UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ________________ Commission file number 1-16337 --------------- OIL STATES INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 76-0476605 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three Allen Center, 333 Clay Street, Suite 3460, Houston, Texas 77002 (Address of principal executive offices) (Zip Code) (713) 652-0582 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The Registrant had 48,335,502 shares of common stock outstanding as of May 13, 2002.
OIL STATES INTERNATIONAL, INC. INDEX Part I -- FINANCIAL INFORMATION <Table> <CAPTION> PAGE NO. -------- <S> <C> <C> Item 1. Financial Statements: Consolidated and Combined Financial Statements Unaudited Consolidated, Combined and Pro Forma Statements of Operations for the Three Months Ended March 31, 2002 and 2001 3 Consolidated Balance Sheets -- March 31, 2002 (unaudited) and December 31, 2001 4 Unaudited Consolidated and Combined Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 5 Notes to Unaudited Consolidated, Combined and Pro Forma Financial Statements 6 - 9 Unaudited Pro Forma Consolidated and Combined Financial Statement 10 Unaudited Pro Forma Consolidated and Combined Statement of Operations for the Three Months Ended March 31, 2001 11 Notes to Unaudited Pro Forma Consolidated and Combined Financial Statement 12 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II -- OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Default Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 (a) Index of Exhibits 20 - 22 (b) Report on Form 8-K 22 Signature Page 23 </Table> 2
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED, COMBINED AND PRO FORMA STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2001 THREE MONTHS ENDED --------------------------------- MARCH 31, 2002 CONSOLIDATED AND CONSOLIDATED PRO FORMA (1) COMBINED ------------ ------------- -------- <S> <C> <C> <C> Revenues .................................................. $ 150,600 $ 191,494 $ 142,977 Costs and expenses: Cost of sales ........................................... 120,153 153,321 108,179 Selling, general and administrative expenses ............ 12,228 13,437 12,304 Depreciation expense .................................... 5,233 5,058 4,996 Amortization expense .................................... 75 1,960 1,368 Other operating income .................................. (283) (135) (135) --------- --------- --------- 137,406 173,641 126,712 --------- --------- --------- Operating income .......................................... 13,194 17,853 16,265 Interest expense .......................................... (1,047) (2,970) (3,228) Interest income ........................................... 108 316 294 Other income .............................................. 314 264 264 --------- --------- --------- Income before income taxes, minority interest, and extraordinary item ...................................... 12,569 15,463 13,595 Income tax expense ........................................ (2,766) (231) (180) Minority interest in income of combined companies and consolidated subsidiaries ............................... 5 -- (1,600) --------- --------- --------- Net income before extraordinary item ...................... 9,808 15,232 11,815 Extraordinary loss on debt restructuring, net of income taxes ............................................ -- (784) (784) --------- --------- --------- Net income ................................................ 9,808 14,448 11,031 Preferred dividends ....................................... -- -- (41) --------- --------- --------- Net income attributable to common shares .................. $ 9,808 $ 14,448 $ 10,990 ========= ========= ========= Basic earnings (loss) per share: Earnings per share before extraordinary item ............ $ .20 $ .32 $ .32 Extraordinary loss on debt restructuring, net of income taxes .......................................... -- (.02) (.02) Basic net income per share .............................. .20 .30 .30 Diluted earnings (loss) per share: Earnings per share before extraordinary item ............ $ .20 $ .32 $ .31 Extraordinary loss on debt restructuring, net of income taxes .......................................... -- (.02) (.02) Diluted net income per share ............................ .20 .30 .29 Weighted average number of common shares outstanding: Basic ................................................... 48,233 48,156 36,418 Diluted ................................................. 48,637 48,634 38,337 </Table> (1) See detailed pro forma statement of income and related footnotes on pages 10 to 13 of this Form 10-Q. The accompanying notes are an integral part of these financial statements. 3
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <Table> <Caption> MARCH 31, DECEMBER 31, ASSETS 2002 2001 ----------- ------------ (UNAUDITED) <S> <C> <C> Current assets: Cash and cash equivalents............................... $ 3,336 $ 4,982 Accounts receivable, net................................ 104,036 116,790 Inventories, net........................................ 76,469 76,917 Prepaid expenses and other current assets............... 4,427 3,932 --------- -------- Total current assets.................................. 188,268 202,621 Property, plant, and equipment, net....................... 147,639 150,090 Goodwill, net............................................. 172,991 172,235 Other noncurrent assets................................... 5,439 4,937 --------- -------- Total assets......................................... $ 514,337 $529,883 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................ $ 74,533 $ 83,528 Income taxes............................................ 3,906 4,267 Current portion of long-term debt....................... 732 3,894 Deferred revenue........................................ 5,710 2,646 Other current liabilities............................... 1,569 509 --------- -------- Total current liabilities............................ 86,450 94,844 Long-term debt.......................................... 57,722 73,939 Deferred income taxes................................... 7,837 8,436 Postretirement healthcare benefits...................... 5,503 5,570 Other liabilities....................................... 3,009 2,897 --------- -------- Total liabilities.................................... 160,521 185,686 Stockholders' equity: Common stock............................................ 483 483 Additional paid-in capital.............................. 326,143 326,031 Retained (earnings)..................................... 34,518 24,710 Accumulated other comprehensive loss.................... (7,328) (7,027) --------- -------- Total stockholders' equity........................... 353,816 344,197 --------- -------- Total liabilities and stockholders' equity........... $ 514,337 $529,883 ========= ======== </Table> The accompanying notes are an integral part of these financial statements. 4
