UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 0-18312
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TUBOSCOPE VETCO INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 76-0252850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2835 Holmes Road, Houston, Texas 77051
- -------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(713) 799-5100
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO______
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The Registrant had 41,566,030 shares of common stock outstanding as of June
30, 1996.
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
INDEX
Page No.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1996 (unaudited) and December 31, 1995 2
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended June 30, 1996 and 1995 3
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1996 and 1995 4
Notes to Unaudited Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-10
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature Page 12
Exhibit Index 13-16
Appendix A - Financial Data Schedule 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
1
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31,
1996 1995
----------- -------------
(UNAUDITED)
(IN THOUSANDS)
A S S E T S
-----------
Current assets:
Cash and cash equivalents........................................................................... $ 11,352 $ 9,394
Accounts receivable, net............................................................................ 97,018 52,071
Inventory, net...................................................................................... 41,122 14,364
Deferred federal income taxes....................................................................... 4,689 2,521
Prepaid expenses and other.......................................................................... 10,139 6,403
-------- --------
Total current assets............................................................................ 164,320 84,753
-------- --------
Property and equipment:
Land, buildings and leasehold improvements.......................................................... 75,712 81,557
Operating equipment and equipment leased to customers............................................... 135,329 105,187
Accumulated depreciation and amortization........................................................... (50,820) (46,706)
-------- --------
Net property and equipment...................................................................... 160,221 140,038
Identified intangibles, net............................................................................ 21,388 29,379
Goodwill, net.......................................................................................... 116,944 47,751
Other assets, net...................................................................................... 4,912 4,758
-------- --------
Total assets.................................................................................... $467,785 $306,679
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable.................................................................................... $ 38,139 $ 14,306
Accrued liabilities................................................................................. 40,087 18,705
Federal and foreign income taxes payable............................................................ 3,006 2,557
Current portion of long-term debt and short-term borrowings......................................... 32,454 4,562
-------- --------
Total current liabilities....................................................................... 113,686 40,130
Long-term debt......................................................................................... 121,092 107,055
Pension liabilities.................................................................................... 9,142 9,869
Deferred taxes payable................................................................................. 15,693 16,411
Other liabilities...................................................................................... 1,289 1,598
Commitments and contingencies..........................................................................
-------- --------
Total liabilities............................................................................... 260,902 175,063
-------- --------
Redeemable Series A Convertible Preferred Stock........................................................ -- 10,175
-------- --------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized, 41,566,030 shares
issued and outstanding (18,546,075 at December 31, 1995).......................................... 411 185
Paid-in capital...................................................................................... 258,996 116,379
Retained earnings (deficit).......................................................................... (50,126) 6,650
Cumulative translation adjustment.................................................................... (2,398) (1,773)
-------- --------
Total common stockholders' equity............................................................... 206,883 121,441
-------- --------
Total liabilities and equity.................................................................... $467,785 $306,679
======== ========
See notes to unaudited consolidated financial statements.
2
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenue............................................ $94,643 $45,652 $141,661 $89,338
Costs and expenses:
Costs of services and products sold.............. 66,144 33,513 101,315 66,115
Goodwill amortization............................ 671 330 863 651
Selling, general, and administration............. 10,784 5,140 15,785 10,337
Research and engineering costs................... 928 885 1,765 1,790
Write-off of long-term assets.................... -- -- 63,061 --
Drexel transaction costs......................... 11,206 -- 11,206 --
----------- ------------ ----------- -----------
89,733 39,868 193,995 78,893
----------- ------------ ----------- -----------
Operating profit................................... 4,910 5,784 (52,334) 10,445
Other expense (income):
Interest expense................................... 3,415 3,166 6,010 6,367
Interest income.................................... (100) (56) (131) (104)
Foreign exchange................................... (190) (349) (345) (945)
Other, net......................................... 314 (97) 824 270
----------- ------------ ----------- -----------
Income before income taxes......................... 1,471 3,120 (58,692) 4,857
----------- ------------ ----------- -----------
Provision (benefit) for income taxes............... 2,658 1,248 (1,916) 1,943
----------- ------------ ----------- -----------
Net income (loss).................................. (1,187) 1,872 (56,776) 2,914
Dividends applicable to redeemable preferred stock. (175) 175 -- 350
----------- ------------ ----------- -----------
Net income (loss) applicable to common stock....... ($1,012) $1,697 ($56,776) $2,564
=========== ============ =========== ===========
Earnings per common share:
Net income (loss)............................... ($0.02) $0.09 ($1.86) $0.14
=========== ============ =========== ===========
Weighted average number of common shares 42,191,793 18,521,966 30,475,362 18,513,116
outstanding........................................ =========== ============ =========== ===========
See notes to unaudited consolidated financial statements.
