in
the manner such agreements are in effect on the Issue Date;
(G) restrictions on the transfer of assets subject to any Lien
permitted under the Indenture imposed by the holder of such Lien;
(H) restrictions imposed by any agreement to sell assets or
Capital Stock permitted under the Indenture to any Person pending the
closing of such sale;
(I) any agreement or instrument governing Capital Stock of any
Person that is acquired;
(J) any Purchase Money Note or other Indebtedness or other
contractual requirements of a Securitization Entity in connection with
a Qualified Securitization Transaction; provided that such restrictions
apply only to such Securitization Entity;
(K) other Indebtedness outstanding on the Issue Date or
permitted to be issued or incurred under the Indenture; provided that
any such restrictions are ordinary and customary with respect to the
type of Indebtedness being incurred or Preferred Stock being issued
(under the relevant circumstances) if the Board of Directors of Dresser
determines that any such encumbrance or restriction will not materially
adversely affect Dresser's ability to make principal or interest
payments on the notes;
(L) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary
course of business; and
(M) any encumbrances or restrictions imposed by any
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of the contracts,
instruments or obligations referred to in clauses (A) through (L)
above; provided that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or
refinancings are, in the good faith judgment of Dresser's Board of
Directors (evidenced by a Board Resolution), whose judgment shall be
conclusively binding, not materially more restrictive with respect to
such dividend and other payment restrictions than those contained in
the dividend or other payment restrictions prior to such amendment,
modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
LIMITATION ON LIENS
Dresser will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist any Liens of any kind against or upon any property or assets or
any proceeds therefrom of Dresser or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, in each case to secure
Indebtedness, unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the notes, the notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens; and
(2) in all other cases, the notes are equally and ratably secured,
except for:
(a) Liens existing as of the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date;
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(b) Liens securing Senior Debt;
(c) Liens securing the notes and the Guarantees;
(d) Liens of Dresser or a Restricted Subsidiary of Dresser on
assets of any Restricted Subsidiary of Dresser;
(e) Liens securing Refinancing Indebtedness which is incurred
to Refinance any Indebtedness that was secured by a Lien permitted
under the Indenture and that has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens do not
extend to or cover any property or assets of Dresser or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced;
and
(f) Permitted Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT
Dresser will not, and will not permit any Guarantor to, incur or suffer
to exist any Indebtedness that is senior in right of payment to the notes or
such Guarantor's Guarantee, as the case may be, and subordinate in right of
payment to any other Indebtedness of Dresser or such Guarantor, as the case may
be.
MERGER, CONSOLIDATION AND SALE OF ASSETS
Dresser will not, in a single transaction or series of related
transactions, consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary of Dresser to sell, assign, transfer, lease, convey or
otherwise dispose of) all or substantially all of Dresser's assets (determined
on a consolidated basis for Dresser and Dresser's Restricted Subsidiaries)
whether as an entirety or substantially as an entirety to any Person unless:
(1) either:
(a) Dresser shall be the surviving or continuing corporation;
or
(b) the Person (if other than Dresser) formed by such
consolidation or into which Dresser is merged or the Person that
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of Dresser and of Dresser's
Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity"):
(x) shall be a corporation organized and validly
existing under the laws of the United States or any State
thereof or the District of Columbia; and
(y) shall expressly assume, by supplemental indenture
(in form and substance satisfactory to the trustee) executed
and delivered to the trustee, the due and punctual payment of
the principal of and premium, if any, and interest on all of
the notes and the performance of every covenant of the notes,
the Indenture and the Registration Rights Agreement on the
part of Dresser to be performed or observed;
(2) except in the case of a merger of Dresser with or into a Wholly
Owned Restricted Subsidiary of Dresser and except in the case of a merger
entered into solely for the purpose of reincorporating Dresser in another
jurisdiction, immediately after giving effect to such transaction and the
assumption contemplated by clause (1) (b) (y) above (including giving
effect to any Indebtedness and Acquired Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction), Dresser or such Surviving Entity, as the case may be, shall
be able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the proviso of the "Limitation on
Incurrence of Additional Indebtedness" covenant;
(3) except in the case of a merger of Dresser with or into a Wholly
Owned Restricted Subsidiary of Dresser and except in the case of a merger
entered into solely for the purpose of reincorporating Dresser in
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another jurisdiction, immediately after giving effect to such
transaction and the assumption contemplated by clause (1) (b) (y) above
(including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted or to be released in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and
(4) Dresser or the Surviving Entity shall have delivered to the trustee
an officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or
other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with
the applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been
satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of Dresser the Capital Stock of which constitutes all or
substantially all of the properties and assets of Dresser shall be deemed to be
the transfer of all or substantially all of the properties and assets of
Dresser. However, transfers of assets between or among Dresser and its
Restricted Subsidiaries will not be subject to the foregoing covenant.
The Indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of Dresser in
accordance with the foregoing in which Dresser is not the continuing
corporation, the successor Person formed by such consolidation or into which
Dresser is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
Dresser under the Indenture and the notes with the same effect as if such
Surviving Entity had been named as such and that, in the event of a conveyance,
lease or transfer, the conveyor, lessor or transferor will be released from the
provisions of the Indenture.
Each Guarantor (other than any Guarantor whose Guarantee is to be
released in accordance with the terms of its Guarantee and the Indenture in
connection with any transaction complying with the provisions of " -- Limitation
on Asset Sales") will not, and Dresser will not cause or permit any Guarantor
to, consolidate with or merge with or into any Person other than Dresser or any
other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) is a corporation organized and existing under
the laws of the United States or any State thereof or the District of
Columbia;
(2) such entity assumes by supplemental indenture all of the
obligations of the Guarantor on its Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, Dresser could satisfy the
provisions of clause (2) of the first paragraph of this covenant.
Any merger or consolidation of a Guarantor with and into Dresser (with
Dresser being the surviving entity) or another Guarantor need only comply with
clause (4) of the first paragraph of this covenant.
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LIMITATIONS ON TRANSACTIONS WITH AFFILIATES
Dresser will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or permit to occur any
transaction or series of related transactions (including, without limitation,
the purchase, sale, lease or exchange of any property or the rendering of any
service) with, or for the benefit of, any of its Affiliates (an "Affiliate
Transaction"), other than Affiliate Transactions on terms that are not
materially less favorable than those that might reasonably have been obtained in
a comparable transaction at such time on an arm's-length basis from a Person
that is not an Affiliate of Dresser or such Restricted Subsidiary; provided,
however, that for an Affiliate Transaction with an aggregate value of $7.5
million or more, at Dresser's option, either:
(1) a majority of the disinterested members of the Board of Directors
of Dresser shall determine in good faith that such Affiliate Transaction is
on terms that are not materially less favorable than those that might
reasonably have been obtained in a comparable transaction at such time on
an arm's-length basis from a Person that is not an Affiliate of Dresser; or
(2) the Board of Directors of Dresser or any such Restricted Subsidiary
party to such Affiliate Transaction shall obtain an opinion from a
nationally recognized investment banking, appraisal or accounting firm that
such Affiliate Transaction is on terms that are not materially less
favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person
that is not an Affiliate of Dresser.
The restrictions set forth in the first paragraph of this covenant
shall not apply to:
(1) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees or consultants of Dresser or any
Restricted Subsidiary of Dresser as determined in good faith by Dresser's
Board of Directors or senior management;
(2) transactions exclusively between or among Dresser and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by
the Indenture;
(3) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not more disadvantageous to the
Holders in any material respect than the original agreement as in effect on
the Issue Date;
(4) Restricted Payments or Permitted Investments permitted by the
Indenture;
(5) transactions effected as part of a Qualified Securitization
Transaction;
(6) the payment of customary annual management, consulting and advisory
fees and related expenses to the Permitted Holders and their Affiliates
made pursuant to any financial advisory, financing, underwriting or
placement agreement or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or
divestitures which are approved by the Board of Directors of Dresser or
such Restricted Subsidiary in good faith;
(7) payments or loans to employees or consultants that are approved by
the Board of Directors of Dresser in good faith;
(8) sales of Qualified Capital Stock;
(9) the existence of, or the performance by Dresser or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the Issue
Date and any similar agreements which it may enter into thereafter;
provided, however, that the existence of, or the performance by Dresser or
any of its Restricted Subsidiaries of obligations under, any future
amendment to any such existing agreement or under any
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similar agreement entered into after the Issue Date shall only be
permitted by this clause (9) to the extent that the terms of any such
amendment or new agreement are not disadvantageous to the Holders of the
notes in any material respect;
(10) any payments or transactions provided for in any of the
Transaction Agreements;
(11) distributions to DEG Acquisitions, LLC provided for in the Tax
Sharing Agreement; and
(12) distributions to DEG Acquisitions, LLC to pay administrative and
other operating expenses in an aggregate amount not to exceed $500,000 per
fiscal year.
FUTURE GUARANTEES BY WHOLLY OWNED DOMESTIC RESTRICTED SUBSIDIARIES
Dresser will not create or acquire another Wholly Owned Domestic
Restricted Subsidiary unless such Wholly Owned Domestic Restricted Subsidiary
executes and delivers a supplemental indenture to the Indenture, providing for a
Guarantee of payment of the notes by such Wholly Owned Domestic Restricted
Subsidiary on the same terms as set forth in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Wholly Owned
Domestic Restricted Subsidiary shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the trustee or any Holder, upon any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of Dresser of all of Dresser's Capital Stock in, or all or
substantially all of the assets of, such Wholly Owned Domestic Restricted
Subsidiary; provided that such sale or disposition of such Capital Stock or
assets is otherwise in compliance with the terms of the Indenture.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Dresser will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee any Indebtedness of Dresser that is pari passu with or
subordinate in right of payment to the notes ("Guaranteed Indebtedness"), unless
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee on the same
terms as set forth in the Indenture of payment of the notes by such Restricted
Subsidiary and (ii) to the extent permitted by law, such Restricted Subsidiary
waives and agrees that it will not in any manner whatsoever claim or take the
benefit or advantage of any rights of reimbursement, indemnity or subrogation or
any other rights against Dresser or any other Restricted Subsidiary as a result
of any payment by such Restricted Subsidiary under its Guarantee; provided that
this paragraph shall not be applicable to any guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari
passu with the notes, then the guarantee of such Guaranteed Indebtedness shall
be pari passu with, or subordinated to, the Guarantee or (B) subordinated to the
notes, then the guarantee of such Guaranteed Indebtedness shall be subordinated
to the Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the notes.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the trustee or any Holder, upon any sale or other disposition (by
merger or otherwise), to any Person which is not a Restricted Subsidiary of
Dresser, of all of Dresser's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary; provided that such sale or disposition of
such Capital Stock or assets is otherwise in compliance with the terms of the
Indenture.
CONDUCT OF BUSINESS
Dresser will not, and will not permit any of its Restricted
Subsidiaries to, engage in any businesses a majority of whose revenues are not
derived from businesses that are the same as, or reasonably similar, ancillary
or related to, or a reasonable extension, development or expansion of, the
businesses in which Dresser and its Restricted Subsidiaries are engaged on the
Issue Date.
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REPORTS TO HOLDERS
Whether or not required by the rules and regulations of the Commission,
so long as any notes are outstanding, Dresser will furnish to the Holders of
notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Dresser were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
that describes the financial condition and results of operations of Dresser
and its consolidated Subsidiaries (showing in reasonable detail, either on
the face of the financial statements or in the footnotes thereto and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial condition and results of operations of Dresser
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of Dresser) and,
with respect to the annual information only, a report thereon by Dresser's
certified independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Dresser were required to file such reports, in
each case, within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, whether or not required by
the rules and regulations of the Commission, Dresser will file a copy of all
such information and reports with the Commission for public availability within
the time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, Dresser
has agreed that, for so long as any notes remain outstanding, it will furnish to
the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d) (4)
under the Securities Act.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of
Default:"
(1) the failure to pay interest on any notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(2) the failure to pay the principal of any notes when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer on the date
specified for such payment in the applicable offer to purchase) (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after Dresser receives written notice specifying the default
(and demanding that such default be remedied) from the trustee or the
Holders of at least 25% of the outstanding principal amount of the notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default
with such notice requirement but without such passage of time requirement);
(4) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of Dresser or any Restricted Subsidiary of Dresser
(other than a Securitization Entity) which failure continues for at least
20 days, or the acceleration of the final stated maturity of any such
Indebtedness, which acceleration remains uncured or unrescinded for at
least 20 days, if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated (in each case with respect to which the 20-day period described
above has passed), aggregates $25.0 million or more at any time;
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(5) one or more judgments in an aggregate amount in excess of $25.0
million shall have been rendered against Dresser or any of its Significant
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for
a period of 60 days after such judgment or judgments become final and
nonappealable;
(6) certain events of bankruptcy affecting Dresser or any of its
Significant Subsidiaries; or
(7) any Guarantee of a Significant Subsidiary ceases to be in full
force and effect or any Guarantee of a Significant Subsidiary is declared
to be null and void and unenforceable or any Guarantee of a Significant
Subsidiary is found to be invalid or any Guarantor that is a Significant
Subsidiary denies its liability under its Guarantee (other than by reason
of release of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in
clause (6) above with respect to Dresser) shall occur and be continuing, the
trustee or the Holders of at least 25% in principal amount of outstanding notes
may declare the principal of and accrued interest on all the notes to be due and
payable by notice in writing to Dresser and the trustee specifying the
applicable Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same:
(1) shall become immediately due and payable; or
(2) if there are any amounts outstanding under the New Credit Facility,
shall become immediately due and payable upon the first to occur of an
acceleration under the New Credit Facility or five business days after
receipt by Dresser and the Representative under the New Credit Facility of
such Acceleration Notice but only if such Event of Default is then
continuing.
If an Event of Default specified in clause (6) above with respect to
Dresser occurs and is continuing, then all unpaid principal of and premium, if
any, and accrued and unpaid interest on all of the outstanding notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the notes as described in the next preceding
paragraph, the Holders of a majority in principal amount of the notes may
rescind and cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid;
(4) if Dresser has paid the trustee its reasonable compensation and
reimbursed the trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the description above of Events of
Default, the trustee shall have received an officers' certificate and an
opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the notes may waive
any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any notes.
Holders of the notes may not enforce the Indenture or the notes except
as provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the trustee, the trustee is under no
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obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee.
Under the Indenture, Dresser is required to provide an officers'
certificate to the trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Dresser may, at its option and at any time, elect to have its
Obligations and the Obligations of the Guarantors discharged with respect to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that Dresser
shall be deemed to have paid and discharged the entire indebtedness represented
by the outstanding notes, except for:
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the notes when such
payments are due;
(2) Dresser's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the trustee and
Dresser's obligations in connection therewith, and
(4) the Legal Defeasance provisions of the Indenture.
In addition, Dresser may, at its option and at any time, elect to have
the Obligations of Dresser released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such Obligations shall not constitute a Default or Event of
Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including nonpayment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Dresser must irrevocably deposit with the trustee, in trust, for
the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, Dresser shall have delivered to
the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that:
(a) Dresser has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(b) since the date of the Indenture, there has been a change
in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders will
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not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Dresser shall have delivered to
the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or an Event of
Default resulting from the borrowing of funds to be applied to such deposit
and the grant of any Lien securing such borrowing) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of or constitute a default under the Indenture (other
than a Default or an Event of Default resulting from the borrowing of funds
to be applied to such deposit and the grant of any Lien securing such
borrowing) or any other material agreement or instrument to which Dresser
or any of its Subsidiaries is a party or by which Dresser or any of its
Subsidiaries is bound;
(6) Dresser shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by Dresser with the
intent of preferring the Holders over any other creditors of Dresser or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of Dresser or others;
(7) Dresser shall have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with; and
(8) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by
clause (2) above with respect to a Legal Defeasance need not be delivered if all
notes not theretofore delivered to the trustee for cancellation (1) have become
due and payable, or (2) will become due and payable on the maturity date within
one year under arrangements satisfactory to the trustee for the giving of notice
of redemption by the trustee in the name, and at the expense, of Dresser.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
notes, as expressly provided for in the Indenture) as to all outstanding notes
when
(1) either:
(a) all the notes theretofore authenticated and delivered
(except lost, stolen or destroyed notes which have been replaced or
paid and notes for whose payment money has theretofore been deposited
in trust or segregated and held in trust by Dresser and thereafter
repaid to Dresser or discharged from such trust) have been delivered
to the trustee for cancellation; or
(b) all notes not theretofore delivered to the trustee for
cancellation have become due and payable, pursuant to an optional
redemption notice or otherwise, and Dresser has irrevocably deposited
or caused to be deposited with the trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the notes
not theretofore delivered to the trustee for cancellation, for
principal of, premium, if any, and interest on the notes to the date
of deposit together with irrevocable instructions from Dresser
directing the trustee to apply such funds to the payment thereof at
maturity or redemption, as the case may be; and
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(2) Dresser has paid all other sums payable under the Indenture by
Dresser.
The trustee will acknowledge the satisfaction and discharge of the
Indenture if Dresser has delivered to the trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, Dresser, the Guarantors and the trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may:
(1) reduce the amount of notes whose Holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing
the fixed maturity of any notes, or change the date on which any notes may
be subject to redemption or reduce the redemption price therefore;
(4) make any notes payable in money other than that stated in the
notes;
(5) make any change in the provisions of the Indenture protecting the
right of each Holder to receive payment of principal of and interest on
such Note on or after the due date thereof or to bring suit to enforce
such payment, or permitting Holders of a majority in principal amount of
notes to waive Defaults or Events of Default;
(6) after Dresser's obligation to purchase notes arises thereunder,
amend, change or modify in any material respect the obligation of Dresser
to make and consummate a Change of Control Offer in the event of a Change
of Control or modify any of the provisions or definitions with respect
thereto after a Change of Control has occurred;
(7) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the notes or any
Guarantee in a manner which adversely affects the Holders; or
(8) release any Guarantor that is a Significant Subsidiary from any of
its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event
of Default, the trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
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The Indenture and the provisions of the TIA contain certain limitations
on the rights of the trustee, should it become a creditor of Dresser, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
trustee is permitted to engage in other transactions; provided that if the
trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
Dresser or at the time it merges or consolidates with or into Dresser or any of
its Restricted Subsidiaries or that is assumed in connection with the
acquisition of assets from such Person and in each case not incurred by such
Person in connection with, or in anticipation or contemplation of, such Person
becoming a Restricted Subsidiary of Dresser or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing. Notwithstanding the foregoing, no Person (other than Dresser or any
Subsidiary of Dresser) in whom a Securitization Entity makes an Investment in
connection with a Qualified Securitization Transaction shall be deemed to be an
Affiliate of Dresser or any of its Subsidiaries solely by reason of such
Investment.
"Asset Acquisition" means (a) an Investment by Dresser or any
Restricted Subsidiary of Dresser in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of Dresser, or shall be merged with
or into or consolidated with Dresser or any Restricted Subsidiary of Dresser, or
(b) the acquisition by Dresser or any Restricted Subsidiary of Dresser of the
assets of any Person (other than a Restricted Subsidiary of Dresser) which
constitute all or substantially all of the assets of such Person or comprises
any division or line of business of such Person or any other properties or
assets of such Person, other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than leases entered into in the ordinary course of
business), assignment or other transfer for value by Dresser or any of its
Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any
Person other than Dresser or a Restricted Subsidiary of Dresser of:
(1) any Capital Stock of any Restricted Subsidiary of Dresser, or
(2) any other property or assets of Dresser or any Restricted
Subsidiary of Dresser other than in the ordinary course of business;
provided, however, that Asset Sales shall not include:
(a) a transaction or series of related transactions for which
Dresser or its Restricted Subsidiaries receive aggregate consideration
of less than $5.0 million;
(b) the sale, lease, conveyance, disposition or other transfer
of all or substantially all of the assets of Dresser as permitted under
" -- Certain Covenants -- Merger, Consolidation and Sale of Assets" or
any disposition that constitutes a Change of Control;
(c) the sale or discount, in each case without recourse, of
accounts receivable arising in the ordinary course of business, but
only in connection with the compromise or collection thereof;
93
(d) disposals or replacements of obsolete equipment in the
ordinary course of business;
(e) the sale, lease, conveyance, disposition or other transfer
by Dresser or any Restricted Subsidiary of Dresser of assets or
property to one or more Restricted Subsidiaries of Dresser in
connection with Investments permitted under the "Limitation on
Restricted Payments" covenant or pursuant to any Permitted Investment;
(f) sales of accounts receivable, equipment and related assets
(including contract rights) of the type specified in the definition of
Qualified Securitization Transaction to a Securitization Entity for the
fair market value thereof, including cash in an amount at least equal
to 75% of the fair market value thereof as determined in accordance
with GAAP. For the purposes of this clause (f), Purchase Money Notes
shall be deemed to be cash;
(g) dispositions in the ordinary course of business;
(h) foreclosures on assets;
(i) any exchange of like property pursuant to Section 1031 of
the Internal Revenue code of 1986, as amended, for use in a Permitted
Business;
(j) a Permitted Investment or a Restricted Payment that is
permitted by the covenant described under the caption " -- Limitation
on Restricted Payments";
(k) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied
to the purchase price of similar replacement equipment; and
(1) in the ordinary course of business, the license of
patents, trademarks, copyrights and know-how to third Persons.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
trustee.
"Capital Stock" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, rights to purchase, warrants, options, participations or
other equivalents (however designated and whether or not voting) of
corporate stock, including each class of Common Stock and Preferred Stock
of such Person or options to purchase the same; and
(2) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP. For purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
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(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either S&P or Moody's;
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-2 from S&P or at least P-2 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the
date of acquisition thereof combined capital and surplus of not less than
$250.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above;
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above; and
(7) in the case of any Subsidiary organized or having its principal
place of business outside the United States, investments denominated in the
currency of the jurisdiction in which that Subsidiary is organized or has
its principal place of business which are similar to the items specified in
clauses (1), (2), (4), (5) and (6) above.
