Back to GetFilings.com

Table of Contents

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year end December 31, 2002

¨    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number 333-60778

DRESSER, INC.

(Exact name of registrant as specified in its charter)

15455 Dallas Parkway, Suite 1100

Addison, Texas 75001

(Address of principal executive offices) (zip code)

(972) 361-9800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act: NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

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 the 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.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

There is currently no established publicly traded market for the common equity of the Company held by non-affiliates.

The number of shares outstanding of common stock (par value $0.01 per share) as of December 4, 2003 was 1,000.

Table of Contents

Index to Financial Statements

DRESSER, INC.

Form 10-K Annual Report

Index

2

Table of Contents

Index to Financial Statements

PART I

General Business Development

Dresser, Inc. was originally incorporated in 1998, under the name Dresser Equipment Group, Inc. (“DEG”), under the laws of the state of Delaware. Its certificate of incorporation was amended and restated on April 9, 2001. As used in this report, the terms “we,” “our,” “us,” “Dresser” and the “Company” refer to Dresser, Inc. and its predecessors, subsidiaries and affiliates unless the context indicates otherwise.

In January 2001, Halliburton Company (“Halliburton”), together with its wholly-owned subsidiary Dresser B.V., signed an Agreement and Plan of Recapitalization with DEG Acquisitions, LLC, an entity owned by affiliates of First Reserve Corporation (“First Reserve”) and Odyssey Investment Partners, LLC (“Odyssey”) to effect the recapitalization of its businesses relating to, among other things, the design, manufacture and marketing of flow control, measurement systems and compression and power systems for customers primarily in the energy industry. Halliburton originally acquired the businesses as part of its acquisition of Dresser Industries, Inc. in 1998. Dresser Industries’ operations consisted of Dresser’s businesses and certain other operating units retained by Halliburton following the consummation of the recapitalization transaction. In order to accomplish this transaction, Halliburton effected the reorganization of various legal entities that comprised the DEG business segment of Halliburton. Simultaneously and contingent upon completion of the recapitalization, the acquisition of certain foreign entities was consummated. This transaction has been accounted for as a leveraged recapitalization. No adjustments or revaluation of Dresser’s historical basis of accounting for operations were required.

In connection with the recapitalization in April 2001, Dresser paid Halliburton approximately $1,300 million to redeem our common equity and acquire the stock of certain of our foreign subsidiaries from Dresser B.V. The recapitalization transaction and related expenses were financed through the issuance of $300.0 million of senior subordinated notes, $720.0 million of borrowings under our credit facility and approximately $400.0 million of common equity contributed by DEG Acquisitions, LLC. Halliburton retained an approximate 5.1% voting interest as part of the recapitalization transaction.

On July 3, 2002, we modified our corporate structure by forming a Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. We are now wholly-owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the sole shareholder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the sole shareholder of Dresser Holdings, Ltd. On July 3, 2002, the shares of Dresser were cancelled and the holders thereof became shareholders of Dresser, Ltd. Dresser Holdings, Inc. and Dresser Holdings, Ltd. have no assets or liabilities, other than common stock holdings of Dresser and Dresser Holdings, Inc., respectively, conduct no operations outside of Dresser and have no transactions to date other than those incidental to their formation.

Restatement of our Financial Statements

Our independent auditors for 1998 through 2001, Arthur Andersen LLP, (“Andersen”), have ceased operations. We engaged new independent auditors, PricewaterhouseCoopers LLP (“PwC”), in June 2002 to audit our 2002 financial statements and, upon discovery of errors affecting our 2001 financial statements, also engaged PwC to perform a new audit of our 2001 financial statements. PwC was not engaged to audit, and has not audited, any of our financial statements prior to the year ended December 31, 2001. The Company and PwC have discovered other errors in our financial statements affecting the years 1998 through 2000.

PwC has reported to our audit committee “material weaknesses” and “reportable conditions” under standards established by the American Institute of Certified Public Accountants regarding various elements of

3

Table of Contents

Index to Financial Statements

our system of internal controls, which contributed to the accounting errors in our financial statements that necessitated the restatement described below. For more information regarding these material weaknesses and reportable conditions, see “—Certain Risk Factors—Our independent auditors have reported to our audit committee material weaknesses and reportable conditions regarding various elements of our system of internal controls” and “Item 9A. Controls and Procedures.” We have conducted a review of the errors requiring restatement, including a separate review by our audit committee to determine what remedial measures were necessary. We believe our management has taken or is in the process of taking the steps necessary to correct the errors and avoid similar errors in the future. For more information regarding the steps we have taken or are in the process of taking, see “Item 9A. Controls and Procedures.”

We concluded that re-audits of the years 1998 through 2000 were impracticable in light of the change in ownership and control of the Company in early 2001, and subsequent changes in personnel, records, consolidations and operating realignments. Because our then independent auditors have ceased operations, we are unable to give effect to the corrections without rendering fiscal years 1998 through 2000 unaudited and, accordingly, the financial statements at December 31, 2000 and all earlier periods are presented as unaudited.

We have not amended our annual report on Form 10-K for the year ended December 31, 2001 or our quarterly reports on Form 10-Q for any period prior to that date, and the financial statements and related financial information contained in such reports should no longer be relied upon.

This report gives effect to our restatements of our financial statements for 1998 through 2001. The following is a summary of accounting errors and restatements; the tables reflect the impact as an increase or (decrease) to the financial statement caption:

Errors in carve-out financial statements:

From 1998 to 2001, our carve-out financial statements incorrectly excluded certain restructuring charges, legal settlements and deferred tax assets that were specifically related to the DEG business unit of Halliburton. The impact of these items on our financial statements for 1998 through 2001 is as follows:

Errors in leveraged recapitalization transaction:

As described in Note 1 to our financial statements, our leveraged recapitalization transaction comprised two interdependent components: the recapitalization of DEG and the acquisition of certain foreign operations of Halliburton. These related transactions should have been accounted for as a single transaction. We had accounted

4

Table of Contents

Index to Financial Statements

for the acquisition of the foreign operations incorrectly by applying the principles of purchase accounting to that acquisition. In addition, we incorrectly valued the pension and postretirement benefit obligations and assets associated with this transaction at purchase accounting values instead of at historical costs. We also did not give recognition to liabilities assumed for our participation in Halliburton’s single employer postretirement obligations nor did we reflect the retention of certain liabilities for legal exposures and other risk management matters by Halliburton. In addition, we determined a full valuation allowance was necessary for the domestic deferred tax assets at the date of the leveraged recapitalization based upon the impact of the incurrence of significant indebtedness and associated interest expense on our restated historical financial statements. The impact of the restatement of these items on our 2001 and 2000 financial statements is as follows:

Errors in reserves:

Reserves were established in 1999 and prior periods while we were part of Halliburton that were incorrectly included in the 1999 carve-out financial statements. From 1999 through 2001, we inappropriately offset expenses against these reserves. In particular, certain other expenses were incorrectly accounted for in amount, timing, or business segment. The impact of the restatement on 1999 through 2001 is as follows:

5

Table of Contents

Index to Financial Statements

Other errors:

We made other errors in our 1999, 2000 and 2001 financial statements, principally related to accounting for various accrued liabilities, restructuring charges, revenue recognition, capitalized costs, inventory and deferred financing fees, as well as in our intercompany and equity accounts, the effects of which are as follows:

Errors in the statement of cash flows:

In addition to the effects of the errors described above on our statement of cash flows, we made errors in our 2001 statement of cash flows, the correction of which resulted in a net decrease in operating cash flows of $46.9 million, an increase in cash flows from investing activities of $2.2 million, an increase in cash flows provided by financing activities of $45.0 million and a decrease of $0.3 million on the effects of translation adjustments on cash.