3
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
---------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)................................................................ ($56,776) $ 2,914
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................. 6,960 7,650
Provision (recovery) for losses on accounts receivable........................ 36 (119)
Benefit for deferred income taxes............................................. (6,578) (523)
Compensation related to employee 401(K) plan.................................. 126 130
Write-off of long term assets................................................ 63,061 --
Changes in current assets and liabilities, net of effects of
acquired companies:
Accounts receivable....................................................... (12,434) 1,441
Inventory................................................................. 485 (1,384)
Prepaid expenses and other assets......................................... (2,119) (1,288)
Accounts payable, accrued liabilities, and other......................... 7,842 (3,541)
Federal and foreign income taxes payable.................................. (1,033) 80
Pension liabilities....................................................... (727) 1,027
--------- -------
Net cash provided by (used in) operating activities.......................... (1,157) 6,387
--------- -------
Cash flows used in investing activities:
Capital expenditures............................................................. (7,771) (3,837)
Net assets of acquired companies, net of cash acquired........................... (19,005) --
Other............................................................................ (1,292) (785)
--------- -------
Net cash used in investing activities......................................... (28,068) (4,622)
--------- -------
Cash flows provided by financing activities:
Borrowings under financing agreements............................................ 4,800 502
Principal payments under financing agreements.................................... (6,152) (2,503)
Foreign currency options......................................................... -- (258)
Dividends paid on Redeemable Series A Convertible Preferred Stock................ (175) (350)
Cash received in Drexel Merger................................................... 2,101 --
Proceeds from sale of Common Stock and warrants................................. 30,609 101
--------- -------
Net cash provided by (used in) financing activities........................... 31,183 (2,508)
--------- -------
Net increase (decrease) in cash and cash equivalents............................... 1,958 (743)
Cash and cash equivalents:
Beginning of period.............................................................. 9,394 8,531
--------- -------
End of period.................................................................... $ 11,352 $ 7,788
========= =======
Supplemental disclosure of cash flow information:
Cash paid during the six month period for:
Interest, net................................................................. $ 5,791 $ 6,798
========= =======
Taxes......................................................................... $ 5,775 $ 1,973
========= =======
Supplementary disclosure of non-cash financing and investing activities:
Acquisitions:
Fair market value of net assets acquired...................................... $ 100,007 $ --
Fair market value of common stock, stock options, and warrants issued........ (100,007) --
--------- -------
$ -- $ --
========= =======
See notes to unaudited consolidated financial statements.
4
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
AND AS OF DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
and its wholly-owned subsidiaries have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations. The unaudited consolidated financial statements included in
this report reflect all the adjustments which the Company considers
necessary for a fair presentation of the results of operations for the
interim periods covered and for the financial condition of the Company at
the date of the interim balance sheet. Results for the interim periods are
not necessarily indicative of results of the year.
The financial statements included in this report should be read in
conjunction with the audited financial statements and accompanying notes
included in the Company's 1995 Form 10-K, filed under the Securities
Exchange Act of 1934 (Commission File No. 0-18312).
2. INVENTORY
At June 30, 1996 inventories consist of the following (in thousands):
Components, subassemblies, and expendable parts................. $ 32,816
Equipment under production...................................... 8,306
--------
$ 41,122
========
3. DIVIDEND RESTRICTIONS
In certain situations, Tuboscope Vetco International Inc.'s (TVI's) $75
million Senior Subordinated 10.75% Notes restrict the ability of TVI to
dividend or otherwise make distributions to the Company and prohibit the
Company from paying dividends on its Common Stock. Such restrictions are
permitted restrictions in TVI's Senior Bank Credit Agreement.
4. SUMMARIZED FINANCIAL INFORMATION OF REGISTRANT (TVI)
The following is summarized balance sheet information for TVI as of June
30, 1996 and December 31, 1995 and summarized statements of operations for
the six months ended June 30, 1996 and 1995 (in thousands).
SUMMARIZED BALANCE SHEETS
June 30, December 31,
ASSETS 1996 1995
------ ---- ----
Current assets............................................ $ 95,209 $ 98,502
Noncurrent assets......................................... 202,672 202,833
-------- --------
Total assets............................................ $297,881 $301,335
======== ========
LIABILITIES AND EQUITY
----------------------
Current liabilities....................................... $ 72,198 $ 38,463
Noncurrent liabilities.................................... 110,630 130,617
Stockholders' equity...................................... 115,053 132,255
-------- --------
Total liabilities and equity............................ $297,881 $301,335
======== ========
5
4. SUMMARIZED FINANCIAL INFORMATION OF REGISTRANT (TVI) (CONT'D)
Six Months Ended
June 30,
------------------
1996 1995
--------- -------
SUMMARIZED STATEMENTS OF OPERATIONS
Revenue........................................................... $104,536 $88,207
======== =======
Operating profit (loss)........................................... $(52,023) $10,303
======== =======
Income (loss) before income taxes................................. $(49,561) $ 4,454
======== =======
Net income (loss)................................................. $(46,630) $ 2,931
======== =======
5. MERGER WITH D.O.S LTD.
On April 24, 1996, pursuant to that certain Agreement and Plan of Merger
dated as of January 3, 1996 by and among the Company, Grow Acquisition
Limited, a Bermuda corporation and wholly owned subsidiary of the Company
("Grow"), and D.O.S. Ltd., a Bermuda corporation (Drexel), Grow was merged
with and into Drexel (the "Merger"). Upon consummation of the Merger, all
of the outstanding ordinary shares of Drexel were converted into the right
to receive approximately 16.7 million shares of Company Common Stock.
