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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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: 000-19580
T-3 ENERGY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0697390
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
13111 NORTHWEST FREEWAY, SUITE 500, HOUSTON, TEXAS 77040
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 996-4110
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE
CLASS B WARRANT
CLASS C WARRANT
CLASS D WARRANT
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates was
$19,173,479 at June 28, 2002. As of March 21, 2003, there were 10,581,669 shares
of common stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION
14A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 2003
ANNUAL MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF
THIS REPORT ON FORM 10-K.
TABLE OF CONTENTS
FORM 10-K
Item Page
---- ----
PART I
1. Business......................................................................... 1
2. Properties....................................................................... 7
3. Legal Proceedings................................................................ 7
4. Submission of Matters to a Vote of Security Holders.............................. 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............ 8
6. Selected Financial Data ......................................................... 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 12
7A. Quantitative and Qualitative Disclosures About Market Risk ...................... 22
8. Financial Statements and Supplementary Data ..................................... 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................................ 22
PART III
10. Directors and Executive Officers of the Registrant............................... 23
11. Executive Compensation .......................................................... 23
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.............................................................. 23
13. Certain Relationships and Related Transactions................................... 23
14. Controls and Procedures.......................................................... 23
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 24
i
Unless otherwise indicated, all references to "we," "us," "our," "our
company" or "T-3" include T-3 Energy Services, Inc. and all of its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We manufacture, remanufacture and distribute oilfield products and
services to the upstream and downstream oil and gas industry primarily in the
Gulf Coast region. Our customers include companies engaged in exploration,
production, completion, transportation and processing of oil and gas, and
drilling and well servicing contractors. Our operations are organized into three
business segments: (1) the Pressure Control segment, (2) the Products segment,
and (3) the Distribution segment.
We were formerly named Industrial Holdings, Inc. ("IHI"). On December
17, 2001, T-3 Energy Services, Inc., a private Delaware corporation ("former
T-3"), merged into IHI, with IHI surviving the merger. In connection with the
merger, the combined company was reincorporated in Delaware under the name "T-3
Energy Services, Inc." and implemented a one-for-ten reverse stock split of its
common stock.
The merger was treated for accounting purposes as a purchase of IHI by
former T-3 (a reverse acquisition) in a purchase business transaction. The
purchase method of accounting requires that we carry forward former T-3's net
assets at their historical book values and reflect IHI's net assets at their
estimated fair market values, with any excess of the fair market value of the
purchase consideration in excess of the fair market value of IHI's identifiable
net assets treated as goodwill. The historical financial data presented in this
Annual Report on Form 10-K includes the historical financial condition and
operating results of T-3 prior to its merger with IHI. For the year 2001, the
historical financial data also includes the two weeks of operations of the
combined company from December 17, 2001 to December 31, 2001.
We were incorporated in Delaware in November 2001 in connection with
the merger and re-incorporation in Delaware. The Company's principal executive
offices are located at 13111 Northwest Freeway, Suite 500, Houston, Texas 77040,
and its telephone number is (713) 996-4110.
BUSINESS STRATEGY
Our business strategy is to maximize shareholder value by building a
diversified oilfield services company founded on products and services that
enhance our customers' operations. We have adopted the strategies described
below:
- integrate our existing operations through appropriate
financial controls and personnel, management information
systems and facilities consolidations;
- enter niche markets for products and services that allow us an
opportunity to perform more effectively and efficiently than
major energy services companies;
- acquire products and services that complement each other in
the manufacturing, aftermarket and service arenas;
- expand higher margin aftermarket services by promoting rapid
response to customer needs;
- focus primarily on the Gulf of Mexico and high pressure gas
markets;
- emphasize inter-company coordination through bundled products
and services, combined sales efforts and inter-company
purchases; and
1
- complete strategic add-on acquisitions.
Currently, we have 24 locations throughout the Gulf Coast region and in
other select oil and gas regions in Texas and Louisiana. We believe that the
oilfield service industry will continue to consolidate as industry participants
seek to gain access to additional markets and broader product offerings. We
believe that we are well-positioned to take advantage of our customers'
increasing desire for vendors to "bundle" a wide range of products and services,
and our customers' expected future investment in the energy industry's upstream
and downstream infrastructure.
OPERATIONS
PRODUCTS AND SERVICES
Pressure Control. Through our Pressure Control segment, we manufacture,
remanufacture and repair high pressure, severe service products including
valves, chokes, actuators, blow out preventers, manifolds and wellhead
equipment. Pressure Control products and services are sold primarily in the Gulf
Coast region to major and independent oil and gas companies engaged in
exploration, production, completion and transportation of oil and gas, and to
drilling and well servicing contractors. Valves, chokes, actuators and other
pressure control products are used to start, stop and monitor the flow of
liquids and gases and to protect equipment and personnel from excessive or
sudden changes in pressure. Drilling machinery, including drawworks, mud pumps,
rotary tables, blowout preventers and pipe handling equipment, are major
mechanical and pressure control components of drilling and well servicing rigs.
These components are essential to the pumping of fluids, the hoisting,
supporting and rotating of the drill string and controlling sudden changes in
well pressure that may cause the well to ignite.
Products. Our Products segment remanufactures and repairs pumps,
electric motors and generators, manufactures specialty bolts and fasteners,
fabricates equipment and components for use in the exploration and production of
oil and gas and provides specialty machining for the repair and remanufacture of
natural gas and diesel engines. The Products segment's products and services are
sold primarily to customers in the upstream and downstream oil and gas industry,
located in the Gulf Coast region and North America. Pumps are used to move
various types of fluids from one point to the next and are sold based on the
fluid type and characteristics, volume to be pumped and the pressure at which
the fluid is to be pumped. Electric motors are used in numerous applications to
provide power to equipment in petrochemical plants and refineries, offshore
production platforms and drilling and well servicing rigs. Generators are used
on offshore platforms on drilling rigs to generate the electric power necessary
for operations. Stud bolts, specialty fasteners and value added services
including coating, electroplating, special machining and traceability, are used
by these same customers in conjunction with the other products and services we
provide.
Distribution. Our Distribution segment is engaged in the specialty
distribution of pipes, valves, stud bolts, gaskets and other ancillary products
primarily to the upstream and downstream oil and gas industry, offshore
fabrication companies and shipyards. Our distribution activities are carried out
through our network of four primary distribution centers along the Louisiana and
Texas Gulf Coast. The products stocked at each location vary depending upon
local customer needs.
For further information on segment reporting, see Note 13 to the
consolidated financial statements of T-3 Energy Services, Inc.
CUSTOMERS AND MARKETS
The Pressure Control segment sells its products and services to
companies engaged in the exploration, production and pipeline transportation of
oil and gas; companies in the petrochemical, chemical and petroleum refining
industries; and onshore and offshore contract drilling and well servicing
companies.
Within the Products segment, pumps, electric motors and generators,
specialty bolts and fasteners, and fabrication and specialty machining services
are sold to customers in the upstream and downstream oil and gas industry
located in the Gulf Coast region and North America.
2
The Distribution segment's customers are primarily companies in the
upstream and downstream oil and gas industry, offshore fabrication companies and
shipyards.
No single customer within any of our segments accounted for greater
than 10% of total sales within such segment during 2002.
MARKETING
We market our products primarily through a direct sales force of 83
persons. We believe that our proximity to customers is a key to maintaining and
increasing sales. A majority of our sales are on a purchase order basis at fixed
prices on normal 30-day trade terms. Large orders may be filled on a contract
basis, depending on the circumstances. International sales are typically made
with agent or representative arrangements, and significant sales are secured by
letters of credit.
SUPPLIERS AND RAW MATERIALS
In each of our segments, new and used inventory and related equipment
and parts are acquired from suppliers, including individual brokers, other
remanufacturing companies and original equipment manufacturers. No single
supplier of products is significant to the operations of our segments, and we
have not experienced and do not expect a shortage of products that we sell.
COMPETITION
In each of our segments, many of the markets in which we compete are
highly fragmented, and our competitors in these niche markets range from
relatively small, privately-held businesses to large integrated companies.
Competition is based on several competitive factors, including reputation,
manufacturing capabilities, availability of plant capacity, price, performance
and dependability. Although we do not typically maintain supply or service
contracts with our customers, a significant portion of our sales represents
repeat business from our customers. We compete with a large number of companies,
none of which are dominant in our markets, many of which possess greater
financial resources or offer certain products and services we do not offer.
BACKLOG
As of December 31, 2002, our backlog for the Pressure Control segment
was $8.1 million, as compared to $8.2 million at December 31, 2001. As of
December 31, 2002, our backlog for the Products segment was $2.2 million, the
same as at December 31, 2001. As of December 31, 2002, our backlog for the
Distribution segment was $1.3 million, as compared to $0.9 million at December
31, 2001.
The above backlog information consisted of written orders or
commitments believed to be firm contracts for products and services. These
contracts are occasionally varied or modified by mutual consent and in some
instances may be cancelable by the customer on short notice without substantial
penalty. As a result, our backlog as of any particular date may not be
indicative of our actual operating results for any future period. Management
believes that substantially all of the orders and commitments included in
backlog at December 31, 2002 will be completed within the next 12 months.
ENVIRONMENTAL REGULATIONS
We are subject to numerous federal, state and local laws and
regulations relating to the storage, handling, emission and discharge of
materials into the environment, including the Comprehensive Environmental
Response Compensation and Liability Act, the Clean Water Act, the Clean Air Act
and the Resource Conservation and Recovery Act. Each of these statutes allows
the imposition of substantial civil and criminal penalties, as well as permit
revocation, for violations of the requirements. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at our facilities or at third-party facilities at which we have
arranged for the disposal or treatment of hazardous materials and/or wastes.
3
In July 2001, we discovered preliminary information concerning deep
soil contamination at one of our leased facilities. This preliminary information
is limited and the contamination source has not yet been identified. We have
informed the landlord of the existence of the contamination and have requested
that they remediate the property as required by the lease. We expect that the
landlord will comply with its obligations under the lease to investigate the
environmental condition and take any action required under applicable laws. We
do not believe that we have contributed to or are responsible for remediation of
the site.
We believe that we are in compliance in all material respects with
applicable environmental laws and are in full compliance with all obligations to
investigate or remediate contamination that could reasonably be expected to
result in material liability. However, it is possible that unanticipated factual
developments could cause us to make environmental expenditures that are
significantly different from those we currently expect. In addition,
environmental laws continue to be amended and revised to impose stricter
obligations. We cannot predict the effect such future requirements, if enacted,
would have on us, although we believe that such regulations would be enacted
over time and would affect the industry as a whole.
EMPLOYEES
As of December 31, 2002, we had a total of 886 employees, 226 of whom
are salaried and 660 of whom are paid on an hourly basis. The entire work force
is employed within the United States. We consider our relations with our
employees to be good. None of our employees are covered by a collective
bargaining agreement.
ACCESS TO COMPANY FILINGS
Access to our filings of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 with the United States Securities and Exchange Commission
(SEC) may be obtained through the Investor Relations section of our website
(http://www.t3energyservices.com). Our website provides a hyperlink to a third
party SEC filings website where these reports may be viewed and printed at no
cost as soon as reasonably practicable after we have electronically filed such
material with the SEC. The contents of our website are not, and shall not be
deemed to be, incorporated into this report.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
Certain information in this Annual Report on Form 10-K, including the
information we incorporate by reference, includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify our forward-looking
statements by the words "expects," "projects," "believes," "anticipates,"
"intends," "plans," "budgets," "predicts," "estimates" and similar expressions.
We have based the forward-looking statements relating to our operations
on our current expectations, and estimates and projections about us and about
the industry in which we operate in general. We caution you that these
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that we cannot predict. In addition, we have based
many of these forward-looking statements on assumptions about future events that
may prove to be inaccurate. Our actual outcomes and results may differ
materially from what we have expressed or forecast in the forward-looking
statements. Except as required by law, we undertake no obligation to update any
of the forward-looking statements in this Form 10-K after the date of this Form
10-K.
BECAUSE WE DEPEND ON THE OIL AND GAS INDUSTRY, A DECLINE IN OIL AND GAS PRICES
OR A DECREASE IN INDUSTRY ACTIVITY MAY NEGATIVELY IMPACT OUR PROFITS.
We are, and will continue to be, dependent upon the oil and gas
industry and the level of oil and gas exploration and production. The level of
exploration and production depends upon the prevailing view of future product
prices. Many factors affect the supply and demand for oil and gas and therefore
influence product prices, including:
4
- the level of production from known reserves;
- weather conditions;
- the actions of the Organization of Petroleum Exporting
Countries;
- political instability in the Middle East and elsewhere;
- the level of oil and gas inventories;
- the cost of producing oil and gas;
- the level of drilling activity;
- worldwide economic activity; and
- governmental regulation.
If there is a significant reduction in demand for drilling services, in
cash flows of drilling contractors or production companies or in drilling or
well servicing rig utilization rates, then demand for our products will decline.
THE OILFIELD SERVICE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, WHICH
MAY RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE OR PROFIT MARGINS.
The oilfield service industry in which we operate is highly
competitive. Many of our competitors have greater financial and other resources
than we do. Each of our operating units is subject to competition from a number
of similarly sized or larger businesses. Factors that affect competition include
price, quality and customer service. Strong competition may result in a loss of
market share and a decrease in revenue and profit margins.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
Our business exposes us to possible claims for personal injury or death
resulting from the use of our products. We carry comprehensive insurance,
subject to deductibles, at levels we believe are sufficient to cover existing
and future claims. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain
adequate insurance coverage at rates we believe are reasonable.
OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our business is affected by governmental regulations relating to our
industry segments in general, as well as environmental and safety regulations
that have specific application to our business. While we are not aware of any
proposed or pending legislation, future legislation may have an adverse effect
on our business, financial condition, results of operations or prospects.
We are subject to various federal, state and local environmental laws,
including those governing air emissions, water discharges and the storage,
handling, disposal and remediation of petroleum and hazardous substances. We
have in the past and will likely in the future incur expenditures to ensure
compliance with environmental laws. Due to the possibility of unanticipated
factual or regulatory developments, the amount and timing of future
environmental expenditures could vary substantially from those currently
anticipated. Moreover, certain of our facilities have been in operation for many
years and, over that time, we and other predecessor operators have generated and
disposed of wastes that are or may be considered hazardous. Accordingly,
although we have undertaken considerable efforts to comply with applicable laws,
it is possible that environmental requirements or facts not currently known to
us will require unanticipated efforts and expenditures that cannot be currently
quantified.
5
THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR OFFICERS OF FIRST RESERVE CORPORATION. THE RESOLUTION OF THESE
CONFLICTS OF INTEREST MAY NOT BE IN OUR OR OUR SHAREHOLDERS' BEST INTERESTS.
Three of our directors, Thomas R. Denison, Joseph R. Edwards and Ben A.
Guill, are also current directors or officers of First Reserve Corporation,
which controls the general partner of First Reserve Fund VIII, L.P., a
beneficial owner of more than 85% of our common stock. This may create conflicts
of interest because these directors have responsibilities to First Reserve Fund
VIII and its owners. Their duties as directors or officers of First Reserve
Corporation may conflict with their duties as directors of our company regarding
business dealings between First Reserve Corporation and us and other matters.
The resolution of these conflicts may not always be in our or our shareholders'
best interests.
WE RENOUNCED ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND FIRST RESERVE
FUND VIII AND ITS DIRECTOR DESIGNEES ON OUR BOARD OF DIRECTORS GENERALLY HAVE NO
OBLIGATION TO OFFER US THOSE OPPORTUNITIES.
First Reserve Fund VIII has investments in other oilfield service
companies that compete with us, and First Reserve Corporation and its
affiliates, other than T-3, may invest in other such companies in the future. We
refer to First Reserve Corporation, its other affiliates and its portfolio
companies as the First Reserve group. Our certificate of incorporation provides
that, so long as First Reserve Corporation and its affiliates continue to own at
least 20% of our common stock, we renounce any interest in specified business
opportunities. Our certificate of incorporation also provides that if an
opportunity in the oilfield services industry is presented to a person who is a
member of the First Reserve group, including any individual who also serves as a
director of our company:
- no member of the First Reserve group or any of those
individuals will have any obligation to communicate or offer
the opportunity to us; and
- such entity or individual may pursue the opportunity as that
entity or individual sees fit,
unless:
- it was presented to a member of the First Reserve group in
that person's capacity as a director or officer of T-3; or
- the opportunity was identified solely through the disclosure
of information by or on behalf of T-3.
These provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock. As
a result of these charter provisions, our future competitive position and growth
potential could be adversely affected.
THE CONVICTION OF OUR FORMER INDEPENDENT AUDITORS, ARTHUR ANDERSEN LLP, ON
FEDERAL OBSTRUCTION OF JUSTICE CHARGES MAY ADVERSELY AFFECT ARTHUR ANDERSEN
LLP'S ABILITY TO SATISFY ANY CLAIMS ARISING FROM THE PROVISION OF AUDITING
SERVICES TO US AND MAY IMPEDE OUR ACCESS TO THE CAPITAL MARKETS.
Arthur Andersen LLP, which audited our financial statements for the
years ended December 31, 2001 and 2000, was convicted in June 2002 on federal
obstruction of justice charges. In light of the jury verdict and the underlying
events, Arthur Andersen LLP stopped practicing before the Securities and
Exchange Commission and subsequently ceased operations. The Securities and
Exchange Commission has stated that, for the time being subject to certain
conditions, it will continue accepting financial statements audited by Arthur
Andersen LLP. After reasonable efforts, we have not been able to obtain the
consent of Arthur Andersen LLP to the incorporation by reference of its audit
report dated March 8, 2002 into our registration statement Form S-8. As
permitted under Rule 437a promulgated under the Securities Act of 1933, as
amended (Securities Act), we have not filed the written consent of Arthur
Andersen LLP that would otherwise be required by the Securities Act. Because
Arthur Andersen LLP has not consented to the incorporation by reference of their
report in the registration statement, you may not be able to recover amounts
from Arthur Andersen LLP under Section 11(a) of the Securities Act for any
untrue statement of a material fact or any omission to state a material fact, if
any, contained in or omitted from our financial statements included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which
are incorporated by reference in the registration statement.
6
ITEM 2. PROPERTIES
We operate 24 facilities, all located in the Gulf Coast region, which
range in size from 7,200 square feet to approximately 120,000 square feet of
manufacturing and related space, or an aggregate of approximately 717,800 square
feet, including corporate headquarters. Of this total, 499,900 square feet of
manufacturing and related space is located in leased premises under leases
expiring at various dates through 2011. We believe our facilities are suitable
for their present and intended purposes and are adequate for our current level
of operations.
We maintain our principal executive offices at 13111 Northwest Freeway,
Suite 500, Houston, Texas 77040. This property consists of conventional office
space and is, in our opinion, adequate to meet our needs for the foreseeable
future.
The following chart lists our facilities by segment:
SEGMENT NUMBER OF FACILITIES SQUARE FOOTAGE
------- -------------------- --------------
Pressure Control...................... 13 248,600
Products.............................. 6 359,500
Distribution.......................... 4 102,500
Other................................. 1 7,200
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the
ordinary course of business. While there are uncertainties inherent in the
ultimate outcome of such matters and it is impossible to currently determine the
ultimate costs that may be incurred, we believe the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on our consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders in the
fourth quarter of 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on The Nasdaq National Market under the symbol
"TTES." The following table sets forth the high and low closing sales prices of
our common stock, as adjusted to reflect the one-for-ten reverse stock split
that was implemented on December 18, 2001 in connection with the closing of the
merger, for the periods indicated below:
PRICE RANGE
---------------
HIGH LOW
---- ---
2001
First Quarter................. $ 22.50 $ 10.00
Second Quarter................ $ 23.13 $ 16.50
Third Quarter................. $ 18.60 $ 8.50
Fourth Quarter................ $ 12.80 $ 7.60
2002
First Quarter................. $ 10.24 $ 7.50
Second Quarter................ $ 9.70 $ 8.27
Third Quarter................. $ 8.60 $ 5.13
Fourth Quarter................ $ 7.61 $ 6.40
All of the foregoing prices reflect interdealer quotations, without
retail mark-up, mark-downs or commissions and may not necessarily represent
actual transactions in our common stock.
On March 17, 2003, the last reported sales price of our common stock,
as quoted by The Nasdaq National Market, was $6.89 per share. On March 17, 2003,
there were approximately 204 record holders of our common stock, not including
the number of persons or entities who hold stock in nominee or street name
through various brokerage firms and banks.