We have also restated our 2001 and 2000 cash flows statements to reflect the impact of other errors found in our intercompany reconciliation process. The impact of these errors was to increase operating cash flows by $4.4 million and $0.1 million for the years ended December 31, 2001 and 2000, respectively.

Reclassifications:

We have reclassified equity earnings of unconsolidated subsidiaries from revenues to a separate line item on the financial statements. The impact was to reduce revenues in 2001 and 2000 by $2.1 million and $0.8 million,

6

Table of Contents

Index to Financial Statements

respectively. We have also reclassified progress billings to customers from a reduction of inventory to deferred revenue. The impact was to increase inventory and deferred revenue by $2.0 million in 2001 and $1.9 million in 2000.

Summary of Restated Items

The following table presents, on a condensed basis, the aggregate impact of the restatement adjustments on our previously reported 2001 balance sheet:

The following table presents the effect of the restatement adjustments on shareholders’ deficit for the period ended December 31, 2001:

7

Table of Contents

Index to Financial Statements

The following table presents, on a condensed basis, the impact of the restatement adjustments on our previously reported statements of operations for the periods ending December 31, 2001, 2000, 1999 and 1998, respectively:

8

Table of Contents

Index to Financial Statements

The following presents the effect of the restatement adjustments on income for the periods ended December 31, 2001, 2000, 1999 and 1998, respectively.

Fourth Quarter 2001 Adjustments

The Company recorded a number of adjustments in the fourth quarter of 2001. Some portion of the charges to fourth quarter operations resulting from these efforts, $7.8 million, may relate to earlier quarters of 2001; however the Company does not have sufficient information to identify all specific charges attributable to individual prior quarters of 2001 and, accordingly, recorded them in the fourth quarter of 2001. Management believes there were no material fourth quarter adjustments, that may relate to earlier quarters, in the year ended December 31, 2002.

Overview

We design, manufacture and market highly engineered equipment and services sold primarily to customers in the energy industry. Our primary business segments are flow control, measurement systems and compression and power systems. We sell our products and services to customers including major oil companies, multinational engineering and construction companies and other industrial firms. Our total revenues by geographic region in 2002 consisted of North America (52.1%), Europe/Africa (24.3%), Latin America (9.0%), Asia (9.6%) and the Middle East (5.0%). We have pursued a strategy of customer, geographic and product diversity to mitigate the impact of an economic downturn on our business in any one part of the world or in any single business segment.

For the year ended December 31, 2002, we generated revenues of $1,589.4 million, operating income of $82.9 million and a net loss of $23.2 million.

We offer our customers highly engineered products and services used to produce, transport, process, store and distribute oil and gas and their by-products. Because many of our products are used in mission-critical applications, our customers often require us to meet internal, government and industry standards, an expensive process that can take years, in order to reduce the likelihood of costly system failures. Our products are often developed and engineered in cooperation with our customers for specific applications. The purchasing decisions for these customized products are driven primarily by product performance, technical specifications and the ability to deliver service and support rather than solely by price. We are increasingly combining our products and services to develop integrated solutions to meet our customers’ needs.

9

Table of Contents

Index to Financial Statements

We believe that our installed base of energy infrastructure equipment is one of the largest in the world in the markets we serve. This significant installed base provides us with a recurring demand for replacement parts and equipment upgrades and a substantial platform to expand our aftermarket service business. A significant portion of replacement equipment, parts and maintenance services in our businesses is awarded to the original equipment manufacturer. Aftermarket parts and services typically carry higher margins than our original equipment sales, and accounted for approximately 22% of our revenues in 2002.

Competitive Strengths

We believe the following competitive strengths position us to enhance our growth and profitability:

10

Table of Contents

Index to Financial Statements

Business Strategy

Products and Services

We have three business segments: flow control, measurement systems, and compression and power systems. Our businesses are organized around the products and services provided to the customers they serve. During the second quarter of 2002, we made changes to our internal corporate structure with the reorganization of certain of our operating units. We believe these changes will better serve our customers. Although we still report under three reportable segments, the operating units that comprise each reportable segment have changed. The flow control segment consists of all of the previous valve and actuator product lines with the addition of the instruments, meters, regulators, and piping specialties product lines. We have aggregated these product lines into this segment as we believe these product lines are similar in nature, have similar economic characteristics, serve the same type or class of customer and have similar distribution and production processes. Measurement systems primarily reflect the results of the retail fueling product line. The compression and power systems segment components have not changed and the segment continues to report the results of the natural gas engine and industrial blower product lines. Segment and geographic financial information appear in Note 19 of our financial statements located elsewhere in this report.

Flow Control

Our flow control segment manufactures control valves, on/off valves, pressure relief valves and actuators. We serve the oil and gas production, transportation, storage, refining, petrochemical and power generation

11

Table of Contents

Index to Financial Statements

sectors of the energy industry. We believe we produce one of the most complete valve product lines for the energy infrastructure industry, including both standard and customized product offerings. Our broad portfolio of products, combined with a global sales and service network, positions us as one of the preferred global flow control solutions providers. In addition, our technical expertise and product knowledge allow us to be one of a few global vendors who can meet the needs of our most demanding energy customers, including specially-designed products for deep-water and severe service applications. Our valve products compete at unit price levels ranging from $200 to over $500,000.

In addition to valve products, our flow control segment also designs, manufactures and markets four primary product lines: meters, instruments, integrated flow systems and piping specialties. Demand for these products is driven primarily by natural gas consumption and infrastructure spending in the hydrocarbon and chemical process industries. Customer trends such as integration of information technology systems with “smart” equipment and increased outsourcing of metering and monitoring services are also expected to drive demand in this market.

Historically, demand for our flow control products has been driven by the dynamics of the energy industry and in particular by energy infrastructure spending. Demand for valve products has therefore been greatest in industrialized nations throughout North America and Europe. In the future, we expect that growth will primarily be driven by upgrading existing products, the development of new applications and increasing demand in developing regions such as Latin America, Asia and Africa. Demand for meters, instruments, integrated flow systems and piping specialties has historically been strongest in North America and Europe, with future growth expected in Latin America, Asia and the Middle East as industrialization continues.

On/off valves, which are sold under the Control Seal^™, Grove^®, Ledeen^™, Ring-O^®, TK^®, Tom Wheatley^™, Wheatley^® and Texsteam^™ brand names, are typically used in applications that either require flow to be completely on or off or have limited flow adjustment capabilities. Included in this category are: ball, gate, globe, check and butterfly valves. We have designed and patented hundreds of specialized on/off valve products. Among other new product development programs, we are designing subsea ball and check valves for deep-water oil and gas development, fire-proof valves, severe service valves, liquefied natural gas valves and more cost-effective rising-stem ball valves. Many of these valves are custom manufactured from specialty materials to handle the demanding environments in which they will be used and to meet our customers’ stringent specifications.