In connection with the Merger, on April 24, 1996 the Company sold to SCF-
III, L.P., a Delaware limited partnership ("SCF"), 4,200,000 shares of
Company Common Stock and warrants to purchase 2,533,000 shares of Company
Common Stock at an exercise price of $10 per share expiring on December 31,
2000, for an aggregate purchase price of $31,000,000 pursuant to a certain
Subscription Agreement dated as of January 3, 1996 between the Company and
SCF.
Also in connection with the Merger, on April 24, 1996 Baker Hughes
Incorporated ("Baker Hughes") exchanged all of its 100,000 shares of Series
A Convertible Preferred Stock, par value $.01 per share, of the Company for
1,500,000 shares of Company Common Stock and warrants to purchase 1,250,000
shares of Company Common Stock at an exercise price of $10 per share
expiring on December 31, 2000, pursuant to that certain Exchange Agreement
dated as of January 3, 1996 between the Company and Baker Hughes.
6. ACQUISITION OF WADECO
On May 31, 1996, pursuant to that certain Share Purchase Agreement dated as
of May 31, 1996, the Company acquired all of the outstanding shares of
capital stock of Wadeco Oilfield Services Ltd. ("Wadeco") for $16.4 million
(provided from the Company's cash reserves and its existing revolving
credit facility). In addition, the Company assumed $5.2 million of Wadeco
debt.
7. NEW SENIOR CREDIT AGREEMENT
On August 2, 1996, TVI and Drexel Holdings Inc., a wholly owned subsidiary
of the Company, executed a new Senior Credit Agreement (the "Agreement)
which consisted of a $100 million revolving credit facility ("revolving
loans") due in five years and a $130 million advance/term loan facility
("term loans") due over six years. The initial draws were $9 million and
$50 million related to the revolving loans and term loans, respectively,
and was used to retire $59 million of existing outstanding debt of both TVI
and Drexel.
The revolving loans may be repaid, in whole or in part, at any time prior
to August 2, 2001. The outstanding principal balance on the term loans
becomes fixed on June 30, 1997, and is thereafter amortized and repaid on a
quarterly basis between September 30, 1997 and August 2, 2002.
Interest rates for the revolving and term loans, at the option of the
Company, are stated in either the lenders announced fluctuating commercial
base rate or a Eurodollar rate plus an applicable margin (determined by
total funded debt to total capital ratio). Commitment fees on the unused
revolving and term loan balances range from 0.175% to 0.375% (determined by
total funded debt to total capital ratio).
6
7. NEW SENIOR CREDIT AGREEMENT (CONT'D)
The indebtedness under the Agreement is collateralized by the stock of TVI
and Drexel Holdings and a significant portion of the stock of several
foreign subsidiaries, and is guaranteed by the Company. The Agreement
contains financial covenants with respect to interest coverage ratio, total
funded debt to total capital ratio, and a minimum tangible net worth.
The Company is expected to recognize an extraordinary loss, related to the
early retirement of its existing Senior Credit Agreement, of approximately
$700,000 in the third quarter of 1996.
7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
- ---------------------
REVENUE. Revenue was approximately $94.6 million and $141.7 million for the
second quarter and first six months of 1996, respectively, representing
increases of $48.9 million and $52.4 million from the same periods in 1995,
respectively. The recent merger with Drexel, which was completed effective
April 1, 1996, accounted for $36.5 million of the increases for the second
quarter and first six months of 1996. On a pro forma basis, revenue was up
$19.8 million (26.4%) and $29.3 million (19.8%) for the second quarter and first
half of 1996, respectively, over the second quarter and first half of 1995,
respectively.
Revenue from the Company's Oilfield Services, comprised of Inspection, Coating,
and Solids Control, was approximately $67.3 million and $105.5 million for the
second quarter and six months ending June 30, 1996. These results represented
increases of $32.3 million and $37.2 million over the prior year periods,
respectively. The merger with Drexel added the Solids Control operations to
the Company's Oilfield Services. In addition, the Company completed the
acquisition of Wadeco, a Canadian Solids Control company, effective May 1,
1996. Solids Control operations which includes the rental and sale of equipment
used in the removal of rock cuttings and other solid contaminants from the mud
used in drilling operations, contributed revenue of $22.5 million in the second
quarter of 1996. On a pro forma basis for the Tuboscope/Drexel Merger, Solids
Control revenue was up $4.3 million primarily as a result of increased activity
in Latin America, specifically Venezuela, and revenue earned in Wadeco's
operations. Inspection revenue was up $6.3 million (28.3%) in the second
quarter of 1996 compared to the second quarter of 1995. The increase was mainly
the result of a $4.2 million increase in Latin America Inspection operations
which benefited from the acquisition of an Argentina operation in September 1995
and a large contract in Colombia awarded in the fourth quarter of 1995. In
addition, Europe, Africa, and Middle East (EAME) operations were up $1.5 million
as a result of an increase in Mill surveillance work and the completion of the
majority of an Algerian reclamation project. Coating revenue was up $4.1 million
(34.1%) in the second quarter of 1996, mainly as a result of a $3.2 million
Russian Coating plant sale. Also, North America Coating revenue improved $2.0
million as revenue was up at all North America Coating plants due mainly to
significant increases in Gulf Coast activity and line pipe Coating activity in
Canada.
