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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NUMBER 1-8514
SMITH INTERNATIONAL, INC.
DELAWARE 95-3822631
(State of Incorporation) (IRS Employer Identification No.)
16740 HARDY STREET
HOUSTON, TEXAS 77032
(Present address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code -- 713-443-3370
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Securities registered pursuant to 12(g) of the Act:
TITLE OF EACH CLASS
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Class A Warrants
Class B Warrants
Indicate by check or 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 / /
Aggregate market value of voting stock held by non-affiliates on March 4,
1994: $404,597,613 (38,533,106 shares at closing price on New York Stock
Exchange of $10.50). For this purpose all shares held by officers and directors
and their respective affiliates are considered to be held by affiliates, but
neither the registrant nor such persons concede that they are affiliates of the
registrant.
COMMON SHARES OUTSTANDING ON MARCH 4, 1994 39,314,667
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement related to the Registrant's 1994 Annual
Shareholders Meeting are incorporated by reference into Part III of this Form
10-K.
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/]
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PART I
ITEM 1. BUSINESS
GENERAL
Smith International, Inc. ("Smith" or the "Company") is a leading downhole
drilling tool manufacturer and service company, which manufactures and markets a
wide range of products and services used in the drilling of oil and gas wells.
Smith provides technologically advanced drill bits, and drilling and completion
services to the oil and gas drilling industry. Supplying products and services
to the oil and gas drilling industry represents approximately 92% of the
Company's revenues, with the remainder to the mining and industrial markets. The
following table sets forth the revenues attributable to continuing operations of
the Company for its two major product and service groups:
1993 1992 1991
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
Drill bits............................... $162.3 73 $145.5 69 $166.1 66
Drilling and completion services......... 58.4 27 65.2 31 85.9 34
------ --- ------ --- ------ ---
Total.......................... $220.7 100 $210.7 100 $252.0 100
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
Beginning in March 1994, the Company will also provide drilling fluids and
systems to the oil and gas drilling industry as a result of the Company's
February 28, 1994 acquisition of a 64% interest in M-I Drilling Fluids Company
(M-I). Information about M-I is also provided below.
SALE OF DIRECTIONAL DRILLING BUSINESS
On March 29, 1993, the Company sold its directional drilling systems and
services (DDS) business and certain of its subsidiaries and other affiliates to
Halliburton Company (Halliburton) for 6,857,000 shares of Halliburton common
stock. In April 1993, the Halliburton common stock was sold for $247.7 million.
As a result, the Company recorded income from discontinued operations of $73.6
million including the gain from the sale of the DDS business of $80.1 million.
The gain includes provisions for various fees, expenses and taxes related to the
DDS sale. The DDS business reported revenues of approximately $36.3 million in
the first three months of 1993, $158.7 million in 1992 and $151.1 million in
1991. The DDS business reported operating losses of $6.5 million in the first
three months of 1993, $3.0 million in 1992 and $4.6 million in 1991.
The Company used a portion of the proceeds of the DDS sale to repay certain
debt of the Company. For further discussion, refer to Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ACQUISITIONS OF A-Z/GRANT AND LINDSEY
On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey are leading providers of downhole tools, remedial services
and liner hangers to the oil and gas industry. A-Z/Grant and Lindsey reported
unaudited revenues of $31.6 million in 1993, $29.0 million in 1992, and $31.0
million in 1991. The acquisition was accounted for as a purchase effective
December 22, 1993. The unaudited results of A-Z/Grant and Lindsey from December
22, 1993 to December 31, 1993 were not significant to the operations of the
Company.
ACQUISITION OF M-I DRILLING FLUIDS COMPANY IN 1994
Effective February 28, 1994, the Company acquired a 64% interest in M-I
from Dresser Industries, Inc. (Dresser) for $160 million. M-I was owned 64% by
Dresser and 36% by Halliburton prior to the acquisition. M-I is a leading
provider of environmentally sensitive drilling fluids and systems to the oil and
gas drilling
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industry. The Company purchased the 64% interest in M-I using $80 million of its
cash and issuing a note payable to Dresser for $80 million due on August 28,
1994. M-I reported unaudited revenues of $405.8 million in 1993, $382.6 million
in 1992 and $435.5 million in 1991.
With the completion of the aforementioned acquisitions, the Company has
established itself as a leading supplier of expendable drilling products to the
oil and gas drilling industry. On an unaudited pro forma basis, the combined
total revenues of all of the Company's businesses totaled $658.1 million in
1993.
INDUSTRY OVERVIEW AND BUSINESS OPERATIONS
Substantially all of the Company's products and services are used in the
process of drilling oil and natural gas wells. Therefore, the level of drilling
activity is a useful general indicator of the demand for the products and
services of the Company at any given time. The level of drilling activity is
determined by a variety of factors over which the Company has no control,
including the current and anticipated market price of crude oil and natural gas,
the production levels of the Organization of Petroleum Exporting Countries
("OPEC") and other oil and gas producers, the regional supply and demand for oil
and natural gas, the level of worldwide economic activity and the long-term
effect of worldwide energy conservation measures. The worldwide average active
rig count increased 2.4% from 1,673 in 1992 to 1,713 in 1993, primarily due to
the 5.0% increase in the average U.S. rig count between 1992 and 1993. Overall
the international active rig count increased slightly as an increase in drilling
activity in Canada was partially offset by drilling declines in all major
international areas except the Middle East.
Management anticipates drilling activity in 1994 to approximate 1993
activity levels and intense competition to continue. Some additional drilling
for natural gas is expected to occur during 1994 in the Gulf of Mexico region of
the U.S. due to the increase in natural gas prices over the prior year, the
decline in natural gas reserves and the general emphasis of utilizing natural
gas as an environmentally preferred fuel. Management believes that the Company
is well positioned to benefit from increases in worldwide oil and gas
exploration drilling which may develop in 1994 and beyond and that increased
drilling activity will positively impact the Company's results in the future.
OTHER BACKGROUND INFORMATION
On March 7, 1986, the Company, exclusive of its subsidiaries, filed for
protection under Chapter 11 of the U.S. Bankruptcy Code as a result of a
judgment in the amount of $205.4 million in a patent infringement case relating
to a drill bit patent that has since expired. The Company initiated the
bankruptcy proceedings in order to protect its assets and operations from the
judgment. On December 31, 1987, the Company's plan of reorganization became
effective, and since that date it has conducted its business in the ordinary
course.
During the reorganization, the Company completed an extensive restructuring
of its internal operating divisions and sold certain of its operations in order
to focus on its core businesses. Because the Company sustained its historical
levels of research and engineering expenditures and maintained its share of
industry revenues during this period, management believes that the Company was
not adversely affected by the reorganization.
Industrial Equity (Pacific) Limited, a Hong Kong Corporation ("IEP")
acquired 8,754,892 shares of Common Stock, 933,468 Class A Warrants and 967,133
Class B Warrants in open market purchases beginning in October 1986 and pursuant
to the Company's plan of reorganization. Pursuant to a private placement in
February 1988, IEP acquired preferred stock that was subsequently converted into
the Company's 8.75% Convertible Preferred Stock.
In May 1989, the Board of Directors of the Company was notified by IEP that
IEP wished to explore the possibility of acquiring the remaining shares of the
Company that it did not own. In response to that announcement, a Special
Committee of the Company's Board of Directors was formed. In July 1989, the
Special Committee announced that it intended to solicit offers for the Company
from third parties and "explore alternatives designed to maximize shareholder
value."
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The Company agreed to be acquired by Dresser pursuant to an Agreement and
Plan of Merger, dated November 13, 1989. On December 28, 1989, Dresser exercised
its right to terminate the Merger Agreement based upon circumstances relating to
obtaining clearance under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
On March 19, 1990, the Company and IEP entered into an agreement pursuant
to which the Company and IEP agreed, among other things, that IEP would sell
certain of the Company's securities owned by it in a public offering. The
offering was successful and closed on May 30, 1990. IEP agreed that it would not
acquire any securities in excess of 5% of the Company's Common Stock on a fully
diluted basis for a five year period from the closing of the offering.
DRILL BITS
Products. The Company's drill bits group designs, manufactures and markets
drill bits used in drilling oil and gas wells and mining applications. The
Company offers over 900 drill bits under the Smith Tool(TM), Smith Diamond(TM)
and Smith Mining(TM) product lines. Drill bit sizes range from 5 7/8 to 28
inches in diameter for the petroleum industry and from 2 15/16 to 17 1/2 inches
in diameter for the mining industry. Most bits manufactured by the Company are
three-cone drill bits. The surfaces of the cones are comprised of different
types of pointed structures that are referred to as "cutting structures" or
"teeth." The cutting structures are either an integral part of the steel cone
with a hardmetal applied surface (referred to as "milled tooth") or made of an
inserted material (referred to as "insert") which is usually tungsten carbide.
The Company also manufactures and markets shear bits featuring cutters made
of polycrystalline diamond ("PDC") or natural diamonds. The Company manufactures
PDC's for use in the Company's diamond drill bits, and has patented processes
for applying diamonds to a curved surface with multiple transition layers. The
Company believes that the curved surface diamond insert significantly improves
the ability of diamond shear bits to drill in harder and more abrasive
formations. Smith is the only oilfield equipment manufacturer that develops,
manufactures and markets its own synthetic diamond materials, which provides the
Company a cost and technological advantage with respect to these products. In
addition, the Company's in-house diamond research, engineering and manufacturing
capabilities enhance the Company's ability to develop the application of diamond
technology into Smith drill bits and across other Smith product lines. These
diamond enhanced products last longer and increase penetration rates, which
decreases overall drilling costs in certain formations. The Company believes
that its ability to develop specialized diamond inserts for specific
applications will provide new business opportunities as with Diamond Enhanced
Insert roller cone bits and Impax(TM) hammer bits.
The cutting structures in mining bits are principally tungsten carbide
inserts ("TCI"). Mining bits are typically utilized for shallow drilling to
place explosives for blasting in open pit mining operations. Other mining bits
using both tungsten carbide and diamond enhanced inserts have been designed for
use with air driven percussion tools and are known as hammer bits.
Competition. Besides the Company, Hughes Christensen (a division of
Baker-Hughes, Inc.), Security (a division of Dresser), and Reed/Hycalog (a
division of Camco International, Inc.) are the three major competitors in the
petroleum drill bit business. While the Company and Hughes Christensen maintain
the leading shares of worldwide revenues of three-cone mining drill bits, they
compete with over 20 other competitors.
Competition for sales of petroleum drill bits is generally based on a
number of factors, including performance, quality, reliability, service, price,
technological advances and breadth of products. The Company believes its quality
and reliability as well as technological advances, such as the Diamond Enhanced
Inserts, specialized hardmetal applications and Spinodal bearing features in its
drill bits, further enhance the Company's reputation and competitive advantage.
Competition for sales of mining drill bits generally is based on a number of
factors, including price, performance and availability.
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DRILLING AND COMPLETION SERVICES
Products and Services. The Company manufactures tubular drill string
components within its Drilco product line. These tubular products include drill
collars to provide drilling weight to the bit, Hevi-Wate(TM) drill pipe to
provide stress transition between drill collars and conventional drill pipe or
to provide drilling weight to the bit in horizontal drilling, connecting subs to
attach drill string members of differing diameters and connections and kellys to
rotate the drill string on conventional drilling rigs.
The Company manufactures downhole tools which are also used in the drilling
process. These downhole tools are sold or rented to the end users, and include
stabilizers to centralize the drill string, reamers to maintain a uniform hole
diameter and shock subs to reduce the shock and vibration that occurs in the
drill string.
The Company also manufactures downhole remedial tools for use in connection
with the drill string for specialized drilling and workover operations within
its Servco product line. These remedial tools are sold or rented to the end
users, and typically include supervision services provided by the Company's
employees. These remedial operations include section milling to remove a section
of casing permitting the well to be re-drilled using the existing casing string,
hole opening and underreaming to enlarge the wellbore for proper cementing of
the casing or gravel packing, packer milling to remove production packers,
conventional milling to remove wellbore obstructions, pipe cutting to remove the
casing when a well is abandoned and fishing services to remove obstructions from
well bores primarily during workover operations.
The Company maintains field service centers which provide inspection and
repair services for the Company's drill string components, customer owned
tubular goods and for the Company's rental tools. These field service centers
serve as the distribution points for all the Company's products, and are an
important part of the Company's marketing efforts.
In addition to the above, the recently acquired A-Z International and Grant
Oilfield Tools provides rotating drilling heads, milling tools, Pack-Stock
combination packers and whipstocks for various drilling and remedial activities,
and Lindsey Completion Systems has been an industry innovator in the liner
hanger, completion and cementing equipment product lines.
Competition. Competition in the drilling and completion services market is
primarily based on response time, reliability and price. The Company attributes
its competitive position to its commitment to quality and service which is
evidenced by the Company maintaining quality equipment and trained personnel at
field service centers in almost every major drilling location in the world. The
markets for drilling and completion services are highly fragmented.
DRILLING FLUIDS OPERATIONS
Products and Services. Through the acquisition of M-I, the Company will
provide drilling fluids products, systems, and technical services to end users
engaged in drilling oil, natural gas, and geothermal wells worldwide. Drilling
fluids products and systems are used to cool and lubricate the bit during
drilling operations, contain formation pressures, keep rock cuttings in
suspension to remove them from the hole, and maintain the stability of the
wellbore. Technical services are provided at the wellsite to ensure that the
products and systems are applied effectively to optimize drilling operations.
These services include well-specific products and systems during the planning
phase, testing and recommending adjustments to the properties of the fluids
during the drilling phase, and analyzing well results to improve the drilling of
future wells.
M-I is a global leader in environmentally-sensitive drilling fluids
products and systems as well as equipment related to the control of fluids at
the wellsite. M-I manufactures and distributes more than 200 minerals products
and chemical additives at nearly 30 grinding and chemical plants strategically
located near most of the world's major drilling areas. M-I offers water-base,
oil-base, and synthetic-base drilling fluids systems, each comprised of a number
of individual products designed to ensure that the multiple functions of the
drilling fluid are met. These products include weighting agents such as barite
which control formation pressures; thickening agents or viscosifiers which
improve the carrying capacity of the fluid; thinners and
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dispersants, used to thin a drilling fluid which has become too thick from
formation cuttings; and fluid loss control agents, lost circulation materials,
and other products used to address formation-specific conditions. Major new
products and systems introduced in the last three years include NOVADRIL, a
synthetic-base drilling fluid system; MCAT(TM), a cationic water-base system;
ENVIROTHERM, a high-temperature drilling fluid additive; KLA-CURE(R), an
additive used in suppressing shales; and PIPE-LAX(TM) ENV, an
environmentally-sensitive spotting fluid.
Through its Swaco Geolograph operations, a complete line of solids control,
pressure control, and rig instrumentation products are offered to the worldwide
drilling market on both a sale and rental basis. Key products in the pressure
control line include the D-Gasser and Super Choke which hold dominant market
positions. The solid control product line of shakers, hydroclones, and
centrifuges have been designed to offer operators the option to drill "dry
locations", where drilling fluid waste is minimized and handled in an
environmentally-safe manner. Swaco Geolograph's rig instrumentation line
features the SMART Data Acquisition System, an advanced monitoring system that
measures, monitors, and displays the drilling status of a well with high speed
accuracy.
Competition. Besides M-I, the major competitors in the worldwide drilling
fluids industry are Baroid Drilling Fluids (a subsidiary of Baroid Corporation
which recently merged with Dresser) and Inteq (a division of Baker-Hughes,
Inc.). Together, these three companies supply products and systems to over
two-thirds of the worldwide drilling fluids market. While these companies supply
a majority of the market, the drilling fluids industry is highly competitive,
with a significant number of smaller, locally-based competitors and foreign
multinational drilling fluids suppliers. Competition within the industry is
based on a number of factors, including drilling performance, quality,
reliability, service, price, technological advantages, and breadth of the
product line.
INTERNATIONAL OPERATIONS
Sales to the international oil drilling markets are a key strategic focus
of Smith management, and the Company markets its products and services through
its subsidiaries, joint ventures and sales agents in virtually all petroleum
producing areas of the world, including Canada, the North Sea/Europe, the Middle
East, Mexico, Central and South America, Asia/Pacific and Africa. As a result,
53% of the Company's total revenues from continuing operations in 1993 were
generated from sales in the international markets, compared to 58% in 1992.
Approximately 61% of the Company's revenues are denominated in U.S. dollars.
Historically, international drilling activity has been less volatile than
in the U.S. due to the relatively high costs of exploration and development
programs which can only be undertaken by major oil companies, consortiums and
national oil companies. These entities operate under longer term strategic
priorities than do the independent drilling operators that are more common in
the U.S. market.
SALES AND DISTRIBUTION
The Company markets its products on a worldwide basis, employing Company
sales personnel and independent sales agents. Sales are directed to end users in
the drilling industry including independent drilling contractors, major and
independent oil companies and national oil companies. In the United States,
approximately 75% of all sales are made by Company sales personnel and the
remainder of which are made by independent sales agents.
The Company's sales force is supported by 15 field service centers in the
U.S. and Canada and 27 field service centers outside of North America. The
Company considers that its worldwide sales position has been significantly
enhanced by its field service centers presently maintained in Bolivia, Brazil,
Canada, Colombia, France, Germany, Italy, Mexico, Norway, Singapore, Tunisia,
United Kingdom, United States and Venezuela. These field service centers serve
as bases for the sales force and rental tool operations and also provide an
opportunity to market a wider range of the Company's products than could be
marketed by a sales office. The Company's field service centers are also
important factors in maintaining good customer relations since they are designed
primarily for repair and maintenance of drill string components and rental
tools.
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MANUFACTURING
The Company's manufacturing operations, along with quality control support,
are designed to ensure that all products and services marketed by the Company
will meet standards of performance and reliability consistent with the Company's
reputation in the industry.
The Company lowered its fixed costs and labor costs by closing its
California manufacturing facilities and relocating the manufacturing of the
drill bits to Ponca City, Oklahoma and other products to Houston, Texas in 1989.
This move has permitted the Company to realize significant annual savings since
that date.
Management estimates that the Company has available manufacturing
facilities to accommodate a worldwide demand level equivalent to approximately
3,000 average active drilling rigs which compares to 1,700 average active
drilling rigs estimated for 1994. In addition, the Company has entered into
license agreements and joint ventures with worldwide manufacturers in order to
increase its production capacity for drill bits.
RAW MATERIALS
The Company purchases a variety of raw materials, including alloy and
stainless steel bars, tungsten carbide inserts and forgings. Generally, the
Company is not dependent on any single source of supply for any of its raw
materials or purchased components. The Company currently purchases 80% of the
tungsten carbide inserts used as cutting structures on drill bit cones, wear
pads for stabilizers and hard surface materials for mills and reamers from one
supplier pursuant to a supply agreement entered into in connection with the sale
of a division by the Company to that supplier. In addition, the Company has also
entered into a supply agreement to purchase 80% of its U.S. forging requirements
from a single supplier. The Company believes that numerous alternative supply
sources are available for all of such materials. The Company also produces PDC
synthetic diamonds in Provo, Utah for utilization in various Company products as
well as direct customer sales. The Company believes that it enjoys a competitive
advantage in the manufacture of diamond drill bits because it is the only
diamond drill bit manufacturer producing its own PDC.