"Change of Control" means the occurrence of one or more of the
following events:
(1) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of Dresser to any Person or group of related Persons for purposes of
Section 13 (d) of the Exchange Act (a "Group"), other than to the Permitted
Holders or their Related Parties or any Permitted Group;
(2) the approval by the holders of Capital Stock of Dresser of any plan
or proposal for the liquidation or dissolution of Dresser (whether or not
otherwise in compliance with the provisions of the Indenture);
(3) any Person or Group (other than the Permitted Holders or their
Related Parties or any Permitted Group) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50%
of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of Dresser; or
(4) the first day on which a majority of the members of the Board of
Directors of Dresser are not Continuing Directors.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any
period, the sum (without duplication) of such Person's:
(1) Consolidated Net Income, and
(2) to the extent Consolidated Net Income has been reduced thereby:
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(a) all income taxes and foreign withholding taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance
with GAAP for such period;
(b) Consolidated Interest Expense;
(c) Consolidated Non-cash Charges less any non-cash items
increasing Consolidated Net Income for such period (other than normal
accruals in the ordinary course of business);
(d) any cash charges resulting from the Transactions and the
related financings that, in each case, are incurred prior to the six
month anniversary of the Issue Date; and
(e) any non-capitalized transactions costs incurred in
connection with actual, proposed or abandoned financings, acquisitions
or divestitures, including, but not limited to, financing and
refinancing fees and costs incurred in connection with the
Transactions,
all as determined on a consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of (x) Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four-Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to (y) Consolidated Fixed Charges of such Person for the Four-Quarter
Period. In addition to and without limitation of the foregoing, for purposes of
this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
(1) the incurrence or repayment of any Indebtedness or the issuance of
any Designated Preferred Stock of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to
the need to make such calculation and any incurrence or repayment of other
Indebtedness or the issuance or redemption of other Preferred Stock (and
the application of the proceeds thereof), other than the incurrence or
repayment of Indebtedness in the ordinary course of business for working
capital purposes pursuant to revolving credit facilities, occurring during
the Four-Quarter Period or at any time subsequent to the last day of the
Four-Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment or issuance or redemption, as the case may be (and
the application of the proceeds thereof), had occurred on the first day of
the Four-Quarter Period; and
(2) Asset Sales or other dispositions or Asset Acquisitions (including,
without limitation, (A) any Asset Acquisition giving rise to the need to
make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being
liable for Acquired Indebtedness, and (B) any Consolidated EBITDA including
any pro forma expense and cost reductions and other operating improvements
that have occurred or are reasonably expected to occur in the reasonable
judgment of the chief financial officer of Dresser (regardless of whether
those cost savings or operating improvements could then be reflected in pro
forma financial statements in accordance with GAAP, Regulation S-X
promulgated under the Securities Act or any other regulation or policy of
the SEC related thereto) attributable to the assets which are the subject
of the Asset Acquisition or Asset Sale or other disposition and without
regard to clause (4) of the definition of Consolidated Net Income)
occurring during the Four-Quarter Period or at any time subsequent to the
last day of the Four-Quarter Period and on or prior to the Transaction
Date, as if such Asset Sale or other disposition or Asset Acquisition
(including the incurrence or assumption of any such Acquired Indebtedness)
occurred on the first day of the Four-Quarter Period. If such Person or any
of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to
the incurrence of such guaranteed Indebtedness as if such Person or any
Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such other Indebtedness that was so guaranteed.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes
of determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio":
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(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date; and
(2) notwithstanding clause (1) of this paragraph, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by agreements relating to Interest Swap Obligations, shall be
deemed to accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all cash dividend payments on any
series of Preferred Stock of such Person times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current effective consolidated federal, state and local income tax
rate of such Person, expressed as a decimal; provided that with respect to
any series of Preferred Stock that was not paid cash dividends during such
period but that is eligible to be paid cash dividends during any period
prior to the maturity date of the notes, cash dividends shall be deemed to
have been paid with respect to such series of Preferred Stock during such
period for purposes of this clause (2).
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum of, without duplication:
(1) the aggregate of all cash and non-cash interest expense with
respect to all outstanding Indebtedness of such Person and its Restricted
Subsidiaries, including the net costs associated with Interest Swap
Obligations, for such period determined on a consolidated basis in
conformity with GAAP, but excluding amortization or write-off of debt
issuance costs;
(2) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period; and
(3) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP and without any deduction in respect of Preferred Stock dividends;
provided that there shall be excluded therefrom:
(1) gains and losses from Asset Sales (without regard to the $5.0
million limitation set forth in the definition thereof) and the related tax
effects according to GAAP;
(2) gains and losses due solely to fluctuations in currency values and
the related tax effects according to GAAP;
(3) all extraordinary, unusual or nonrecurring charges, gains and
losses (including, without limitation, all restructuring costs and any
expense or charge related to the repurchase of Capital Stock or warrants or
options to purchase Capital Stock) and the related tax effects according to
GAAP;
(4) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes a Restricted
Subsidiary of the referent Person or is merged or consolidated with or into
such Person or any Restricted Subsidiary of such Person;
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(5) the net income (or loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is prohibited by
contract, operation of law or otherwise;
(6) the net loss of any Person, other than a Restricted Subsidiary of
the referent Person;
(7) the net income of any Person, other than a Restricted Subsidiary of
the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or a Restricted Subsidiary of the
referent Person by such Person;
(8) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or
transfer of assets; and
(9) any non-cash compensation charges, including any arising from
existing stock options resulting from any merger or recapitalization
transaction.
"Consolidated Net Tangible Assets" means, with respect to any Person,
the total assets minus unamortized deferred tax assets, goodwill, patents,
trademarks, service marks, trade names, copyrights and all other items which
would be treated as intangibles, in each case on the most recent consolidated
balance sheet of such Person and its Restricted Subsidiaries prepared in
accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to any Person, for
any period, the aggregate depreciation, amortization and other non-cash charges
and expenses of such Person and its Restricted Subsidiaries reducing
Consolidated Net Income of such Person and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such charges that require an accrual of or a reserve for cash payments for
any future period other than accruals or reserves in the ordinary course of
business or associated with mandatory repurchases of equity securities).
Notwithstanding the foregoing, accruals in respect of payables in the ordinary
course of business shall be deemed not to constitute a "Consolidated Non-cash
Charge."
"Continuing Director" means, as of any date of determination, any
member of the Board of Directors of Dresser who:
(1) was a member of such Board of Directors on the Issue Date; or
(2) was nominated for election or elected to such Board of Directors by
any of the Permitted Holders or with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election or the applicable Guarantor, as the case may be.
"Credit Facilities" means one or more debt facilities (including,
without limitation, the New Credit Facility) or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans, term
loans, receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) and/or letters of credit, bank guarantees or banker's
acceptances.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect Dresser
or any Restricted Subsidiary of Dresser against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Noncash Consideration" means any noncash consideration
received by Dresser or one of its Restricted Subsidiaries in connection with an
Asset Sale that is designated as Designated Noncash Consideration pursuant to an
officers' certificate executed by the principal executive officer and the
principal financial officer of Dresser or such Restricted Subsidiary at the time
of such Asset Sale. Any particular item of Designated Noncash
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Consideration will cease to be considered to be outstanding once it has been
sold for cash or Cash Equivalents. At the time of receipt of any Designated
Noncash Consideration, Dresser shall deliver an officers' certificate to the
trustee which shall state the fair market value of such Designated Noncash
Consideration and shall state the basis of such valuation, which shall be a
report of a nationally recognized investment banking, appraisal or accounting
firm with respect to the receipt in one transaction or a series of related
transactions of Designated Noncash Consideration with a fair market value in
excess of $10.0 million.
"Designated Preferred Stock" means Preferred Stock that is so
designated as Designated Preferred Stock, pursuant to an officers' certificate
executed by the principal executive officer and the principal financial officer
of Dresser, on the issuance date thereof, the cash proceeds of which are
excluded from the calculation set forth in clause (iii) (x) of the first
paragraph of the "Limitation on Restricted Payments" covenant.
"Designated Senior Debt" means:
(1) Indebtedness under or in respect of the New Credit Facility, and
(2) any other Indebtedness constituting Senior Debt which, at the time
of determination, has an aggregate principal amount of at least $25.0
million and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by Dresser or the applicable
Guarantor, as the case may be.
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder
thereof), or upon the happening of any event (other than an event which would
constitute a Change of Control), matures (excluding any maturity as the result
of an optional redemption by the issuer thereof) or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole
option of the holder thereof (except, in each case, upon the occurrence of a
Change of Control) on or prior to the final maturity date of the notes.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of
Dresser that is incorporated under the laws of the United States or any state
thereof or the District of Columbia.
"Equity Offering" means in connection with any optional redemption
pursuant to " -- Optional Redemption Upon Equity Offerings," any offering of
Qualified Capital Stock of Dresser or any direct or indirect parent of Dresser
generating gross proceeds to Dresser of at least $25.0 million; provided that in
the case of a Qualified Capital Stock Offering by any direct or indirect parent
of Dresser, such parent makes a contribution to Dresser, or is issued Qualified
Capital Stock of Dresser by Dresser in an amount equal to the redemption price
of the notes to be redeemed in such redemption plus accrued and unpaid interest
thereon.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of Dresser acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of Dresser delivered to the trustee.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of
Dresser incorporated in any jurisdiction outside of the United States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect from time to time.
"Guarantee" means:
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(1) the senior subordinated guarantee of the notes by the Domestic
Restricted Subsidiaries of Dresser; and
(2) the senior subordinated guarantee of the notes by any Wholly Owned
Domestic Restricted Subsidiary required under the terms of the "Future
Guarantees by Restricted Subsidiaries" covenant and the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant.
"Guarantor" means any Restricted Subsidiary of Dresser that incurs a
Guarantee; provided that upon the release and discharge of such Restricted
Subsidiary from its Guarantee in accordance with the Indenture, such Restricted
Subsidiary shall cease to be a Guarantor.
"Hedging Agreement" means any agreement with respect to the hedging of
price risk associated with the purchase of commodities used in the business of
Dresser and its Restricted Subsidiaries.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all Obligations
under any title retention agreement (but excluding trade accounts payable and
other accrued liabilities arising in the ordinary course of business);
(5) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8) below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any Lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured;
(8) all Obligations under Currency Agreements and Interest Swap
Obligations of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock. For the purposes of calculating the amount of Indebtedness of a
Securitization Entity outstanding as of any date, the face or notional amount of
any interest in receivables or equipment that is outstanding as of such date
shall be deemed to be Indebtedness but any such interests held by Affiliates of
such Securitization Entity shall be excluded for purposes of such calculation.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest; and
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(2) the principal amount thereof (together with any interest thereon
that is more than 30 days past due), in the case of any other Indebtedness
provided that the principal amount of any Indebtedness that is denominated
in any currency other than United States dollars shall be the amount
thereof, as determined pursuant to the foregoing provision, converted into
United States dollars at the Spot Rate in effect on the date that
Indebtedness was incurred or, if that indebtedness was incurred prior to
the date of the Indenture, the Spot Rate in effect on the date of the
Indenture. If such Indebtedness is incurred to refinance other Indebtedness
denominated in a foreign currency, and such refinancing would cause the
applicable U.S. dollar-denominated restriction to be exceeded if calculated
at the relevant Spot Rate in effect on the date of such refinancing, such
U.S. dollar-denominated restriction shall be deemed not to have been
exceeded so long as the principal amount of such refinancing Indebtedness
does not exceed the principal amount of such Indebtedness being refinanced.
The principal amount of any Indebtedness incurred to refinance other
Indebtedness, if incurred in a different currency from the Indebtedness
being refinanced, shall be calculated based on the Spot Rate applicable to
the currencies in which such respective Indebtedness is denominated that is
in effect on the date of such refinancing.
Indebtedness shall not include obligations of any Person (A) arising
from the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently drawn against insufficient funds in the
ordinary course of business, provided that such obligations are extinguished
within two Business Days of their incurrence, (B) resulting from the endorsement
of negotiable instruments for collection in the ordinary course of business and
consistent with past business practices and (C) under stand-by letters of credit
to the extent collateralized by cash or Cash Equivalents.
"Interest Swap Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by Dresser
and its Restricted Subsidiaries in accordance with normal trade practices of
Dresser or such Restricted Subsidiary, as the case may be. If Dresser or any
Restricted Subsidiary of Dresser sells or otherwise disposes of any Common Stock
of any direct or indirect Restricted Subsidiary of Dresser such that, after
giving effect to any such sale or disposition, such Restricted Subsidiary is no
longer a Restricted Subsidiary of Dresser, Dresser shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means the date of original issuance of the notes on April
10, 2001.
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Marketable Securities" means publicly traded debt or equity securities
that are listed for trading on a national securities exchange and that were
issued by a corporation whose debt securities are rated in one of the three
highest rating categories by either S&P or Moody's.
"Moody's" means Moody's Investors Service, Inc.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents, including payments in respect of
deferred payment obligations when received in the form of cash or
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Cash Equivalents (other than the portion of any such deferred payment
constituting interest) received by Dresser or any of its Restricted Subsidiaries
from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions);
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements; and
(3) appropriate amounts to be provided by Dresser or any Restricted
Subsidiary of Dresser, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and retained
by Dresser or any Restricted Subsidiary of Dresser, as the case may be,
after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale.
"New Credit Facility" means the Credit Agreement dated as of the Issue
Date among Dresser, the lenders party thereto in their capacities as lenders
thereunder, Morgan Stanley Senior Funding, Inc., as administrative agent and
Credit Suisse First Boston, as syndication agent, together with the related
documents thereto (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder or adding Restricted Subsidiaries of Dresser as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Business" means any business (including stock or assets)
that derives a majority of its revenues from the business engaged in by Dresser
and its Restricted Subsidiaries on the Issue Date and/or activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which Dresser and its Restricted
Subsidiaries are engaged on the Issue Date.
"Permitted Group" means any group of investors that is deemed to be a
"person" (as such term is used in Section 13 (d) (3) of the Exchange Act) by
virtue of the Stockholders Agreements, as the same may be amended, modified or
supplemented from time to time, provided that no single Person (together with
its Affiliates), other than the Permitted Holders and their Related Parties, is
the "beneficial owner" (as such term is used in Section 13 (d) of the Exchange
Act), directly or indirectly, of more than 50% of the voting power of the issued
and outstanding Capital Stock of Dresser that is "beneficially owned" (as
defined above) by such group of investors.
"Permitted Holders" means First Reserve Corporation, its Affiliates and
any general or limited partners on the date of the Indenture of First Reserve
Corporation, Odyssey Investment Partners Fund, LP, its Affiliates and any
general or limited partners on the date of the Indenture of Odyssey Investment
Partners Fund, LP.
"Permitted Indebtedness" means, without duplication, each of the
following:
(1) Indebtedness under the notes and the Indenture issued on the Issue
Date and any notes issued in exchange therefor pursuant to the Indenture
and any Guarantees thereof in an aggregate principal amount not to exceed
the amount issued on the Issue Date;
(2) Indebtedness of Dresser or any of its Restricted Subsidiaries
incurred pursuant to one or more Credit Facilities in an aggregate
principal amount at any time outstanding not to exceed $820 million, less
the aggregate amount of Indebtedness of Securitization Entities at the time
outstanding; provided that the amount of Indebtedness permitted to be
incurred pursuant to Credit Facilities in accordance with this clause (2)
shall be in
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addition to any Indebtedness permitted to be incurred pursuant to
Credit Facilities in reliance on, and in accordance with, clauses (7),
(13) and (15) below; and provided further that any Indebtedness incurred
pursuant to the New Credit Facility on the Issue Date shall initially be
deemed to be incurred under this clause (2);
(3) other Indebtedness of Dresser and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereof;
(4) Interest Swap Obligations of Dresser or any of its Restricted
Subsidiaries covering Indebtedness of Dresser or any of its Restricted
Subsidiaries; provided that any Indebtedness to which any such Interest
Swap Obligations correspond is otherwise permitted to be incurred under
the Indenture; and provided further that such Interest Swap Obligations
are entered into, in the judgment of Dresser, to protect Dresser or any of
its Restricted Subsidiaries from fluctuations in interest rates on its
outstanding Indebtedness and not for purposes of speculation;
(5) Indebtedness of Dresser or any Restricted Subsidiary of Dresser
under Hedging Agreements and Currency Agreements so long as any such
agreement has been entered into in the ordinary course of business and not
for purposes of speculation;
(6) the incurrence by Dresser or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Dresser and any such Restricted
Subsidiaries; provided, however, that:
(a) if Dresser is the obligor on such Indebtedness and the
aggregate principal amount thereof exceeds of $1.0 million, and the
payee is a Restricted Subsidiary of Dresser that is not a Guarantor,
such Indebtedness is expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes, and
(b) (i) any subsequent issuance or transfer of Capital Stock
that results in any such Indebtedness being held by a Person other than
Dresser or a Restricted Subsidiary thereof, and
(ii) any sale or other transfer of any such Indebtedness
to a Person that is not either Dresser or a Restricted
Subsidiary thereof (other than by way of granting a Lien
permitted under the Indenture or in connection with the
exercise of remedies by a secured creditor)
shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by Dresser or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause (6);
(7) Indebtedness (including Capitalized Lease Obligations) incurred by
Dresser or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount outstanding after
giving effect to that incurrence not to exceed the greater of $40.0
million or (b) 10% of Consolidated Net Tangible Assets at the time of
incurrence;
(8) Refinancing Indebtedness;
(9) guarantees by Dresser and its Restricted Subsidiaries of one
another's Indebtedness; provided that such Indebtedness is permitted to be
incurred under the Indenture;
(10) Indebtedness arising from agreements of Dresser or a Restricted
Subsidiary of Dresser providing for indemnification, adjustment of
purchase price, earn out or other similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or a Restricted Subsidiary of Dresser, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing
such acquisition; provided that the maximum assumable liability in respect
of all such Indebtedness shall at no time exceed the gross proceeds
actually received by Dresser and its Restricted Subsidiaries in connection
with such disposition;
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(11) obligations in respect of performance and surety bonds and completion
guarantees provided by Dresser or any Restricted Subsidiary of Dresser in the
ordinary course of business;
(12) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is non-recourse to Dresser or any
Restricted Subsidiary of Dresser (except for Standard Securitization
Undertakings);
(13) additional Indebtedness of Dresser and its Restricted Subsidiaries in
an aggregate principal amount that does not exceed $50.0 million at any one
time outstanding (which amount may, but need not, be incurred in whole or in
part under a Credit Facility);
(14) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided that such Indebtedness is extinguished
within five business days of incurrence;
(15) Indebtedness of Dresser or any of its Restricted Subsidiaries
represented by letters of credit for the account of Dresser or such
Restricted Subsidiary, as the case may be, issued in the ordinary course of
business of Dresser or such Restricted Subsidiary, including, without
limitation, in order to provide security for workers' compensation claims or
payment obligations in connection with self-insurance or similar requirements
in the ordinary course of business and other Indebtedness with respect to
workers' compensation claims, self-insurance obligations, performance, surety
and similar bonds and completion guarantees provided by Dresser or any
Restricted Subsidiary of Dresser in the ordinary course of business;
(16) unsecured Indebtedness incurred by Dresser to current or former
employees in connection with the purchase or redemption of Equity Interests
of Dresser not to exceed in the aggregate $10.0 million; and
(17) Indebtedness of a Restricted Subsidiary of Dresser incurred and
outstanding on the date such Restricted Subsidiary was acquired by Dresser in a
principal amount that, when taken together with the principal amount of all
other Indebtedness incurred pursuant to this clause (17) that is at the time
outstanding, does not exceed $40.0 million; provided that such Indebtedness was
incurred by such Restricted Subsidiary prior to such acquisition by Dresser or
one of its Restricted Subsidiaries and was not incurred in connection with, or
contemplation of, such acquisition by Dresser or one of its Restricted
Subsidiaries.
For purposes of determining compliance with the "Limitation on Incurrence
of Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness
described in clauses (1) through (17) above or is permitted to be incurred
pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of such
covenant, Dresser shall, in its sole discretion, classify (or later reclassify)
such item of Indebtedness in any manner that complies with such covenant.
Accrual of interest, accretion or amortization of original issue discount, the
payment of interest on any Indebtedness in the form of additional Indebtedness
with the same terms, and the payment of dividends on Disqualified Capital Stock
in the form of additional shares of the same class of Disqualified Capital Stock
will not be deemed to be an incurrence of Indebtedness or an issuance of
Disqualified Capital Stock for purposes of the "Limitation on Incurrence of
Additional Indebtedness" covenant.