Control valves, which are sold under the Masoneilan^®, and Becker Precision Equipment (BPE^™) brands, are used primarily in applications that require continuous and accurate control of flow rates. Control valves adjust flow passage size at the direction of remote signals emanating from an external control system. We are developing new “smart” technologies that transmit control and measurement data generated by our products to our customers’ service systems that remotely monitor the performance of their plant and equipment. These technologies can substantially lower operating costs for our customers. In addition, we are developing products that remotely transmit predictive maintenance information, thereby avoiding unexpected downtime. We believe providing smart capabilities to enhance our existing product lines will be an important driver of growth in our valve business over the next several years. We are currently marketing smart valve products with both analog and digital communication interfaces. We expect demand for digital products to grow significantly in the future as this relatively new communication interface matures. We have established a product development and marketing alliance with Yokogawa Electric Corporation, a leading Japanese process control systems provider, in order to offer our customers integrated valve and control system solutions. These integrated solutions and smart products typically command higher margins than our standard valve product offerings.

Pressure relief valves, including both safety and safety relief valve types, are used to protect process equipment from excessive pressure. We sell our pressure relief valves to the power generation, oil and gas, and

12

Table of Contents

Index to Financial Statements

refining and petrochemical industries under the Consolidated^® brand name. We are developing new products for use in growing applications, including enhanced pilot operated safety valves for use in offshore and liquefied natural gas applications.

Meters, pressure regulators and piping specialties, which are sold primarily to customers in the natural gas industry under the Roots^®, Mooney^™ and Dresser^® brand names, are used for volume measurement and pressure regulation. These products are sold at unit prices ranging from approximately $400 to over $82,500. We sell complete, integrated natural gas control stations that can be used by a utility to regulate distribution of low-pressure natural gas from high-pressure transmission pipelines. These control stations typically combine a number of our products such as valves, meters, pressure sensors and regulators into a complete system solution. Historically, a utility would have performed the engineering and design necessary to build these stations to regulate gas pressure and flow, bid out the component parts and contracted for the assembly and installation. We can provide utilities with a total system solution at a lower overall cost.

Instrument products consist primarily of pressure and temperature instrumentation manufactured for oil and gas, refining, chemical, industrial and commercial customers worldwide. These products are used by our customers to monitor pressure, temperature, pH levels, and flow rates of gases and liquids. Our key instrument brands and related products are Ashcroft^® pressure and temperature instruments, Heise^® precision testing and calibration devices and digital and analog transducers, Ebro^™ portable electronic instruments and Ashcroft^® utility gauges, which are designed specifically for high reliability of service. Our instrument products range in price from $1 to over $5,500 per unit.

Our flow control segment’s other products, sold under the Ledeen^™, Texsteam^™ and Nil-Cor^® brands, include chemical injection pumps; high-alloy gate, globe, check and ball valves; compact and linear electric actuators; and composite ball, butterfly and check valves. Our actuator products, which are used to control valve movement, are often sold in packages for use with our other products, such as our subsea actuators used in conjunction with our subsea on/off valve technology.

Our flow control segment’s strength as a product leader is enhanced by its service capabilities. These services include preliminary design, application engineering, design testing, production and installation, project management, operation and maintenance training, preventive/predictive maintenance programs and inventory management services.

Measurement Systems

Our measurement systems segment consists of retail fueling, which is a leading supplier of fuel dispensers, pumps, peripherals, point-of-sale and site monitoring systems and software for the retail fueling industry. In March 2003, we acquired certain retail fuel dispenser and point of sale system assets of Tokheim North America and its MSI business unit. We have substantially integrated these assets into our Wayne business unit.

We have marketed our retail fuel systems for approximately 100 years under the Wayne^® brand. As an industry pioneer, we were the first to introduce self-service consoles and fuel blending dispensers to service stations. More recently, we introduced the first in-pump card readers and cash acceptors, the first use of microcomputers in fuel processing systems, the first in-pump radio frequency identification payment systems such as Speedpass^® (a registered trademark of ExxonMobil) and the first dispenser mounted touch screen payment/communication systems. We also produce regulatory agency approved vapor recovery systems that reduce gasoline vapor emissions into the atmosphere during the fueling process. We continue to develop and market innovative technologies that allow our customers to reduce costs, increase throughput and improve profits at their locations.

13

Table of Contents

Index to Financial Statements

Demand for our systems and other products over recent years has been affected by a reduced level of capital spending by our customers. We typically would expect our customers to upgrade, rebrand or replace their equipment prior to the end of its useful life, to introduce new customer convenience features, support new marketing initiatives, or to comply with government regulations. Over the last few years however many of our major oil customers have delayed upgrading or replacing their equipment. High volume retailers, such as Sam’s Club, Kroger and Safeway have entered the domestic retail fuel market, generating demand for new equipment, software and service. These retailers typically utilize twice as many fuel dispensers per location as traditional retail fueling stations.

Our core product line consists of a wide variety of fuel dispensers, including Ovation^®, Global Century^™, VISTA^™ and Global Star^™. Our basic fuel dispenser design supports single and multiple hose configurations that can measure and dispense dedicated or blended fuel. Our fuel dispensing platforms can be expanded to include card processing terminals, cash acceptors, bar code scanners, radio frequency identification payment systems, keypads, printers and graphic displays to allow consumers to purchase and pay for fuel and other items at the pump. In addition, our dispensers are usually designed and graphically detailed in collaboration with our customers to meet their precise image standards. Our retail fuel dispensers range in price from $2,800 to over $15,000 per unit.

We also design and market self-service control and point-of-sale systems for the retail fueling industry. These enterprise software solutions are designed to support our retail customers’ efforts to improve back office efficiency and record keeping, reduce labor hours and improve retail margins. For example, our Nucleus^® system, which is an open architecture, PC based point-of-sale system, is designed to support larger convenience store formats that feature a wide selection of in-store merchandise and services. As the hub of all store operations, the Nucleus^® system interfaces with a wide variety of peripherals and systems, enabling cashiers and managers to monitor and manage store operations efficiently. The Nucleus^® system also supports back office functions including inventory control, price book management, employee management and site administration. In addition, we were one of the first to introduce a fully integrated point-of-sale system that combined the functionality of a self-service control console, electronic cash acceptor and card processing system into a single countertop terminal called the Wayne Plus/3^™ terminal. We have deployed 10,000 of these systems in over 9,000 locations. Our software systems range in price from $7,000 to over $16,000.

In connection with our product development initiatives, we have entered into a number of important strategic alliances with technology partners to enhance and broaden our retail product offerings. For example, our alliance with Texas Instruments was important in our development of advanced pay-at-the-pump technologies, including Speedpass^®, which allows consumers to buy fuel with the wave of a radio frequency key fob.

In order to help our customers derive maximum value from their investment in our retail fuel solutions, we offer a comprehensive suite of services. These services include product rollout management, installation, user training and a 24/7 help desk. We also offer 24/7 onsite maintenance and repair, including one hour response to site emergencies, four hour response to critical problems and 24 hour response to all other concerns. Onsite services are provided by a mix of our own field support technicians and independent service organizations. All field support technicians and independent service organizations receive ongoing technical training and carry an extensive inventory of service parts and diagnostic equipment.