PRODUCT DEVELOPMENT, ENGINEERING AND PATENTS
The Company maintains product development and engineering departments in
bit technology and downhole tool technology whose activities are directed to
developing new products and processes, improving existing product lines and
designing specialized products to meet customer requirements. Experimental work
in metallurgy also comprises a significant portion of the work of these
departments. For example, recent new product developments include: tungsten
carbide insert and milled tooth Spinodal(TM) bearing roller cone bits, Diamond
Enhanced Insert roller cone bits, steerable motor PDC and roller cone bits; the
Smith Diamond Maxidrill(TM) products and Diamond Enhanced Impax(TM) hammer bits;
the Servco Millmaster(TM) carbide cutting structure; and the Servco Bearclaw(TM)
PDC underreamer. In recent years, the Company has received special meritorious
awards for engineering innovations sponsored by Petroleum Engineer International
magazine. One such award was for the placement of PDC on curved surfaces for
rock bit cutting structure while another was for the development of a new
hardfacing material for use on milled tooth drill bits.
During 1991, the Company developed FDS+ Milled Tooth Rock Bits for longer
life at higher rates of penetration. The Company continuously attempts to
improve the quality, performance and reliability of its products in order to
maintain its competitive position in the industries it serves and to develop new
tools and materials to meet the evolving market needs.
The Company also maintains a drill bit data base which records the
performance of substantially all drill bits used in the U.S. over the last 10
years, including those manufactured by competitors. This database gives the
Company the ability to monitor, among other things, drill bit failures and
performance improvements with product development. Management believes this
proprietary data base gives the Company a competitive advantage in the drill bit
business.
The Company has historically maintained its research and engineering
expenditures at a high level to enable it to maintain its technological and
performance leadership and broaden its product lines in the drilling
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tools and services industry. The Company's expenditures for research and
engineering activities amounted to $6.6 million in 1993, $6.2 million in 1992
and $8.9 million in 1991. In 1993, research and engineering expenditures
approximated 3.0% of revenues.
Although the Company has over 650 patents and regards its patents and
patent applications as important in the operation of its business, it does not
believe that any significant portion of its business is materially dependent
upon any single patent or group of patents or generally upon patent protection.
EMPLOYEES
At December 31, 1993, the Company had approximately 1,750 full time
employees throughout the world. None of the Company's employees in the United
States are covered by collective bargaining agreements. The Company considers
its labor relations to be satisfactory.
ITEM 2. PROPERTIES
The principal manufacturing facilities of the Company at December 31, 1993
are shown in the table below.
APPROX.
LAND BLDG. SPACE
LOCATION PRINCIPAL PRODUCTS MANUFACTURED (ACRES) (SQ. FT.)
------- ------------------------------ ------- -----------
Houston, Texas........... Tubulars, downhole tools, remedial products, 106.4 720,199
diamond bits
Ponca City, Oklahoma..... Drill bits 15.2 206,800
Saline de Volterra, Drill bits 12.3 129,953
Italy..................
Provo, Utah.............. Synthetic diamond materials 4.0 32,000
The Company considers its manufacturing facilities to be in good condition
and adequately maintained. Due to the downturn in business in recent years, the
Company's manufacturing facilities operated below capacity throughout 1993 and
are continuing to operate below capacity levels. A portion of the Houston, Texas
facility is currently being held for sale by the Company.
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ITEM 3. LEGAL PROCEEDINGS
In January 1991, the Company and several of the Company's competitors were
served with a federal grand jury subpoena for documents, principally concerning
the Company's sales, marketing and pricing activities for tri-cone rock bits
produced and sold by the Company. In June 1992, Baker Hughes entered a plea of
guilty to an Information charging it with a single count of violating Section 1
of the Sherman Act for the period March through May 11, 1989 and agreed to pay a
$1.0 million fine to the U.S. government. On November 23, 1993, the Company
entered a plea of guilty to a violation of Section 1 of the Sherman Act for the
same period and paid a fine to the U.S. government of $0.7 million.
After it was served the subpoena by the grand jury, the Company was served
with complaints in three civil proceedings. Each action alleged violations of
Section 1 of the Sherman Act. The cases were consolidated for discovery purposes
with four other cases filed against other tri-cone rock bit manufacturers, but
not the Company, in the Southern District of Texas, which made allegations
similar to those made against the Company. The consolidated case was captioned
Red Eagle Resources Corporation, Inc., et al. v. Baker Hughes, Inc., Baker
Hughes Production, Inc., Hughes Tool Company, Reed Tool Company, a/k/a/ Baker
RTC, Inc., Camco International, Inc., Smith International, Inc., and Dresser
Industries, Inc., Civil Action No. 91-H-627. In September 1992, the district
court certified the case as a class action. The class consisted of direct
purchasers of rock bits from defendants in the period September 1, 1986, through
January 15, 1992.
On August 27, 1993, without admitting any form of liability, the Company
entered into an agreement with the plaintiffs to settle all claims against the
Company. The Company recorded a special charge of $19.9 million to cover the
cost of the settlement of $16.8 million and related estimated legal fees and
other costs and expenses. On October 28, 1993, an order was entered which gave
final approval to this settlement.
Chevron USA Inc., which opted not to be part of the above mentioned class
action, filed suit against the Company in the United States District Court for
the Southern District of Texas, Houston Division, entitled Chevron USA Inc.,
acting by and through its division Chevron USA Production Company v. Baker
Hughes, Inc., Reed Tool Company a/k/a Baker RTC, Inc., CAMCO International,
Inc., Smith International, Inc. and Dresser Industries, Inc. Cause No. H-93-949,
alleging violations of Section 1 of the Sherman Act. This case is in its early
phase; little formal discovery has occurred; and docket call for the trial of
this matter has been set for January 26, 1996. Management believes that the
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
Executive Life
On March 4, 1992, the Company was served with a complaint in the U.S.
District Court in the Central District of California, entitled Lynn Martin,
Secretary of the U.S. Dept. of Labor v. Smith International, Inc., et al., Case
No. CV-92-1196. The complaint alleges violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") arising out of the Company's purchase of
annuities from Executive Life Insurance Company("Executive Life"), upon the
termination of its Pension Plan in August 1985. The Department of Labor ("DOL")
filed the lawsuit in order to prevent the expiration of the statute of
limitations while it completed its investigation of the Company's purchase of
annuities from Executive Life. In 1993, Executive Life emerged from a
conservatorship proceeding in California state court. The Company believes that
it properly discharged its legal responsibilities with regard to the purchase of
annuities from Executive Life and, consequently, that uninsured losses of the
Company, if any, resulting from the DOL claims will not be material.
Superfund
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 (the "Superfund Act") generally addresses remedial action at sites from
which there has been a "release" of "hazardous substances." Among other things,
the Superfund Act authorizes the U.S. Environmental Protection Agency (the
"EPA") to take any necessary response actions at these sites and, in certain
circumstances, to order those parties liable for the "release" to take response
actions. The EPA may seek reimbursement of expenditures of federal funds from
parties potentially liable under the Superfund Act. Relevant court decisions
have
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interpreted the Superfund Act to impose strict, joint and several liability upon
all persons liable for response costs under the statute with respect to a
particular site, if the harm at such site is indivisible. The Superfund Act
requires the EPA to develop a National Priorities List ("NPL") of sites which
are the most deserving of prompt investigation and remediation. At present,
there are approximately 1,000 sites nationwide on the NPL.
The Sheridan Site. On March 31, 1987, the Sheridan Site Committee (the
"Committee") filed a claim in the Company's Chapter 11 case on behalf of itself
and 59 potentially responsible parties ("PRPs") at the Sheridan Disposal
Services site in Hempstead, Texas, an NPL site. The claim was based on the
Company's alleged liability to the claimants for "contribution and potential
cost recovery for administrative and remedial work" expenses incurred and to be
incurred by them in connection with the Sheridan Disposal site.
On August 28, 1987, the Company reached a settlement with the Committee.
The Committee agreed to withdraw its proof of claim. In return, the Company
agreed to pay its allocable share of response costs incurred by the Committee,
such share to be limited to the lesser of $3 million or 2.93% of actual response
costs. The Company's obligations pursuant to the settlement agreement with the
Committee were not discharged or affected by confirmation of the Company's plan
of reorganization.
The settlement agreement with the Committee further provides that payments
by the Company will be made on the same basis and at the same time as they are
made by members of the Committee whose members have recently agreed to enter
into a judicial consent decree under which they will complete the remedies
selected by EPA under its Record of Decision (the "ROD"), issued in December
1988 and supplemented in September 1989. Based upon the ROD, total remediation
costs are estimated, on a preliminary basis, to be approximately $28 million. On
this basis, the Company's share would be $0.8 million. On October 4, 1989, the
Company entered into a Sheridan Site Trust Agreement together with 37 other
PRPs, providing a mechanism for the disbursement of funds in connection with
remedial action to be performed at the Sheridan Site. Remediation efforts and
expenditures at the Sheridan Site will likely extend over the next five years.
The OII Site. Under the Superfund Act, the EPA has been conducting various
activities at the Operating Industries, Inc. ("OII") site, a disposal site on
the NPL located in Monterey Park, California. The United States, on behalf of
the EPA, filed a proof of claim in the Company's Chapter 11 case alleging that
it had incurred approximately $8 million in response costs to date, and would
continue to incur response costs in the future. Subsequently, the United States
alleged that its costs had increased to over $10 million. In addition to the
United States, 21 other PRPs for cleanup of the OII site also filed proofs of
claim against the Company's estate for contribution or indemnity arising from
any claims asserted against them by the United States for response costs. The
Company objected to the claims of the United States and the PRPs.
On June 14, 1988, the United States District Court entered an order
approving a Stipulation and Agreement to Compromise and Settle EPA's claim
against the Company's estate (the "OII Settlement Agreement"). Under the OII
Settlement Agreement, the claim of the United States was allowed as an amount
(approximately $150,000) sufficient to entitle the EPA to a distribution
pursuant to the Company's plan of reorganization. The Company further agreed to
pay its allocable share of total future site response costs at the OII site,
such share, however, to be limited to the lesser of $5 million or 0.65% of
future site response costs.
On July 15, 1988, the District Court entered a further order withdrawing
and dismissing the general unsecured claims of the 21 potentially responsible
parties and their requests for payment of administrative expenses.
The EPA has issued three ROD's with respect to the OII Site and remediation
work under RODs I and II has commenced. The Company may be requested to make
interim contributions with respect to these RODs. The EPA issued ROD III with
respect to landfill gas control and landfill cover on September 30, 1990. This
ROD includes net present work cost estimates for the work covering 30, 45 and 60
years of project life. The EPA has estimated the cost of this work to exceed
$100 million. Because of the time span involved in the remedy, EPA is working
with certain parties on a South West Early Action Plan ("SWEAP") designed to
address landfill gas issues in the southwestern portion of the OII landfill,
which is near several homes.
9
11
The cost of the final long-term remedy for the clean-up of the OII site is
presently unknown and depends on the nature and extent of contamination at the
site and the remedy which is ultimately selected. The EPA is still preparing its
Remedial Investigation and Feasibility Study ("RI/FS") which will examine the
various alternatives for a final remedy of the site;and anticipates that the
RI/FS may be completed by mid-1994. Actual remediation expenditures will likely
extend for a number of years after a final remedy is selected for the site,
subsequent to completion of the RI/FS.
At this time, the Company is unable to determine the amount it may
ultimately have to contribute to the OII site pursuant to the OII settlement
agreement. This amount will range from the approximately $150,000 that the
Company has already paid to the $5.0 million at which the Company's liability is
capped under the OII settlement agreement.
The Chemform Site. Chemform, Inc. ("Chemform"), a former wholly owned
subsidiary of the Company and, subsequently, the Company itself, operated a
business and held a leasehold interest in property located in Pompano Beach,
Florida (the "Chemform Site") between May 14, 1976 and March 16, 1979, at which
time the Company sold the Chemform business and assigned the lease.
The EPA has been conducting various activities at the Chemform Site under
the Superfund Act and placed the Chemform Site on the NPL on October 4, 1989. In
October 1989, the Company, along with three other PRPs at the Chemform Site,
entered into a consent agreement with the EPA for the preparation of an RI/FS.
An Amendment to that consent agreement, which became effective on April 7, 1992,
specified that the RI/FS for the Chemform Site would be addressed in two
operable units: Operable Unit One addresses Site-related groundwater
contamination, and Operable Unit Two addressed source and soil contamination.
On September 22, 1992, the EPA issued the ROD for Operable Unit One at the
Site. The ROD selected a "No Action with Monitoring" alternative, under which
groundwater would be monitored quarterly for at least one year. On July 13,
1993, the Company, along with two other PRPs and the EPS, executed an
Administrative Order on Consent ("AOC") and Scope of Work ("SOW") which will
govern the implementation of the ROD for Operable Unit One at the Chemform Site.
Under the terms of the AOC and SOW, the Company, along with two other PRPs,
agree to undertake the groundwater monitoring work specified in the AOC and SOW.
In the ROD, EPA estimated the costs of constructing the required groundwater
wells and the cost of one year of groundwater monitoring to be approximately
$0.1 million.
On September 16, 1993, EPA issued the ROD for Operable Unit Two at the
Chemform Site, which addresses site-related soil contamination. The ROD
determined that no further Superfund action is necessary to address Operable
Unit Two at the site; however, the State of Florida, as represented by the
Florida Department of Environmental Protection, has not yet concurred in the ROD
for Operable Unit Two. It is not known whether the State of Florida will do so,
or whether any further proceedings will be required due to the State's lack of
concurrence. The Company believes that the EPA will demand reimbursement of
certain oversight expenses that the EPA allegedly has incurred in administering
the Chemform site. The Company intends to scrutinize and, if necessary,
vigorously contest any such claims made by the EPA.
As of December 31, 1990, the Company recorded a $5.0 million provision for
its estimated liability for clean-up of all of the Company's environmental
matters that were known at that time including the estimated costs to be
incurred regarding the Superfund sites discussed above. In 1993, 1992 and 1991,
the Company paid for various clean-up activities and recorded additional
provisions charged to continuing operations of $0.5 million, $0.4 million and
$0.8 million, respectively, and a provision of $1.5 million charged to the gain
on sale of DDS operations based on revised estimates of required future clean-up
costs. At December 31, 1993, the remaining recorded liability for estimated
future clean-up costs for the sites discussed above as well as properties
currently or previously owned or leased by the Company was $3.6 million. As
additional information becomes available, the Company may be required to provide
for additional environmental clean-up costs for Superfund sites and for
properties currently or previously owned or leased by the Company. However, the
Company believes that none of its clean-up obligations will result in
liabilities having a material adverse effect on the Company's consolidated
financial position or results of operations.
10
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The names and ages of all executive officers of the Company, all
positions and offices with the Company presently held by each person named and
their business experience during the last five years are stated below.
Positions, unless otherwise specified, are with the Company.
NAME, AGE AND POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------------------------- ---------------------------------------------------
Douglas L. Rock (47).................... Chairman of the Board since February 1991; Chief
Chairman of the Board, Chief Executive Executive Officer, President and Chief Operating
Officer Officer since March 1989; President and Chief
Operating Officer from December 1987 to March
1989.
Loren K. Carroll (50)................... Executive Vice President and Chief Financial
Executive Vice President and Chief Officer since October 1992; member of the Board of
Financial Officer Directors since November 1987; President of
Geneva Business Services and a Director of Geneva
Companies from March 1989 to October 1992;
Executive Vice President and Chief Financial
Officer of the Company from January 1988 to March
1989.
Neal S. Sutton (48)..................... Vice President -- Administration since March 1992;
Vice President -- Administration, Vice President, Secretary and General Counsel of
General Counsel and Secretary the Company since January 1991; Associate General
Counsel of Cooper Industries, Inc. from November
1989 to December 1990; General Counsel and
Secretary of Cameron Iron Works, Inc. from 1977
to November 1989.
Bryan L. Dudman (37).................... Vice President -- Worldwide Bit Operations since
Vice President -- Worldwide Bit December 1993; Vice President -- Worldwide
Operations Operations from March 1993 to December 1993; Vice
President -- Western Hemisphere from September
1990 to March 1993. Vice President
Operations -- United States/Canada from May 1987
to September 1990.
D. Barry Heppenstall (47)............... Vice President and General Manager -- Drill Bits
Vice President and General Manager -- since March 1992; Vice President -- Smith Tool
Drill Bits Manufacturing from September 1990 to March 1992;
Vice President -- SII Manufacturing from April
1987 to September 1990.
John J. Kennedy (41).................... Treasurer since May 1991; Treasury Director
Treasurer responsible for International Operations from
November 1987 to May 1991.
Richard A. Werner (52).................. Vice President and General Manager -- Smith
Vice President and General Manager -- Drilling and Completion Services since December
Smith Drilling and Completion Services 1993; Vice President and General
Manager -- Drilco/Servco from March 1993 to
December 1993; Vice President and General
Manager -- Downhole Tools and Services from May
1991 to March 1993; Vice President Operations of
Triumph-LOR, Inc. from April 1987 to May 1991.
(b) All officers of the Company are elected annually by the Board of
Directors at the meeting of the Board of Directors regularly held immediately
following the annual meeting of shareholders. They hold office until their
successors are elected and qualified.
11
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Common Stock of the Company is traded on the New York Stock Exchange
and the Pacific Stock Exchange. The following are the high and low sale prices
for the Company's Common Stock as reported on the New York Stock Exchange
Composite Tape for the periods indicated.
COMMON STOCK
----------------
HIGH LOW
---- ---
1992
First Quarter..................................................... 8 7/8 6 1/8
Second Quarter.................................................... 10 5/8 7 3/8
Third Quarter..................................................... 9 1/2 8
Fourth Quarter.................................................... 10 1/8 7 3/8
1993
First Quarter..................................................... 10 3/8 8
Second Quarter.................................................... 10 7/8 9 1/8
Third Quarter..................................................... 10 7/8 8 1/2
Fourth Quarter.................................................... 11 1/2 7 3/4
On March 4, 1994, the Company had approximately 5,380 Common Stock holders
of record and the last reported closing price on the New York Stock Exchange
Composite Tape was $10.50.
The Company has not paid dividends on its Common Stock since the first
quarter of 1986. The Company's indenture relating to its long-term debt contains
covenants restricting the payment of cash dividends to the Company's common
Stockholders based on net earnings and operating cash flow formulas as defined
in the indenture. In addition to compliance with the indenture, the
determination of the amount of future cash dividends to be declared and paid on
the Common Stock, if any, will depend upon the Company's financial condition,
earnings and cash flow from operations, the level of its capital expenditures,
its future business prospects and other factors that the Board of Directors deem
relevant.
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ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA(A):
Revenues........................ $220,712 $210,669 $251,967 $255,383 $214,544
Gross profit.................... 82,542 74,114 99,966 96,320 71,067
Income (loss) from continuing
operations before litigation
settlement, interest and
taxes......................... 18,575 10,260 10,673(d) 28,485 9,012
Income (loss) from continuing
operations before
extraordinary
tax credit and change in
accounting principle.......... (3,995)(b) 1,164 (5,013) 5,574 (6,671)
Income (loss) from discontinued
operations(a)................. 73,623(a) (2,975) (4,623)(d) 5,006 3,368
Income (loss) before
extraordinary tax credit and
change in accounting
principle..................... 69,628 (1,811) (9,636) 10,580 (3,303)
Net income (loss)............... 68,328(c) (1,811) (9,636)(d) 15,801(f) (3,303)
PER SHARE DATA:
Income (loss) applicable to
common stock --
From continuing operations
before extraordinary tax
credit
and change in accounting
principle.................. $ (.13) $ (.02) $ (.22) $ .13 $ (.29)
From discontinued
operations................. 1.95 (.08) (.16) .16 .11
From extraordinary tax
credit..................... -- -- -- .17 --
From the change in accounting
principle.................. (.03)(c) -- -- -- --
Net income (loss)............. $ 1.79 $ (.10) $ (.38) $ .46 $ (.18)
BALANCE SHEET DATA
(AT DECEMBER 31):
Total assets.................... $348,386 $370,482 $397,335 $395,628 $325,869
Long-term debt.................. $ 46,000(a) $ 46,000(a) $100,020(e) $145,520 $138,405
Total shareholders' equity...... $214,466 $149,785 $157,006(e) $118,356 $101,310
- ---------------
(a) In March 1993, the Company sold its DDS business to Halliburton resulting in
income from discontinued operations of $73.6 million. This amount includes
the gain from the sale of the DDS business of $80.1 million. As a result,
the financial data for the periods 1989 through 1992 has been restated to
report the results of the DDS business as discontinued operations. The
Company used a portion of the proceeds from the DDS sale to repay its bank
debt and $49.0 million of notes payable to insurance companies. The
Company's remaining debt, totaling $46.0 million, is presented as long-term
debt at December 31, 1993 and 1992. See Notes 2 and 6 of Notes to
Consolidated Financial Statements.