"Permitted Investments" means:
(1) Investments by Dresser or any Restricted Subsidiary of Dresser in any
Restricted Subsidiary of Dresser (whether existing on the Issue Date or
created thereafter) or any Person (including by means of any transfer of cash
or other property) if as a result of such Investment such Person shall become
a Restricted Subsidiary of Dresser or that will merge with or consolidate
into Dresser or a Restricted Subsidiary of Dresser and Investments in Dresser
by any Restricted Subsidiary of Dresser;
(2) Investments in cash and Cash Equivalents;
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(3) loans and advances to employees and officers of Dresser and its
Restricted Subsidiaries for bona fide business purposes in an aggregate
principal amount not to exceed $5.0 million at any one time outstanding;
(4) Currency Agreements, Hedging Agreements and Interest Swap Obligations
entered into in the ordinary course of business and otherwise in compliance
with the Indenture and not for purposes of speculation;
(5) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers or in good
faith settlement of delinquent obligations of such trade creditors or
customers;
(6) Investments made by Dresser or its Restricted Subsidiaries as a result
of consideration received in connection with an Asset Sale made in compliance
with the "Limitation on Asset Sales" covenant;
(7) Investments existing on the Issue Date or made pursuant to commitments
existing on the Issue Date;
(8) accounts receivable created or acquired in the ordinary course of
business;
(9) guarantees by Dresser or a Restricted Subsidiary of Dresser permitted
to be incurred under the Indenture;
(10) any Investment in a Person engaged in a Permitted Business (other
than an Investment in an Unrestricted Subsidiary) having an aggregate fair
market value, taken together with all other Investments made pursuant to this
clause (10) that are at that time outstanding, not to exceed 5% of Total
Assets at the time of that Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(11) any Investment by Dresser or a Restricted Subsidiary of Dresser in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction;
provided that any Investment in a Securitization Entity is in the form of a
Purchase Money Note or an equity interest; and
(12) other Investments to the extent paid for with Qualified Capital Stock
of Dresser.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims either:
(a) not delinquent; or
(b) contested in good faith by appropriate proceedings and as to
which Dresser or the applicable Restricted Subsidiary has set aside on its
books such reserves as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen and repairmen and other Liens imposed by
law incurred in the ordinary course of business for sums not yet delinquent
or being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP has been made in respect
thereof,
(3) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types
of social security, including any Lien securing letters of credit issued in
the ordinary course of business consistent with past practice in connection
therewith, or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default;
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(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of Dresser or any
of its Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation;
(7) purchase money Liens to finance property or assets of Dresser or any
Restricted Subsidiary of Dresser acquired, constructed or improved in the
ordinary course of business; provided, however, that
(a) the related purchase money Indebtedness shall not exceed the
cost of such property or assets and shall not be secured by any property
or assets of Dresser or any Restricted Subsidiary of Dresser other than
the property and assets so acquired, and
(b) the Lien securing such Indebtedness shall be created within 90
days of such acquisition;
(8) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof,
(10) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of Dresser or any
of its Restricted Subsidiaries, including rights of offset and set-off;
(11) Liens securing Interest Swap Obligations entered into in the ordinary
course of business and not for the purposes of speculation which Interest
Swap Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(12) Liens securing Indebtedness under Currency Agreements and Hedging
Agreements entered into in the ordinary course of business and not for
purposes of speculation;
(13) Liens incurred in the ordinary course of business of Dresser or any
Restricted Subsidiary of Dresser with respect to obligations that do not in
the aggregate exceed $50.0 million at any one time outstanding;
(14) Liens on assets transferred to a Securitization Entity or on assets
of a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction;
(15) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Dresser and its Restricted
Subsidiaries;
(16) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(17) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of custom duties in connection with the importation
of goods;
(18) Liens securing Acquired Indebtedness incurred in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; provided
that;
(a) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by Dresser or a
Restricted Subsidiary of Dresser and were not granted in connection with,
or in anticipation, of the incurrence of such Acquired Indebtedness by
Dresser or a Restricted Subsidiary of Dresser; and
(b) such Liens do not extend to or cover any property or assets of
Dresser or of any of its Restricted Subsidiaries other than the property
or assets that secured the Acquired Indebtedness prior to the
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time such Indebtedness became Acquired Indebtedness of Dresser or a
Restricted Subsidiary of Dresser and are no more favorable to the
lienholders than those securing the Acquired indebtedness prior to the
incurrence of such Acquired Indebtedness by Dresser or a Restricted
Subsidiary of Dresser;
(19) Liens placed upon assets of a Restricted Subsidiary of Dresser that
is not a Guarantor to secure Indebtedness of such Restricted Subsidiary that
is otherwise permitted under the Indenture; and
(20) Liens existing on the Issue Date, together with any Liens securing
Indebtedness incurred in reliance on clause (8) of the definition of
Permitted Indebtedness in order to refinance the Indebtedness secured by
Liens existing on the Issue Date; provided that the Liens securing the
refinancing Indebtedness shall not extend to property other than that pledged
under the Liens securing the Indebtedness being refinanced.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"Productive Assets" means assets (including Capital Stock) that are used
or usable by Dresser and its Restricted Subsidiaries in Permitted Businesses.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing amounts owed to Dresser or any Restricted Subsidiary of Dresser in
connection with a Qualified Securitization Transaction to a Securitization
Entity, which note shall be repaid from cash available to the Securitization
Entity other than amounts required to be established as reserves pursuant to
agreements, amounts paid to investors in respect of interest and principal and
amounts paid in connection with the purchase of newly generated receivables or
newly acquired equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by Dresser or any of its Restricted
Subsidiaries pursuant to which Dresser or any of its Subsidiaries may sell,
convey or otherwise transfer to:
(1) a Securitization Entity (in the case of a transfer by Dresser or any
of its Restricted Subsidiaries); and
(2) any other Person (in the case of a transfer by a Securitization
Entity),
or may grant a security interest in any accounts receivable or equipment
(whether now existing or arising or acquired in the future) of Dresser or any of
its Restricted Subsidiaries, and any assets related thereto, including, without
limitation, all collateral securing such accounts receivable and equipment, all
contracts and contract rights and all guarantees or other obligations in respect
of such accounts receivable and equipment, proceeds of such accounts receivable
and equipment and other assets (including contract rights) which are customarily
transferred or in respect of which security interests are customarily granted in
connection with asset securitization transactions involving accounts receivable
and equipment.
"Recapitalization" means the recapitalization of Dresser consummated on
the Issue Date.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing, modification,
replacement, restatement, refunding, deferral, extension, substitution,
supplement, reissuance or resale of existing or future Indebtedness (other than
intercompany Indebtedness), including any additional Indebtedness incurred to
pay interest or premiums required by
107
the instruments governing such existing or future Indebtedness as in effect at
the time of issuance thereof ("Required Premiums") and fees in connection
therewith; provided that any such event shall not:
(1) directly or indirectly result in an increase in the aggregate
principal amount of Permitted Indebtedness, except to the extent such
increase is a result of a simultaneous incurrence of additional Indebtedness:
(a) to pay Required Premiums and related fees; or
(b) otherwise permitted to be incurred under the Indenture; and
(2) create Indebtedness with a Weighted Average Life to Maturity at the
time such Indebtedness is incurred that is less than the Weighted Average
Life to Maturity at such time of the Indebtedness being refinanced, modified,
replaced, renewed, restated, refunded, deferred, extended, substituted,
supplemented, reissued or resold.
"Related Party" with respect to any Permitted Holder means:
(a) (1) any spouse, sibling, parent or child of such Permitted Holder;
or
(2) the estate of any Permitted Holder during any period in which
such estate holds Capital Stock of Dresser for the benefit of any
Person referred to in clause (a) (1); or
(b) any trust, corporation, partnership, limited liability company or
other entity the beneficiaries, stockholders, partners, owners or Persons
beneficially owning an interest of more than 50% of which consist of, or the
sole managing partner or managing member of which is, one or more Permitted
Holders and/or such other Persons referred to in the immediately preceding
clause (a).
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party providing for the leasing
to Dresser or a Restricted Subsidiary of Dresser of any property, whether owned
by Dresser or any Restricted Subsidiary of Dresser at the Issue Date or later
acquired, which has been or is to be sold or transferred by Dresser or such
Restricted Subsidiary to such Person or to any other Person from whom funds have
been or are to be advanced by such Person on the security of such Property.
"Securitization Entity" means any Person in which Dresser or any
Restricted Subsidiary of Dresser makes an Investment and to which Dresser or any
Restricted Subsidiary of Dresser transfers accounts receivable or equipment (and
related assets, including contract rights) which engages in no activities other
than in connection with the financing of accounts receivable or equipment or
related assets (including contract rights) and which is designated by the Board
of Directors of Dresser (as provided below) as a Securitization Entity:
(1) no portion of the Indebtedness or any other Obligations (contingent or
otherwise) of which:
(a) is guaranteed by Dresser or any Restricted Subsidiary of Dresser
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness)) pursuant to Standard Securitization
Undertakings;
108
(b) is recourse to or obligates Dresser or any Restricted Subsidiary
of Dresser in any way other than pursuant to Standard Securitization
Undertakings; or
(c) subjects any property or asset of Dresser or any Restricted
Subsidiary of Dresser, directly or indirectly, contingently or otherwise,
to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings;
(2) with which neither Dresser nor any Restricted Subsidiary of Dresser
has any material contract, agreement, arrangement or understanding other than
on terms no less favorable to Dresser or such Restricted Subsidiary than
those that might be obtained at the time from Persons that are not Affiliates
of Dresser, other than fees payable in the ordinary course of business in
connection with servicing receivables of such entity; and
(3) to which neither Dresser nor any Restricted Subsidiary of Dresser has
any obligation to maintain or preserve such entity's financial condition or
cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of Dresser shall be
evidenced to the trustee by filing with the trustee a certified copy of the
Board Resolution of Dresser giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
conditions.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of Dresser or any Guarantor, whether outstanding on the Issue Date
or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the notes or the
Guarantee of such Guarantor, as the case may be. Without limiting the generality
of the foregoing, "Senior Debt" shall also include the principal of, premium, if
any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of:
(x) all monetary obligations of every nature of Dresser or any Guarantor
under the New Credit Facility, including, without limitation, obligations to
pay principal, premium and interest, reimbursement obligations under letters
of credit, fees, expenses and indemnities;
(y) all Interest Swap Obligations (and guarantees thereof); and
(z) all obligations (and guarantees thereof) under Currency Agreements and
Hedging Agreements,
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(i) any Indebtedness of Dresser or a Guarantor to Dresser or to a
Subsidiary of Dresser;
(ii) any Indebtedness to, or guaranteed on behalf of, any director,
officer or employee of Dresser or any Subsidiary of Dresser (including,
without limitation, amounts owed for compensation);
(iii) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(iv) Indebtedness represented by Disqualified Capital Stock;
(v) any liability for federal, state, local or other taxes owed or owing
by Dresser or any Guarantor;
(vi) that portion of any Indebtedness incurred in violation of the
Indenture provisions set forth under "Limitation on Incurrence of Additional
Indebtedness" (but, as to any such obligation, no such violation shall be
109
deemed to exist for purposes of this clause (vi) if the holder(s) of such
obligation or their representative and the trustee shall have received an
officers' certificate of Dresser to the effect that the incurrence of such
Indebtedness does not (or in the case of revolving credit indebtedness, that
the incurrence of the entire committed amount thereof at the date on which
the initial borrowing thereunder is made) would not violate such provisions
of the Indenture);
(vii) Indebtedness which, when incurred and without respect to any
election under Section 1111 (b) of Title 11, United States Code, is without
recourse to Dresser; and
(viii) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of Dresser, including, without
limitation, the Convertible Subordinated Debentures.
"Significant Subsidiary" with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1-02(w) of Regulation S-X under the Securities
Act.
"Spot Rate" means, for any currency, the spot rate at which that currency
is offered for sale against United States dollars, as determined by reference to
the New York foreign exchange selling rates, as published in The Wall Street
Journal on that date of determination for the immediately preceding business day
or, if that rate is not available, as determined in any publicly available
source of similar market data.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Dresser or any Subsidiary of Dresser
which are reasonably customary in an accounts receivable or equipment
transaction.
"Stockholders Agreements" means those certain stockholders agreements
entered into in connection with the Recapitalization.
"Subsidiary" with respect to any Person, means:
(i) any corporation of which the outstanding Capital Stock having at least
a majority of the votes entitled to be cast in the election of directors
under ordinary circumstances shall at the time be owned, directly or
indirectly, by such Person; or
(ii) any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly, owned by
such Person.
"Tax Sharing Agreement" means that certain tax sharing agreement to be
entered into between Dresser and DEG Acquisitions, LLC, pursuant to which (a)
DEG Acquisitions will agree to file consolidated, combined or unitary federal,
state, local and foreign income tax returns on behalf of itself and its
Subsidiaries, including Dresser, to the extent it is permitted to do so under
the relevant law, and (ii) Dresser will be obligated to pay to DEG Acquisitions
a portion of the total income tax liability of DEG Acquisitions and its
Subsidiaries, in an amount equal to the excess of (a) the relevant income tax
liability of DEG Acquisitions and its subsidiaries for a taxable period over (b)
the corresponding consolidated, combined or unitary income tax liability of DEG
Acquisitions and its Subsidiaries that DEG Acquisitions would have incurred if
Dresser and its Subsidiaries had not been Subsidiaries of DEG Acquisitions.
"Total Assets" means the total consolidated assets of Dresser and its
Restricted Subsidiaries, as set forth on Dresser's most recent consolidated
balance sheet.
"Transaction Agreements" means (i) that certain Agreement and Plan of
Recapitalization dated as of January 30, 2001; (ii) the agreements and
understandings described in this prospectus under the caption "Certain Related
Party Transactions;" (iii) the Sponsor Rights Agreement among us and certain
Permitted Holders dated the Issue Date; (iv) the Investor Rights Agreement among
certain of our stockholders and us dated the Issue Date; (v) the Transition
Services Agreement between us and Halliburton Company dated the Issue Date; and
(vi) the Employee Benefits Agreement between us and Halliburton Company dated
the Issue Date.
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"Transactions" means the transactions contemplated by the Transaction
Agreements.
"Unrestricted Subsidiary" of any Person means:
(1) any Subsidiary of such Person that at the time of determination shall
be or continue to be designated an Unrestricted Subsidiary by the Board of
Directors of such Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, Dresser or any other Subsidiary of Dresser that is not a Subsidiary
of the Subsidiary to be so designated; provided that:
(1) Dresser certifies to the trustee that such designation complies with
the "Limitation on Restricted Payments" covenant; and
(2) each Subsidiary to be so designated and each of its Subsidiaries has
not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness pursuant to which the lender has recourse to
any of the assets of Dresser or any of its Restricted Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if (x) immediately after giving effect to such
designation, Dresser is able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant and (y) immediately before and
immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the trustee by promptly filing with the
trustee a copy of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such Indebtedness
into
(2) the sum of the total of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including payment
at final maturity, in respect thereof by
(b) the number of years (calculated to the nearest one-twelfth)
which will elapse between such date and the making of such payment.
"Wholly Owned Domestic Restricted Subsidiary" of any Person means any
Domestic Restricted Subsidiary of such Person of which 95% or more of the
outstanding voting securities are owned by such Person or any Wholly Owned
Domestic Restricted Subsidiary of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means any Wholly Owned
Subsidiary of such Person which at the time of determination is a Restricted
Subsidiary.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such
Person of which all the outstanding voting securities (other than in the case of
a Restricted Subsidiary that is incorporated in a jurisdiction other than a
State in the United States or the District of Columbia, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Subsidiary of such Person.
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BOOK-ENTRY; DELIVERY AND FORM
The notes will be represented by one or more permanent global notes in
definitive, fully registered form without interest coupons and will be deposited
with the Trustee as custodian for, and registered in the name of a nominee of,
the Depository Trust Company.
Ownership of beneficial interests in a global note will be limited to
persons who have accounts with the Depository Trust Company ("participants") or
persons who hold interests through participants. Ownership of beneficial
interests in a global note will be shown on, and the transfer of that ownership
will be effected only through, records maintained by the Depository Trust
Company or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants).
So long as the Depository Trust Company, or its nominee, is the registered
owner or holder of a the exchange notes, the Depository Trust Company or that
nominee, as the case may be, will be considered the sole owner or holder of the
exchange notes represented by the global note for all purposes under the
Indenture and the notes. No beneficial owner of an interest in a global note
will be able to transfer that interest except in accordance with the Depository
Trust Company's applicable procedures, in addition to those provided for under
the Indenture and, if applicable, those of Euroclear and Clearstream Banking.
Payments of the principal of, and interest on, a global note will be made
to the Depository Trust Company or its nominee, as the case may be, as the
registered owner thereof. Neither Dresser, the Trustee nor any paying agent will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in a global note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
We expect that the Depository Trust Company or its nominee, upon receipt
of any payment of principal or interest in respect of a global note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global note as
shown on the records of the Depository Trust Company or its nominee. We also
expect that payments by participants to owners of beneficial interests in such
global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in the Depository Trust Company will be
effected in the ordinary way in accordance with the Depository Trust Company
rules and will be settled in same-day funds. Transfers between participants in
Euroclear and Clearstream Banking will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
We expect that the Depository Trust Company will take any action permitted
be taken by a holder of notes (including the presentation of notes for as
described below) only at the direction of one or more participants account the
Depository Trust Company interests in a global note is and only in respect of
such portion of the aggregate principal amount as to which such participant or
participants has or have given such to exchange to whose credited of notes
direction. However, if there is an Event of Default under the notes, the
Depository Trust Company will exchange the applicable global note for
certificated notes, which it will distribute to its participants.
We understand that: the Depository Trust Company is a limited purpose
trust company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. the Depository Trust Company was
created to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of certificates. Indirect access to the Depository Trust
Company system is available to others such as banks, brokers, dealers and trust
companies and certain other organizations that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
112
Although the Depository Trust Company, Euroclear and Clearstream Banking
are expected to follow the foregoing procedures in order to facilitate transfers
of interests in a global note among participants of the Depository Trust
Company, Euroclear and Clearstream Banking, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither Dresser nor the Trustee will have any
responsibility for the performance by the Depository Trust Company, Euroclear or
Clearstream Banking or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
If the Depository Trust Company is at any time unwilling or unable to
continue as a depositary for the global notes and a successor depositary is not
appointed by Dresser within 90 days, we will issue certificated notes in
exchange for the global notes. Holders of an interest in a global note may
receive certificated notes in accordance with the Depository Trust Company's
rules and procedures in addition to those provided for under the Indenture.
113
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The following discussion is a summary of the material United States
federal income tax consequences relevant to the exchange of the old notes
pursuant to this exchange offer and the ownership and disposition of the
exchange notes, but does not purport to be a complete analysis of all potential
tax effects. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), United States Treasury Regulations issued thereunder,
Internal Revenue Service rulings and pronouncements and judicial decisions now
in effect, all of which are subject to change at any time. Any such change may
be applied retroactively in a manner that could adversely affect a holder of the
notes. This discussion does not address all of the United States federal income
tax consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, U.S. expatriates, insurance companies, dealers in
securities or currencies, traders in securities, holders whose functional
currency is not the U.S. dollar, tax-exempt organizations and persons holding
the notes as part of a "straddle," "hedge," "conversion transaction" or other
integrated transaction. Moreover, the effect of any applicable state, local or
foreign tax laws is not discussed. The discussion deals only with notes held as
"capital assets" within the meaning of Section 1221 of the Code.
We have not sought and will not seek any rulings from the Internal Revenue
Service (the "IRS") with respect to the matters discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the notes or that any
such position would not be sustained. If a partnership or other entity taxable
as a partnership holds the notes, the tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership.
HOLDERS OF THE EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
REGARD TO THE TAX CONSEQUENCES OF THE EXCHANGE OF THE OLD NOTES FOR THE EXCHANGE
NOTES AND OF HOLDING AND DISPOSING OF THE EXCHANGE NOTES, INCLUDING THE UNITED
STATES FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES AND POTENTIAL CHANGES IN
THE TAX LAWS.
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of the old notes for the exchange notes in the exchange offer
will not be treated as an "exchange" for federal income tax purposes, because
the exchange notes will not be considered to differ materially in kind or extent
from the old notes. Accordingly, the exchange of old notes for exchange notes
will not be a taxable event to holders for federal income tax purposes.
Moreover, the exchange notes will have the same tax attributes as the old notes
and the same tax consequences to holders as the old notes have to holders,
including without limitation, the same issue price, adjusted issue price,
adjusted tax basis and holding period. Therefore, references to "notes" apply
equally to the exchange notes and the old notes.
UNITED STATES HOLDERS
For purposes of the following discussion, "United States Holder" means a
beneficial owner of the notes who or that is:
- an individual that is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident of the
United States or meets the "substantial presence" test under Section
7701(b) of the Code;
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or political
subdivision thereof;
- an estate, the income of which is subject to United States federal income
tax regardless of its source; or
- a trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons can
control all substantial trust decisions, or, if the trust was in existence
on August 20, 1996, has elected to continue to be treated as a United
States person.
114
Interest
Payments of stated interest on the notes generally will be taxable to a
United States Holder as ordinary income at the time that such payments are
received or accrued, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes.
Market Discount
If a United States Holder acquires a note at a cost that is less than the
stated redemption price at maturity, the amount of such difference is treated as
"market discount" for federal income tax purposes, unless such difference is
less than .0025 multiplied by the stated redemption price at maturity multiplied
by the number of complete years until maturity (from the date of acquisition).
Under the market discount rules of the Code, a United States Holder is
required to treat any gain on the sale, exchange, retirement or other
disposition of a note as ordinary income to the extent of the accrued market
discount that has not been previously included in income. Thus, principal
payments and payments received upon the sale or exchange of a note are treated
as ordinary income to the extent of accrued market discount that has not been
previously included in income. If a United States Holder disposes of a note with
market discount in certain otherwise nontaxable transactions, such holder may be
required to include accrued market discount as ordinary income as if the holder
had sold the note at its then fair market value.
In general, the amount of market discount that has accrued is determined
on a ratable basis. A United States Holder may, however, elect to determine the
amount of accrued market discount on a constant yield to maturity basis. This
election is made on a note-by-note basis and is irrevocable.
With respect to notes with market discount, a United States Holder may not
be allowed to deduct immediately a portion of the interest expense on any
indebtedness incurred or continued to purchase or to carry the notes. A United
States Holder may elect to include market discount in income currently as it
accrues, in which case the interest deferral rule set forth in the preceding
sentence will not apply. This election will apply to all debt instruments that a
U.S. holder acquires on or after the first day of the first taxable year to
which the election applies and is irrevocable without the consent of the IRS.