Coiled Tubing Products, which were also acquired as part of the Drexel Merger,
contributed revenue of $15.7 million in the second quarter of 1996. Coiled
tubing products include the sale of coiled tubing units and blowout preventors
used in oilfield workover, drilling and production operations. On a pro forma
basis, Coiled Tubing Products revenue was up $4.7 million in the second quarter
of 1996 compared to the second quarter of 1995, attributable mainly to the sale
of two large coiled tubing drilling units and high demand for coiled tubing
pressure control equipment.
Pipeline Services revenue was $5.0 million and $8.2 million for the second
quarter and first six months of 1996, respectively, representing increases of
$1.0 million and $1.1 million over the second quarter and first half of 1995,
respectively. The majority of the increase was due to greater activity in the
EAME market with a slight increase in North America.
Industrial Inspection revenue was $3.3 million and $6.7 million for the second
quarter and first six months of 1996, equal to the second quarter of 1995 and
down $319,000 from the first half of 1995. The year-to-date decline was mainly
the result of lower revenue in the Middle East.
Mill Systems and Sales revenue was $2.0 million and $3.6 million for the quarter
and six months ending June 30, 1996, respectively, down $1.0 million and $1.4
million from the same periods in 1995, respectively. The decrease was due to
lower Mill equipment sales in the U.S.
Other revenue was $1.4 million and $1.9 million for the second quarter and first
six months of 1996, respectively, an increase of $454,000 over the second
quarter of 1995 and even with the first half of 1995. The second quarter 1996
improvement was due to a line pipe service job in Ecuador.
GROSS PROFIT. Gross profit was approximately $27.8 million (29.4%) and $39.5
million (27.9%) for the second quarter and first half of 1996, respectively,
compared to $11.8 million (25.9%) and $22.6 million (25.3%) for the second
quarter and first half of 1995, respectively. Drexel and Wadeco operations
accounted for the majority of the second quarter increase ($12.4 million of the
$16.0 million improvement). Gross profit percentages benefited from greater
revenue in high profit margin product lines, including Pipeline, Coating, and
Solids Control. Gross profit also improved due to lower depreciation and
amortization expense associated with the write-off of long-term assets in the
first quarter of 1996.
8
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and administrative
costs were $10.8 million and $15.8 million in the second quarter and first half
of 1996, respectively, increases of $5.6 million and $5.5 million over the same
periods of 1995, respectively. The increase was mainly the result of $5.5
million of overhead costs associated with the Drexel and Wadeco operations.
RESEARCH AND ENGINEERING COSTS. Research and engineering costs were $928,000
and $1.8 million for the second quarter and first half of 1996, respectively,
similar to the amounts recorded in the same periods of 1995, respectively. The
major portion of costs currently being incurred is related to the Company's
TruRes/TM/ "High Resolution" pipeline tools.
WRITE-OFF OF LONG-TERM ASSETS. The first quarter 1996 write-off of long-term
assets of $63.1 million included a writedown of approximately $50.8 million
associated with the Company's adoption of SFAS No. 121 Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of and
a decision by management to sell certain assets, primarily as a result of the
Drexel Merger, which resulted in additional write-downs of approximately $12.3
million.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 established "accounting standards for the
impairment of the long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of." The new statement
requires the value of long-lived assets, certain identifiable intangibles, and
goodwill to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If this change in circumstances or other initial indication has
occurred, the next step in determining whether an asset has been impaired is
performed using the expected future undiscounted cash flows of assets, grouped
at the lowest level for which there are identifiable cash flows, compared to the
carrying value of those assets. If the undiscounted cash flow value is less than
the net carrying value, the amount of impairment is then measured by comparing
the discounted cash flows with the corresponding carrying values of the assets
evaluated. The Company's previous policy was to evaluate the realizability of
long-term assets on an aggregate basis based on undiscounted cash flows.
Management accumulated cash flow information at the lowest asset grouping levels
for which there were identifiable cash flows. These levels were represented by
separate product line operations at individual operating locations. Based on the
data, the Company's adoption of SFAS No. 121 resulted in a write-down of long-
lived assets of approximately $50.8 million in the first quarter of 1996.
The majority of the SFAS No. 121 write-down was in international locations such
as Italy, Saudi Arabia, Japan, and Germany which have experienced significant
reductions in rig activity and other business declines since the Company's
acquisition of substantially all the foreign operations of Baker Hughes Tubular
Services, Inc. (Vetco Services) in October 1991. In addition, the analysis of
U.S. locations by identifiable cash flows for individual asset locations
resulted in additional write-downs.