(b) In September 1993, the Company agreed to settle a class action civil lawsuit
which alleged violations of Section 1 of the Sherman Act. As a result, the
Company recorded a special charge of $19.9 million to cover the cost of the
settlement and related legal fees and other costs and expenses. See Note 16
of Notes to Consolidated Financial Statements.
(Notes continued on following page)
13
15
(c) During the first quarter of 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." As
a result of adopting SFAS No. 106, the Company recorded the total
outstanding liability related to such retiree benefits of $1.3 million as
the cumulative effect of a change in accounting principle in the
Consolidated Statements of Operations. See Note 11 of Notes to Consolidated
Financial Statements.
(d) In 1991, the Company recorded $22.2 million of non-recurring charges related
primarily to the restructuring of its worldwide operations in response to a
decline in U.S. drilling activity. The non-recurring charges consisted of
$21.2 million of charges related to the restructuring and an additional
$1.0 million tax provision to reflect expected tax settlements of prior
year foreign tax liabilities of certain of the Company's subsidiaries. The
amount of restructuring charges related to the continuing operations of the
Company of $18.4 million in 1991 was charged to income (loss) from
continuing operations before interest and taxes. The amount of
restructuring charges related to the DDS business of $2.8 million is
recorded in the results of discontinued operations in 1991. See Notes 3 and
8 of Notes to the Consolidated Financial Statements.
(e) In 1991, the Company paid off its Series B Notes totaling $44.7 million from
the $50.0 million proceeds of its temporary warrant reduction offers and
its issuance of 992,000 shares of additional common stock. See Notes 6 and
9 of Notes to Consolidated Financial Statements.
(f) In accordance with APB No. 11, the Company recognized an extraordinary tax
credit of $7.5 million in 1990 resulting from utilization of operating loss
carryforwards of which approximately $5.2 million related to continuing
operations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Substantially all of the products and services of the Company are used in
the process of drilling an oil or natural gas well. Consequently, drilling
activity is closely followed by the oil service industry as it is an indicator
of the overall market demand for the Company's products and services. Although
the average active drilling rig count is one indicator of the Company's
potential market, another important factor is the mix of natural gas and oil
wells being drilled.
During 1993, the United States average rig count increased by 5.0% from
1992 activity levels while the 1993 international average rig count increased
slightly from 1992 levels. The United States drilling activity rebounded from
the record low activity levels experienced during 1992 as a result of the
improvement in natural gas prices experienced during 1993. Although the average
international rig count did not change substantially from 1992 levels, there
were significant activity changes between international drilling markets, as all
international areas experienced drilling activity declines except Canada and the
Middle East.
Management anticipates drilling activity in 1994 to approximate 1993
activity levels and intense competition to continue. Some additional drilling
for natural gas is expected to occur during 1994 in the Gulf of Mexico region of
the U.S. due to the increase in natural gas prices during the prior year, the
decline in natural gas reserves and the general emphasis utilizing natural gas
as an environmentally preferred fuel. Management believes that the Company is
well positioned to benefit from increases in worldwide oil and gas exploration
drilling which may develop in 1994 and beyond and that greater drilling activity
will positively impact the Company's results in the future.
SALE OF DIRECTIONAL DRILLING BUSINESS
On March 29, 1993, the Company sold its directional drilling systems and
services (DDS) business and certain of its subsidiaries and other affiliates to
Halliburton Company (Halliburton) for 6,857,000 shares of Halliburton common
stock. In April 1993, the Halliburton common stock was sold for $247.7 million.
As a result, the Company recorded income from discontinued operations of $73.6
million including the gain from the sale of the DDS business of $80.1 million.
The gain includes provisions for various fees, expenses and taxes related to the
DDS sale. The DDS business reported revenues of approximately $36.3 million in
the first three months of 1993, $158.7 million in 1992 and $151.1 million in
1991.
The Company used a portion of the proceeds of the DDS sale to repay certain
debt of the Company. For further discussion, refer to "Liquidity and Capital
Resources" below.
ACQUISITIONS OF A-Z/GRANT AND LINDSEY
On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey are leading providers of downhole tools, remedial services
and liner hangers to the oil and gas industry. A-Z/Grant and Lindsey reported
unaudited revenues of $31.6 million in 1993, $29.0 million in 1992, and $31.0
million in 1991. The acquisition was accounted for as a purchase effective
December 22, 1993. The results of A-Z/Grant and Lindsey from December 22, 1993
to December 31, 1993 were not significant to the operations of the Company.
ACQUISITION OF M-I DRILLING FLUIDS COMPANY IN 1994
Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids Company (M-I) from Dresser Industries, Inc. (Dresser) for $160
million. M-I was owned 64% by Dresser and 36% by Halliburton prior to the
acquisition. M-I is a leading provider of environmentally sensitive drilling
fluids and systems to the oil and gas drilling industry. The Company purchased
the 64% interest in M-I using $80 million of its cash and issuing a note payable
to Dresser for $80 million due on August 28, 1994. The acquisition will
15
17
be accounted for as a purchase. M-I reported unaudited revenues of $405.8
million in 1993, $382.6 million in 1992 and $435.5 million in 1991.
PRO FORMA DATA
The unaudited pro forma revenues and income from continuing operations for
the year ended December 31, 1993 assuming the acquisitions of A-Z/Grant and
Lindsey and M-I had been made on January 1, 1993 are as follows:
Unaudited Pro Forma Revenues.............................................. $658,124
Unaudited Pro Forma Income from Continuing Operations..................... $ 1,652
Unaudited Income from Continuing Operations per Common Share.............. $ 0.02
Refer to page 22 for a more complete presentation of the unaudited pro
forma statement of income (loss) from continuing operations and unaudited pro
forma balance sheet.
RESULTS OF OPERATIONS
Revenues
The tools and equipment manufactured and the services provided by the
Company fall into two major product and service groups that are marketed
throughout the world. The following table sets forth the amounts and percentages
of revenues by major product group and by area:
1993 1992 1991
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
Breakdown by Product Group:
Drill bits................................. $162.3 73 $145.5 69 $166.1 66
Drilling and completion services........... 58.4 27 65.2 31 85.9 34
------ ----- ------ ----- ------ -----
Total.............................. $220.7 100 $210.7 100 $252.0 100
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
Breakdown by Area:
Domestic................................... $104.4 47 $ 88.2 42 $110.2 44
Export..................................... 29.9 14 27.9 13 33.4 13
International.............................. 86.4 39 94.6 45 108.4 43
------ ----- ------ ----- ------ -----
Total.............................. $220.7 100 $210.7 100 $252.0 100
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
Average Active Rig Count:
Domestic................................... 757 721 860
Canada..................................... 183 96 121
International (excluding Canada)........... 773 856 909
------ ------ ------
Total.............................. 1,713 1,673 1,890
------ ------ ------
------ ------ ------
Drill Bits
Drill bit revenues are generated from the sale of petroleum drill bits and
mining bits. Petroleum drill bit revenues increased $18.3 million or 14.4% from
$127.5 million in 1992 to $145.8 million in 1993 due primarily to higher sales
and improved pricing in the United States and Canada resulting from the increase
in North American drilling activity and increased sales into the former Soviet
Union. These increases were partially offset by reduced sales in the North Sea
area due to lower drilling activity and reduced volume in Mexico and Italy.
Petroleum drill bit revenues declined $18.0 million or 12.4% from $145.5 million
in 1991 to $127.5 million in 1992 due primarily to the decline in worldwide
drilling activity, principally in the U.S. and Canada, and price reductions
resulting from competitive pressures. This decrease was partially offset by an
increase of 16.0% in diamond bit sales.
16
18
Mining drill bit revenues decreased $1.5 million or 8.3% from $18.0 million
in 1992 to $16.5 million in 1993 due to reduced sales to Canadian iron ore
producers. Mining drill bit revenues decreased $2.6 million or 12.6% from $20.6
million in 1991 to $18.0 million in 1992 due to lower domestic and export
activity.
Drilling and Completion Services
Drilling and completion services revenues decreased $6.8 million or 10.4%
from $65.2 million in 1992 to $58.4 million in 1993 due to lower international
drilling activity primarily in the Europe/Africa region, the Middle East and
Mexico. These declines were partially offset by increased sales in Canada.
Drilling and completion services revenues decreased $20.7 million or 24.1% from
$85.9 million in 1991 to $65.2 million in 1992 due to reduced worldwide drilling
activity, primarily the U.S., and lower sales in Australia, the Middle East,
Africa and the United Kingdom. The Company also discontinued its inspection
business in the United Kingdom and closed certain service centers in the U.S. in
1992.
For the periods indicated, the following table summarizes the results of
continuing operations of the Company and presents results as a percentage of
total revenues of the continuing operations:
YEAR ENDED DECEMBER 31
-----------------------------------------------
1993 1992 1991
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
Product sales................................ $177.0 80 $166.6 79 $195.1 77
Rentals, services and other revenues......... 43.7 20 44.1 21 56.9 23
------ --- ------ --- ------ ---
Total revenues..................... 220.7 100 210.7 100 252.0 100
------ --- ------ --- ------ ---
Cost of product sales........................ 104.4 47 99.7 47 104.4 41
Cost of rentals, services and other
revenues................................... 33.8 16 36.9 18 47.6 19
------ --- ------ --- ------ ---
Total cost of sales................ 138.2 63 136.6 65 152.0 60
------ --- ------ --- ------ ---
Gross profit....................... 82.5 37 74.1 35 100.0 40
------ --- ------ --- ------ ---
Selling expenses............................. 42.0 19 41.6 20 45.5 18
General and administrative expenses.......... 21.9 10 22.2 10 25.4 10
Restructuring charges........................ -- -- -- -- 18.4 8
------ --- ------ --- ------ ---
Income from continuing operations before
litigation settlement, interest and
taxes...................................... 18.6 8 10.3 5 10.7 4
Litigation settlement........................ 19.9 9 -- -- -- --
Interest expense, net........................ 2.2 1 10.1 5 12.8 5
------ --- ------ --- ------ ---
Income (loss) from continuing operations
before income taxes........................ (3.5 ) (2) 0.2 -- (2.1 ) (1)
Income tax provision (benefit)............... 0.5 -- (1.0 ) (1) 2.9 1
------ --- ------ --- ------ ---
Income (loss) from continuing operations
before
cumulative effect of change in accounting
principle.................................. $(4.0 ) (2) $ 1.2 1 $(5.0 ) (2)
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
1993 Versus 1992
Revenues for 1993 increased $10.0 million or 4.7% from $210.7 in 1992 to
$220.7 in 1993. Revenues in the United States and Canada increased due primarily
to increased drilling activity. These increases were partially offset by lower
revenues outside of North America due to lower drilling activity. Domestic
revenues increased $16.2 million, or 18.4%, from $88.2 million in 1992 to $104.4
million in 1993 due to a 5.0% increase in the average U.S. rig count and
improved pricing. International revenues decreased by $6.2 million or 5.1% from
$122.5 million in 1992 to $116.3 million in 1993 due to the 9.7% decline in
international drilling activity which was partially offset by revenues in Canada
and the former Soviet Union.
17
19
Product sales increased $10.4 million or 6.2% from $166.6 in 1992 to $177.0
million in 1993 due primarily to the increase in drilling activity in the United
States and Canada partially offset by lower sales in the North Sea, the Middle
East and Mexico. Rentals, services and other revenues decreased $0.4 million or
0.9% from $44.1 million in 1992 to $43.7 million in 1993 as a result of lower
drilling activity in the Europe/Africa region and the Middle East.
Gross profit increased $8.4 million or 11.3% from $74.1 million in 1992 to
$82.5 million in 1993. Gross profit on product sales increased $5.7 million or
8.5% from $66.9 million in 1992 to $72.6 million in 1993 due to higher sales and
improved pricing in the United States and Canada. Gross profit on rentals,
services and other revenues increased $2.7 million or 37.5% from $7.2 million in
1992 to $9.9 million in 1993 due to lower operating costs in the United States
and Canada.
Operating expenses, comprised of selling expenses and general and
administrative expenses, increased by $0.1 million or 0.2% from $63.8 million in
1992 to $63.9 million in 1993. The increase was due primarily to higher variable
selling expenses relating to the higher North American sales and higher legal
expenses associated with the drill bit litigation. These increases were reduced
by lower personnel levels due to cost reduction actions and lower foreign
currency translation losses. Operating expenses as a percentage of revenues
decreased from 30.3% in 1992 to 29.0% in 1993.
On August 27, 1993, without admitting any form of liability, the Company
entered into an agreement to settle a class action civil lawsuit pending in the
federal district court in Houston. The lawsuit alleged that the Company and
other defendants violated Section 1 of the Sherman Act. The Company recorded a
special charge of $19.9 million to cover the cost of the settlement and related
estimated legal fees and other costs and expenses. On October 28, 1993, an order
was entered which gave final approval to this settlement.
Interest expense decreased $4.6 million or 43.4% from $10.6 million in 1992
to $6.0 million in 1993 due to the refinancing of long-term debt in the fourth
quarter of 1992 and the repayment of debt from the proceeds of the DDS sale.
Interest income increased due to a higher level of short-term investments
resulting from the investment of the proceeds of the DDS sale.
The tax provision of $0.5 million for 1993 consists primarily of foreign
taxes on income. The tax benefit of $1.0 million in 1992 relates primarily to a
$2.5 million benefit related to the settlement of a U.S. tax claim with the IRS.
The Company provides for U.S. taxes at the statutory rate offset by tax benefits
related to the U.S. net operating loss (NOL) carryforwards, available to the
Company as well as foreign taxes. During 1993, the Company adopted Statement of
Financial Accounting Standard No. 109 for accounting for income taxes. The
adoption did not materially affect the 1993 results.
1992 Versus 1991
Revenues for 1992 decreased $41.3 million or 16.4% from $252.0 million in
1991 to $210.7 million in 1992 due primarily to an 11.5% decline in the average
worldwide rig count. International revenues decreased $19.3 million or 13.6%
from $141.8 million in 1991 to $122.5 million in 1992 due primarily to lower
Canadian drilling activity, lower volume in the Middle East, France, the U.K.
and Australia and reduced revenues in the Far East due to increased competition
and pricing pressure. Domestic revenues decreased $22.0 million, or 20.0%, from
$110.2 million in 1991 to $88.2 million in 1992 due to a 16.2% decline in the
average U.S. rig count and competitive pricing pressures.
Product sales decreased $28.5 million or 14.6% from $195.1 million in 1991
to $166.6 million in 1992 due primarily to the decline in U.S. and Canadian
drilling activity and competitive pricing pressures in the U.S. and Far East.
Rentals, services and other revenues decreased $12.8 million or 22.5% from $56.9
million in 1991 to $44.1 million in 1992 due to reduced U.S. drilling activity,
lower demand in Africa, Australia and the Middle East and the closing of certain
service centers in the United States and the discontinuance of the inspection
business in the United Kingdom.
Gross profit decreased $25.9 million or 25.9% from $100.0 million in 1991
to $74.1 million in 1992. Gross profit on product sales decreased by $23.8
million or 26.2% from $90.7 million in 1991 to $66.9 million in 1992 due to
lower volumes in aforementioned areas and competitive pricing pressures
principally in the U.S. and
18
20
Far East. Gross profit on rentals, services and other revenues decreased by $2.1
million or 22.6% from $9.3 million in 1991 to $7.2 million in 1992 due primarily
to lower U.S., Australia and the United Kingdom revenue levels.
Operating expenses, comprised of selling expenses and general and
administrative expenses, decreased by $7.1 million or 10.0% from $70.9 million
in 1991 to $63.8 million in 1992. This decrease was due primarily to lower
variable selling expenses associated with reduced revenues offset by currency
translation losses in 1992 compared to currency translation gains in 1991.
Operating expenses as a percentage of revenues increased from 28.1% in 1991 to
30.3% in 1992.
In 1991, the Company recorded $22.2 million of non-recurring charges
related primarily to the restructuring of its worldwide operations in response
to the decline in U.S. drilling activity. The non-recurring charges consisted
primarily of $21.2 million of restructuring charges composed of $9.9 million for
estimated severance and relocation costs, a writedown of $5.7 million related to
fixed assets of closed and downsized locations, a provision of $3.7 million to
expense certain manufacturing inefficiencies and $1.9 million related to other
non-recurring restructuring charges. The Company also recorded an additional
$1.0 million tax provision to reflect expected tax settlements of prior year
foreign tax liabilities of certain of the Company's subsidiaries. The amount of
restructuring charges related to the continuing operations of the Company of
$18.4 million was charged to income from continuing operations before interest
and taxes. The amount of the restructuring charges related to the DDS business
in 1991 of $2.8 million was recorded in the results of discontinued operations.
The $1.0 million tax provision was charged against continuing operations.
Interest expense decreased $3.2 million or 23.2% from $13.8 million in 1991
to $10.6 million in 1992 due primarily to lower long-term debt resulting from
the repayment of the Series B Notes in December, 1991, the refinancing of
long-term debt in the fourth quarter of 1992 and lower short-term interest
rates. Interest income decreased $0.5 million or 50.0% from $1.0 million in 1991
to $0.5 million in 1992 due primarily to lower short-term interest rates.
The tax benefit of $1.0 million at December 31, 1992 relates primarily to a
$2.5 million benefit related to the settlement of a U.S. tax claim with the IRS.
See Note 8 to the Notes to Consolidated Financial Statements. The Company
provides for U.S. taxes at the statutory rate offset by tax benefits related to
the U.S. NOL carryforwards available to the Company as well as foreign taxes.
In addition to the $1.0 million foreign tax provision discussed above, the
tax provision of $2.9 million at December 31, 1991 provides for U.S. taxes at
the statutory rate offset by tax credits related to the U.S. NOL carryforwards
available to the Company as well as foreign taxes. During 1991, the Company
adopted Statement of Financial Accounting Standard No. 96 for accounting for
income taxes. The adoption did not materially affect the 1991 results.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's cash position at December 31, 1993 totaled $101.6 million or
an increase of $85.3 million from the Company's cash position at December 31,
1992. The Company's current ratio increased to 3.20 to 1 at December 31, 1993
from 1.77 to 1 at December 31, 1992. The improvement in cash and the current
ratio arises due to proceeds received from the sale in 1993 of the DDS business
to Halliburton offset by debt repayment of $102.6 million, payments of $19.9
million related to a litigation settlement and the payment of $19.0 million to
acquire A-Z/Grant and Lindsey.
