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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 000-19580
T-3 ENERGY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0697390
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
13111 NORTHWEST FREEWAY, SUITE 500, HOUSTON, TEXAS 77040
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 996-4110
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE
CLASS B WARRANT
CLASS C WARRANT
CLASS D WARRANT
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates was
$19,173,479 at June 28, 2002. As of March 21, 2003, there were 10,581,669 shares
of common stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION
14A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 2003
ANNUAL MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF
THIS REPORT ON FORM 10-K.
TABLE OF CONTENTS
FORM 10-K
Item Page
---- ----
PART I
1. Business......................................................................... 1
2. Properties....................................................................... 7
3. Legal Proceedings................................................................ 7
4. Submission of Matters to a Vote of Security Holders.............................. 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............ 8
6. Selected Financial Data ......................................................... 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 12
7A. Quantitative and Qualitative Disclosures About Market Risk ...................... 22
8. Financial Statements and Supplementary Data ..................................... 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................................ 22
PART III
10. Directors and Executive Officers of the Registrant............................... 23
11. Executive Compensation .......................................................... 23
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.............................................................. 23
13. Certain Relationships and Related Transactions................................... 23
14. Controls and Procedures.......................................................... 23
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 24
i
Unless otherwise indicated, all references to "we," "us," "our," "our
company" or "T-3" include T-3 Energy Services, Inc. and all of its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We manufacture, remanufacture and distribute oilfield products and
services to the upstream and downstream oil and gas industry primarily in the
Gulf Coast region. Our customers include companies engaged in exploration,
production, completion, transportation and processing of oil and gas, and
drilling and well servicing contractors. Our operations are organized into three
business segments: (1) the Pressure Control segment, (2) the Products segment,
and (3) the Distribution segment.
We were formerly named Industrial Holdings, Inc. ("IHI"). On December
17, 2001, T-3 Energy Services, Inc., a private Delaware corporation ("former
T-3"), merged into IHI, with IHI surviving the merger. In connection with the
merger, the combined company was reincorporated in Delaware under the name "T-3
Energy Services, Inc." and implemented a one-for-ten reverse stock split of its
common stock.
The merger was treated for accounting purposes as a purchase of IHI by
former T-3 (a reverse acquisition) in a purchase business transaction. The
purchase method of accounting requires that we carry forward former T-3's net
assets at their historical book values and reflect IHI's net assets at their
estimated fair market values, with any excess of the fair market value of the
purchase consideration in excess of the fair market value of IHI's identifiable
net assets treated as goodwill. The historical financial data presented in this
Annual Report on Form 10-K includes the historical financial condition and
operating results of T-3 prior to its merger with IHI. For the year 2001, the
historical financial data also includes the two weeks of operations of the
combined company from December 17, 2001 to December 31, 2001.
We were incorporated in Delaware in November 2001 in connection with
the merger and re-incorporation in Delaware. The Company's principal executive
offices are located at 13111 Northwest Freeway, Suite 500, Houston, Texas 77040,
and its telephone number is (713) 996-4110.
BUSINESS STRATEGY
Our business strategy is to maximize shareholder value by building a
diversified oilfield services company founded on products and services that
enhance our customers' operations. We have adopted the strategies described
below:
- integrate our existing operations through appropriate
financial controls and personnel, management information
systems and facilities consolidations;
- enter niche markets for products and services that allow us an
opportunity to perform more effectively and efficiently than
major energy services companies;
- acquire products and services that complement each other in
the manufacturing, aftermarket and service arenas;
- expand higher margin aftermarket services by promoting rapid
response to customer needs;
- focus primarily on the Gulf of Mexico and high pressure gas
markets;
- emphasize inter-company coordination through bundled products
and services, combined sales efforts and inter-company
purchases; and
1
- complete strategic add-on acquisitions.
Currently, we have 24 locations throughout the Gulf Coast region and in
other select oil and gas regions in Texas and Louisiana. We believe that the
oilfield service industry will continue to consolidate as industry participants
seek to gain access to additional markets and broader product offerings. We
believe that we are well-positioned to take advantage of our customers'
increasing desire for vendors to "bundle" a wide range of products and services,
and our customers' expected future investment in the energy industry's upstream
and downstream infrastructure.
OPERATIONS
PRODUCTS AND SERVICES
Pressure Control. Through our Pressure Control segment, we manufacture,
remanufacture and repair high pressure, severe service products including
valves, chokes, actuators, blow out preventers, manifolds and wellhead
equipment. Pressure Control products and services are sold primarily in the Gulf
Coast region to major and independent oil and gas companies engaged in
exploration, production, completion and transportation of oil and gas, and to
drilling and well servicing contractors. Valves, chokes, actuators and other
pressure control products are used to start, stop and monitor the flow of
liquids and gases and to protect equipment and personnel from excessive or
sudden changes in pressure. Drilling machinery, including drawworks, mud pumps,
rotary tables, blowout preventers and pipe handling equipment, are major
mechanical and pressure control components of drilling and well servicing rigs.
These components are essential to the pumping of fluids, the hoisting,
supporting and rotating of the drill string and controlling sudden changes in
well pressure that may cause the well to ignite.
Products. Our Products segment remanufactures and repairs pumps,
electric motors and generators, manufactures specialty bolts and fasteners,
fabricates equipment and components for use in the exploration and production of
oil and gas and provides specialty machining for the repair and remanufacture of
natural gas and diesel engines. The Products segment's products and services are
sold primarily to customers in the upstream and downstream oil and gas industry,
located in the Gulf Coast region and North America. Pumps are used to move
various types of fluids from one point to the next and are sold based on the
fluid type and characteristics, volume to be pumped and the pressure at which
the fluid is to be pumped. Electric motors are used in numerous applications to
provide power to equipment in petrochemical plants and refineries, offshore
production platforms and drilling and well servicing rigs. Generators are used
on offshore platforms on drilling rigs to generate the electric power necessary
for operations. Stud bolts, specialty fasteners and value added services
including coating, electroplating, special machining and traceability, are used
by these same customers in conjunction with the other products and services we
provide.
Distribution. Our Distribution segment is engaged in the specialty
distribution of pipes, valves, stud bolts, gaskets and other ancillary products
primarily to the upstream and downstream oil and gas industry, offshore
fabrication companies and shipyards. Our distribution activities are carried out
through our network of four primary distribution centers along the Louisiana and
Texas Gulf Coast. The products stocked at each location vary depending upon
local customer needs.
For further information on segment reporting, see Note 13 to the
consolidated financial statements of T-3 Energy Services, Inc.
CUSTOMERS AND MARKETS
The Pressure Control segment sells its products and services to
companies engaged in the exploration, production and pipeline transportation of
oil and gas; companies in the petrochemical, chemical and petroleum refining
industries; and onshore and offshore contract drilling and well servicing
companies.
Within the Products segment, pumps, electric motors and generators,
specialty bolts and fasteners, and fabrication and specialty machining services
are sold to customers in the upstream and downstream oil and gas industry
located in the Gulf Coast region and North America.
2
The Distribution segment's customers are primarily companies in the
upstream and downstream oil and gas industry, offshore fabrication companies and
shipyards.
No single customer within any of our segments accounted for greater
than 10% of total sales within such segment during 2002.
MARKETING
We market our products primarily through a direct sales force of 83
persons. We believe that our proximity to customers is a key to maintaining and
increasing sales. A majority of our sales are on a purchase order basis at fixed
prices on normal 30-day trade terms. Large orders may be filled on a contract
basis, depending on the circumstances. International sales are typically made
with agent or representative arrangements, and significant sales are secured by
letters of credit.
SUPPLIERS AND RAW MATERIALS
In each of our segments, new and used inventory and related equipment
and parts are acquired from suppliers, including individual brokers, other
remanufacturing companies and original equipment manufacturers. No single
supplier of products is significant to the operations of our segments, and we
have not experienced and do not expect a shortage of products that we sell.