In addition to the write-down of $50.8 million associated with the adoption of
SFAS No. 121, the Company recognized $12.3 million of write-downs associated
with the decision to sell certain assets. A decision was made to sell the
Company's corporate headquarters on Holmes Road in Houston, Texas in the first
quarter of 1996. The decision was made in connection with the Drexel Merger and
the Company recognized a significant write-down represented by the difference
between the facility's net book value and estimated fair value less costs to
sell. A decision has also been made by the Company to sell certain tank
inspection equipment and related operations which are currently performing below
acceptable levels. The sale of this operation is expected to be completed in the
third quarter of 1996.
DREXEL TRANSACTION COSTS. The $11.2 million of Drexel transaction costs include
executive severance costs of $6.4 million associated with former officers of the
Company and consolidation costs of $4.8 million related to Tuboscope personnel
and facilities. The consolidation costs of $4.8 million were related mainly to
the consolidation of overhead facilities and personnel in EAME and the
consolidation of certain operating locations in North America.
OPERATING PROFIT. Operating profit was $4.9 million and operating loss was
$52.3 million for the second quarter and first half of 1996, respectively.
Excluding the write-off of long-term assets and the Drexel transaction costs,
operating profit would have been $16.1 million and $21.9 million, respectively,
for the second quarter and first half of 1996. These results represented a $10.3
million and $11.5 million improvement over the second quarter and first half of
1995, respectively. The stronger operating profit was due mainly to operating
profit contributions from Drexel and Wadeco, and stronger operations in
Inspection, Coating, and Pipeline Services.
INTEREST EXPENSE. Interest expense was $3.4 million and $6.0 million in the
three and six months ended June 30, 1996, respectively, an increase of $249,000
over the second quarter of 1995 and a decrease of $357,000 compared to the first
six months of 1995, respectively. The second quarter 1996 increase was due to
debt associated with the Drexel and Wadeco operations.
9
OTHER EXPENSE (INCOME). Other expense (income), which includes interest income,
foreign exchange, and other expense (net), resulted in a net expense of $24,000
in the second quarter of 1996 compared to income of $502,000 in the second
quarter of 1995. The 1995 second quarter results included a net gain of $1.7
million from an arbitration award related to the Company's acquisition of Vetco
Services in 1991 and the accrual of $1.0 million of legal and other nonoperating
costs associated with the Company's Italian subsidiary.
PROVISION FOR INCOME TAXES. The effective tax rate on operating profits,
excluding the write-off of long-term assets and the Drexel transaction costs for
the quarter ended June 30, 1996 was 39% compared to 40% for the quarter ended
June 30, 1995. The slight improvement in the rate is due in part to the
elimination of non-deductible goodwill amortization through the SFAS No. 121
write-off. The effective tax rate of the write-off of long-term assets and the
resulting tax consequences was 9%. Included therein is an increase in the
valuation allowance against foreign tax credits and a provision for tax
contingencies in foreign jurisdictions. The effective tax rate on the Drexel
transaction costs was 5.7%. The low effective tax rate benefit on the Drexel
transaction costs was due to $5.4 million of non-deductible executive severance
costs.
NET INCOME. The second quarter 1996 net loss was $1.2 million compared to the
second quarter of 1995 net income of $1.9 million. The decrease was due to the
factors discussed above. Excluding the after-tax impact of the write-off of
long-term assets and the Drexel transaction costs, net income would have been
$7.7 million in the second quarter of 1996.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
For the six months ended June 30, 1996, the Company used $1.2 million of cash in
operations as compared to $6.4 million in 1995. Cash was used in operations
during the first six months of 1996 principally as a result of a $12.4 million
increase in accounts receivables (net of the effect of acquisitions). The
increase in accounts receivables was due to a $3.2 million Coating plant sale in
Russia late in the second quarter of 1996 and an overall increase in revenue in
several different product lines. In addition, cash from operations was used to
prepay insurance policies, which renew each year in the second quarter, and was
the primary cause in a $2.1 million increase in prepaid expenses. These
increases in current asset accounts were partially offset by a $7.8 million
increase in accounts payable, accrued liabilities, and other. The accounts
payable, accrued liabilities, and other increase was mainly a result of
consolidation accruals related to the Tuboscope/Drexel merger.
For the six months ended June 30, 1996, the Company used $28.1 million for
investing activities compared to $4.6 in the same period of 1995. The increase
was due to $7.8 million in capital spending (compared to $3.8 million in 1995)
and acquisitions of $19.0 million. Capital spending was up in 1996 due to the
addition of the Drexel and Wadeco operations. The acquisition cost of $19.0
million consisted of $16.4 million for Wadeco and $2.6 million related to an
acquisition of a Solids Control operation in Venezuela.
For the six months ended June 30, 1996, the Company generated $31.2 million of
cash from financing activities compared to a usage of $2.5 million in 1995. The
cash was generated through the sale of $30.6 million of Common Stock and $2.1
million of cash received in the Drexel Merger. Cash used in financing activities
consisted primarily of principal payments of $6.2 million related mainly to the
Company's senior term debt, offset somewhat by borrowings of $4.8 million mostly
on the Company's revolver.