Compression and Power Systems

Our compression and power systems segment is a leader in the design, manufacture and marketing of natural gas fueled engines used primarily for natural gas compression and distributed power generation. Most natural gas compression applications involve pressurizing gas for delivery from one point to another, typically from lower pressure wells to higher pressure gathering and pipeline systems. Compression is also used to reinject

14

Table of Contents

Index to Financial Statements

natural gas into oil wells to help lift liquids to the surface and to inject gas into underground reservoirs. Distributed power generation is the use of onsite electric generators for primary, supplemental or back-up power in areas where existing power sources are unreliable or costly. Our product offering ranges from 85 to 4,500 horsepower (75 to 3,300 kilowatt) engines and power generation packages with a base wholesale price range of $29,000 to over $1,200,000. We also manufacture positive displacement and centrifugal equipment covering applications requiring deep vacuum to 40 PSI with flows from 2 CFM to 350,000 CFM in bare blowers, or complete packages and controls. Our power systems and compression products are sold under the Waukesha^® and Roots^® brand names both directly to end users and through a network of independent distributors worldwide. We believe we have the largest installed base of natural gas fueled industrial engines in the world as a result of our long history and leading market position.

Long-term demand for our compression and power system products is primarily a function of worldwide energy consumption and infrastructure spending. Demand in this segment, particularly in gas compression applications, is cyclical and subject to periodic downturns which have caused revenue and earnings declines in the past. Over the long-term we view distributed power generation as an opportunity for future revenue growth in this segment. We believe favorable environmental, regulatory and cost characteristics of natural gas compared to other energy sources and the relatively wide dispersion of gas reserves throughout the world will favor its use in power generation. The need for “clean” power for high tech equipment, uncertainty about electrical utility deregulation and lack of infrastructure in underdeveloped nations are potential sources for growth in demand. Improved infrastructure for developing nations will also drive our blower business growth in the future, especially in waste water treatment and power generation applications.

We believe we have developed some of the most reliable and durable engines and blowers in our industry. These products provide our customers with low total cost of ownership through long intervals between overhauls, high equipment uptimes and predictable service schedules. We typically expect our VHP^® engine model to operate in excess of 40,000 hours at 98% rated uptime before requiring a major overhaul. Engine reliability is essential because they are frequently used in mission-critical applications or in remote locations where the cost of failure is extremely high. For example, two of our engines provide standby power for Chicago’s 911 Emergency Communications Center and seven of our top-of-the-line engines drive compressors at a remote gas storage facility in Aitken Creek, British Columbia.

The aftermarket in both the natural gas compression and distributed power generation markets is substantial. Our natural gas engines typically run continuously for years at a time, creating a regular need for maintenance services and replacements parts. Our customers typically spend many times the initial purchase price of one of our engines in service, upgrades and maintenance costs over its lifetime. As a result, our aftermarket parts and services revenues are an important part of our business, representing approximately 43% of our total natural gas engine related revenues in 2002. We currently maintain a significant market share for our aftermarket parts as our customers tend to be more focused on reliability than price when servicing our engines.

In addition to selling stand-alone engines, we provide our customers with a variety of services and equipment packages. For example, we offer complete power generation systems in which we integrate our engines with generators, switchgear and controls manufactured by other vendors in order to deliver a total solution to our customers. We also offer our customers technical training, subcontracted turnkey installation and field troubleshooting worldwide.

Competition

As one of a small group of major competitors in each of our business lines, we encounter intense competition in all areas of our business. Our businesses typically are characterized by fewer than ten manufacturers that together account for the majority of each market and a large number of smaller competitors

15

Table of Contents

Index to Financial Statements

who divide the remainder. The primary bases of competition include product performance, customer service, product lead times, global reach, brand reputation, breadth of product line, quality of aftermarket service and support and price. We believe the significant capital required to construct new manufacturing facilities; the production volumes required to maintain low unit costs; the need to secure a broad range of reliable raw material and intermediate material supplies; the significant technical knowledge required to develop high performance products, applications and processes and the need to develop close, integrated relationships with customers serve as disincentives for new market entrants. Some of our existing competitors, however, have greater financial and other resources than us.

Sales and Marketing

We market our products and services worldwide through our established sales presence in over 100 countries and a manufacturing or support facility presence in over 22 countries. We believe our proximity to customers has historically been an important sales advantage.

Our sales force is comprised of over 400 direct sales and service representatives and an extensive global network of over 900 independent distributors and over 300 authorized service centers who sell our products and provide service and aftermarket support to our installed base. Due to the long operating history of our business, many of our distributor relationships are longstanding and exclusive to us. For example, our flow control business is supported by an independent global network of over 100 Green Tag^® and Masoneilan Authorized Repair Centers (MARC^®), the majority of which represent long-term relationships. We also offer training programs for some of our independent distributors, allowing them to reach increasingly higher levels of certification. Our most highly qualified independent distributors are often able to command higher aftermarket service margins as a result of their expertise and tend to be our most loyal distributors. Most of our distributor agreements are terminable at any time by either us or the distributor, subject to short notice periods.

We believe the performance driven nature of our products has fostered close working relationships with our customers. Our marketing strategy is to leverage our strong brand reputations and technical expertise to develop new products and achieve qualification and certification as an approved vendor. For example, our measurement systems segment has successfully targeted the domestic high volume retail market for gasoline through a systematic marketing and technology development effort, securing significant share of this market. We have worked to enhance our competitive position by aggressively pursuing alliance relationships with our key customers whereby we work directly with our customers’ design and engineering departments to develop products to meet specific infrastructure needs or other customer-specific requirements. The compression and power systems segment has strategically positioned itself with certain customers in the gas compression market by selling engines directly to them. These customers include four major gas compression packagers and seven medium size packagers. All four of the major packagers operate gas compressor lease fleets of their own or provide contract compression services.

Customers

We sell our products and services to more than 10,000 customers, including most of the world’s major oil companies, multinational engineering and construction companies and other Fortune 500 firms. Many of our customers purchase products and services from each of our three operating segments. Our customer base is geographically diverse, with 52.1% of our 2002 revenues in North America, 24.3% in Europe/Africa, 9.0% in Latin America, 9.6% in Asia and 5.0% in the Middle East. Our top ten customers in 2002 included Shell, ExxonMobil, BP and Halliburton and accounted for 15.6% of our revenues. Our largest customer accounted for approximately 2.8% of our revenues in 2002.

16

Table of Contents

Index to Financial Statements

Backlog

Backlog at the end of 2002 was $349.1 million, a 16.8% decrease over a backlog of $419.5 million at the end of 2001. Of our backlog at year-end 2002, we expect approximately 98% to be filled during 2003.

Raw Materials

The main raw materials we use are commodity metals, forgings, castings, fasteners, and electronic circuitry. We seek to purchase raw materials globally to benefit from low cost sources. Substantially all our raw materials are purchased from outside sources and are readily available. However, the availability and prices of raw materials may be subject to curtailment or change due to, among other things, the supply of, and demand for, such raw materials, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by raw materials or component parts suppliers, changes in exchange rates and worldwide price levels.