COMPETITION
In each of our segments, many of the markets in which we compete are
highly fragmented, and our competitors in these niche markets range from
relatively small, privately-held businesses to large integrated companies.
Competition is based on several competitive factors, including reputation,
manufacturing capabilities, availability of plant capacity, price, performance
and dependability. Although we do not typically maintain supply or service
contracts with our customers, a significant portion of our sales represents
repeat business from our customers. We compete with a large number of companies,
none of which are dominant in our markets, many of which possess greater
financial resources or offer certain products and services we do not offer.
BACKLOG
As of December 31, 2002, our backlog for the Pressure Control segment
was $8.1 million, as compared to $8.2 million at December 31, 2001. As of
December 31, 2002, our backlog for the Products segment was $2.2 million, the
same as at December 31, 2001. As of December 31, 2002, our backlog for the
Distribution segment was $1.3 million, as compared to $0.9 million at December
31, 2001.
The above backlog information consisted of written orders or
commitments believed to be firm contracts for products and services. These
contracts are occasionally varied or modified by mutual consent and in some
instances may be cancelable by the customer on short notice without substantial
penalty. As a result, our backlog as of any particular date may not be
indicative of our actual operating results for any future period. Management
believes that substantially all of the orders and commitments included in
backlog at December 31, 2002 will be completed within the next 12 months.
ENVIRONMENTAL REGULATIONS
We are subject to numerous federal, state and local laws and
regulations relating to the storage, handling, emission and discharge of
materials into the environment, including the Comprehensive Environmental
Response Compensation and Liability Act, the Clean Water Act, the Clean Air Act
and the Resource Conservation and Recovery Act. Each of these statutes allows
the imposition of substantial civil and criminal penalties, as well as permit
revocation, for violations of the requirements. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at our facilities or at third-party facilities at which we have
arranged for the disposal or treatment of hazardous materials and/or wastes.
3
In July 2001, we discovered preliminary information concerning deep
soil contamination at one of our leased facilities. This preliminary information
is limited and the contamination source has not yet been identified. We have
informed the landlord of the existence of the contamination and have requested
that they remediate the property as required by the lease. We expect that the
landlord will comply with its obligations under the lease to investigate the
environmental condition and take any action required under applicable laws. We
do not believe that we have contributed to or are responsible for remediation of
the site.
We believe that we are in compliance in all material respects with
applicable environmental laws and are in full compliance with all obligations to
investigate or remediate contamination that could reasonably be expected to
result in material liability. However, it is possible that unanticipated factual
developments could cause us to make environmental expenditures that are
significantly different from those we currently expect. In addition,
environmental laws continue to be amended and revised to impose stricter
obligations. We cannot predict the effect such future requirements, if enacted,
would have on us, although we believe that such regulations would be enacted
over time and would affect the industry as a whole.
EMPLOYEES
As of December 31, 2002, we had a total of 886 employees, 226 of whom
are salaried and 660 of whom are paid on an hourly basis. The entire work force
is employed within the United States. We consider our relations with our
employees to be good. None of our employees are covered by a collective
bargaining agreement.
ACCESS TO COMPANY FILINGS
Access to our filings of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 with the United States Securities and Exchange Commission
(SEC) may be obtained through the Investor Relations section of our website
(http://www.t3energyservices.com). Our website provides a hyperlink to a third
party SEC filings website where these reports may be viewed and printed at no
cost as soon as reasonably practicable after we have electronically filed such
material with the SEC. The contents of our website are not, and shall not be
deemed to be, incorporated into this report.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
Certain information in this Annual Report on Form 10-K, including the
information we incorporate by reference, includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify our forward-looking
statements by the words "expects," "projects," "believes," "anticipates,"
"intends," "plans," "budgets," "predicts," "estimates" and similar expressions.
We have based the forward-looking statements relating to our operations
on our current expectations, and estimates and projections about us and about
the industry in which we operate in general. We caution you that these
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that we cannot predict. In addition, we have based
many of these forward-looking statements on assumptions about future events that
may prove to be inaccurate. Our actual outcomes and results may differ
materially from what we have expressed or forecast in the forward-looking
statements. Except as required by law, we undertake no obligation to update any
of the forward-looking statements in this Form 10-K after the date of this Form
10-K.
BECAUSE WE DEPEND ON THE OIL AND GAS INDUSTRY, A DECLINE IN OIL AND GAS PRICES
OR A DECREASE IN INDUSTRY ACTIVITY MAY NEGATIVELY IMPACT OUR PROFITS.
We are, and will continue to be, dependent upon the oil and gas
industry and the level of oil and gas exploration and production. The level of
exploration and production depends upon the prevailing view of future product
prices. Many factors affect the supply and demand for oil and gas and therefore
influence product prices, including:
4
- the level of production from known reserves;
- weather conditions;
- the actions of the Organization of Petroleum Exporting
Countries;
- political instability in the Middle East and elsewhere;
- the level of oil and gas inventories;
- the cost of producing oil and gas;
- the level of drilling activity;
- worldwide economic activity; and
- governmental regulation.
If there is a significant reduction in demand for drilling services, in
cash flows of drilling contractors or production companies or in drilling or
well servicing rig utilization rates, then demand for our products will decline.
THE OILFIELD SERVICE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, WHICH
MAY RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE OR PROFIT MARGINS.
The oilfield service industry in which we operate is highly
competitive. Many of our competitors have greater financial and other resources
than we do. Each of our operating units is subject to competition from a number
of similarly sized or larger businesses. Factors that affect competition include
price, quality and customer service. Strong competition may result in a loss of
market share and a decrease in revenue and profit margins.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
Our business exposes us to possible claims for personal injury or death
resulting from the use of our products. We carry comprehensive insurance,
subject to deductibles, at levels we believe are sufficient to cover existing
and future claims. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain
adequate insurance coverage at rates we believe are reasonable.
OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our business is affected by governmental regulations relating to our
industry segments in general, as well as environmental and safety regulations
that have specific application to our business. While we are not aware of any
proposed or pending legislation, future legislation may have an adverse effect
on our business, financial condition, results of operations or prospects.
We are subject to various federal, state and local environmental laws,
including those governing air emissions, water discharges and the storage,
handling, disposal and remediation of petroleum and hazardous substances. We
have in the past and will likely in the future incur expenditures to ensure
compliance with environmental laws. Due to the possibility of unanticipated
factual or regulatory developments, the amount and timing of future
environmental expenditures could vary substantially from those currently
anticipated. Moreover, certain of our facilities have been in operation for many
years and, over that time, we and other predecessor operators have generated and
disposed of wastes that are or may be considered hazardous. Accordingly,
although we have undertaken considerable efforts to comply with applicable laws,
it is possible that environmental requirements or facts not currently known to
us will require unanticipated efforts and expenditures that cannot be currently
quantified.
5
THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR OFFICERS OF FIRST RESERVE CORPORATION. THE RESOLUTION OF THESE
CONFLICTS OF INTEREST MAY NOT BE IN OUR OR OUR SHAREHOLDERS' BEST INTERESTS.
Three of our directors, Thomas R. Denison, Joseph R. Edwards and Ben A.
Guill, are also current directors or officers of First Reserve Corporation,
which controls the general partner of First Reserve Fund VIII, L.P., a
beneficial owner of more than 85% of our common stock. This may create conflicts
of interest because these directors have responsibilities to First Reserve Fund
VIII and its owners. Their duties as directors or officers of First Reserve
Corporation may conflict with their duties as directors of our company regarding
business dealings between First Reserve Corporation and us and other matters.
The resolution of these conflicts may not always be in our or our shareholders'
best interests.
WE RENOUNCED ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND FIRST RESERVE
FUND VIII AND ITS DIRECTOR DESIGNEES ON OUR BOARD OF DIRECTORS GENERALLY HAVE NO
OBLIGATION TO OFFER US THOSE OPPORTUNITIES.