The Company was required to repay its bank debt in connection with the DDS
sale. The Company also granted options which expired on July 23, 1993 to its
insurance company lenders for early repayment of their debt at a reduced make
whole premium. On April 12, 1993, the Company used a portion of the proceeds of
the DDS sale to retire its domestic credit facility totaling $37.2 million, its
domestic bank term loan totaling $16.4 million and $39.0 million of notes
payable with insurance companies. On July 23, 1993, the Company repaid an
additional $10.0 million of notes payable with insurance companies. The
Company's remaining debt totaling $46.0 million at December 31, 1993 is
classified as long-term. The accompanying December 31, 1992
19
21
balance sheet has also been restated to classify the $46.0 million of debt as
long-term. The Company has renegotiated its loan agreements with the insurance
companies to amend certain financial covenants as well as to release the
collateral under the loan indenture. The Company was in compliance with its loan
covenants under the amended loan indenture at December 31, 1993. See Note 6 of
the Notes to Consolidated Financial Statements.
Certain of the Company's foreign subsidiaries have short-term lines of
credit with various foreign banks totaling approximately $1.7 million. At
December 31, 1993, the Company had borrowed $0.7 million under these lines. The
majority of these lines are unsecured.
The Company has annual interest requirements of approximately $4.5 million
under its existing long-term debt. The Company's indenture relating to its
long-term debt contains covenants restricting the payment of cash dividends to
the Company's common stockholders based on net earnings and operating cash flow
formulas as defined in the indenture. The Company has not paid dividends on its
Common Stock since the first quarter of 1986. In addition to compliance with the
covenants of the indenture, the determination of the amount of future cash
dividends to be declared and paid on the Common Stock, if any, will depend upon
the Company's financial condition, earnings and cash flow from operations, the
level of its capital expenditures, its future business prospects and other
factors that the Board of Directors deem relevant.
On March 2, 1994, the Company used $80.0 million of its cash and issued a
note payable totaling $80.0 million to Dresser to acquire its 64% interest in
M-I. The note payable to Dresser bears interest at LIBOR +2% and is due on
August 28, 1994. The Company has commitments to refinance the Dresser note
payable with a $40 million term loan from its insurance company lenders and a
$65 million revolving line of credit from a bank group. The term loan will bear
interest at 6.02 percent and be payable over a period ending in January 1998.
The revolving line of credit will be due in March 1997 and bear interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. Management believes that such
financing will be completed by the end of March 1994.
The Company believes that it has sufficient existing manufacturing capacity
to meet current demand for its products and services. Projected capital
expenditures in 1994, excluding M-I capital expenditures, will approximate $14
million.
The Company currently expects to be able to meet its ongoing working
capital and capital expenditure requirements from existing cash on hand,
operating cash flow and existing credit facilities or credit facilities to
be arranged as discussed above.
The Company has been named as a potentially responsible party in connection
with three sites on the U.S. Environmental Protection Agency's National
Priorities List. At December 31, 1993, the remaining recorded liability for
estimated future clean-up costs for Superfund sites as well as properties
currently or previously owned or leased by the Company was $3.6 million. As
additional information becomes available, the Company may be required to provide
for additional environmental clean-up costs. However, the Company believes that
none of its clean-up obligations will result in liabilities having a material
adverse effect on the Company's consolidated financial position or results of
operations. See Item 3. "Legal Proceedings -- Superfund" for further discussion.
Because of its substantial foreign operations, the Company is exposed to
currency fluctuations and exchange risks. The Company tries to limit these risks
by matching, to the extent possible, assets and liabilities denominated in
foreign currencies and using hedging instruments to cover certain unmatched
positions.
Inflation has not had a material effect on the Company in the last few
years, and the effect is expected to be minor in the near future. In general,
the Company has been able to offset most of the effects of inflation through
productivity gains, cost reductions, and price increases.
20
22
Net Operating Loss Carryforwards
As of December 31, 1993, for U.S. tax reporting purposes, the Company had
NOL carryforwards of approximately $148.5 million, expiring between 2001 and
2007, which should be available to offset future U.S. taxable income. Upon
certain changes in equity ownership of the Company, however, the Company's
ability to utilize its NOL carryforwards may become subject to limitation under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code").
Management believes that the application of Section 382 will not materially
limit the availability of the NOL carryforwards.
21
23
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma statement of income (loss) from
continuing operations for the year ended December 31, 1993 presents the
acquisitions of M-I and A-Z/Grant and Lindsey as though the acquisitions were
effective January 1, 1993. The unaudited pro forma statement of income (loss)
from continuing operations gives effect to the acquisitions under the purchase
method of accounting and the assumptions included in the accompanying unaudited
notes to pro forma financial statements. The unaudited pro forma statement of
income (loss) from continuing operations reflect the amortization of estimated
goodwill, additional depreciation expense related to the estimated write-up of
fixed assets and rental tools of A-Z/Grant and Lindsey and estimated adjustments
to interest, taxes and minority interest.
The following unaudited pro forma balance sheet as of December 31, 1993
presents the acquisition of M-I as if the acquisition had occurred at December
31, 1993. The unaudited pro forma balance sheet reflects the acquisition under
the purchase method of accounting and the assumptions included in the
accompanying unaudited notes to pro forma financial statements. The unaudited
pro forma balance sheet reflects only those adjustments relating to the
acquisition of M-I, the consolidation of the Company's 64% interest in M-I and
certain estimated asset and liability valuation adjustments anticipated to
result from the Company's allocation of the purchase price to the accounts of
M-I at February 28, 1994.
Management has not fully evaluated all of the consequences of the
acquisition of M-I including assessing the fair market value of the assets
acquired and the total amount of costs that may be necessary to consolidate the
operations of M-I with the Company. As a result, the current estimate of the
excess of the purchase price over net assets acquired in the acquisition of M-I
totaling $51.2 million has been reflected as goodwill in the unaudited pro forma
balance sheet. Upon completion of these evaluations during 1994, any additional
asset and liability adjustments and the adjusted excess purchase price over net
assets acquired will be recorded in accordance with purchase accounting rules
and principles.
The unaudited pro forma financial statements are not intended to be
indicative of the results that would have occurred if the acquisitions had been
effective as of the dates indicated or that may be obtained in the future. The
unaudited pro forma financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company included
elsewhere in this Form 10-K.
22
24
SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA STATEMENT OF
INCOME (LOSS) FROM CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
UNAUDITED
----------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------- -------------------------
A-Z/GRANT
SMITH & LINDSEY M-I ADJUSTMENTS COMBINED
-------- --------- -------- ----------- --------
Revenues...................... $220,712 $31,600 $405,812 $658,124
Cost of Revenues.............. 138,170 23,200 247,045 27,122(a) 436,134
597(b)
-------- --------- -------- ----------- --------
Gross Margin.................. 82,542 8,400 158,767 (27,719) 221,990
Operating Expenses:
Selling Expenses............ 41,997 4,600 119,249 (27,122)(a) 138,724
General and Administrative
Expenses................. 21,970 1,000 18,231 41,201
Equity in Joint Ventures and
Other Income, net........ -- -- (6,051) 1,279(c) (4,597)
175(d)
-------- --------- -------- ----------- --------
Total Operating
Expenses............ 63,967 5,600 131,429 (25,668) 175,328
-------- --------- -------- ----------- --------
Income from Continuing
Operations Before Litigation
Settlement, Interest and
Taxes....................... 18,575 2,800 27,338 (2,051) 46,662
Litigation Settlement......... 19,900 -- -- 19,900
Interest Expense (Income),
net......................... 2,202 -- (628) 4,800(e) 10,434
4,060(f)
-------- --------- -------- ----------- --------
Income (Loss) From Continuing
Operations Before Income
Taxes....................... (3,527) 2,800 27,966 (10,911) 16,328
Income Tax Provision.......... 468 -- 6,289 115(g) 6,872
-------- --------- -------- ----------- --------
Income (Loss) From Continuing
Operations Before Minority
Interest.................... (3,995) 2,800 21,677 (11,026) 9,456
Minority Interest............. -- -- 7,804 7,804
-------- --------- -------- ----------- --------
Income (Loss) From Continuing
Operations.................. ($ 3,995)(h) $ 2,800 $ 13,873 $ (11,026) $ 1,652(h)
-------- --------- -------- ----------- --------
-------- --------- -------- ----------- --------
Average Common and Equivalent
Shares Outstanding.......... 37,775 37,775
-------- --------
-------- --------
Income (Loss) from Continuing
Operations Per Common
Share....................... ($ 0.13)(h) $ 0.02(h)
-------- --------
-------- --------
See accompanying unaudited notes to pro forma financial statements.
23
25
SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
UNAUDITED
--------------------------------------
HISTORICAL PRO FORMA
--------------------- -------------------------
SMITH M-I ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(i)
ASSETS
Current Assets:
Cash and Cash Equivalents.................... $101,561 $ (2,203) $ (80,000)(j) $ 16,858
(2,500)(k)
Receivables.................................. 67,830 112,132 (1,280)(n) 178,682
Inventory.................................... 81,654 85,432 (7,040)(n) 160,046
Prepaid Expense and Other.................... 4,802 3,832 8,634
-------- -------- ----------- --------
Total Current Assets................. 255,847 199,193 (90,820) 364,220
-------- -------- ----------- --------
Rental Tools, net.............................. 20,510 -- 20,510
Property, Plant and Equipment, net............. 41,652 52,634 94,286
Investments in Joint Ventures and
Unconsolidated Subsidiaries.................. 6,283 9,518 15,801
Investment in M-I Drilling Fluids Co........... -- -- 160,000(j) --
(160,000)(l)
Goodwill....................................... 2,954 -- 37,254(l) 54,108
12,100(n)
1,800(k)
Other Assets................................... 21,140 5,427 700(k) 27,267
-------- -------- ----------- --------
Total Assets......................... $348,386 $266,772 $ (38,966) $576,192
-------- -------- ----------- --------
-------- -------- ----------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term Borrowings and Current Portion of
Long-term Debt............................ $ 702 $ 1,091 $ 10,000(j) $ 11,793
Accounts Payable............................. 24,763 30,467 55,230
Accrued Payroll Costs........................ 10,923 7,082 18,005
Income Taxes Payable......................... 9,484 807 10,291
Other........................................ 34,098 14,838 3,780(n) 52,716
-------- -------- ----------- --------
Total Current Liabilities............ 79,970 54,285 13,780 148,035
-------- -------- ----------- --------
Long-Term Debt................................. 46,000 -- 70,000(j) 116,000
Minority Interest.............................. -- -- 69,044(m) 69,044
Other Long-term Liabilities.................... 7,950 20,697 28,647
Shareholders' Equity........................... 214,466 191,790 (122,746)(l) 214,466
(69,044)(m)
-------- -------- ----------- --------
Total Liabilities and Shareholders'
Equity............................. $348,386 $266,772 $ (38,966) $576,192
-------- -------- ----------- --------
-------- -------- ----------- --------
See accompanying unaudited notes to pro forma financial statements.
24
26
SMITH INTERNATIONAL, INC.
UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS --
(a) To reclassify M-I freight expenses from selling expense to cost of sales to
be consistent with the policies of the Company.
(b) To record annual amortization of goodwill which will be amortized over 40
years
(c) To record additional depreciation expense as a result of adjustments to
increase the book value of the A-Z/Grant and Lindsey rental tools and
property and equipment to estimated fair value and depreciate the assets
over the estimated remaining lives of the respective assets.
(d) To record annual amortization of debt issuance costs which will be amortized
over the 4 year life of the debt.
(e) To record interest expense at an interest rate of 6.0 percent on the
acquisition-related debt, as refinanced (see Note j below), assuming no
principal reduction.
(f) To reduce interest income at an interest rate of 4.0 percent as
approximately $101.5 million of the Company's cash was used to fund the
acquisitions and, therefore, would not have been available to earn interest
income.
(g) To record additional income tax expense related to the earnings of A-Z/Grant
and Lindsey, the Company's portion of M-I earnings and the effects of the
aforementioned adjustments at the U.S. Alternative Minimum Tax Rate of 2.0
percent. Additional taxes would not be required because of the Company's
net operating loss carryforward position.
(h) Income (loss) from continuing operations is presented excluding the
cumulative effect of change in accounting principle. The Smith and
unaudited pro forma income (loss) from continuing operations of ($3,995)
and $1,652, respectively, include the special charge for a litigation
settlement of $19,900 ($0.53 per common share). The Smith and unaudited pro
forma income from continuing operations excluding the litigation settlement
would increase to $15,905 and $21,552, respectively, or $0.40 and $0.55 per
common share, respectively. The preferred stock dividends of $868 must be
deducted from the applicable income (loss) from continuing operations
amounts in order to compute these amounts per common share.
BALANCE SHEET --
(i) The historical balance sheet of the Company includes the accounts of
A-Z/Grant and Lindsey on an estimated basis acquired by the Company on
December 22, 1993 for $19.0 million. Management has not fully evaluated all
of the consequences of the acquisition of A-Z/Grant and Lindsey including
completing the appraisals of the assets acquired and assessing the total
amount of costs that may be necessary to consolidate the operations of
A-Z/Grant and Lindsey with the Company. Upon completion of these
evaluations, any additional asset and liability adjustments will be
recorded and the excess purchase price over net assets acquired, if any,
will be recorded in accordance with purchase accounting rules and
principles.
(j) To record the purchase of the 64% interest in M-I using $80.0 million in
cash and $80.0 million in debt. The Company has reflected $10.0 million of
debt as current portion of long-term debt and $70.0 million of debt as
long-term because the Company has commitments to refinance the Dresser note
payable with a $40 million term loan from its insurance company lenders and
a $65 million revolving line of credit from a bank group. The term loan
will bear interest at a rate of 6.02 percent and be payable over a period
ending in January 1998. The revolving line of credit will be due in March
1997 and bear interest at a rate ranging
25
27
SMITH INTERNATIONAL, INC.
UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. Management believes that such
financing will be completed by the end of March 1994.
(k) To record $1.8 million of estimated acquisition costs in connection with the
M-I acquisition and $0.7 million of debt issuance costs in connection with
the refinanced acquisition debt.
(l) To eliminate the investment in M-I of $160.0 million against the Company's
estimated portion of its equity in M-I of $122.7 million with the remaining
balance of $37.3 million reported tentatively as goodwill.
(m) To reclassify the minority interest ownership in M-I by Halliburton of $69.0
million from shareholders' equity to minority interest.
(n) To record the Company's portion of the current estimate of adjustments to
asset reserves and liabilities required at the acquisition date in
connection with the purchase of M-I with the corresponding adjustment
recorded as goodwill. Management has not fully evaluated all of the
consequences of the acquisition of M-I including assessing the fair market
value of the assets acquired and the total amount of costs that may be
necessary to consolidate the operations of M-I with the Company. Upon
completion of a full evaluation of the Company's purchase price allocation
of M-I accounts, additional adjustments may become necessary to the
preliminary allocation of the purchase price. The Company expects this
evaluation process will be completed in 1994.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smith International, Inc.:
We have audited the accompanying consolidated balance sheets of Smith
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These consolidated financial statements and schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Smith International, Inc.
and subsidiaries as of December 31, 1993 and 1992 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the accompanying
index of financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
As discussed in Note 1 to the Notes to Consolidated Financial Statements,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 96
and SFAS No. 109 "Accounting for Income Taxes" in 1991 and 1993, respectively.
In 1993, the Company also adopted SFAS No. 106 "Employers Accounting for
Postretirement Benefits other than Pensions".
ARTHUR ANDERSEN & CO.
Houston, Texas
February 9, 1994,
except for the subsequent event
discussed in Note 2, as to which
the date is March 21, 1994
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30
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Product sales.............................................. $177,021 $166,630 $195,047
Rentals, services and other revenues....................... 43,691 44,039 56,920
-------- -------- --------
Total revenues................................... 220,712 210,669 251,967
-------- -------- --------
Cost of product sales...................................... 104,406 99,656 104,368
Cost of rentals, services and other revenues............... 33,764 36,899 47,633
-------- -------- --------
Total cost of sales.............................. 138,170 136,555 152,001
-------- -------- --------
Gross profit............................................... 82,542 74,114 99,966
-------- -------- --------
Selling expenses........................................... 41,997 41,582 45,503
General and administrative expenses........................ 21,970 22,272 25,371
Restructuring charges (Note 3)............................. -- -- 18,419
-------- -------- --------
Total operating expenses......................... 63,967 63,854 89,293
-------- -------- --------
Income from continuing operations before litigation
settlement, interest and taxes........................... 18,575 10,260 10,673
Litigation settlement (Note 16)............................ 19,900 -- --
Interest expense........................................... 6,023 10,600 13,827
Interest income............................................ (3,821) (497) (999)
-------- -------- --------
Income (loss) from continuing operations before income
taxes.................................................... (3,527) 157 (2,155)
Income tax provision (benefit) (Note 8).................... 468 (1,007) 2,858
-------- -------- --------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle................. (3,995) 1,164 (5,013)
-------- -------- --------
Discontinued operations (Note 2):
Net losses of discontinued DDS operations after income
tax provisions of $236 in 1993, $2,734 in 1992 and
$2,356 in 1991........................................ (6,483) (2,975) (4,623)
Gain from sale of DDS operations net of taxes of
$8,144................................................ 80,106 -- --
-------- -------- --------
Income (loss) from discontinued operations................. 73,623 (2,975) (4,623)
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle..................................... 69,628 (1,811) (9,636)
Cumulative effect of change in accounting for certain post
retirement benefits (Note 1)............................. (1,300) -- --
-------- -------- --------
Net income (loss).......................................... 68,328 (1,811) (9,636)
Preferred stock dividends.................................. (868) (1,740) (1,747)
-------- -------- --------
Net income (loss) applicable to common stock............... $ 67,460 $ (3,551) $(11,383)
-------- -------- --------
-------- -------- --------
Income (loss) per common share from continuing
operations............................................... $ (.13) $ (.02) $ (.22)
-------- -------- --------
-------- -------- --------
Net income (loss) per common share......................... $ 1.79 $ (.10) $ (.38)
-------- -------- --------
-------- -------- --------
Average common shares and equivalent shares outstanding.... 37,775 36,295 30,095
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
29
31
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------
1993 1992
-------- ---------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents........................................... $101,561 $ 16,249
Receivables, less allowance of $4,995 in 1993 and $4,254 in 1992 for
doubtful accounts................................................ 67,830 89,264
Inventories (Note 4)................................................ 81,654 77,315
Prepaid expenses and other.......................................... 4,802 7,163
Net assets of DDS business sold in March 1993 (Note 2).............. -- 106,233
-------- ---------
Total current assets........................................ 255,847 296,224
-------- ---------
RENTAL EQUIPMENT, less accumulated depreciation of $23,457 in 1993 and
$24,140 in 1992..................................................... 20,510 10,551
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................ 1,348 743
Buildings........................................................... 18,007 15,044
Machinery and equipment............................................. 138,235 142,785
-------- ---------
157,590 158,572
Less -- accumulated depreciation.................................... 115,938 124,600
-------- ---------
Net property, plant and equipment.............................. 41,652 33,972
-------- ---------
OTHER ASSETS, including assets held for sale of $11,866 in 1993 and
$13,817 in 1992 (Note 5)............................................ 30,377 29,735
-------- ---------
TOTAL ASSETS.......................................................... $348,386 $ 370,482
-------- ---------
-------- ---------
The accompanying notes are an integral part of these financial statements.