DIVIDEND POLICY
We have never paid dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings to support our operations and growth. Any payment of cash
dividends in the future will be dependent on the amount of funds legally
available, our earnings, financial condition, capital requirements and other
factors that the board of directors may deem relevant. Additionally, certain of
our debt agreements restrict the payment of dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information with respect to compensation
plans under which our securities are authorized for issuance as of December 31,
2002:
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES FOR FUTURE ISSUANCE
TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY
EXERCISE OF OUTSTANDING EXERCISE PRICE OF COMPENSATION PLANS
OPTIONS, WARRANT OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
(a) (b) (c)
- ---------------------------------------------- ----------------------- -------------------- ---------------------
Equity compensation plans approved by
security holders 471,880 $ 14.42 528,120
Equity compensation plans not approved by
security holders -- $ -- --
- ---------------------------------------------- ------- ------- -------
Total 471,880 $ 14.42 528,120
8
ITEM 6. SELECTED FINANCIAL DATA
This item is presented in three tables for the historical reporting
requirements of T-3. T-3 began operations in the first half of 2000 by acquiring
and merging two predecessor companies with different fiscal year ends. Selected
historical data for T-3, Cor-Val, Inc. and Preferred Industries, Inc. are
presented separately below.
Selected Financial Data of T-3
T-3 was incorporated in October 1999, but did not engage in business
activities until the acquisition of Cor-Val on February 29, 2000. T-3 acquired
Preferred Industries on April 30, 2000. For financial reporting purposes, T-3
was deemed the accounting acquirer of both Cor-Val and Preferred Industries and
applied the purchase method of accounting in both acquisitions. Cor-Val and
Preferred Industries have been identified as predecessors to T-3 for financial
presentation purposes. Additionally, T-3 acquired O&M Equipment, Inc. in April
2000, Control Products of Louisiana, Inc. in September 2000, Coastal Electric
Motors, Inc. in December 2000, and A&B Bolt and Supply, Inc. in May 2001. The
results of operations for these acquisitions are included in the operating
results for T-3 from their respective dates of acquisition. On December 17,
2001, former T-3 merged into IHI with IHI surviving the merger under the name
T-3 Energy Services, Inc. The merger was treated for accounting purposes as if
IHI was acquired by T-3 (a reverse acquisition) in a purchase business
transaction. The purchase method of accounting requires that we carry forward
former T-3's net assets at their historical book values and reflect IHI's net
assets at their estimated fair values at the date of the merger. Accordingly,
the operating results presented in this Annual Report on Form 10-K include the
operating results of T-3 prior to its merger with IHI and the two weeks of
operations of the combined company from December 17, 2001 to December 31, 2001.
The following selected consolidated financial data for each of the
three years in the period ended December 31, 2002 has been derived from our
audited consolidated financial statements. The following information should be
read in conjunction with our consolidated financial statements and the related
notes thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Annual Report
on Form 10-K.
9
T-3
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
---- ---- ----
(IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
OPERATING DATA:
Sales ....................................................... $146,870 $ 90,162 $ 25,683
Income from operations ...................................... 10,276 10,126 3,784
Income before extraordinary loss ............................ 4,570 2,396 335
Extraordinary loss (1) ...................................... -- 474 --
-------- -------- --------
Net income .................................................. $ 4,570 $ 1,922 $ 335
======== ======== ========
Basic earnings (loss) per common share:
Income before extraordinary loss ......................... $ 0.44 $ 1.05 $ 0.26
Extraordinary loss ....................................... -- (0.20) --
-------- -------- --------
Net income per common share .............................. $ 0.44 $ 0.85 $ 0.26
======== ======== ========
Diluted earnings (loss) per common share: (2)
Income before extraordinary loss ......................... $ 0.44 $ 0.89 $ 0.26
Extraordinary loss ....................................... -- (0.13) --
-------- -------- --------
Net income per common share .............................. $ 0.44 $ 0.76 $ 0.26
======== ======== ========
Weighted average common shares
outstanding:
Basic .................................................... 10,346 2,271 1,302
Diluted .................................................. 10,347(2) 3,715(2) 1,302(2)
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
BALANCE SHEET DATA:
Total assets ................................................ 186,599 199,728 66,819
Long-term debt, less current maturities ..................... 26,441 43,897 36,083
- ---------------------------------------
(1) The repayment of our combined indebtedness in connection with the
merger in December 2001 resulted in an extraordinary loss of $0.5
million, net of a $0.3 million income tax benefit, as a result of the
write-off of unamortized deferred loan costs.
(2) There were 185,180 weighted average shares of common stock related to
our convertible subordinated debt that were not included in the
computation of diluted earnings per share for 2000 because to do so
would have been anti-dilutive. For 2002, 2001 and 2000, there were
480,575, 282,829 and 120,588 options, respectively, and for 2002 and
2001, 3,489,079 warrants that were not included in the computation of
diluted earnings per share because their inclusion would have been
anti-dilutive.
Selected Historical Financial Data of Cor-Val, Inc.
The following table presents summary historical financial and other
data for Cor-Val and should be read in conjunction with the financial statements
of Cor-Val and the notes thereto and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Annual Report on Form 10-K. The following selected unaudited historical
financial data as of and for the year ended March 31, 1999 and eleven months
ended February 29, 2000 has been derived from the audited consolidated financial
statements as of and for the year ended March 31, 1999 and for the eleven months
ended February 29, 2000. The March 31, 1998 selected unaudited historical
financial data has been derived from the March 31, 1998 unaudited consolidated
financial statements. Cor-Val has been identified as a predecessor to T-3 for
financial reporting purposes.
10
COR-VAL, INC.
ELEVEN MONTHS
ENDED YEAR ENDED MARCH 31,
FEBRUARY 29, --------------------
2000(1) 1999 1998
------------- -------- --------
(IN THOUSANDS)
OPERATING DATA:
Sales........................................................ $ 10,842 $ 10,310 $ 12,512
Income from operations....................................... 1,616 1,362 1,970
Net income................................................... $ 1,618 $ 797 $ 897
========= ======== ========
AS OF MARCH 31,
---------------
1999 1998
-------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets................................................................. 4,041 3,855
Long-term debt (2)........................................................... 94 1,007
- ------------------------------------
(1) In July 1999, Cor-Val purchased all of the equity securities of Cor-Val
Services, Inc. in exchange for common stock.
(2) Excludes deferred income taxes and other long-term liabilities.
Selected Historical Financial Data of Preferred Industries, Inc.
The following table presents summary historical financial and other
data for Preferred Industries and should be read in conjunction with the
financial statements of Preferred Industries and the notes thereto and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. The
following selected unaudited historical financial data as of and for the years
ended December 31, 1998 and 1999 and the four months ended April 30, 2000 has
been derived from the audited financial statements of Preferred Industries as of
and for the years ended December 31, 1998 and 1999, and for the four months
ended April 30, 2000. Preferred Industries has been identified as a predecessor
to T-3 for financial reporting purposes.
11
PREFERRED INDUSTRIES, INC.
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------
APRIL 30, 2000 1999 1998
-------------- -------- --------
(IN THOUSANDS)
OPERATING DATA:
Sales........................................................ $ 3,808 $ 12,925 $ 18,040
Income (loss) from operations................................ 641 (25) 229
Net income (loss)............................................ $ 352 $ (131) $ 103
======= ======== ========
AS OF DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets.................................................................. 6,923 7,942
Long-term debt (1)............................................................ 1,843 2,358
(1) Excludes deferred income taxes and other long-term liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion of our historical results of operations and
financial condition should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
T-3 was incorporated in October 1999, but did not engage in business
activities until the acquisition of Cor-Val, Inc. on February 29, 2000. We
acquired Preferred Industries, Inc. on April 30, 2000. For financial reporting
purposes, T-3 was deemed the accounting acquirer of both Cor-Val and Preferred
Industries and applied the purchase method of accounting in both acquisitions.
In this Annual Report on Form 10-K, we sometimes refer to Cor-Val and Preferred
Industries together as the predecessors. The results of operations of the
predecessors are included in our operating results from their respective dates
of acquisition.
During the year 2000, we acquired five operating companies in
transactions accounted for using the purchase method of accounting. On February
29, 2000, we acquired Cor-Val for approximately $21.4 million in cash, plus
liabilities assumed and the issuance of 54,508 shares of our common stock. On
April 30, 2000, we acquired Preferred Industries for approximately $18.8 million
in cash, plus liabilities assumed and the issuance of 18,169 shares of our
common stock. On April 30, 2000, we acquired O&M Equipment, Inc. for
approximately $1.4 million in cash, plus liabilities assumed and a maximum
earnout of $1.0 million based on the performance of O&M through 2002 ($0.3
million was earned in 2002, $0.6 million was earned in 2001, and $0.1 million
was earned in 2000). Additionally, we acquired Control Products of Louisiana,
Inc. and Coastal Electric Motors, Inc. in September 2000 and December 2000,
respectively, for total consideration of approximately $10.3 million in cash,
plus liabilities assumed. The results of operations of these companies have been
included in our operating results from the dates of acquisition.
On May 7, 2001, simultaneous with the signing of the merger agreement
with IHI, we acquired A&B Bolt, a subsidiary of IHI, for $15.3 million in cash
including expenses in a transaction accounted for using the purchase method of
accounting. The results of operations of A&B Bolt have been included in our
operating results from the date of acquisition.
12
On December 17, 2001, T-3 Energy Services, Inc., a private Delaware
corporation ("former T-3"), merged into IHI, with IHI surviving the merger. In
connection with the merger, the combined company was reincorporated in Delaware
under the name "T-3 Energy Services, Inc." and implemented a one-for-ten reverse
stock split of its common stock.
The merger was treated for accounting purposes as a purchase of IHI by
former T-3 (a reverse acquisition) in a purchase business transaction. The
purchase method of accounting requires that we carry forward former T-3's net
assets at their historical book values and reflect IHI's net assets at their
estimated fair market values, with any excess of the fair market value of the
purchase consideration in excess of the fair market value of IHI's identifiable
net assets treated as goodwill. The historical financial data presented in this
Annual Report on Form 10-K includes the historical financial condition and
operating results of T-3 prior to its merger with IHI. For the year 2001, the
historical financial data also includes the two weeks of operations of the
combined company from December 17, 2001 to December 31, 2001.
As part of the merger with IHI, we acquired a non-energy subsidiary.
Because the subsidiary's operations are outside our strategic focus, at the time
of the merger, we identified this operation as one to be sold. The sale was
completed in July 2002.
On December 18, 2001, our shares of common stock began trading on The
Nasdaq National Market under the new symbol "TTES." In addition, our Class B
Warrants, Class C Warrants and Class D Warrants began trading on the
over-the-counter bulletin board under the new symbols "TTESZ," "TTESL," and
"TTESW," respectively (these Class B, Class C and Class D Warrants expired
January 14, 2003). Immediately after the merger, First Reserve Fund VIII, L.P.
("First Reserve") owned approximately 77% of our common shares, and collectively
all of the former T-3 shareholders (including First Reserve) owned approximately
79% of our common shares, with the remaining 21% of our common shares being held
by the shareholders of IHI immediately prior to the merger.
Before the closing and as part of the merger, (1) IHI divested of
substantially all of its non-energy-related subsidiaries, (2) SJMB, L.P.
converted $3.6 million of its IHI debt into shares of IHI common stock, (3)
First Reserve converted $25.3 million of its former T-3 debt into shares of
former T-3 common stock, and (4) First Reserve purchased an additional $46.8
million in shares of former T-3 common stock. In addition, the combined company
completed a refinancing of its senior debt simultaneously with the closing of
the merger. Under the terms of the merger, all but two of IHI's then existing
directors and all of its officers resigned their positions with the combined
company, and the management of former T-3 and six of former T-3's director
designees assumed the management and director duties for the combined company.
Our financial statements for the year ended December 31, 2000 reflect
operations for the ten-month period from March 1, 2000 (the date the company
commenced business operations) to December 31, 2000. Our results of operations
for the year ended December 31, 2000 are not comparable to the results of
operations for the comparable periods for each of the predecessor companies
because (1) T-3 was not engaged in business operations prior to March 1, 2000,
(2) T-3 made three acquisitions during the year 2000 in addition to the
predecessors which are not reflected for the full period, and (3) the historical
information presented for the predecessors does not reflect the purchase
accounting adjustments recorded by T-3.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the
consolidated financial statements included elsewhere within this Annual Report
on Form 10-K. The significant accounting policies which we believe are the most
critical to our financial condition and results of operations and require
management's subjective judgment and estimates are described below.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the historical carrying amount, net
of write-offs and the allowance for doubtful accounts. Our receivables are
exposed to concentrations of credit risk since a majority of our business is
conducted with companies in the oil and gas, petrochemical, chemical and
petroleum refining industries in the Gulf Coast
13
region. We continually monitor collections and evaluate the financial strength
of our customers but do not require collateral to support our customer
receivables. We provide an allowance for doubtful accounts for potential
collection issues in addition to reserves for specific accounts receivable where
collection is no longer probable. We cannot give assurances that we will
continue to experience the same credit loss rates we have in the past or that
our losses will not exceed the amount reserved.
INVENTORY
We regularly review inventory quantities on hand and record a provision
for excess and slow moving inventory to write down the recorded cost of
inventory to its fair market value. This analysis is based primarily on the
length of time the item has remained in inventory and management's consideration
of current and expected market conditions. However, a significant decrease in
demand and a further weakening of market conditions could result in further
writedowns in inventory carrying values and a charge to earnings.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets to be held and used by us are reviewed to determine whether
any events or changes in circumstances indicate the carrying amount of the asset
may not be recoverable. Long-lived assets include property, plant and equipment
and definite-lived intangibles. For long-lived assets to be held and used, we
base our evaluation on impairment indicators such as the nature of the assets,
the future economic benefit of the assets, any historical or future
profitability measurements and other external market conditions or factors that
may be present. If such impairment indicators are present or other factors exist
that indicate the carrying amount of the asset may not be recoverable, we
determine whether an impairment has occurred through the use of an undiscounted
cash flows analysis of the asset at the lowest level for which identifiable cash
flows exist. If an impairment has occurred, we recognize a loss for the
difference between the carrying amount and the estimated fair value of the
asset. The fair value of the asset is measured using quoted market prices or, in
the absence of quoted market prices, is based on an estimate of discounted cash
flows.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses and represents a
significant portion of our assets. Identifiable intangible assets acquired in
business combinations are recorded based upon fair market value at the date of
acquisition.
Effective January 1, 2002, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." This standard changes the accounting for
goodwill and certain other intangible assets from an amortization method to an
impairment only approach. The standard also requires a reassessment of the
useful lives of identifiable intangible assets other than goodwill and at least
an annual test for impairment of goodwill and intangibles with indefinite lives.
In 2002, the Company completed the transitional goodwill and indefinite
life intangibles impairment tests and the annual test required by SFAS No. 142
and recorded no impairments of its goodwill and indefinite life intangibles
based on these fair value tests. The Company tests goodwill for impairment
annually using the fair value criteria prescribed by SFAS No. 142. Fair value
was estimated using discounted cash flow methodologies, which are significantly
influenced by management's assumptions as to future cash flows, and market
comparable information. We will continue to test on a consistent measurement
date unless events occur or circumstances change between annual impairment tests
that would more likely than not reduce fair value of a reporting unit below its
carrying value.
14
RESULTS OF OPERATIONS OF T-3
The following table sets forth certain operating statement data for
each of our segments for each of the years presented (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Sales:
Pressure Control ..................................... $ 70,177 $ 52,120 $ 25,412
Products ............................................. 39,445 7,435 271
Distribution ......................................... 37,248 30,607 --
---------- --------- ---------
146,870 90,162 25,683
---------- --------- ---------
Cost of sales:
Pressure Control ..................................... 45,713 33,434 15,650
Products ............................................. 32,175 5,709 251
Distribution ......................................... 26,850 22,041 --
---------- --------- ---------
104,738 61,184 15,901
---------- --------- ---------
Gross profit:
Pressure Control ..................................... 24,464 18,686 9,762
Products ............................................. 7,270 1,726 20
Distribution ......................................... 10,398 8,566 --
---------- --------- ---------
42,132 28,978 9,782
---------- --------- ---------
Selling, general and administrative expenses:
Pressure Control ..................................... 11,397 9,689 5,356
Products ............................................. 6,523 1,624 118
Distribution ......................................... 8,278 6,130 --
Corporate ............................................ 5,658 1,409 524
---------- --------- ---------
31,856 18,852 5,998
---------- --------- ---------
Income (loss) from operations:
Pressure Control ..................................... 13,067 8,997 4,406
Products ............................................. 747 102 (98)
Distribution ......................................... 2,120 2,436 --
Corporate ............................................ (5,658) (1,409) (524)
---------- --------- ---------
$ 10,276 $ 10,126 $ 3,784
========== ========= =========
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Sales. On a consolidated basis, sales increased $56.7 million, or 63%,
in 2002 compared to 2001. Sales increased across all segments as a result of the
merger with IHI in December 2001 and the acquisition of A&B Bolt in May 2001.
However, as a result of lower North American drilling rig activity and continued
general economic uncertainty, on a pro forma basis as if the merger with IHI,
the acquisition of A&B Bolt, and the sale of a non-energy-related subsidiary had
occurred as of January 1, 2001, sales decreased $37.3 million for the year ended
December 31, 2002, compared to the year ended December 31, 2001.
Sales for the Pressure Control segment increased $18.1 million, or 35%,
in 2002 compared to 2001. The sales increase in 2002 over 2001 was primarily
attributable to the inclusion of a full year's sales in the 2002 period from the
IHI merger. However, on a pro forma basis as if the merger with IHI had occurred
as of January 1, 2001, sales for this segment decreased $9.8 million due to
lower levels of North American drilling rig activity and general economic
uncertainty, partially offset by increased international sales.
15
Sales for the Products segment increased $32.0 million, or 431%, in
2002 compared to 2001. This sales increase was primarily attributable to the
inclusion of a full year's sales in the 2002 period from the IHI merger.
However, on a pro forma basis as if the merger with IHI had occurred as of
January 1, 2001, sales for this segment decreased $20.3 million due to lower
levels of North American drilling rig activity and general economic uncertainty.
Sales for the Distribution segment increased $6.6 million, or 22%, in
2002 compared to 2001. The sales increase in 2002 over 2001 was primarily
attributable to the inclusion of a full year's sales in the 2002 period. The
Distribution segment was formed in 2001 with the acquisition of A&B Bolt in May
2001. However, on a pro forma basis as if the acquisition of A&B Bolt and the
sale of a non energy-related subsidiary had occurred as of January 1, 2001,
sales for this segment decreased $7.2 million due to lower levels of North
American drilling rig activity and general economic uncertainty.
Cost of Sales. On a consolidated basis, cost of sales increased $43.6
million, or 71%, in 2002 compared to 2001 primarily as a result of the merger
with IHI in December 2001. Gross profit margin was 29% in 2002 compared to 32%
in 2001. Gross profit margin was lower on a consolidated basis in 2002 compared
to 2001 primarily because of a change in the mix of sales. The Pressure Control
segment, which typically has the highest margins of all of our segments,
represented a smaller percentage of total sales (48% in 2002 compared to 58% in
2001). The Products and Distribution segments, which typically have lower
margins than the Pressure Control segment, represented a larger percentage of
total sales (52% in 2002 compared to 42% in 2001).
Cost of sales for the Pressure Control segment increased $12.3 million,
or 37%, in 2002 compared to 2001, primarily as a result of the increase in sales
described above. Gross profit margin was 35% in 2002 compared to 36% in 2001.
This slight decrease was attributable to fixed costs that did not decrease
proportionally with pro forma sales, partially offset by improved margins
because of increased operational efficiencies.
Cost of sales for the Products segment increased $26.5 million, or
464%, in 2002 compared to 2001, primarily as a result of the increase in sales
as a result of the merger in December 2001. Gross profit margin decreased from
23% in 2001 to 18% in 2002. Gross profit margin decreased primarily as a result
of a change in the mix of products and services sales within the segment, in
addition to fixed costs that did not decrease proportionally with the decrease
in pro forma sales.
Cost of sales for the Distribution segment increased $4.8 million, or
22%, in 2002 compared to 2001, primarily as a result of the increase in sales.
Gross profit margin was 28% in 2002 and 2001.
Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses increased $13.0 million, or 69%, in
2002 compared to 2001, primarily as a result of the merger with IHI, the
acquisition of A&B Bolt in 2001 and the costs associated with being a publicly
traded company. The increase was net of a decrease in the amortization of
goodwill of $1.6 million. Selling, general and administrative expenses as a
percentage of sales were 22% and 21% for 2002 and 2001, respectively.
Selling, general and administrative expenses for the Pressure Control
segment increased $1.7 million, or 18%, in 2002 compared to 2001 as a result of
the increase in sales and the merger with IHI in December 2001. The increase was
net of a decrease in the amortization of goodwill of $1.4 million. As a
percentage of sales, selling, general and administrative expenses decreased from
19% in 2001 to 16% in 2002, due to the higher sales resulting from the IHI
merger absorbing a larger portion of these fixed expenses.