First Reserve Fund VIII has investments in other oilfield service
companies that compete with us, and First Reserve Corporation and its
affiliates, other than T-3, may invest in other such companies in the future. We
refer to First Reserve Corporation, its other affiliates and its portfolio
companies as the First Reserve group. Our certificate of incorporation provides
that, so long as First Reserve Corporation and its affiliates continue to own at
least 20% of our common stock, we renounce any interest in specified business
opportunities. Our certificate of incorporation also provides that if an
opportunity in the oilfield services industry is presented to a person who is a
member of the First Reserve group, including any individual who also serves as a
director of our company:
- no member of the First Reserve group or any of those
individuals will have any obligation to communicate or offer
the opportunity to us; and
- such entity or individual may pursue the opportunity as that
entity or individual sees fit,
unless:
- it was presented to a member of the First Reserve group in
that person's capacity as a director or officer of T-3; or
- the opportunity was identified solely through the disclosure
of information by or on behalf of T-3.
These provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock. As
a result of these charter provisions, our future competitive position and growth
potential could be adversely affected.
THE CONVICTION OF OUR FORMER INDEPENDENT AUDITORS, ARTHUR ANDERSEN LLP, ON
FEDERAL OBSTRUCTION OF JUSTICE CHARGES MAY ADVERSELY AFFECT ARTHUR ANDERSEN
LLP'S ABILITY TO SATISFY ANY CLAIMS ARISING FROM THE PROVISION OF AUDITING
SERVICES TO US AND MAY IMPEDE OUR ACCESS TO THE CAPITAL MARKETS.
Arthur Andersen LLP, which audited our financial statements for the
years ended December 31, 2001 and 2000, was convicted in June 2002 on federal
obstruction of justice charges. In light of the jury verdict and the underlying
events, Arthur Andersen LLP stopped practicing before the Securities and
Exchange Commission and subsequently ceased operations. The Securities and
Exchange Commission has stated that, for the time being subject to certain
conditions, it will continue accepting financial statements audited by Arthur
Andersen LLP. After reasonable efforts, we have not been able to obtain the
consent of Arthur Andersen LLP to the incorporation by reference of its audit
report dated March 8, 2002 into our registration statement Form S-8. As
permitted under Rule 437a promulgated under the Securities Act of 1933, as
amended (Securities Act), we have not filed the written consent of Arthur
Andersen LLP that would otherwise be required by the Securities Act. Because
Arthur Andersen LLP has not consented to the incorporation by reference of their
report in the registration statement, you may not be able to recover amounts
from Arthur Andersen LLP under Section 11(a) of the Securities Act for any
untrue statement of a material fact or any omission to state a material fact, if
any, contained in or omitted from our financial statements included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which
are incorporated by reference in the registration statement.
6
ITEM 2. PROPERTIES
We operate 24 facilities, all located in the Gulf Coast region, which
range in size from 7,200 square feet to approximately 120,000 square feet of
manufacturing and related space, or an aggregate of approximately 717,800 square
feet, including corporate headquarters. Of this total, 499,900 square feet of
manufacturing and related space is located in leased premises under leases
expiring at various dates through 2011. We believe our facilities are suitable
for their present and intended purposes and are adequate for our current level
of operations.
We maintain our principal executive offices at 13111 Northwest Freeway,
Suite 500, Houston, Texas 77040. This property consists of conventional office
space and is, in our opinion, adequate to meet our needs for the foreseeable
future.
The following chart lists our facilities by segment:
SEGMENT NUMBER OF FACILITIES SQUARE FOOTAGE
------- -------------------- --------------
Pressure Control...................... 13 248,600
Products.............................. 6 359,500
Distribution.......................... 4 102,500
Other................................. 1 7,200
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the
ordinary course of business. While there are uncertainties inherent in the
ultimate outcome of such matters and it is impossible to currently determine the
ultimate costs that may be incurred, we believe the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on our consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders in the
fourth quarter of 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on The Nasdaq National Market under the symbol
"TTES." The following table sets forth the high and low closing sales prices of
our common stock, as adjusted to reflect the one-for-ten reverse stock split
that was implemented on December 18, 2001 in connection with the closing of the
merger, for the periods indicated below:
PRICE RANGE
---------------
HIGH LOW
---- ---
2001
First Quarter................. $ 22.50 $ 10.00
Second Quarter................ $ 23.13 $ 16.50
Third Quarter................. $ 18.60 $ 8.50
Fourth Quarter................ $ 12.80 $ 7.60
2002
First Quarter................. $ 10.24 $ 7.50
Second Quarter................ $ 9.70 $ 8.27
Third Quarter................. $ 8.60 $ 5.13
Fourth Quarter................ $ 7.61 $ 6.40
All of the foregoing prices reflect interdealer quotations, without
retail mark-up, mark-downs or commissions and may not necessarily represent
actual transactions in our common stock.
On March 17, 2003, the last reported sales price of our common stock,
as quoted by The Nasdaq National Market, was $6.89 per share. On March 17, 2003,
there were approximately 204 record holders of our common stock, not including
the number of persons or entities who hold stock in nominee or street name
through various brokerage firms and banks.
DIVIDEND POLICY
We have never paid dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings to support our operations and growth. Any payment of cash
dividends in the future will be dependent on the amount of funds legally
available, our earnings, financial condition, capital requirements and other
factors that the board of directors may deem relevant. Additionally, certain of
our debt agreements restrict the payment of dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information with respect to compensation
plans under which our securities are authorized for issuance as of December 31,
2002:
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES FOR FUTURE ISSUANCE
TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY
EXERCISE OF OUTSTANDING EXERCISE PRICE OF COMPENSATION PLANS
OPTIONS, WARRANT OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
(a) (b) (c)
- ---------------------------------------------- ----------------------- -------------------- ---------------------
Equity compensation plans approved by
security holders 471,880 $ 14.42 528,120
Equity compensation plans not approved by
security holders -- $ -- --
- ---------------------------------------------- ------- ------- -------
Total 471,880 $ 14.42 528,120
8
ITEM 6. SELECTED FINANCIAL DATA
This item is presented in three tables for the historical reporting
requirements of T-3. T-3 began operations in the first half of 2000 by acquiring
and merging two predecessor companies with different fiscal year ends. Selected
historical data for T-3, Cor-Val, Inc. and Preferred Industries, Inc. are
presented separately below.
Selected Financial Data of T-3
T-3 was incorporated in October 1999, but did not engage in business
activities until the acquisition of Cor-Val on February 29, 2000. T-3 acquired
Preferred Industries on April 30, 2000. For financial reporting purposes, T-3
was deemed the accounting acquirer of both Cor-Val and Preferred Industries and
applied the purchase method of accounting in both acquisitions. Cor-Val and
Preferred Industries have been identified as predecessors to T-3 for financial
presentation purposes. Additionally, T-3 acquired O&M Equipment, Inc. in April
2000, Control Products of Louisiana, Inc. in September 2000, Coastal Electric
Motors, Inc. in December 2000, and A&B Bolt and Supply, Inc. in May 2001. The
results of operations for these acquisitions are included in the operating
results for T-3 from their respective dates of acquisition. On December 17,
2001, former T-3 merged into IHI with IHI surviving the merger under the name
T-3 Energy Services, Inc. The merger was treated for accounting purposes as if
IHI was acquired by T-3 (a reverse acquisition) in a purchase business
transaction. The purchase method of accounting requires that we carry forward
former T-3's net assets at their historical book values and reflect IHI's net
assets at their estimated fair values at the date of the merger. Accordingly,
the operating results presented in this Annual Report on Form 10-K include the
operating results of T-3 prior to its merger with IHI and the two weeks of
operations of the combined company from December 17, 2001 to December 31, 2001.