30
32
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
----------------------
1993 1992
-------- ---------
(IN THOUSANDS)
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt (Note
6)............................................................... $ 702 $ 103,343
Accounts payable.................................................... 24,763 30,463
Accrued payroll costs............................................... 10,923 11,569
Income taxes payable (Note 8)....................................... 9,484 3,592
Other............................................................... 34,098 18,785
-------- ---------
Total current liabilities................................... 79,970 167,752
-------- ---------
LONG-TERM DEBT (Note 6)............................................... 46,000 46,000
-------- ---------
DEFERRED INCOME TAXES (Note 8)........................................ 4,563 4,666
-------- ---------
OTHER LONG-TERM LIABILITIES........................................... 3,387 2,279
-------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 16)
SHAREHOLDERS' EQUITY:
Preferred stock:
Authorized -- 5,000,000 shares, 8.75% convertible preferred
stock; issued and outstanding 798,800 shares in 1992 (Note 9)... -- 19,970
Common stock:
Authorized -- 60,000,000 shares, $1 par value; issued and
outstanding -- 39,311,447 shares in 1993 and 36,773,437 shares
in 1992 (Note 9)................................................ 39,311 36,773
Common stock warrants (Note 9):
Class A warrants -- outstanding -- 225,520 in 1993 and 1992...... -- --
Class B warrants -- outstanding -- 1,872,205 in 1993 and
1,872,324 in 1992............................................... -- --
Class C warrants -- outstanding -- 451,357 in 1993 and 1992...... 7,278 7,278
Additional paid-in capital............................................ 271,582 253,910
Accumulated deficit................................................... (83,433) (150,893)
Cumulative translation adjustments.................................... (6,358) (4,668)
Less-treasury securities, at cost (628,583 common shares and 451,357
Class C warrants in 1993; and 470,183 common shares and 451,357
Class C warrants in 1992) (Note 9).................................. (13,914) (12,585)
-------- ---------
Total shareholders' equity.................................. 214,466 149,785
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $348,386 $ 370,482
-------- ---------
-------- ---------
The accompanying notes are an integral part of these financial statements.
31
33
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
--------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) from continuing operations (after litigation
settlement of $19,900 in 1993 and restructuring charges of
$18,419 in 1991)................................................. $ (5,295) $ 1,164 $ (5,013)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities excluding the net effects from the
acquisition of
A-Z/Grant and Lindsey:
Depreciation and amortization.................................. 11,600 22,737 25,182
Provision for losses on receivables............................ 974 1,860 1,861
Provision for write-down of fixed assets and assets held for
sale (Notes 3 and 5).......................................... -- -- 5,746
Gain on disposal of fixed assets............................... (1,623) (7,164) (5,570)
Foreign currency translation losses............................ 621 2,902 1,058
Change in receivables.......................................... 19,424 (7,139) 10,034
Change in inventories.......................................... 2,011 15,045 (14,364)
Change in accounts payable..................................... (5,960) 564 3,844
Changes in other current assets and liabilities................ 763 (14,875) (3,567)
Changes in other non-current assets and liabilities............ (631) 2,257 (2,859)
--------- -------- --------
Subtotal.................................................... 21,884 17,351 16,352
Net results of discontinued operations...................... (6,483) (2,975) (4,623)
--------- -------- --------
Net cash provided by operating activities.............. 15,401 14,376 11,729
--------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of the DDS operations (Note 2)............... 247,709 -- --
Costs and expenses paid related to the sale of the DDS operations
(Note 2)......................................................... (47,377) -- --
Acquisition of A-Z/Grant and Lindsey (Note 2)....................... (19,000) -- --
Fixed asset additions............................................... (15,191) (26,668) (43,429)
Proceeds from disposal of fixed assets.............................. 7,091 11,756 9,270
--------- -------- --------
Net cash provided by (used in) investing activities.... 173,232 (14,912) (34,159)
--------- -------- --------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings, net (Note 6).......... (33,360) (15,970) 7,777
Proceeds from issuance of long-term debt (Note 6)................... -- 115,000 --
Repayment of long-term debt (Note 6)................................ (67,683) (98,348) (45,500)
Proceeds from issuance of common stock and exercise of stock options
and warrants (Note 9)............................................ 240 39 50,595
Purchase of treasury stock (Note 9)................................. (1,329) -- --
Dividends paid on preferred stock................................... (868) (1,740) (1,747)
--------- -------- --------
Net cash provided by (used in) financing activities.... (103,000) (1,019) 11,125
--------- -------- --------
Effect of exchange rate changes on cash............................... (321) (388) (208)
--------- -------- --------
Increase (decrease) in cash and cash equivalents...................... 85,312 (1,943) (11,513)
Cash and cash equivalents at beginning of year........................ 16,249 18,192 29,705
--------- -------- --------
Cash and cash equivalents at end of year.............................. $ 101,561 $ 16,249 $ 18,192
--------- -------- --------
--------- -------- --------
The accompanying notes are an integral part of these financial statements.
32
34
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
COMMON STOCK
WARRANTS
PREFERRED STOCK COMMON STOCK ------------------
------------------- ------------------- NUMBER ADDITIONAL
NUMBER NUMBER OF PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS AMOUNT CAPITAL
--------- ------- ---------- ------- ---------- ------ ----------
(IN THOUSANDS, EXCEPT SHARE AND WARRANT DATA)
Balance, December 31, 1990................. 799,300 $19,983 29,162,576 $29,162 8,867,103 $7,278 $210,760
Issuance of Class B Warrants to
management............................... -- -- -- -- 60,000 -- --
Exercise of employee stock options......... -- -- 105,516 105 -- -- 953
Exercise of common stock warrants.......... -- -- 6,377,864 6,378 (6,377,864) -- 32,594
Issuance of common stock................... -- -- 992,000 992 -- -- 9,573
Conversion of preferred stock
into common stock........................ (500) (13) 1,562 2 -- -- 11
Net loss................................... -- -- -- -- -- -- --
Preferred dividends........................ -- -- -- -- -- -- --
Translation adjustment for the year........ -- -- -- -- -- -- --
Other...................................... -- -- 113,690 114 -- -- --
------- ------- ---------- ------- ---------- ----- --------
Balance, December 31, 1991................. 798,800 19,970 36,753,208 36,753 2,549,239 7,278 253,891
Exercise of employee stock options......... -- -- 20,191 20 -- -- 19
Exercise of common stock warrants.......... -- -- 38 -- (38) -- --
Net loss................................... -- -- -- -- -- -- --
Preferred dividends........................ -- -- -- -- -- -- --
Translation adjustment for the year........ -- -- -- -- -- -- --
-------- ------- ---------- ------- ---------- ----- --------
Balance, December 31, 1992................. 798,800 19,970 36,773,437 36,773 2,549,201 7,278 253,910
Exercise of employee stock options......... -- -- 41,641 42 -- -- 197
Exercise of common stock warrants.......... -- -- 119 -- (119) -- 1
Purchase of treasury stock................. -- -- -- -- -- -- --
Conversion of preferred stock into
common stock............................. (798,800) (19,970) 2,496,250 2,496 -- -- 17,474
Net income................................. -- -- -- -- -- -- --
Preferred dividends........................ -- -- -- -- -- -- --
Translation adjustment for the year........ -- -- -- -- -- -- --
-------- ------- ---------- ------- --------- ------ ---------
Balance, December 31, 1993................. -- $ -- 39,311,447 $39,311 2,549,082 $7,278 $271,582
-------- ------- ---------- ------- ---------- ------ ---------
-------- ------- ---------- ------- ---------- ------ ---------
TREASURY SECURITIES
---------------------------------------
COMMON STOCK WARRANTS
------------------ ------------------
CUMULATIVE NUMBER NUMBER
ACCUMULATED TRANSLATION OF OF
DEFICITS ADJUSTMENTS SHARES AMOUNT WARRANTS AMOUNT
----------- ----------- -------- ------- -------- -------
Balance, December 31, 1990................. $(135,959) $ (397) (356,493) $(5,193) (451,357) $(7,278)
Issuance of Class B Warrants to
management............................... -- -- -- -- -- --
Exercise of employee stock options......... -- -- -- -- -- --
Exercise of common stock warrants.......... -- -- -- -- -- --
Issuance of common stock................... -- -- -- -- -- --
Conversion of preferred stock
into common stock........................ -- -- -- -- -- --
Net loss................................... (9,636) -- -- -- -- --
Preferred dividends........................ (1,747) -- -- -- -- --
Translation adjustment for the year........ -- (562) -- -- -- --
Other...................................... -- -- (113,690) (114) -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1991................. (147,342) (959) (470,183) (5,307) (451,357) (7,278)
Exercise of employee stock options......... -- -- -- -- -- --
Exercise of common stock warrants.......... -- -- -- -- -- --
Net loss................................... (1,811) -- -- -- -- --
Preferred dividends........................ (1,740) -- -- -- -- --
Translation adjustment for the year........ -- (3,709) -- -- -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1992................. (150,893) (4,668) (470,183) (5,307) (451,357) (7,278)
Exercise of employee stock options......... -- -- -- -- -- --
Exercise of common stock warrants.......... -- -- -- -- -- --
Purchase of treasury stock................. -- -- (158,400) (1,329) -- --
Conversion of preferred stock into
common stock............................. -- -- -- -- -- --
Net income................................. 68,328 -- -- -- -- --
Preferred dividends........................ (868) -- -- -- -- --
Translation adjustment for the year........ -- (1,690) -- -- -- --
--------- ------- -------- ------- -------- -------
Balance, December 31, 1993................. $ (83,433) $(6,358) (628,583) $(6,636) (451,357) $(7,278)
--------- ------- -------- ------- -------- -------
--------- ------- -------- ------- -------- -------
The accompanying notes are an integral part of these financial statements.
33
35
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE EXPRESSED IN THOUSANDS, EXCEPT WHERE STATED IN MILLIONS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned domestic and international subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Investments in affiliates of at least a 20% interest but not more than a 50%
interest are accounted for using the equity method; all other investments are
carried at cost, which does not exceed the estimated net realizable value of
such investments.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
The Company's cash balance at December 31, 1993 includes $8.8 million held
in escrow or otherwise restricted.
Fixed Assets
Fixed assets, consisting of rental equipment and property, plant and
equipment, are stated at cost. The Company computes depreciation on fixed assets
using principally the straight-line method. The estimated useful lives used in
computing depreciation range from 3 to 40 years for buildings, 3 to 20 years for
machinery and equipment, and 3 to 7 years for rental equipment. Leasehold
improvements are amortized over the lives of the leases or the estimated useful
lives of the improvements, whichever is shorter. For income tax purposes,
accelerated methods of depreciation are used.
Cost of major renewals and betterments are capitalized as fixed assets.
Expenditures for maintenance, repairs and minor improvements are charged to
expense when incurred. When fixed assets are sold or retired, the remaining cost
and related reserves are removed from the accounts and the resulting gain or
loss is included in the results of operations.
Valuation of Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ("LIFO") method for most domestic inventories and by
the first-in, first-out ("FIFO") method for all other inventories. Inventory
costs consist of materials, labor and factory overhead.
Translation of Foreign Currencies
The accounts of all international operations, except those described in the
following paragraph, are translated to United States dollars as follows: cash,
receivables and related allowances, current liabilities and long-term debt are
translated at year-end exchange rates; income and expense accounts, except for
cost of inventory sold and depreciation and amortization are translated at
average exchange rates during the year and all other accounts are translated at
historical rates. All translation adjustments resulting from the translation of
these financial statements to United States dollars are charged or credited to
income currently.
The accounts of the Company's operations in Italy are translated to United
States dollars as follows: all asset and liability accounts are translated at
year-end exchange rates, and income and expense items are translated at the
average exchange rates during the year. Cumulative translation adjustments
resulting from the translation of the financial statements of these operations
to United States dollars are recorded as a separate component of shareholders'
equity.
34
36
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All foreign currency transaction gains and losses are credited or charged
to income currently.
Foreign Exchange Contracts
From time to time, the Company enters into spot and forward contracts under
foreign exchange lines as a hedge against accounts payable in foreign
currencies. Market value gains and losses on such forward contracts are
recognized on a monthly basis, and the resulting amounts offset foreign exchange
gains or losses on the related accounts payable as payments are made.
The Company also purchases foreign exchange option contracts to hedge
certain operating exposures. Premiums paid under these contracts are expensed
over the life of the contract. Gains arising on these options are recognized at
the time the options are exercised.
Income Taxes
In the fourth quarter of 1991, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 96, "Accounting for Income Taxes" effective
January 1, 1991. This standard changed the criteria for measuring the provision
for income taxes and required that a liability approach be used to report the
deferred tax liability in the consolidated balance sheet. Deferred income tax
assets and liabilities arise from differences between the tax basis of an asset
or liability and its reported amount in the consolidated financial statements.
Deferred tax balances under this standard are determined by using the tax rate
expected to be in effect when the taxes will actually be paid. Under the
provisions of SFAS No. 96, the Company elected not to restate prior years'
consolidated financial statements and has determined that the cumulative effect
of the change in accounting for income taxes was insignificant.
In the first quarter of 1993, the Company adopted SFAS No. 109 "Accounting
for Income Taxes". This standard superseded SFAS No. 96, "Accounting for Income
Taxes" and required an asset and liability approach for financial accounting and
income tax reporting. In connection with the adoption of SFAS No. 109, the
Company elected not to restate prior years' consolidated financial statements
and has determined that the cumulative effect of the change in accounting for
income taxes was insignificant.
Earnings Per Common Share
Earnings per common share are computed on the basis of the weighted average
number of common shares and equivalent shares outstanding during each year after
deducting preferred dividends. Earnings per common share assuming full dilution,
is substantially the same as primary earnings per common share as presented for
each of the three years ended December 31, 1993. As the Company incurred a net
loss for the years 1992 and 1991, the equivalent shares were antidilutive for
those years; therefore, the equivalent shares are not included in the average
number of common shares outstanding when calculating the loss per common share
in 1992 and 1991.
Income (loss) per common share from discontinued operations was $1.95,
$(.08) and $(.16), respectively, for the years ended December 31, 1993, 1992 and
1991. The loss per common share attributable to the change in accounting
principle was $(.03) for the year ended December 31, 1993.
Employee Benefits
During the first quarter of 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". This
standard changed the criteria for recognizing the cost of postretirement
benefits from the pay-as-you-go (cash) basis to the recognition of such benefits
over the employee service periods. As a result of adopting this standard, the
Company recorded the total outstanding liability related to such retiree
benefits of $1.3 million as the cumulative effect of a change in accounting
principle in the consolidated statements of operations.
35
37
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS AND DISPOSITIONS
Sale of Directional Drilling Business
On March 29, 1993, the Company sold its Directional Drilling systems and
services (DDS) business and certain of its subsidiaries and other affiliates to
Halliburton Company (Halliburton) for 6,857,000 shares of Halliburton common
stock. In April 1993, the Halliburton common stock was sold for $247.7 million.
As a result, the Company recorded income from discontinued operations of $73.6
million including the gain from the sale of the DDS business of $80.1 million.
The gain includes provisions for various fees, expenses and taxes related to the
DDS sale.
The DDS sale consisted primarily of the inventory, rental equipment and
plant and equipment of the Dyna-Drill and Datadril product lines as well as
certain downhole tools used in the DDS business. In addition, the Company
retained approximately $23.0 million of receivables, net of payables related to
the DDS business as of the date of sale. The following table summarizes the net
assets as of December 31, 1992 of the DDS business sold to Halliburton in March
1993.
Inventories................................................................ $ 26,871
Rental equipment, net...................................................... 61,787
Plant and equipment, net................................................... 12,696
Other current assets....................................................... 4,350
Other long-term assets..................................................... 1,141
Liabilities assumed........................................................ (612)
--------
Net assets of the DDS business................................... $106,233
--------
--------
The consolidated statements of operations reported the net results of the
DDS operations as income (loss) from discontinued operations. The DDS business
reported revenues of $36.3 million in the first three months of 1993, $158.7
million in 1992 and $151.1 million in 1991. In 1991, restructuring charges
relating to the DDS business totalled approximately $2.8 million (See Note 3).
In determining the income (loss) from discontinued operations, interest expense
of $1.3 million in 1993, $5.6 million in 1992 and $7.6 million in 1991 has been
allocated to the discontinued DDS operations based on the ratio of the estimated
net assets sold in relation to the sum of the Company's shareholders' equity and
the aggregate of outstanding debt at the end of each period.
Acquisitions of A-Z/Grant and Lindsey
On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey is a leading provider of downhole tools, remedial services
and liner hangers to the oil and gas industry. A-Z/Grant and Lindsey reported
unaudited revenues of $31.6 million in 1993, $29.0 million in 1992, and $31.0
million in 1991. This acquisition was accounted for as a purchase effective
December 22, 1993. The unaudited results of A-Z/Grant and Lindsey from December
22, 1993 to December 31, 1993, were not significant to the operations of the
Company.
The historical balance sheet of the Company at December 31, 1993 includes
the accounts of A-Z/Grant and Lindsey on an estimated basis. Management has not
fully evaluated all of the consequences of the acquisition of A-Z/Grant and
Lindsey including assessing the fair market value of the assets acquired and the
total amount of costs that may be necessary to consolidate the operations of
A-Z/Grant and Lindsey with the Company. Upon completion of these evaluations
during 1994, any additional adjustments will be recorded and the excess purchase
price over net assets acquired, if any, will be recorded in accordance with
purchase accounting rules and principles.
36
38
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent Event -- Acquisition of M-I Drilling Fluids Company
Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids Company (M-I) from Dresser Industries, Inc. (Dresser) for $160
million. M-I was owned 64% by Dresser and 36% by Halliburton prior to the
acquisition. M-I is a leading provider of drilling fluids and systems to the oil
and gas drilling industry. The Company purchased the 64% interest in M-I using
$80 million of its cash and issuing a note payable to Dresser for $80 million
due on August 28, 1994. This acquisition will be accounted for as a purchase.
M-I reported unaudited revenues of $405.8 million in 1993, $382.6 million in
1992 and $435.5 million in 1991.
The Company has commitments to refinance the Dresser note payable with a
$40 million term loan from its insurance company lenders and a $65 million
revolving line of credit from the bank group. The term loan will bear interest
at a rate of 6.02 percent and be payable over a period ending in January 1998.
The revolving line of credit will be due in March 1997 and bear interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. Management believes such financing
will be completed by the end of March 1994.
The unaudited pro forma revenues and income from continuing operations for
the year ended December 31, 1993 assuming the acquisitions of A-Z/Grant and
Lindsey and M-I had been made on January 1, 1993 are as follows:
Unaudited pro forma revenues............................................... $658,124
Unaudited pro forma income from continuing operations...................... $ 1,652
Unaudited income from continuing operations per common share............... $ 0.02
3. RESTRUCTURING CHARGES
During the fourth quarter of 1991, the Company decided to restructure
certain of its worldwide operations in response to the continuing decline of
U.S. oil and gas drilling activity. The restructuring consisted of closing
manufacturing facilities in Mexico City and Veracruz, Mexico, closing various
service locations in the U.S. as well as downsizing other worldwide operations
and reducing the worldwide workforce by approximately 27%. As a result of the
restructuring, the Company recorded a $21.2 million unusual charge to income
from continuing operations before interest and taxes in 1991 consisting of $9.9
million for estimated severance and relocation costs, a writedown of $5.7
million related to fixed assets of closed and downsized locations, a provision
of $3.7 million to expense certain manufacturing inefficiencies and $1.9 million
related to other non-recurring items.