Current and long-term debt was $153.5 million at June 30, 1996, an increase of
$41.9 million from the $111.6 million outstanding at December 31, 1995. Debt
assumed in the Drexel merger resulted in $38.1 million of this increase. Debt
assumed in the acquisition of Wadeco was $5.2 million. The Company's outstanding
debt at June 30, 1996 consisted of $75 million of 10.75% Senior Subordinated
Notes due 2003, $5.2 million of term loans due under the Company's Senior Credit
Agreement, $24.0 million due under the Company's $35 million revolving credit
facility, $13.5 million of term loans due under Drexel's senior credit
agreement, $16.7 million due under Drexel's revolving credit facility, $5.0
million related to Wadeco's operations, $4.5 million related to the construction
of the Aberdeen, Scotland coating facility, $2.0 million of revenue bonds, $3.8
million of debt related to former owners of SWECO Oilfield Services (which was
acquired by Drexel in November 1995), and 3.8 million of other outstanding debt.
NEW SENIOR CREDIT AGREEMENT
- ---------------------------
As discussed in Note 7 of Notes to the Unaudited Consolidated Financial
Statements, on August 2, 1996 the Company refinanced the existing senior debt
for Tuboscope and Drexel with a new Senior Credit Agreement which allows the
Company to borrow up to $100 million on the revolving credit facility and up to
$130 million on an advance/term loan facility. The initial borrowing was $9
million on the revolving credit facility and $50 million on the term loan
facility, with the proceeds being used to retire $59 million of existing senior
debt of Tuboscope and Drexel.
The revolving loans may be repaid, in whole or in part, at any time prior to
August 2, 2001. The outstanding principal balance on the term loans becomes
fixed on June 30, 1997, and is thereafter amortized and repaid on a quarterly
basis between September 30, 1997 and August 2, 2002.
10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held April 24, 1996 for the following
purposes:
1. PROPOSAL ONE: Approval and adoption of the Agreement and Plan of Merger
dated as of January 3, 1996 (the "Merger Agreement"), between Tuboscope,
Grow Acquisition Limited, a Bermuda corporation and wholly owned subsidiary
of Tuboscope ("Sub"), and D.O.S. Ltd., a Bermuda corporation ("Drexel),
providing for the merger of Sub with and into Drexel.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
14,042,064 225,251 17,986 3,196,193
2. PROPOSAL TWO: Approval of the sale of Tuboscope to SCF-III, L.P., a
Delaware limited partnership and an affiliate of a stockholder of Drexel
("SCF"), of 4,200,000 shares of Tuboscope Common Stock and warrants to
purchase, subject to adjustment under certain circumstances, an aggregate
of 2,533,000 shares of Tuboscope Common Stock at an exercise price of $10
per share expiring on December 31, 2000, for an aggregate purchase price of
$31,000,000 pursuant to a Subscription Agreement dated as of January 3,
1996 between Tuboscope and SCF.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
14,008,356 241,106 35,839 3,196,193
3. PROPOSAL THREE: Approval of an Amendment to Tuboscope's Certificate of
Incorporation to increase the number of authorized shares of Tuboscope
Common Stock from 35,000,000 to 60,000,000.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
17,300,903 151,775 27,216 1,600
4. PROPOSAL FOUR: The election of the members of the Tuboscope Board of
Directors.
NAME FOR AGAINST
---- --- -------
Jerome R. Baier 17,392,762 88,732
Martin G. Hubbard 17,392,762 88,732
William V. Larkin, Jr. 17,392,467` 89,027
Eric L. Mattson 17,392,762 88,732
Timothy M. Pennington III 17,392,467 89,027
Martin R. Reid 17,392,467 89,027
Patrick T. Seaver 17,392,762 88,732
James J. Shelton 17,392,762 88,732
Frederick J. Warren 17,392,762 88,732
5. PROPOSAL FIVE: Approval of the 1996 Equity participation Plan of Tuboscope
Vetco International Corporation.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
12,859,949 3,694,838 54,856 871,851
Item 6.Exhibits and reports on Form 8-K
(a) Exhibits -- Reference is hereby made to the Exhibit Index
commencing on page 13.
(b) A Report on Form 8-K was filed on June 14,1996 regarding the
acquisition of Wadeco. Amendment No. 1 to this report on Form 8-K
was filed on August 2, 1996.
11
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUBOSCOPE VETCO
INTERNATIONAL CORPORATION
-------------------------
(Registrant)
Date: August 14, 1996 /s/ Joseph C. Winkler
- --------------------------- ---------------------
Joseph C. Winkler
Executive Vice President, Chief
Financial Officer
and Treasurer (Duly Authorized
Officer,
Principal Financial and Accounting
Officer)
12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION NOTE NO.
- ----------- ----------- --------
2(a) Agreement and Plan of Merger, dated as of January 3, 1996, among (Note 12)
Tuboscope Vetco International Corporation, Grow Acquisition Limited
and D.O.S. Ltd.
3(a) Restated Certificate of Incorporation, dated March 12, 1990. (Note 7)
3(b) Amended and Restated Bylaws. (Note 2)
3(c) Certificate of Designation of Series A Convertible Preferred Stock, (Note 3)
dated October 22, 1991.
3(d) Certificate of Amendment to Restated Certificate of Incorporation dated (Note 10)
May 12, 1992.