The following selected consolidated financial data for each of the
three years in the period ended December 31, 2002 has been derived from our
audited consolidated financial statements. The following information should be
read in conjunction with our consolidated financial statements and the related
notes thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Annual Report
on Form 10-K.
9
T-3
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
---- ---- ----
(IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
OPERATING DATA:
Sales ....................................................... $146,870 $ 90,162 $ 25,683
Income from operations ...................................... 10,276 10,126 3,784
Income before extraordinary loss ............................ 4,570 2,396 335
Extraordinary loss (1) ...................................... -- 474 --
-------- -------- --------
Net income .................................................. $ 4,570 $ 1,922 $ 335
======== ======== ========
Basic earnings (loss) per common share:
Income before extraordinary loss ......................... $ 0.44 $ 1.05 $ 0.26
Extraordinary loss ....................................... -- (0.20) --
-------- -------- --------
Net income per common share .............................. $ 0.44 $ 0.85 $ 0.26
======== ======== ========
Diluted earnings (loss) per common share: (2)
Income before extraordinary loss ......................... $ 0.44 $ 0.89 $ 0.26
Extraordinary loss ....................................... -- (0.13) --
-------- -------- --------
Net income per common share .............................. $ 0.44 $ 0.76 $ 0.26
======== ======== ========
Weighted average common shares
outstanding:
Basic .................................................... 10,346 2,271 1,302
Diluted .................................................. 10,347(2) 3,715(2) 1,302(2)
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
BALANCE SHEET DATA:
Total assets ................................................ 186,599 199,728 66,819
Long-term debt, less current maturities ..................... 26,441 43,897 36,083
- ---------------------------------------
(1) The repayment of our combined indebtedness in connection with the
merger in December 2001 resulted in an extraordinary loss of $0.5
million, net of a $0.3 million income tax benefit, as a result of the
write-off of unamortized deferred loan costs.
(2) There were 185,180 weighted average shares of common stock related to
our convertible subordinated debt that were not included in the
computation of diluted earnings per share for 2000 because to do so
would have been anti-dilutive. For 2002, 2001 and 2000, there were
480,575, 282,829 and 120,588 options, respectively, and for 2002 and
2001, 3,489,079 warrants that were not included in the computation of
diluted earnings per share because their inclusion would have been
anti-dilutive.
Selected Historical Financial Data of Cor-Val, Inc.
The following table presents summary historical financial and other
data for Cor-Val and should be read in conjunction with the financial statements
of Cor-Val and the notes thereto and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Annual Report on Form 10-K. The following selected unaudited historical
financial data as of and for the year ended March 31, 1999 and eleven months
ended February 29, 2000 has been derived from the audited consolidated financial
statements as of and for the year ended March 31, 1999 and for the eleven months
ended February 29, 2000. The March 31, 1998 selected unaudited historical
financial data has been derived from the March 31, 1998 unaudited consolidated
financial statements. Cor-Val has been identified as a predecessor to T-3 for
financial reporting purposes.
10
COR-VAL, INC.
ELEVEN MONTHS
ENDED YEAR ENDED MARCH 31,
FEBRUARY 29, --------------------
2000(1) 1999 1998
------------- -------- --------
(IN THOUSANDS)
OPERATING DATA:
Sales........................................................ $ 10,842 $ 10,310 $ 12,512
Income from operations....................................... 1,616 1,362 1,970
Net income................................................... $ 1,618 $ 797 $ 897
========= ======== ========
AS OF MARCH 31,
---------------
1999 1998
-------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets................................................................. 4,041 3,855
Long-term debt (2)........................................................... 94 1,007
- ------------------------------------
(1) In July 1999, Cor-Val purchased all of the equity securities of Cor-Val
Services, Inc. in exchange for common stock.
(2) Excludes deferred income taxes and other long-term liabilities.
Selected Historical Financial Data of Preferred Industries, Inc.
The following table presents summary historical financial and other
data for Preferred Industries and should be read in conjunction with the
financial statements of Preferred Industries and the notes thereto and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. The
following selected unaudited historical financial data as of and for the years
ended December 31, 1998 and 1999 and the four months ended April 30, 2000 has
been derived from the audited financial statements of Preferred Industries as of
and for the years ended December 31, 1998 and 1999, and for the four months
ended April 30, 2000. Preferred Industries has been identified as a predecessor
to T-3 for financial reporting purposes.
11
PREFERRED INDUSTRIES, INC.
FOUR MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------
APRIL 30, 2000 1999 1998
-------------- -------- --------
(IN THOUSANDS)
OPERATING DATA:
Sales........................................................ $ 3,808 $ 12,925 $ 18,040
Income (loss) from operations................................ 641 (25) 229
Net income (loss)............................................ $ 352 $ (131) $ 103
======= ======== ========
AS OF DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets.................................................................. 6,923 7,942
Long-term debt (1)............................................................ 1,843 2,358
(1) Excludes deferred income taxes and other long-term liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion of our historical results of operations and
financial condition should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
T-3 was incorporated in October 1999, but did not engage in business
activities until the acquisition of Cor-Val, Inc. on February 29, 2000. We
acquired Preferred Industries, Inc. on April 30, 2000. For financial reporting
purposes, T-3 was deemed the accounting acquirer of both Cor-Val and Preferred
Industries and applied the purchase method of accounting in both acquisitions.
In this Annual Report on Form 10-K, we sometimes refer to Cor-Val and Preferred
Industries together as the predecessors. The results of operations of the
predecessors are included in our operating results from their respective dates
of acquisition.
During the year 2000, we acquired five operating companies in
transactions accounted for using the purchase method of accounting. On February
29, 2000, we acquired Cor-Val for approximately $21.4 million in cash, plus
liabilities assumed and the issuance of 54,508 shares of our common stock. On
April 30, 2000, we acquired Preferred Industries for approximately $18.8 million
in cash, plus liabilities assumed and the issuance of 18,169 shares of our
common stock. On April 30, 2000, we acquired O&M Equipment, Inc. for
approximately $1.4 million in cash, plus liabilities assumed and a maximum
earnout of $1.0 million based on the performance of O&M through 2002 ($0.3
million was earned in 2002, $0.6 million was earned in 2001, and $0.1 million
was earned in 2000). Additionally, we acquired Control Products of Louisiana,
Inc. and Coastal Electric Motors, Inc. in September 2000 and December 2000,
respectively, for total consideration of approximately $10.3 million in cash,
plus liabilities assumed. The results of operations of these companies have been
included in our operating results from the dates of acquisition.
On May 7, 2001, simultaneous with the signing of the merger agreement
with IHI, we acquired A&B Bolt, a subsidiary of IHI, for $15.3 million in cash
including expenses in a transaction accounted for using the purchase method of
accounting. The results of operations of A&B Bolt have been included in our
operating results from the date of acquisition.
12
On December 17, 2001, T-3 Energy Services, Inc., a private Delaware
corporation ("former T-3"), merged into IHI, with IHI surviving the merger. In
connection with the merger, the combined company was reincorporated in Delaware
under the name "T-3 Energy Services, Inc." and implemented a one-for-ten reverse
stock split of its common stock.
The merger was treated for accounting purposes as a purchase of IHI by
former T-3 (a reverse acquisition) in a purchase business transaction. The
purchase method of accounting requires that we carry forward former T-3's net
assets at their historical book values and reflect IHI's net assets at their
estimated fair market values, with any excess of the fair market value of the
purchase consideration in excess of the fair market value of IHI's identifiable
net assets treated as goodwill. The historical financial data presented in this
Annual Report on Form 10-K includes the historical financial condition and
operating results of T-3 prior to its merger with IHI. For the year 2001, the
historical financial data also includes the two weeks of operations of the
combined company from December 17, 2001 to December 31, 2001.
As part of the merger with IHI, we acquired a non-energy subsidiary.
Because the subsidiary's operations are outside our strategic focus, at the time
of the merger, we identified this operation as one to be sold. The sale was
completed in July 2002.