4. INVENTORIES
Inventories consist of the following:
1993 1992
-------- --------
Raw materials................................................... $ 10,965 $ 13,084
Work in process................................................. 13,105 12,220
Finished goods.................................................. 68,732 64,359
-------- --------
92,802 89,663
Reserves to state domestic inventories ($70,597 in 1993 and
$69,011 in 1992) on a LIFO basis.............................. (11,148) (12,348)
-------- --------
$ 81,654 $ 77,315
-------- --------
-------- --------
37
39
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ASSETS HELD FOR SALE
The Company's efforts to combine manufacturing facilities and reduce
operating capacity have resulted in certain excess and/or idle assets which are
classified as assets held for sale. Assets held for sale are stated at the lower
of cost or estimated net realizable value as of December 31, 1993 and 1992 as
follows:
1993 1992
------- -------
Land.............................................................. $ 4,194 $ 4,840
Buildings......................................................... 5,865 8,593
Machinery and equipment........................................... 1,807 384
------- -------
$11,866 $13,817
------- -------
------- -------
6. DEBT
The following summarizes the Company's short-term debt and long-term debt:
BALANCE AT DECEMBER
31,
----------------------
1993 1992
------- --------
SHORT-TERM DEBT
Short-term bank borrowings with weighted average interest rates of 7%
in 1993 and 9% in 1992.............................................. $ 702 $ 34,361
Current portion of long-term debt..................................... -- 68,982
------- --------
Total short-term debt and current portion of long-term
debt...................................................... 702 103,343
------- --------
LONG-TERM DEBT
Notes payable to insurance companies due on October 1, 2001 at
9.83%............................................................... 46,000 95,000
Secured Term loan payable to banks at LIBOR +1 1/4%................... -- 18,182
Other................................................................. -- 1,800
------- --------
46,000 114,982
Less: Amounts classified as current portion of long-term debt....... -- 68,982
------- --------
Total Long-Term Debt........................................ 46,000 46,000
------- --------
Total Debt................................................ $46,702 $149,343
------- --------
------- --------
On October 2, 1992, the Company refinanced substantially all of its
short-term and long-term debt through a private placement of debt and a new
syndicated bank credit facility. The private debt offering consisted of $95.0
million of secured long-term debt repayable over a nine year period with
interest at 9.83%. The secured domestic bank facility consisted of a $20.0
million three year term loan repayable in quarterly installments and a $40.0
million revolving credit facility expiring on June 30, 1995. The Company used
the proceeds of the secured long-term debt, the term loan and $19.6 million of
the revolving credit facility to retire the Company's $89.4 million Series A
notes due December 31, 1994 with interest at 13%, a term loan of $6.5 million
with interest at prime +1 3/4%, an outstanding balance of the Company's domestic
credit facility of $30.5 million and $8.2 million of international lines of
credit.
In connection with the DDS sale, the Company was required to repay its bank
debt. The Company also granted options which expired on July 23, 1993 to its
insurance company lenders for early repayment of their debt at a reduced make
whole premium. On April 12, 1993, the Company used a portion of the proceeds of
the DDS sale to retire its domestic credit facility totaling $37.2 million, its
domestic bank term loan totaling $16.4 million and $39.0 million of notes
payable with insurance companies. On July 23, 1993, the Company repaid an
additional $10.0 million of notes payable with insurance companies. The
Company's remaining debt totaling $46.0 million at December 31, 1993 is
classified as long-term. The accompanying December 31, 1992
38
40
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance sheet has also been restated to classify the $46.0 million of debt as
long-term. The Company has renegotiated its loan agreements with the insurance
companies to amend certain financial covenants as well as to release the
collateral under the loan indenture. The Company was in compliance with its loan
covenants under the amended loan indenture at December 31, 1993.
Certain of the Company's foreign subsidiaries have short-term lines of
credit with various foreign banks totaling approximately $1.7 million. At
December 31, 1993, the Company had borrowed $0.7 million under these lines. The
majority of these lines are unsecured.
The Company's indenture relating to its long-term debt contains covenants
restricting the payment of cash dividends to the Company's common stockholders
based on net earnings and operating cash flow formulas as defined in the
indenture. The Company has not paid dividends on its Common Stock since the
first quarter of 1986. In addition to compliance with the covenants of the
indenture, the determination of the amount of future cash dividends to be
declared and paid on the Common Stock, if any, will depend upon the Company's
financial condition, earnings and cash flow from operations, the level of its
capital expenditures, its future business prospects and other factors that the
Board of Directors deem relevant.
See Note 2 for a discussion of the financing of the M-I acquisition.
In July 1993, the Company entered into a swap agreement with a financial
institution. Under this agreement, the Company receives a fixed rate of 4.86% on
$46.0 million of borrowings and pays a floating rate based on 6 month LIBOR.
Management believes that the fair market value of the swap agreement at December
31, 1993 was insignificant.
Interest paid during the years ended December 31, 1993, 1992, and 1991
amounted to $9.2 million, $15.7 million, and $21.3 million, respectively.
7. FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable and short-term debt approximate the fair market values due to the
short-term maturities of these instruments. Management believes that the
carrying amount of long-term debt is not materially different from the fair
value using rates currently available for debt of similar terms and maturity.
The Company is a party to financial instruments described below with off
balance sheet risks which it utilizes in the normal course of business to manage
its exposure to fluctuations in interest rates and foreign currency exchange
rates.
Foreign Currency Forward Contracts and Options
At December 31, 1993, the Company had outstanding foreign exchange
contracts as a hedge against foreign accounts totaling $11.0 million maturing at
various dates during 1994. There were no significant unrecorded gains or losses
on these contracts at December 31, 1993. The Company has outstanding option
contracts of $5.9 million at December 31, 1993 which expire at various dates in
1994. The Company has no loss exposure under these contracts.
Interest Rate Contracts
The Company utilizes an interest rate swap agreement to manage its interest
rate exposure. At December 31, 1993 the fair value of the agreement was
insignificant. At December 31, 1993, the Company reported as part of cash and
cash equivalents $16.9 million as the carrying cost of an investment fund which
utilizes financial instruments to manage its interest rate exposure. During the
year ended December 31, 1993, the fund's hedge account incurred a net loss of
$0.3 million reducing the fair value of the fund to $16.6 million.
39
41
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
See Note 1 regarding changes in the method in recording income taxes during
1991 and 1993. The consolidated income tax provision (benefit) relating to
continuing operations are summarized as follows:
1993 1992 1991
----- ------- ------
Current --
United States.......................................... $ -- $ 108 $ 257
Foreign................................................ 662 1,613 904
State.................................................. 13 (30) 181
----- ------- ------
675 1,691 1,342
----- ------- ------
Deferred --
United States (including, in 1992, the benefit of a
$2,500 tax settlement).............................. (301) (2,462) 627
Foreign................................................ 94 (236) 889
----- ------- ------
(207) (2,698) 1,516
----- ------- ------
Income tax provision (benefit)........................... $ 468 $(1,007) $2,858
----- ------- ------
----- ------- ------
Deferred taxes are principally attributable to timing differences related
to depreciation expense and net operating loss (NOL) and tax credit
carryforwards. Deferred taxes also include, in 1992, the net benefit resulting
from a settlement of various outstanding issues with the Internal Revenue
Service related to prior year audits and offsetting claims for refunds of prior
year taxes and, in 1991, the recording of a $1.0 million tax provision to
reflect expected settlements of prior year foreign tax liabilities of certain of
the Company's subsidiaries. In 1993 and 1991, the Company reported the tax
benefit of operating loss carryforwards as a reduction in the provision for
income taxes in accordance with SFAS No. 109 and SFAS No. 96, respectively.
The income tax provision (benefit) computed by applying the U.S. Federal
statutory rate to income (loss) from continuing operations before income taxes
are reconciled to the actual tax provision (benefit) as follows:
1993 1992 1991
------- ------- -------
Income (loss) from continuing operations before income
taxes:
United States....................................... $21,020 $ 2,740 $ 7,002
Foreign............................................. (24,547) (2,583) (9,157)
------- ------- -------
Total....................................... $(3,527) $ 157 $(2,155)
------- ------- -------
------- ------- -------
Computed U.S. Federal statutory tax expense
(benefit)........................................... $(1,199) $ 53 $ (733)
U.S. Alternative Minimum Tax.......................... -- 161 548
Utilization of U.S. net operating loss carryforward... (7,283) -- (2,478)
U.S. branch income/foreign dividends.................. (165) (1,089) 98
State taxes, net...................................... 13 (30) 181
Expected settlement of foreign tax liabilities
(related to prior years)............................ -- -- 1,000
Foreign tax provisions in excess of U.S. rate/foreign
losses
with no tax benefit realized........................ 8,929 2,255 3,907
U.S. benefit of tax settlement........................ -- (2,500) --
Other items, net...................................... 173 143 335
------- ------- -------
Income tax provision (benefit).............. $ 468 $(1,007) $ 2,858
------- ------- -------
------- ------- -------
40
42
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax liability are as follows:
DECEMBER 31, JANUARY 1,
1993 1993
------------ -----------
Deferred tax liabilities attributed to the excess of net
book basis over remaining tax basis (principally
depreciation):
Domestic.................................................. $ 8,286 $ 12,451
Foreign................................................... 4,015 3,990
-------- ---------
Total deferred tax liabilities....................... 12,301 16,441
-------- ---------
Deferred tax assets attributed to domestic net operating
loss and tax credit carryforwards......................... 62,091 71,168
Other deferred tax assets:
Domestic.................................................. 11,863 6,267
Foreign................................................... -- 173
-------- ---------
Subtotal............................................. 73,954 77,608
Valuation allowance......................................... (66,216) (65,833)
-------- ---------
Net deferred tax assets.............................. 7,738 11,775
-------- ---------
Net deferred tax liability...................... $ 4,563 $ 4,666
-------- ---------
-------- ---------
For U.S. tax reporting purposes, the Company has cumulative NOL
carryforwards in the amount of approximately $148.5 million. These losses were
generated in 1986, 1987, 1988 and 1992 in the amounts of $12.7 million, $91.3
million, $42.3 million and $2.2 million, respectively. Losses in 1986, 1987,
1988 and 1992 are available to reduce future U.S. taxable income that may be
generated through the years 2001, 2002, 2003 and 2007, respectively. Upon
certain changes in equity ownership of the Company, the ability to utilize NOL
carryforwards becomes subject to limitation under Section 382 of the Internal
Revenue Code of 1986, as amended. In the opinion of management, the application
of Section 382 will not materially limit the availability of net tax loss
carryforwards.
Also available to reduce future U.S. income taxes are unused alternative
minimum tax credits of $2.8 million and investment tax credits of $7.3 million.
The investment tax credits which expire as follows: $2.8 million in 1997, $1.8
million in 1998, $1.6 million in 1999 and $1.1 million in 2000. Income taxes
paid during the years ended December 31, 1993, 1992 and 1991 amounted to $0.9
million, $4.4 million, and $7.4 million respectively.
The Company's foreign subsidiaries currently have undistributed earnings of
$17.8 million which if repatriated would be generally sheltered from U.S. tax by
NOL carryforwards and various foreign tax credits.
9. CAPITAL STOCK
Preferred Stock
The Company's preferred stock carried a cumulative annual dividend of 8.75%
($2.1875 per share based on a $25 value) payable quarterly and was convertible
into common stock at $8 per share, subject to certain antidilution adjustments.
The Preferred Stock had a liquidation preference of $25 per share plus cash
equal to any accumulated and unpaid dividends, and was redeemable at the
Company's option at any time at a redemption price of $25 per share plus cash
equal to any accumulated and unpaid dividends, provided that the average closing
price of the common stock for the 20 trading days ending on the fifth day before
mailing the notice of redemption was at least 125% of the conversion price if
mailed before February 10, 1994.
In June 1993, the Company called the remaining shares of preferred stock
for redemption in accordance with the terms of the Certificate of Designation
with regard to the preferred stock. All holders of the preferred stock
surrendered their shares for conversion into 2,496,250 shares of common stock of
the Company. For
41
43
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes of the Consolidated Statements of Cash Flows, this conversion of
preferred stock to common stock is a non-cash transaction, and, therefore, is
not reflected in the Consolidated Statements of Cash Flows. As of December 31,
1993, there were no shares of the preferred stock outstanding.
Common Stock Warrants and Treasury Securities
In November 1991, the Company raised approximately $50.0 million in equity
through its temporary warrant reduction offers and the issuance of 992,000
shares of additional common stock. In connection with the temporary warrant
reduction offers, 2,758,268 Class A Warrants and 3,619,596 Class B Warrants were
exercised to purchase the Company's common stock at a temporarily reduced
exercise price of $5.10 per Class A Warrant and $7.35 per Class B Warrant. The
proceeds were used to retire the Company's then outstanding Series B Notes and
accrued interest thereon totalling $46.8 million in December, 1991.
At December 31, 1993, the Company has outstanding 225,520 Class A Warrants
and 1,872,205 Class B Warrants to purchase common stock exercisable until
February 28, 1995 at a price of $8.28 per share and $15.00 per share,
respectively.
During 1990, the Company issued 300,000 shares of common stock and 451,357
Class C warrants to an international subsidiary. These Class C Warrants are
exercisable until February 28, 1995 at a price of $1.00 per share. The Company
has recorded these warrants at their estimated value at the date of issue of
$16.125 per warrant. This transaction is reflected as treasury securities in the
consolidated balance sheets and consolidated statements of shareholders' equity.
In June 1993, the Board of Directors approved a stock repurchase program
whereby the Company may buy up to 3 million shares of its outstanding common
stock. The program contemplates that the Company may, from time to time,
purchase shares in the open market. This program is funded by the Company's cash
balances. As of December 31, 1993, the Company had purchased 158,400 shares of
common stock under the stock repurchase program at a cost of $1.3 million. These
shares are reflected as treasury securities in the Consolidated Balance Sheets
and Consolidated Statements of Shareholders' Equity.
The Company did not make dividend payments to common stockholders during
1993, 1992 and 1991. See Note 6.
10. EMPLOYEE STOCK OPTIONS, RESTRICTED STOCK AWARDS AND STOCK APPRECIATION
RIGHTS
As of December 31, 1993, the Company has outstanding stock options granted
under two plans: the 1989 Long-Term Incentive Compensation Plan ("1989 Plan")
and the 1982 Stock Option Plan ("1982 Plan"). No further options may be granted
under the 1982 Plan. Options issued in 1982, 1983, 1984 and 1985 under the 1982
Plan were cancelled and reissued effective June of 1986 at an option price which
represented the fair market value on the date of reissuance. During 1991,
options under the Company's 1971 Stock Option Plan lapsed.
42
44
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The options, exercisable at various dates through December 2003, are
conditioned upon continued employment. A summary of stock option transactions
for 1993, 1992 and 1991 are as follows:
1993 1992 1991
--------- -------- -------
Outstanding at beginning of year............................ 720,190 636,854 524,000
Options granted............................................. 439,500 277,487 247,620
Options forfeited........................................... (116,015) (136,078) (30,250)
Options exercised:
-- with a basis of $0.00.................................. -- -- (31,122)
-- with a basis of $2.48.................................. (200) -- --
-- with a basis of $2.50.................................. -- (40,132) (35,753)
-- with a basis of $2.53.................................. (17,008) (11,941) (4,758)
-- with a basis of $5.50.................................. (15,750) (6,000) (28,250)
-- with a basis of $8.38.................................. (7,885) -- --
-- with a basis of $10.27................................. -- -- (3,438)
-- with a basis of $12.56................................. -- -- (1,195)
--------- -------- -------
Outstanding at end of year.................................. 1,002,832 720,190 636,854
--------- -------- -------
--------- -------- -------
Options exercisable:
Granted in 1982-1984 with a basis of $10.21............... 1,925 1,825 2,450
Granted in 1982-1985 with a basis of $2.53................ 6,800 25,133 37,649
Granted in 1986 with a basis of $2.48..................... 633 833 833
Granted in 1987 with a basis of $5.50..................... 34,650 52,400 58,400
Granted in 1989 with a basis of $10.27.................... 91,345 80,408 59,460
Granted in 1990 with a basis of $2.50..................... -- -- 1,250
Granted in 1990 with a basis of $12.56.................... 75,924 53,495 31,068
Granted in 1990 with a basis of $15.72.................... 3,750 2,500 1,250
Granted in 1990 with a basis of $16.09.................... 10,313 6,875 3,438
Granted in 1991 with a basis of $10.52.................... 2,500 1,250 --
Granted in 1991 with a basis of $14.73.................... 66,455 31,445 --
Granted in 1992 with a basis of $8.38..................... 54,293 -- --
Granted in 1992 with a basis of $9.25..................... 20,000 20,000 --
Options not exercisable:
Granted in 1989 with a basis of $10.27.................... -- 26,802 59,460
Granted in 1990 with a basis of $2.50..................... -- -- 36,382
Granted in 1990 with a basis of $12.56.................... 20,036 53,495 93,202
Granted in 1990 with a basis of $15.72.................... -- 2,500 3,750
Granted in 1990 with a basis of $16.09.................... -- 6,875 10,312
Granted in 1991 with a basis of $2.52..................... -- -- 2,500
Granted in 1991 with a basis of $2.90..................... -- -- 75,150
Granted in 1991 with a basis of $10.52.................... 2,500 3,750 5,000
Granted in 1991 with a basis of $14.73.................... 45,370 104,333 155,300
Granted in 1992 with a basis of $8.38..................... 126,838 246,271 --
Granted in 1993 with a basis of $8.38..................... 199,500 -- --
Granted in 1993 with a basis of $10.31.................... 240,000 -- --
--------- -------- -------
1,002,832 720,190 636,854
--------- -------- -------
--------- -------- -------
Included in the 1993 grants were stock options of 199,500 shares and
240,000 shares at exercise prices of $8.38 and $10.31, respectively. These stock
options vest over a four year period from the date of grant.
43
45
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the 1992 grants were stock options of 257,487 shares and 20,000
shares at exercise prices of $8.38 and $9.25, respectively. Of the total $8.38
stock options, the Company granted 167,497 shares in exchange for certain Stock
Appreciation Rights valued at an exercise price of $10.53 - $16.09. The stock
options granted at $8.38 vest over a four year period from the date of grant.
The stock options granted at $9.25 were fully vested at the date of grant.
Included in the 1991 grants were restricted stock options of 80,040 shares at
$2.90. These options vested over a two year period from the date of grant but
lapsed during 1992.
In addition, as part of the 1989 Plan, the Company granted 82,540 Stock
Appreciation Rights in 1991 at an exercise price range of $10.52 - $14.73 and
80,775 Stock Appreciation Rights in 1990 at an exercise price range of
$12.56 - $16.09. At December 31, 1993, there were 16,508 of these rights
outstanding. These rights vest over a four year period from date of grant, and
are exercisable until February 2001. Upon exercise of the rights, appreciation
is paid by distributing cash or shares at the option of the Company.
At December 31, 1993, there were no shares of common stock reserved under
the 1989 Plan for the future granting of stock options, awarding of additional
restricted stock options and/or awarding of additional Stock Appreciation
Rights.
11. EMPLOYEE BENEFITS
The Company has non-contributory pension plans in the U.S. and U.K. Benefit
accruals under the Company's U.S. pension plan, which have been frozen since
1987, covered substantially all the U.S. employees of the Company at that date.
Due to the freezing of domestic pension benefits and fully funding those
benefits in 1987, a contribution was not necessary for 1992 or 1991.