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <Table> <Caption> THREE MONTHS ENDED MARCH 31, ----------------------------------- 2002 2001 ------------ ---------------- CONSOLIDATED CONSOLIDATED AND COMBINED <S> <C> <C> Cash flows from operating activities: Net income before extraordinary item .................................. $ 9,808 $ 11,815 Adjustments to reconcile net income from continuing operations to net cash from operating activities: Minority interest, net of distributions ............................. (5) 1,600 Depreciation and amortization ....................................... 5,308 6,364 Deferred income tax provision ....................................... (909) (4,577) Other, net .......................................................... 813 257 Changes in working capital .......................................... 7,169 (26,468) -------- -------- Net cash flows provided by (used in) operating activities ......... 22,184 (11,009) Cash flows from investing activities: Acquisitions of businesses, net of cash acquired ...................... (1,405) (2,120) Capital expenditures .................................................. (3,568) (4,660) Proceeds from sale of equipment ....................................... 573 2,425 Cash acquired in Sooner acquisition ................................... -- 4,894 Other, net ............................................................ 32 (40) -------- -------- Net cash flows provided by (used in) investing activities ......... (4,368) 499 Cash flows from financing activities: Borrowings/(repayments) under revolving credit facility ............... (15,965) 19,953 Debt repayments ....................................................... (3,559) (64,038) Preferred stock dividends ............................................. -- (844) Proceeds from issuance of common stock ................................ 15 84,200 Repurchase of preferred stock ......................................... -- (21,775) Payment of offering and financing costs ............................... -- (4,511) Other, net ............................................................ (43) (1,665) -------- -------- Net cash flows provided by (used in) financing activities ......... (19,552) 11,320 Effect of exchange rate changes on cash ................................. 253 (102) -------- -------- Net increase in cash and cash equivalents from continuing operations .... (1,483) 708 Net cash provided by (used in) discontinued operations .................. (163) 155 Cash and cash equivalents, beginning of year ............................ 4,982 4,821 -------- -------- Cash and cash equivalents, end of period ................................ $ 3,336 $ 5,684 ======== ======== </Table> The accompanying notes are an integral part of these consolidated financial statements. 5
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED, COMBINED AND PRO FORMA FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of Oil States International, Inc. (Oil States or the Company) and its consolidated subsidiaries since February 14, 2001. On February 14, 2001, the Company acquired the three companies (HWC Energy Services, Inc. - HWC; PTI Group, Inc. - PTI and Sooner Inc. - Sooner) previously reported in the Combined and Pro Forma financial statements presented herein. The combined financial statements include the activities of Oil States, HWC and PTI, collectively the Controlled Group for the period prior to February 14, 2001, utilizing reorganization accounting. The reorganization accounting method, which yields results similar to the pooling of interests method, has been used in the preparation of the combined financial statements of the Controlled Group (entities under common control of SCF-III L.P. (SCF-III), a private equity fund that focuses on investments in the energy industry). Under this method of accounting, the historical financial statements of HWC and PTI are combined with Oil States for the period until February 14, 2001 when Oil States, HWC and PTI merged and Oil States acquired Sooner in exchange for its common stock. After February 14, 2001, the consolidated financial statements of Oil States include the results of all its subsidiaries including HWC, PTI and Sooner. The combined financial statements have been adjusted to reflect minority interests in the Controlled Group. All significant intercompany accounts and transactions between the consolidated entities have been eliminated in the accompanying consolidated, combined and pro forma financial statements. The accompanying unaudited consolidated and combined financials statements of the Company and its wholly-owned subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the year. The financial statements included in this report should be read in conjunction with Oil States' audited financial statements and accompanying notes included in its 2001 Form 10-K, filed under the Securities Exchange Act of 1934, as amended. 2. NEW ACCOUNTING PRONOUNCEMENT - GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 142 - "Goodwill and Other Intangible Assets" (FAS No. 142). In connection with the adoption of FAS No. 142, the Company ceased amortizing goodwill. Also, as required by this statement, the Company has completed its evaluation of goodwill for potential impairment. No provision for goodwill impairment was required based on the evaluation performed. 6
Changes in the carrying amount of goodwill for the three months ended March 31, 2002, are as follows (in thousands): <Table> <Caption> OFFSHORE WELLSITE TUBULAR PRODUCTS SERVICES SERVICES TOTAL -------- -------- -------- ----- <S> <C> <C> <C> <C> Balance as of January 1, 2002 $ 41,585 $ 81,156 $ 49,494 $ 172,235 Goodwill acquired -- 808 -- 808 Impairment losses -- -- -- -- Foreign currency translation and other changes (101) (36) 85 (52) --------- --------- --------- --------- Balance as of March 31, 2002 $ 41,484 $ 81,928 $ 49,579 $ 172,991 ========= ========= ========= ========= </Table> The following tables present what reported income before extraordinary items and net income would have been in all periods presented exclusive of amortization expense recognized in those periods related to goodwill. <Table> <Caption> FOR THE THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, 2002 MARCH 31, 2001 -------------- ----------------------------------- (THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED AND CONSOLIDATED PRO FORMA COMBINED ------------ --------- -------- <S> <C> <C> <C> Reported net income before extraordinary item $ 9,808 $ 15,232 $ 11,815 Add: Goodwill amortization -- 1,879 1,288 ----------- ---------- ---------- Adjusted net income before extraordinary item $ 9,808 $ 17,111 $ 13,103 =========== ========== ========== Basic earnings per share: Reported net income before extraordinary item $ .20 $ .32 $ .32 Goodwill amortization -- .04 .04 ----------- ---------- ---------- Adjusted net income before extraordinary item $ .20 $ .36 $ .36 =========== ========== ========== Diluted earnings per share: Reported net income before extraordinary item $ .20 $ .32 $ .31 Goodwill amortization -- .03 .03 ----------- ---------- ---------- Adjusted net income before extraordinary item $ .20 $ .35 $ .34 =========== ========== ========== </Table> 3. INITIAL PUBLIC OFFERING, MERGER TRANSACTIONS AND REFINANCING On February 9, 2001, the Company began trading its common stock on the New York Stock Exchange under the symbol "OIS" pursuant to completion of its initial public offering (the Offering). On February 14, 2001, the Company closed the business combination and the Offering thereby acquiring the minority interests in PTI and HWC and 100% of the Sooner operations. The Company recorded additional goodwill of $61.9 million as a result of the acquisition of these minority interests. Concurrent with the Offering, the Company acquired Sooner for $69.5 million. The Company exchanged 7,597,152 shares of its common stock for all of the outstanding common shares of Sooner. The Company accounted for the acquisition using the purchase method of accounting and recorded approximately $40 million in goodwill. Concurrent with the closing of the Offering, the Company issued 4,275,555 shares of common stock to SCF-III and SCF-IV L.P. (SCF-IV) in exchange for approximately $36.0 million of indebtedness of Oil States and Sooner which was held by SCF-III and SCF-IV (the SCF Exchange). With the proceeds received in the Offering, the Company repaid $43.7 million of outstanding subordinated debt of the Controlled Group and Sooner, redeemed $21.8 million of preferred stock of Oil States, paid accrued interest on subordinated debt and accrued dividends on preferred stock aggregating $7.1 million, and repurchased common 7