Manufacturing

Our manufacturing processes generally consist of fabrication, machining, component assembly and testing. Many of our products are designed, manufactured and produced to order and are often built in compliance with specific customer requirements. We have actively rationalized our manufacturing footprint which entails combing, closing or relocating some of our facilities. See “Item 7. Management’s Discussion of Financial Condition and Results of Operations—Restructuring and Other Exit Activities.”

To improve productivity, we are implementing a variety of manufacturing strategies including cellular manufacturing, just-in-time process engineering and the outsourcing of the fabrication of subassemblies and components of our products. Our manufacturing operations are conducted in 48 locations around the world. We typically own the plants and equipment at our facilities and the underlying real property but intend to increasingly utilize leased facilities as we relocate or consolidate manufacturing operations. We believe that we have sufficient production capacity to meet demand over the next several years.

We strive to produce the highest quality products and are committed to continuous quality and efficiency improvement of our products and processes. To help achieve our quality goals, we carefully control our manufacturing processes and materials and have satisfied the standards for ISO-9001 certification at most of our manufacturing facilities. The International Organization for Standardization awards ISO-9001 certification on a facility-by-facility basis to manufacturers who adhere to strict quality standards. Companies must maintain these standards and supply supporting documentation to retain their ISO certification, and certified facilities are audited regularly.

Research And Development

We invest in research and development each year in order to maintain our product leadership positions. We have developed many of the technological and product breakthroughs in our markets and produce some of the most advanced products available in many of our businesses. We believe we have significant opportunities for growth by developing new products and services that offer our customers greater performance and significant cost savings. These opportunities include developing “smart” valves, instruments and meters, new retail fuel point-of-sale payment technologies and additional natural gas fueled engine models operating at greater efficiencies. Potential end users for these technologies include most of our existing customer base as well as customers of our competitors.

We are also actively engaged in research and development programs designed to advance the design of products to meet specific functional and economic requirements and manufacturing methods. In particular, we have begun efforts to redesign many of our products to use common components. These engineering efforts span

17

Table of Contents

Index to Financial Statements

many of our businesses. We have also placed special emphasis on ensuring that newly developed products are compatible with, and build upon, our existing manufacturing and marketing capabilities.

Each of our business segments maintains its own research and development staff. Our research and development expense was $21.2 million, $26.7 million, and $29.0 million, for the years ended December 31, 2002, 2001, and 2000, respectively. We believe current expenditures are adequate to sustain ongoing research and development activities.

Intellectual Property

We rely on a combination of patents, trademark, copyright and trade secret protection, employee and third-party nondisclosure agreements and license arrangement to protect our intellectual property. We sell most of our products under a number of registered trade names, which we believe are widely recognized in the industry. In addition, many of our products and technologies are protected by patents. No single patent, trademark or trade name is material to our business as a whole. We anticipate we will apply for additional patents in the future as we develop new products and processes.

Any issued patents that cover our proprietary technology may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, our competitors could commercialize our technologies.

With respect to proprietary know-how, we rely on trade secret protection and confidentiality agreements. Monitoring the unauthorized use of our technology is difficult, and the steps we have taken may not prevent unauthorized use of our technology. The disclosure or misappropriation of our intellectual property could harm our ability to protect our rights and our competitive position.

Employees

We had approximately 7,900 employees worldwide as of December 31, 2002. Of our employees, approximately 54.0% are located in the U.S. and 46.0% are outside the U.S.

Approximately 40.0% of our employees in the United States (22.0% of our global workforce) are covered by collective bargaining agreements.

We have long-term labor agreements with United Automobile, Aerospace and Agricultural Implement Workers of America, Local Union 470 in Massachusetts, United Automobile, Aerospace and Agricultural Implement Workers of America Union Local 1118 in Indiana, International Association of Machinists & Aerospace Workers, AFL-CIO, District 10 in Wisconsin, United Steelworkers of America AFL-CIO, Local 8040 in Texas, International Brotherhood of Teamsters, Chauffeurs, Warehousemen, Local 145 in Connecticut, International Association of Machinists & Aerospace Workers, AFL-CIO, Local 1644 in Pennsylvania, Paper, Allied-International Chemical & Energy Workers International Union, AFL-CIO, CLC, Local 5-0399 in Kentucky, and the International Brotherhood of Teamsters, Local 145 in Connecticut. In addition, we have two labor agreements with Office & Professional Employees International Union on behalf of Local 465 and Local Lodge 2518 International Association of Machinists and Aerospace Workers in Louisiana. Of these agreements, one expires in May 2004 three expire in 2005, two expire in 2006 and two expire in 2008. Two of our contracts, United Steelworkers of America AFL-CIO, Local 8040 in Houston, Texas and Paper, Allied- International Chemical & Energy Works International Union, AFL-CIO, CLC, Local 5-0399 in Kentucky, have been extended through the date of the respective plant closures.

18

Table of Contents

Index to Financial Statements

In May 2003, our labor agreement with the International Association of Machinists and Aerospace Workers, District 10 at our Waukesha, Wisconsin manufacturing plant expired and we failed to reach agreement on a new labor contract at that time. The bargaining unit voted in favor of a strike on May 2, 2003. On July 23, 2003, we announced the signing of a new three year labor agreement and that our union shop employees were to resume work on July 28, 2003. Additionally, one of our other bargaining agreements expired in November 2003. On November 7, 2003, bargaining unit members voted in favor of a strike that commenced on that date. On November 9, 2003, a new labor agreement was signed, and employees returned to work on November 10, 2003.

See “—Certain Risk Factors—Our business could suffer if we are unsuccessful in negotiating new collective bargaining agreements.”

Environmental Matters

Our businesses and some of our products are subject to regulation under various and changing federal, state, local and foreign laws and regulations relating to the environment and to employee safety and health. These environmental laws and regulations govern the generation, storage, transportation, handling, disposal and emission of various substances.

These environmental laws also impose liability for personal injury or property damage related to releases of hazardous substances. Permits are required for operation of our businesses, and these permits are subject to renewal, modification and, in certain circumstances, revocation. We believe we are substantially in compliance with these laws and permitting requirements. Our businesses also are subject to regulation under substantial, various and changing federal, state, local and foreign laws and regulations that allow regulatory authorities and private parties to compel (or seek reimbursement for) cleanup of environmental contamination at sites now or formerly owned or operated by our businesses and at facilities where our waste is or has been disposed. Going forward, we expect to incur ongoing capital and operating costs for investigation and remediation and to maintain compliance with currently applicable environmental laws and regulations; however, we do not expect those costs, in the aggregate, to be material.

We are responsible for evaluating and addressing the environmental impact of sites where we operate our businesses or have maintained operations. As a result, we spend money each year assessing and remediating contaminated properties to avoid future liabilities, to comply with legal and regulatory requirements, or to respond to claims by third parties.

Available Information

Our Internet address is www.dresser.com. We file annual, quarterly and current reports and other information with the Securities and Exchange Commission, (the “SEC”), and we make available free of charge our SEC filings through our Internet website as soon as reasonably practicable after we electronically file these materials with the SEC. You may access these SEC filings via the hyperlink that we provide on our website.

Certain Risk Factors

Set forth below are important risks and uncertainties that could adversely affect our results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by our management.