Selling, general and administrative expenses for the Products segment
increased $4.9 million, or 302%, in 2002 as compared to 2001, primarily as a
result of the merger with IHI in December 2001. The increase was net of a
decrease in the amortization of goodwill of $0.1 million. As a percentage of
sales, selling, general and administrative expenses decreased from 22% in 2001
to 17% in 2002, due to the higher sales resulting from the IHI merger absorbing
a larger portion of these fixed expenses.
Selling, general and administrative expenses for the Distribution
segment increased $2.1 million, or 35%, in 2002 as compared to 2001, primarily
as a result of the inclusion of a full year's operations for A&B in 2002. The
increase was net of a decrease in the amortization of goodwill of $0.1 million.
As a percentage of sales, selling, general and administrative expenses increased
from 20% in 2001 to 22% in 2002, primarily because fixed selling, general and
administrative expenses did not decrease proportionally with the decrease in
sales.
16
Selling, general and administrative expenses for the Corporate
operations increased $4.3 million, or 302%, in 2002 compared to 2001. This
increase was primarily attributable to the merger with IHI in December 2001 and
the addition of corporate staff, including human resource, environmental, safety
and information systems personnel, and related expenses resulting from the
Company's growth and the costs associated with being a publicly traded company.
Interest Expense. On a consolidated basis, interest expense decreased
to $3.5 million in 2002 from $4.9 million in 2001, primarily as a result of
lower debt levels and interest rates throughout 2002.
Interest Income. Interest income in 2002 was generated from seller
notes receivable that arose in conjunction with the disposal by IHI of several
business units prior to the completion of the merger. Interest income in 2001
was not material.
Income Taxes. Income tax expense for 2002 was $3.0 million as compared
to $2.9 million in 2001. The effective tax rate for 2002 was 40% compared to 54%
in 2001. For both years, the tax rate in excess of statutory rates was primarily
attributable to nondeductible expenses and state income taxes, net of the
Federal benefit provided. The decrease in the effective rate in 2002 is
attributable to the impact of nondeductible goodwill no longer being amortized
due to the adoption of Statement of Financial Accounting Standards No. 142 and
lower state income taxes.
Income Before Extraordinary Loss. On a consolidated basis, income
before extraordinary loss was $4.6 million in 2002 compared with $2.4 million in
2001 as a result of the foregoing factors.
Extraordinary Loss. As a result of the merger and the subsequent
refinancing of our indebtedness in December 2001, we recorded an extraordinary
loss of $0.5 million, net of tax, for the write-off of unamortized deferred loan
costs.
Net Income. On a consolidated basis, net income was $4.6 million in
2002 compared with $1.9 million in 2001 as a result of the foregoing factors.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Sales. On a consolidated basis, sales increased $64.5 million, or 251%,
in 2001 compared to 2000.
Sales for the Pressure Control segment increased $26.7 million, or
105%, in 2001 compared to 2000. Sales for 2000 were generated from four
acquisitions that were made between February 2000 and September 2000. The sales
increase in 2001 over 2000 was primarily attributable to the inclusion of a full
year's sales in the 2001 period from these same acquisitions. In addition, sales
were positively influenced by increases in the worldwide rig count, optimism
regarding the long-term hydrocarbon price environment, increased worldwide
demand for oil and gas coupled with declining production in many areas. The
factors resulted in increased oil and gas prices, increased exploration and
production spending and an improved demand for oilfield services in the first
three quarters of 2001.
Sales for the Products segment increased $7.2 million in 2001 from $0.3
million in 2000. This sales increase was primarily attributable to the
acquisition of Coastal Electric Motors, Inc. in December 2000 and the inclusion
of a full year's sales in the 2001 period along with $1.8 million of sales
generated from the acquired IHI entities in December 2001.
Sales for the Distribution segment for 2001 were $30.6 million. The
Distribution segment was formed in 2001 with the acquisition of A&B Bolt in May
2001.
Cost of Sales. On a consolidated basis, cost of sales increased $45.3
million, or 285%, in 2001 compared to 2000. Gross profit margin was 32% in 2001
compared to 38% in 2000. Gross profit was lower on a consolidated basis in 2001
compared to 2000 primarily because of a change in the mix of sales. The Pressure
Control segment, which typically has the highest margins of all of our segments,
represented a smaller percentage of total sales (58% in 2001 compared to 99% in
2000). The Products and Distribution segments, which typically have lower
margins
17
than the Pressure Control segment, represented a larger percentage of total
sales (42% in 2001 compared to 1% in 2000).
Cost of sales for the Pressure Control segment increased $17.8 million,
or 114%, in 2001 compared to 2000, primarily as a result of the increase in
sales described above. Gross profit margin was 36% in 2001 compared to 38% in
2000. The decline in margins in 2001 compared to 2000 is attributable to the
companies acquired in the second half of 2000 generally having lower gross
margins on remanufactured products.
Cost of sales for the Products segment increased $5.5 million in 2001
from $0.3 million in 2000, primarily as a result of the increase in sales and
the merger in December 2001. Gross profit margin increased from 7% in 2000 to
23% in 2001. Only one month of operations was included in 2000. Gross profit
margin in 2000 was lower than it would be for a full year since both sales and
gross profit margin in this segment are typically lower in the month of
December.
Cost of sales for the Distribution segment was $22.0 million in 2001.
Gross profit margin was 28% in 2001.
Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses increased $12.8 million, or 214%,
in 2001 compared to 2000, primarily as a result of the increased sales and the
inclusion of a full year's operations of our 2000 acquisitions described above.
Selling, general and administrative expenses for the Pressure Control
segment increased $4.3 million, or 81%, in 2001 compared to 2000 as a result of
the increase in sales and the inclusion of a full year's operations of our 2000
acquisitions as described above.
Selling, general and administrative expenses for the Products segment
increased $1.5 million in 2001 from $0.1 million in 2000, primarily as a result
of the increase in sales and the inclusion of a full year's operations of our
2000 acquisitions as described above.
Selling, general and administrative expenses in the Distribution
segment were $6.1 million in 2001.
Selling, general and administrative expenses for the Corporate
operations increased $0.9 million, or 169%, in 2001 compared to 2000. The 2001
period included a full year of administrative and MIS support services as well
as expenses associated with the preparation and completion of the merger of IHI
and T-3. T-3 maintained a smaller support staff during the first half of 2000
prior to most of its acquisitions.
Interest Expense. On a consolidated basis, interest expense increased
to $4.9 million in 2001 as compared to $2.8 million in 2000, primarily as a
result of higher debt levels and interest rates throughout 2001.
Income Taxes. Income tax expense for 2001 was $2.9 million as compared
to $0.7 million in 2000. The effective tax rate for 2001 was 54% compared to 67%
in 2000. For both years, the tax rate in excess of statutory rates was primarily
attributable to nondeductible goodwill associated with the acquisitions made in
2000.
Income Before Extraordinary Loss. On a consolidated basis, income
before extraordinary loss was $2.4 million in 2001 compared with $0.3 million in
2000 as a result of the foregoing factors.
Extraordinary Loss. As a result of the merger and the subsequent
refinancing of our indebtedness in December 2001, we recorded an extraordinary
loss of $0.5 million, net of tax, for the write-off of unamortized deferred loan
costs.
Net Income. On a consolidated basis, net income was $1.9 million in
2001 compared with $0.3 million in 2000 as a result of the foregoing factors.
18
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had working capital of $24.7 million, current
maturities of long-term debt of $3.5 million, long-term debt of $26.4 million
and stockholders' equity of $130.6 million. Historically, our principal
liquidity requirements and uses of cash have been for debt service, capital
expenditures, working capital and acquisition financing, and our principal
sources of liquidity and cash have been from cash flows from operations,
borrowings under long-term debt arrangements and issuances of equity securities.
We have financed acquisitions through bank borrowings, sales of equity
(primarily to First Reserve) and internally generated funds.
Net Cash Provided by Operating Activities. For 2002, net cash provided
by operating activities was $10.5 million compared to $1.0 million in 2001 and
$2.1 million in 2000. The increase of $9.5 million for 2002 was attributable to
the increase in net income and deferred taxes, and more efficient management of
our working capital. Cash provided by operations decreased in 2001 as compared
to 2000 as working capital increased with increased sales.
Net Cash Used in Investing Activities. Principal uses of cash are for
capital expenditures and acquisitions. For 2002, 2001 and 2000, we made capital
expenditures of approximately $5.7 million, $3.2 million and $5.9 million,
respectively. Cash consideration paid for acquisitions, including the merger
with IHI, was $0.3 million, $72.4 million and $51.9 million in 2002, 2001, and
2000, respectively. (see Note 2 to our consolidated financial statements).
Net Cash Provided by (Used in) Financing Activities. Sources of cash
from financing activities include borrowings under our credit facilities and
sales of equity securities. Financing activities used $9.3 million of net cash
in 2002, compared to providing net cash of $78.5 million in 2001 and $56.8
million in 2000. During 2002, we had net repayments of $15.8 million under our
credit facilities, compared to net borrowings of $13.3 million and $2.5 million
during 2001 and 2000, respectively. We had proceeds from issuance of long-term
debt and convertible subordinated debt of $2.5 million, $46.6 million and $51.8
million in 2002, 2001 and 2000, respectively. We made principal payments on
long-term debt of $6.0 million, $25.7 million and $17.3 million in 2002, 2001
and 2000, respectively.
Proceeds from sales of our common stock were $10.0 million in 2002,
arising from the March sale of 1.0 million shares of common stock at $10 per
share to our largest stockholder, First Reserve. In 2001, proceeds from sales of
our common stock were $46.9 million. In connection with the merger with IHI in
December 2001, First Reserve purchased $46.8 million in shares of common stock.
Additionally, an executive officer and a director purchased $0.1 million in
shares of common stock. In 2000, proceeds from sales of common stock were $20.9
million, including sales of 1.7 million shares to First Reserve and two
directors for aggregate cash proceeds of $18.9 million and 0.2 million shares to
an affiliate of General Electric Capital Corporation, CFE, Inc., for cash
proceeds of $2.0 million.
Principal Debt Instruments. As of December 31, 2002, we had an
aggregate of $29.9 million borrowed under our principal bank credit facility and
other bank financings. As of December 31, 2002, we had $21.2 million in
availability under our revolving credit facility. However, as a result of the
funded debt-to-EBITDA ratio covenant, as defined in the credit agreement, our
availability was limited to $5.2 million.
On December 17, 2001, we entered into a senior credit facility with
Wells Fargo, N.A. and General Electric Capital Corporation maturing December 17,
2004. Concurrently, we entered into a $12.0 million subordinated term loan with
Wells Fargo Energy Capital, Inc. maturing December 17, 2005. The senior credit
facility includes a revolving credit facility of the lesser of a defined
borrowing base (based upon 85% of eligible accounts receivable and 50% of
eligible inventory) or $41.5 million, a term loan of $16.5 million and an
optional facility for up to an additional $20.0 million in the form of a
revolving credit commitment for future acquisitions based upon specific
criteria. The senior credit facility's term loan is payable in equal quarterly
installments of $0.8 million. The applicable interest rate of the senior credit
facility is governed by our trailing-twelve-month funded debt-to-EBITDA ratio
and ranges from prime plus 1.25% or LIBOR plus 2.25% to prime plus 2.00% or
LIBOR plus 3.00%. At December 31, 2002, the senior credit facility bore interest
at LIBOR plus 2.75%, with interest payable quarterly. We are required to prepay
the senior credit facility under certain circumstances with the net cash
proceeds of asset sales, insurance proceeds, equity issuances and institutional
debt, and commencing April 2003, if, and for so long as,
19
our funded debt-to-EBITDA ratio is 2.25 to 1 or greater, with 50% of excess cash
flow as determined under the senior credit agreement. The senior credit facility
provides, among other covenants and restrictions, that we comply with certain
financial covenants, including a limitation on capital expenditures, a minimum
fixed charge coverage ratio, minimum consolidated tangible net worth and a
maximum funded debt-to-EBITDA ratio. As of December 31, 2002, we were in
compliance with the covenants under the senior credit facility. The senior
credit facility is collateralized by substantially all of our assets. The senior
credit facility's weighted average interest rate, including amortization of loan
costs, for the year ended December 31, 2002 was 7.1%. Effective February 20,
2003, the senior credit facility was amended to provide an increase in the
aggregate additional revolving credit commitment for future acquisitions to
$30.0 million (up to $10.0 million per single acquisition) and an increase in
the maximum funded debt-to-EBITDA ratio. Had this amendment been effective at
December 31, 2002, our maximum borrowing capacity under the senior credit
facility would have increased from $5.2 million to $12.2 million as a result of
the increase in this ratio.
The subordinated term loan bears interest at a fixed rate of 9.50% with
interest payable quarterly. The principal balance is due in full on December 17,
2005. The effective interest rate, including amortization of loan costs, is
10.7%. The subordinated term loan provides, among other restrictions, that we
maintain a minimum fixed charge coverage ratio and a maximum funded
debt-to-EBITDA ratio. Under the terms of our senior credit facility, we are not
currently permitted to make principal payments on the subordinated term loan. As
of December 31, 2002, we were in compliance with the covenants under the
subordinated term loan. The subordinated term loan is collateralized by a second
lien on substantially all of our assets.
We believe that cash generated from operations and amounts available
under our senior credit facility and from other sources of debt will be
sufficient to fund existing operations, working capital needs, capital
expenditure requirements and financing obligations. We also believe any
significant increase in capital expenditures caused by any need to increase
manufacturing capacity can be funded from operations or through debt financing.
We intend to pursue additional acquisition candidates, but the timing,
size or success of any acquisition effort and the related potential capital
commitments cannot be predicted. We expect to fund future cash acquisitions
primarily with cash flow from operations and borrowings, including the
unborrowed portion of our senior credit facility or new debt issuances, but may
also issue additional equity either directly or in connection with an
acquisition. However, acquisition funds may not be available at terms acceptable
to us.
A summary of our outstanding contractual obligations and other
commercial commitments at December 31, 2002 is as follows (in thousands):
Payments Due by Period
----------------------
Less than 1
-----------
Contractual Obligations Total Year 1-3 Years 4-5 Years After 5 Years
----------------------- ----- ---- --------- --------- -------------
Long-term debt $ 29,904 $ 3,463 $ 25,706 $ 141 $ 594
Operating leases 5,498 1,741 2,261 1,208 288
-------- ------- -------- ------- -----
Total Contractual Obligations $ 35,402 $ 5,204 $ 27,967 $ 1,349 $ 882
======== ======= ======== ======= =====
RELATED PARTIES
We have transactions in the normal course of business with certain
related parties.
During February 2000, we entered into a $25 million senior secured
promissory note with First Reserve, our largest shareholder. We incurred
interest expense of approximately $1.8 million for the year ended December 31,
2000 related to this note. The senior secured promissory note was paid in full
on September 29, 2000, with proceeds from the credit agreement (see Note 6 to
our consolidated financial statements) and a 12%, $8 million convertible
subordinated note payable to First Reserve. In May 2001, we entered into a 12%,
$15 million convertible promissory note payable to First Reserve. The proceeds
of the note were used to fund our acquisition of A&B Bolt. In December 2001, the
two convertible promissory notes and accrued interest in the aggregate amount of
$25.3 million were converted into 2.0 million shares of common stock. Interest
expense on these two notes was $2.1 million and $0.2 million for the years ended
December 31, 2001 and 2000, respectively.
20
In 2000, we sold 1.7 million shares of common stock to First Reserve
and two of our directors for cash proceeds of $18.9 million. In 2001, we sold
0.01 million shares of common stock to an executive officer and a director of
the Company for cash proceeds of $0.1 million.
On March 27, 2002, we sold 1.0 million shares of our common stock at
$10 per share to our largest stockholder, First Reserve. The $10 per share price
was at a premium to our then recent trading history. Our common stock closed at
$9.30 per share on March 19, 2002.
General Electric Capital Corporation is a beneficial owner of 181,692
shares of our common stock (see Note 11 to our consolidated financial
statements), and provides debt financing to us. In connection with this
financing, we paid financing costs of approximately $0.1 million and $1.0
million and incurred interest expense of approximately $2.2 million and $0.7
million for the years ended December 31, 2001 and 2000, respectively.
Prior to the merger of T-3 and IHI, IHI sold one of its subsidiaries to
an entity controlled by Don Carlin and Robert Cone, and IHI received a $3.5
million note receivable from the former subsidiary as part of its purchase price
(see Note 4 to our consolidated financial statements). Mr. Carlin is a former
director, and Mr. Cone is a former executive officer and director of the
Company.
We lease certain buildings under noncancelable operating leases from
related parties. Lease commitments under these leases are approximately $0.7
million, $0.5 million, and $0.1 million for 2003, 2004 and 2005, respectively.
Rent expense to related parties was $0.9 million, $0.3 million and $0.05 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
INFLATION
Although we believe that inflation has not had any material effect on
operating results, our business may be affected by inflation in the future.
SEASONALITY
We believe that our business is not subject to any significant seasonal
factors, and do not anticipate significant seasonality in the future.
NEW ACCOUNTING PRONOUNCEMENTS
During the third quarter of 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 covers all legally
enforceable obligations associated with the retirement of tangible long-lived
assets and provides the accounting and reporting requirements for such
obligations. SFAS No. 143, is effective for us beginning January 1, 2003. We
believe that the adoption of SFAS No. 143 will not have a significant impact on
our consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." As a result, the criteria in Accounting Principles
Board Opinion (APB) No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," will now be used to classify those gains and losses. Under SFAS
No. 145, the Company will be required to reclassify any gain or loss on
extinguishment of debt that was previously classified as an extraordinary item
to normal operations for all fiscal years beginning after May 15, 2002,
including all prior period presentations. We will implement SFAS No. 145 in
2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 covers the
recognition of liabilities for costs associated with an exit or disposal
activity and provides the accounting and reporting requirements for such
obligations. SFAS No. 146 is effective for the Company beginning January 1,
2003. We believe that the adoption of SFAS No. 146 will not have a significant
impact on our consolidated financial position or results of operations.
21
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 clarifies disclosures that are required to be made for
certain guarantees and establishes a requirement to record a liability at fair
value for certain guarantees at the time of the guarantee's issuance. The
disclosure requirements of FIN No. 45 have been applied in our 2002 financial
statements. The requirement to record a liability applies to guarantees issued
or modified after December 31, 2002. We believe the adoption of this portion of
the interpretation will not have a material effect on our financial condition or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation No. 46 requires unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse the risks and rewards of ownership
among their owners and other parties involved. The provisions of Interpretation
No. 46 are applicable immediately to all variable interest entities created
after January 31, 2003 and variable interest entities in which an enterprise
obtains an interest in after that date, and for variable interest entities
created before this date, the provisions are effective July 1, 2003. We will
adopt this standard in 2003 and are currently evaluating the impact it will have
on our financial disclosures, financial condition, and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
We are exposed to some market risk due to the floating interest rate
under our revolving credit facility and certain of our term debt. As of December
31, 2002, our revolving credit facility had no principal balance and our
variable long-term debt had a principal balance of $15.3 million, with interest
rates that float with prime or LIBOR. A 1.0% increase in interest rates could
result in a $0.2 million annual increase in interest expense on the existing
principal balances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in this report as set forth in the "Index to Consolidated Financial
Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 24, 2002, we determined, pursuant to the authority and approval
of our board of directors, and upon the recommendation of our audit committee,
to dismiss Arthur Andersen LLP ("Andersen") and to appoint Ernst & Young LLP as
our independent auditors for fiscal year 2002. The appointment of Ernst & Young
was made after careful consideration by the Board of Directors, its Audit
Committee and our management.
Andersen's report on our financial statements for the two fiscal years
ended December 31, 2001 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to audit scope or accounting
principle. During those periods and through the subsequent interim period
preceding the dismissal of Andersen, there were no disagreements with Andersen
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Andersen, would have caused them to make a
reference to the subject matter of the disagreement(s) in connection with their
report. During those periods and through the subsequent interim period preceding
the dismissal of Andersen, there were no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).
During the two fiscal years ended December 31, 2001 and through the
subsequent interim period preceding the dismissal of Andersen, we did not
consult with Ernst & Young regarding either (1) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and either
a written report was provided to us or oral advice was provided that Ernst &
Young concluded was an important factor considered by us in reaching a decision
as to the accounting, auditing or financial reporting issue, or (2) any matter
that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
and the related instructions to Item 304) or a reportable event (as described in
Regulation S-K, Item 304(a)(1)(v)).
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
The Company's management team continues to review the Company's
internal controls and procedures and the effectiveness of those controls. Within
the 90 days prior to the date of this report, the Company conducted an
evaluation, under the supervision of and with the participation of the Company's
management, including the President and Chief Executive Officer and Vice
President and Chief Financial Officer, of the effectiveness of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based upon that evaluation, the President and Chief
Executive Officer and Vice President and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's disclosure
procedures subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or taken.
23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements
See index to consolidated financial statements set forth on
page F-1.
b. Reports on Form 8-K
On November 12, 2002, the Company filed a current report on
Form 8-K disclosing in Item 5 an updated description of the
Company's capital stock.
c. Exhibits
See the Exhibit Index appearing on page EX-1.