The following tables detail the components of pension expense for the three
years ended December 31, 1993, the funded status of the plans and major
assumptions used to determine these amounts:
1993 1992 1991
------- ------- -------
Service cost.................................................. $ 276 $ 343 $ 363
Interest cost................................................. 769 805 791
Actual return on plan assets.................................. (1,308) (848) (988)
Net amortization and deferral and other....................... 1,284 19 263
------- ------- -------
Net periodic pension cost..................................... $ 1,021 $ 319 $ 429
------- ------- -------
------- ------- -------
Reconciliation of Funded Status of the Plan
DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $10,276 $ 9,674 $ 9,426
------- ------- -------
------- ------- -------
Accumulated benefit obligation........................... $10,468 $ 9,842 $ 9,626
------- ------- -------
------- ------- -------
Projected benefit obligation............................. $11,540 $10,373 $10,159
Plan assets at fair value................................ 10,259 11,250 10,248
------- ------- -------
Projected benefit obligation (in excess of) or less than
plan assets............................................ $(1,281) $ 877 $ 89
Unrecognized net (gain) loss............................. 1,440 (825) 351
Additional minimum liability............................. (2,491) -- --
------- ------- -------
Prepaid pension cost (pension liability) recognized in
the balance sheet...................................... $(2,332) $ 52 $ 440
------- ------- -------
------- ------- -------
Weighted-average assumed discount rate................... 7.0% 8.5% 8.5%
Rate of compensation increases........................... None in U.S. due to freezing
of benefits, 7.5% in U.K.
Weighted-average expected long-term rate of return on
plan assets............................................ 7.0% 8.5% 8.5%
44
46
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For 1993, the Company reduced its discount rate related to the domestic
pension plan from 8.5% to 7.0% to more accurately reflect current market trends.
As a result, the projected benefit obligation exceeded the fair value of the
plan's assets by $2.5 million. This amount is recorded as an additional minimum
liability in the Consolidated Balance Sheets at December 31, 1993.
The Company has several other pension plans covering certain international
employees. Pension expense for these plans totaled $0.2 million in 1993, $0.4
million in 1992 and $0.2 million in 1991. Based on the latest available
actuarial valuations, total accumulated plan benefits are $2.0 million and net
assets available for benefits are $2.4 million.
The Company has an Employee 401(k) Plan which allows eligible participating
employees to make contributions in either a Company stock fund or any one of
seven mutual funds or a combination thereof. The Company contributes for all
eligible employees a percentage of their qualified compensation into the Plan.
Contribution percentages range from 2% for employees under the age of 40 to 6%
for employees who are 60 years of age or older. Contributions to this plan by
the Company totaled approximately $1.7 million in 1993 and $2.0 million for the
years ended December 31, 1992 and 1991. Effective January 1, 1990, the Company
also initiated an additional plan to fund a matching contribution ranging from
0% to 100% of an individual employee's 401(k) contributions based on the Company
achieving a certain level of operating income as a percentage of total revenue
for the year. In 1993, the Company recorded an expense of $1.2 million for this
plan. No expense was required or recorded for matching contributions for 1992 or
1991 related to this plan.
The Company and its subsidiaries provide certain health care benefits for
retired employees. Most of the employees who retire from the Company are
eligible for these benefits. The cost of postretirement health care benefits
were recognized as an expense as claims were paid in 1992 and 1991. These costs
totaled approximately $0.2 million in 1992 and $0.3 million in 1991.
In 1990, the Financial Accounting Standards Board ("FASB") issued SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
During the first quarter of 1993, the Company adopted this new standard. As a
result of adopting SFAS No. 106, the Company recorded the total outstanding
liability related to such retiree benefits of $1.3 million as the cumulative
effect of a change in accounting principle in the consolidated statements of
operations.
Prior to May 1, 1993, the Company had two retiree medical coverage plans.
Effective May 1, 1993 the two plans were combined into one plan, the Smith
International, Inc. Retiree Medical Plan. The plan provides postretirement
medical benefits to retirees and their spouses. The retiree medical plan has an
annual limitation (a "cap") on the dollar amount of the Company's portion of the
cost of benefits incurred by retirees under the plan. The remaining cost of
benefits in excess of the cap is the responsibility of the participants. For
1993, the cap was $25,000. The cap is adjusted annually for inflation, which is
currently assumed to be 4 percent.
The following table sets forth the plan's funded status reconciled with the
amount shown in the Company's consolidated balance sheets:
DECEMBER 31, JANUARY 1,
1993 1993
------------ ----------
Accumulated postretirement benefit obligation:
-- Retirees................................................ $ (1,140) $ (1,236)
-- Actives................................................. (93) (64)
Plan assets at fair value.................................... -- --
-------- --------
Accumulated postretirement benefit obligation in excess of
plan assets................................................ (1,233) (1,300)
Unrecognized net gain........................................ (57) --
-------- --------
Prepaid (Accrued) postretirement benefit cost................ $ (1,290) $ (1,300)
-------- --------
-------- --------
45
47
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Postretirement benefit expense recognized in income from continuing
operations for the year ended December 31, 1993 is summarized as follows:
Service cost.................................................................. $ 9
Interest cost on accumulated postretirement benefit obligation and other...... 223
-----
Postretirement benefit expense................................................ $ 232
-----
-----
The health care cost trend rate assumption can have a significant effect on
the amounts reported. For measurement purposes, a 12% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 1993. The
rate was assumed to gradually decrease to 7% for 1998 and to remain at that
level thereafter. An increase of one percentage point in the health care cost
trend rate would not have a material effect on either the accumulated
postretirement benefit obligation or the aggregate of the service and interest
cost components of the postretirement benefits expense.
The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation for 1993 and 1992 were 7.0% and 8.0%,
respectively.
12. STOCKHOLDERS' RIGHTS PLAN
On June 19, 1990, the Company adopted a Stockholder Rights Plan ("the
Rights Plan"). The Rights Plan provides for a dividend distribution of one
preferred stock purchase right ("Right") for each outstanding share of the
Company's Common Stock, to shareholders of record at the close of business on
June 29, 1990. The Rights Plan is designed to deter coercive takeover tactics
and to prevent an acquiror from gaining control of the Company without offering
a fair price to all of the Company's shareholders. The Rights will expire on
June 19, 2000.
Each Right entitles shareholders to buy one-hundredth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $50. The Rights are exercisable only if a person or group (a)
acquires beneficial ownership of 20% or more of the Common Stock or (b) acquires
beneficial ownership of 1% or more of the Company's Common Stock if such person
or group is a 20%-or-more shareholder on the date when the Rights dividend
distribution is declared or (c) commences a tender or exchange offer which upon
consummation such person or group would beneficially own 20% or more of the
Common Stock of the Company. However, the Rights will not become exercisable if
Common Stock is acquired pursuant to an offer for all shares which a majority of
the independent directors, excluding all officers of the Company, determine to
be fair to and otherwise in the best interests of the Company and its
shareholders.
If any person or group becomes the beneficial owner of 20% or more of the
Company's Common Stock, or acquires 1% or more of the Common Stock if such
person or group is a 20%-or-more shareholder on the date when the Rights
dividend distribution is declared, other than (in either case) pursuant to an
offer for all shares as described above, then each Right not owned by such
person or group or certain related parties will entitle its holder to purchase,
at the Right's then current exercise price, shares of the Company's Common Stock
(or, in certain circumstances as determined by the Board, cash, other property,
or other securities) having a value of twice the Right's exercise price. In
addition, if, after any person becomes the beneficial owner of 20% or more of
the Company's Common Stock, or acquires 1% or more of the Common Stock if such
person is a 20%-or-more shareholder on the date when the Rights dividend
distribution is declared, the Company is involved in the merger or other
business combination transaction with another person in which its Common Stock
is changed or converted, or sells 50% or more of its assets or earning power to
another person, each Right will entitle its holder to purchase, at the Right's
then current exercise price, shares of common stock of such other person having
a value of twice the Right's exercise price.
46
48
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company will generally be entitled to redeem the Rights at $.01 cents
per Right at any time until the tenth business day (subject to extension)
following public announcement that a person has become the beneficial owner of
20% or more of the Company's Common Stock, or acquires 1% or more of the Common
Stock if a 20%-or-more shareholder on the date when the Rights dividend
distribution is declared.
13. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Amounts charged to expense for continuing operations is as follows:
1993 1992 1991
------- ------- -------
Maintenance and repairs.................................. $5,689 $3,927 $9,748
Depreciation of fixed assets............................. 7,348 9,088 9,473
Amortization of intangible assets........................ 934 618 619
Taxes, other than payroll and income taxes............... 1,901 2,280 2,061
Rents.................................................... 6,572 6,190 4,663
Research and engineering costs........................... 6,574 6,218 8,943
14. QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR
------- ------- -------- ------- --------
1993
Revenues....................................... $49,954 $52,741 $ 59,039 $58,978 $220,712
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gross profit................................... $17,821 $19,619 $ 22,239 $22,863 $ 82,542
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) from continuing operations....... $ 1,327 $ 2,651 $(14,158) $ 6,185 $ (3,995)
Income from discontinued operations (Note 2)... 73,623 -- -- -- 73,623
Cumulative effect of change in accounting
principle.................................... (1,300) -- -- -- (1,300)
------- ------- -------- ------- --------
Net income (loss).............................. $73,650 $ 2,651 $(14,158) $ 6,185 $ 68,328
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per common share:
From continuing operations................... $ 0.03 $ 0.06 $ (0.36) $ 0.16 $ (0.13)
From discontinued operations................. 2.02 -- -- -- 1.95
From the change in accounting principle...... (0.04) -- -- -- (0.03)
------- ------- -------- ------- --------
Net income (loss)............................ $ 2.01 $ 0.06 $ (0.36) $ 0.16 $ 1.79
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Included in third quarter of 1993 results is a special charge of $19.9
million ($0.51 per common share in the third quarter and $0.53 per common share
for the full year) relating to the settlement of drill bit litigation (See Note
16). Due to the conversion of the preferred stock into common stock (See Note 9)
in the second quarter of 1993, the total year income (loss) per common share
amounts do not equal the sum of the quarterly income (loss) per common share
amounts.
47
49
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH YEAR
------- ------- -------- ------- --------
1992
Revenues....................................... $53,895 $49,916 $ 53,386 $53,472 $210,669
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gross profit................................... $19,387 $18,255 $ 18,506 $17,966 $ 74,114
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) from continuing operations....... $ 2,039 $ (145) $ (280) $ (450) $ 1,164
Income (loss) from discontinued operations
(Note 2)..................................... 488 (1,371) (727) (1,365) (2,975)
------- ------- -------- ------- --------
Net income (loss).............................. $ 2,527 $(1,516) $ (1,007) $(1,815) $ (1,811)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per common share:
From continuing operations................... $ 0.05 $ (0.01) $ (0.02) $ (0.02) $ (0.02)
Income (loss) from discontinued operations..... 0.01 (0.04) (0.02) (0.04) (0.08)
------- ------- -------- ------- --------
Net income (loss)............................ $ 0.06 $ (0.05) $ (0.04) $ (0.06) $ (0.10)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Included in the income (loss) from continuing operations and net income
(loss) for the fourth quarter of 1992 is a benefit of $2.5 million to reflect
the settlement of U.S. tax issues and approval of U.S. tax refund claim for
prior years. For each of the quarters in 1993 and 1992, fully diluted net income
(loss) per common share was the same as the respective primary net income (loss)
per common share amount.
15. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS
The Company operates primarily in one industry segment: petroleum services.
The products and services of the petroleum services segment are primarily used
in the drilling of oil and gas wells. The following chart sets forth information
concerning the Company's continuing domestic and international operations:
UNITED INTERNATIONAL
STATES OPERATIONS ELIMINATIONS TOTAL
-------- ------------- ------------ -----------
Year ended December 31, 1993:
Sales and other revenues to unaffiliated
customers................................... $134,341 $ 86,371 $ -- $ 220,712
Transfers between geographic areas............. 58,693 23,061 (81,754) --
-------- --------- -------- ----------
Total revenues................................. $193,034 $ 109,432 $(81,754) $ 220,712
-------- --------- -------- ----------
-------- --------- -------- ----------
Income from continuing operations before
interes and taxes........................... $ 26,532 $ (1,920) $ (96) $ 24,516
-------- --------- -------- ----------
-------- --------- -------- ----------
Identifiable assets............................ $249,118 $ 99,268 $ -- $ 348,386
-------- --------- -------- ----------
-------- --------- -------- ----------
Year ended December 31, 1992:
Sales and other revenues to unaffiliated
customers................................... $116,129 $ 94,540 $ -- $ 210,669
Transfers between geographic areas............. 54,334 26,738 (81,072) --
-------- --------- -------- ----------
Total revenues................................. $170,463 $ 121,278 $(81,072) $ 210,669
-------- --------- -------- ----------
-------- --------- -------- ----------
Income from continuing operations before
interest and taxes.......................... $ 17,391 $ (1,556) $ 176 $ 16,011
-------- --------- -------- ----------
-------- --------- -------- ----------
Identifiable assets............................ $147,535 $ 116,102 $ -- $ 263,637
-------- --------- -------- ----------
-------- --------- -------- ----------
Year ended December 31, 1991:
Sales and other revenues to unaffiliated
customers................................... $143,592 $ 108,375 $ -- $ 251,967
Transfers between geographic areas............. 63,856 34,285 (98,141) --
-------- --------- -------- ----------
Total revenues................................. $207,448 $ 142,660 $(98,141) $ 251,967
-------- --------- -------- ----------
-------- --------- -------- ----------
Income from continuing operations before
interest and taxes.......................... $ 16,397 $ (856) $ (176) $ 15,365
-------- --------- -------- ----------
-------- --------- -------- ----------
Identifiable assets............................ $141,838 $ 146,724 $ -- $ 288,562
-------- --------- -------- ----------
-------- --------- -------- ----------
48
50
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
General corporate expenses and interest income and expense have been
excluded from income from continuing operations before interest and taxes in the
table above. Results of operations as reported in the accompanying consolidated
financial statements include general corporate expenses of $5.9 million in 1993,
$5.7 million in 1992 and $4.7 million in 1991.
Transfers between geographic areas are recorded by the Company and its
subsidiaries based on their various intercompany pricing agreements.
United States sales include $29.9 million in 1993, $27.9 million in 1992
and $33.4 million in 1991 exported to various international markets. These
markets include North Sea/Europe, Africa, Middle East, Latin America, Far
East/Asia, and Canada. With the exception of North Sea/Europe, neither export
nor international sales to any one of these individual markets exceeded 10% of
consolidated revenues.
No single customer accounts for 10% or more of consolidated revenues for
the periods presented.
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. This industry concentration has the
potential to impact the Company's exposure to credit risk, either positively or
negatively, because customers may be similarly affected by changes in economic
or other conditions. The creditworthiness of this customer base is strong, and
the Company has not experienced significant credit losses on such receivables.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The Company leases certain facilities and machinery and equipment under
operating leases. The Company also leases certain machinery and equipment under
capital leases. At December 31, 1993 and 1992, machinery and equipment included
$3.0 million and $2.5 million, respectively (before accumulated amortization of
$0.7 million and $0.7 million, respectively) related to capital leases. These
capital leases are recorded in other current and other long-term liabilities in
the accompanying consolidated balance sheets.
Future minimum payments under all non-cancellable leases having initial
terms of one year or more are as follows:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ ------- ---------
1994............................................................ $ 660 $ 3,316
1995............................................................ 520 2,149
1996............................................................ 435 1,437
1997............................................................ 345 1,072
1998............................................................ 11 872
Thereafter..................................................... -- 9,454
------- ---------
1,971 $18,300
---------
---------
Less: amount representing interest on capital leases........... 384
-------
Present value of minimum lease payments under capital leases... $ 1,587
-------
-------
49
51
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
In January 1991, the Company and several of the Company's competitors were
served with a federal grand jury subpoena for documents, principally concerning
the Company's sales, marketing and pricing activities for tri-cone rock bits
produced and sold by the Company. In June 1992, Baker Hughes entered a plea of
guilty to an Information charging it with a single count of violating Section 1
of the Sherman Act for the period March through May 11, 1989 and agreed to pay a
$1.0 million fine to the U.S. government. On November 23, 1993, the Company
entered a plea of guilty to a violation of Section 1 of the Sherman Act for the
same period and paid a fine to the U.S. government of $0.7 million.
After it was served the subpoena by the grand jury, the Company was served
with complaints in three civil proceedings. Each action alleged violations of
Section 1 of the Sherman Act. The cases were consolidated for discovery purposes
with four other cases filed against other tri-cone rock bit manufacturers, but
not the Company, in the Southern District of Texas, which made allegations
similar to those made against the Company. The consolidated case was captioned
Red Eagle Resources Corporation, Inc., et al. v. Baker Hughes, Inc., Baker
Hughes Production, Inc., Hughes Tool Company, Reed Tool Company, a/k/a/ Baker
RTC, Inc., Camco International, Inc., Smith International, Inc., and Dresser
Industries, Inc., Civil Action No. 91-H-627. In September 1992, the district
court certified the case as a class action. The class consisted of direct
purchasers of rock bits from defendants in the period September 1, 1986, through
January 15, 1992.
On August 27, 1993, without admitting any form of liability, the Company
entered into an agreement with the plaintiffs to settle all claims against the
Company. The Company recorded a special charge of $19.9 million to cover the
cost of the settlement of $16.8 million and related estimated legal fees and
other costs and expenses. On October 28, 1993, an order was entered which gave
final approval to this settlement.
Chevron USA Inc., which opted not to be part of the above mentioned class
action, filed suit against the Company in the United States District Court for
the Southern District of Texas, Houston Division, entitled Chevron USA Inc.,
acting by and through its division Chevron USA Production Company v. Baker
Hughes, Inc., Reed Tool Company a/k/a Baker RTC, Inc., CAMCO International,
Inc., Smith International, Inc. and Dresser Industries, Inc. Cause No. H-93-949,
alleging violations of Section 1 of the Sherman Act. This case is in its early
phase; little formal discovery has occurred; and docket call for the trial of
this matter has been set for January 26, 1996. Management believes that the
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
On March 4, 1992, the Company was served with a complaint in the U.S.
District Court in the Central District of California by the U.S. Department of
Labor ("DOL"). The complaint alleges violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") arising out of the Company's purchase of
annuities from Executive Life Insurance Company("Executive Life"), upon the
termination of its Pension Plan in August 1985. The DOL filed the lawsuit in
order to prevent the expiration of the statute of limitations while it completed
its investigation of the Company's purchase of annuities from Executive Life. In
1993, Executive Life emerged from a conservatorship proceeding in California
state court. The Company believes that it properly discharged its legal
responsibilities with regard to the purchase of annuities from Executive Life
and, consequently, that uninsured losses of the Company, if any, resulting from
the DOL claims will not be material.
The Company also is named in a number of environmental legal actions
related to the conduct of its business. The major actions relate to several
Superfund sites including the Sheridan Disposal Services site in Hempstead,
Texas, the Operating Industries, Inc. site in Monterey Park, California and the
Chemform site in Pompano Beach, Florida. The Company has notified its insurance
companies of potential claims for each of the above sites and coverage has been
denied.
The Company reached a settlement with the Sheridan Site Committee (the
Committee) with respect to the Sheridan Disposal Services site in Hempstead,
Texas. The Company has agreed to pay its allocable share
50
52
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of response costs incurred by the Committee, such share to be limited to the
lesser of $3.0 million or 2.93% of actual response costs. The Company has also
reached a settlement with the United States Environmental Protection Agency
Region IX ("EPA") with respect to the Operating Industries, Inc. ("OII") site.
The Company has agreed to pay its allocable share of total future site response
costs incurred, such share to be limited to the lesser of $5.0 million or 0.65%
of the future site response costs incurred. As of December 31, 1993, the Company
anticipates that its ultimate liability for the Sheridan and OII sites will be
substantially less than these maximum amounts.