On December 18, 2001, our shares of common stock began trading on The
Nasdaq National Market under the new symbol "TTES." In addition, our Class B
Warrants, Class C Warrants and Class D Warrants began trading on the
over-the-counter bulletin board under the new symbols "TTESZ," "TTESL," and
"TTESW," respectively (these Class B, Class C and Class D Warrants expired
January 14, 2003). Immediately after the merger, First Reserve Fund VIII, L.P.
("First Reserve") owned approximately 77% of our common shares, and collectively
all of the former T-3 shareholders (including First Reserve) owned approximately
79% of our common shares, with the remaining 21% of our common shares being held
by the shareholders of IHI immediately prior to the merger.
Before the closing and as part of the merger, (1) IHI divested of
substantially all of its non-energy-related subsidiaries, (2) SJMB, L.P.
converted $3.6 million of its IHI debt into shares of IHI common stock, (3)
First Reserve converted $25.3 million of its former T-3 debt into shares of
former T-3 common stock, and (4) First Reserve purchased an additional $46.8
million in shares of former T-3 common stock. In addition, the combined company
completed a refinancing of its senior debt simultaneously with the closing of
the merger. Under the terms of the merger, all but two of IHI's then existing
directors and all of its officers resigned their positions with the combined
company, and the management of former T-3 and six of former T-3's director
designees assumed the management and director duties for the combined company.
Our financial statements for the year ended December 31, 2000 reflect
operations for the ten-month period from March 1, 2000 (the date the company
commenced business operations) to December 31, 2000. Our results of operations
for the year ended December 31, 2000 are not comparable to the results of
operations for the comparable periods for each of the predecessor companies
because (1) T-3 was not engaged in business operations prior to March 1, 2000,
(2) T-3 made three acquisitions during the year 2000 in addition to the
predecessors which are not reflected for the full period, and (3) the historical
information presented for the predecessors does not reflect the purchase
accounting adjustments recorded by T-3.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the
consolidated financial statements included elsewhere within this Annual Report
on Form 10-K. The significant accounting policies which we believe are the most
critical to our financial condition and results of operations and require
management's subjective judgment and estimates are described below.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the historical carrying amount, net
of write-offs and the allowance for doubtful accounts. Our receivables are
exposed to concentrations of credit risk since a majority of our business is
conducted with companies in the oil and gas, petrochemical, chemical and
petroleum refining industries in the Gulf Coast
13
region. We continually monitor collections and evaluate the financial strength
of our customers but do not require collateral to support our customer
receivables. We provide an allowance for doubtful accounts for potential
collection issues in addition to reserves for specific accounts receivable where
collection is no longer probable. We cannot give assurances that we will
continue to experience the same credit loss rates we have in the past or that
our losses will not exceed the amount reserved.
INVENTORY
We regularly review inventory quantities on hand and record a provision
for excess and slow moving inventory to write down the recorded cost of
inventory to its fair market value. This analysis is based primarily on the
length of time the item has remained in inventory and management's consideration
of current and expected market conditions. However, a significant decrease in
demand and a further weakening of market conditions could result in further
writedowns in inventory carrying values and a charge to earnings.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets to be held and used by us are reviewed to determine whether
any events or changes in circumstances indicate the carrying amount of the asset
may not be recoverable. Long-lived assets include property, plant and equipment
and definite-lived intangibles. For long-lived assets to be held and used, we
base our evaluation on impairment indicators such as the nature of the assets,
the future economic benefit of the assets, any historical or future
profitability measurements and other external market conditions or factors that
may be present. If such impairment indicators are present or other factors exist
that indicate the carrying amount of the asset may not be recoverable, we
determine whether an impairment has occurred through the use of an undiscounted
cash flows analysis of the asset at the lowest level for which identifiable cash
flows exist. If an impairment has occurred, we recognize a loss for the
difference between the carrying amount and the estimated fair value of the
asset. The fair value of the asset is measured using quoted market prices or, in
the absence of quoted market prices, is based on an estimate of discounted cash
flows.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses and represents a
significant portion of our assets. Identifiable intangible assets acquired in
business combinations are recorded based upon fair market value at the date of
acquisition.
Effective January 1, 2002, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." This standard changes the accounting for
goodwill and certain other intangible assets from an amortization method to an
impairment only approach. The standard also requires a reassessment of the
useful lives of identifiable intangible assets other than goodwill and at least
an annual test for impairment of goodwill and intangibles with indefinite lives.
In 2002, the Company completed the transitional goodwill and indefinite
life intangibles impairment tests and the annual test required by SFAS No. 142
and recorded no impairments of its goodwill and indefinite life intangibles
based on these fair value tests. The Company tests goodwill for impairment
annually using the fair value criteria prescribed by SFAS No. 142. Fair value
was estimated using discounted cash flow methodologies, which are significantly
influenced by management's assumptions as to future cash flows, and market
comparable information. We will continue to test on a consistent measurement
date unless events occur or circumstances change between annual impairment tests
that would more likely than not reduce fair value of a reporting unit below its
carrying value.
14
RESULTS OF OPERATIONS OF T-3
The following table sets forth certain operating statement data for
each of our segments for each of the years presented (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Sales:
Pressure Control ..................................... $ 70,177 $ 52,120 $ 25,412
Products ............................................. 39,445 7,435 271
Distribution ......................................... 37,248 30,607 --
---------- --------- ---------
146,870 90,162 25,683
---------- --------- ---------
Cost of sales:
Pressure Control ..................................... 45,713 33,434 15,650
Products ............................................. 32,175 5,709 251
Distribution ......................................... 26,850 22,041 --
---------- --------- ---------
104,738 61,184 15,901
---------- --------- ---------
Gross profit:
Pressure Control ..................................... 24,464 18,686 9,762
Products ............................................. 7,270 1,726 20
Distribution ......................................... 10,398 8,566 --
---------- --------- ---------
42,132 28,978 9,782
---------- --------- ---------
Selling, general and administrative expenses:
Pressure Control ..................................... 11,397 9,689 5,356
Products ............................................. 6,523 1,624 118
Distribution ......................................... 8,278 6,130 --
Corporate ............................................ 5,658 1,409 524
---------- --------- ---------
31,856 18,852 5,998
---------- --------- ---------
Income (loss) from operations:
Pressure Control ..................................... 13,067 8,997 4,406
Products ............................................. 747 102 (98)
Distribution ......................................... 2,120 2,436 --
Corporate ............................................ (5,658) (1,409) (524)
---------- --------- ---------
$ 10,276 $ 10,126 $ 3,784
========== ========= =========
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Sales. On a consolidated basis, sales increased $56.7 million, or 63%,
in 2002 compared to 2001. Sales increased across all segments as a result of the
merger with IHI in December 2001 and the acquisition of A&B Bolt in May 2001.
However, as a result of lower North American drilling rig activity and continued
general economic uncertainty, on a pro forma basis as if the merger with IHI,
the acquisition of A&B Bolt, and the sale of a non-energy-related subsidiary had
occurred as of January 1, 2001, sales decreased $37.3 million for the year ended
December 31, 2002, compared to the year ended December 31, 2001.
Sales for the Pressure Control segment increased $18.1 million, or 35%,
in 2002 compared to 2001. The sales increase in 2002 over 2001 was primarily
attributable to the inclusion of a full year's sales in the 2002 period from the
IHI merger. However, on a pro forma basis as if the merger with IHI had occurred
as of January 1, 2001, sales for this segment decreased $9.8 million due to
lower levels of North American drilling rig activity and general economic
uncertainty, partially offset by increased international sales.
15
Sales for the Products segment increased $32.0 million, or 431%, in
2002 compared to 2001. This sales increase was primarily attributable to the
inclusion of a full year's sales in the 2002 period from the IHI merger.