Our independent auditors have reported to our audit committee material weaknesses and reportable conditions regarding various elements of our system of internal controls.

Our independent auditors have reported to our audit committee “material weaknesses” and “reportable conditions” regarding various elements of our system of internal controls. Reportable conditions are matters

19

Table of Contents

Index to Financial Statements

coming to the auditor’s attention that, in its judgment, should be communicated to the audit committee because they represent significant deficiencies in the design or operation of internal controls, which could adversely affect the organization’s ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. A material weakness in internal controls is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Our independent auditors noted material weaknesses with respect to our review and oversight of the financial reporting process (including corporate accounting of reserves and accruals) and with respect to accounting for pension and postretirement benefits obligations, and they cited reportable conditions with respect to broad areas of concern regarding internal controls over financial reporting as it relates to the operation of our finance organization, revenue recognition practices relating to bill and hold transactions, multiple element transactions and actual or de facto FOB destination transactions, specially designated charges (restructuring and exit activities), and intercompany accounting (balances, confirmation and elimination) and consolidation. Their observations related as well to more general matters, including exposures related to our decentralized accounting organization, the size of our corporate accounting staff relative to the size of our company, variety of systems used for operating and financial reporting, outdated finance policies and lack of internal training for business unit financial personnel.

Certain of the matters described above contributed to accounting errors in our financial statements, which necessitated the restatements described elsewhere in this report and/or resulted in adjustments to our 2002 financial statements upon audit.

We have taken and continue to take steps to correct these internal control deficiencies. For more information regarding the steps we have taken or are in the process of taking, see “Item 9A. Controls and Procedures.” The efficacy of the steps we have taken to date and the steps we are still in the process of taking to improve the reliability of our interim financial statements is subject to continued management review supported by confirmation and testing by our internal auditors and external auditors.

We have restated our financial statements for fiscal years 1998 through 2001 as a result of accounting errors, and our financial statements for fiscal year 2000 and earlier periods are unaudited.

Since Andersen, our independent auditors for the years 1998 through 2001, have ceased operations, we are unable to give effect to the corrections of the errors contained in the financial statements for the years 1998 through 2000 without rendering those fiscal years unaudited and, accordingly, the financial statements at December 31, 2000 and all earlier periods are unaudited. Unaudited annual financial information is not in compliance with the rules and regulations of the Securities and Exchange Commission for filing reports.

Our operating results could be harmed during economic or industry downturns.

The businesses of most of our customers, particularly oil, gas and chemical companies, are, to varying degrees, cyclical and have historically experienced periodic downturns. Profitability in those industries is highly sensitive to supply and demand cycles and volatile product prices, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. For example, due to the recent downturn in the energy industry and overall industrial economy, many of our key customers have reduced their capital spending, which has resulted in reduced demand for our products. These industry downturns have been characterized by diminished product demand, excess manufacturing capacity and subsequent accelerated erosion of average selling prices. In addition, certain of our

20

Table of Contents

Index to Financial Statements

customers may experience reduced access to capital during economic downturns. Therefore, any significant downturn in our customers’ markets or in general economic conditions could result in a reduction in demand for our products and services and could harm our business. In addition, because we only compete in some segments of the energy infrastructure industry, a downturn in the specific segments we serve may affect us more severely than our competitors who compete in the industry as a whole. See “Item 7. Management’s Discussion of Financial Condition and Results of Operations—Market Forces; Outlook.”

The loss of one of our large customers, or failure to win national, regional and global contracts from an existing customer, could reduce our cash flow, market share and profits.

For the year ended December 31, 2002, our largest customer represented approximately 2.8% of total revenues, and our top ten customers collectively represented approximately 15.6% of total revenues. The loss of any of these customers, or class of customers, or decreases in these customers’ capital expenditures, could decrease our cash flow, market share and profits. As a result of industry consolidation, especially among natural gas compression and major oil companies, our largest customers have become larger and, as a result, account for a larger percentage of our sales. We could lose a large customer as a result of a merger or consolidation. Major oil companies and national oil companies have moved toward creating alliances and preferred supplier relationships with suppliers. In addition, these customers are increasingly pursuing arrangements with suppliers that can meet a larger portion of their needs on a more global basis. Typically, a customer can terminate these arrangements at any time. The loss of a customer, or the award of a contract to a competitor, could significantly reduce our cash flow, market share and profits.

Economic, political and other risks associated with international sales and operations could adversely affect our business.

Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business internationally. Our sales outside North America as a percentage of our total sales were 47.9% for the year ended December 31, 2002. Of that amount, 1.1% of our sales for 2002 were in Venezuela and 5.0% of our sales were in the Middle East. Accordingly, our future results could be harmed by a variety of factors, including:

21

Table of Contents

Index to Financial Statements

Our international operations are affected by global economic and political conditions. Changes in economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations or expropriation. In addition, the financial condition of foreign customers may not be as strong as that of our current domestic customers.

Fluctuations in the value of the U.S. dollar may adversely affect our results of operations. Because our financial results are reported in dollars, if we generate sales or earnings in other currencies, the translation of those results into dollars can result in a significant increase or decrease in the amount of those sales or earnings. In addition, our debt service requirements are primarily in U.S. dollars even though a significant percentage of our cash flow is generated in euros or other foreign currencies. Significant changes in the value of the euro relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on U.S. dollar denominated debt, including the notes and borrowings under the credit facility.

In addition to currency translation risks, we incur currency transaction risk whenever we or one of our subsidiaries enter into either a purchase or a sales transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, we cannot assure you that we will be able to effectively manage our currency transaction and/or translation risks. It is possible that volatility in currency exchange rates will have a material adverse effect on our financial condition or results of operations. We have in the past experienced and expect to continue to experience economic losses and gains and negative and positive impacts on earnings as a result of foreign currency exchange rate fluctuations. We expect that the portion of our revenues denominated in non-dollar currencies will continue to increase in future periods.

Our expansion in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We cannot assure you that we will continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business.

Disruptions and uncertainties caused by war or terrorism could adversely affect our business.

Acts of war and/or acts of terrorism could have a material adverse impact on our business, results of operations and financial condition. The threat of terrorism and war and heightened security and military response to this threat, or any future acts of terrorism, may cause further disruption to our economy and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of orders or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

If we are not able to apply new technology and software in our products or develop new products, we may not be able to generate new sales.

Our success depends, in significant part, on our ability to develop products and services that customers will accept. We may not be able to develop successful new products in a timely fashion. Our commitment to customizing products to address particular needs of our customers could burden our resources or delay the delivery or installation of products. If there is a fundamental change in the energy industry, some of our products could become obsolete and we may need to develop new products rapidly. Our products may not be marketed properly or satisfy the needs of the worldwide market.

In addition, there is intense competition to establish proprietary rights to these new products and the related technologies. The technology and software in our products, including electronic components, point-of-sale systems and related products, is growing increasingly sophisticated and expensive. Several of our competitors

22

Table of Contents

Index to Financial Statements

have significantly greater financial, technical and marketing resources than we do. These competitors may develop proprietary products that are superior to ours or integrate new technologies more quickly than we do. We may not be able to obtain rights to this technology. We may also face claims that our products infringe patents that our competitors hold. Any of these factors could harm our relationship with customers and reduce our sales and profits.