Amortizable Bond Premium
In general, if a United States Holder purchases a note for an amount in
excess of the stated principal amount of the note, such excess will constitute
bond premium. A United States Holder generally may elect to amortize the premium
over the remaining term of the note on a constant yield method as an offset to
interest when includible in income under such holder's regular accounting
method. The notes are subject to call provisions at our option at various times,
as described in this prospectus under "Description of the Notes - Redemption". A
United States Holder will calculate the amount of amortizable bond premium based
on the amount payable at the applicable call date, but only if the use of the
call date (in lieu of the stated maturity date) results in a smaller amortizable
bond premium for the period ending on the call date. If a United States Holder
does not elect to amortize bond premium, that premium will decrease the gain or
increase the loss such holder would otherwise recognize on disposition of the
note. An election to amortize premium on a constant yield method will also apply
to all debt obligations held or subsequently acquired by the electing United
States Holder on or after the first day of the first taxable year to which the
election applies. The election may not be revoked the without the consent of the
IRS. United States Holders should consult their own tax adviser before making
this election.
Sale or Other Taxable Disposition of the Notes
A United States Holder will recognize gain or loss on the sale, exchange,
redemption, retirement or other taxable disposition of a note equal to the
difference between the amount realized upon the disposition (less a portion
allocable to any accrued and unpaid interest, which will be taxable as ordinary
income) and the United States Holder's adjusted tax basis in the note. A United
States Holder's adjusted basis in a note generally will be the United States
Holder's cost therefor, reduced by any principal payments received by such
holder and by the amount of
115
amortized bond premium, if any, taken into account in respect of the note, and
increased by the amount of market discount, if any, previously included in
income in respect of the note. This gain or loss generally will be a capital
gain or loss, except as described under "Market Discount" above, and will be a
long-term capital gain or loss if the United States Holder has held the note for
more than one year. Otherwise, such gain or loss will be a short-term capital
gain or loss. The deduction of capital losses is subject to limitations under
the Code.
Backup Withholding
A United States Holder may be subject to a backup withholding tax of up to
31% when such holder receives interest and principal payments on the notes held
or upon the proceeds received upon the sale or other disposition of such notes.
Certain holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to backup withholding. A United States
Holder will be subject to this backup withholding tax if such holder is not
otherwise exempt and such holder:
- fails to furnish its taxpayer identification number ("TIN"), which, for an
individual, is ordinarily his or her social security number;
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed to properly report payments of
interest or dividends;
- fails to certify, under penalties of perjury, that it has furnished a
correct TIN and that the IRS has not notified the United States Holder
that it is subject to backup withholding; or
- - a United States branch of a foreign bank or foreign insurance company.
United States Holders should consult their personal tax advisor regarding
their qualification for an exemption from backup withholding and the procedures
for obtaining such an exemption, if applicable. The backup withholding tax is
not an additional tax and taxpayers may use amounts withheld as a credit against
their United States federal income tax liability or may claim a refund as long
as they timely provide certain information to the IRS.
NON-UNITED STATES HOLDERS
Definition of Non-United States Holders; Interest Payments and Gains from
Dispositions
A non-United States Holder is a beneficial owner of the notes who is not a
United States person within the meaning of the Code and Treasury regulations.
Interest paid to a non-United States Holder will not be subject to United
States federal withholding tax of 30% (or, if applicable, a lower treaty rate)
provided that:
- such holder does not directly or indirectly, actually or constructively
own 10% or more of the total combined voting power of all of our classes
of stock;
- such holder is not a controlled foreign corporation that is related to us
through stock ownership and is not a bank that received such notes on an
extension of credit made pursuant to a loan agreement entered into in the
ordinary course of its trade or business; and
- either (1) the non-United States Holder certifies in a statement provided
to us or our paying agent, under penalties of perjury, that it is not a
"United States person" within the meaning of the Code and provides its
name and address, or (2) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business and holds the notes on behalf of the
non-United States Holder certifies to us or our paying agent under
penalties of perjury that it, or the financial institution between it and
the non-United States Holder, has received from the non-United States
Holder a
116
statement, under penalties of perjury, that such holder is not a "United
States person" and provides us or our paying agent with a copy of such
statement.
The certification requirement described above may require a non-United
States Holder that provides an IRS form, or that claims the benefit of an income
tax treaty, to also provide its United States taxpayer identification number.
The applicable regulations generally also require, in the case of a note held by
a foreign partnership, that
- the certification described above be provided by the partners and
- the partnership provide certain information.
Further, a look-through rule will apply in the case of tiered
partnerships. Special rules are applicable to intermediaries. Prospective
investors should consult their tax advisors regarding the certification
requirements for non-United States persons.
A non-United States Holder will generally not be subject to United States
federal income tax or withholding tax on gain recognized on the sale, exchange,
redemption, retirement or other disposition of a note. However, a non-United
States Holder may be subject to tax on such gain if such holder is an individual
who was present in the United States for 183 days or more in the taxable year of
the disposition and certain other conditions are met, in which case such holder
may have to pay a United States federal income tax of 30% (or, if applicable, a
lower treaty rate) on such gain.
If interest or gain from a disposition of the notes is effectively
connected with a non-United States Holder's conduct of a United States trade or
business, or if an income tax treaty applies and the non-United States Holder
maintains a United States "permanent establishment" to which the interest or
gain is generally attributable, the non-United States Holder may be subject to
United States federal income tax on the interest or gain on a net basis in the
same manner as if it were a United States Holder. If interest income received
with respect to the notes is taxable on a net basis, the 30% withholding tax
described above will not apply (assuming an appropriate certification is
provided). A foreign corporation that is a holder of a note also may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty. For this
purpose, interest on a note or gain recognized on the disposition of a note will
be included in earnings and profits if the interest or gain is effectively
connected with the conduct by the foreign corporation of a trade or business in
the United States.
Backup Withholding and Information Reporting
Backup withholding will not apply to payments made by us or our paying
agents, in their capacities as such, to a non-United States Holder of a note if
the holder has provided the required certification that it is not a United
States person as described above, provided that neither we nor our paying agent
has actual knowledge, or reason to know, that the holder is a United States
person. However, information reporting may still apply with respect to interest
payments even if certification is provided. Payments of the proceeds from a
disposition by a non-United States Holder of a note made to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding, except that information reporting (but generally not backup
withholding) may apply to those payments if the broker is:
- a United States person;
- a controlled foreign corporation for United States federal income tax
purposes;
- a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period; or
- a foreign partnership, if at any time during its tax year, one or more of
its partners are United States persons, as defined in Treasury
regulations, who in the aggregate hold more than 50% of the income or
117
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business.
Payment of the proceeds from a disposition by a non-United States Holder
of a note made to or through the United States office of a broker is generally
subject to information reporting and backup withholding unless the holder or
beneficial owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding.
Non-United States Holders should consult their own tax advisors regarding
application of backup withholding in their particular circumstance and the
availability of and procedure for obtaining an exemption from backup withholding
under current Treasury regulations. Any amounts withheld under the backup
withholding rules from a payment to a non-United States Holder will be allowed
as a credit against the holder's United States federal income tax liability or
may be refunded, provided the required information is furnished timely to the
IRS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus together with
any resale of those exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in the resales of
exchange notes received in exchange for old notes where those old notes were
acquired as a result of market-making activities or other trading activities. We
have agreed that for a period of up to 180 days after the expiration date, we
will make this prospectus, as amended or supplemented, available to any
broker-dealer that requests it in the letter of transmittal for use in any such
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other persons. Exchange notes received by broker-dealers
for their own account pursuant to the exchange offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
exchange notes. Any broker-dealer that resells exchange notes that of those
exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify the
holders of old notes including any broker-dealers, and certain parties related
to such holders, against certain types of liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for us
by Latham & Watkins, New York, New York.
EXPERTS
The consolidated financial statements of Dresser, Inc. as of December 31,
2000 and 2001 and for each of the three years in the period ended December 31,
2001 have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said form as experts in accounting and auditing.
118
DRESSER, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
DRESSER, INC.: PAGE
----
Report of Independent Public Accountants -- Arthur Andersen LLP ....... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000........... F-3
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999.................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 2001,
2000 and 1999.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999.................................................... F-6
Notes to the Consolidated Financial Statements ........................ F-7
Report of Independent Public Accountants on Financial Statement
Schedule............................................................... F-35
Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts........................ II-1
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Dresser, Inc.:
We have audited the accompanying consolidated balance sheets of Dresser,
Inc. (the "Company" or "Dresser") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' (deficit) equity
and cash flows for the three years ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dresser as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 28, 2002
F-2
DRESSER, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE INFORMATION)
DECEMBER 31, DECEMBER 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 97.2 $ 19.7
Receivables, less allowance for doubtful accounts of $5.4 for 2001 and 2000 316.2 286.1
Inventories, net .......................................................... 328.3 254.6
Other current assets ...................................................... 10.4 11.5
-------- --------
TOTAL CURRENT ASSETS ......................................... 752.1 571.9
Property, plant and equipment, net ........................................ 235.9 231.1
Investments in unconsolidated subsidiaries ................................ 4.8 2.7
Long-term receivables and other assets .................................... 86.8 13.3
Deferred tax assets ....................................................... 95.6 --
Intangibles, net .......................................................... 414.5 258.1
-------- --------
TOTAL ASSETS ................................................. $1,589.7 $1,077.1
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts and notes payable ......................................... $ 245.3 $ 143.6
Contract advances .................................................. 10.5 15.1
Accrued expenses ................................................... 137.2 127.1
-------- --------
TOTAL CURRENT LIABILITIES .................................... 393.0 285.8
Pension and other retiree benefits ........................................ 214.3 197.8
Long-term debt ............................................................ 1,000.0 0.2
Other liabilities ......................................................... 26.0 30.7
-------- --------
Commitments and contingencies
TOTAL LIABILITIES ............................................ 1,633.3 514.5
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock, $0.001 par value; issued and outstanding at
December 31, 2001: class A -- 10,488,222, class B -- 909,486
Divisional Equity .................................................. -- 581.8
Shareholders' (deficit) equity, net ................................ (11.0) --
Accumulated other comprehensive loss ............................... (32.6) (19.2)
-------- --------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY ......................... (43.6) 562.6
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY ......... $1,589.7 $1,077.1
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
DRESSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
YEAR ENDED
DECEMBER 31,
------------
2001 2000 1999
---- ---- ----
Revenues ................................................ $1,545.8 $1,408.5 $1,432.6
Cost of revenues ........................................ 1,075.2 963.3 993.7
-------- -------- --------
Gross profit ..................................... 470.6 445.2 438.9
Selling, engineering, administrative and general expenses 303.9 274.7 293.9
-------- -------- --------
Operating income ........................................ 166.7 170.5 145.0
Interest expense ........................................ (68.7) (2.7) (1.8)
Other income ............................................ 1.5 9.1 2.9
-------- -------- --------
Income before taxes ..................................... 99.5 176.9 146.1
Income taxes ............................................ (42.7) (68.1) (56.2)
-------- -------- --------
Net income .............................................. $ 56.8 $ 108.8 $ 89.9
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
DRESSER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
COMMON STOCK
----------------------------------------
ACCUMULATED
OTHER
CLASS A CLASS B ADDITIONAL COMPREHENSIVE
NUMBER OF PAR NUMBER OF PAR PAID IN DIVISIONAL ACCUMULATED INCOME
SHARES VALUE SHARES VALUE CAPITAL EQUITY DEFICIT (LOSS) TOTAL
------ ----- ------ ----- ------- ------ ------- ------ -----
Balance as of
December 31, 1998 . -- $ -- $-- $ -- $ 562.8 $ -- $(26.1) $ 536.7
Intercompany
activity, net ...... -- -- -- -- -- (99.1) -- -- (99.1)
Foreign currency
translation
adjustment ....... -- -- -- -- -- -- -- 14.5 14.5
Net income .......... -- -- -- -- 89.9 -- -- 89.9
---------- --- ------- --- -------- ------ ------- ------ -------
Comprehensive
income .......... 104.4
---------- --- ------- --- -------- ------ ------- ------ -------
Balance as of
December 31, 1999 . -- -- -- -- -- 553.6 -- (11.6) 542.0
Intercompany
activity, net ...... -- -- -- -- -- (80.6) -- -- (80.6)
Foreign currency
translation
adjustment ....... -- -- -- -- -- -- -- (7.6) (7.6)
Net income .......... -- -- -- -- -- 108.8 -- -- 108.8
---------- --- ------- --- -------- ------ ------- ------ -------
Comprehensive
income ............ 101.2
---------- --- ------- --- -------- ------ ------- ------ -------
Balance as of
December 31, 2000 . -- -- -- -- -- 581.8 -- (19.2) 562.6
Recapitalization
transaction ........ 10,237,408 -- 300,000 -- 421.5 (581.8) (523.7) -- (684.0)
Issuance of shares
for acquisitions ... 171,756 -- 490,744 -- 26.5 -- -- -- 26.5
Issuance of shares
to employees and
directors, net ... 79,058 -- 118,742 -- 7.9 -- -- -- 7.9
Foreign currency
translation
adjustment ....... -- -- -- -- -- -- -- (10.9) (10.9)
Unrealized loss on
derivatives ....... -- -- -- -- -- -- -- (2.5) (2.5)
Net income .......... -- -- -- -- -- -- 56.8 -- 56.8
---------- --- ------- --- -------- ------ ------- ------ -------
Comprehensive
income ............ 43.4
---------- --- ------- --- -------- ------ ------- ------ -------
Balance as of
December 31,
2001 .............. 10,488,222 $-- 909,486 $-- $ 455.9 $ -- $(466.9) $(32.6) $ (43.6)
========== === ======= === ======== ====== ======= ====== =======
The accompanying notes are an integral part of these financial statements.
F-5
DRESSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED
----------
DECEMBER 31,
------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 56.8 $ 108.8 $ 89.9
Adjustments to reconcile net income to cash flow provided by
operating activities:
Depreciation and amortization .............................................. 58.8 49.2 48.5
Equity earnings of unconsolidated affiliates ............................... (2.1) (0.8) (1.3)
Loss on disposal of fixed assets ........................................... -- -- 1.9
Other changes, net of non-cash items
Receivables ................................................................ (30.1) 6.5 (23.1)
Inventory .................................................................. (73.6) (17.6) 2.3
Accounts payable ........................................................... 56.0 (52.1) 28.5
Other, net ................................................................. 70.9 (2.5) (5.3)
----------- --------- ---------
Net cash provided by operating activities .......................... 136.7 91.5 141.4
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................... (36.0) (27.3) (38.4)
Business acquisitions .......................................................... (1,329.1) (1.7) --
Other .......................................................................... 1.4 0.1 0.7
----------- --------- ---------
Net cash used in investing activities .............................. (1,363.7) (28.9) (37.7)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in intercompany activities ............................................. (109.3) (116.1) (100.3)
Cash Equity .................................................................... 369.6 -- --
Increase (decrease) in short-term debt ......................................... 45.7 10.6 (2.8)
Increase (decrease) in long-term debt .......................................... 999.8 -- (0.9)
Cash overdrafts ................................................................ -- 19.2 8.7
---------- --------- --------
Net cash provided by (used in) financing activities ................ 1,305.8 (86.3) (95.3)
---------- --------- --------
Effect of translation adjustments on cash ...................................... (1.3) 9.7 (1.9)
---------- -------- --------
Net increase in cash and equivalents ........................................... 77.5 (14.0) 6.5
Cash and equivalents, beginning of period ...................................... 19.7 33.7 27.2
---------- -------- --------
CASH AND EQUIVALENTS, END OF PERIOD ............................................ $ 97.2 $ 19.7 $ 33.7
========== ======== ========
Supplemental disclosure of cash flow information: Cash payment during the period
for:
Interest ................................................................. $ 51.5 $ 2.5 $ 2.8
Income Taxes ............................................................. $ 16.2 $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-6
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Dresser, Inc. was originally incorporated in 1998, under the name of
Dresser Equipment Group, Inc. ("DEG") under the laws of the state of Delaware.
The certificate of incorporation was amended and restated on April 9, 2001. As
used in this report, the terms "Dresser" and the "Company" refer to Dresser,
Inc. and its predecessors, subsidiaries and affiliates unless the context
indicates otherwise.
In January 2001, Halliburton Company ("Halliburton"), together with
its wholly owned subsidiary Dresser B.V. signed an Agreement and Plan of
Recapitalization (the "Agreement") with DEG Acquisitions, LLC, to effect the
sale of its businesses relating to, among other things, the design, manufacture
and marketing of flow control, measurement systems and power systems for
customers primarily in the energy industry. Halliburton originally acquired the
businesses as part of its acquisition of Dresser Industries, Inc. in 1998.
Dresser Industries' operations consisted of the Company's businesses and certain
other operating units retained by Halliburton following the consummation of the
recapitalization transactions. In order to accomplish this transaction,
Halliburton effected the reorganization of various legal entities that comprised
the Dresser Equipment Group ("DEG") business segment of Halliburton.
In connection with the recapitalization in April 2001, Dresser made
payments to Halliburton Company of approximately $1,300 to redeem common equity
and purchase the stock of foreign subsidiaries. The recapitalization
transactions and related expenses were financed through the issuance of $300 of
senior subordinated debt, $720 of borrowings under the credit facility, and
approximately $400 of common equity contributed by DEG Acquisition LLC, an
entity owned by First Reserve Corporation and Odyssey Investment Partners Fund,
LP.
The consolidated financial statements of the Company for periods
presented prior to March 31, 2001 have been prepared by management on a
carve-out basis and reflect the consolidated financial position, results of
operations and cash flows of Dresser in accordance with accounting principles
generally accepted in the United States. The consolidated financial statements
exclude certain items, which were not transferred as a result of the Agreement
and any financial effects from Halliburton's decision to discontinue this
business segment. In addition, certain amounts in the financial statements have
been estimated, allocated and pushed down from Halliburton in a consistent
manner in order to depict the financial position, results of operations and cash
flows of Dresser on a stand-alone basis. However, the financial position,
results of operations and cash flows may not be indicative of what would have
been reported if Dresser had been a stand-alone entity or had been operated in
accordance with the Agreement during the periods presented prior to March 31,
2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant items subject to such estimates and assumptions include
the carrying value of long-lived assets; valuation allowances for receivables
and inventories.
F-7
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and corporations, and limited liability
companies in which the Company owns a controlling interest, after the
elimination of all significant intercompany accounts and transactions. The
condition for control of corporations and limited liability companies is the
ownership of a majority of voting interest. Prior to the recapitalization
transactions, the financial statements reflect intercompany amounts with
Halliburton as components of divisional equity.
REVENUES AND INCOME RECOGNITION
Revenues are recognized as products are shipped and services are
rendered. The distinction between product sales and services is based upon the
overall activity of the particular business operation. Service revenues were
immaterial for all years presented. All known or anticipated losses on contracts
are provided for currently. Claims and change orders which are in the process of
being negotiated with customers for extra work or changes in the scope of work
are included in revenue when collection is deemed probable.
None of the Company's product distributors is given price protection
rights. If items are shipped with rights to return, revenue is not recorded
until the customer has approved the shipment and written acceptance is received.
The Company does have arrangements with certain customers whereby the customers
have formal acceptance provisions; however, customer acceptance is generally
part of the testing phase and occurs prior to the product being approved for
shipment. Revenue is not recorded until the latter occurs: customer acceptance
or final shipment. Software sales are not a significant component of the
Company's total sales.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
Research and development costs, recorded as a component of selling, engineering,
administrative and general expenses in the consolidated financial statements,
were $23.9, $24.9 and $25.7 for the years ended December 31, 2001, 2000 and
1999, respectively.
CASH AND EQUIVALENTS
All highly liquid investments at acquisition with a maturity of
three months or less are considered to be cash equivalents.
RECEIVABLES
Accounts receivable are stated at their net realizable value.
Included in receivables are notes receivable of $7.6 and $10.6 as of December
31, 2001 and 2000, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market. A portion of
the United States inventory cost is determined using the last-in, first-out
(LIFO) method. All other United States and non-United States inventories are
valued on a first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reported at cost less accumulated
depreciation, which is generally provided using the straight-line method over
the estimated useful lives of the assets of 10 to 30 years for buildings and 3
to 17 years for machinery and equipment. Some assets are depreciated using
accelerated methods. Expenditures for maintenance and repairs are expensed as
incurred. Expenditures for improvements that extend the life of the asset are
generally capitalized. Upon sale or retirement of an asset, the related costs
and accumulated depreciation are removed from the accounts, and any gain or loss
is recognized.
F-8
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed. The estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash value is required.
EQUITY INVESTMENTS
The Company holds various equity investments ranging from 25% to 50%
ownership. The investments are included in "Investments in Unconsolidated
Subsidiaries" in the accompanying financial statements and are accounted for
using the equity method of accounting. Under the equity method, the original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of the entities.
Equity in earnings of unconsolidated affiliates, accounted for using
the equity method, have been included in revenues in the consolidated financial
statements and were $2.1, $0.8, and $1.3 for the years ended December 31, 2001,
2000 and 1999, respectively.
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill and patents, which
are shown net of accumulated amortization. Goodwill resulting from business
acquisitions represents the excess of purchase price over fair value of net
assets acquired and is being amortized over 4 to 40 years using the
straight-line method. Goodwill was $408.7 and $252.7, net of accumulated
amortization of $67.6 and $53.4 as of December 31, 2001 and 2000, respectively.
Patents are being amortized over their estimated useful lives,
ranging from 5 to 40 years. Patents and other intangible assets were $5.8 and
$5.4 net of related accumulated amortization of $13.3 and $12.9 as of December
31, 2001 and 2000, respectively.