stock from non-accredited shareholders and shareholders holding pre-emptive stock purchase rights for $1.6 million. The balance of the proceeds were used to reduce amounts outstanding under bank lines of credit. On February 14, 2001, the Company entered into a $150 million senior secured revolving credit facility. This new credit facility replaced existing bank credit facilities. In connection with the debt refinancing discussed above, the Company incurred prepayment penalties and wrote-off unamortized debt issue costs totaling $0.8 million which is reported as an extraordinary item. 4. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS Additional information regarding selected balance sheet accounts is presented below (in thousands): <Table> <Caption> MARCH 31, DECEMBER 31, 2002 2001 ---- ---- <S> <C> <C> Accounts receivable: Trade........................................................ $ 98,140 $115,726 Unbilled revenue............................................. 6,708 2,674 Other........................................................ 1,381 1,123 Allowance for doubtful accounts.............................. (2,193) (2,733) --------- ------- $ 104,036 $116,790 ========= ======== </Table> <Table> <Caption> MARCH 31, DECEMBER 31, 2002 2001 ---- ---- <S> <C> <C> Inventories: Tubular goods......................................................... $ 38,020 $41,882 Other finished goods and purchased products........................... 17,689 20,024 Work in process....................................................... 16,405 12,012 Raw materials......................................................... 9,698 8,696 --------- ------- Total inventories.................................................... 81,812 82,614 Inventory reserves.................................................... (5,343) (5,697) --------- ------- $ 76,469 $76,917 ========= ======= </Table> <Table> <Caption> ESTIMATED MARCH 31, DECEMBER 31, USEFUL LIFE 2002 2001 ----------- ---- ---- <S> <C> <C> <C> Property, plant and equipment: Land............................................. $ 4,157 $ 4,163 Buildings and leasehold improvements............. 2-50 years 28,396 27,505 Machinery and equipment.......................... 2-15 years 147,838 147,183 Rental tools..................................... 3-10 years 25,852 24,876 Office furniture and equipment................... 1-10 years 10,952 10,667 Vehicles......................................... 2-5 years 5,669 6,197 Construction in progress......................... 300 1,033 --------- -------- Total property, plant and equipment............ 223,164 221,624 Less: Accumulated depreciation...................... (75,525) (71,534) --------- -------- $ 147,639 $150,090 ========= ======== </Table> <Table> <Caption> MARCH 31, DECEMBER 31, 2002 2001 ---- ---- <S> <C> <C> Accounts payable and accrued liabilities: Trade accounts payable....................................... $ 48,431 $52,386 Accrued compensation......................................... 6,610 10,317 Accrued insurance............................................ 3,392 3,498 Accrued interest............................................. 243 248 Accrued taxes, other than income taxes....................... 2,413 3,314 Reserves related to discontinued operations, current portion. 4,862 4,976 Postretirement healthcare benefits current portion........... 1,100 1,100 Other........................................................ 7,482 7,689 --------- ------- $ 74,533 $83,528 ========= ======= </Table> 8
5. SEGMENT AND RELATED INFORMATION In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has identified the following reportable segments: Offshore Products and Wellsite Services and, since the acquisition of Sooner, Tubular Services. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of the acquisition was retained. Financial information by industry segment for each of the three-month periods ended March 31, 2002 and 2001 is summarized in the following table (in thousands): <Table> <Caption> OFFSHORE WELLSITE TUBULAR CORPORATE AND PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL -------- -------- -------- ------------ ----- <S> <C> <C> <C> <C> <C> MARCH 31, 2002 Revenues from unaffiliated customers ....................... $ 32,737 $ 66,593 $ 51,270 $ -- $ 150,600 ========= ========= ========= ========= ========= EBITDA .......................... 4,361 15,227 117 (1,203) 18,502 ========= ========= ========= ========= ========= Depreciation and amortization ... 1,345 3,807 144 12 5,308 ========= ========= ========= ========= ========= Operating income (loss) ......... 3,016 11,420 (27) (1,215) 13,194 ========= ========= ========= ========= ========= Capital expenditures ............ 1,381 2,142 45 -- 3,568 ========= ========= ========= ========= ========= Total assets .................... $ 142,358 $ 248,202 $ 120,098 $ 3,679 $ 514,337 ========= ========= ========= ========= ========= MARCH 31, 2001 (Consolidated and Combined) Revenues from unaffiliated customers...................... $ 29,501 $ 69,155 $ 44,321 $ -- $ 142,977 ========= ========= ========= ========= ========= EBITDA .......................... 1,787 19,879 2,101 (1,138) 22,629 ========= ========= ========= ========= ========= Depreciation and amortization ... 1,610 4,076 202 476 6,364 ========= ========= ========= ========= ========= Operating income (loss) ......... 177 15,803 1,898 (1,613) 16,265 ========= ========= ========= ========= ========= Capital expenditures ............ 800 3,721 139 -- 4,660 ========= ========= ========= ========= ========= Total assets .................... $ 136,821 $ 222,795 $ 131,273 $ 65,356 $ 556,245 ========= ========= ========= ========= ========= </Table> 6. COMPREHENSIVE INCOME Comprehensive income for the three months ended March 31, 2002 and 2001 was as follows (in thousands): <Table> <Caption> THREE MONTHS ENDED MARCH 31 2002 2001 ---- ---- <S> <C> <C> Comprehensive income: Net income.......................... $ 9,808 $ 11,031 Cumulative translation adjustment........................ (301) (3,074) --------- --------- Total comprehensive income.......... $ 9,507 $ 7,957 ========= ========= </Table> 7. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company is aware that certain energy service companies that have in the past used asbestos in connection with the manufacture of equipment or otherwise in the operation of their business have become the subject of increased asbestos related litigation. Certain subsidiaries of the Company have been named as defendants in four cases by plaintiffs seeking damages, including punitive damages, alleging that our subsidiaries have responsibility for four individuals developing mesothelioma, asbestosis, lung cancer or other lung diseases as a result of exposure to asbestos. Although these are the only cases that management is aware that are pending or threatened against the Company or its subsidiaries involving allegations relating to asbestos exposure, there can be no assurance that other asbestos related claims will not be made. Based on management's preliminary investigation, management does not believe that these cases or future claims relating to asbestos exposure will have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 9
UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENT The consolidated financial statements of Oil States International, Inc. reflect the Company's financial position, results of operations and changes in stockholders' equity for periods subsequent to February 14, 2001, the date of our initial public offering and the combination of Oil States International, Inc. (Oil States), HWC Energy Services, Inc. (HWC) and PTI Group Inc. (PTI) (collectively, the Controlled Group), among other things. As more fully described below, and in footnotes that follow, the combined financial statements reflect the financial position, results of operations and changes in stockholders' equity of the predecessor entities that now comprise Oil States International, Inc. based on reorganization accounting. The pro forma financial information that follows reflect our historical consolidated or combined statements of operations, depending upon the period involved, and give effect to the pro forma transactions and adjustments more fully described below. The following tables set forth unaudited pro forma consolidated and combined financial information for Oil States giving effect to: o the combination of Oil States, HWC and PTI as entities under the common control of SCF-III L.P. (SCF III), based upon reorganization