3(e) Certificate of Amendment to Restated Certificate of Incorporation dated (Note 11)
May 10, 1994.
4(a) Stockholders' Agreement, dated May 13, 1988, between the Company, (Note 1)
Brentwood, Hub, the Management Investors, the Other Investors, and
the Institutional Investors, including the Common Stock Registration
Rights Agreement attached thereto as Exhibit A.
4(b) Purchase Agreement, dated May 13, 1988, between the Company, (Note 1)
Tuboscope Acquisition Corporation and the purchasers named on the
execution pages thereto.
4(c) Indenture (including the form of Note), dated as of April 1, 1993, among (Note 4)
Tuboscope Vetco International Inc., the Company and Norwest Bank
Minnesota, National Association, as Trustee, regarding the 10 3/4%
Senior Subordinated Notes due 2003 of Tuboscope Vetco International
Inc.
4(e) Various documentation relating to $1,000,000 Alaska Industrial
Revenue Bond financing. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish
copies of relevant documentation to the Securities and Exchange
Commission upon request).
4(f) Various documentation relating to $1,000,000 Wyoming Industrial
Revenue Bond financing. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish
copies of relevant documentation to the Securities and Exchange
Commission upon request).
4(g) Plan of Recapitalization. (Note 2)
4(h) Various promissory notes in the aggregate principal amount of
$4,000,000 relating to the acquisition of Sound Optics Systems, Inc.,
dba South Optical Systems, Inc. (Not filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish
copies of the relevant documentation to the Securities and Exchange
Commission upon request).
4(i) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI Hughes Incorporated relating to Vetco Services
Acquisition.
13
EXHIBIT NO. DESCRIPTION NOTE NO.
----------- ----------- --------
4(j) Secured Credit Agreement, dated June 30, 1994, between Tuboscope (Note 9)
Vetco International Inc., CTI Inspection Services Inc., Tuboscope Vetco
Capital Corp, Tuboscope Vetco International Corporation and ABN
AMRO Bank, N.V., as Agent.
4(k) Secured Credit Agreement, dated August 2, 1996, between Tuboscope Exhibit 4(k)
Vetco International Inc., and Drexel Holdings, Inc., and The Chase
Manhattan Bank, N.A., ABN Amro Bank N.V., Houston Agency, and
the other Lenders Party Hereto, and ABN Amro Bank N.V., Houston
Agency as Administrative Agent.
10(a) Form of Employment Agreement, dated May 13, 1988, between (Note 1)
Tuboscope Inc., the Company and William V. Larkin and E. Wayne
Overman.
10(b) Savings Investment Plan, dated May 13, 1988, as amended by (Note 1)
First Amendment to Savings Investment Plan.
10(c) Second, Third and Fourth Amendments to Savings Investment Plan. (Note 4)
10(d) Fifth, Sixth and Seventh Amendments to Savings Investment Plan. (Note 8)
10(e) Lease Agreement, dated July 1, 1981, between C.M. Thibodaux (Note 1)
Company, Ltd. and AMF Tuboscope, Inc.
10(f) Lease Agreement between Sam J. Siracusa, John Siracusa, Jr., Elizabeth (Note 1)
Ann Siracusa, Louis Anthony Siracusa, Philomena Siracusa Archer,
Catherine Agnes Siracusa, Maria Josette Siracusa, Julie Ann Siracusa,
the Succession of Joseph C. Siracusa and AMF Tuboscope, Inc., as
amended by letter agreement among the same parties, dated June 14,
1989.
10(g) Agreement to Purchase, Sell and Sublease, dated June 9, 1980, between (Note 1)
Alaska International Construction, Inc. and AMF Tuboscope, Inc., as
amended by letter agreement, dated June 12, 1980 between the same
parties.
10(h) Lease Agreement, dated June 10, 1977, between Batinorest and A.M.F. (Note 1)
France.
10(i) Supplementary Agreement Fixed Rental Scheme, dated May 19, 1989, (Note 1)
between Jurong Town Corporation and AMF Far East Pte. Ltd.
10(j) Lease, dated December 13, 1984, between Barclays Nominees (KWS) (Note 1)
Limited and AMF International Limited, as amended by Transfer of
Whole Agreement, dated November 20, 1987, between AMF
International Limited and Tuboscope Limited.
10(k) Description of Life Insurance Plan. (Note 1)
10(l) Amended and Restated Stock Option Plan for Key Employees of (Note 5)
Tuboscope Vetco International Corporation.
10(m) Form of Revised Incentive Stock Option Agreement. (Note 5)
10(n) Form of Revised Non-Qualified Stock Option Agreement. (Note 5)
10(o) Stock Option Plan for Non-Employee Directors of Tuboscope Vetco (Note 6)
International Corporation.
14
EXHIBIT NO. DESCRIPTION NOTE NO.
----------- ----------- --------
10(p) Amendment to Stock Option Plan for Non-Employee Directors of (Note 6)
Tuboscope Vetco International Corporation.