The Company reevaluates goodwill and other intangibles based on
undiscounted operating cash flows whenever significant events or changes occur
which might impair recovery of recorded asset costs. The Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, effective for fiscal years beginning after December 15, 2001,
which will require the amortization of goodwill to cease and the testing of
goodwill for impairment at transition, annually, and at interim periods if an
event or circumstance might result in an impairment. The Company will adopt this
statement effective January 1, 2002.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to reverse.
Prior to the recapitalization, the Company was part of Halliburton's
consolidated tax-reporting group for U.S. income tax purposes. Halliburton does
not record specific tax assets and liabilities to its business units, but
instead allocates each business unit a tax expense based on its consolidated tax
position. The income tax provision shown in the consolidated financial
statements is based upon the Company's estimate of the effective tax rate of
38.5% for the periods ending December 31, 2000 and 1999, respectively. The
Company believes that the income tax charge in 2000 and 1999 was calculated in a
manner consistent with a reasonable estimate of future tax expense (see Note
12).
DERIVATIVE INSTRUMENTS
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and No. 138. As a result of the adoption of SFAS No. 133, as amended, the
Company recognizes all derivative financial instruments, such as interest rate
swap contracts and
F-9
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
foreign exchange contracts, in the consolidated financial statements at fair
value. Changes in the fair value of derivative financial instruments are either
recognized in income or in shareholders' equity as a component of comprehensive
income depending on whether the derivative financial instrument qualifies for
hedge accounting. Changes in fair values of derivatives accounted for as cash
flow hedges, to the extent they are effective as hedges, are recorded in other
comprehensive income net of deferred taxes. Changes in fair value of derivatives
not qualifying as hedges are reported in income. The Company did not reflect the
transition in a separate line item as a change in accounting principle, net of
tax, due to the minimal impact of $3.3 on the Company's results of operations.
FOREIGN CURRENCY TRANSLATION
Foreign entities whose functional currency is the United States
dollar translate monetary assets and liabilities at year-end exchange rates and
nonmonetary items at historical rates. Revenue and expense amounts are
translated at the average rates in effect during the year, except for
depreciation and cost of product sales, which are translated at historical
rates. Gains or losses from changes in exchange rates are recognized in the
consolidated statement of operations in the year of occurrence. Foreign entities
whose functional currency is the local currency translate net assets at year-end
rates and revenue and expense amounts at average exchange rates. Adjustments
resulting from these translations are reflected in the consolidated financial
statements as a component of other comprehensive income in shareholders' equity.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation. These changes had no impact on previously reported
net income or shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued two new statements, SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16,
"Business Combinations," eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS No. 141 is effective for all transactions
completed after June 30, 2001, except transactions using the
pooling-of-interests method that were initiated prior to July 1, 2001. As the
Company had no business combination transactions in process or otherwise
initiated that contemplated pooling-of-interests, adoption of SFAS No. 141 will
not have an impact on the Company's consolidated financial statements.
SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets," and eliminates the requirement to amortize goodwill and
indefinite-lived assets, addresses the amortization of intangible assets with a
defined life and requires impairment testing and recognition of goodwill and
intangible assets. SFAS No. 142 will be effective for the Company beginning
January 1, 2002. As a result of the adoption of SFAS No. 142, amortization will
decrease by approximately $14.2. The Company is currently evaluating the impact
this statement will have on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity shall recognize
the cumulative effect of adoption of SFAS No. 143 as a change in accounting
principle. The Company is currently evaluating the impact this statement will
have on the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and
F-10
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
for Long-Lived Assets to Be Disposed Of." SFAS No. 144 primarily addresses
significant issues relating to the implementation of SFAS No. 121 and develops a
single accounting model for long-lived assets to be disposed of, whether
previously held and used or newly acquired. The provisions of SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001. The Company is
currently evaluating the impact this statement will have on the Company's
financial position or results of operations.
3. INVENTORIES:
Inventories on the last-in, first out (LIFO) method represented
$91.0 and $76.4 of the Company's inventories as of December 31, 2001 and 2000,
respectively. The excess of FIFO costs over LIFO costs as of December 31, 2001
and 2000, were $72.2 and $70.4, respectively. Inventories are summarized as
follows:
2001 2000
---- ----
Finished products and parts ........... $203.0 $157.6
In-process products and parts ......... 105.4 87.0
Raw materials and supplies ............ 89.8 78.0
------ ------
Total inventory .......... 398.2 322.6
Less --
LIFO reserve and full absorption (67.9) (66.1)
Progress payments on contracts . (2.0) (1.9)
------ ------
Inventories, net ...................... $328.3 $254.6
====== ======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2001 and 2000,
consisted of the following:
2001 2000
---- ----
Land and land improvements ........................ $ 14.7 $ 15.2
Buildings ......................................... 154.8 164.1
Machinery and equipment ........................... 557.8 525.4
Total property, plant and equipment .. 727.3 704.7
Less -- Allowance for depreciation and amortization (491.4) (473.6)
------- -------
Property, plant and equipment, net ................ $ 235.9 $ 231.1
======= =======
Depreciation expense totaled $44.2, $40.5, and $39.9 for the years
ended December 31, 2001, 2000, and 1999, respectively.
5. OTHER ASSETS
Other Assets at December 31, 2001 and 2000, consisted of the
following:
2001 2000
---- ----
Deferred financing costs .... $71.3 $ --
Other assets ................ 20.8 13.3
----- -------
92.1 13.3
Less accumulated amortization (5.3) --
----- -------
Total ....................... $86.8 $ 13.3
===== =======
Deferred financing costs are amortized to interest expense on a
straight-line basis (which approximates the effective interest method) over the
term of the related loans, which range from six to ten years.
F-11
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
6. ACCRUED EXPENSES
Accrued expenses at December 31, 2001 and 2000, consisted of the
following:
2001 2000
---- ----
Payroll and other compensation ........... $ 45.5 $ 69.8
Warranty costs ........................... 18.8 17.3
Interest ................................. 13.1 1.3
Income taxes ............................. 17.9 14.1
Self insurance ........................... 4.5 4.5
Other accrued liabilities ................ $ 37.4 $ 20.1
------ ------
Total .................................... $137.2 $127.1
====== ======
7. ACQUISITIONS:
In the second quarter of 2001, the Company completed the acquisition
of Entech Industries, Inc. ("Entech"), a valve manufacturer with operations
based in four European countries, for approximately $74.4, which consisted of
approximately $29.5 in cash, $16.3 in assumed debt and $28.6 in equity. The
acquisition was valued at approximately $70 million not including $4.4 million
in cash attributable to incremental transaction costs. Entech consists of five
business units engaged in the design, manufacture and distribution of valves
engineered for the oil & gas production and transmission, petrochemical and
power industries. Entech's business lines are reflected in our flow control
segment. In connection with the acquisition, the Company recorded goodwill of
approximately $50.7, which is being amortized on a straight-line basis over 20
years.
On April 1, 2000, we acquired the remaining 50% interest in the
NIMCO joint venture that had been owned by our joint venture partner. Prior to
the acquisition on April 1, 2000, our interest in the NIMCO joint venture was
accounted for using the equity method and only our share of its earnings was
included in our revenues.
8. DEBT:
SHORT-TERM NOTES PAYABLE
At December 31, 2001 and 2000, the Company had $39.3 and $18.7,
respectively, of notes payable to various banks with interest rates ranging from
1.1% to 15.5% and 5.2% to 8.05%, respectively. The weighted average interest
rate at December 31, 2001 was approximately 3.7%.
LONG-TERM DEBT
In connection with the recapitalization transactions, the Company
issued $300.0 in notes and obtained a new credit facility.
The Company sold $300.0 of notes in April 2001 in a private
placement. In September 2001, under a registration statement, the Company
exchanged the notes. The exchanged notes were identical except that the old
notes were not registered under the Securities Act. The notes may be redeemed
beginning April 15, 2006. The initial redemption price is 104.688% of the
principal amount plus accrued interest. The redemption price will decline each
year after 2006 and will be 100.0% of the principal amount, plus accrued
interest, beginning on April 15, 2009. In addition, before April 15, 2004, the
Company may redeem up to 35% of the notes at a redemption price of 109.375% of
their principal amount, plus accrued interest. The Company may redeem the notes
only if after such redemption, at least 65% of the aggregate principal amount of
the notes originally issued remain outstanding. Upon a change of control, the
Company will be required to make an offer to repurchase the notes at a price
equal to 101% of their principal amount plus accrued interest. The wholly owned
domestic subsidiaries of Dresser, Inc. guarantee the notes.
F-12
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
The new credit facility provides a six-year $165.0 Tranche A U.S.
term loan facility, a six-year Tranche A Euro term loan facility in an amount
equivalent, as of the closing date, to $100.0 which was borrowed by a foreign
subsidiary, and an eight-year $455.0 Tranche B term loan facility, each of which
was drawn to partially finance the recapitalization transactions and pay certain
related costs and expenses. In addition, the new credit facility provides for a
six-year $100.0 revolving credit facility to be utilized by the Company for
working capital requirements and other general corporate purposes. As of
December 31, 2001, there was $70.7 available under the revolving credit
facility; amounts outstanding under letters of credit were $29.3.
The loans and other obligations under the credit facilities are
guaranteed by the Company's parent and all of the Company's existing and future
direct and indirect wholly owned domestic subsidiaries. The Company's
obligations and the guarantees are secured by (a) all or substantially all of
the material property and assets, real or personal now owned or hereafter
acquired by the Company or the guarantors, and (b) all proceeds and products of
the property and assets described in clause (a) above. The obligations of our
foreign subsidiary that borrowed under the Tranche A Euro term loan facility are
secured by certain of the assets of that foreign subsidiary.
At the Company's request, and so long as (a) no default or event of
default has occurred and is continuing under the credit facility and (b) the
lenders or other financial institutions are willing to lend such incremental
amounts, the Tranche B term loan facility may be increased from time to time in
an amount, in the aggregate, not to exceed $95.0.
The credit agreement documentation contains certain customary
representations and warranties and contains customary covenants restricting our
ability to, among others: (i) declare dividends or redeem or repurchase capital
stock; (ii) prepay, redeem or purchase debt; (iii) incur liens and engage in
sale-leaseback transactions; (iv) make loans and investments; (v) incur
additional indebtedness; (vi) amend or otherwise alter debt and other material
agreements; (vii) make capital expenditures; (viii) engage in mergers,
acquisitions and asset sales; (ix) transact with affiliates; and (x) alter the
business the Company conducts. The Company is required to indemnify the agent
and lenders and comply with specified financial and affirmative covenants
including a total debt to EBITDA ratio and an interest coverage ratio. The
Company was in compliance with these covenants at December 31, 2001.
Outstanding long term borrowing consist of the following:
DESCRIPTION 2001 2000 AMORTIZATION INTEREST RATE MATURITY
----------- ---- ---- ------------ ------------- --------
9-3/8% Notes................... $ 300.0 $ -- None 9.375% April 15, 2011
Tranche A - U.S................ 160.9 -- (1) LIBOR + 3.0%(2) April 10, 2007
Tranche A - Euro............... 98.1 -- (1) Euribor + 3.0%(2) April 10, 2007
Tranche B...................... 452.7 -- (3) LIBOR + 3.5%(4) April 10, 2009
Other.......................... 13.3 0.2 Various (5) (6)
-------- ----
$1,025.0 $0.2
Less current portion (25.0) --
======== ====
Long term debt................. $1,000.0 $0.2
======== ====
(1) The Tranche A term loans will amortize with annual reductions of 5% in
year one, 10% in year two, 15% in year three, 20% in year four and 25% in
years five and six.
(2) The interest rate margin can range from 2.0% - 3.25% depending on the
Company's leverage ratio. At December 31, 2001, the 3 month LIBOR rate and
Euribor rate was 1.88% and 3.29%, respectively.
(3) The Tranche B term loans will amortize 1% for years one through seven,
with the remainder to be repaid in quarterly amounts in year eight.
(4) The interest rate margin can range from 3.0% - 3.75% depending on the
Company's leverage ratio. At December 31, 2001, the 3-month LIBOR rate was
1.88%.
(5) The interest rates range from 2.175% to 8.11%.
F-13
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
(6) Maturity dates of the loans range from 2002 to 2008.
Minimum principal payments on long-term debt subsequent to 2001 are
as follows:
2002 ....................... $ 25.0
2003 ....................... 47.3
2004 ....................... 51.9
2005 ....................... 65.1
2006 ....................... 71.8
Thereafter ................. 763.9
--------
$1,025.0
========
9. FINANCIAL INSTRUMENTS:
DERIVATIVE FINANCIAL INSTRUMENTS
The Company only uses derivatives for hedging purposes. The
following is a summary of the Company's risk management strategies and the
effect of these strategies on the Company's consolidated financial statements.
CASH FLOW HEDGING STRATEGY
The Company selectively hedges significant exposures to potential
foreign exchange losses considering current market conditions, future operating
activities and the cost of hedging exposure in relation to the perceived risk of
loss. The purpose of the foreign currency hedging activities is to protect the
Company from the risk that the cash flow resulting from the sale or purchase of
products and services in foreign currencies will be adversely affected by
changes in exchange rates. The Company uses forward exchange contracts to manage
its exposures to movements in foreign exchange rates. The use of these financial
instruments modifies exposure and reduces the risk of cash flow variability to
the Company. As of December 31, 2001, the Company had approximately $93.8 of
foreign exchange risk hedged using forward exchange contracts.
The Company has entered into interest rate swap agreements that
effectively convert a portion of its variable rate debt to a fixed rate basis
for the next 2 years, thus reducing the impact of interest rate changes on
future interest expense. As of December 31, 2001, the Company had entered into
two interest rate swaps. The notional amounts were $115.0 and $99.3 with fixed
rates of 4.49% and 4.46%, respectively.
As of December 31, 2001, the net accumulated derivative loss in
accumulated other comprehensive income was $2.5. During the twelve months ended
December 31, 2001, $1.1 of accumulated net derivative losses was reclassified
from accumulated other comprehensive income into earnings, as a result of the
recognition of the forecasted transactions. When the hedged item is realized,
the gain or loss included in other comprehensive income is reported on the same
line in the consolidated statement of operations. Other disclosures related to
hedge ineffectiveness, gains/(losses) excluded from the assessment of hedge
ineffectiveness, and gain/(losses) resulting from the disqualification of hedge
accounting have been omitted due to the insignificance of these amounts.
As of December 31, 2001, the Company had a net liability of $4.7,
which approximates fair value, related to its interest rate swaps, which are
reflected in accrued expenses in the consolidated balance sheet. In addition,
the Company had assets of $2.4 and a liability of $0.2 related to its foreign
currency forward contracts. These amounts, which approximate fair value, are
reflected in other current assets on our consolidated balance sheet.
At December 31, 2001, the Company expects to reclassify $1.0 of net
losses on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months.
F-14
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, investments, trade
accounts receivable, and derivatives. The Company maintains cash and cash
equivalents and investments with various financial institutions. Trade
receivables are generated from a diverse group of customers with no significant
concentrations of receivables from any single customer. The Company maintains an
allowance for losses based upon the expected collectibility of all trade
accounts receivable.
There are no significant concentrations of credit risk with any
individual counterparty or group of counterparties related to the Company's
derivative contracts. The Company selects counterparties based on
creditworthiness, which is continually monitored, and the counterparties'
ability to perform their obligations under the terms of the transactions. The
Company does not expect any counterparties to fail to meet their obligation
under these contracts given their high credit ratings; therefore, the Company
considers the credit risk associated with the derivative contracts to be
minimal.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management estimates the fair value of (i) accounts receivable,
accounts payable, accrued expense and short term debt approximate carrying value
due to the relatively short maturity of these instruments; (ii) notes receivable
approximate carrying value based upon effective borrowing rates for issuance of
debt with similar terms and remaining maturities; and (iii) the borrowings under
the term loans and various other notes approximate carrying value because these
borrowings accrue interest at variable interest rates based on market rates. The
Company estimates the fair value of its fixed rate debt for its 93/8% notes
based on market prices and for the remainder its fixed rate debt generally using
discounted cash flow analysis based on the Company's current borrowing rates for
debts with similar maturities. The estimated fair value of the fixed rate debt
at December 31, 2001 was approximately $306.8. The carrying value of the fixed
rate debt is approximately $302.2. See Note 9, for the fair value of the
Company's derivative instruments.
11. RELATED-PARTY TRANSACTIONS
On April 10, 2001, Halliburton executed a transition services
agreement with the Company whereby Halliburton agreed to provide transition
services for up to nine months at its cost, which the Company believes
approximated the fair market value of those services. The services covered by
this agreement included certain human resources and employee benefit
administration services, certain information technology services and certain
real estate support services at facilities that we shared with Halliburton.
Payments made to Halliburton under this agreement during 2001 were approximately
$1.8.
During 2001, the Company leased certain space to Halliburton on a
month to month basis. The Company received $0.5, and subsequent to December 31,
2001, Halliburton has vacated the space.
In connection with the acquisition of Entech, the Company issued
440,955 shares of class B common stock valued at $17.6 to entities affiliated
with First Reserve Corporation.
Prior to the recapitalization transactions, DEG used and was charged
directly for, certain services that Halliburton provides to its business units.
Halliburton also allocated a certain portion of its non-corporate expenses to
each business unit. These services included, among others, information systems
support, human resources, tax, procurement, communications, real estate and both
internal and external legal services. Halliburton allocated the costs for some
of these services to its business units based on factors such as number of
employees, revenues and assets, or directly charged for some services on an as
used basis. The related expenses for these services for the years ended December
31, 2000 and 1999 were approximately $9.3 and $10.6, respectively. Management
believes that these allocation methods were reasonable. In addition, Halliburton
also administered DEG's risk management programs. The insurance program included
a broad all-risk coverage for real and personal property and third-party
liability coverage, employer's liability coverage, automobile liability, general
product liability, workers'
F-15
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
compensation liability and other standard liability coverage. Expenses of $14.3
and $6.7 have been allocated by Halliburton to DEG for these risk management
coverages for the years ended December 31, 2000 and 1999, respectively.
Halliburton also allocated benefit costs associated with retired and divested
business employees' corporate-related pension and employee benefit charges and
union-related pension and employee benefit charges.
All of the charges described above have been included as costs of
DEG's operations in the consolidated financial statements. The Company's
management believes that it is possible that the terms of these transactions may
differ from those that would result from transactions among third parties. Such
allocations are not necessarily indicative of actual results. However,
management believes that the methods used to charge for services provided by
Halliburton were reasonable.
12. INCOME TAXES
The federal and state income tax provision is summarized as follows:
DECEMBER 31
2001
-----------
CURRENT INCOME TAX EXPENSE:
United States
Federal ......................... $11.0
State ........................... --
Foreign ............................. 19.9
-----
30.9
-----
DEFERRED INCOME TAX EXPENSE(BENEFIT):
United States
Federal ......................... 11.5
State ........................... 1.1
Foreign ............................. (0.8)
-----
11.8
-----
Total provision for income taxes .... $42.7
=====
A reconciliation of the provision for income taxes with amounts
determined by applying the statutory U.S. federal income tax rate to income
before income taxes is as follows:
DECEMBER 31
2001
-----------
Computed tax at the federal statutory rate of 35% $34.8
Non-deductible interest ......................... 1.9
Non-deductible transaction costs ................ 0.6
Meals and entertainment ......................... 0.6
Non-deductible employee benefits ................ 0.4
State taxes, net of federal benefit ............. 1.1
Prior year foreign tax adjustment ............... 1.0
Goodwill ........................................ 0.9
Foreign losses not benefited .................... 0.7
Foreign tax in excess of US tax rate ............ 1.0
Other ........................................... (0.3)
----
Provision for income taxes ...................... $42.7
====
Effective income tax rate ....................... 42.9%
====
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
F-16
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
DECEMBER 31
2001
----
Deferred tax assets:
Inventory ........................... $ 0.4
Fixed assets ........................ 30.8
Goodwill ............................ 36.7
Postretirement medical obligation ... 54.6
Post retirement benefit obligation .. 5.6
Warranty expense .................... 4.5
Workers compensation ................ 2.0
Deferred compensation ............... 4.2
Net operating losses carryforwards .. 32.0
Other ............................... 4.3
------
Total deferred tax assets $175.1
======
Valuation allowance ..................... (79.5)
------
Net deferred tax asset .................. $ 95.6
======
Deferred tax liabilities:
State taxes ......................... $ 5.6
Other ............................... 0.8
------
Total deferred tax liabilities .......... $ 6.4
======
The Company has a net operating loss ("NOL") carryforward for U.S.
federal tax purposes of approximately $78.6 expiring in 2021. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the NOL carryforward that can be utilized.
The Company believes that future taxable income may not be sufficient to realize
all deferred tax assets. Accordingly, management believes that the deferred tax
assets, net of a $79.5 valuation allowance, are considered realizable with
sufficient certainty.
The Company has not recorded deferred income taxes applicable to
undistributed earning of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $26.0 at
December 31, 2001. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of approximately $1.0 would
have been required at December 31, 2001.
For the years ended December 31, 2000 and 1999, the Company was a
part of the Halliburton consolidated tax-reporting group for U.S. income tax
purposes. Halliburton does not record specific tax assets and liabilities to its
business units, but instead allocates each business unit a tax expense based on
its consolidated tax position. As such, the effects of temporary and permanent
differences, as well as any valuation allowances relating to any tax assets are
not separately determinable and therefore not included for the year ended
December 31, 2000. The historical amounts have not been provided as this amount
would not be indicative of the Company's taxable position. Tax strategy
decisions were made during those periods that may not have been made had the
Company operated on a stand-alone basis.
The income tax provision for December 31, 2000 and 1999 is based
upon the Company's estimate of the effective tax rate of 38.5%. The Company
believes that this income tax charge was calculated in a manner consistent with
a reasonable estimate of future tax expense.