accounting, which yields results similar to pooling of interest accounting, effective from the dates each of these entities became controlled by SCF III; o the conversion of the common stock held by the minority interests of each entity in the Controlled Group into shares of our common stock, based on the purchase method of accounting; o the conversion of all of the outstanding common stock of Sooner Inc. (Sooner) into shares of our common stock, based on the purchase method of accounting; and o the exchange of 4,275,555 shares of our common stock for $36.0 million of debt of Sooner and Oil States; and o our sale of 10,000,000 shares of common stock in our initial public offering (the Offering) and the application of the net proceeds totaling $84.1 million. With the proceeds received in the Offering, the Company repaid $43.7 million of outstanding subordinated debt of the Controlled Group and Sooner, redeemed $21.8 million of preferred stock of Oil States, paid accrued interest on subordinated debt and accrued dividends on preferred stock aggregating $7.1 million, and repurchased common stock from non-accredited shareholders and shareholders holding pre-emptive stock purchase rights for $1.6 million. The balance of the proceeds was used to reduce amounts outstanding under bank lines of credit. The unaudited pro forma consolidated and combined financial statements do not purport to be indicative of the results that would have been obtained had the transactions described above been completed on the indicated dates or that may be obtained in the future. The unaudited pro forma combined financial statements should be read in conjunction with the historical consolidated and combined financial statements and notes thereto included in our Annual Report on Form 10-K. 10
PRO FORMA CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <Table> <Caption> PRO FORMA ----------------------------------------------------------------------------- SOONER INC. MINORITY COMBINED AND CONSOLIDATED AND (PERIOD FROM SOONER INC. INTEREST OFFERING CONSOLIDATED, COMBINED JAN. 1, 2001 TO ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS GROUP FEB. 14, 2001) (NOTE 2) (NOTE 3) (NOTES 1 AND 4) AND OFFERING ---------------- --------------- ----------- ------------ --------------- ------------ <S> <C> <C> <C> <C> <C> <C> Revenue......................... $ 142,977 $ 48,517 $ $ $ $191,494 Expenses Costs of sales................ 108,179 45,142 153,321 Selling, general and 12,304 1,133 13,437 administrative.................. Depreciation and amortization. 6,364 188 331 135 7,018 Other expense (income)........ (135) (135) --------- -------- ------ ------ ------ -------- Operating income (loss)......... 16,265 2,054 (331) (135) 17,853 --------- -------- ------ ------ ------ -------- Interest income................. 294 22 316 Interest expense................ (3,228) (585) 843(A) (2,970) Other income.................... 264 -- 264 --------- -------- ------ ------ ------ -------- Earnings before income taxes.. 13,595 1,491 (331) (135) 843 15,463 Income tax (expense) benefit.... (180) (542) 491(C) (231) --------- -------- ------ ------ ------ -------- Net income (loss) before minority interests..................... 13,415 949 (331) (135) 1,334 15,232 Minority interests, net of taxes (1,600) -- 1,600 -- --------- -------- ------ ------ ------ -------- Net income (loss) before extraordinary item............ 11,815 949 (331) (135) 2,934 15,232 Extraordinary loss on debt restructuring................. (784) -- (784) --------- -------- ------ ------ ------ -------- Net income (loss)............... 11,031 14,448 Preferred dividends............. (41) -- 41(B) -- --------- -------- ------ ------ ------ -------- Net income attributable to common shares........................ $ 10,990 $ 949 $ (331) $ (135) $2,975 $ 14,448 ========= ======== ====== ====== ====== ======== Net income per common share..... Basic......................... $ .30 $ .30 ========== ========= Diluted....................... $ .29 $ .30 ========== ========= Average shares outstanding...... Basic......................... 36,418 48,156 ========= ======== Diluted....................... 38,337 48,634 ========= ======== </Table> 11
OIL STATES INTERNATIONAL, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Basis of Presentation The purchase method of accounting has been used to reflect the acquisition of the minority interests of each company in the Controlled Group concurrent with the closing of the Offering. The purchase price is based on the fair value of the shares owned by the minority interests, valued at the initial public offering price of $9.00 per share. Under this accounting method, the excess of the purchase price over the fair value of the assets and liabilities allocable to the minority interests acquired has been reflected as goodwill. Where book value of minority interests exceeded the purchase price, such excess reduced property, plant and equipment. For purposes of the pro forma combined financial statements, the goodwill recorded in connection with this transaction is being amortized over 20 years using the straight-line method based on management's evaluation of the nature and duration of customer relationships and considering competitive and technological developments in the industry. Note, however, that accounting for goodwill will change prospectively under new accounting pronouncements (See Note 3 to Consolidated and Combined Financial Statements in the Company's Form 10-K for the year ended December 31, 2001). The purchase method of accounting also has been used to reflect the acquisition of the outstanding common stock of Sooner concurrent with the closing of the Offering. The purchase price is based on the fair value of the shares of Sooner, valued at the initial public offering price of $9.00 per share. The excess of the purchase price over the fair value of the assets and liabilities of Sooner has been reflected as goodwill. For purposes of the pro forma combined financial statements, the goodwill recorded in connection with this transaction is being amortized over 15 years using the straight-line method based on management's evaluation of the nature and duration of customer relationships and considering competitive and technological developments in the industry. Note, however, that accounting for goodwill will change prospectively under new accounting pronouncements (See Note 3 to Consolidated and Combined Financial Statements in the Company's Form 10-K for the year ended December 31, 2001). The unaudited pro forma statements of operations for the three months ended March 31, 2001, include the historical financial statements of Sooner, adjusted for the effects of purchase accounting, as presented below. NOTE 1. COMBINING ADJUSTMENTS Minority interest in (income) loss and related tax effect of the Controlled Group are presented below (in thousands): <Table> <Caption> OIL STATES HWC PTI TOTAL ---------- --- --- ----- <S> <C> <C> <C> <C> Period from January 1, 2001 to February 14, 2001................... $72 $ (129) $(1,543) $(1,600) === ====== ======= ======= </Table> NOTE 2. ACQUISITION OF SOONER To reflect the acquisition of all outstanding common shares of Sooner in exchange for 7,597,152 shares of Oil States common stock valued at the estimated offering price per share of $9.00 (in millions): <Table> <S> <C> Purchase price............................................................................... $ 69.5 (1) Less: fair value of net assets acquires...................................................... 29.7 ------- Goodwill..................................................................................... $ 39.8 ======= Amortization for the period from January 1, 2001 to February 14, 2001........................ $ 33 ======= </Table> - --------- (1) The purchase price for Sooner includes the estimated fair value of Sooner stock options ($1.1 million) converted into Oil States stock options. 12