However, on a pro forma basis as if the merger with IHI had occurred as of
January 1, 2001, sales for this segment decreased $20.3 million due to lower
levels of North American drilling rig activity and general economic uncertainty.
Sales for the Distribution segment increased $6.6 million, or 22%, in
2002 compared to 2001. The sales increase in 2002 over 2001 was primarily
attributable to the inclusion of a full year's sales in the 2002 period. The
Distribution segment was formed in 2001 with the acquisition of A&B Bolt in May
2001. However, on a pro forma basis as if the acquisition of A&B Bolt and the
sale of a non energy-related subsidiary had occurred as of January 1, 2001,
sales for this segment decreased $7.2 million due to lower levels of North
American drilling rig activity and general economic uncertainty.
Cost of Sales. On a consolidated basis, cost of sales increased $43.6
million, or 71%, in 2002 compared to 2001 primarily as a result of the merger
with IHI in December 2001. Gross profit margin was 29% in 2002 compared to 32%
in 2001. Gross profit margin was lower on a consolidated basis in 2002 compared
to 2001 primarily because of a change in the mix of sales. The Pressure Control
segment, which typically has the highest margins of all of our segments,
represented a smaller percentage of total sales (48% in 2002 compared to 58% in
2001). The Products and Distribution segments, which typically have lower
margins than the Pressure Control segment, represented a larger percentage of
total sales (52% in 2002 compared to 42% in 2001).
Cost of sales for the Pressure Control segment increased $12.3 million,
or 37%, in 2002 compared to 2001, primarily as a result of the increase in sales
described above. Gross profit margin was 35% in 2002 compared to 36% in 2001.
This slight decrease was attributable to fixed costs that did not decrease
proportionally with pro forma sales, partially offset by improved margins
because of increased operational efficiencies.
Cost of sales for the Products segment increased $26.5 million, or
464%, in 2002 compared to 2001, primarily as a result of the increase in sales
as a result of the merger in December 2001. Gross profit margin decreased from
23% in 2001 to 18% in 2002. Gross profit margin decreased primarily as a result
of a change in the mix of products and services sales within the segment, in
addition to fixed costs that did not decrease proportionally with the decrease
in pro forma sales.
Cost of sales for the Distribution segment increased $4.8 million, or
22%, in 2002 compared to 2001, primarily as a result of the increase in sales.
Gross profit margin was 28% in 2002 and 2001.
Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses increased $13.0 million, or 69%, in
2002 compared to 2001, primarily as a result of the merger with IHI, the
acquisition of A&B Bolt in 2001 and the costs associated with being a publicly
traded company. The increase was net of a decrease in the amortization of
goodwill of $1.6 million. Selling, general and administrative expenses as a
percentage of sales were 22% and 21% for 2002 and 2001, respectively.
Selling, general and administrative expenses for the Pressure Control
segment increased $1.7 million, or 18%, in 2002 compared to 2001 as a result of
the increase in sales and the merger with IHI in December 2001. The increase was
net of a decrease in the amortization of goodwill of $1.4 million. As a
percentage of sales, selling, general and administrative expenses decreased from
19% in 2001 to 16% in 2002, due to the higher sales resulting from the IHI
merger absorbing a larger portion of these fixed expenses.
Selling, general and administrative expenses for the Products segment
increased $4.9 million, or 302%, in 2002 as compared to 2001, primarily as a
result of the merger with IHI in December 2001. The increase was net of a
decrease in the amortization of goodwill of $0.1 million. As a percentage of
sales, selling, general and administrative expenses decreased from 22% in 2001
to 17% in 2002, due to the higher sales resulting from the IHI merger absorbing
a larger portion of these fixed expenses.
Selling, general and administrative expenses for the Distribution
segment increased $2.1 million, or 35%, in 2002 as compared to 2001, primarily
as a result of the inclusion of a full year's operations for A&B in 2002. The
increase was net of a decrease in the amortization of goodwill of $0.1 million.
As a percentage of sales, selling, general and administrative expenses increased
from 20% in 2001 to 22% in 2002, primarily because fixed selling, general and
administrative expenses did not decrease proportionally with the decrease in
sales.
16
Selling, general and administrative expenses for the Corporate
operations increased $4.3 million, or 302%, in 2002 compared to 2001. This
increase was primarily attributable to the merger with IHI in December 2001 and
the addition of corporate staff, including human resource, environmental, safety
and information systems personnel, and related expenses resulting from the
Company's growth and the costs associated with being a publicly traded company.
Interest Expense. On a consolidated basis, interest expense decreased
to $3.5 million in 2002 from $4.9 million in 2001, primarily as a result of
lower debt levels and interest rates throughout 2002.
Interest Income. Interest income in 2002 was generated from seller
notes receivable that arose in conjunction with the disposal by IHI of several
business units prior to the completion of the merger. Interest income in 2001
was not material.
Income Taxes. Income tax expense for 2002 was $3.0 million as compared
to $2.9 million in 2001. The effective tax rate for 2002 was 40% compared to 54%
in 2001. For both years, the tax rate in excess of statutory rates was primarily
attributable to nondeductible expenses and state income taxes, net of the
Federal benefit provided. The decrease in the effective rate in 2002 is
attributable to the impact of nondeductible goodwill no longer being amortized
due to the adoption of Statement of Financial Accounting Standards No. 142 and
lower state income taxes.
Income Before Extraordinary Loss. On a consolidated basis, income
before extraordinary loss was $4.6 million in 2002 compared with $2.4 million in
2001 as a result of the foregoing factors.
Extraordinary Loss. As a result of the merger and the subsequent
refinancing of our indebtedness in December 2001, we recorded an extraordinary
loss of $0.5 million, net of tax, for the write-off of unamortized deferred loan
costs.
Net Income. On a consolidated basis, net income was $4.6 million in
2002 compared with $1.9 million in 2001 as a result of the foregoing factors.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Sales. On a consolidated basis, sales increased $64.5 million, or 251%,
in 2001 compared to 2000.
Sales for the Pressure Control segment increased $26.7 million, or
105%, in 2001 compared to 2000. Sales for 2000 were generated from four
acquisitions that were made between February 2000 and September 2000. The sales
increase in 2001 over 2000 was primarily attributable to the inclusion of a full
year's sales in the 2001 period from these same acquisitions. In addition, sales
were positively influenced by increases in the worldwide rig count, optimism
regarding the long-term hydrocarbon price environment, increased worldwide
demand for oil and gas coupled with declining production in many areas. The
factors resulted in increased oil and gas prices, increased exploration and
production spending and an improved demand for oilfield services in the first
three quarters of 2001.
Sales for the Products segment increased $7.2 million in 2001 from $0.3
million in 2000. This sales increase was primarily attributable to the
acquisition of Coastal Electric Motors, Inc. in December 2000 and the inclusion
of a full year's sales in the 2001 period along with $1.8 million of sales
generated from the acquired IHI entities in December 2001.
Sales for the Distribution segment for 2001 were $30.6 million. The
Distribution segment was formed in 2001 with the acquisition of A&B Bolt in May
2001.
Cost of Sales. On a consolidated basis, cost of sales increased $45.3
million, or 285%, in 2001 compared to 2000. Gross profit margin was 32% in 2001
compared to 38% in 2000. Gross profit was lower on a consolidated basis in 2001
compared to 2000 primarily because of a change in the mix of sales. The Pressure
Control segment, which typically has the highest margins of all of our segments,
represented a smaller percentage of total sales (58% in 2001 compared to 99% in
2000). The Products and Distribution segments, which typically have lower
margins
17
than the Pressure Control segment, represented a larger percentage of total
sales (42% in 2001 compared to 1% in 2000).
Cost of sales for the Pressure Control segment increased $17.8 million,
or 114%, in 2001 compared to 2000, primarily as a result of the increase in
sales described above. Gross profit margin was 36% in 2001 compared to 38% in
2000. The decline in margins in 2001 compared to 2000 is attributable to the
companies acquired in the second half of 2000 generally having lower gross
margins on remanufactured products.