F-17
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
13. COMMITMENT AND CONTINGENCIES:
HALLIBURTON INDEMNIFICATIONS
In accordance with the Agreement, Halliburton has agreed to
indemnify the Company for certain items. The indemnification items generally
include any product liability claim or product warranty claim arising out of any
products relating to any discontinued product or service line of the Company. In
addition, Halliburton has generally agreed to indemnify the Company for any
product liability claim made prior to closing the Agreement, any environmental
liability claim against the Company, any loss, liability, damage or expense from
any legal proceeding initiated prior to closing of the Agreement, any loss,
liability, damage or expense relating to worker's compensation, general
liability, and automobile liability arising out of events or occurrences prior
to the closing as to which the Company notifies Halliburton prior to the third
anniversary of the closing date. Based on these indemnity rights, only
liabilities related to exposures not specifically covered above have been
included in the consolidated financial statements.
LEASES
At December 31, 2001, the Company was obligated under noncancelable
operating leases, principally for the use of land, offices, equipment, field
facilities, and warehouses. Total rental expense charged to operations for such
leases totaled $14.4, $13.6, and $9.9, for the years ended December 31, 2001,
2000 and 1999, respectively.
Additionally, the Company has entered into several capital leases.
Future minimum lease payments under capital and operating leases that had
initial or remaining noncancelable lease terms at December 31, 2001, were:
FISCAL YEAR CAPITAL OPERATING
- ----------- ------- ---------
2002 ....................... $1.3 $13.3
2003 ....................... 2.0 11.4
2004 ....................... 0.9 8.9
2005 ....................... 0.7 7.8
2006 ....................... 0.7 4.7
Thereafter ................. 0.4 13.0
---- -----
Total minimum lease payments $6.0 $59.1
==== =====
PRODUCT WARRANTIES
The Company offers warranties on the sale of certain of its products
and records an accrual for estimated future claims. Such accruals are based upon
historical experience and management's estimate of the level of future claims.
ENVIRONMENTAL
The Company's businesses and some of the Company's products are
subject to regulation under various and changing federal, state, local and
foreign laws and regulations relating to the environment and to employee safety
and health. These environmental laws and regulations govern the generation,
storage, transportation, handling, disposal and emission of various substances.
These environmental laws also impose liability for personal injury
or property damage related to releases of hazardous substances. Permits are
required for operation of the Company's businesses, and these permits are
subject to renewal, modification and, in certain circumstances, revocation. The
Company believes it is substantially in compliance with these laws and
permitting requirements. The Company's businesses also are subject to regulation
under substantial various and changing federal, state, local and foreign laws
and regulations which allow regulatory authorities and private parties to compel
(or seek reimbursement for) cleanup of environmental contamination at sites now
or formerly owned or operated by the Company's businesses and at facilities
where their
F-18
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
waste is or has been disposed. Going forward, the Company expects to incur
ongoing capital and operating costs for investigation and remediation and to
maintain compliance with currently applicable environmental laws and
regulations; however, the Company does not expect those costs, in the aggregate,
to be material.
In April 2001, the Company completed the recapitalization
transaction. Halliburton originally acquired the Company's businesses as part of
its acquisition of Dresser Industries, Inc. ("Dresser Industries") in 1998.
Dresser Industries' operations consisted of the Company's businesses, as well as
other operating units. As Halliburton has publicly disclosed, it has been
subject to numerous lawsuits involving asbestos claims associated with, among
other things, the operating units of Dresser Industries that were retained by
Halliburton or disposed of by Dresser Industries or Halliburton prior to the
recapitalization transaction. These lawsuits have resulted in significant
expense for Halliburton. The Company has not historically incurred, and in the
future the Company does not believe that it will incur, any material liability
as a result of the past use of asbestos in products manufactured by these other
units of Dresser Industries, or as a result of the past use of asbestos in
products manufactured by the Company's businesses or any predecessor entities of
the Company's businesses.
Pursuant to the recapitalization agreement, all liabilities related
to asbestos claims arising out of events occurring prior to the consummation of
the recapitalization transaction, are defined to be "excluded liabilities,"
whether they resulted from activities of Halliburton, Dresser Industries or any
predecessor entities of any of the Company's businesses. The recapitalization
agreement further provides, subject to certain limitations and exceptions, that
Halliburton will indemnify the Company and hold it harmless against losses and
liabilities that the Company actually incurs which arise out of or result from
"excluded liabilities," as well certain other liabilities in existence as of the
closing of the recapitalization transaction. The maximum aggregate amount of
losses indemnifiable by Halliburton pursuant to the recapitalization agreement
is $950.0 million. All indemnification claims are subject to notice and
procedural requirements which may result in Halliburton denying indemnification
claims for some losses. See "Certain Risk Factors -- Environmental Compliance
Costs And Liabilities Could Adversely Affect Our Financial Condition" and " --
We May Be Faced With Unexpected Product Claims or Regulations."
The Company is responsible for evaluating and addressing the
environmental impact of sites where the Company is operating or has maintained
operations. As a result, the Company spends money each year assessing and
remediating contaminated properties to avoid future liabilities, to comply with
legal and regulatory requirements, or to respond to claims by third parties.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its executive officers
and certain management personnel. The agreements generally continue until
terminated by the executive or the Company and provide for severance payments
under certain circumstances. The agreements include a covenant against
competition with the Company, which extends for a period of time after
termination for any reason.
14. SHAREHOLDERS' EQUITY:
CAPITAL STOCK
The Company has authorized the issuance of up to 15 million shares
of stock which consists of 13 million shares of class A common stock, par value
$0.001 per share and 2 million shares of class B common stock, par value $0.001
per share. The holder of each share of class A common stock shall have the right
to one vote and shall be entitled to notice of any shareholders' meeting in
accordance with the bylaws of the Company and shall be entitled to vote upon
such matters and in such manner provided by law. The holders of class B common
stock shall have no voting rights. As of December 31, 2001, the Company had
10,488,222 shares of class A common stock outstanding and 909,486 shares of
class B common stock outstanding.
F-19
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
In accordance with the Agreement, Halliburton retained an
approximate 5.1% interest in the Company, for which Halliburton received 537,408
shares of class A common stock. The Company issued DEG Acquisition, LLC 9.7
million shares of class A common stock and 300,000 shares of class B common
stock valued at $400 on the date of closing. As of December 31, 2001, DEG
Acquisition, LLC owned approximately 92.5% of the Company with the remaining
2.4% being held by various parties.
In connection with the acquisition of Entech, the Company issued
171,756 shares of class A common stock and 490,744 shares of class B common
stock valued at approximately $26.5, net of 52,857 shares reacquired for $2.1.
In addition, during 2001, the Company issued 925 shares of class A
common stock to non employee, non affiliate board members as compensation for
participation in board and committee meetings.
STOCK INCENTIVE PLANS
The Company has adopted certain employee incentive programs for the
purpose of (i) attracting and retaining employees, directors and consultants
(ii) providing incentives to those deemed important to the success of the
Company and (iii) associating the interests of these individuals with the
interest of the Company and their shareholders through opportunities for
increased stock ownership.
DRESSER, INC. 2001 STOCK INCENTIVE PLAN
The Dresser incentive plan provides for the award of a variety of
equity based compensation awards, including non-qualified stock options,
incentive stock options, restricted stock awards, phantom stock, stock
appreciation rights and other rights with respect to the Company's common stock.
Under the plan, the Company can issue 710,101 shares of common stock, which can
be issued in either class A or class B common stock. However, the aggregate
number of shares of common stock that may be issued pursuant to the exercise of
incentive stock options under this incentive plan shall not exceed 672,601
shares.
During 2001, the Company issued to certain employees, 214,000
options with an exercise price of $40.00 per share. These options will vest 20%
on the first anniversary of the date of grant and 1/48 of the remaining 80% per
month for each month thereafter until the option is fully vested. The Company
has also issued 321,000 options with an exercise price of $40.00; shares will
vest if the employee is still employed after nine and one-half years, but
vesting will accelerate if the Company achieves predetermined financial
performance milestones. In addition, the Company has issued 107,000 options at
an exercise price of $40.00, which will vest if the Company's majority
shareholder realizes a 35% annualized internal rate of return on its initial
investment and is able to liquidate its initial investment at a price equal to
at least 450% of the price paid for its initial investment. As of December 31,
2001, 618,000 options remained outstanding; no options had been exercised.
Certain members of management are party to an Investor Rights
Agreement, whereby if the employee leaves for good reason, is terminated by the
Company without cause, dies or suffers a permanent disability, then such
employee will, pursuant to a right granted in the employee's employment
agreement be permitted to cause the Company to repurchase shares at fair market
value that they have held for at least six months. If an employee retires, is
terminated for cause, or resigns (without good reason), or leaves for the
reasons enumerated in the prior sentence but fails to "put" their shares to the
Company for repurchase, then the Company will have the right to repurchase their
shares at fair value. Due to this redemption feature, options owned by
management will be recorded in temporary equity upon vesting and exercise. As of
December 31, 2001, no options had vested.
SFAS NO. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123 defines a fair value method of accounting for employee
stock compensation and encourages, but does not require all entities to adopt
that method of accounting. Entities electing not to adopt the fair value method
of accounting must make pro forma disclosures of net income as if the fair value
based method of accounting as defined in the statement had been applied. The
Company accounts for the stock option plans in
F-20
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
accordance with APB Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. The fair value of the options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 2001: risk-free rate 5.09%, a dividend yield of 0.0%,
a volatility factor of the expected market price of 0.01, and an expected life
of the options of 10 years. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information is as follows:
2001
----
Net income as reported ........... $56.8
Pro forma net income ............. $55.8
During 2001, the Company issued 642,000 options to certain employees
with a weighted average exercise price of $40.00. In addition, 24,000 options
with a weighted average exercise price of $40.00 were forfeited. As of December
31, 2001, 618,000 options remained outstanding with a weighted average exercise
price of $40.00 and a weighted average contractual remaining life of 9.3 years.
2001 MANAGEMENT EMPLOYEE EQUITY PURCHASE PLAN
The 2001 Management Employee Equity Purchase Plan provides for
certain of the Company's employees, directors and consultants, as authorized by
the board of directors, to purchase common stock of the Company. The plan
provides for the purchase of up to 87,500 shares of class A common stock and up
to 762,523 shares of class B common stock. The per share price for such shares
will be $40.00 which equaled the fair market value on the date of the
recapitalization transactions. The number of shares that each employee will be
eligible to purchase will be between 625 and 25,000 shares subject to the
overall limitation on the number of shares that may be purchased under the plan.
As of December 31, 2001, 87,500 shares of class A common stock and 146,875
shares of class B common stock had been purchased under the plan. The company
received proceeds of $9.4. In connection with the resignation of one employee,
the Company repurchased 9,367 shares of class A common stock and 28,133 shares
of class B common stock.
DEFERRED COMPENSATION
The Company offers a non-qualified deferred compensation program to
certain key employees whereby they may defer a portion of annual compensation.
Participants will generally be able to elect to have such accounts deemed to be
invested in either units which are valued based upon the value of the Company's
common stock or an interest bearing account. Distributions shall generally be
made from the deferred compensation plan over time following the participant's
retirement or other termination of employment. The liability for the deferred
compensation program included in the financial statements at December 31, 2001
and 2000, was $8.8 and $10.0, respectively. Certain liabilities under the
Halliburton deferred compensation plans and supplemental retirement plans have
been transferred to the Company's plan and are general liabilities of the
Company.
15. RETIREMENT AND OTHER POSTRETIREMENT PLANS:
DEFINED CONTRIBUTION PLANS
These plans provide retirement contributions in return for services
rendered, provide an individual account for each participant and have terms that
specify how contributions to the participant's account are to be determined
rather than the amount of pension benefits the participant is to receive.
Contributions to these plans are based on pretax income and/or discretionary
amounts determined on an annual basis. The expense associated with the
contribution and administration of these plans was $5.5 and $6.4, for the years
ended December 31, 2001 and 2000, respectively.
DOMESTIC AND FOREIGN BENEFITS
F-21
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
The Company sponsors several qualified and non-qualified pension
plans and other postretirement benefit plans that cover a significant number of
its employees. These plans include both defined contribution plans and defined
benefit plans. The plans are funded to operate on an actuarially sound basis.
Plan assets are primarily invested in cash, short-term investments, real estate,
equity and fixed income securities of entities domiciled in the country of the
plan's operation. The plans that have been included in these financial
statements are as follows:
DOMESTIC FOREIGN
PENSION BENEFITS PENSION BENEFITS
---------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
<C
Reconciliation of benefit obligation --
Obligation as of beginning of year $156.2 $148.6 $85.8 $48.9
Service cost ..................... 1.3 2.9 1.2 2.5
Interest cost .................... 4.9 10.9 1.7 4.3
Plan amendments .................. -- 4.5 -- --
Actuarial (gain) loss ............ (3.7) (0.6) (2.4) 2.2
Business combinations ............ -- -- -- 38.2
Benefit payments ................. (4.2) (10.1) (1.3) (3.4)
Participant plan contributions ... -- -- -- 0.1
Curtailments ..................... -- -- -- --
Effects of settlements ........... -- -- (0.8) (0.4)
Foreign currency exchange rates .. -- -- (7.2) (6.6)
------ ------ ----- -----
Obligation at end of year ............. $154.5 $156.2 $77.0 $85.8
====== ====== ===== =====
DOMESTIC FOREIGN
PENSION BENEFITS PENSION BENEFITS
---------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
Change in plan assets --
Fair value of plan assets at valuation date $165.8 $164.9 $ 43.5 $ 35.5
Actual return on plan assets .............. (14.5) 9.1 (2.4) 3.5
Business contributions .................... -- -- -- 7.9
Employer contributions .................... 4.1 1.9 0.9 2.5
Participant contributions ................. -- -- -- 0.1
Benefit payments .......................... (4.3) (10.1) (0.9) (2.6)
Foreign currency changes .................. -- -- (2.4) (3.0)
Effects of settlements .................... -- -- (1.7) (0.5)
------ ------ ------ ------
Fair value of plan assets at valuation date $151.1 $165.8 $ 37.0 $ 43.4
====== ====== ====== ======
Funded status --
Funded status at end of year .............. $ (3.4) $ 9.6 $(40.0) $(42.4)
Unrecognized transition obligation ........ -- -- 11.2 --
Unrecognized loss ......................... -- -- 2.9 --
------ ------ ------ ------
Net amount recognized ..................... $ (3.4) $ 9.6 $(25.9) $(42.4)
====== ====== ====== ======
F-22
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
In the table above, the valuation date used for the obligation, fair
value of plan assets and funded status for 2001 is for the period ended April
10, 2001 when Dresser, Inc. was formed. In 2000, the valuation date was December
31, 2000. For the nine months ended December 31, 2001 the funded status of both
the domestic and foreign pension benefit plans was as follows:
DOMESTIC FOREIGN
PENSION PENSION
BENEFITS BENEFITS
2001 2001
---- ----
Net amount recognized at 4/10/2001 ................ $(3.4) $(25.9)
Contributions -- 4/10/2001-12/31/2001 ........ 2.4 --
Net Periodic Pension Cost 4/10/2001-12/31/2001 (0.8) (4.1)
----- ------
Net amount recognized at 12/31/2001 .......... $(1.8) $(30.0)
===== ======
Weighed average assumptions at valuation date:
DOMESTIC PENSION DOMESTIC PENSION FOREIGN PENSION FOREIGN PENSION
BENEFITS 2001 BENEFITS 2000 BENEFITS 2001 BENEFITS 2000
------------- ------------- ------------- -------------
Discount rate ................ 7.5% 7.5% 3.0-7.0% 3.0-7.0%
Rate of compensation increase N/A 4.5-5.0% 3.5-7.6% 3.5-4.5%
Expected return on plan assets 9.0% 9.0% 5.0-8.0% 3.5-8.0%
The aggregate benefits obligation for those plans where the
accumulated benefits obligation exceeded the fair value of plan assets
represents the net liability. The net liability recognized was $31.8 and $32.8
for the years ended December 31, 2001 and 2000, respectively.
Components of the net periodic benefit cost for the plans are as
follows:
DOMESTIC FOREIGN
PENSION BENEFITS PENSION BENEFITS
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Service cost ....................... $ 2.1 $ 2.9 $ 3.1 $ 1.9 $ 2.5 $ 2.2
Interest cost ...................... 8.2 10.9 10.3 2.8 4.3 2.4
Expected return on plan assets ..... (9.5) (14.3) (14.1) (1.9) (2.7) (2.5)
Amortization of:
Unrecognized net loss ......... -- 0.2 0.1 -- 0.2 (0.1)
Unrecognized net asset ........ -- -- (0.1) 1.3 2.0 --
Unrecognized prior service cost -- 0.1 (0.2) -- -- --
----- ------ ------ ----- ----- -----
Net periodic pension cost .......... $ 0.8 $ (0.2) $ (0.9) $ 4.1 $ 6.3 $ 2.0
===== ====== ====== ===== ===== =====
There were no prior service costs, gains or losses reported in 2001
for the domestic plans. The prior service costs reported in 2000 were amortized
on the straight-line basis over the average remaining service period of active
participants. In 2000, gains and losses in excess of 10% of the greater of the
benefit obligation and the market-related value of assets were amortized over
the average remaining service period of active participants.
F-23
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
NON-QUALIFIED PENSION PLANS
The Company provides certain key employees with additional pension
benefits through several unfounded non-qualified pension plans. These plans, the
Dresser, Inc. Supplemental Executive Retirement Plan (SERP), the Dresser, Inc.
Excess Compensation Limit Plan and the ERISA Excess Benefits Plan for Dresser,
Inc., work in tandem with the Company's qualified retirement plans and are
designed to restore the benefits that are otherwise limited due to Internal
Revenue Service limitations. The estimated liability for the non-qualified
pension plans at December 31, 2001 and 2000, was $4.7 and $4.3, respectively.
OTHER POSTRETIREMENT PLANS
The Company offers postretirement medical plans to specific eligible
employees. Plans are contributory with the Company absorbing remaining costs.
The Company may elect to adjust the amount of its contributions for these plans.
As a result, for these plans, the expected future health care cost information
rate affects the accumulated postretirement benefit obligation amount.
The accumulated projected benefit obligation for the postretirement
medical and life plans at December 31, 2001 and 2000, was $163.2 and $155.4,
respectively. In 2001 service costs, interest costs and benefits paid represent
expenses for the nine month period when the Company was formed. An additional
$1.8 was incurred and paid to Halliburton Company for the first three months of
2001 that is excluded from the table below.
2001 2000
---- ----
Change in benefit obligation --
Benefit obligation at beginning of year .............................. $155.9 $148.9
Service cost .................................................... 1.3 2.5
Interest cost ................................................... 9.3 10.9
Benefits paid ................................................... (3.3) (6.9)
------ ------
Benefit obligation at end of year ............................... $163.2 $155.4
====== ======
Change in plan assets --
Fair value of plan assets at valuation date ..................... $ -- $ --
Employer contribution ........................................... 3.3 6.9
Benefits paid ................................................... (3.3) (6.9)
Fair value of plan assets at valuation date ..................... $ -- $ --
------ ------
Funded status ................................................... $163.2 $155.4
Unrecognized actuarial gain/(loss) ................................... -- --
Unrecognized prior service cost ...................................... -- --
------ ------
Net amount recognized ........................................... $163.2 $155.4
====== ======
Amounts recognized in the consolidated balance sheets consist of:
Accrued benefit liability ................................... $163.2 $155.4
====== ======
Net amount recognized ....................................... $163.2 $155.4
====== ======
2001 2000
---- ----
Weighted-average assumptions at valuation date:
Discount rate ................................. 7.5% 7.5%
Expected return on plan assets ................ N/A N/A
Rate of compensation increase ................. 4.0% 4.0%
2001 2000 1999
---- ---- ----
Components of net periodic benefit coast at valuation date:
Service cost ......................................... $ 1.3 $ 2.5 $ 2.3
Interest cost ........................................ 9.3 10.9 10.5
Expected return on plan assets ....................... -- -- --
Unrecognized actuarial gain (loss) ................... -- -- --
----- ----- -----
Net periodic benefit cost ................................. $10.6 $13.4 $12.8
===== ===== =====
F-24
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percent change in assumed
healthcare cost trend rates would have the following effect:
1% 1%
INCREASE DECREASE
-------- --------
Effect on total service and interest cost components of net periodic postretirement
healthcare benefit cost .......................................................... $ 1.2 $ (1.0)
Effect on healthcare cost component of the accumulated postretirement benefit obligation 17.9 (15.2)
16. SEGMENT INFORMATION:
The Company operates under three reportable segments: flow control,
measurement systems and power systems. The business segments are organized
around the products and services provided to the customers each serves.
Flow Control. The flow control segments designs, manufactures and
markets valves and actuators. These products are used to start, stop and monitor
the flow of liquids and gases and to protect process equipment from excessive
pressure. The flow control segment markets its products under well recognized
brand names, including Masoneilan(R), Grove(R), Consolidated(R) and
Ledeen(TM).
Measurement Systems. The measurement systems segment consists of two
primary product groups. The first, retail fueling, is a leading supplier of fuel
dispensers, pumps, peripheral, point-of-sale and site monitoring systems and
software for the retail fueling industry. The second, measurement, is a leading
supplier of natural gas meters, regulators, digital and analog pressure and
temperature gauges and transducers and specialty couplings and connectors. These
systems and other products are used to measure and monitor liquids and gases.
Our measurement systems group markets its products and services under well
recognized brand names including Wayne(R), Ashcroft(R), Mooney(TM),
Roots(TM) and Dresser(R).
Power Systems. The power systems segment designs, manufactures and
markets natural gas fueled engines used primarily in natural gas compression and
power generation applications and rotary blowers and vacuum pumps. Our power
systems group markets its products under well-recognized brand names, including
Waukesha(R) and Roots(TM).