24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 21st DAY OF MARCH,
2003.
T-3 ENERGY SERVICES, INC.
By: /s/ STEVEN J. BRADING
----------------------------------------
STEVEN J. BRADING (CHIEF FINANCIAL
OFFICER AND VICE PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS AND IN THE CAPACITIES INDICATED
ON THE 21st DAY OF MARCH, 2003.
SIGNATURE TITLE
--------- -----
By: /s/ MICHAEL L. STANSBERRY President, Chief Executive Officer and Director
------------------------------------ (Principal Executive Officer)
MICHAEL L. STANSBERRY
By: /s/ STEVEN J. BRADING Vice President, Chief Financial Officer, Treasurer and
------------------------------------ Secretary (Principal Financial Officer)
STEVEN J. BRADING
By: /s/ JOEL V. STAFF Chairman of the Board
------------------------------------
JOEL V. STAFF
By: /s/ THOMAS R. DENISON Director
------------------------------------
THOMAS R. DENISON
By: /s/ JOSEPH R. EDWARDS Director
------------------------------------
JOSEPH R. EDWARDS
By: /s/ BEN A. GUILL Director
------------------------------------
BEN A. GUILL
By: /s/ STEVEN W. KRABLIN Director
------------------------------------
STEVEN W. KRABLIN
By: /s/ JAMES M. TIDWELL Director
------------------------------------
JAMES M. TIDWELL
25
CERTIFICATIONS
I, Michael L. Stansberry, certify that:
1. I have reviewed this annual report on Form 10-K of T-3 Energy
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ MICHAEL L. STANSBERRY
-------------------------
Michael L. Stansberry
Chief Executive Officer
March 21, 2003
26
CERTIFICATIONS
I, Steven J. Brading, certify that:
1. I have reviewed this annual report on Form 10-K of T-3 Energy
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ STEVEN J. BRADING
------------------------
Steven J. Brading
Chief Financial Officer
March 21, 2003
27
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
T-3 Energy Services, Inc., and Subsidiaries:
Report of Independent Auditors..................................................................... F-2
Report of Independent Public Accountants........................................................... F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001....................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000............................................................... F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000......................................................... F-7
Notes to Consolidated Financial Statements......................................................... F-8
Cor-Val, Inc., and Subsidiary, a Predecessor of T-3 Energy Services, Inc. and Subsidiaries:
Report of Independent Public Accountants........................................................... F-27
Consolidated Balance Sheet as of March 31, 1999.................................................... F-28
Consolidated Statements of Operations for the Eleven Month Period Ended February 29, 2000 and
the Year Ended March 31, 1999.................................................................. F-29
Consolidated Statements of Cash Flows for the Eleven Month Period Ended February 29, 2000 and
the Year Ended March 31, 1999.................................................................. F-30
Consolidated Statements of Stockholders' Equity for the Eleven Month Period Ended
February 29, 2000 and the Year Ended March 31, 1999............................................ F-31
Notes to Consolidated Financial Statements......................................................... F-32
Preferred Industries, Inc., a Predecessor of T-3 Energy Services, Inc. and Subsidiaries:
Report of Independent Public Accountants........................................................... F-39
Balance Sheets at December 31, 1999 and 1998....................................................... F-40
Statements of Operations for the Four Month Period Ended April 30, 2000 and the Years
Ended December 31, 1999 and 1998............................................................... F-41
Statements of Cash Flows for the Four Month Period Ended April 30, 2000 and
the Years Ended December 31, 1999 and 1998..................................................... F-42
Statements of Stockholders' Equity for the Four Month Period Ended
April 30, 2000 and the Years Ended December 31, 1999 and 1998.................................. F-43
Notes to Financial Statements...................................................................... F-44
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
T-3 Energy Services, Inc.:
We have audited the accompanying consolidated balance sheet of T-3
Energy Services, Inc. as of December 31, 2002, and the related consolidated
statements of operations, cash flows and stockholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of T-3
Energy Services, Inc. as of December 31, 2001 and for the two years then ended
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated March 8, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of T-3
Energy Services, Inc., at December 31, 2002, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the accompanying consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.
142 (Goodwill and Other Intangible Assets) "FAS 142" in 2002.
As discussed above, the financial statements of T-3 Energy Services,
Inc. as of December 31, 2001, and for each of the years in the two year period
ended December 31, 2001, were audited by other auditors who have ceased
operations. As described in Note 1, these financial statements have been revised
to include the transitional disclosures required by FAS 142. Our audit
procedures with respect to the disclosures in Note 1 for 2001 and 2000 included
(a) agreeing the previously reported net income to the previously issued
financial statements, (b) agreeing the adjustments to reported net income
representing amortization expense (net of tax effect) recognized in 2001 and
2000 related to goodwill to the Company's underlying records obtained from
management, and (c) testing the mathematical accuracy of the reconciliation of
adjusted net income to reported net income, and the related earnings per share
amounts. In our opinion, the disclosures in Note 1 for 2001 and 2000 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.
ERNST & YOUNG LLP
Houston, Texas
February 20, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
T-3 Energy Services, Inc.:
We have audited the accompanying consolidated balance sheets of T-3
Energy Services, Inc. (a Delaware corporation), and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations, cash
flows and stockholders' equity for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
T-3 Energy Services, Inc., and subsidiaries as of December 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 8, 2002
NOTE: The report of Arthur Andersen LLP presented above is a copy of a
previously issued Arthur Andersen LLP report and said report has not been
reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent
to the inclusion of its report in this Form 10-K.
F-3
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31,
------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 857 $ 5,395
Accounts receivable - trade, net.................................. 22,519 29,158
Inventories....................................................... 18,430 19,225
Notes receivable, current portion................................. 696 161
Deferred income taxes............................................. 2,595 4,673
Prepaids and other current assets................................. 5,262 3,892
---------- ----------
Total current assets......................................... 50,359 62,504
Property and equipment, net....................................... 29,927 27,233
Notes receivable, less current portion............................ 5,053 5,873
Goodwill, net..................................................... 96,986 99,260
Other intangible assets, net...................................... 3,663 4,298
Other assets...................................................... 611 560
---------- ----------
Total assets...................................................... $ 186,599 $ 199,728
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade.......................................... $ 14,433 $ 16,229
Accrued expenses and other........................................ 7,781 12,115
Current maturities of long-term debt.............................. 3,463 5,307
---------- ----------
Total current liabilities.................................... 25,677 33,651
Long-term debt, less current maturities........................... 26,441 43,897
Other long-term liabilities....................................... 1,108 2,455
Deferred income taxes............................................. 2,764 3,695
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 25,000,000 shares
authorized, no shares issued or outstanding............... -- --
Common stock, $.001 par value, 50,000,000 shares authorized,
10,581,669 shares issued and outstanding in 2002 and
9,581,669 shares issued and outstanding in 2001........... 11 10
Warrants, 3,489,079 issued and outstanding in 2002 and 2001 938 938
Additional paid-in capital................................... 122,833 112,825
Retained earnings............................................ 6,827 2,257
---------- ----------
Total stockholders' equity................................ 130,609 116,030
---------- ----------
Total liabilities and stockholders' equity........................ $ 186,599 $ 199,728
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Sales:
Products............................................................... $ 114,646 $ 69,282 $ 15,834
Services............................................................... 32,224 20,880 9,849
--------- ---------- ---------
146,870 90,162 25,683
Cost of sales:
Products............................................................... 82,684 47,184 9,470
Services............................................................... 22,054 14,000 6,431
--------- ---------- ---------
104,738 61,184 15,901
Gross profit............................................................... 42,132 28,978 9,782
Selling, general and administrative expenses............................... 31,856 18,852 5,998
--------- ---------- ---------
Income from operations..................................................... 10,276 10,126 3,784
Interest expense........................................................... 3,478 4,851 2,809
Interest income............................................................ 676 3 48
Other (income) expense, net................................................ (84) 22 20
--------- ---------- ---------
Income before provision for income taxes and
extraordinary loss..................................................... 7,558 5,256 1,003
Provision for income taxes................................................. 2,988 2,860 668
--------- ---------- ---------
Income before extraordinary loss........................................... 4,570 2,396 335
Extraordinary loss, net of income tax benefit of $303...................... -- 474 --
--------- ---------- ---------
Net income................................................................. $ 4,570 $ 1,922 $ 335
========= ========== =========
Basic earnings (loss) per common share:
Income before extraordinary loss....................................... $ 0.44 $ 1.05 $ 0.26
Extraordinary loss..................................................... -- (0.20) --
--------- ---------- ---------
Net income per common share............................................ $ 0.44 $ 0.85 $ 0.26
========= ========== =========
Diluted earnings (loss) per common share:
Income before extraordinary loss....................................... $ 0.44 $ 0.89 $ 0.26
Extraordinary loss..................................................... -- (0.13) --
--------- ---------- ---------
Net income per common share............................................ $ 0.44 $ 0.76 $ 0.26
========= ========== =========
Weighted average common shares outstanding:
Basic.................................................................. 10,346 2,271 1,302
========= ========== =========
Diluted................................................................ 10,347 3,715 1,302
========= ========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income................................................................. $ 4,570 $ 1,922 $ 335
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss.................................................... -- 474 --
Depreciation and amortization......................................... 3,736 4,021 1,912
Amortization of deferred loan costs................................... 850 184 38
Deferred taxes........................................................ 3,667 (153) (157)
Amortization of stock compensation.................................... 9 31 --
Changes in assets and liabilities, net of effect of
purchase acquisitions:
Accounts receivable - trade, net.................................... 6,479 (3,050) (695)
Inventories......................................................... 617 (3,144) (550)
Prepaids and other current assets................................... (1,307) (2,010) (179)
Notes receivable.................................................... 271 (192) --
Other assets........................................................ (57) (46) (29)
Accounts payable - trade............................................ (1,859) (738) 221
Accrued expenses and other.......................................... (6,469) 3,699 1,182
---------- --------- ---------
Net cash provided by operating activities.................................. 10,507 998 2,078
---------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................................... (5,702) (3,189) (5,861)
Proceeds from sales of property and equipment........................... 262 295 13
Cash consideration paid for acquisitions, net of cash
acquired.............................................................. (300) (72,364) (51,890)
---------- --------- -----------
Net cash used in investing activities...................................... (5,740) (75,258) (57,738)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt and convertible
subordinated debt................................................... 2,473 46,615 51,775
Net borrowings (repayments) under revolving credit facility............ (15,806) 13,301 2,505
Payments on long-term debt............................................. (5,967) (25,738) (17,333)
Debt financing costs................................................... (5) (2,631) (1,017)
Proceeds from sales of common stock.................................... 10,000 46,940 20,898
---------- --------- ---------
Net cash provided by (used in) financing activities........................ (9,305) 78,487 56,828
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents....................... (4,538) 4,227 1,168
Cash and cash equivalents, beginning of year............................... 5,395 1,168 --
---------- --------- ---------
Cash and cash equivalents, end of year..................................... $ 857 $ 5,395 $ 1,168
========== ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK WARRANTS ADDITIONAL TOTAL
--------------- ------------ -------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------ ------ -------- ------ ------- -------- ------
BALANCE, JANUARY 1, 2000......... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Sales of common stock -- -- 1,898 2 -- -- 20,896 -- 20,898
Issuances of common stock
in acquisitions............... -- -- 73 -- -- -- 800 -- 800
Net income....................... -- -- -- -- -- -- -- 335 335
------ ------ ------ -------- -------- ------- ---------- -------- ----------
BALANCE, DECEMBER 31, 2000....... -- -- 1,971 2 -- -- 21,696 335 22,033
Sales of common stock -- -- 3,669 4 -- -- 46,936 -- 46,940
Amortization of stock
compensation.................. -- -- -- -- -- -- 31 -- 31
First Reserve debt conversion.... -- -- 1,953 2 -- -- 25,302 -- 25,304
Merger with IHI.................. -- -- 1,989 2 3,489 938 18,860 -- 19,800
Net income....................... -- -- -- -- -- -- -- 1,922 1,922
------ ------ ------ -------- -------- ------- ---------- -------- ----------
BALANCE, DECEMBER 31, 2001....... -- -- 9,582 10 3,489 938 112,825 2,257 116,030
Sales of common stock -- -- 1,000 1 -- -- 9,999 -- 10,000
Amortization of stock
compensation.................. -- -- -- -- -- -- 9 -- 9
Net income....................... -- -- -- -- -- -- -- 4,570 4,570
------ ------ ------ -------- -------- ------- ---------- -------- ----------
BALANCE, DECEMBER 31, 2002....... -- $ -- 10,582 $ 11 3,489 $ 938 $ 122,833 $ 6,827 $ 130,609
====== ====== ====== ======== ======== ======= ========== ======== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
T-3 Energy Services, Inc. was incorporated in October 1999, but did not
engage in business activities until the acquisition of Cor-Val, Inc. on February
29, 2000. T-3 acquired Preferred Industries, Inc. on April 30, 2000. For
financial reporting purposes, T-3 was deemed the accounting acquirer of both
Cor-Val and Preferred Industries and applied the purchase method of accounting
in both acquisitions. Cor-Val and Preferred Industries have been identified as
predecessors to T-3 for financial presentation purposes. Additionally, T-3
acquired O&M Equipment, Inc. in April 2000, Control Products of Louisiana, Inc.
in September 2000, Coastal Electric Motors, Inc. in December 2000 and A&B Bolt
and Supply, Inc. in May 2001. The results of operations for these acquisitions
are included in the operating results for T-3 from their respective dates of
acquisition. On December 17, 2001, T-3 merged into IHI with IHI surviving the
merger under the name T-3 Energy Services, Inc. The merger was treated for
accounting purposes as if IHI was acquired by T-3 (a reverse acquisition) in a
purchase business transaction. The purchase method of accounting required that
the Company carry forward T-3's net assets at their historical book values and
reflect IHI's net assets at their estimated fair values at the date of the
merger. Accordingly, the 2001 historical operating results presented herein
include the historical operating results of T-3 prior to its merger with IHI and
the two weeks of operations of the combined company from December 17, 2001 to
December 31, 2001. In connection with the merger at December 17, 2001, the
Company implemented a one-for-ten reverse stock split of its common stock and
common shares underlying existing warrants and options. Accordingly, all share
amounts presented in this report have been restated to reflect this stock split.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of T-3 Energy Services, Inc., and its wholly owned subsidiaries. All significant
intercompany accounts have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of December
31, 2002 and 2001, there were no cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
prepaids and other current assets, accounts payable and accrued expenses and
other approximate their respective fair values because of the short maturities
of those instruments.
Long term notes receivable, including its current portion, are
estimated by discounting future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings. The carrying
amounts of these notes receivable closely approximate their fair values.
The fair value of long-term debt, including current maturities, is
estimated based upon quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturities. The
carrying amounts of these long-term debt instruments closely approximate their
fair values.
Other long-term liabilities consist primarily of deferred payments for
which cost approximates fair value.
F-8
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are stated at the historical carrying amount, net
of write-offs and the allowance for doubtful accounts. The Company's receivables
are exposed to concentrations of credit risk since its business is primarily
conducted with companies in the oil and gas, petrochemical, chemical and
petroleum refining industries in the Gulf Coast region. The Company continually
monitors collections and evaluates the financial strength of its customers but
does not require collateral to support its customer receivables. The Company
provides an allowance for doubtful accounts for potential collection issues in
addition to reserves for specific accounts receivable where collection is no
longer probable, as presented in the table below (dollars in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
-------------- -------------- -------------
Balance at beginning of year.................... $ 86 $ -- $ --
Charged to expense.............................. 483 86 --
Write-offs...................................... (125) -- --
-------------- -------------- -------------
Balance at end of year.......................... $ 444 $ 86 $ --
============== ============== =============
Inventories
Inventories are stated at the lower of cost or market. Cost includes, where
applicable, manufacturing labor and overhead. The first-in, first-out method
("FIFO") is used to determine the cost of substantially all of the inventories
except for certain valve inventories for which the specific identification
method is used to determine cost. Inventories consist of the following (dollars
in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- -------------
Raw materials................................... $ 4,115 $ 4,995
Work in process................................. 3,357 3,029
Finished goods and component parts.............. 10,958 11,201
-------------- -------------
$ 18,430 $ 19,225
============== =============
The Company regularly reviews inventory quantities on hand and records
a provision for excess and slow moving inventory. During 2002, 2001 and 2000,
the Company recorded $515,000, $183,000 and $0, respectively, in charges to
earnings to write down the recorded cost of inventory to its estimated fair
market value.
Property and Equipment
Property and equipment is stated at cost. For property and equipment
acquired as a result of business combinations (see Note 2), cost is determined
based upon fair values as of the acquisition dates. Depreciation is computed
using the straight-line method over estimated useful lives. Expenditures for
replacements and major improvements are capitalized. Expenditures for
maintenance, repairs and minor replacements are expensed as incurred. Leasehold
improvements are amortized over the lesser of the estimated useful life or term
of the lease.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets to be held and used by the Company are reviewed to determine
whether any events or changes in circumstances indicate the carrying amount of
the asset may not be recoverable. Long-lived assets include property, plant and
equipment and definite-lived intangibles. For long-lived assets to be held and
used, the Company bases its evaluation on impairment indicators such as the
nature of the assets, the future economic benefit of the assets, any historical
or future profitability measurements and other external market conditions or
factors that may be present. If such impairment indicators are present or
F-9
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other factors exist that indicate the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of the asset at the lowest level
for which identifiable cash flows exist. If an impairment has occurred, the
Company recognizes a loss for the difference between the carrying amount and the
estimated fair value of the asset. The fair value of the asset is measured using
quoted market prices or, in the absence of quoted market prices, is based on an
estimate of discounted cash flows. As of December 31, 2002 and 2001, no
significant impairment had occurred.
Goodwill
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses. Identifiable intangible
assets acquired in business combinations are recorded based upon fair market
value at the date of acquisition.
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." This standard changes the accounting for goodwill and
certain other intangible assets from an amortization method to an impairment
only approach. The standard also requires a reassessment of the useful lives of
identifiable intangible assets other than goodwill and at least an annual test
for impairment of goodwill and intangibles with indefinite lives.
In 2002, the Company completed the transitional goodwill and indefinite
life intangibles impairment tests and the annual test required by SFAS No. 142
and recorded no impairments of its goodwill and indefinite life intangibles
based on these fair value tests. The Company tests goodwill for impairment
annually using the fair value criteria prescribed by SFAS No. 142. Fair value
was estimated using discounted cash flow methodologies, which are significantly
influenced by management's assumptions as to future cash flows, and market
comparable information. The Company will continue to test on a consistent
measurement date unless events occur or circumstances change between annual
impairment tests that would more likely than not reduce fair value of a
reporting unit below its carrying value.
Had the Company accounted for its goodwill and certain other intangible
assets under SFAS No. 142 for all prior periods presented, the Company's net
income and earnings per common share would have been as follows for the two
years ended December 31, 2001 (dollars in thousands, except per share data):
DECEMBER 31, DECEMBER 31,
2001 2000
-------------- -------------
Reported income before extraordinary item.............. $ 2,396 $ 335
Amortization expense, net of tax....................... 1,608 887
-------------- -------------
Reported income before extraordinary item,
as adjusted......................................... 4,004 1,222
Extraordinary loss, net of tax......................... (474) --
-------------- -------------
Net income, as adjusted................................ $ 3,530 $ 1,222
============== =============
Earnings per common share, as adjusted:
Basic............................................. $ 1.55 $ 0.94
============== =============
Diluted........................................... $ 1.19 $ 0.94
============== =============
F-10
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the carrying amount of goodwill for the year ended
December 31, 2002, are as follows (dollars in thousands):
PRESSURE
CONTROL PRODUCTS DISTRIBUTION UNALLOCATED TOTAL
---------- ---------- ------------ ----------- ----------
Balance at beginning of year........... $ 62,680 $ 29,768 $ 5,565 $ 1,247 $ 99,260
Purchase accounting.................... (41) (631) (355) (1,247) (2,274)
Impairment............................. -- -- -- -- --
---------- ---------- ------------ ----------- ----------
Balance at end of year................. $ 62,639 $ 29,137 $ 5,210 $ -- $ 96,986
---------- ---------- ------------ ----------- ----------
During 2002, the Company reduced goodwill by $1,931,000 as a result of
the utilization of acquired net operating losses, reductions in net operating
loss valuation allowances and utilization of tax-deductible goodwill
amortization. In 2002, as part of its final purchase accounting adjustments,
$763,000 was reclassified to non-competes and various other adjustments were
made to reflect the final valuation of the acquired assets and liabilities.