Cost of sales for the Products segment increased $5.5 million in 2001
from $0.3 million in 2000, primarily as a result of the increase in sales and
the merger in December 2001. Gross profit margin increased from 7% in 2000 to
23% in 2001. Only one month of operations was included in 2000. Gross profit
margin in 2000 was lower than it would be for a full year since both sales and
gross profit margin in this segment are typically lower in the month of
December.
Cost of sales for the Distribution segment was $22.0 million in 2001.
Gross profit margin was 28% in 2001.
Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses increased $12.8 million, or 214%,
in 2001 compared to 2000, primarily as a result of the increased sales and the
inclusion of a full year's operations of our 2000 acquisitions described above.
Selling, general and administrative expenses for the Pressure Control
segment increased $4.3 million, or 81%, in 2001 compared to 2000 as a result of
the increase in sales and the inclusion of a full year's operations of our 2000
acquisitions as described above.
Selling, general and administrative expenses for the Products segment
increased $1.5 million in 2001 from $0.1 million in 2000, primarily as a result
of the increase in sales and the inclusion of a full year's operations of our
2000 acquisitions as described above.
Selling, general and administrative expenses in the Distribution
segment were $6.1 million in 2001.
Selling, general and administrative expenses for the Corporate
operations increased $0.9 million, or 169%, in 2001 compared to 2000. The 2001
period included a full year of administrative and MIS support services as well
as expenses associated with the preparation and completion of the merger of IHI
and T-3. T-3 maintained a smaller support staff during the first half of 2000
prior to most of its acquisitions.
Interest Expense. On a consolidated basis, interest expense increased
to $4.9 million in 2001 as compared to $2.8 million in 2000, primarily as a
result of higher debt levels and interest rates throughout 2001.
Income Taxes. Income tax expense for 2001 was $2.9 million as compared
to $0.7 million in 2000. The effective tax rate for 2001 was 54% compared to 67%
in 2000. For both years, the tax rate in excess of statutory rates was primarily
attributable to nondeductible goodwill associated with the acquisitions made in
2000.
Income Before Extraordinary Loss. On a consolidated basis, income
before extraordinary loss was $2.4 million in 2001 compared with $0.3 million in
2000 as a result of the foregoing factors.
Extraordinary Loss. As a result of the merger and the subsequent
refinancing of our indebtedness in December 2001, we recorded an extraordinary
loss of $0.5 million, net of tax, for the write-off of unamortized deferred loan
costs.
Net Income. On a consolidated basis, net income was $1.9 million in
2001 compared with $0.3 million in 2000 as a result of the foregoing factors.
18
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had working capital of $24.7 million, current
maturities of long-term debt of $3.5 million, long-term debt of $26.4 million
and stockholders' equity of $130.6 million. Historically, our principal
liquidity requirements and uses of cash have been for debt service, capital
expenditures, working capital and acquisition financing, and our principal
sources of liquidity and cash have been from cash flows from operations,
borrowings under long-term debt arrangements and issuances of equity securities.
We have financed acquisitions through bank borrowings, sales of equity
(primarily to First Reserve) and internally generated funds.
Net Cash Provided by Operating Activities. For 2002, net cash provided
by operating activities was $10.5 million compared to $1.0 million in 2001 and
$2.1 million in 2000. The increase of $9.5 million for 2002 was attributable to
the increase in net income and deferred taxes, and more efficient management of
our working capital. Cash provided by operations decreased in 2001 as compared
to 2000 as working capital increased with increased sales.
Net Cash Used in Investing Activities. Principal uses of cash are for
capital expenditures and acquisitions. For 2002, 2001 and 2000, we made capital
expenditures of approximately $5.7 million, $3.2 million and $5.9 million,
respectively. Cash consideration paid for acquisitions, including the merger
with IHI, was $0.3 million, $72.4 million and $51.9 million in 2002, 2001, and
2000, respectively. (see Note 2 to our consolidated financial statements).
Net Cash Provided by (Used in) Financing Activities. Sources of cash
from financing activities include borrowings under our credit facilities and
sales of equity securities. Financing activities used $9.3 million of net cash
in 2002, compared to providing net cash of $78.5 million in 2001 and $56.8
million in 2000. During 2002, we had net repayments of $15.8 million under our
credit facilities, compared to net borrowings of $13.3 million and $2.5 million
during 2001 and 2000, respectively. We had proceeds from issuance of long-term
debt and convertible subordinated debt of $2.5 million, $46.6 million and $51.8
million in 2002, 2001 and 2000, respectively. We made principal payments on
long-term debt of $6.0 million, $25.7 million and $17.3 million in 2002, 2001
and 2000, respectively.
Proceeds from sales of our common stock were $10.0 million in 2002,
arising from the March sale of 1.0 million shares of common stock at $10 per
share to our largest stockholder, First Reserve. In 2001, proceeds from sales of
our common stock were $46.9 million. In connection with the merger with IHI in
December 2001, First Reserve purchased $46.8 million in shares of common stock.
Additionally, an executive officer and a director purchased $0.1 million in
shares of common stock. In 2000, proceeds from sales of common stock were $20.9
million, including sales of 1.7 million shares to First Reserve and two
directors for aggregate cash proceeds of $18.9 million and 0.2 million shares to
an affiliate of General Electric Capital Corporation, CFE, Inc., for cash
proceeds of $2.0 million.
Principal Debt Instruments. As of December 31, 2002, we had an
aggregate of $29.9 million borrowed under our principal bank credit facility and
other bank financings. As of December 31, 2002, we had $21.2 million in
availability under our revolving credit facility. However, as a result of the
funded debt-to-EBITDA ratio covenant, as defined in the credit agreement, our
availability was limited to $5.2 million.
On December 17, 2001, we entered into a senior credit facility with
Wells Fargo, N.A. and General Electric Capital Corporation maturing December 17,
2004. Concurrently, we entered into a $12.0 million subordinated term loan with
Wells Fargo Energy Capital, Inc. maturing December 17, 2005. The senior credit
facility includes a revolving credit facility of the lesser of a defined
borrowing base (based upon 85% of eligible accounts receivable and 50% of
eligible inventory) or $41.5 million, a term loan of $16.5 million and an
optional facility for up to an additional $20.0 million in the form of a
revolving credit commitment for future acquisitions based upon specific
criteria. The senior credit facility's term loan is payable in equal quarterly
installments of $0.8 million. The applicable interest rate of the senior credit
facility is governed by our trailing-twelve-month funded debt-to-EBITDA ratio
and ranges from prime plus 1.25% or LIBOR plus 2.25% to prime plus 2.00% or
LIBOR plus 3.00%. At December 31, 2002, the senior credit facility bore interest
at LIBOR plus 2.75%, with interest payable quarterly. We are required to prepay
the senior credit facility under certain circumstances with the net cash
proceeds of asset sales, insurance proceeds, equity issuances and institutional
debt, and commencing April 2003, if, and for so long as,
19
our funded debt-to-EBITDA ratio is 2.25 to 1 or greater, with 50% of excess cash
flow as determined under the senior credit agreement. The senior credit facility
provides, among other covenants and restrictions, that we comply with certain
financial covenants, including a limitation on capital expenditures, a minimum
fixed charge coverage ratio, minimum consolidated tangible net worth and a
maximum funded debt-to-EBITDA ratio. As of December 31, 2002, we were in
compliance with the covenants under the senior credit facility. The senior
credit facility is collateralized by substantially all of our assets. The senior
credit facility's weighted average interest rate, including amortization of loan
costs, for the year ended December 31, 2002 was 7.1%. Effective February 20,
2003, the senior credit facility was amended to provide an increase in the
aggregate additional revolving credit commitment for future acquisitions to
$30.0 million (up to $10.0 million per single acquisition) and an increase in
the maximum funded debt-to-EBITDA ratio. Had this amendment been effective at
December 31, 2002, our maximum borrowing capacity under the senior credit
facility would have increased from $5.2 million to $12.2 million as a result of
the increase in this ratio.