Certain reclassifications have been made to conform the presentation of Sooner's financial statements to the Controlled Group. NOTE 3. ACQUISITION OF MINORITY INTERESTS To reflect the acquisition of the minority interests of each company in the Controlled Group in exchange for shares of Oil States common stock and elimination of the historical amounts reflected for the combined group (in millions, except share and per share information): <Table> <Caption> OIL STATES HWC PTI COMBINED ----------- ---------- ----------- ----------- <S> <C> <C> <C> <C> Common stock issued to minority interests.......... 1,418,729 1,359,603 4,204,058 6,982,390 Estimated offering price per share................. $ 9.00 9.00 $ 9.00 $ 9.00 ----------- ---------- ----------- ----------- Purchase price of the minority interests........... $ 12.8 $ 12.2 $ 37.8 $ 62.8 Minority interests in fair value of net assets acquired........................................... 13.8 7.7 15.9 37.4 ----------- ---------- ----------- ----------- Additional goodwill................................ $ (1.0) $ 4.5 $ 21.9 $ 25.4 =========== ========== =========== =========== Amortization of the additional goodwill for the period from January 1, 2001 to February 14, 2001............................................. $ (.015) $ .020 $ .130 $ .135 =========== ========== =========== =========== </Table> NOTE 4. OFFERING (A) To adjust interest expense for debt repaid with Offering proceeds and as a result of the exchange of shares for subordinated debt. (B) To eliminate preferred stock dividends due to the redemption of the preferred stock. (C) To adjust income tax expense for the reduction of deferred taxes due to the formation of the combined group. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described under "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995" in "Item 1, Business" and elsewhere in our Annual Report on Form 10-K. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements, even if new information becomes available or other events occur in the future. Overview We provide a broad range of products and services to the oil and gas industry through our offshore products, tubular services and well site services business segments. Demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers' willingness to spend capital on the exploration and development of oil and gas reserves. Demand for our products and services by our customers is highly sensitive to current and expected oil and natural gas prices. Our offshore products segment provides highly engineered and technically designed products for offshore oil and gas development and production systems and facilities. Sales of our offshore products and services depend upon the development of offshore production systems, repairs and upgrades of existing drilling rigs and construction of new drilling rigs. In this segment, we are particularly influenced by deepwater drilling and production activities. Through our tubular services division, we distribute premium tubing and casing. Sales of tubular products and services depend upon the overall level of drilling activity and the mix of wells being drilled. Demand for tubular products is positively impacted by increased drilling of deeper horizontal and offshore wells that generally require premium tubulars and connectors, large diameter pipe and longer and additional tubular and casing strings. In our well site services business segment, we provide hydraulic well control services, pressure control equipment and rental tools and remote site accommodations, catering and logistics services. Demand for our well site services depends upon the level of worldwide drilling and workover activity. Energy and oilfield service activities are highly cyclical depending upon crude oil and natural gas pricing, among other things. Beginning in late 1996 and continuing though the early part of 1998, stabilization of oil and gas prices led to increases in drilling activity as well as the refurbishment and new construction of drilling rigs. In the second half of 1998, crude oil prices declined substantially and reached levels below $11 per barrel in early 1999. With this decline in pricing, many of our customers substantially reduced their capital spending and related activities. This industry downturn continued through most of 1999. The rig count in the United States and Canada, as measured by Baker Hughes Incorporated, fell from 1,481 rigs in February 1998 to 559 rigs in April 1999. This downturn in activity had a material adverse effect on demand for our products and services, and the results of our operations decreased significantly. The price of crude oil and natural gas increased over 1999 levels in 2000 and 2001 due to improved demand for oil, supply reductions by OPEC member countries and reductions in natural gas storage levels. That improvement in crude oil and natural gas pricing led to increases in the rig count in 2000 and the first half of 2001, particularly in Canada and the United States, where the rig count reached a high of 1,698 rigs in February 2001. The average North American rig count was 1,263 and 1,498 during 2000 and 2001, respectively. Crude oil and natural gas prices decreased significantly from levels reached in early 2001 by the end of 2001. The economic slowdown in the United States and the rest of the world, moderate weather and the resultant increased inventories of oil and gas, especially in the United States, contributed to those price declines. With those price reductions, our customers have responded with decreased drilling activity and spending on exploration and development. As of March 31, 2002, the rig count in the United States and Canada, as measured by Baker Hughes, was 1,012, a decline of 40.4% from the high reached in February 2001 and a decline of 13.1% from 1,165 rigs working at December 29, 2001. We have a diversified product and service offering which has exposure throughout the oil and gas cycle. Demand for our tubular services is highly correlated to movements in the rig count in the United States and began to weaken with the overall deterioration of industry fundamentals since the first quarter of 2001. Certain of our well site services businesses have decreased in the first quarter of 2002 when the United States rig count declined 7.0% 14
compared to the fourth quarter of 2001 and 27.9% compared to the first quarter of 2001. Although the Canadian rig count increased seasonally in the first quarter of 2002 on average by 100 rigs or 36.3% compared to the fourth quarter of 2001, it has decreased 133 rigs or 26.1% compared to the first quarter of 2001. Recently, oil and gas prices have increased and rig counts in the U.S. have begun to increase. The U.S. rig count reached its lowest level since 1999 when it totaled 738 rigs on April 15, 2002. The U.S. rig count has risen since then and totaled 812 as of May 10, 2002. We believe that our offshore products segment lagged the general market recovery in 2000 and 2001 because its sales primarily relate to offshore construction and production facility development which generally occur later in the exploration and development cycle. Worldwide offshore construction and development activity is improving currently and we expect it to increase substantially as construction activity in the shallow water regions of the Gulf of Mexico resumes and as the industry increasingly pursues deeper water drilling and development projects. Backlog in our offshore products segment increased from $38.1 million at March 31, 2001 to $72.4 million at December 31, 2001 and $84.3 million at March 31, 2002. Approximately 95% of our backlog as of March 31, 2002 is expected to be completed by December 31, 2002. Management believes that fundamental oil and gas supply and demand factors will lead to increased drilling activity in North America over time. However, the timing of any such recovery is uncertain. We view the recent increases in actual and forecasted oil and natural gas prices as an important step towards increased demand for oilfield service activity. Although the diversified nature of our businesses is expected to moderate the impact of North American drilling activity declines, we