10(q) Form of Non-Qualified Stock Option Agreement. (Note 6)
10(r) Employee Qualified Stock Purchase Plan. (Note 8)
10(s) Purchase Agreement, dated as of July 20, 1990, by and among Oil and (Note 7)
Gas Manufacturing Company, Inc., F.T. Glascock, Thomas C. Glascock,
J. David Glascock, Hutchison-Hayes International, Inc., John F. Joplin,
William F. Joplin, Sound Optics Systems, Inc. dba Sound Optical
Systems, Inc. and Tuboscope Inc.
10(t) Form of Employment Agreement, dated July 23, 1990, between (Note 7)
Tuboscope Inc. and Thomas Glascock and William Glascock.
10(u) Purchase Agreement, dated as of September 30, 1991, between the (Note 3)
Company and BHI relating to the Vetco Services Acquisition.
10(v) Amended and Restated Employment Agreement dated June 23, 1993, (Note 8)
between the Company, Tuboscope Vetco International Inc., and Martin
R. Reid.
10(w) Technology Transfer Agreement, dated as of October 29, 1991, between (Note 3)
Tuboscope Inc. and BHI.
10(x) Sublease, dated December 1, 1987, between McDermott Incorporated (Note 3)
and AMF Tuboscope, Inc. as amended by letter agreement, dated
November 10, 1989, between Tuboscope Inc. and McDermott
Incorporated.
10(y) Letter agreement, dated March 5, 1990 amending the Agreement to (Note 3)
Purchase, Sell and Sublease dated June 9, 1980 between AMF
Tuboscope Inc. and Alaska International Construction, Inc. as amended
June 12, 1980.
10(z) Employment Agreement, between Vetco Inspection GmbH and Gerhard (Note 3)
H. Hage.
10(aa) Lease Agreement with respect to Celle, Germany facility. (Note 3)
10(bb) Building Agreement for Land at Jurong, dated May 5, 1983, between (Note 3)
Jurong Town Corporation and Vetco International, Inc.
10(cc) Lease Agreement, dated January 1, 1988, between Mohamed Alhajri (Note 3)
Est. and Vetco Saudi Company.
10(dd) Lease Agreement, dated November 26, 1989, between Mohammed F. (Note 3)
Al-Hajri Est. and Vetco Saudi Arabia Ltd.
10(ee) Lease between J.G.B. Properties Limited and Vetco Inspection GmbH. (Note 3)
10(ff) Eighth and Ninth Amendment to Savings Investment Plan. (Note 9)
10(gg) Subscription Agreement, dated as of January 3, 1996, by and between (Note 12)
Tuboscope Vetco International Corporation and SCF-III, L.P.
10(hh) Exchange Agreement, dated as of January 3, 1996, among Tuboscope (Note 13)
Vetco International Corporation and Baker Hughes Incorporated.
15
EXHIBIT NO. DESCRIPTION NOTE NO.
----------- ----------- --------
10(ii) Voting Agreement, dated as of January 3, 1996, among Tuboscope (Note 12)
Vetco International Corporation, D.O.S. Ltd., D.O.S. Partners, L.P.,
Panmell (Holdings), Ltd. And Zink Industries Limited.
10(jj) Voting Agreement, dated as of January 3, 1996, among D.O.S. Ltd., (Note 12)
Brentwood Associates IV, L.P. and Baker Hughes Incorporated.
10(kk) Form of Amended and Restated Executive Agreement. (Note 13)
10(ll) First Amendment to Amended and Restated Employment Agreement (Note 13)
between the Company, Tuboscope Vetco International Inc. and Martin
Reid.
10(mm) Third Amendment to General Manager Employment Agreement (Note 13)
between the Company, Tuboscope Vetco International Inc. and Gerhard
H. Hage.
10(nn) Third Amendment to Employment Agreement between the Company, (Note 13)
Tuboscope Vetco International Inc. and William V. Larkin.
10(oo) Master Lease Agreement, dated December 18, 1995, between the (Note 13)
Company and Heller Financial Leasing, Inc.
27 Financial Data. Exhibit 27
Note 1 Previously filed by the Registrant in Registration No. 33-31102 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 2 Previously filed by the Registrant in Registration No. 33-33248 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 3 Previously filed by the Registrant in File No. 33-43525 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 4 Previously filed by the Registrant in Registration No. 33-56182 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 5 Previously filed by the Registrant in Registration No. 33-72150 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 6 Previously filed by the Registrant in Registration No. 33-72072 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 7 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 8 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 9 Previously filed in the Quarterly Report on Form 10Q for the quarter
ended June 30, 1994 and incorporated by reference herein pursuant to
Rule 12b-32 of the Exchange Act.
Note 10 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and incorporated by reference
herein pursuant to Rule 12b-32 of the Exchange Act.
Note 11 Previously filed in the Company's Proxy Statement for the 1994 Annual
Meeting of Stockholders and incorporated by reference herein pursuant
to Rule 12b-32 of the Exchange Act.
16
Note 12 Previously filed in the Company's Current Report on Form 8-K filed on
January 16, 1996 and incorporated by reference herein pursuant to Rule
12b-32 of the Exchange Act.
Note 13 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated by reference
herein pursant to Rule 12b-32 of the Exchange Act.
17