Other Intangible Assets
Other intangible assets include deferred loan costs, non-compete
agreements, patents and other similar items, as described below (dollars in
thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- -------------
Deferred loan costs............................. $ 2,723 $ 2,718
Covenants not to compete........................ 4,038 3,125
Other intangible assets......................... 45 38
-------------- -------------
6,806 5,881
Less: Accumulated amortization.................. (3,143) (1,583)
-------------- -------------
$ 3,663 $ 4,298
============== =============
Deferred loan costs were incurred in connection with the arrangement of
the Company's credit agreement and the Wells Fargo note payable (see Note 6).
Deferred loan costs are amortized over the terms of the applicable loan
agreements, which range from three to fifteen years. Accumulated amortization
was $920,000 and $70,000 at December 31, 2002 and 2001, respectively.
Amortization of deferred loan costs for the years ended December 31, 2002, 2001
and 2000, which is classified as interest expense, was $850,000, $184,000 and
$38,000, respectively. The early repayment of certain T-3 indebtedness in
connection with the merger with IHI in December 2001 resulted in an
extraordinary loss of $474,000, net of a $303,000 income tax benefit, as a
result of the write-off of unamortized deferred loan costs.
Covenants not to compete are amortized upon commencement of the
non-compete period over the terms of the agreements, which range from one to
five years. Accumulated amortization was $2,216,000 and $1,509,000 at December
31, 2002 and 2001, respectively. Amortization expense for covenants not to
compete was $707,000, $908,000 and $601,000 for the years ended December 31,
2002, 2001 and 2000, respectively. The following table summarizes estimated
aggregate amortization expense for each of the five succeeding fiscal years (in
thousands):
Year ending December 31 -
2003.......................................................... $ 592
2004.......................................................... 206
2005.......................................................... 31
2006.......................................................... 3
2007.......................................................... 2
F-11
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to 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 enacted tax rates expected to apply to
taxable income in the year in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances for deferred tax assets are recorded when
it is more likely than not that some or all of the benefit from the deferred tax
assets will not be realized.
Contingencies
The Company records an estimated loss from a loss contingency when
information available prior to the issuance of its financial statements
indicates that it is probable that an asset has been impaired or a liability has
been incurred at the date of the financial statements and the amount of the loss
can be reasonably estimated. Accounting for contingencies such as environmental,
legal and income tax matters requires the Company to use its judgment. While the
Company believes that its accruals for these matters are adequate, the actual
loss from a loss contingency could be significantly different than the estimated
loss, resulting in an adverse effect on the results of operations and financial
position of the Company.
Revenue Recognition
The Company recognizes revenue upon shipment of its products or upon
completion of services it renders. Revenues and profits on contracts, which are
typically completed in less than one month, are accounted for using the
completed-contract method of accounting, whereby manufacture, repair and service
revenues are not recognized until the work is completed and/or the product is
delivered to and accepted by the customer.
Stock-Based Compensation
At December 31, 2002, the Company had stock option plans, which are
described more fully in Note 12. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. No significant stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per common share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to
stock-based employee plans (dollars in thousands, except per share data):
2002 2001 2000
--------- --------- ---------
Net income, as reported................................... $ 4,570 $ 1,922 $ 335
Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects........................... (311) (172) (106)
--------- --------- ---------
Net income, as adjusted................................... $ 4,259 $ 1,750 $ 229
Basic EPS:
As reported............................................. $ 0.44 $ 0.85 $ 0.26
As adjusted............................................. $ 0.41 $ 0.77 $ 0.18
Diluted EPS:
As reported............................................. $ 0.44 $ 0.76 $ 0.26
As adjusted............................................. $ 0.41 $ 0.71 $ 0.18
F-12
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the purpose of estimating the fair value disclosures above, the
fair value of each stock option has been estimated on the grant date with a
Black-Scholes option pricing model. The following assumptions for 2002, 2001 and
2000, respectively, were computed on a weighted average basis: risk-free
interest rate of 4.82%, 5.32% and 6.71%, expected volatility of 37.21%, 35.93%
and 54.76%, expected life of 4, 6 and 10 years and no expected dividends. The
effects of applying SFAS No. 123 may not be indicative of future amounts since
additional future awards are anticipated and the estimation of values involves
subjective assumptions which may vary materially as a result of actual events.
Cash Flows
Supplemental disclosures of cash flow information is presented in the
following table:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Non-cash investing and financing activities:
Property acquired with debt............................................ $ -- $ 915 $ 1,800
Common stock and warrants issued in acquisitions and merger............ -- 19,800 800
Refinancing of senior secured promissory
note with convertible subordinated debt............................. -- -- 8,000
Conversion of convertible subordinated debt
to equity........................................................... -- 25,304 --
Cash paid during the period for:
Interest............................................................ $ 2,676 $ 2,608 $ 2,476
Income taxes........................................................ 2,511 1,835 907
Use of Estimates
The preparation of 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. Management bases its 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 could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the prior-year amounts to
conform to the current-year presentation.
Newly Issued Accounting Standards
During the third quarter of 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 143 covers all legally enforceable obligations associated with the
retirement of tangible long-lived assets and provides the accounting and
reporting requirements for such obligations. SFAS No. 143 is effective for the
Company beginning January 1, 2003. Management believes that the adoption of SFAS
No. 143 will not have a significant impact on the Company's consolidated
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." As a result, the criteria in APB No. 30, "Reporting
F-13
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. Under SFAS 145, the Company will be required to
reclassify any gain or loss on extinguishment of debt that was previously
classified as an extraordinary item to normal operations for all fiscal years
beginning after May 15, 2002, including all prior period presentations. The
Company will implement SFAS 145 in 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 covers the
recognition of liabilities for costs associated with an exit or disposal
activity and provides the accounting and reporting requirements for such
obligations. SFAS No. 146 is effective for the Company beginning January 1,
2003. Management believes that the adoption of SFAS No. 146 will not have a
significant impact on the Company's consolidated financial position or results
of operations.
In November 2002, the FASB issued Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies disclosures
that are required to be made for certain guarantees and establishes a
requirement to record a liability at fair value for certain guarantees at the
time of the guarantee's issuance. The disclosure requirements of FIN No. 45 have
been applied in the Company's 2002 financial statements. The requirement to
record a liability applies to guarantees issued or modified after December 31,
2002. The Company believes the adoption of this portion of the interpretation
will not have a material effect on its financial condition or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." FIN No. 46 requires unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN No. 46 are
applicable immediately to all variable interest entities created after January
31, 2003 and variable interest entities in which an enterprise obtains an
interest in after that date, and for variable interest entities created before
this date, the provisions are effective July 1, 2003. The Company will adopt
this standard in 2003 and is currently evaluating the impact it will have on
its financial disclosures, financial condition and results of operations.
2. BUSINESS COMBINATIONS AND DISPOSITIONS:
During fiscal year 2000, the Company acquired the stock and assets of
five companies in transactions accounted for using the purchase method of
accounting. On February 29, 2000, the Company acquired Cor-Val, Inc. for
approximately $21.4 million in cash plus liabilities assumed and the issuance of
54,508 shares of the Company's common stock. On April 30, 2000, the Company
acquired Preferred Industries, Inc. for approximately $18.8 million in cash plus
liabilities assumed and the issuance of 18,169 shares of the Company's common
stock. Also, on April 30, 2000, the Company acquired O&M Equipment, Inc. for
approximately $1.4 million in cash plus liabilities assumed and a maximum earn
out of $1.0 million based on the performance of O&M through 2002 ($291,000 was
earned in 2002, $592,000 was earned in 2001 and $117,000 was earned in 2000).
Additionally, the Company acquired Control Products of Louisiana, Inc. in
September 2000, and Coastal Electric Motors, Inc. in December 2000,
respectively, for total consideration of approximately $10.3 million in cash
plus liabilities assumed. The cash used to acquire these five companies was
obtained from the issuance of the Company's common stock and borrowings from its
largest shareholder as well as third party financial lending institutions (see
Notes 6 and 9). The common stock issued in these transactions was recorded at
its estimated fair market value of $11.01 per share. The results of operations
of the acquired companies have been included in the Company's operating results
from the dates of their acquisitions.
On May 7, 2001, the Company's board of directors approved an agreement
and plan of merger with Industrial Holdings, Inc. (IHI). As a condition to the
merger agreement, T-3 purchased IHI's subsidiary, A&B Bolt and Supply, Inc., on
May 7, 2001, for a purchase price of $15.3 million in cash including expenses.
On December 17, 2001, T-3 and IHI completed the merger, with IHI being the
surviving legal entity and changing its name to T-3 Energy Services, Inc. The
merger was treated for accounting purposes as if IHI was acquired by T-3 (a
reverse acquisition). The valuation of IHI's net assets was $21.9 million and
was based upon the 2.0
F-14
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million shares of IHI common stock outstanding at the date of the merger at the
approximate trading price of $9.75 at the time that the final terms of the
merger were announced plus the fair value of outstanding warrants and options,
determined with a Black-Scholes option pricing model, plus merger costs incurred
by T-3. The acquisitions of A&B Bolt and IHI have been accounted for using the
purchase method of accounting. The purchase method of accounting requires that
the Company adjust the net assets of the acquired companies to their estimated
fair values at the date of acquisition and merger. The results of operations of
A&B Bolt and IHI have been included in the Company's operating results from the
date of acquisition and merger, respectively.
On June 30, 2002, the Company sold the net assets of a non-energy
subsidiary acquired as part of the merger with IHI. The assets were sold for
book value, and no gain or loss was recognized on the sale.
On December 30, 2002, the Company acquired certain assets of a
spray-welding business, including a covenant not to compete valued at $150,000,
for $300,000 in cash.
The following schedule summarizes investing activities related to the
Company's acquisitions and merger presented in the consolidated statements of
cash flows for the years ended December 31, 2002, 2001 and 2000 (dollars in
thousands):
2002 2001 2000
---- ---- ----
Fair value of tangible and intangible assets,
net of cash acquired............................. $ 300 $ 54,134 $ 21,443
Goodwill recorded.................................. -- 64,865 36,950
Total liabilities assumed.......................... -- (26,835) (5,703)
Common stock issued................................ -- (19,800) (800)
----------- ----------- ------------
Cash paid for acquisitions, net of cash
acquired........................................... $ 300 $ 72,364 $ 51,890
=========== =========== ============
The Company's sales and net income on an unaudited pro forma basis for
the years ended December 31, 2001 and 2000, assuming the IHI merger and the
acquisitions of the five companies in 2000 and A&B Bolt in 2001 had occurred on
January 1, 2000, would be as follows (dollars in thousands, except per share
data):
2001 2000
---- ----
Sales.................................... .......... $ 193,879 $ 161,365
Income (loss) before extraordinary loss............ 3,396 (2,333)
Net income (loss).................................. 2,922 (2,333)
Basic earnings (loss) per share before
extraordinary loss................................. 0.35 (0.24)
Diluted earnings (loss) per share before
extraordinary loss................................. 0.35 (0.24)
Basic earnings (loss) per share.................... 0.31 (0.24)
Diluted earnings (loss) per share.................. 0.30 (0.24)
The pro forma results include adjustments to goodwill amortization,
depreciation expense, interest expense, income tax expense and operating
expenses to reflect the reduction in salaries and related benefits of owners and
officers of certain acquired companies whose positions and salaries have been
eliminated by contractual agreement and not replaced. The 2001 pro forma net
income includes $3.1 million in merger related expenses incurred by IHI that
have not been eliminated. The pro forma results presented are not necessarily
indicative of what actually would have occurred if the acquisitions had been
completed as of January 1, 2000, nor are they necessarily indicative of future
consolidated results.
F-15
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment and the estimated useful lives is
as follows (dollars in thousands):
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIFE 2002 2001
----------- ------------ ------------
Land.................................. -- $ 1,057 $ 1,057
Buildings and improvements............ 3-40 years 8,503 7,455
Machinery and equipment............... 3-15 years 18,297 15,636
Vehicles.............................. 5-10 years 2,757 2,556
Furniture and fixtures................ 3-10 years 685 618
Computer equipment.................... 3-7 years 3,257 1,675
Construction in progress.............. -- 140 7
------------ ------------
34,696 29,004
Less -- Accumulated depreciation...... (4,769) (1,771)
------------ ------------
Property and equipment, net........ $ 29,927 $ 27,233
============ ============
Depreciation expense for the years ended December 31, 2002, 2001 and
2000, was $3,029,000, $1,440,000 and $422,000, respectively.
4. NOTES RECEIVABLE:
Notes receivable consist of the following (dollars in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------- ------------
8.00% subordinated promissory note receivable with an effective rate of
12%, in the original face amount of $350,000, net of a $25,000 and
$31,000 discount at December 31, 2002 and 2001, respectively,
due in monthly installments of $7,100 through January 2007........................ $ 291 $ 319
7.00% promissory note receivable with an effective rate of 12%, in the
original face amount of $719,000, net of a $137,000 discount, due in
monthly installments of $8,300 through December 2011, secured
by furniture, fixtures, and equipment, paid in full in 2002....................... -- 582
Subordinated promissory note receivable with interest at the greater of
8.00% or LIBOR + 5.5%, with an effective rate of 12%, in the original
face amount of $1,500,000, net of a $119,000 discount, due in monthly
installments of $30,400 beginning in January 2003 through November 2004
with a final payment in December 2004 of all outstanding principal
and interest...................................................................... 1,381 1,381
10.00% subordinated promissory note receivable from former directors, with an
effective rate of 12%, in the original face amount of $3,500,000, net of a
$138,000 discount. Interest payments due in twelve quarterly installments
beginning April 2002 with a final payment in December 2004 of all
outstanding principal and interest................................................ 3,362 3,362
Other notes receivable, unsecured................................................. 715 390
------------- ------------
5,749 6,034
Less -- Current portion........................................................... (696) (161)
------------- ------------
$ 5,053 $ 5,873
============= ============
F-16
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (dollars in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Accrued payroll and related benefits............................. $ 2,493 $ 3,327
Accrued taxes.................................................... 400 1,277
Other accrued liabilities........................................ 4,888 7,511
------------ ------------
$ 7,781 $ 12,115
============ ============
6. LONG-TERM DEBT:
Long-term debt from financial institutions consists of the following
(dollars in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Wells Fargo credit facility...................................... $ -- $ 15,806
Wells Fargo swing line........................................... 2,079 --
Wells Fargo term loan............................................ 13,200 16,500
Wells Fargo Energy Capital subordinated term loan................ 12,000 12,000
Wells Fargo mortgage notes payable............................... 2,469 2,593
Equipment loans and other........................................ 156 2,305
------------ ------------
Total.................................................. 29,904 49,204
Less -- Current maturities of long-term debt..................... (3,463) (5,307)
------------ ------------
Long-term debt......................................... $ 26,441 $ 43,897
============ ============
On December 17, 2001, the Company entered into a senior credit facility
with Wells Fargo, N.A. and General Electric Capital Corporation maturing
December 17, 2004. Concurrently, the Company entered into a $12.0 million
subordinated term loan with Wells Fargo Energy Capital, Inc., maturing December
17, 2005. The senior credit facility includes a revolving credit facility of the
lesser of a defined borrowing base (based upon 85% of eligible accounts
receivable and 50% of eligible inventory) or $41.5 million, a term loan of $16.5
million and an optional facility for up to an additional $20.0 million in
revolving credit commitments for future acquisitions based upon specific
criteria. At December 31, 2002, there was $21.2 million in availability under
the revolving credit facility; however, as a result of the funded debt-to-EBITDA
ratio covenant, the Company's availability was limited to $5.2 million. The
senior credit facility's term loan is payable in equal quarterly installments of
$0.8 million. The applicable interest rate of the senior credit facility is
governed by the Company's trailing-twelve-month funded debt-to-EBITDA ratio and
ranges from prime plus 1.25% or LIBOR plus 2.25% to prime plus 2.00% or LIBOR
plus 3.00%. At December 31, 2002, the senior credit facility bore interest at
LIBOR plus 2.75%, with interest payable quarterly. The Company is required to
prepay the senior credit facility under certain circumstances with the net cash
proceeds of asset sales, insurance proceeds, equity issuances and institutional
debt, and commencing April 2003, if, and for so long as, its funded
debt-to-EBITDA ratio is 2.25 to 1 or greater, with 50% of excess cash flow as
determined under the senior credit agreement. The senior credit facility
provides, among other covenants and restrictions, that the Company comply with
certain financial covenants, including a limitation on capital expenditures, a
minimum fixed charge coverage ratio, minimum consolidated tangible net worth and
a maximum funded debt-to-EBITDA ratio. As of December 31, 2002, the Company was
in compliance with the covenants under the senior credit facility. The senior
credit facility is collateralized by substantially all of the Company's assets.
The senior credit facility's weighted average interest rate, including
amortization of loan costs, for the year ended December 31, 2002 was 7.1%.
Effective February 20, 2003, the senior credit facility was amended to provide
an increase in the aggregate additional revolving credit commitment for future
acquisitions to $30.0 million (up to $10.0 million per single acquisition) and
an increase in the maximum funded debt-to-EBITDA ratio. Had this amendment been
effective
F-17
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at December 31, 2002, the Company's maximum borrowing capacity under the senior
credit facility would have increased from $5.2 million to $12.2 million as a
result of the increase in this ratio.
The subordinated term loan bears interest at 9.50% with interest
payable quarterly. The principal balance is due in full on December 17, 2005.
The effective interest rate, including amortization of loan costs, is 10.7%. The
subordinated term loan provides, among other covenants and restrictions, that
the Company maintain a minimum fixed charge coverage ratio and a maximum funded
debt-to-EBITDA ratio. Under the terms of the senior credit facility, the Company
is not currently permitted to make principal payments on the subordinated term
loan. As of December 31, 2002, the Company was in compliance with the covenants
under the subordinated term loan. The subordinated term loan is collateralized
by a second lien on substantially all of the Company's assets.
The Company has two notes payable with Wells Fargo Bank with combined
outstanding principal of $2,469,000 and $2,593,000 at December 31, 2002 and
2001, respectively. The notes bear interest at 9.00% and the Treasury rate plus
3.65%, respectively, and are payable in monthly installments totaling $27,000.
The notes mature in May, 2005 and February, 2016, respectively, and are
collateralized by certain real estate of two of the Company's subsidiaries.
The aggregate maturities of long-term debt during the five years
subsequent to December 31, 2002, are as follows (dollars in thousands):
Year ending December 31 --
2003...................................................................... $ 3,463
2004...................................................................... 12,147
2005...................................................................... 13,559
2006...................................................................... 86
2007...................................................................... 55
Thereafter................................................................ 594
----------
$ 29,904
==========
7. EARNINGS PER SHARE:
Basic net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per common share is the same as basic but assumes the
exercise of convertible subordinated debt securities and includes dilutive stock
options using the treasury stock method. The following table reconciles the
numerators and denominators of the basic and diluted per common share
computations for net income for the years ended December 31, 2002, 2001 and
2000, as follows (in thousands except per share data):
F-18
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
--------- --------- ---------
Numerator:
Net income................................................... $ 4,570 $ 1,922 $ 335
Interest on convertible debt, net of tax..................... -- 901 --
--------- --------- ---------
Net income before interest on convertible debt............... $ 4,570 $ 2,823 $ 335
========= ========= =========
Denominator:
Weighted average common shares outstanding -- basic.......... 10,346 2,271 1,302
Shares for convertible debt.................................. -- 1,435 --
Shares for dilutive stock options............................ 1 9 --
--------- --------- ---------
Weighted average common shares outstanding and
Assumed conversions -- diluted............................. 10,347 3,715 1,302
========= ========= =========
Basic earnings (loss) per common share:
Income before extraordinary loss............................. $ 0.44 $ 1.05 $ 0.26
Extraordinary loss........................................... -- (0.20) --
--------- --------- ---------
Net income per common share.................................. $ 0.44 $ 0.85 $ 0.26
========= ========= =========
Diluted earnings (loss) per common share:
Income before extraordinary loss............................. $ 0.44 $ 0.89 $ 0.26
Extraordinary loss........................................... -- (0.13) --
--------- --------- ---------
Net income per common share.................................. $ 0.44 $ 0.76 $ 0.26
========= ========= =========
There were 185,180 weighted average shares of common stock related to
the Company's convertible subordinated debt that were not included in the
computation of diluted earnings per share for 2000 because to do so would have
been anti-dilutive. For 2002, 2001 and 2000, there were 480,575, 282,829 and
120,588 options, respectively, and for 2002 and 2001, 3,489,079 warrants that
were not included in the computation of diluted earnings per share because their
inclusion would have been anti-dilutive.