are expecting a 15 -- 20% revenue decline in 2002 compared to pro forma 2001 levels based upon our forecast of energy prices and drilling activity levels. The Combination Prior to the Offering in February 2001, SCF-III, L.P. owned majority interests in Oil States, HWC and PTI, and SCF-IV, L.P. owned a majority interest in Sooner. L. E. Simmons & Associates, Incorporated is the ultimate general partner of SCF-III, L.P. and SCF-IV, L.P. L.E. Simmons, the chairman of our board of directors, is the sole shareholder of L.E. Simmons & Associates, Incorporated. Concurrently with the closing of our initial public offering, the Combination closed and HWC, PTI and Sooner merged with wholly owned subsidiaries of Oil States. As a result, HWC, Sooner and PTI became our wholly owned subsidiaries. The financial results of Oil States, HWC and PTI have been combined for the three years in the period ended December 31, 2000 as well as the beginning of calendar 2001 until February 14, 2001 using reorganization accounting, which yields results similar to the pooling of interests method. The combined results of Oil States, HWC and PTI form the basis for the discussion of our results of operations for those periods. The operations of Oil States, HWC and PTI represent two of our business segments, offshore products and well site services. Concurrent with the closing of our initial public offering on February 14, 2001, Oil States acquired Sooner, and the acquisition was accounted for using the purchase method of accounting. The pro forma financial statements for the quarter ended March 31, 2001 reflect the acquisition of Sooner effective as of January 1, 2001. Following the acquisition of Sooner, we reported under three business segments. 15
RESULTS OF OPERATIONS (IN MILLIONS, EXCEPT MARGIN PERCENTAGES) <Table> <Caption> PRO FORMA THREE MONTHS ENDED MARCH 31, -------------------------------------------------------- 2002 2001 2001 ---- ---- ---- CONSOLIDATED PRO FORMA CONSOLIDATED AND COMBINED ------------ --------- ------------------------- <S> <C> <C> <C> Revenues Well Site Services....................... $ 66.6 $ 69.2 $ 69.2 Offshore Products........................ 32.7 29.5 29.5 Tubular Services......................... 51.3 92.8 44.3 -------- -------- ------- Total............................ $ 150.6 $ 191.5 $ 143.0 ======== ======== ======= Gross Margin Well Site Services....................... $ 20.0 $ 25.5 $ 25.5 Offshore Products........................ 8.2 6.3 6.3 Tubular Services......................... 2.2 6.6 3.2 Corporate/Other.......................... -- (.2) (.2) -------- -------- ------- Total............................ $ 30.4 $ 38.2 $ 34.8 ======== ======== ======= Gross Margin as a Percent of Revenues Well Site Services....................... 30.0% 36.8% 36.8% Offshore Products........................ 25.1% 21.4% 21.4% Tubular Services......................... 4.3% 7.1% 7.2% Total............................ 20.2% 19.9% 24.3% Operating Income (Loss) Well Site Services....................... $ 11.4 $ 15.8 $ 15.8 Offshore Products........................ 3.0 .2 .2 Tubular Services......................... -- 3.9 1.9 Corporate/Other.......................... (1.2) (2.1) (1.6) -------- -------- ------- Total............................ $ 13.2 $ 17.8 $ 16.3 ======== ======== ======= </Table> THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO PRO FORMA THREE MONTHS ENDED MARCH 31, 2001 Revenues. Revenues decreased $40.9 million, or 21.4%, to $150.6 million during the current quarter compared to pro forma revenues of $191.5 million during the quarter ended March 31, 2001. Tubular Services revenues decreased $41.5 million, or 44.7%, in the three months ended March 31, 2002 compared to pro forma revenues in the three months ended March 31, 2001 as a result of reduced drilling activity in the U.S. Well Site Services revenues declined $2.6 million, or 3.8%, and Offshore Products revenues increased $3.2 million, or 10.8%, during the same period. Well Site Services revenues declined compared to the prior year primarily due to lower drilling and workover activity in North America. Offshore Products revenues increased as a result of greater activity supporting offshore production facility construction. Cost of Sales. Cost of sales decreased by $33.2 million, or 21.6%, to $120.2 million in the three months ended March 31, 2002 compared to $153.3 million in the three month period ended March 31, 2001. Decreased Tubular Services revenues were the principal reason for the corresponding decrease in cost of sales during the period. Tubular Services cost of sales decreased from $86.2 million in the first quarter of 2001 to $49.1 million in the first quarter of 2002, a decrease of $37.1 million, or 43.0%. Gross Margin. Our gross margins, which we calculate before a deduction for depreciation expense, decreased $7.8 million, or 20.4%, from $38.2 million in the three months ended March 31, 2001 to $30.4 million in the three months ended March 31, 2002. Well Site Services gross margins decreased $5.5 million, or 21.6%, to $20 million in the three months ended March 31, 2002 compared to the three months ended March 31, 2001. Within our Well Site Services segment, shallow drilling and specialty rental tool businesses' gross margins declined $1.1 million, or 50%, and $0.8 million, or 19.3%, respectively, in the three months ended March 31, 2002 compared to the three months ended March 31, 2001 as a result of lower utilization and pricing for our drilling and rental tool assets. Also in Well Site Services, our remote accommodations, catering and logistics services and modular building 16
construction services gross margins decreased by $3.6 million, or 21.1%, in the three months ended March 31, 2002 compared to the three months ended March 31, 2001 because a greater mix of revenues were generated from to our lower-margin catering and modular building construction activities and because of lower U.S. Gulf of Mexico rental revenues. Offshore Products gross margins increased $1.9 million, or 23.2%, from $6.3 million in the three months ended March 31, 2001 to $8.2 million in the three months ended March 31, 2002 primarily due to increased revenues and a favorable mix of our higher-margin connector products versus our lower-margin fabrication work. Tubular Services gross margins declined to $2.2 million, or 4.3% of Tubular Services revenues in the three months ended March 31, 2002 compared to $6.6 million, or 7.1% of Tubular Services revenues, in the three months ended March 31, 2001 as a result of decreased oil and gas company drilling which decreased demand for our Tubular products and services. Selling, General and Administrative Expenses. During the three months ended March 31, 2002, selling, general and administrative expenses (SG&A) totaled $12.2 million compared to SG&A of $13.4 million on a pro forma basis for the three months ended March 31, 2001. Special nonrecurring severance and restructuring costs totaling $0.7 million were charged to SG&A in the first three months of 2002. These increased costs were more than offset by cost containment measures taken because of lower activity levels in 2002 compared to 2001 and the absence of certain nonrecurring charges, totaling $0.3 million, in our remote site accommodations business that were recorded during the three months ended March 31, 2001. Depreciation and Amortization. Depreciation expense increased $0.2 million in the first quarter 2002 compared to the first quarter 2001 due primarily to capital expenditures made in our Well Site Services segment during 2001. Amortization expense decreased from $2.0 million in the first quarter 2001 to $0.1 million in the first quarter 2002 due to the adoption of a new accounting standard that discontinued goodwill amortization (See Note 2 to Financial Statements contained herein). Operating Income. Our operating income represents revenues less (i) cost of sales, (ii) selling, general and administrative expenses and (iii) depreciation and amortization expense plus other operating income. Our operating income