Issued patents that cover our proprietary technology may not provide us with substantial protection or be commercially beneficial to us.

Any issued patents that cover our proprietary technology may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, our competitors could commercialize our technologies.

We face intense competition.

We encounter intense competition in all areas of our business. Competition in our primary business segments is based on a number of considerations including product performance, customer service, product lead times, global reach, brand reputation, breadth of product line, quality of aftermarket service and support and price. Additionally, customers for our products are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. Our customers increasingly demand more technologically advanced and integrated products and we must continue to develop our expertise and technical capabilities in order to manufacture and market these products successfully. To remain competitive, we will need to invest continuously in research and development, manufacturing, marketing, customer service and support and our distribution networks. We believe that in order to maintain our competitiveness, we need to continue to focus on increasing operational efficiency and cash flow. This focus includes our on-going initiatives to increase manufacturing efficiencies, consolidate raw material sources, increase global procurement and improve working capital efficiency. We believe these initiatives offer us opportunities to improve our profitability and cash flow. The continuation of re-engineering, plant consolidations, and the implementation of a new enterprise-wide reporting, or ERP, system is critical to achieving these improvements. We may have to adjust the prices of some of our products to stay competitive. We cannot assure you that we will have sufficient resources to continue to make such investments, we will achieve our stated objectives or that we will maintain our competitive position. Some of our competitors have greater financial and other resources than we do.

If we lose our senior management, our business may be adversely affected.

The success of our business is largely dependent on our senior managers, as well as on our ability to attract and retain other qualified personnel. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain “key person” life insurance on any of our key employees.

Environmental compliance costs and liabilities could adversely affect our financial condition.

Our operations and properties are subject to stringent laws and regulations relating to environmental protection, including laws and regulations governing the investigation and clean up of contaminated properties as well as air emissions, water discharges, waste management, and workplace health and safety. Such laws and regulations affect a significant percentage of our operations, are constantly changing, are different in every jurisdiction and can impose substantial fines and sanctions for violations. Further, they may require substantial expenditures for the installation of costly pollution control equipment or operational changes to limit pollution

23

Table of Contents

Index to Financial Statements

emissions and/or decrease the likelihood of accidental hazardous substance releases. We must conform our operations and properties to these laws and adapt to regulatory requirements in all jurisdictions as these requirements change.

We have experienced, and expect to continue to experience, both operating and capital costs to comply with environmental laws and regulations, including potentially substantial costs for remediation and investigation of some of our properties (many of which are sites of long-standing manufacturing operations). In addition, although we believe our operations are substantially in compliance and that we will be indemnified by Halliburton for certain contamination and compliance costs (subject to certain exceptions and limitations), new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination, the imposition of new clean-up requirements, new claims for property damage or personal injury arising from environmental matters, or the refusal and/or inability of Halliburton to meet its indemnification obligations could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition or results of operations. See “Item 3. Legal Proceedings.”

Our business could suffer if we are unsuccessful in negotiating new collective bargaining agreements.

As of December 31, 2002, we had approximately 7,900 employees. Approximately 40% of our U.S. workforce and 46% of our global workforce is represented by labor unions. Currently, of our ten material collective bargaining agreements, one will expire in May 2004, three will expire in 2005, two will expire in 2006 and one will expire in 2008. Two of our labor contracts will expire at the time the respective plants are closed. Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in negotiating new collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of our operations.

In May 2003, one of our collective bargaining agreements expired. The bargaining unit responded by voting in favor of a strike that commenced on May 2, 2003. In July 2003, we announced the signing of a new three year labor agreement, and our union shop employees resumed work on July 28, 2003. The effect of the strike negatively impacted our results of operations for the second and third quarters of 2003. One of our bargaining agreements expired in November 2003. On November 7, 2003, bargaining unit members voted in favor of a strike that commenced on that date. On November 9, 2003, a new labor agreement was signed, and employees returned to work on November 10, 2003.

We rely on a limited number of third party suppliers and subcontractors for specific components and sub-assemblies and we may not be able to expediently obtain substitute suppliers and subcontractors if our supplies are interrupted.

We rely on non-affiliated suppliers and subcontractors for the supply of components and sub-assemblies that are incorporated in our products. If these suppliers or manufacturers experience financial, operational, manufacturing capacity or quality assurance difficulties, or if there is any other disruption in our relationships, we may be required to locate alternative sources of supply. Our inability to obtain sufficient quantities of these components and sub-assemblies and the relatively long lead time needed to qualify new subcontractors may result in delays in delivery, interruption or delays in manufacturing and the cancellation of orders for our products.

We are dependent on the availability of raw materials and components.

We require substantial amounts of raw materials that we purchase from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the supply of, and

24

Table of Contents

Index to Financial Statements

demand for, such raw materials, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by raw materials or component parts suppliers, changes in exchange rates and worldwide price levels. Any change in the supply of, or price for, these raw materials and components could materially affect our operating results.

We rely on independent distributors.

In addition to our own direct sales force, we depend on the services of independent distributors to sell our products and provide service and aftermarket support to our customers. Many of these independent distributors are not bound to us by exclusive distribution contracts and may offer products and services that compete with ours to our customers. In addition, the majority of the distribution contracts we have with these independent distributors are cancelable by the distributor after a short notice period. The loss of a substantial number of these distributors or the decision by many of these distributors to offer competitors’ products to our customers could materially reduce our sales and profits.

We are controlled by First Reserve and Odyssey, whose interest may not be aligned with investors’ interest.

A holding company controlled by First Reserve, Odyssey and their affiliates owns approximately 92.5% of the outstanding voting stock of our indirect parent company and, therefore, has the power, subject to certain exceptions, to control our affairs and policies. They also control the election of directors, appointment of management, entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The directors so elected will have authority, subject to the terms of our debt, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions about our capital stock.

The interests of First Reserve, Odyssey and their affiliates could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of First Reserve and Odyssey as equity holders might conflict with interests of holders of our debt securities. Affiliates of First Reserve and Odyssey may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to investors. In addition, our sponsors or their affiliates currently own, and may in the future own, businesses that directly compete with ours.

Our historical financial information may not be comparable to future periods.

The historical financial information included herein for periods prior to the consummation of the recapitalization transaction may not necessarily reflect our results of operations, financial position and cash flows in the future or the results of operations, financial position and cash flows that would have occurred if we had been a separate, independent entity during the periods presented. The historical financial information included in this report for those periods does not fully reflect the many significant changes that occurred in our capital structure, funding and operations as a result of the recapitalization, the credit facility, the notes offering or the additional costs we expect to incur in operating as an independent company. For example, funds required for working capital and other cash needs for those periods were obtained from Halliburton on an interest-free intercompany basis without any debt service requirement.

We may be faced with unexpected product claims or regulations.

Because some of our products are used in systems that handle toxic or hazardous substances, a failure of any of our products could have material adverse consequences and alleged failures of certain of our products have resulted in, and in the future could result in, claims against us for product liability, including property damage, personal injury damage and consequential damages. Further, we may be subject to potentially material liabilities relating to claims alleging personal injury as a result of hazardous substances incorporated into our products.

25

Table of Contents

Index to Financial Statements

Our substantial indebtedness could adversely affect our financial condition.