8. INCOME TAXES:
The components of the provision for income taxes for the years ended
December 31 are as follows (dollars in thousands):
2002 2001 2000
---- ---- ----
Federal --
Current.......................................... $ (859) $ 2,396 $ 780
Deferred......................................... 3,514 (141) (150)
State --
Current.......................................... 180 617 45
Deferred......................................... 153 (12) (7)
--------- --------- ---------
$ 2,988 $ 2,860 $ 668
========= ========= =========
F-19
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the actual tax rate to the statutory U.S. tax rate
for the years ended December 31 is as follows (dollars in thousands):
2002 2001 2000
---- ---- ----
Income tax expense at the statutory rate................. $ 2,570 $ 1,787 $ 341
Increase resulting from -
Nondeductible goodwill and expenses................. 199 625 311
State income taxes, net of federal benefit.......... 219 399 13
Other............................................... -- 49 3
----------- ----------- -----------
$ 2,988 $ 2,860 $ 668
=========== =========== ===========
The components of deferred taxes as of December 31 are as follows
(dollars in thousands):
2002 2001
---- ----
Deferred income tax assets -
Net operating loss carryforwards..................... $ 7,367 7,140
Accrued expenses..................................... 1,635 2,326
Inventories.......................................... 1,553 1,783
Intangible assets.................................... 104 320
Allowance for doubtful accounts...................... 250 244
Other 70 --
----------- ------------
10,979 11,813
Valuation allowance....................................... (5,686) (7,140)
----------- ------------
Total deferred income tax assets................. 5,293 4,673
Deferred income tax liabilities -
Property and equipment............................... (4,426) (3,559)
Prepaid expenses..................................... (842) --
Other................................................ (194) (136)
----------- ------------
Total deferred income tax liabilities............ (5,462) (3,695)
----------- ------------
Net deferred income tax asset (liability)........ $ (169) $ 978
=========== ============
The Company and its subsidiaries file a consolidated federal income tax
return. At December 31, 2002, through its acquisition of A&B Bolt and its merger
with IHI, the Company had net operating loss ("NOL") carryforwards of
approximately $21.7 million for income tax purposes which expire in 2019 and
2020 and are subject to annual limitations under Section 382 of the Internal
Revenue Code. In 2002, the Company reduced its valuation allowance by $1,454,000
to recognize a Federal deferred tax asset to the extent of Federal net deferred
tax liabilities. The Company has provided a valuation allowance against the
remaining deferred tax assets. Under purchase accounting, any reductions in the
valuation allowance attributable to the use of these NOL carryforwards reduces
goodwill.
At December 31, 2002, the Company had $9,931,000 in goodwill, net of
accumulated amortization, that will be tax deductible in future periods.
9. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with
certain related parties. Except as noted below, management believes these
transactions were made at the prevailing market rates or terms.
During February 2000, T-3 entered into a $25 million senior secured
promissory note with First Reserve. T-3
F-20
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incurred interest expense of approximately $1,835,000 for the year ended
December 31, 2000 related to this note. The senior secured promissory note was
paid in full on September 29, 2000, with proceeds from its then existing credit
agreement and a 12%, $8 million convertible subordinated note payable to First
Reserve. In May 2001, the Company entered into a 12%, $15 million convertible
promissory note payable to First Reserve. The proceeds of the note were used to
fund the acquisition of A&B Bolt. In December 2001, the two convertible
promissory notes and accrued interest in the aggregate amount of $25.3 million
were converted into 1,953,244 shares of common stock. Interest expense on these
two notes was $2,056,000 and $248,000 for the years ended December 31, 2001 and
2000, respectively.
General Electric Capital Corporation is a beneficial owner of 181,692
shares of common stock (see Note 11), and provides debt financing to the
Company. In connection with this financing, the Company paid financing costs of
approximately $124,000 and $992,000 and incurred interest expense of
approximately $2,205,000 and $660,000 for the years ended December 31, 2001 and
2000, respectively.
In 2000, the Company sold 1,689,527 and 27,253 shares of common stock
to First Reserve and two directors of the Company, respectively, for cash
proceeds of $18,898,000. In 2001, the Company sold 12,718 shares of common stock
to an executive officer and a director of the Company for cash proceeds of
$140,000.
Prior to the merger of T-3 and IHI, IHI sold one of its subsidiaries to
an entity controlled by Don Carlin and Robert Cone, and IHI received a $3.5
million note receivable from the former subsidiary as part of its purchase price
(see Note 4). Mr. Carlin is a former director, and Mr. Cone is a former
executive officer and director of the Company.
On March 27, 2002, the Company sold 1,000,000 shares of its common
stock at $10 per share to First Reserve. The $10 per share price was at a
premium to the Company's then recent trading history. The Company's common
stock closed at $9.30 per share on March 19, 2002.
The Company leases certain buildings under noncancelable operating
leases from current employees of the Company. Lease commitments under these
leases are approximately $684,000, $522,000, and $108,000 for 2003, 2004 and
2005, respectively. Rent expense to related parties was $907,000, $269,000 and
$47,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases certain buildings, equipment and vehicles under
noncancelable operating leases with related parties and other third parties.
Total expense related to these leases included in the accompanying statements of
operations for the years ended December 31, 2002, 2001 and 2000 were $2,084,000,
$570,000 and $92,000, respectively. Aggregate minimum rental commitments for
noncancelable operating leases with terms exceeding one year, net of minimum
sublease income from subleases assumed in the merger with IHI, are as follows
(dollars in thousands):
Year ending December 31 -
2003....................................................................... $ 1,741
2004....................................................................... 1,392
2005....................................................................... 869
2006....................................................................... 665
2007....................................................................... 543
Thereafter................................................................. 288
-----------
Total minimum lease payments............................................... $ 5,498
Less: minimum sublease income.............................................. (741)
-----------
Net minimum lease payments................................................. $ 4,757
===========
F-21
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the purchase accounting for the merger with IHI, the
Company engaged a lease broker to determine the fair market rental rate of
leases of comparable lease space. As a result of this engagement, it was
determined that at the date of the merger, the contract rental rates associated
with two of these leases exceeded the then fair market rental rate. Accordingly,
the Company recorded a reserve based on this excess that is amortized over the
remaining lease terms of 3 to 6 years. The reserve balance was $1,645,000 and
$2,858,000 at December 31, 2002 and 2001, respectively.
Contingencies
The Company is, from time to time, involved in various legal actions
arising in the normal course of business. Management does not believe there are
any existing or potential legal actions involving the Company that will have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
At December 31, 2002, the Company had no letters of credit outstanding.
11. STOCKHOLDERS' EQUITY:
Authorized Shares
The Company's authorized capital stock consists of an aggregate of
75,000,000 shares. Those shares consist of 50,000,000 shares of common stock,
par value $.001 per share, and 25,000,000 shares of preferred stock, par value
$.001 per share.
Sales and Issuances of Common Stock
In April, 2001, the Company sold 12,718 shares of common stock to an
executive officer and a director of the Company for cash proceeds of $140,000.
In connection with the merger with IHI in December 2001, First Reserve
converted two subordinated convertible notes including interest totaling $25.3
million into 1,953,244 shares of common stock and purchased 3,656,250 shares of
common stock for $46.8 million.
In 2000, the Company sold 1,716,780 shares of common stock to First
Reserve and two of the Company's directors for cash proceeds of $18,898,000. On
September 29, 2000, the Company sold an additional 181,692 shares of common
stock to an affiliate of General Electric Capital Corporation for total cash
proceeds of $2,000,000.
In connection with certain acquisitions made during fiscal 2000, the
Company issued 72,677 shares of common stock valued at $800,000.
On March 27, 2002, the Company sold 1,000,000 shares of its common
stock at $10 per share to its largest stockholder, First Reserve.
Warrants to acquire common stock
The following table sets forth the 3,489,079 outstanding warrants to
acquire 814,983 shares of common stock as of December 31, 2002:
F-22
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Number of
common shares
Class B redeemable warrants, ten warrants to acquire one share of common stock
at $100 per share, issued by IHI in connection with initial public offering and with
tender offer to Class B warrant holders currently exercisable,
expiring on January 14, 2003, redeemable upon 30 days notice............................. 14,669
Class C redeemable warrants, ten warrants to acquire one share of common stock
at $150.00 per share, issued by IHI in connection with tender offer to
Class B warrant holders, currently exercisable, expiring on January 14, 2003,
redeemable if closing bid price of common stock equals or exceeds $200.00
for 20 consecutive days.................................................................. 172,350
Class D redeemable warrants, ten warrants to acquire one share of common
stock at $225.00 per share, issued by IHI in connection with tender offer to Class B
warrant holders, currently exercisable, expiring on January 14, 2003, redeemable
if closing bid price of common stock equals or exceeds $250.00
for 20 consecutive days.................................................................. 110,102
Warrants to acquire common stock at $12.50 per share issued by IHI to
SJMB, L.P. as compensation for consulting services, currently
exercisable, expiring on June 29, 2005................................................... 75,000
Warrants to acquire common stock at $12.50 per share issued by IHI to
SJMB, L.P. in consideration of a $2 million bank guaranty,
currently exercisable, expiring on June 13, 2005......................................... 40,000
Warrants to acquire common stock at $14.00 per share issued by IHI to
its lenders in connection with the amendment of its credit agreement,
currently exercisable, expiring on June 30, 2005......................................... 15,000
Warrants to acquire common stock at $12.50 per share issued by IHI to
SJMB, L.P. in connection with an acquisition,
currently exercisable, expiring on June 30, 2005......................................... 30,000
Warrants to acquire common stock at $12.50 per share issued by IHI to an executive
officer as compensation for services rendered, currently exercisable,
expiring on June 13, 2005................................................................ 30,000
Warrants to acquire common stock at $12.80 per share issued by IHI to the
former T-3 shareholders in connection with the merger with IHI,
currently exercisable, expiring on December 17, 2011..................................... 327,862
In connection with the merger with IHI, the Company valued the Class B,
Class C and Class D redeemable warrants based upon their trading prices at the
merger date and the remaining warrants using a Black-Scholes option pricing
model.
12. EMPLOYEE BENEFIT PLANS:
Stock Option Plans
T-3 Energy Services, Inc. 2002 Stock Incentive Plan
The T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended
(the Plan), provides officers and employees equity-based incentives. The Plan
will remain in effect for 10 years, unless terminated earlier. Generally,
options expire 10 years from the grant date and vest over three to four years
from the grant date.
In 2000, the Company issued performance-based options under the Plan to
purchase up to approximately 57,860 shares of the Company's common stock at
$11.01 per share which expired 10 years from the date of grant. In 2001, T-3
amended the options whereby the performance-based options were converted to time
based options. These converted options vest at 33-1/3% on the third, fourth and
fifth anniversaries of the date of employment. As a result of the amendment, the
Company recorded a compensation charge in 2001 and 2002. At December 31, 2002,
there was $79,000 in deferred compensation expense to be recognized over the
remaining vesting period of these options.
F-23
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Industrial Holdings, Inc. Stock Option Plans
IHI maintained an incentive stock plan and a non-employee director plan
under which it granted incentive or non-qualified options to key employees and
non-qualified options to non-employee directors. The option price per share was
generally the fair market value on the date of the grant and the options granted
were exercisable immediately to five years after the grant date in accordance
with the vesting provisions of the individual agreement set forth at the time of
the award. All options expire ten years from the date of the grant. All options
vested at the time of the merger under the change of control provision provided
by the plan. As of January 1, 2002, all outstanding stock options that were
previously granted under this plan were assumed and continued under the T-3
Energy Services, Inc. 2002 Stock Incentive Plan.
The following table summarizes information about T-3 employee stock options
outstanding at December 31:
2002 2001 2000
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- ---------- ----------- --------- ----------- -------- ----------
Outstanding at the beginning of the year.... 439,175 $ 19.68 120,589 $ 11.01 -- --
Granted..................................... 207,500 9.03 96,033 12.74 120,589 $ 11.01
Assumed from Industrial Holdings, Inc....... -- -- 225,242 27.18 -- --
Exercised................................... -- -- -- -- -- --
Forfeited................................... (174,795) 21.23 (2,689) 11.01 -- --
---------- ----------- --------- ----------- -------- ----------
Outstanding at end of year.................. 471,880 $ 14.42 439,175 $ 19.68 120,589 $ 11.01
---------- ----------- --------- ----------- -------- ----------
Options exercisable at end of year.......... 162,526 $ 22.36 276,490 $ 24.33 -- --
Weighted-average fair value of options
granted during the year at market price.. 207,500 3.23 96,033 $ 5.64 120,589 $ 8.07
Weighted-average fair value of options
granted during the year where exercise
price is greater than market price
at grant date............................ -- -- -- -- -- --
The following table summarizes significant ranges of all outstanding
and exercisable options at December 31, 2002:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISABLE NUMBER EXERCISE
EXERCISABLE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------ ----------- ----------------- -------------- ----------- -----------
$ 7.55 50,000 9.6 $ 7.55 -- $ 7.55
$ 9.50 123,000 9.1 $ 9.50 -- $ 9.50
$ 11.01 129,442 7.3 $ 11.01 36,276 $ 11.01
$ 12.50 89,217 7.4 $ 12.50 89,217 $ 12.50
$ 12.80 18,387 7.2 $ 12.80 4,596 $ 12.80
$ 14.41 39,209 7.2 $ 14.41 9,812 $ 14.41
$ 17.50 300 7.9 $ 17.50 300 $ 17.50
$ 31.38 - 55.00 6,000 6.8 $ 31.88 6,000 $ 31.88
$ 92.50 - 105.00 13,825 4.5 $ 99.71 13,825 $ 99.71
$113.80 - 137.50 2,500 5.5 $ 137.50 2,500 $ 137.50
The Company follows APB Opinion No. 25 in accounting for stock options
issued to employees. Under APB Opinion No. 25, compensation expense is not
recorded for stock options issued to employees if the exercise price of an
option is equal to or greater than the market price of the stock on the date of
grant. SFAS No. 123, "Accounting for Stock-Based Compensation," requires that if
a company does not record compensation expense for stock options issued to
employees pursuant to APB Opinion No. 25, the Company must disclose the effects
on its results of operations as if an estimate of the value of stock-based
compensation at the date of grant had
F-24
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
been recorded as an expense. The Company's adjusted net income and earnings per
share, assuming that the Company had expensed the estimated fair value of
options provided to its employees over the applicable vesting period, are
summarized in Note 1.
Defined Contribution Plans
The Company sponsors a defined contribution retirement plan for most
full-time and some part-time employees. The plan provides for matching
contributions up to 50% of the first 6% of covered employees' salaries or wages
contributed and for discretionary contributions. Contributions to this plan
totaled approximately $597,000, $305,000 and $100,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
13. REPORTABLE SEGMENTS:
The Company's determination of reportable segments considers the
strategic operating units under which the Company sells various types of
products and services to various customers. Financial information for purchase
transactions is included in the segment disclosures only for periods subsequent
to the dates of acquisition.
The Company's operations are organized into three business segments:
(1) the Pressure Control segment, (2) the Products segment, and (3) the
Distribution segment. The Pressure Control segment manufactures remanufactures
and repairs high pressure, severe service products including valves, chokes,
actuators, blow out preventers, manifolds and wellhead equipment. The Products
segment remanufactures and repairs pumps, electric motors and generators,
manufactures specialty bolts and fasteners, fabricates equipment and components
for use in the exploration and production of oil and gas and provides specialty
machining for the repair and remanufacture of natural gas and diesel engines.
The Distribution segment is engaged in the specialty distribution of pipes,
valves, stud bolts, gaskets and other ancillary products primarily to the
upstream and downstream oil and gas industry, offshore fabrication companies and
shipyards. No single customer accounted for 10% or more of consolidated sales
during the three years ended December 31, 2002.
The accounting policies of the segments are the same as those of the
Company as described in Note 1. Intersegment sales and transfers are accounted
for at commercial prices and are eliminated in consolidation. The Company
evaluates performance based on income from operations excluding certain
corporate costs not allocated to the segments. Inter-segment sales are not
material. Substantially all sales are from domestic sources and all assets are
held in the United States.
(DOLLARS IN THOUSANDS)
PRESSURE
2002 CONTROL PRODUCTS DISTRIBUTION CORPORATE CONSOLIDATED
- ---- ---------- ---------- -------------- ----------- --------------
Sales ............................... $ 70,177 $ 39,445 $ 37,248 $ -- $ 146,870
Depreciation and amortization........ 2,023 931 343 439 3,736
Income (loss) from operations........ 13,067 747 2,120 (5,658) 10,276
Total assets......................... 104,433 46,648 19,157 16,361 186,599
Capital expenditures................. 2,558 1,568 196 1,380 5,702
2001
Sales ............................... $ 52,120 $ 7,435 $ 30,607 $ -- $ 90,162
Depreciation and amortization........ 3,153 293 371 204 4,021
Income (loss) from operations........ 8,997 102 2,436 (1,409) 10,126
Total assets......................... 107,685 50,176 23,286 18,581 199,728
Capital expenditures................. 1,775 271 280 863 3,189
2000
Sales ............................... $ 25,412 $ 271 $ -- $ -- $ 25,683
Depreciation and amortization........ 1,870 37 -- 5 1,912
Income (loss) from operations........ 4,406 (98) -- (524) 3,784
Total assets......................... 61,819 4,899 -- 101 66,819
Capital expenditures................. 5,818 -- -- 43 5,861
F-25
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 2002 and 2001 is as follows (in
thousands, except per share data):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------- -------------
2002
Sales............................................ $ 36,410 $ 37,236 $ 35,312 $ 37,912
Gross profit..................................... 10,686 11,077 10,173 10,196
Income from operations........................... 3,002 3,092 2,283 1,899
Net income....................................... 1,307 1,402 1,065 796
Basic earnings per common share.................. .14 .13 .10 .08
Diluted earnings per common share................ .14 .13 .10 .08
2001
Sales............................................ $ 13,392 $ 22,115 $ 26,641 $ 28,014
Gross profit..................................... 4,833 7,299 8,336 8,510
Income from operations........................... 1,889 2,686 3,116 2,435
Income before extraordinary loss................. 457 716 1,009 214
Net income (loss)................................ 457 716 1,009 (260)
Basic earnings (loss) per common share:
Income before extraordinary loss.............. .23 .36 .51 .07
Extraordinary loss............................ .00 .00 .00 (.15)
Net income (loss) per common share .23 .36 .51 (.08)
Diluted earnings (loss) per common share:
Income before extraordinary loss.............. .21 .28 .36 .07
Extraordinary loss............................ .00 .00 .00 (.15)
Net income (loss)per common share............. .21 .28 .36 (.08)
The sum of the individual quarterly net income per common share amounts may not
agree with the year-to-date net income per common share as each quarterly
computation is based upon the weighted average number of common shares
outstanding during that period.
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To T-3 Energy Services, Inc.:
We have audited the accompanying consolidated balance sheet of Cor-Val,
Inc., and subsidiary as of March 31, 1999, and the related consolidated
statements of operations, cash flows and stockholders' equity for the year ended
March 31, 1999 and for the eleven months ended February 29, 2000. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cor-Val, Inc. and subsidiary, as of March 31, 1999, and the consolidated results
of their operations and their cash flows for the year ended March 31, 1999, and
for the eleven months ended February 29, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
June 8, 2001
NOTE: The report of Arthur Andersen LLP presented above is a copy of a
previously issued Arthur Andersen LLP report and said report has not been
reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent
to the inclusion of its report in this Form 10-K.
F-27
COR-VAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET -- MARCH 31, 1999
ASSETS
CURRENT ASSETS:
Cash.......................................................................... $ 703
Trade accounts receivable, net................................................ 1,229,595
Inventories................................................................... 1,309,866
Prepaid expenses and other current assets..................................... 214,468
Deferred tax asset............................................................ 88,746
------------
Total current assets.................................................. 2,843,378
PROPERTY AND EQUIPMENT, net..................................................... 744,511
CASH SURRENDER VALUE OF LIFE INSURANCE.......................................... 453,457
------------
Total assets.......................................................... $ 4,041,346
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable........................................................ $ 338,327
Accrued liabilities........................................................... 190,811
Current maturities of long-term debt.......................................... 103,655
Loans from stockholders....................................................... 822,013
Customer advances and deposits................................................ 99,467
------------
Total current liabilities............................................. 1,554,273
LONG-TERM DEBT, less current maturities......................................... 93,951
DEFERRED TAX LIABILITY.......................................................... 38,040
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 1,000 shares authorized, 100
shares issued and outstanding.............................................. 10,000
Retained earnings............................................................. 2,345,082
------------
Total stockholders' equity............................................ 2,355,082
------------
Total liabilities and stockholders' equity............................ $ 4,041,346
============
The accompanying notes are an integral part of these consolidated
financial statements.