decreased $4.6 million, or 25.8%, to $13.2 million for the three months ended March 31, 2002 from $17.8 million in the three month period ended March 31, 2001. Well Site Services operating income decreased from $15.8 million during the three months ended March 31, 2001 to $11.4 million for the three months ended March 31, 2002. Offshore Products operating income increased from $0.2 million during the three months ended March 31, 2001 to $3.0 million for the three months ended March 31, 2002. Tubular Services operating income was approximately break-even for the three months ended March 31, 2002 compared to operating income of $3.9 million during 2001. The accounting change affecting goodwill amortization for our company impacted "Corporate / Other" operating income and contributed to the operating loss being reduced from $2.1 million in 2001 to an operating loss of $1.2 million in the three months ended March 31, 2002. Interest Expense. Interest expense decreased $1.9 million, or 64.0%, to $1.0 million for the quarter ended March 31, 2002 compared to $2.9 million for the quarter ended March 31, 2001. Decreased interest expense is attributable to lower debt levels and interest rates. Income Tax Expense. Income tax expense totaled $2.8 million, or 22.0% of pretax income, in the three months ended March 31, 2002 compared with $0.2 million, or 1.5% of pretax income, in the three months ended March 31, 2001. Decreased amounts of net operating loss carryforwards available to offset currently taxable income has resulted in a higher estimated annual effective tax rate for the year 2002 compared to 2001. THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 Refer to Pro Forma Statement of Operations and Related Footnotes on Pages 10 to 14 of this Form 10Q for details of pro forma adjustments made to the Company's consolidated and combined statement of operations for the three month period ended March 31, 2001. Differences between the March 31, 2001 Consolidated and Combined Statement of Operations and the March 31, 2001 Pro Forma Consolidated and Combined Statement of Operations appearing on Page 3 and Page 12 can be 17
summarized as follows: 1. The Pro Forma Consolidated and Combined Statement of Operations include the results of operations for Sooner for the period from January 1, 2001 until its acquisition date of February 14, 2001. Sooner's revenues, gross margin, gross margin as a percent of revenues and operating income during this period were $48.5 million, $3.4 million, 7.0% and $2.0 million, respectively. 2. The Pro Forma Consolidated and Combined Statement of Operations include an additional $0.3 million of goodwill amortization related to the Sooner acquisition. 3. The Pro Forma Consolidated and Combined Statement of Operations include an additional $0.1 million of Sooner minority interests in income for the period. 4. The Pro Forma Consolidated and Combined Statement of Operations include adjustments to decrease interest expense by $0.9 million, eliminate minority interests in earnings totaling $1.6 million and eliminate preferred stock dividends of $0.04 million in the first three months of 2001 to reflect the pro forma impact of the Offering and the Combination as if each had occurred at the beginning of the period. Additionally, the related income tax effect for these adjustments was $0.5 million. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs are to fund capital expenditures, such as expanding and upgrading our manufacturing facilities and equipment, increasing our rental tool and workover assets, increasing our accommodation units, funding new product development and to fund general working capital needs. In addition, capital is needed to fund strategic business acquisitions. Our primary sources of funds have been cash flow from operations, proceeds from borrowings under our bank facilities and private and public debt and equity offerings. Cash was provided by (used in) operations during the three months ended March 31, 2002 and 2001 in the amounts of $22.2 million and ($11.0) million, respectively. Cash provided by operations in 2002 was generated by our net income and lower working capital invested in our tubular services segment, partially offset by the seasonal use of working capital in our Canadian operations. During the three months ended March 31, 2001, there were significant investments in working capital as a result of tubular inventory increases and relatively high Canadian seasonal working capital needs. Cash was used by investing activities in the amount of $4.4 million during the three months ended March 31, 2002 primarily as a result of capital expenditures which totaled $3.6 million and one rental tool acquisition made in our well site services segment totaling $1.4 million, partially offset by cash proceeds from asset sales. Capital expenditures totaled $3.6 million and $4.7 million during the three months ended March 31, 2002 and 2001, respectively. Capital expenditures during both these periods consisted principally of purchases of assets for our well site services businesses. We currently expect to spend a total of approximately $22.8 million during 2002 to upgrade our equipment and facilities and expand our product and service offerings. We expect to fund these capital expenditures with internally generated funds. Net cash of $19.6 million was used in financing activities during the three months ended March 31, 2002, primarily as a result of elective debt repayments under our bank credit facility. As of March 31, 2002, we had $50.8 million outstanding under our debt facility and an additional $7.1 million of outstanding letters of credit, leaving $92.1 million available to be drawn under the facility. In addition, we have another floating rate bank credit facility in the UK that had a balance of $2.4 million at March 31, 2002. Our total debt represented 14.2% of our total capitalization at March 31, 2002. We believe that cash from operations and available borrowings under our credit facility will be sufficient to meet our liquidity needs for the foreseeable future. If our plans or assumptions change or are inaccurate, or we make any acquisitions, we may need to raise additional capital. However, there is no assurance that we will be able to raise additional funds or be able to raise such funds on favorable terms. 18
TAX MATTERS For the year ended December 31, 2001, we had deferred tax assets, net of deferred tax liabilities, of approximately $19.7 million for federal income tax purposes before application of valuation allowances. Our primary deferred tax assets are net operating loss carry forwards, or NOLs, which total approximately $93.7 million. A valuation allowance is currently provided against the majority of our NOLs. The NOLs expire over a period through 2020. Our NOLs are currently limited under Section 382 of the Internal Revenue Code due to a change of control that occurred during 1995. However in 2002, approximately $40 million of NOLs are available for use currently if sufficient income is generated. Our 2001 effective tax rate approximated 4%. This low effective tax rate was due to the partial utilization of net operating losses which benefited the consolidated group after the merger. We currently estimate our 2002 effective tax rate will be approximately 22%. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (the Statements), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company has applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statements is expected to result in an increase in net income of approximately $8.0 million ($.16 per diluted share) per year. During the first quarter of 2002, the Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has completed its evaluation of goodwill and indefinite lived intangible assets and there was no impairment of assets recorded. In June of 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement is effective for fiscal years beginning after June 15, 2002 and the Company expects to adopt the Statement effective January 1, 2003. It is expected that this Statement will have an immaterial effect on the Company's consolidated financial statements. In August of 2001 the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company was required to adopt this Statement effective January 1, 2002 and it did not have an impact on the consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. We have long-term debt and revolving lines of credit subject to the risk of loss associated with movements in interest rates. Currently, we have floating rate obligations totaling approximately $53.2 million for amounts borrowed under our revolving lines of credit. These floating-rate obligations expose us to the risk of increased interest expense in the event of increases in short-term interest rates. If the floating interest rate were to increase by 1% from March 31, 2002 levels, our combined interest expense would increase by a total of approximately $0.5 million annually. Foreign Currency Exchange Rate Risk. Our operations are conducted in various countries around the world in a number of different currencies. As such, our earnings are subject to change due to movements in foreign currency exchange rates when transactions are denominated in currencies other than the U.S. dollar, which is our functional currency. In order to mitigate the effects of exchange rate risks, we generally pay a portion of our expenses in local currencies and a substantial portion of our contracts provide for collections from customers in U.S. dollars. As of March 31, 2002, we had Canadian dollar-denominated debt totaling approximately $18.8 million. We had no interest rate hedges or forward foreign exchange contracts at March 31, 2002. 19
PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including claims relating to matters occurring prior to our acquisition of businesses and also relating to businesses we have sold. In certain cases, we are entitled to indemnification from the sellers of businesses and in other cases, we have indemnified the buyers of businesses from us. Although we can give no assurance about the outcome of these or any other pending legal and administrative proceedings and the effect such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. The Company is aware that certain energy service companies that have in the past used asbestos in connection with the manufacture of equipment or otherwise in the operation of their business have become the subject of increased asbestos related litigation. Certain subsidiaries of the Company have been named as defendants in four cases by plaintiffs seeking damages, including punitive damages, alleging that our subsidiaries have responsibility for four individuals developing mesothelioma, asbestosis, lung cancer or other lung diseases as a result of exposure to asbestos. Although these are the only cases that management is aware that are pending or threatened against the Company or its subsidiaries involving allegations relating to asbestos exposure, there can be no assurance that other asbestos related claims will not be made. Based on management's preliminary investigation, management does not believe that these cases or future claims relating to asbestos exposure will have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) INDEX OF EXHIBITS <Table> <Caption> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> <C> 3.1 -- Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 3.2 -- Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 3.3 -- Certificate of Designations of Special Preferred Voting Stock of Oil States International, Inc. (incorporated by reference </TABLE> 20
<Table> <Caption> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> <C> to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 4.1 -- Form of common stock certificate (incorporated by reference to Exhibit 4.1 of Oil States' Registration Statement No. 333-43400 on Form S-1). 4.2 -- Amended and Restated Registration Rights Agreement (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.1 -- Combination Agreement dated as of July 31, 2000 by and among Oil States International, Inc., HWC Energy Services, Inc., Merger Sub-HWC, Inc., Sooner Inc., Merger Sub-Sooner, Inc. and PTI Group Inc. (incorporated by reference to Exhibit 10.1 of Oil States' Registration Statement No. 333-43400 on Form S-1). 10.2 -- Plan of Arrangement of PTI Group Inc. (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.3 -- Support Agreement between Oil States International, Inc. and PTI Holdco (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.4 -- Voting and Exchange Trust Agreement by and among Oil States International, Inc., PTI Holdco and Montreal Trust Company of Canada (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.5** -- 2001 Equity Participation Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.6** -- Form of Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 of Oil States' Registration Statement No. 333-43400 on Form S-1). 10.7** -- Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.8** -- Executive Agreement between Oil States International, Inc. and Douglas E. Swanson (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.9** -- Executive Agreement between Oil States International, Inc. and Cindy B. Taylor (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 10.10** -- Form of Executive Agreement between Oil States International, Inc. and other Named Executive Officers (Messrs. Hughes and Chaddick) (incorporated by reference to Exhibit 10.10 of Oil States' Registration Statement No. 333-43400 on Form S-1). 10.11** -- Form of Change of Control Severance Plan for Selected Members of Management (incorporated by reference to Exhibit 10.11 of Oil States' Registration Statement No. 333-43400 on Form S-1). </TABLE> 21
<Table> <Caption> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> <C> 10.12 -- Credit Agreement among Oil States International, Inc., PTI Group Inc., the Lenders named therein, Credit Suisse First Boston, Credit Suisse First Boston Canada, Hibernia National Bank and Royal Bank of Canada (incorporated by reference to Exhibit 10.12 of Oil States' Registration Statement No. 333-43400 on Form S-1). 10.13A** -- Restricted Stock Agreement, dated February 8, 2001, between Oil States International, Inc. and Douglas E. Swanson. 10.13B** -- Restricted Stock Agreement, dated February 22, 2001, between Oil States International, Inc. and Douglas E. Swanson. 10.14** -- Form of Indemnification Agreement (incorporated by reference to Exhibit 10.14 of Oil States' Registration Statement No. 333-43400 on Form S-1). 10.15** -- Form of Executive Agreement between Oil States International, Inc. And named Executive Officer (Mr. Slator) (Incorporated by Reference to Exhibit 10.16 to the Company's Annual Report On Form 10K for the year ended December 31, 2001, as filed With the Commission on March 4, 2002. 10.16*,** -- Form of Executive Agreement between Oil States International, Inc. and named executive officer (Mr. Trahan). 16.1 -- Letter Regarding Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 of Oil States' Registration Statement No. 333-43400 on Form S-1). 21.1 -- List of subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of Oil States' Registration Statement No. 333-43400 on Form S-1). </Table> - --------- * Filed herewith ** Management contracts or compensatory plans or arrangements. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the period covered by this report. 22
SIGNATURES Pursuant to the requirements of the Securities Exchanges Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OIL STATES INTERNATIONAL, INC. Date: May 15, 2002 By /s/ CINDY B. TAYLOR ------------------ ----------------------------- Cindy B. Taylor Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: May 15, 2002 By /s/ ROBERT W. HAMPTON ------------------ ------------------------------ Robert W. Hampton Vice President -- Finance and Accounting and Secretary (Principal Accounting Officer) 23
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.16 -- Form of Executive Agreement between Oil States International, Inc. and named executive officer (Mr. Trahan).