Certain environmental problems may exist at the Chemform site in Pompano
Beach, Florida, which is located in a highly industrialized area. The Company
held a leasehold interest in this property between May 14, 1976 and March 16,
1979. On October 4, 1989, the EPA listed the Chemform site on the National
Priorities List. In October 1989, the Company and three other potential
responsible parties entered into an administrative consent decree order with the
EPA for the preparation of the Remedial Investigation and Feasibility Study
("RI/FS"). An amendment to the consent decree specified that the RI/FS would be
addressed in two operable units: Operable Unit One addresses Site-related
groundwater contamination, and Operable Unit Two addressed source and soil
contamination. On September 22, 1992, EPA issued the Record of Decision ("ROD")
for Operable Unit One, which selected a "No Action with Monitoring" alternative,
under which groundwater will be monitored for at least one year. In the ROD, the
EPA estimated the costs of constructing the required groundwater wells and the
cost of one year of groundwater monitoring to be approximately $0.1 million. On
September 16, 1993, EPA issued the ROD for Operable Unit Two at the Chemform
Site, which addresses site-related soil contamination. The ROD determined that
no further Superfund action is necessary to address Operable Unit Two at the
Site; however, the State of Florida, as represented by the Florida Department of
Environmental Protection, has not yet concurred in the ROD for Operable Unit
Two. The Company believes that the EPA will demand reimbursement of certain
oversight expenses that the EPA allegedly has incurred in administering the
Chemform site. The Company intends to scrutinize and, if necessary, vigorously
contest any such claims made by the EPA.
As of December 31, 1990, the Company recorded a $5.0 million provision for
its estimated liability for the clean-up of all of the Company's environmental
matters that were known at that time including the estimated costs to be
incurred regarding the Superfund sites discussed above. In 1993, 1992 and 1991,
the Company paid for various clean up activities and made additional provisions,
charged to continuing operations, of $0.5 million, $0.4 million and $0.8
million, respectively, and a provision of $1.5 million charged to the gain on
sale of DDS operations in 1993 based on revised estimates of required future
clean-up costs. At December 31, 1993, the remaining recorded liability for
estimated future clean-up costs for the sites discussed above as well as for
properties currently or previously owned or leased by the Company totalled $3.6
million. As additional information becomes available, the Company may be
required to provide for additional environmental clean-up costs for the
Superfund sites and for properties currently or previously owned or leased by
the Company. The Company believes that any additional unrecorded clean-up
liabilities will not have a material adverse effect on the Company's
consolidated financial position or the results of its operations.
51
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors of the Registrant, see the information
set forth following the caption "ELECTION OF DIRECTORS" in the Company's
definitive proxy statement to be filed no later than 120 days after the end of
the fiscal year covered by this Form 10-K (the "Proxy Statement"), which
information is incorporated herein by reference. For information concerning
executive officers of the Registrant, see Item 4A appearing in Part I of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth following the caption "EXECUTIVE COMPENSATION AND
OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS" in the Company's Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth following the captions "ELECTION OF DIRECTORS"
and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" in the Company's Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth following the captions "ELECTION OF DIRECTORS"
and "EXECUTIVE COMPENSATION AND OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS"
in the Company's Proxy Statement is incorporated herein by reference.
52
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
PAGE
REFERENCE
---------
(1) Financial statements included in this report:
Report of Independent Public Accountants.............................. 28
Consolidated Statements of Operations for the years ended December 31,
1993, 1992 and 1991.................................................. 29
Consolidated Balance Sheets at December 31, 1993 and 1992............. 30-31
Consolidated Statements of Cash Flows at December 31, 1993, 1992 and
1991................................................................. 32
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991..................................... 33
Notes to Consolidated Financial Statements............................ 34-51
(2) Financial statement schedules for the years ended December 31, 1993,
1992 and 1991:
V -- Property, plant and equipment............................... 56-58
VI -- Accumulated depreciation of property, plant and equipment... 56-58
VIII -- Valuation and qualifying accounts and reserves.............. 59
IX -- Short-term borrowings....................................... 59
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.
(3) EXHIBITS AND INDEX TO EXHIBITS
3.1 -- Restated Certificate of Incorporation of the Company as amended to date.
3.2 -- Bylaws of the Company as amended to date.
4.1 -- Warrant Agreement dated as of February 12, 1988 between the Company and
Morgan Shareholder Services Trust Company, as Warrant Agent.
4.2 -- Rights Agreement, dated as of June 19, 1990, between the Company and First
Chicago Trust Company of New York. Filed as Exhibit 4.13 to the Company's
report on Form 10-K for the year ended December 31, 1991 and incorporated
herein by reference.
4.3 -- Note Agreement, dated as of August 31, 1992, between the Company and
Principal Mutual Life Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS Life Insurance
Company, IDS Life Insurance Company of New York and American Enterprise Life
Insurance Company.
4.4 -- First Amendment and Waiver, dated as of March 24, 1993, between the Company
and Principal Mutual Life Insurance Company, John Hancock Mutual Life
Insurance Company, John Hancock Variable Life Insurance Company, IDS Life
Insurance Company, IDS Life Insurance Company of New York and American
Enterprise Life Insurance Company.
4.5 -- Second Amendment and Waiver, dated as of September 1, 1993, between the
Company and Principal Mutual Life Insurance Company, John Hancock Mutual Life
Insurance Company, John Hancock Variable Life Insurance Company, IDS Life
Insurance Company, IDS Life Insurance Company of New York and American
Enterprise Life Insurance Company.
9. -- Not applicable.
10.1 -- Smith International, Inc. Supplemental Pension Plan as amended to date. Filed
as Exhibit 10.1 to the Company's report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
53
55
10.2 -- Smith International, Inc. 1982 Stock Option Plan. Filed as Exhibit 10.3 to
the Company's report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10.3 -- Smith International, Inc. 1989 Long-Term Incentive Compensation Plan. Filed
as Exhibit 10.4 to the Company's report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
10.4 -- Smith International, Inc. Directors' Retirement Plan as amended to date.
Filed as Exhibit 10.5 to the Company's report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
10.5 -- Smith International, Inc. Supplemental Executive Retirement Plan, as amended.
10.6 -- Agreement dated March 19, 1990 between the Company and Industrial Equity
(Pacific) Limited and Brierley Investments Limited. Filed as Exhibit 10.12 to
the Company's report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10.7 -- Supply Agreement dated April 2, 1987 between the Company and TCM Holding
Corporation and Rogers Tool Works, Inc. for the supply of tungsten carbide
products. Filed as Exhibit 10.13 to the Company's report on Form 10-K for the
year ended December 31, 1989 and incorporated herein by reference.
10.8 -- Supply Agreement dated October 1, 1989 between the Company and Amforge-Smith
Forge Company for the supply of forgings. Filed as Exhibit 10.14 to the
Company's report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
10.9 -- Sale and Purchase and Business Agreement dated December 28, 1989 between the
Company and Gammaloy, Ltd. relating to the Company's sale of its domestic
fleet of non-magnetic drill collars. Filed as Exhibit 10.15 to the Company's
report on Form 10-K for the year ended December 31, 1989 and incorporated
herein by reference.
10.10 -- Consulting Agreement dated December 31, 1990 between the Company and Kenneth
R. Grumbles. Filed as Exhibit 10.11 to the Company's report on Form 10-K for
the year ended December 31, 1991 and incorporated herein by reference.
10.11 -- Employment Agreement dated December 10, 1987 between the Company and Douglas
L. Rock.
10.12 -- Employment Agreement dated December 10, 1987 between the Company and D. Barry
Heppenstall.
10.13 -- Employment Agreement dated December 10, 1987 between the Company and Bryan
Dudman.
10.14 -- Employment Agreement dated January 2, 1991 between the Company and Neal S.
Sutton. Filed as Exhibit 10.21 to the Company's report on Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference.
10.15 -- Employment Agreement dated May 1, 1991 between the Company and Richard A.
Werner. Filed as Exhibit 10.20 to the Company's report on Form 10-K for the
year ended December 31, 1991 and incorporated herein by reference.
10.16 -- Amendment to Employment Agreement dated October 16, 1989 between the Company
and Douglas L. Rock. Filed as Exhibit 10.29 to the Company's report on Form
10-K for the year ended December 31, 1989 and incorporated herein by
reference.
10.17 -- Amendment to Employment Agreement dated October 16, 1989 between the Company
and D. Barry Heppenstall. Filed as Exhibit 10.31 to the Company's report on
Form 10-K for the year ended December 31, 1989 and incorporated herein by
reference.
10.18 -- Amendment to Employment Agreement dated October 16, 1989 between the Company
and Bryan Dudman. Filed as Exhibit 10.33 to the Company's report on Form 10-K
for the year ended December 31, 1989 and incorporated herein by reference.
54
56
10.19 -- Amendment to Employment Agreement dated January 2, 1991 between the Company
and Neal S. Sutton. Filed as Exhibit 10.32 to the Company's report on Form
10-K for the year ended December 31, 1990 and incorporated herein by
reference.
10.20 -- Amendment to Employment Agreement dated May 1, 1991 between the Company and
Richard A. Werner. Filed as Exhibit 10.30 to the Company's report on Form
10-K for the year ended December 31, 1991 and incorporated herein by
reference.
10.21 -- Asset Acquisition Agreement dated January 14, 1993 by and between the Company
and Halliburton Company with respect to the sale of the Company's directional
drilling business. Filed as Exhibit 10.21 to the Company's report on Form
10-K for the year ended December 31, 1992 and incorporated herein by
reference.
11. -- Not applicable.
12. -- Not applicable.
13. -- Not applicable.
18. -- Not applicable.
19. -- Not applicable.
21. -- Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-31556.
23.2 -- Consent of Arthur Andersen & Co. regarding Form S-8 Registration Statement
No. 33-69840.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
55
57
SMITH INTERNATIONAL, INC.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS)
BALANCE AT ADDITIONS TRANSFERS, BALANCE
BEGINNING --------------------- RETIREMENTS AT END
OF YEAR AT COST(A) OTHER(B) OR SALES OTHER(C) OF YEAR
---------- ---------- -------- ----------- -------- --------
Land............................... $ 743 $ 611 $ (12) $ -- $ 6 $ 1,348
Buildings.......................... 15,044 2,926 (230) (48) 315 18,007
Machinery and equipment............ 142,785 13,040 (1,744) (7,363) (8,483) 138,235
--------- --------- -------- ---------- -------- --------
158,572 16,577 (1,986) (7,411) (8,162) 157,590
Rental equipment................... 34,691 14,418 (417) (4,725) -- 43,967
--------- --------- -------- ---------- -------- --------
$ 193,263 $ 30,995 $(2,403) $ (12,136) $(8,162) $201,557
--------- --------- -------- ---------- -------- --------
--------- --------- -------- ---------- -------- --------
SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS)
ADDITIONS
BALANCE AT -------------------- TRANSFERS, BALANCE
BEGINNING CHARGED RETIREMENTS AT END
OF YEAR TO INCOME OTHER(B) OR SALES OTHER(C) OF YEAR
---------- --------- -------- ----------- -------- --------
Buildings........................... $ 7,603 $ 543 $ (148) $ (769) $ -- $ 7,229
Machinery and equipment............. 116,997 4,060 (1,481) (3,178) (7,689) 108,709
--------- -------- -------- --------- -------- --------
124,600 4,603 (1,629) (3,947) (7,689) 115,938
Rental equipment.................... 24,140 2,347 (309) (2,721) -- 23,457
--------- -------- -------- --------- -------- --------
$ 148,740 $ 6,950 $(1,938) $(6,668) $(7,689) $139,395
--------- -------- -------- --------- -------- --------
--------- -------- -------- --------- -------- --------
See Note 1 of Notes to Consolidated Financial Statements for discussion of
depreciation methods and rates.
(A) Includes $10,299 and $5,505 of rental equipment and plant and equipment,
respectively, related to the acquisition of A-Z/Grant and Lindsey.
(B) Foreign currency translation adjustment arising from the provisions of
Statement of Financial Accounting Standards Board No. 52; see Note 1 of
Notes to Consolidated Financial Statements.
(C) Amounts primarily represent the reclassification of certain fixed assets to
assets held for sale.
56
58
SMITH INTERNATIONAL, INC.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(AMOUNTS IN THOUSANDS)
BALANCE AT ADDITIONS TRANSFER, BALANCE
BEGINNING ------------------ RETIREMENTS AT END
OF YEAR AT COST OTHER(A) OR SALES(B) OTHER(C) OF YEAR
---------- ------- -------- ----------- -------- --------
Land................................ $ 4,256 $ 20 $ (33) $ (240) $(3,260) $ 743
Buildings........................... 28,700 711 (544) (7,841) (5,982) 15,044
Machinery and equipment............. 167,395 8,399 (3,709) (29,300) -- 142,785
--------- ------- -------- ---------- -------- --------
200,351 9,130 (4,286) (37,381) (9,242) 158,572
Rental equipment.................... 134,731 17,538 (2,399) (115,179) -- 34,691
--------- ------- -------- ---------- -------- --------
$ 335,082 $26,668 $(6,685) $ (152,560) $(9,242) $193,263
--------- ------- -------- ---------- -------- --------
--------- ------- -------- ---------- -------- --------
SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(AMOUNTS IN THOUSANDS)
ADDITIONS
BALANCE AT -------------------- TRANSFER, BALANCE
BEGINNING CHARGED RETIREMENTS AT END
OF YEAR TO INCOME OTHER(A) OR SALES(B) OTHER(C) OF YEAR
---------- --------- -------- ----------- -------- --------
Buildings........................... $ 11,022 $ 1,521 $ (352) $ (3,724) $ (864) $ 7,603
Machinery and equipment............. 133,013 7,016 (2,998) (20,034) -- 116,997
--------- --------- -------- ---------- -------- --------
144,035 8,537 (3,350) (23,758) (864) 124,600
Rental equipment.................... 61,617 13,582 (1,332) (49,727) -- 24,140
--------- --------- -------- ---------- -------- --------
$ 205,652 $22,119 $(4,682) $ (73,485) $ (864) $148,740
--------- --------- -------- ---------- -------- --------
--------- --------- -------- ---------- -------- --------
See Note 1 of Notes to Consolidated Financial Statements for discussion of
depreciation methods and rates.
(A) Foreign currency translation adjustment arising from the provisions of
Statement of Financial Accounting Standards Board No. 52; see Note 1 of
Notes to Consolidated Financial Statements.
(B) Includes transfer of $61,787 and $12,696 of net book value of rental
equipment and plant and equipment, respectively, to net assets of DDS
business sold in 1993; see Note 2 of Notes to Consolidated Financial
Statements.
(C) Amount represents the reclassification of certain fixed assets to assets
held for sale.
57
59
SMITH INTERNATIONAL, INC.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(AMOUNTS IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING ------------------ RETIREMENTS AT END
OF YEAR AT COST OTHER(A) OR SALES OTHER(B) OF YEAR
---------- ------- -------- ----------- -------- --------
Land................................ $ 4,587 $ -- $ (2) $ (87) $ (242) $ 4,256
Buildings........................... 30,029 739 (26) (355) (1,687) 28,700
Machinery and equipment............. 192,126 8,653 (334) (20,893) (12,157) 167,395
---------- ------- -------- ----------- -------- --------
226,742 9,392 (362) (21,335) (14,086) 200,351
Rental equipment.................... 110,226 34,037 (150) (9,382) -- 134,731
---------- ------- -------- ----------- -------- --------
$ 336,968 $43,429 $ (512) $ (30,717) $(14,086) $335,082
---------- ------- -------- ----------- -------- --------
---------- ------- -------- ----------- -------- --------
SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
(AMOUNTS IN THOUSANDS)
ADDITIONS
BALANCE AT -------------------- BALANCE
BEGINNING CHARGED RETIREMENTS AT END
OF YEAR TO INCOME OTHER(A) OR SALES OTHER(B) OF YEAR
---------- --------- -------- ----------- -------- --------
Buildings........................... $ 10,598 $ 1,589 $ (26) $ (221) $ (918) $ 11,022
Machinery and equipment............. 149,645 8,797 (259) (18,286) (6,884) 133,013
---------- --------- -------- ----------- -------- --------
160,243 10,386 (285) (18,507) (7,802) 144,035
Rental equipment.................... 58,848 11,402 (123) (8,510) -- 61,617
---------- --------- -------- ----------- -------- --------
$ 219,091 $21,788 $ (408) $ (27,017) $(7,802) $205,652
---------- --------- -------- ----------- -------- --------
---------- --------- -------- ----------- -------- --------
See Note 1 of Notes to Consolidated Financial Statements for discussion of
depreciation methods and rates.
(A) Foreign currency translation adjustment arising from the provisions of
Statement of Financial Accounting Standards Board No. 52; see Note 1 of
Notes to Consolidated Financial Statements.
(B) Amount represents a provision to writedown certain fixed assets to their
estimated net realizable value and the reclassification of such items to
assets held for sale.
58
60
SMITH INTERNATIONAL, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
OF YEAR TO EXPENSE WRITE-OFFS OTHER(1) OF YEAR
---------- ---------- ---------- -------- -------
Allowance for Doubtful Accounts:
Year Ended -- December 31, 1993............... $4,254 $ 974 $ (1,285) $1,052 $ 4,995
Year Ended -- December 31, 1992............... $4,308 $1,860 $ (1,914) -- $ 4,254
Year Ended -- December 31, 1991............... $6,159 $1,861 $ (3,712) -- $ 4,308
- ---------------
(1) Amount represents the reclassification of certain reserves relating to
long-term receivables to trade accounts receivable.
SMITH INTERNATIONAL, INC.
SCHEDULE IX -- SHORT-TERM BORROWINGS
(DOLLARS IN THOUSANDS)
CATEGORY MAXIMUM AVERAGE
OF AMOUNT AMOUNT
AGGREGATE WEIGHTED OUT- OUT-
SHORT- BALANCE AVERAGE STANDING STANDING
TERM AT END INTEREST DURING DURING
BORROWINGS OF YEAR RATE THE YEAR THE YEAR
---------- -------- -------- -------- --------
Year Ended:
December 31, 1993...... Notes payable to Banks $ 702 7% $ 39,702 $ 13,859 7%
December 31, 1992...... Notes payable to Banks $34,361 9% $ 52,208 $ 45,484 10%
December 31, 1991...... Notes payable to Banks $50,533 11% $ 50,533 $ 39,094 11%
- ---------------
(2) Computed by dividing short-term interest expense by average short-term
borrowings.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMITH INTERNATIONAL, INC.
By: /s/ DOUGLAS L. ROCK
--------------------------------
Douglas L. Rock
Chief Executive Officer, President,
and Chief Operating Officer
March 21, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated:
/s/ DOUGLAS L. ROCK Chairman of the Board, Chief March 21, 1994
- --------------------------------------------- Executive Officer,
(Douglas L. Rock) President and Chief
Operating Officer
/s/ LOREN K. CARROLL Executive Vice President and March 21, 1994
- --------------------------------------------- Chief Financial Officer
(Loren K. Carroll)
/s/ BENJAMIN F. BAILAR Director March 21, 1994
- ---------------------------------------------
(Benjamin F. Bailar)
/s/ G. CLYDE BUCK Director March 21, 1994
- ---------------------------------------------
(G. Clyde Buck)
/s/ JAMES R. GIBBS Director March 21, 1994
- ---------------------------------------------
(James R. Gibbs)
/s/ JERRY W. NEELY Director March 21, 1994
- ---------------------------------------------
(Jerry W. Neely)
/s/ H. MOAK ROLLINS Director March 21, 1994
- ---------------------------------------------
(H. Moak Rollins)
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