F-28
COR-VAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTHS
ENDED YEAR ENDED
FEBRUARY 29, MARCH 31,
2000 1999
-------------- -------------
NET SALES:
Products............................................................. $ 8,597,067 $ 9,796,482
Services............................................................. 2,244,623 513,809
----------- ------------
10,841,690 10,310,291
COST OF SALES:
Products............................................................. 4,499,341 4,686,975
Services............................................................. 1,077,632 131,048
----------- ------------
5,576,973 4,818,023
----------- ------------
Gross profit................................................. 5,264,717 5,492,268
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................... 3,648,558 4,130,445
----------- ------------
INCOME FROM OPERATIONS................................................. 1,616,159 1,361,823
OTHER INCOME (EXPENSE):
Interest expense..................................................... (88,537) (119,613)
Other income, net.................................................... 141,073 22,538
----------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES............................... 1,668,695 1,264,748
PROVISION FOR INCOME TAXES............................................. 50,706 468,150
----------- ------------
NET INCOME............................................................. $ 1,617,989 $ 796,598
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-29
COR-VAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELEVEN MONTHS
ENDED YEAR ENDED
FEBRUARY 29, MARCH 31,
2000 1999
--------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $1,617,989 $ 796,598
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization..................................... 311,841 194,156
Loss (gain) on sales of equipment................................. (3,360) 10,684
Deferred income taxes............................................. 50,706 (56,638)
Changes in operating assets and liabilities, net of
noncash transactions--
Trade accounts receivable, net.................................... (1,353,127) 678,903
Inventories....................................................... 105,973 (583,799)
Prepaid expenses and other current assets......................... 168,729 (173,826)
Cash surrender value of life insurance and other
assets........................................................... (58,487) (102,024)
Trade accounts payable............................................ 358,639 125,397
Accrued liabilities............................................... 204,502 (78,859)
Income taxes payable.............................................. -- (547,014)
Customer advances and deposits.................................... (99,467) 71,408
---------- ---------
Net cash provided by operating activities.................... 1,303,938 334,986
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................. (283,771) (378,030)
Proceeds from sales of property and equipment........................ 3,360 11,637
Cash acquired in acquisition......................................... 325,440 --
---------- ---------
Net cash provided by (used in) investing
activities................................................. 45,029 (366,393)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of loans from stockholders................................ (822,013) (236,545)
Proceeds from loans from stockholders................................ -- 45,238
Proceeds from long-term debt......................................... 1,091,570 270,339
Repayments of long-term debt......................................... (1,479,564) (270,773)
Proceeds from affiliate.............................................. 1,915,744 --
Stockholder distributions............................................ (1,674,261) --
---------- ---------
Net cash used in financing activities........................ (968,524) (191,741)
---------- ---------
NET INCREASE (DECREASE) IN CASH........................................ 380,443 (223,148)
CASH AT BEGINNING OF PERIOD............................................ 703 223,851
---------- ---------
CASH AT END OF PERIOD.................................................. $ 381,146 $ 703
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest.......................................................... $ 88,537 $ 111,070
========== =========
Income taxes...................................................... $ -- $ 693,560
========== =========
Common stock issued in acquisition................................... $3,932,000 $ --
========== =========
Distribution of assets to stockholders............................... $ 647,655 $ --
========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-30
COR-VAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- ------------ ------------ -----------
BALANCE, MARCH 31, 1998............ 100 $ 10,000 $ -- $ 1,548,484 $ 1,558,484
Net income....................... -- -- -- 796,598 796,598
---- -------- ------------ ------------ ------------
BALANCE, MARCH 31, 1999............ 100 10,000 -- 2,345,082 2,355,082
Net income....................... -- -- -- 1,617,989 1,617,989
Stockholder distributions........ -- -- -- (2,321,916) (2,321,916)
Issuance of common stock for
acquisition................... 25 2,500 3,929,500 -- 3,932,000
---- -------- ------------ ------------ ------------
BALANCE, FEBRUARY 29, 2000......... 125 $ 12,500 $ 3,929,500 $ 1,641,155 $ 5,583,155
==== ======== ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-31
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Cor-Val, Inc. (a Louisiana corporation), has served the oil and gas and
petrochemical industries as a manufacturer of valves, control valves and chokes
since 1981. On July 1, 1999, Cor-Val, Inc., purchased all of the equity
securities of Cor-Val Services, Inc. (a Louisiana corporation), in exchange for
25 shares of common stock of Cor-Val, Inc. Cor-Val Services, Inc. was 100% owned
by the father of Cor-Val, Inc.'s officers and directors. Prior to the
acquisition, there was no common ownership between the companies and business
activities were completely separate. Cor-Val Services, Inc., focuses on the
repair, refurbishment and sale of blowout preventers, valves, control valves and
chokes. Cor-Val, Inc., and Cor-Val Services, Inc. (together, the Company), are
located in Houma, Louisiana.
Interim Financial Information
The results of operations and cash flows for the interim eleven months
ended February 29, 2000, are not necessarily indicative of the results for the
entire fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Cor-Val, Inc., and its wholly owned subsidiary, Cor-Val Services, Inc. All
significant intercompany accounts have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of March
31, 1999, there were no cash equivalents.
Inventories
Inventories are stated at the lower of cost or market; cost is
determined using a weighted average based on the first-in, first-out method.
Inventories consisted of the following at March 31, 1999:
Finished goods $ 984,173
Work in process 187,900
Raw materials 137,793
-------------
$ 1,309,866
=============
During the eleven months ended February 29, 2000, and the year ended
March 31, 1999, the Company recorded charges of $376,346 and $100,000,
respectively, to cost of sales for the write-off of inventory that the Company
determined was not saleable.
Revenue Recognition
The Company uses the completed-contract method of accounting, whereby
earnings on manufacture and repair work are not recognized until the work is
completed and/or the product is delivered to and accepted by the customer.
Management's use of the completed-contract method is based upon the fact that
the typical contract is completed in less than one month. A provision is made
for the entire amount of future estimated losses on contracts in progress as
soon as the provision can be determined based upon estimates of the Company.
F-32
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line basis over
estimated useful lives. Expenditures for replacements and major improvements are
capitalized. Expenditures for maintenance, repairs and minor replacements are
charged against income as incurred. Leasehold improvements are amortized over
the lesser of the estimated useful life or term of the lease.
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
realizable. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such asset is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
asset and its carrying value. As of March 31, 1999 and for the eleven months
ended February 29, 2000, no such impairment had occurred.
Goodwill
Goodwill represents the excess of cost over fair value of net assets
acquired and is amortized on a straight-line basis over 20 years. Amortization
expense for the eleven months ended February 29, 2000, totaled $79,824. The
Company periodically evaluates the recoverability of intangibles resulting from
business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions.
Income Taxes
For the year ended March 31, 1999, income taxes are accounted for under
the asset and liability method as specified by Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred assets and
liabilities are recorded for the future tax consequences attributable to
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 enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Effective April 1, 1999, the Company elected to be treated as an S
Corporation. The deferred taxes previously recorded on Cor-Val, Inc.'s March 31,
1999, balance sheet have been removed and charged to the provision for income
taxes as of the effective date.
Use of Estimates
The preparation of 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. Actual results could differ from those estimates.
Concentrations of Credit Risk
A significant portion of the Company's sales are to customers whose
activities are related to the oil and gas industry, including some who are
located in foreign countries. The Company generally extends credit to these
customers and, therefore, collection of receivables is affected by the economy
of the oil and gas industry. Also, with respect to foreign sales, collection may
be more difficult in the event of default. The Company closely monitors
extensions of credit and has historically not experienced significant credit
losses. Most foreign sales are made to large, well-established companies. No
single customer accounted for more than 10 percent of sales for the eleven
months ended February 29, 2000, and for the year ended March 31, 1999. The
Company provides an allowance for doubtful accounts for potential collection
issues in addition to reserves for specific accounts
F-33
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable where collection is no longer probable. The Company has recorded an
allowance for doubtful accounts of $45,117 as of March 31, 1999.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
became effective for the Company's financial statements beginning in fiscal
2001. SFAS No. 133 requires a company to recognize all derivative instruments
(including certain derivative instruments embedded in other contracts) as assets
or liabilities in its balance sheet and measure them at fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company has not
engaged in the use of derivative instruments on hedging activities and therefore
believes that the impact of SFAS No. 133 on its existing accounting policies and
financial reporting disclosures will not be material.
In December 1999, SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," was issued. SAB No. 101 summarizes certain
of the SEC staff's views in applying accounting principles generally accepted in
the United States to revenue recognition in financial statements. The Company
believes that its policies with respect to revenue recognition are in accordance
with the new guidelines and therefore there was no impact from the adoption of
the new guidelines on the Company's consolidated financial position or results
of operations of the Company.
2. BUSINESS COMBINATION:
On July 1, 1999, Cor-Val, Inc., purchased all of the outstanding equity
securities of Cor-Val Services, Inc.'s common stock in a business combination
accounted for using the purchase method of accounting. The accompanying
consolidated balance sheet includes allocations of the purchase price to the
assets acquired and liabilities assumed. The following schedule summarizes
investing activities related to the acquisition in the consolidated statement of
cash flows:
Fair value of assets, net of cash acquired.......... $ 2,045,242
Liabilities assumed................................. (507,957)
Goodwill recorded................................... 2,394,715
-------------
Common stock issued for acquisition $ 3,932,000
=============
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment at March 31, 1999, is as follows:
ESTIMATED
USEFUL LIVES
---------------
Leasehold improvements.................. Life of lease $ 131,961
Machinery and equipment................. 5-7 years 1,523,841
Vehicles................................ 5 years 201,596
Furniture and office equipment.......... 2-7 years 409,731
-------------
2,267,129
Less -- Accumulated depreciation........ (1,522,618)
-------------
Property and equipment, net... $ 744,511
=============
Depreciation expense for the eleven months ended February 29, 2000, and
the year ended March 31, 1999, are $232,017 and $194,156, respectively.
F-34
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT:
Long-term debt at March 31, 1999, is as follows:
Term note, described below.................................. $ 18,052
Various notes, bearing interest at 7.5% to 10.0% in various
monthly installments of $614 to $937, collateralized by
four vehicles and office equipment, maturing on various
dates through 2003........................................ 96,918
Insurance note payable, bearing interest at 10.0%, payable
in monthly installments of $12,331, maturing in May
1999...................................................... 24,662
Capital lease, bearing interest at 12.0%, payable in monthly
installments of $2,063, maturing in January 2002.......... 57,974
------------
Total long-term debt.............................. 197,606
Less -- Current maturities.................................. (103,655)
------------
Long-term debt, less current maturities........... $ 93,951
============
Maturities of long-term debt outstanding at March 31, 1999, are as follows:
2000...................... $ 103,655
2001...................... 57,623
2002...................... 35,622
2003...................... 706
-----------
Total........... $ 197,606
===========
The Company had available a $750,000 working capital line of credit
with Regions Bank at an annual interest rate of 7.5 percent. There was no
balance on this loan at March 31, 1999. The line is available to the Company for
80 percent of eligible trade accounts receivable at any given date, not to
exceed the $750,000 limit. All trade accounts receivable of the Company are
pledged to secure any amount outstanding on the line to the extent funds are
advanced thereon. The Company did not draw any funds on this line during the
year ended March 31, 1999. The line of credit was subsequently canceled by T-3
Energy on March 10, 2000.
The Company has a term note payable to Regions Bank (the Term Note) in
the original amount of $650,000. The Term Note is payable in monthly principal
installments of $9,028 plus interest of 9.0 percent annually and matures on May
11, 1999. The note is secured by substantially all of the machinery, equipment,
furniture and fixtures owned by the Company.
5. LOANS FROM STOCKHOLDERS:
At March 31, 1999, the Company had the following loans payable to
stockholders, which were unsecured:
Various notes payable to Kane Corte, interest payable
annually at 10.0%......................................... $ 233,594
Various notes payable to Bobby Corte, Jr., interest
payable annually at 10.0%................................. 259,881
Various notes payable to Dennis and Kim Sanvi, interest
payable annually at 10.0%................................. 322,898
Note payable to Chris Corte, interest payable annually at
10.0%..................................................... 5,640
-----------
Loans from stockholders..................................... $ 822,013
===========
Subsequent to March 31, 1999, the Company repaid its loans from
stockholders with proceeds from replacement financing through a loan from
Regions Bank (the New Loan). The New Loan is payable to Regions
F-35
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank in monthly installments of $17,182, bears interest at 7.75 percent and
matures on April 1, 2004. The New Loan is secured by the Company's machinery and
equipment, inventory and trade accounts receivable.
6. INCOME TAXES:
The components of the provision (benefit) for income tax expense for
the year ended March 31, 1999, are as follows:
Federal--
Current........................ $ 480,177
Deferred....................... (51,180)
State--
Current........................ 44,611
Deferred....................... (5,458)
-----------
$ 468,150
===========
A reconciliation of the actual tax rate to the statutory U.S. tax rate
for the year ended March 31, 1999, is as follows:
Income tax expense at the statutory rate.......... $ 430,014
Increase resulting from--
State income taxes, net of federal benefit...... 25,841
Other nondeductible expenses.................... 12,295
------------
$ 468,150
============
The components of deferred taxes at March 31, 1999, are as follows:
Deferred income tax assets--
Accrued expenses.................................. $ 34,327
Allowance for doubtful accounts.................. 16,919
Inventory reserve................................ 37,500
----------
Total deferred income tax assets........ 88,746
----------
Deferred income tax liabilities--
Property and equipment........................... (21,825)
Other............................................ (16,215)
----------
Total deferred income tax liabilities... (38,040)
----------
Net deferred income tax asset........... $ 50,706
==========
The income of the Company is currently taxable to the stockholders of
the Company from the effective date of the election to change its status
forward. No provision for income taxes is made in the accounts of the Company
for the eleven months ended February 29, 2000, since the Company is an S
Corporation and, as such, the taxes are liabilities of the stockholders and
depend upon the stockholders' respective tax situations.
7. RELATED-PARTY TRANSACTIONS:
The Company leases its operations facility and certain production space
from related parties. Lease terms, amounts and the nature of the related-party
transactions are discussed in Note 8.
In addition to the leased operating facility described above and prior
to the July 1, 1999, acquisition of Cor-Val Services, Inc., by Cor-Val, Inc. (as
discussed in Note 2), the Company transacted business with Cor-Val Services,
Inc. For the year ended March 31, 1999, sales to Cor-Val Services, Inc., totaled
approximately $200,335 and purchases from Cor-Val Services, Inc., totaled
approximately $134,839. At March 31, 1999, the Company had a $32,554 receivable
from Cor-Val Services, Inc., included with trade receivables on the accompanying
balance sheet. At March 31, 1999, the Company had a $8,966 payable to Cor-Val
Services, Inc.,
F-36
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included with trade payables on the accompanying balance sheet.
During February 2000, the Company received a $1,915,744 cash advance
from First Reserve Corporation, an affiliate of T-3 Energy Services (see Note
10). There were no required repayment terms related to the advance; however, T-3
Energy Services, Inc., subsequently repaid the balance with proceeds from a
third-party long-term note during 2000.
8. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases its operations facility located in Houma, Louisiana,
under a cancelable operating lease from the father of the Company's officers and
directors. The lease has no specified terms other than the fixed monthly
payment, which approximates market rates. During the eleven months ended
February 29, 2000, and the year ended March 31, 1999, the monthly payment was
fixed at $13,818. Total expense for this lease included in the accompanying
statements of operations for the eleven months ended February 29, 2000, and for
the year ended March 31, 1999, was $152,000 and $165,822, respectively. In
conjunction with the acquisition of the Company by T-3 Energy Services, Inc. (as
discussed in Note 10), the facilities leased by the Company from related parties
were also acquired and the related leases cancelled.
The Company leases additional production space, a modular building and
a treatment facility under a cancelable operating lease from Corte Enterprises,
LLC, an affiliated company owned by the Company's officers and directors and
other family members. The rent on these facilities is $9,000 per month. The rent
on these facilities approximates market rates and is negotiated and agreed upon
each year. Total expense for this lease included in the accompanying statements
of operations for the eleven months ended February 29, 2000, and for the year
ended March 31, 1999, was $172,000 and $72,000, respectively. In conjunction
with the acquisition of the Company by T-3 Energy Services, Inc. (as discussed
in Note 10), the facilities leased by the Company from related parties were also
acquired and the related leases cancelled.
The Company leases vehicles under noncancelable operating leases
expiring through February 2003. Total expense for these vehicle leases included
in the accompanying statements of operations for the eleven months ended
February 29, 2000, and for the year ended March 31, 1999, was $39,295 and
$49,626 respectively. The minimum monthly lease payments on these leases range
from $533 to $876.
The Company leases office equipment under noncancelable operating
leases expiring through February 2003. Total expense for these equipment leases
included in the accompanying statements of operations for the eleven months
ended February 29, 2000, and for the year ended March 31, 1999, was $1,939 and
$0, respectively. The minimum monthly lease payments on these leases range from
$121 to $650.
The minimum future rental commitments under noncancelable long-term
operating leases are as follows:
Year ending February 28 --
2001.......................................... $ 30,666
2002.......................................... 23,748
2003.......................................... 6,495
Year ending February 29, 2004................... 1,260
Year ending February 28, 2005................... 1,260
Thereafter...................................... 1,260
----------
Total minimum future lease payments... $ 64,689
==========
F-37
COR-VAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
The Company and its subsidiary are, from time to time, involved in
various legal actions arising in the normal course of business. Management does
not believe there are any existing or potential legal actions involving the
Company and its subsidiary that will have a material adverse effect on the
Company's consolidated financial position or results of operations.
9. RETIREMENT PLANS:
The Company has a defined contribution 401(k) profit-sharing plan
available to eligible employees. All employees who qualify as to age and length
of service are eligible to participate. The board of directors determines
Company contributions to this plan, generally as a percentage of the employees'
elective contributions. The Company contributed $46,223 and $44,835 to the plan
for the eleven months ended February 29, 2000, and for the year ended March 31,
1999, respectively.
The Company also sponsors a discretionary contribution profit-sharing
plan whereby the Company may make discretionary contributions for the benefit of
all eligible employees. Eligibility is determined by length of service to the
Company. The Company elected to contribute $91,667 and $100,000 to the plan for
the eleven months ended February 29, 2000, and for the year ended March 31,
1999, respectively. The $100,000 discretionary contribution is included with
accrued liabilities on the accompanying balance sheet.
10. SUBSEQUENT EVENT:
Effective March 1, 2000, T-3 Energy Services purchased all of the
outstanding equity securities of Cor-Val, Inc., and subsidiary.
F-38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To T-3 Energy Services, Inc.:
We have audited the accompanying balance sheets of Preferred
Industries, Inc., as of December 31, 1999 and 1998, and the related statements
of operations, cash flows and stockholders' equity for the years ended December
31, 1999 and 1998 and for the four months ended April 30, 2000. 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 Preferred
Industries, Inc., as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years ended December 31, 1999 and 1998,
and for the four months ended April 30, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
June 8, 2001
NOTE: The report of Arthur Andersen LLP presented above is a copy of a
previously issued Arthur Andersen LLP report and said report has not been
reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent
to the inclusion of its report in this Form 10-K.
F-39
PREFERRED INDUSTRIES, INC.
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash................................................................... $ 60,142 $ 17,892
Trade accounts receivable, net......................................... 1,586,413 1,922,792
Income tax receivable.................................................. -- 138,820
Inventories............................................................ 1,411,407 1,816,239
Current portion of notes receivable from stockholders.................. 215,355 197,178
Deferred income taxes.................................................. 261,480 35,771
------------- -------------
Total current assets........................................... 3,534,797 4,128,692
CASH SURRENDER VALUE OF LIFE INSURANCE................................... 515,431 393,551
NOTES RECEIVABLE FROM STOCKHOLDERS, net of current
portion................................................................ 1,239,985 1,455,485
PROPERTY AND EQUIPMENT, net.............................................. 1,628,052 1,959,614
OTHER ASSETS............................................................. 4,405 4,405
------------- -------------
Total assets................................................... $ 6,922,670 $ 7,941,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................... $ 347,508 $ 1,057,359
Accrued expenses....................................................... 470,701 138,113
Current portion of notes payable....................................... 527,172 485,414
------------- -------------
Total current liabilities...................................... 1,345,381 1,680,886
NOTES PAYABLE, less current portion...................................... 1,843,459 2,357,832
DEFERRED INCOME TAXES.................................................... 38,930 76,746
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000 shares authorized,
83 shares issued and outstanding.................................... 150,000 150,000
Additional paid-in capital............................................. 120,573 120,573
Treasury stock, 12 shares, at cost..................................... (400,000) (400,000)
Retained earnings...................................................... 3,824,327 3,955,710
------------- -------------
Total stockholders' equity..................................... 3,694,900 3,826,283
------------- -------------
Total liabilities and stockholders' equity..................... $ 6,922,670 $ 7,941,747
============= =============
The accompanying notes are an integral part of these financial
statements.