The following tables present information on the segments:
FLOW MEASUREMENT POWER OTHER/
CONTROL SYSTEMS SYSTEMS CORPORATE CONSOLIDATED
------- ------- ------- --------- ------------
2001
Revenues ........... $622.8 $573.3 $355.3 $ (5.6) $1,545.8
Operating income ... 67.4 56.7 59.8 (17.2) 166.7
Depreciation and
amortization .... 23.5 18.0 12.4 4.9 58.8
Total assets ....... 778.4 307.9 152.6 350.8 1,589.7
Capital expenditures 8.4 16.9 9.8 0.9 36.0
2000
Revenues ........... $549.3 $562.8 $301.2 $ (4.8) $1,408.5
Operating income ... 77.1 64.0 42.0 (12.6) 170.5
Depreciation and
amortization .... 20.7 16.3 12.2 -- 49.2
Total assets ....... 608.3 298.3 146.0 24.5 1,077.1
Capital expenditures 7.1 12.3 7.9 -- 27.3
F-25
DRESSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE INFORMATION)
1999
Revenues ........... $557.6 $605.2 $274.3 $ (4.5) $1,432.6
Operating income ... 74.3 62.3 19.9 (11.5) 145.0
Depreciation and
amortization .... 20.6 15.7 12.2 -- 48.5
Total assets ....... 619.4 278.5 137.4 41.7 1,077.0
Capital expenditures 6.7 17.3 14.4 -- 38.4
The Company has two reportable geographic segments: Americas and
Europe. The following tables present information by geographic area for the
years ended December 31, 2000, 1999 and 1998:
AMERICAS EUROPE OTHER CONSOLIDATED
-------- ------ ----- ------------
2001
Revenues ........ $1,018.7 $319.7 $207.4 $1,545.8
Long-lived assets 317.0 429.1 35.3 781.4
2000
Revenues ........ $ 907.0 $285.0 $216.5 $1,408.5
Long-lived assets 214.2 273.8 21.7 509.7
1999
Revenues ........ $ 869.6 $380.6 $182.4 $1,432.6
Long-lived assets 212.1 289.0 20.4 521.5
17. QUARTERLY INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED DECEMBER 31, 2001
Revenues ................... $361.4 $373.4 $403.3 $07.7
Operating income ........... 37.4 42.8 45.1 41.4
Net income ................. $ 19.5 $ 18.7 $ 11.1 $ 7.5
YEAR ENDED DECEMBER 31, 2000
Revenues ................... $339.8 $356.0 $347.5 $365.2
Operating income ........... 39.1 39.7 45.2 46.5
Net income ................. $ 26.7 $ 20.5 $ 38.5 $23.1
18. SUPPLEMENTAL GUARANTOR INFORMATION:
In connection with the Company's offer to sell $300 million of
Senior Subordinated Notes due 2011 (the "Notes"), certain of the Company's
subsidiaries ("Subsidiary Guarantors") guaranteed, jointly and severally, the
Company's obligation to pay principal and interest on the Notes on a full and
unconditional basis. The guarantors of the Notes will include only the Company's
wholly-owned domestic subsidiaries. The following supplemental consolidating
condensed financial information presents the balance sheets as of December 31,
2001 and 2000 and the statements of operations and cash flows for the years
ended December 31, 2001, 2000 and 1999. In the consolidating condensed financial
statements, the Subsidiary Guarantors account for their investment in the
wholly-owned subsidiaries using the equity method.
F-26
DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................ $ 30.9 $ -- $ 66.3 $ -- $ 97.2
Receivables, net of allowance for doubtful
accounts of $5.4 ......................... 143.5 -- 172.7 -- 316.2
Inventories, net ............................ 171.3 -- 157.0 -- 328.3
Other current assets ........................ 2.9 -- 7.5 -- 10.4
-------- ------ ------ ------- --------
Total current assets ................... 348.6 -- 403.5 -- 752.1
PROPERTY, PLANT AND EQUIPMENT, net ............... 159.8 -- 76.1 -- 235.9
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES ......... -- 791.7 -- (791.7) --
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES ........ 0.4 -- 4.4 -- 4.8
LONG-TERM RECEIVABLES AND OTHER ASSETS ........... 67.5 -- 19.3 -- 86.8
DEFERRED TAX ASSETS .............................. 95.6 -- -- -- 95.6
INTANGIBLES, net ................................. 116.8 9.3 288.4 -- 414.5
-------- ------ ------ ------- --------
Total assets ........................... $ 788.7 $801.0 $791.7 $(791.7) $1,589.7
======== ====== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable .................. $ 74.9 $ -- $170.4 $ -- $ 245.3
Contract advances ........................... 4.4 -- 6.1 -- 10.5
Accrued expenses ............................ 44.2 -- 93.0 -- 137.2
-------- ------ ------ ------- --------
Total current liabilities .............. 123.5 -- 269.5 -- 393.0
PENSION AND OTHER RETIREE BENEFITS ............... 214.3 -- -- -- 214.3
LONG-TERM DEBT ................................... 913.6 -- 86.4 -- 1,000.0
OTHER LIABILITIES ................................ 18.7 -- 7.3 -- 26.0
-------- ------ ------ ------- --------
COMMITMENTS AND CONTINGENCIES
Total liabilities .................... 1,270.1 -- 363.2 -- 1,633.3
SHAREHOLDERS' (DEFICIT) EQUITY:
Shareholders'(deficit) equity, net ............... (485.7) 801.0 506.7 (833.0) (11.0)
Accumulated other comprehensive
income (loss).............................. 4.3 -- (78.2) 41.3 (32.6)
-------- ------ ------ ------- --------
Total shareholders' (deficit) equity ... (481.4) 801.0 428.5 (791.7) (43.6)
-------- ------ ------ ------- --------
Total liabilities and shareholders'
equity .............................. $ 788.7 $801.0 $791.7 $(791.7) $1,589.7
======== ====== ====== ======= ========
F-27
DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents ................. $ 5.5 $ -- $ 14.2 $ -- $ 19.7
Receivables, net of allowance for
doubtful accounts of $5.4 ......... 136.7 -- 149.4 -- 286.1
Inventories, net ..................... 139.6 -- 115.0 -- 254.6
Prepaid expenses ..................... 6.1 -- 5.4 -- 11.5
------ ------ ------ ------- --------
Total current assets .......... 287.9 -- 284.0 -- 571.9
PROPERTY, PLANT AND
EQUIPMENT, net ...................... 161.9 -- 69.2 -- 231.1
INVESTMENTS IN
CONSOLIDATED
SUBSIDIARIES ......................... -- 372.5 -- (372.5) --
INVESTMENT IN
UNCONSOLIDATED
SUBSIDIARIES ......................... 0.4 -- 2.3 -- 2.7
LONG-TERM RECEIVABLES
AND OTHER ASSETS .......................... (13.1) -- 26.4 -- 13.3
INTANGIBLES, net .......................... 118.4 -- 137.0 2.7 258.1
------ ------ ------ ------- --------
Total assets .............................. $555.5 $372.5 $518.9 $(369.8) $1,077.1
====== ====== ====== ======= ========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts and notes payable ........... $ 72.9 $ -- $ 70.7 $ -- $ 143.6
Contract advances .................... 11.8 -- 3.3 -- 15.1
Accrued expenses ..................... 62.1 -- 65.0 -- 127.1
------ ------ ------ ------- --------
Total current liabilities ..... 146.8 -- 139.0 -- 285.8
PENSION AND OTHER
RETIREE BENEFITS ..................... 195.4 -- 2.4 -- 197.8
LONG-TERM DEBT ............................ -- -- 0.2 -- 0.2
OTHER LIABILITIES ......................... 25.9 -- 4.8 -- 30.7
------ ------ ------ ------- --------
COMMITMENTS AND
CONTINGENCIES
Total liabilities ............. 368.1 -- 146.4 -- 514.5
DIVISIONAL EQUITY: ........................ --
Divisional equity (deficit), net .......... 174.2 372.5 436.8 (401.7) 581.8
Accumulated other
comprehensive income (loss) ........ 13.2 -- (64.3) 31.9 (19.2)
------ ------ ------ ------- --------
Total divisional equity
(deficit) .................. 187.4 372.5 372.5 (369.8) 562.6
------ ------ ------ ------- --------
Total liabilities and
divisional equity (deficit) . $555.5 $372.5 $518.9 $(369.8) $1,077.1
====== ====== ====== ======= ========
F-28
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES ...................................... $1,035.9 $ -- $617.6 $(107.7) $1,545.8
COST OF REVENUES .............................. 727.3 -- 454.1 (106.2) 1,075.2
-------- ------ ------ ------- --------
308.6 -- 163.5 (1.5) 470.6
SELLING, ENGINEERING, ADMINISTRATIVE
AND GENERAL EXPENSES .................. 200.6 -- 104.8 (1.5) 303.9
-------- ------ ------ ------- --------
OPERATING INCOME .............................. 108.0 -- 58.7 -- 166.7
EQUITY INCOME OF CONSOLIDATED SUBSIDIARIES .... -- 49.6 -- (49.6) --
OTHER INCOME AND
EXPENSES
Interest expense ......................... (59.2) -- (9.5) -- (68.7)
Other income ............................. 1.1 -- 0.4 -- 1.5
-------- ------ ------ ------- --------
INCOME BEFORE TAXES ........................... 49.9 49.6 49.6 (49.6) 99.5
INCOME TAXES .................................. (19.2) (19.1) (23.5) 19.1 (42.7)
-------- ------ ------ ------- --------
NET INCOME (LOSS) ............................. $ 30.7 $ 30.5 $ 26.1 $ (30.5) $ 56.8
======== ====== ====== ======= ========
F-29
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES ....................... $ 940.3 $ -- $565.5 $(97.3) $1,408.5
COST OF REVENUES ............... 662.8 -- 392.5 (92.0) 963.3
-------- ------ ------ ------ --------
277.5 -- 173.0 (5.3) 445.2
SELLING, ENGINEERING,
ADMINISTRATIVE
AND GENERAL EXPENSES ........ 174.9 -- 105.0 (5.2) 274.7
-------- ------ ------ ------ --------
OPERATING INCOME ............... 102.6 -- 68.0 (0.1) 170.5
EQUITY INCOME OF CONSOLIDATED
SUBSIDIARIES ................ -- 73.2 -- (73.2) --
OTHER INCOME AND EXPENSES
Interest expense ............... -- -- (2.7) -- (2.7)
Other income ................... 1.2 -- 7.9 -- 9.1
-------- ------ ------ ------ --------
INCOME BEFORE TAXES ............ 103.8 73.2 73.2 (73.3) 176.9
INCOME TAXES ................... (39.9) (28.2) (28.2) 28.2 (68.1)
-------- ------ ------ ------ --------
NET INCOME (LOSS) .............. $ 63.9 $ 45.0 $ 45.0 $(45.1) $ 108.8
======== ====== ====== ====== ========
F-30
DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES .................... $918.0 $ -- $621.7 $(107.1) $1,432.6
COST OF REVENUES ............ 662.6 -- 432.8 (101.7) 993.7
------ ------ ------ ------- --------
255.4 -- 188.9 (5.4) 438.9
SELLING, ENGINEERING,
ADMINISTRATIVE
AND GENERAL EXPENSES ..... 184.3 -- 114.8 (5.2) 293.9
------ ------ ------ ------- --------
OPERATING INCOME ............ 71.1 -- 74.1 (0.2) 145.0
EQUITY INCOME OF CONSOLIDATED
SUBSIDIARIES ............. -- 75.5 -- (75.5) --
OTHER INCOME AND EXPENSES
Interest expense ............ (0.3) -- (1.5) -- (1.8)
Other income ................ -- -- 2.9 -- 2.9
------ ------ ------ ------- --------
INCOME BEFORE TAXES ......... 70.8 75.5 75.5 (75.7) 146.1
INCOME TAXES ................ (27.2) (29.1) (29.1) 29.2 (56.2)
------ ------ ------ ------- --------
NET INCOME (LOSS) ........... $ 43.6 $ 46.4 $ 46.4 $ (46.5) $ 89.9
====== ====== ====== ======= ========
F-31
DRESSER, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................. $ 30.7 $ 30.5 $ 26.1 $(30.5) $ 56.8
Adjustments to reconcile net income to cash
flow provided by operating activities:
Depreciation and amortization ............ 29.9 -- 28.9 -- 58.8
Equity earnings of unconsolidated
affiliates ............................. (0.1) -- (2.0) -- (2.1)
Other changes, net of non cash items ..... 46.8 -- (23.6) -- 23.2
--------- ------ ------- ------ ---------
Net cash provided by (used in) operating
activities ............................. 107.3 30.5 29.4 (30.5) 136.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..................... (27.6) -- (8.4) -- (36.0)
Business acquisitions .................... (1,213.0) -- (116.1) -- (1,329.1)
Other .................................... 1.4 -- -- -- 1.4
--------- ------ ------- ------ ---------
Net cash used by investing activities .. (1,239.2) -- (124.5) -- (1,363.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in intercompany activities ....... (125.9) (30.5) 16.6 30.5 (109.3)
Cash equity .............................. 369.6 -- -- -- 369.6
Increase in short-term debt .............. 16.9 -- 28.8 -- 45.7
Increase in long-term debt ............... 896.7 -- 103.1 -- 999.8
--------- ------ ------- ------ ---------
Net cash provided by (used in) financing
activities ........................... 1,157.3 (30.5) 148.5 30.5 1,305.8
EFFECT OF TRANSLATION ADJUSTMENT ON CASH ... -- -- (1.3) -- (1.3)
--------- ------ ------- ------ ---------
NET INCREASE IN CASH AND EQUIVALENTS ....... 25.4 -- 52.1 -- 77.5
CASH AND EQUIVALENTS, beginning of period .. 5.5 -- 14.2 -- 19.7
--------- ------ ------- ------ ---------
CASH AND EQUIVALENTS, end of period ........ $ 30.9 $ -- $ 66.3 $ -- $ 97.2
========= ====== ======= ====== =========
F-32
DRESSER, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................. $ 63.9 $ 45.0 $ 45.0 $(45.1) $ 108.8
Adjustments to reconcile net income to cash
flow provided by operating activities:
Depreciation and amortization ............ 38.2 -- 11.0 -- 49.2
Equity earnings of unconsolidated
affiliates ............................. (0.2) -- (0.6) -- (0.8)
Other changes, net of non cash items ..... (49.1) -- (16.6) -- (65.7)
------- ------ ------ ------ -------
Net cash provided by (used in) operating
activities ........................... 52.8 45.0 38.8 (45.1) 91.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..................... (18.6) -- (8.7) -- (27.3)
Business acquisitions .................... (1.7) -- -- -- (1.7)
Other .................................... 0.1 -- -- -- 0.1
------- ------ ------ ------ -------
Net cash used by investing activities .. (20.2) -- (8.7) -- (28.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in intercompany activities ....... (42.4) (45.0) (73.8) 45.1 (116.1)
Increase in short-term debt .............. -- -- 10.6 -- 10.6
Cash overdrafts .......................... 13.8 -- 5.4 -- 19.2
------- ------ ------ ------ -------
Net cash (used in) provided by financing
activities ........................... (28.6) (45.0) (57.8) 45.1 (86.3)
EFFECT OF TRANSLATION ADJUSTMENT ON CASH ... -- -- 9.7 -- 9.7
------- ------ ------ ------ -------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS .............................. 4.0 -- (18.0) -- (14.0)
CASH AND EQUIVALENTS, beginning of period .. 1.5 -- 32.2 -- 33.7
------- ------ ------ ------ -------
CASH AND EQUIVALENTS, end of period ........ $ 5.5 $ -- $ 14.2 $ -- $ 19.7
======= ====== ====== ====== =======
F-33
DRESSER, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................. $ 43.6 $ 46.4 $ 46.4 $(46.5) $ 89.9
Adjustments to reconcile net income to cash
flow provided by operating activities:
Depreciation and amortization ............ 36.2 -- 12.3 -- 48.5
Equity earnings of unconsolidated
affiliates ............................ (1.0) -- (0.3) -- (1.3)
(Gain) loss on disposal of fixed assets .. 1.9 -- -- -- 1.9
Other changes, net of non-cash items ..... (56.6) -- 59.0 -- 2.4
------- ------ ------- ------ -------
Net cash provided by (used in)
operating activities ................ 24.1 46.4 117.4 (46.5) 141.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................... (28.0) -- (10.4) -- (38.4)
Business acquisitions ...................... -- -- -- -- --
Other ...................................... 0.7 -- -- -- 0.7
------- ------ ------- ------ -------
Net cash used in investing activities .. (27.3) -- (10.4) -- (37.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash in intercompany activities ............ (2.2) (46.4) (98.2) 46.5 (100.3)
Decrease in short-term debt ................ -- -- (2.8) -- (2.8)
Decrease in long-term debt ................. -- -- (0.9) -- (0.9)
Cash overdrafts ............................ 8.7 -- -- -- 8.7
------- ------ ------- ------ -------
Net cash provided by (used in) financing
activities ............................ 6.5 (46.4) (101.9) 46.5 (95.3)
EFFECT OF TRANSLATION ADJUSTMENT ON CASH ..... -- -- (1.9) -- (1.9)
------- ------ ------- ------ -------
NET INCREASE IN CASH AND
EQUIVALENTS ............................... 3.3 -- 3.2 -- 6.5
CASH AND EQUIVALENTS, beginning of the period (1.8) -- 29.0 -- 27.2
------- ------ ------- ------ -------
CASH AND EQUIVALENTS, end of period .......... $ 1.5 $ -- $ 32.2 $ -- $ 33.7
======= ====== ======= ====== =======
F-34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of Dresser,
Inc. and subsidiaries included in this Form 10-K and have issued our report
thereon dated February 28, 2002. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in the index to financial statement schedules is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 28, 2002
F-35
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO WRITE-OFF NET OF BALANCE AT END OF
DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS RECOVERIES PERIOD
----------- ------ ------------ -------------- ---------- ------
FOR THE YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts......... $5.4 1.2 -- (1.2) $5.4
FOR THE YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts......... $5.6 0.7 -- (0.9) $5.4
FOR THE YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts......... $4.5 3.3 (0.2) (2.0) $5.6
II-1
[DRESSER LOGO]
DRESSER, INC.
OFFER TO EXCHANGE
$250,000,000 PRINCIPAL AMOUNT OF ITS
9-3/8% SENIOR SUBORDINATED NOTES DUE 2011,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 9-3/8%
SENIOR SUBORDINATED NOTES DUE 2011
---------------
PROSPECTUS
---------------
_______, 2002
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Three of Dresser, Inc.'s Amended and Restated By-laws sets
forth certain rights of directors and officers of the Company to
indemnification. Such rights provide indemnification by the Company to the
extent permitted by Delaware law. The liabilities against which a director and
officer may be indemnified and factors employed to determine whether a director
and officer is entitled to indemnification in a particular instance depend on
whether the proceedings in which the claim for indemnification arises were
brought (a) other than by and in the right of the Company ("Third-Party
Actions") or (b) by and in the right of the Company ("Derivative Actions").
In Third-Party Actions, the Company is required to indemnify each
director and officer against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative in which
such person may be involved by reason of having acted in such capacity or having
served at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, such person had no reasonable
cause to believe that such person's conduct was unlawful.
In Derivative Actions, the Company is required to indemnify each
director and officer against expenses, including attorneys' fees, actually and
reasonably incurred by such person in connection with the defense or settlement
of any such action or suit if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Company, except that no indemnification is permitted with respect to (1) any
claim, issue or matter as to which such person has been adjudged to be liable
for negligence or misconduct in the performance of such person's duty to the
Company unless a court determines such person is entitled to indemnification.
Unless indemnification is ordered by a court, the determination as
to whether or not a person has satisfied the applicable standard of conduct (and
therefore may be indemnified) is made by the Board of Directors of the Company
by a majority vote of a quorum consisting of directors of the Company who were
not parties to the action, suit or proceeding; or if such a quorum is not
obtainable, or if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or by stockholders of the Company.
The indemnification provided by Article Three of the Amended and
Restated By-laws is not exclusive of any other indemnification rights to which
those seeking indemnification may be entitled under any by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in such person's other capacity
while holding such office.
The Company maintains insurance policies which presently provide
protection, within the maximum liability limits of the policies and subject to a
deductible amount for each claim, to the Company under its indemnification
obligations and to the directors and officers with respect to certain matters
which are not covered by the Company's indemnification obligations.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or II-3 175
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by final adjudication of
such issue.
The undersigned registrants hereby undertake to respond to requests
for information that is incorporated by reference into this prospectus pursuant
to Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This undertaking also includes documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrants hereby undertake to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (1) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (2) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of a prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement); and (3) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
The undersigned registrants hereby undertake as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the application form.
The undersigned registrants hereby undertake that every prospectus:
(1) that is filed pursuant to the immediately preceding paragraph or (2) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933, as amended, and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrants hereby undertake to remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the exchange offer.
ITEM 21. EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
*1.1 Placement Agreement dated March 20, 2002 among Dresser, Inc., the
Guarantors and Morgan Stanley & Co. Incorporated and Credit Swiss
First Boston Corporation.
(1)3.1 Amended and Restated Certificate of Incorporation of Dresser, Inc.,
filed on April 9, 2001.
(1)3.2 Certificate of Incorporation of Dresser International, Inc., filed
February 16, 2001.
(1)3.3 Certificate of Incorporation of DMD Russia, Inc., filed on February
8, 1996.
(1)3.4 Certificate of Amendment to Certificate of Incorporation of DMD
Russia, Inc., filed on October 16, 1997.
(1)3.5 Certificate of Amendment to Certificate of Incorporation of DMD
Russia, Inc., filed on June 20, 2000.