We are a highly leveraged company. As of December 31, 2002, we had $964.4 million of outstanding long-term indebtedness, including the current portion, $19.2 million of short-term notes and a stockholders’ deficit of $295.6 million. This level of indebtedness could have important consequences, including the following:

Despite our substantial indebtedness, we may still incur significantly more debt. This could intensify the risks described above.

The terms of the indenture governing the notes do not prohibit us from incurring significant additional indebtedness in the future. As of December 31, 2002, we had $64.8 million available for additional borrowing under the revolving credit facility, subject to certain conditions. All borrowings under the credit facility are senior to the notes.

Your right to receive payments on the notes will be junior to the borrowings under the credit facility and possibly all future borrowings.

The notes and the subsidiary guarantees rank behind all of our and the subsidiary guarantors’ existing senior indebtedness including the credit facilities and will rank behind all of our and their future senior indebtedness, except any future indebtedness that expressly provides that it ranks equal with, or subordinated in right of payment to, the notes and the guarantees. As a result, upon any distribution to our creditors or the creditors of the subsidiary guarantors in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors or our or their property, the holders of our senior indebtedness and senior indebtedness of the subsidiary guarantors will be entitled to be paid in full in cash before any payment may be made with respect to the notes or the subsidiary guarantees. In addition, the credit facility is secured by substantially all of our assets and the assets of our wholly-owned domestic subsidiaries.

In addition, all payments on the notes and the subsidiary guarantees will be blocked in the event of a payment default on senior debt and may be blocked for up to 179 consecutive days in the event of certain nonpayment defaults on senior indebtedness.

In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors, holders of the notes will participate with trade creditors and all other holders of our senior subordinated indebtedness and the subsidiary guarantors in the assets remaining after we and the subsidiary guarantors have paid all of the senior indebtedness. However, because the indenture requires that amounts otherwise payable to holders of the notes in a bankruptcy or similar proceeding be paid to holders of senior indebtedness instead, holders of the notes may receive less, ratably, than holders of trade payables in any such

26

Table of Contents

Index to Financial Statements

proceeding. In any of these cases, we and the subsidiary guarantors may not have sufficient funds to pay all of our creditors and holders of notes may receive less, ratably, than the holders of senior indebtedness.

As of December 31, 2002, the notes and the subsidiary guarantees would have been subordinated to $408.7 million of long-term indebtedness, including the current portion, $19.2 million of short-term indebtedness and approximately $64.8 million would have been available for borrowing as additional senior indebtedness under the credit facility, subject to certain conditions. We will be permitted to borrow substantial additional indebtedness, including senior indebtedness, in the future under the terms of the indenture.

Restrictive covenants in the credit facility and the indenture may restrict our ability to pursue our business strategies.

The credit facility and the indenture limit our ability, among other things, to:

In addition, the credit facility requires us to maintain certain financial ratios. We may not be able to maintain these ratios. Covenants in the credit facility may also impair our ability to finance future operations or capital needs or to enter into acquisitions or joint ventures or engage in other favorable business activities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

To service our indebtedness, will require a significant amount of cash. The ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flows from operations, available cash and available borrowings under the credit facility will be adequate to meet our future liquidity needs for at least the next few years.

We cannot assure you, however, that our business will generate sufficient cash flows from operations, or that currently anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us under the credit facility in an amount sufficient to enable us to pay or refinance our indebtedness or to fund our other liquidity needs. Future borrowings under our credit facility are conditioned on our continuing compliance with our financial covenants. If we consummate an acquisition, our debt service

27

Table of Contents

Index to Financial Statements

requirements could increase. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Material litigation or changes in legislation or regulations may affect our profitability

During the ordinary course of our business, we are from time to time threatened with, or may become a party to, legal actions and other proceedings. While we are currently involved in a number of legal proceedings, we believe the results of these proceedings will not have a material effect on our business, financial condition or results of operations. In addition, pursuant to the recapitalization agreement, we are indemnified by Halliburton for up to $950.0 million (in aggregate with all other losses) of losses arising out of all legal actions initiated prior to the closing of the recapitalization transaction and certain legal actions arising after the closing. However, material litigation or litigation that is in material in the aggregate, and for which we are not indemnified, may impact our future results of operations.

Our businesses and some of our products are subject to regulation under various and changing federal, state, local and foreign laws and regulations relating to the environment and to employee safety and health. Changes in legislation and regulations could increase our costs and make it more difficult to achieve our business plan.

Certain subsidiaries are not included as subsidiary guarantors.

The guarantors of the notes include our wholly-owned domestic subsidiaries. However, the financial statements include both our wholly-owned and non-wholly-owned domestic subsidiaries and our foreign subsidiaries. The aggregate revenues for the year ended December 31, 2002 of our subsidiaries that are not guarantors were $711.6 million. As of the year ended December 31, 2002, those subsidiaries held 48.7% of our total assets. Each of the subsidiary guarantors would be released from its guarantee of the notes if we transfer 5% or more of its voting stock to a third party so that it is no longer “wholly-owned.” The indenture does not restrict our ability to do so.

Because a substantial portion of our operations are conducted by foreign and non-wholly-owned subsidiaries, our cash flows and our ability to service debt, including our and the subsidiary guarantors’ ability to pay the interest on and principal of the notes when due, are dependent to a significant extent on interest payments, cash dividends and distributions and other transfers of cash from our foreign and non-wholly-owned subsidiaries. In addition, any payment of interest, dividends, distributions, loans or advances by our foreign and non-wholly-owned subsidiaries to us and the subsidiary guarantors, as applicable, could be subject to taxation or other restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdiction in which our foreign subsidiaries operate. Moreover, payments to us and the subsidiary guarantors by the foreign and non-wholly-owned subsidiaries will be contingent upon these subsidiaries’ earnings.

Our foreign and non-wholly-owned subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the foreign subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors and holders of debt of that subsidiary.

Federal and state laws permit a court to void the subsidiary guarantees under certain circumstances.

Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims with respect to a guarantee could be subordinated to all other debts of that subsidiary

28

Table of Contents

Index to Financial Statements

guarantor under certain circumstances. While the relevant laws may vary from state to state, under such laws, the issuance of a guarantee will be a fraudulent conveyance if (1) any of our subsidiaries issued subsidiary guarantees with the intent of hindering, delaying or defrauding creditors or (2) any of the subsidiary guarantors received less than reasonably equivalent value or fair consideration in return for issuing their respective guarantees, and, in the case of (2) only, one of the following is also true:

If the issuance of any guarantee were a fraudulent conveyance, a court could, among other things, void any of the subsidiary guarantors’ obligations under their respective guarantees and require the repayment of any amounts paid thereunder.

Generally, an entity will be considered insolvent if:

We believe, however, that immediately after issuance of the notes and the subsidiary guarantees, we and each of the subsidiary guarantors were solvent, had sufficient capital to carry on our respective businesses and were able to pay our respective debts as they matured. We cannot be sure, however, as to what standard a court would apply in making such determinations or that a court would reach the same conclusions with regard to these issues.

Our corporate headquarters are located in Addison, Texas. The following are the locations of our principal facilities, the facility types and their approximate square footage for our industry segments:

29

Table of Contents

Index to Financial Statements