F-40
PREFERRED INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED APRIL 30, -------------------------------
2000 1999 1998
-------------- ------------- ---------------
NET SALES:
Products............................................. $ 2,148,218 $ 9,350,089 $ 11,865,607
Services............................................. 1,660,183 3,574,174 6,174,966
----------- ------------- -------------
3,808,401 12,924,263 18,040,573
COST OF SALES:
Products............................................. 1,396,342 6,077,558 7,973,011
Services............................................. 1,129,574 2,423,349 4,293,159
----------- ------------- -------------
2,525,916 8,500,907 12,266,170
----------- ------------- -------------
Gross profit................................. 1,282,485 4,423,356 5,774,403
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 640,690 4,448,761 5,544,961
----------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS.......................... 641,795 (25,405) 229,442
OTHER INCOME (EXPENSE):
Interest expense..................................... (62,209) (205,210) (146,373)
Other income, net.................................... 38,528 138,205 107,189
----------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES........ 618,114 (92,410) 190,258
PROVISION FOR INCOME TAXES............................. 266,139 38,973 87,406
----------- ------------- -------------
NET INCOME (LOSS)...................................... $ 351,975 $ (131,383) $ 102,852
=========== ============= =============
The accompanying notes are an integral part of these financial
statements.
F-41
PREFERRED INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FOUR MONTHS
ENDED YEAR ENDED DECEMBER 31,
APRIL 30, -------------------------------
2000 1999 1998
-------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 351,975 $ (131,383) $ 102,852
Adjustments to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation...................................... 104,175 386,214 382,107
Deferred income taxes............................. 98,589 (263,525) (453,774)
Loss on disposal of assets........................ -- 4,095 --
Changes in operating assets and liabilities--
Trade accounts receivable, net.................... (241,003) 336,379 561,864
Income tax receivable............................. -- 138,820 --
Inventories....................................... (368,404) 404,832 (438,358)
Cash surrender value of life insurance............ 515,431 (121,880) (100,570)
Other assets...................................... -- -- (276)
Accounts payable.................................. 378,490 (709,851) 425,248
Accrued expenses.................................. 145,409 332,588 18,492
------------- ------------ -------------
Net cash provided by operating activities.... 984,662 376,289 497,585
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (75,001) (71,247) (877,899)
Proceeds from sales of equipment..................... -- 12,500 25,000
------------- ------------ -------------
Net cash used in investing activities........ (75,001) (58,747) (852,899)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes receivable from stockholders, net.............. 89,473 197,323 (1,652,663)
Proceeds from affiliate.............................. 1,537,102 -- --
Proceeds from notes payable.......................... -- -- 2,906,925
Repayments of notes payable.......................... (2,365,856) (472,615) (893,574)
Distribution to stockholders......................... (40,000) -- --
------------- ------------ -------------
Net cash provided by (used in) financing
activities................................. (779,281) (275,292) 360,688
------------- ------------ -------------
NET INCREASE IN CASH................................... 130,380 42,250 5,374
CASH AT BEGINNING OF PERIOD............................ 60,142 17,892 12,518
------------- ------------ -------------
CASH AT END OF PERIOD.................................. $ 190,522 $ 60,142 $ 17,892
============= ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest.......................................... $ 72,245 $ 195,184 $ 152,399
============= ============ =============
Income taxes...................................... $ 191,067 $ -- $ 621,313
============= ============ =============
The accompanying notes are an integral part of these financial
statements.
F-42
PREFERRED INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY
-------------- PAID-IN STOCK, RETAINED
SHARES AMOUNT CAPITAL AT COST EARNINGS TOTAL
------ ---------- ---------- ---------- ------------ ------------
BALANCE, DECEMBER 31,
1997.................... 83 $ 150,000 $ 120,573 $ (400,000) $ 3,852,858 $ 3,723,431
Net income.............. -- -- -- -- 102,852 102,852
---------- ---------- ---------- ------------ ------------
BALANCE, DECEMBER 31,
1998.................... 83 150,000 120,573 (400,000) 3,955,710 3,826,283
Net loss................ -- -- -- -- (131,383) (131,383)
---------- ---------- ---------- ------------ ------------
BALANCE, DECEMBER 31,
1999.................... 83 150,000 120,573 (400,000) 3,824,327 3,694,900
Net income.............. -- -- -- -- 351,975 351,975
Stockholder distributions -- -- -- -- (40,000) (40,000)
---------- ---------- ---------- ------------ ------------
BALANCE, APRIL 30,
2000.................... 83 $ 150,000 $ 120,573 $ (400,000) $ 4,136,302 $ 4,006,875
=== ========== ========== ========== ============ ============
The accompanying notes are an integral part of these financial
statements.
F-43
PREFERRED INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Preferred Industries, Inc. (the Company), a Louisiana corporation
located in Houma, Louisiana, was formed in 1982. The Company services the oil
and gas production industry through the manufacture and repair of wellhead and
drilling equipment.
Interim Financial Information
The results of operations and cash flows for the interim four months
ended April 30, 2000, are not necessarily indicative of the results for the
entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of December
31, 1999 and 1998, there were no cash equivalents.
Inventories
Inventories are valued at specific cost and are stated at the lower of
cost or market. Inventories consist of the following:
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
Finished goods and component parts.......... $ 603,911 $ 960,650
Work in process............................. 180,568 279,996
Raw materials............................... 626,928 575,593
------------ ------------
$ 1,411,407 $ 1,816,239
============ ============
During the year ended December 31, 1999, the Company recorded a charge
of $334,850 to cost of sales for the write-off of inventory that the Company
determined was not saleable.
Revenue Recognition
The Company uses the completed-contract method of accounting, whereby
earnings on manufacture and repair work are not recognized until the work is
completed and/or delivered to and accepted by the customer. Management's use of
the completed-contract method is based upon the fact that the typical contract
is completed in less than one month. A provision is made for the entire amount
of future estimated losses on contracts in progress as soon as the provision can
be determined based upon estimates of the Company.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method over
estimated useful lives. Expenditures for replacements and major improvements are
capitalized. Expenditures for maintenance, repairs and minor replacements are
charged against income as incurred. Leasehold improvements are amortized over
the lesser of the estimated useful life or term of the lease.
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
realizable. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such asset is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
asset and its carrying value. As of December 31, 1999 and for the four months
ended April 30, 2000, no such impairment had occurred.
F-44
PREFERRED INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
Income Taxes
Income taxes are accounted for under the asset and liability method as
specified by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Deferred assets and liabilities are recorded for
the future tax consequences attributable to 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
enacted tax rates expected to apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Use of Estimates
The preparation of 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of trade accounts receivable. A majority of the
Company's business is conducted with oil and gas exploration companies and oil
field service companies with operations in the Gulf of Mexico. The Company
continually evaluates the financial strength of its customers but does not
require collateral to support the customer receivables. For the four months
ended April 30, 2000, and for the years ended December 31, 1999 and 1998, one
customer (a different customer in each period) accounted for approximately 12
percent, 30 percent and 11 percent, respectively, of the Company's sales. The
Company provides an allowance for doubtful accounts for potential collection
issues in addition to reserves for specific accounts receivable where collection
is no longer probable. The Company has recorded an allowance for doubtful
accounts of $11,072 and $43,258 as of December 31, 1999 and 1998, respectively.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
became effective for the Company's financial statements beginning in fiscal
2001. SFAS No. 133 requires a company to recognize all derivative instruments
(including certain derivative instruments embedded in other contracts) as assets
or liabilities in its balance sheet and measure them at fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company has not
engaged in the use of derivative instruments or hedging activities and therefore
believes that the impact of SFAS No. 133 on its existing accounting policies and
financial reporting disclosures will not be material.
In December 1999, SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," was issued. SAB No. 101 summarizes certain
of the SEC staff's views in applying accounting principles generally accepted in
the United States to revenue recognition in financial statements. The Company
believes that its policies with respect to revenue recognition are in accordance
with the new guidelines and therefore there was no impact from the adoption of
the new guidelines on the Company's financial position or results of operations
of the Company.
F-45
PREFERRED INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
2. PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
DECEMBER 31,
ESTIMATED ------------------------------
USEFUL LIFE 1999 1998
----------- ------------- --------------
Buildings and improvements............... 15 years $ 854,207 $ 854,207
Machinery and equipment.................. 10 years 4,266,621 4,245,474
Vehicles................................. 5 years 290,222 290,222
Furniture and fixtures................... 5 years 61,290 61,290
------------- --------------
5,472,340 5,451,193
Less-- Accumulated depreciation.......... (3,844,288) (3,491,579)
------------- --------------
Property and equipment, net.... $ 1,628,052 $ 1,959,614
============= ==============
Depreciation expense for the four months ended April 30, 2000, and the
years ended December 31, 1999, and 1998, are $104,175, $386,214 and $382,107,
respectively.
3. NOTES PAYABLE:
A summary of notes payable follows:
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
Installment note payable, secured by equipment, maturing
January 31, 2003, annual interest at 8.15%, payable in
monthly installments of $24,565............................ $ 792,510 $ 1,012,106
Installment note payable, secured by inventory, accounts
receivable, equipment and buildings, maturing September
10, 2003, annual interest at 8.00%, payable in monthly
installments of $27,000.................................... 1,455,340 1,637,023
Financing note payable, maturing January 7, 2001, annual
interest at 9.50%, payable in monthly installments of
$597....................................................... 7,162 14,324
Financing note payable, due October 1, 2001, secured by
equipment, annual interest at 8.54%, payable in monthly
installments of $6,143..................................... 115,619 179,793
------------ ------------
Total notes payable................................ 2,370,631 2,843,246
Less -- Current portion...................................... (527,172) (485,414)
------------ ------------
Notes payable, less current portion................ $ 1,843,459 $ 2,357,832
============ ============
Maturities of notes payable as of December 31, 1999, are summarized below:
2000................... $ 527,172
2001................... 546,980
2002................... 533,798
2003................... 762,681
-------------
$ 2,370,631
=============
The Company's notes payable maturing on January 31, 2003, and September
10, 2003, are held by the same bank and contain similar financial covenant
requirements. Among these requirements are provisions for the maintenance of
specified financial ratios and net worth levels. This debt was retired
subsequent to year-end through proceeds received from an affiliate, as discussed
below.
During 2000, the Company received a $1,537,102 cash advance from First
Reserve Corporation, an affiliate of T-3 Energy Services, Inc. (see Note 8). The
proceeds from this advance were used to repay and retire substantially all of
the above notes payable prior to the acquisition of the Company by T-3 Energy
Services, Inc. on April 30, 2000.
F-46
PREFERRED INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
4. INCOME TAXES:
The components of the provision (benefit) for income taxes are as
follows:
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED APRIL 30, ---------------------------
2000 1999 1998
--------------- ----------- -----------
Federal--
Current................ $ 145,090 $ 261,949 $ 471,681
Deferred............... 85,373 (224,179) (392,671)
State--
Current................ 22,460 40,549 69,499
Deferred............... 13,216 (39,346) (61,103)
----------- ----------- -----------
$ 266,139 $ 38,973 $ 87,406
=========== =========== ===========
A reconciliation of the actual tax rate to the statutory U.S. tax is
as follows:
YEAR ENDED
FOUR MONTHS DECEMBER 31,
ENDED APRIL 30, --------------------------
2000 1999 1998
--------------- ----------- -----------
Income tax expense (benefit) at the statutory
rate.................................................... $ 210,159 $ (31,419) $ 64,688
Increase resulting from--
State income taxes, net of federal benefit.............. 23,546 794 5,542
Other nondeductible expenses............................ 32,434 69,598 17,176
---------- ----------- ----------
$ 266,139 $ 38,973 $ 87,406
========== =========== ==========
The components of deferred taxes are as follows:
DECEMBER 31,
--------------------------
1999 1998
----------- ----------
Deferred income tax assets--
Allowance for doubtful accounts......................................... $ 8,775 $ 5,498
Accrued expense......................................................... 171,273 49,669
Inventories............................................................. 124,717 --
----------- ----------
Total deferred income tax assets................................ 304,765 55,167
----------- ----------
Deferred income tax liabilities--
Inventories............................................................. -- (19,396)
Property and equipment.................................................. (6,201) (13,795)
Other................................................................... (76,014) (62,951)
----------- ----------
Total deferred income tax liabilities........................... (82,215) (96,142)
----------- ----------
Net deferred income tax asset (liability)....................... $ 222,550 $ (40,975)
=========== ==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods during which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences.
5. RELATED-PARTY TRANSACTIONS:
In September 1998, the Company entered into a note payable with a bank
for $1,700,000 (see Note 3). Substantially all of the proceeds from this note
were loaned to certain stockholders of the Company, who in turn, purchased an
ownership interest in O&M Equipment, Inc. (O&M). Therefore, the Company is
affiliated with O&M through common ownership. The loan to these stockholders was
made at the prevailing market rate with terms
F-47
PREFERRED INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
identical to the Company's note payable and has been recorded as notes
receivable from stockholders on the accompanying balance sheets at December 31,
1999 and 1998. For the four months ended April 30, 2000, and for the years ended
December 31, 1999 and 1998, interest income on the notes receivable from
stockholders was $38,087, $126,667 and $45,489, respectively. The notes
receivable from stockholders were fully repaid on April 30, 2000, in connection
with the purchase of the Company's outstanding equity securities by T-3 Energy
Services, Inc.
The Company entered into a limited number of business transactions with
O&M on terms which management believes are at the prevailing market rates. For
the four months ended April 30, 2000, and for the years ended December 31, 1999
and 1998, sales to O&M totaled $53,912, $21,735 and $3,857, respectively. For
the four months ended April 30, 2000, and for the years ended December 31, 1999
and 1998, purchases from O&M totaled $30,989, $82,650 and $29,860, respectively.
At December 31, 1999, the Company had accounts receivable from O&M of $2,408
included with accounts receivable on the accompanying balance sheet. There were
no receivables from O&M at December 31, 1998. At December 31, 1999 and 1998, the
Company had accounts payable to O&M of $19,130 and $8,910, respectively,
included with accounts payable on the accompanying balance sheets.
6. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases land and equipment under various noncancelable
operating leases including certain leases which contain escalation clauses.
Future minimum lease commitments as of April 30, 2000, applicable to
noncancelable operating leases with terms of one year or more, are summarized
below:
Year ending April 30 --
2001.......................... $ 25,802
2002.......................... 12,834
2003.......................... 8,315
2004.......................... 6,474
2005.......................... 5,554
Thereafter.................... 16,570
-----------
$ 75,549
===========
Total lease expense included in the accompanying statements of
operations for the four months ended April 30, 2000, and for the years ended
December 31, 1999 and 1998, was $13,573, $36,595 and $45,408, respectively.
Contingencies
The Company is, from time to time, involved in various legal actions
arising in the normal course of business. Management does not believe there are
any existing or potential legal actions involving the Company that will have a
material adverse effect on the Company's financial position or results of
operations.
7. RETIREMENT PLANS:
The Company has a defined contribution 401(k) profit-sharing plan
available to eligible employees. All employees who qualify as to age and length
of service are eligible to participate. Each employee can elect to contribute up
to $10,000 per year to the plan. The Company will match 50 cents for every
dollar contributed by the employee up to 4 percent of the employee's gross
salary. The Company contributed $28,824, $96,103 and $100,914 to the plan for
the four months ended April 30, 2000, and for the years ended December 31, 1999
and 1998, respectively.
8. SUBSEQUENT EVENTS:
Effective April 30, 2000, a change in control of the Company occurred
as a result of the purchase of all of the Company's outstanding equity
securities by T-3 Energy Services, Inc.
F-48
INDEX TO EXHIBITS
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
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2.1 -- Agreement and Plan of Merger dated May 7, 2001, as amended, among Industrial
Holdings, Inc., T-3 Energy Services, Inc.and First Reserve Fund VIII, Limited
Partnership (incorporated herein by reference to Annex I to the Definitive Proxy
Statement on Schedule 14A of T-3 dated November 9, 2001).
2.2 -- Plan and Agreement of Merger dated December 17, 2001, between T-3 Energy
Services, Inc. ("the Company") and T-3 Combination Corp (incorporated herein by
referenced to Exhibit 2.2 to the Company's Current Report on Form 8-K dated
December 31, 2001).
3.1 -- Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein
by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated
December 31, 2001).
3.2 -- Bylaws of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit
3.2 to the Company's Current Report on Form 8-K dated December 31, 2001).
4.1 -- Specimen Certificate of Common Stock, $.001 par value, of the Company
(incorporated herein by reference to Exhibit 4.1 to the Company's 2001 Annual
Report on Form 10-K).
4.2 -- Warrants to purchase 30,000 shares of the Company's Common Stock at $12.50 per
share issued to SJMB, L.P. in connection with the acquisition of OF Acquisition,
L.P. (incorporated herein by reference to Exhibit 4.3 to Industrial Holdings,
Inc. Proxy Statement on Schedule 14A dated August 15, 2000).
4.3 -- Warrants to purchase 40,000 shares of the Company's Common Stock for $12.50 per
share issued to SJMB, LP in consideration of a bank guaranty provided on behalf
of Industrial Holdings, Inc. (incorporated herein by reference to Exhibit 10.3 -
Exhibit A to Industrial Holdings, Inc. Proxy Statement on Schedule 14A dated
August 15, 2000).
4.4 -- Warrants to purchase 75,000 shares of the Company's Common Stock for $12.50 per
share issued to SJMB, L.P. as compensation for consulting services (incorporated
herein by reference to Exhibit 4.9 to the Company's 2001 Annual Report on Form
10-K).
4.5 -- Warrants to purchase 30,000 shares of the Company's Common Stock for $12.50 per
share issued to Robert E. Cone as compensation (incorporated herein by reference
to Exhibit 4.10 to the Company's 2001 Annual Report on Form 10-K).
4.6 -- Form of warrant to purchase 325,000 shares of the Company's Common Stock at
$12.80 per share issued to former T-3 shareholders in connection with the merger
of T-3 and Industrial Holdings, Inc. (incorporated herein by reference to Annex
VII to the Definitive Proxy Statement on Schedule 14A of T-3 dated November 9,
2001).
10.1 -- Employment Agreement of Michael L. Stansberry (incorporated herein by reference
to Exhibit 10.1 to the Company's 2001 Annual Report on Form 10-K).
10.2 -- Employment Agreement of Michael T. Mino (incorporated herein by reference to
Exhibit 10.2 to the Company's 2001 Annual Report on Form 10-K).
10.3* -- Employment Agreement of Steven J. Brading
10.4* -- Employment Agreement of W. Hunt Hodge
10.5 -- Registration Rights Agreement dated December 17, 2001, among Industrial
Holdings, Inc. and the Stockholders thereto (incorporated herein by reference to
Exhibit 10.1 to Industrial Holdings, Inc. Report on Form 8-K dated December 31,
2001).
dated December 31, 2001).
10.6 -- Credit Agreement dated December 18, 2001, among T-3 Energy Services, Inc. and
Wells Fargo Bank, National Association, as Agent for the Banks (incorporated
herein by reference to Exhibit 10.2 to the Company's Report on Form 8-K
dated December 31, 2001).
10.7* -- Third Amendment to Credit Agreement between Wells Fargo Bank Texas, National
Association and the Company dated February 20, 2003.
10.8 -- Loan Agreement dated December 18, 2001, among T-3 Energy Services, Inc. and
Wells Fargo Energy Capital, Inc., as agent for the Lenders (incorporated herein
by reference to Exhibit 10.3 to the Company's Report on Form 8-K dated December
31, 2001).
10.9 -- Asset Purchase Agreement dated October 26, 2001 among IHI, American Rivet
Company, Inc. and ARC Acquisition Corp (incorporated herein by reference to
Exhibit 10.4 to the Company's Report on Form 8-K dated December 31, 2001).
10.10 -- Stock Purchase Agreement dated November 14, 2001 between IHI and GHX Acquisition
Corp. (incorporated herein by reference to Exhibit 10.5 to the Company's Report
on Form 8-K dated December 31, 2001).
10.11 -- Asset Purchase Agreement dated November 6, 2001 among IHI, Landreth Metal
Forming, Inc. and Landreth Fastener Corporation (incorporated herein by
reference to Exhibit 10.6 to the Company's Report on Form 8-K dated December 31,
2001).
10.12 -- Stock Purchase Agreement dated November 15, 2001, among IHI, Donald Carlin and
Robert E. Cone with respect to disposition of Beaird Industries, Inc.
(incorporated herein by reference to Exhibit 10.7 to the Company's Report on
Form 8-K dated December 31, 2001).
10.13 -- Stock Purchase Agreement by and between Industrial Holdings, Inc., the
shareholder of A&B Bolt & Supply, Inc., and T-3 Energy Services, Inc. dated May
7, 2001 (incorporated herein by reference to Exhibit 2.1 to Industrial Holdings,
Inc. Report on Form 10-Q dated May 15, 2001).
10.14 -- T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended and restated
effective July 30, 2002 (incorporated herein by reference to the Company's Form
S-8 filed November 18, 2002).
16.1 -- Letter regarding change in certifying accountants (incorporated herein by
reference to the Company's Form 8-K filed June 28, 2002).
21.1* -- Subsidiaries of the Company.
23.1* -- Consent of Ernst & Young LLP with respect to the audited consolidated financial
statements of T-3 Energy Services, Inc. and subsidiaries.
99.1* -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of The Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
99.2* -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of The Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
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* Filed herewith.