(1)3.6 Certificate of Incorporation of Dresser RE, Inc., filed on March 22,
2001.
(1)3.7 Amended and Restated Bylaws of Dresser, Inc.
(1)3.8 Bylaws of Dresser International, Inc.
(1)3.9 Bylaws of Dresser RE, Inc.
(1)3.10 Bylaws of DMD Russia, Inc.
(1)3.11 Certificate of Merger of Dresser Entech, Inc., filed on June 4,
2001.
(1)3.12 Certificate of Amendment of the Certificate of Incorporation of
Entech Industries, Inc., filed on February 9, 1999.
(1)3.13 Certificate of Incorporation of Entech Industries, Inc., filed on
May 23, 1997.
(1)3.14 Bylaws of Dresser Entech, Inc.
(1)3.15 Certificate of Incorporation of LVF Holding Corporation, filed on
October 10, 2000.
(1)3.16 Bylaws of LVF Holding Corporation.
(1)3.17 Certificate of Merger of Ring-O Valve, Incorporated, filed on
December 30, 1997.
(1)3.18 Article of Amendment of Articles of Incorporation of Begemann Valve,
Inc., filed on February 17, 1993.
(1)3.19 Articles of Amendment of Articles of Incorporation of Chronister
Valve Corporation, filed on April 10, 1991.
(1)3.20 Articles of Incorporation of Chronister Valve Corporation, filed on
April 28, 1989.
(1)3.21 Bylaws of Ring-O Valve, Incorporated.
*3.22 Certificate of Incorporation of Modern Acquisition, Inc., filed on
March 28, 2002.
*3.23 Bylaws of Modern Acquisition, Inc.
(1)4.1 The indenture dated as of April 10, 2001 among Dresser, Inc., the
Guarantors named therein and State Street Bank and Trust Company, as
trustee, relating to the 9-3/8% Senior Subordinated Notes due 2011.
(1)4.2 Specimen Certificate of 9-3/8% Senior Subordinated Notes due 2011.
(1)4.3 Specimen Certificate of 9-3/8% Senior Subordinated Exchange Notes
due 2011.
(1)4.4 Registration Rights Agreement dated April 10, 2001 among Dresser,
Inc., the Guarantors and Morgan Stanley & Co. Incorporated, Credit
Suisse First Boston Corporation and UBS Warburg LLC.
*4.5 Registration Rights Agreement dated March 20, 2002 among Dresser,
Inc., the Guarantors and Morgan Stanley & Co. Incorporated and
Credit Suisse First Boston Corporation.
(1)4.6 Credit Agreement dated as of April 10, 2001 among Dresser, Inc., as
U.S. Borrower, D.I. Luxembourg S.A.R.L., as Euro Borrower, DEG
Issuing Bank and Swing Line Bank, and Morgan Stanley & Co.
Incorporated, as Collateral Agent, Morgan Stanley Senior Funding,
Inc., as Administrative Agent, Credit Suisse First Boston, Cayman
Islands Branch, as Syndication Agent, Morgan Stanley Senior Funding,
Inc. and Credit Suisse First Boston, as Joint Lead Arrangers, and
UBS Warburg LLC and General Electric Capital Corporation, as
Co-Documentation Agents.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
(1)4.7 First Supplemental Indenture dated as of June 4, 2001, among Dresser
Entech, Inc., and Ring-O Valve, Incorporated, Dresser, Inc., the
other Guarantors named in the Indenture dated as of April 10, 2001
and State Street Bank and Trust Company, as trustee, relating to the
9-3/8% Senior Subordinated Notes due 2011.
(1)4.8 Second Supplemental Indenture dated as of June 12, 2001, among LVF
Holding Corporation, Dresser, Inc., the other Guarantors named in
the Indenture dated as of April 10, 2001 and State Street Bank and
Trust Company, as trustee, relating to the 9-3/8% Senior
Subordinated Notes due 2011.
*4.9 Third Supplemental Indenture dated as of April 24, 2002, among
Modern Acquisition, Inc., Dresser, Inc., the other Guarantors named
in the Indenture dated as of April 10, 2001 and State Street Bank
and Trust Company, as trustee, relating to the 9-3/8% Senior
Subordinated Notes due 2011.
*4.10 Amendment No. 1 to the Credit Agreement dated March 13, 2002 among
Dresser, Inc. as U.S. Borrower and D.I. Luxembourg S.A.R.L. as the
Euro Borrower and the Lenders named therein
*5.1 Opinion of Latham & Watkins regarding the validity of the exchange
notes.
*8.1 Opinion of Latham & Watkins regarding tax consequences.
(1)10.1 Amended and Restated Agreement and Plan of Recapitalization dated as
of April 10, 2001 among Halliburton Company and DEG Acquisitions,
LLC.
(1)10.2 Sponsor Rights Agreement dated April 10, 2001 by and among Dresser,
Inc., DEG Acquisitions, LLC, First Reserve Fund VIII, LP, First
Reserve Fund IX, L.P. Odyssey Investment Partners Fund, LP, Odyssey
Coinvestors, LLC and DI Coinvestment, LLC.
(1)10.3 Investor Rights Agreement dated April 10, 2001 by and among Dresser,
Inc., DEG Acquisitions, LLC, Dresser Industries, Inc., and certain
employees of the Company.
(1)10.4 Trademark Assignment and License Agreement dated April 10, 2001 by
and between Halliburton Company and Dresser, Inc.
(1)10.5 Trademark License Agreement dated April 10, 2001 by and between
Halliburton Company and Dresser, Inc.
(1)10.6 Income Tax Sharing Agreement dated April 10, 2001 by and between DEG
Acquisitions, LLC and Dresser, Inc.
(1)10.7 Dresser, Inc. 2001 Stock Incentive Plan
(1)10.8 Dresser, Inc. 2001 Management Equity Purchase Plan
(1)10.9 Dresser, Inc. Senior Executives' Deferred Compensation Plan
(1)10.10 Dresser, Inc. Management Deferred Compensation Plan
(1)10.11 Dresser, Inc. ERISA Excess Benefit Plan
(2)10.12 Dresser, Inc. Supplemental Executive Retirement Plan
(2)10.13 Dresser, Inc. Short Term Deferred Compensation Plan
(2)10.14 Dresser, Inc. Executive Life Insurance Agreement
(2)10.15 Executive Employment agreement dated January 29, 2001 between
Dresser and Patrick M. Murray.
(2)10.16 Executive Employment agreement dated January 29, 2001 between
Dresser and Albert G. Luke.
(2)10.17 Executive Employment agreement dated January 29, 2001 between
Dresser and William E. O'Connor.
(2)10.18 Executive Employment agreement dated January 29, 2001 between
Dresser and John P. Ryan.
(3)10.19 Executive Employment agreement, dated January 29, 2001 between
Dresser and James A. Nattier.
*10.20 Executive Employment agreement dated January 29, 2001 between
Dresser and Dale B. Mikus.
*10.21 Executive Employment agreement dated January 29, 2001 between
Dresser and Frank P. Pittman.
*10.22 Executive Employment agreement dated January 29, 2001 between
Dresser and James F. Riegler.
*10.23 Executive Employment agreement dated January 29, 2001 between
Dresser and Stuart M. Brightman.
*10.24 Executive Employment agreement dated February 1, 2002 between
Dresser and J. Scott Matthews.
*10.25 Executive Employment agreement dated February 18, 2002 between
Dresser and Charles S. Wolley.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
(3)12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
(3)21.1 List of Subsidiaries
*23.1 Consent of Latham & Watkins (included in their opinion filed as
Exhibit 5.1 hereto).
*23.2 Consent of Arthur Andersen LLP.
*25.1 Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939 of State Street Bank and Trust Company.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter from Dresser, Inc. to Registered Holders and
Depository Trust Company Participants.
*99.4 Form of Instructions from Beneficial Owners to Registered Holders
and Depository Trust Company Participants.
*99.5 Form of Letter to Clients.
*99.6 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
- ---------------------
(1) Filed previously as an exhibit to our Registration Statement on Form
S-4, dated May 11, 2001 as amended (file No. 333-60778), and
incorporated by reference herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q
for the period ended September 30, 2001 as filed November 14, 2001,
and incorporated herein by reference.
(3) Filed previously as an exhibit to our Annual Report on Form 10-K for
the year ended December 31, 2001 as filed March 19, 2002, and
incorporated herein by reference.
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, each of the registrants has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of New York, state of New York, on April 25, 2002.
DRESSER, INC.
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President, Chief Executive Officer and Director
DRESSER INTERNATIONAL, INC.
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President and Chief Executive Officer
DRESSER RUSSIA, INC.
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President and Chief Executive Officer
DRESSER RE, INC.
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President
DRESSER ENTECH, INC.
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President
LVF HOLDING CORPORATION
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President
RING O-VALVE, INCORPORATED
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President
MODERN ACQUISITION, INC.
By: /s/ PATRICK M. MURRAY
------------------------------------------------
Patrick M. Murray
President
DRESSER, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President, Chief Executive Officer April 25, 2002
- ---------------------------------
Patrick M. Murray and Director
/s/ JAMES A. NATTIER Executive Vice President, April 25, 2002
- ---------------------------------
James A. Nattier Chief Financial Officer and Director
/s/ DALE B. MIKUS Vice President, Finance, Chief Accounting April 25, 2002
- ---------------------------------
Dale B. Mikus Officer
/s/ WILLIAM E. MACAULAY Chairman of the Board of Directors April 25, 2002
- ---------------------------------
William E. Macaulay
/s/ PAUL D. BARNETT Director April 25, 2002
- ---------------------------------
Paul D. Barnett
/s/ BERNARD J. DUROC-DANNER Director April 25, 2002
- ---------------------------------
Bernard J. Duroc-Danner
/s/ BEN A. GUILL Director April 25, 2002
- ---------------------------------
Ben A. Guill
/s/ WILL HONEYBOURNE Director April 25, 2002
- ---------------------------------
Will Honeybourne
/s/ MUZZAFAR MIRZA Director April 25, 2002
- ---------------------------------
Muzzafar Mirza
/s/ GARY L. ROSENTHAL Director April 25, 2002
- ---------------------------------
Gary L. Rosenthal
DRESSER INTERNATIONAL, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President and Chief Executive Officer April 25, 2002
- -----------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Executive Vice President and Director April 25, 2002
- -----------------------------
James A. Nattier
/s/ DALE B. MIKUS Vice President and Director April 25, 2002
- -----------------------------
Dale B. Mikus
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary April 25, 2002
- -----------------------------
Frank P. Pittman and Director
DRESSER RUSSIA, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President and Chief Executive Officer April 25, 2002
- ---------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Executive Vice President and Director April 25, 2002
- ---------------------------
James A. Nattier
/s/ DALE B. MIKUS Vice President and Director April 25, 2002
- ---------------------------
Dale B. Mikus
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary and Director April 25, 2002
- ---------------------------
Frank P. Pittman
DRESSER RE, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President April 25, 2002
- --------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Executive Vice President and Director April 25, 2002
- --------------------------
James. A. Nattier
/s/ DALE B. MIKUS Vice President, Treasurer and Director April 25, 2002
- --------------------------
Dale B. Mikus
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary April 25, 2002
- --------------------------
Frank P. Pittman and Director
DRESSER ENTECH, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President April 25, 2002
- --------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Vice President and Director April 25, 2002
- --------------------------
James A. Nattier
/s/ DALE B. MIKUS Vice President, Assistant Treasuer April 25, 2002
- --------------------------
Dale B. Mikus and Director
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary April 25, 2002
- --------------------------
Frank P. Pittman and Director
LVF HOLDING CORPORATION
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President April 25, 2002
- -------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Vice President and Director April 25, 2002
- -------------------------
James A. Nattier
/s/ DALE B. MIKUS Vice President, Assistant Treasurer April 25, 2002
- -------------------------
Dale B. Mikus and Director
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary April 25, 2002
- -------------------------
Frank P. Pittman and Director
RING-O VALVE, INCORPORATED
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President April 25, 2002
- ----------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Vice President and Director April 25, 2002
- ----------------------------
James A. Nattier
/s/ DALE B. MIKUS Vice President, Assistant Treasurer April 25, 2002
- ----------------------------
Dale B. Mikus and Director
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary April 25, 2002
- ----------------------------
Frank P. Pittman and Director
MODERN ACQUISITION, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK M. MURRAY President April 25, 2002
- --------------------------
Patrick M. Murray
/s/ JAMES A. NATTIER Vice President and Director April 25, 2002
- --------------------------
James A. Nattier
/s/ DALE B. MIKUS Vice President and Director April 25, 2002
- --------------------------
Dale B. Mikus
/s/ FRANK P. PITTMAN Vice President, Assistant Secretary April 25, 2002
- --------------------------
Frank P. Pittman and Director
EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NO.
*1.1 Placement Agreement dated March 20, 2002 among Dresser, Inc., the
Guarantors and Morgan Stanley & Co. Incorporated and Credit Swiss
First Boston Corporation.
(1)3.1 Amended and Restated Certificate of Incorporation of Dresser, Inc.,
filed on April 9, 2001.
(1)3.2 Certificate of Incorporation of Dresser International, Inc., filed
February 16, 2001.
(1)3.3 Certificate of Incorporation of DMD Russia, Inc., filed on February
8, 1996.
(1)3.4 Certificate of Amendment to Certificate of Incorporation of DMD
Russia, Inc., filed on October 16, 1997.
(1)3.5 Certificate of Amendment to Certificate of Incorporation of DMD
Russia, Inc., filed on June 20, 2000.
(1)3.6 Certificate of Incorporation of Dresser RE, Inc., filed on March 22,
2001.
(1)3.7 Amended and Restated Bylaws of Dresser, Inc.
(1)3.8 Bylaws of Dresser International, Inc.
(1)3.9 Bylaws of Dresser RE, Inc.
(1)3.10 Bylaws of DMD Russia, Inc.
(1)3.11 Certificate of Merger of Dresser Entech, Inc., filed on June 4,
2001.
(1)3.12 Certificate of Amendment of the Certificate of Incorporation of
Entech Industries, Inc., filed on February 9, 1999.
(1)3.13 Certificate of Incorporation of Entech Industries, Inc., filed on
May 23, 1997.
(1)3.14 Bylaws of Dresser Entech, Inc.
(1)3.15 Certificate of Incorporation of LVF Holding Corporation, filed on
October 10, 2000.
(1)3.16 Bylaws of LVF Holding Corporation.
(1)3.17 Certificate of Merger of Ring-O Valve, Incorporated, filed on
December 30, 1997.
(1)3.18 Article of Amendment of Articles of Incorporation of Begemann Valve,
Inc., filed on February 17, 1993.
(1)3.19 Articles of Amendment of Articles of Incorporation of Chronister
Valve Corporation, filed on April 10, 1991.
(1)3.20 Articles of Incorporation of Chronister Valve Corporation, filed on
April 28, 1989.
(1)3.21 Bylaws of Ring-O Valve, Incorporated.
*3.22 Certificate of Incorporation of Modern Acquisition, Inc., filed on
March 28, 2002.
*3.23 Bylaws of Modern Acquisition, Inc.
(1)4.1 The indenture dated as of April 10, 2001 among Dresser, Inc., the
Guarantors named therein and State Street Bank and Trust Company, as
trustee, relating to the 9-3/8% Senior Subordinated Notes due 2011.
(1)4.2 Specimen Certificate of 9-3/8% Senior Subordinated Notes due 2011.
(1)4.3 Specimen Certificate of 9-3/8% Senior Subordinated Exchange Notes
due 2011.
(1)4.4 Registration Rights Agreement dated April 10, 2001 among Dresser,
Inc., the Guarantors and Morgan Stanley & Co. Incorporated, Credit
Suisse First Boston Corporation and UBS Warburg LLC.
*4.5 Registration Rights Agreement dated March 20, 2002 among Dresser,
Inc., the Guarantors and Morgan Stanley & Co. Incorporated and
Credit Suisse First Boston Corporation.
(1)4.6 Credit Agreement dated as of April 10, 2001 among Dresser, Inc., as
U.S. Borrower, D.I. Luxembourg S.A.R.L., as Euro Borrower, DEG
Issuing Bank and Swing Line Bank, and Morgan Stanley & Co.
Incorporated, as Collateral Agent, Morgan Stanley Senior Funding,
Inc., as Administrative Agent, Credit Suisse First Boston, Cayman
Islands Branch, as Syndication Agent, Morgan Stanley Senior Funding,
Inc. and Credit Suisse First Boston, as Joint Lead Arrangers, and
UBS Warburg LLC and
EXHIBIT DESCRIPTION OF EXHIBIT
NO.
General Electric Capital Corporation, as Co-Documentation Agents.
(1)4.7 First Supplemental Indenture dated as of June 4, 2001, among Dresser
Entech, Inc., and Ring-O Valve, Incorporated, Dresser, Inc., the
other Guarantors named in the Indenture dated as of April 10, 2001
and State Street Bank and Trust Company, as trustee, relating to the
9-3/8% Senior Subordinated Notes due 2011.
(1)4.8 Second Supplemental Indenture dated as of June 12, 2001, among LVF
Holding Corporation, Dresser, Inc., the other Guarantors named in
the Indenture dated as of April 10, 2001 and State Street Bank and
Trust Company, as trustee, relating to the 9-3/8% Senior
Subordinated Notes due 2011.
*4.9 Third Supplemental Indenture dated as of April 24, 2002, among
Modern Acquisition, Inc., Dresser, Inc., the other Guarantors named
in the Indenture dated as of April 10, 2001 and State Street Bank
and Trust Company, as trustee, relating to the 9-3/8% Senior
Subordinated Notes due 2011.
*4.10 Amendment No. 1 to the Credit Agreement dated March 13, 2002 among
Dresser, Inc. as U.S. Borrower and D.I. Luxembourg S.A.R.L. as the
Euro Borrower and the Lenders named therein
*5.1 Opinion of Latham & Watkins regarding the validity of the exchange
notes.
*8.1 Opinion of Latham & Watkins regarding tax consequences.
(1)10.1 Amended and Restated Agreement and Plan of Recapitalization dated as
of April 10, 2001 among Halliburton Company and DEG Acquisitions,
LLC.
(1)10.2 Sponsor Rights Agreement dated April 10, 2001 by and among Dresser,
Inc., DEG Acquisitions, LLC, First Reserve Fund VIII, LP, First
Reserve Fund IX, L.P. Odyssey Investment Partners Fund, LP, Odyssey
Coinvestors, LLC and DI Coinvestment, LLC.
(1)10.3 Investor Rights Agreement dated April 10, 2001 by and among Dresser,
Inc., DEG Acquisitions, LLC, Dresser Industries, Inc., and certain
employees of the Company.
(1)10.4 Trademark Assignment and License Agreement dated April 10, 2001 by
and between Halliburton Company and Dresser, Inc.
(1)10.5 Trademark License Agreement dated April 10, 2001 by and between
Halliburton Company and Dresser, Inc.
(1)10.6 Income Tax Sharing Agreement dated April 10, 2001 by and between DEG
Acquisitions, LLC and Dresser, Inc.
(1)10.7 Dresser, Inc. 2001 Stock Incentive Plan
(1)10.8 Dresser, Inc. 2001 Management Equity Purchase Plan
(1)10.9 Dresser, Inc. Senior Executives' Deferred Compensation Plan
(1)10.10 Dresser, Inc. Management Deferred Compensation Plan
(1)10.11 Dresser, Inc. ERISA Excess Benefit Plan
(2)10.12 Dresser, Inc. Supplemental Executive Retirement Plan
(2)10.13 Dresser, Inc. Short Term Deferred Compensation Plan
(2)10.14 Dresser, Inc. Executive Life Insurance Agreement
(2)10.15 Executive Employment agreement dated January 29, 2001 between
Dresser and Patrick M. Murray.
(2)10.16 Executive Employment agreement dated January 29, 2001 between
Dresser and Albert G. Luke.
(2)10.17 Executive Employment agreement dated January 29, 2001 between
Dresser and William E. O'Connor.
(2)10.18 Executive Employment agreement dated January 29, 2001 between
Dresser and John P. Ryan.
(3)10.19 Executive Employment agreement, dated January 29, 2001 between
Dresser and James A. Nattier.
*10.20 Executive Employment agreement dated January 29, 2001 between
Dresser and Dale B. Mikus.
*10.21 Executive Employment agreement dated January 29, 2001 between
Dresser and Frank P. Pittman.
*10.22 Executive Employment agreement dated January 29, 2001 between
Dresser and James F. Riegler.
*10.23 Executive Employment agreement dated January 29, 2001 between
Dresser and Stuart M. Brightman.
*10.24 Executive Employment agreement dated February 1, 2002 between
Dresser and J. Scott Matthews.
EXHIBIT DESCRIPTION OF EXHIBIT
NO.
*10.25 Executive Employment agreement dated February 18, 2002 between
Dresser and Charles S. Wolley.
(3)12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
(3)21.1 List of Subsidiaries
*23.1 Consent of Latham & Watkins (included in their opinion filed as
Exhibit 5.1 hereto).
*23.2 Consent of Arthur Andersen LLP.
*25.1 Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939 of State Street Bank and Trust Company.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter from Dresser, Inc. to Registered Holders and
Depository Trust Company Participants.
*99.4 Form of Instructions from Beneficial Owners to Registered Holders
and Depository Trust Company Participants.
*99.5 Form of Letter to Clients.
*99.6 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
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(1) Filed previously as an exhibit to our Registration Statement on Form
S-4, dated May 11, 2001 as amended (file No. 333-60778), and
incorporated by reference herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q
for the period ended September 30, 2001 as filed November 14, 2001,
and incorporated herein by reference.
(3) Filed previously as an exhibit to our Annual Report on Form 10-K
for the year ended December 31, 2001 as filed March 19, 2002, and
incorporated herein by reference.
* Filed herewith.