The subordinated term loan bears interest at a fixed rate of 9.50% with
interest payable quarterly. The principal balance is due in full on December 17,
2005. The effective interest rate, including amortization of loan costs, is
10.7%. The subordinated term loan provides, among other restrictions, that we
maintain a minimum fixed charge coverage ratio and a maximum funded
debt-to-EBITDA ratio. Under the terms of our senior credit facility, we are not
currently permitted to make principal payments on the subordinated term loan. As
of December 31, 2002, we were in compliance with the covenants under the
subordinated term loan. The subordinated term loan is collateralized by a second
lien on substantially all of our assets.
We believe that cash generated from operations and amounts available
under our senior credit facility and from other sources of debt will be
sufficient to fund existing operations, working capital needs, capital
expenditure requirements and financing obligations. We also believe any
significant increase in capital expenditures caused by any need to increase
manufacturing capacity can be funded from operations or through debt financing.
We intend to pursue additional acquisition candidates, but the timing,
size or success of any acquisition effort and the related potential capital
commitments cannot be predicted. We expect to fund future cash acquisitions
primarily with cash flow from operations and borrowings, including the
unborrowed portion of our senior credit facility or new debt issuances, but may
also issue additional equity either directly or in connection with an
acquisition. However, acquisition funds may not be available at terms acceptable
to us.
A summary of our outstanding contractual obligations and other
commercial commitments at December 31, 2002 is as follows (in thousands):
Payments Due by Period
----------------------
Less than 1
-----------
Contractual Obligations Total Year 1-3 Years 4-5 Years After 5 Years
----------------------- ----- ---- --------- --------- -------------
Long-term debt $ 29,904 $ 3,463 $ 25,706 $ 141 $ 594
Operating leases 5,498 1,741 2,261 1,208 288
-------- ------- -------- ------- -----
Total Contractual Obligations $ 35,402 $ 5,204 $ 27,967 $ 1,349 $ 882
======== ======= ======== ======= =====
RELATED PARTIES
We have transactions in the normal course of business with certain
related parties.
During February 2000, we entered into a $25 million senior secured
promissory note with First Reserve, our largest shareholder. We incurred
interest expense of approximately $1.8 million for the year ended December 31,
2000 related to this note. The senior secured promissory note was paid in full
on September 29, 2000, with proceeds from the credit agreement (see Note 6 to
our consolidated financial statements) and a 12%, $8 million convertible
subordinated note payable to First Reserve. In May 2001, we entered into a 12%,
$15 million convertible promissory note payable to First Reserve. The proceeds
of the note were used to fund our acquisition of A&B Bolt. In December 2001, the
two convertible promissory notes and accrued interest in the aggregate amount of
$25.3 million were converted into 2.0 million shares of common stock. Interest
expense on these two notes was $2.1 million and $0.2 million for the years ended
December 31, 2001 and 2000, respectively.
20
In 2000, we sold 1.7 million shares of common stock to First Reserve
and two of our directors for cash proceeds of $18.9 million. In 2001, we sold
0.01 million shares of common stock to an executive officer and a director of
the Company for cash proceeds of $0.1 million.
On March 27, 2002, we sold 1.0 million shares of our common stock at
$10 per share to our largest stockholder, First Reserve. The $10 per share price
was at a premium to our then recent trading history. Our common stock closed at
$9.30 per share on March 19, 2002.
General Electric Capital Corporation is a beneficial owner of 181,692
shares of our common stock (see Note 11 to our consolidated financial
statements), and provides debt financing to us. In connection with this
financing, we paid financing costs of approximately $0.1 million and $1.0
million and incurred interest expense of approximately $2.2 million and $0.7
million for the years ended December 31, 2001 and 2000, respectively.
Prior to the merger of T-3 and IHI, IHI sold one of its subsidiaries to
an entity controlled by Don Carlin and Robert Cone, and IHI received a $3.5
million note receivable from the former subsidiary as part of its purchase price
(see Note 4 to our consolidated financial statements). Mr. Carlin is a former
director, and Mr. Cone is a former executive officer and director of the
Company.
We lease certain buildings under noncancelable operating leases from
related parties. Lease commitments under these leases are approximately $0.7
million, $0.5 million, and $0.1 million for 2003, 2004 and 2005, respectively.
Rent expense to related parties was $0.9 million, $0.3 million and $0.05 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
INFLATION
Although we believe that inflation has not had any material effect on
operating results, our business may be affected by inflation in the future.
SEASONALITY
We believe that our business is not subject to any significant seasonal
factors, and do not anticipate significant seasonality in the future.
NEW ACCOUNTING PRONOUNCEMENTS
During the third quarter of 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 covers all legally
enforceable obligations associated with the retirement of tangible long-lived
assets and provides the accounting and reporting requirements for such
obligations. SFAS No. 143, is effective for us beginning January 1, 2003. We
believe that the adoption of SFAS No. 143 will not have a significant impact on
our consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." As a result, the criteria in Accounting Principles
Board Opinion (APB) No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," will now be used to classify those gains and losses. Under SFAS
No. 145, the Company will be required to reclassify any gain or loss on
extinguishment of debt that was previously classified as an extraordinary item
to normal operations for all fiscal years beginning after May 15, 2002,
including all prior period presentations. We will implement SFAS No. 145 in
2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 covers the
recognition of liabilities for costs associated with an exit or disposal
activity and provides the accounting and reporting requirements for such
obligations. SFAS No. 146 is effective for the Company beginning January 1,
2003. We believe that the adoption of SFAS No. 146 will not have a significant
impact on our consolidated financial position or results of operations.
21
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 clarifies disclosures that are required to be made for
certain guarantees and establishes a requirement to record a liability at fair
value for certain guarantees at the time of the guarantee's issuance. The
disclosure requirements of FIN No. 45 have been applied in our 2002 financial
statements. The requirement to record a liability applies to guarantees issued
or modified after December 31, 2002. We believe the adoption of this portion of
the interpretation will not have a material effect on our financial condition or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation No. 46 requires unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse the risks and rewards of ownership
among their owners and other parties involved. The provisions of Interpretation
No. 46 are applicable immediately to all variable interest entities created
after January 31, 2003 and variable interest entities in which an enterprise
obtains an interest in after that date, and for variable interest entities
created before this date, the provisions are effective July 1, 2003. We will
adopt this standard in 2003 and are currently evaluating the impact it will have
on our financial disclosures, financial condition, and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
We are exposed to some market risk due to the floating interest rate
under our revolving credit facility and certain of our term debt. As of December
31, 2002, our revolving credit facility had no principal balance and our
variable long-term debt had a principal balance of $15.3 million, with interest
rates that float with prime or LIBOR. A 1.0% increase in interest rates could
result in a $0.2 million annual increase in interest expense on the existing
principal balances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in this report as set forth in the "Index to Consolidated Financial
Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 24, 2002, we determined, pursuant to the authority and approval
of our board of directors, and upon the recommendation of our audit committee,
to dismiss Arthur Andersen LLP ("Andersen") and to appoint Ernst & Young LLP as
our independent auditors for fiscal year 2002. The appointment of Ernst & Young
was made after careful consideration by the Board of Directors, its Audit
Committee and our management.
Andersen's report on our financial statements for the two fiscal years
ended December 31, 2001 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to audit scope or accounting
principle. During those periods and through the subsequent interim period
preceding the dismissal of Andersen, there were no disagreements with Andersen
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Andersen, would have caused them to make a
reference to the subject matter of the disagreement(s) in connection with their
report. During those periods and through the subsequent interim period preceding
the dismissal of Andersen, there were no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).
During the two fiscal years ended December 31, 2001 and through the
subsequent interim period preceding the dismissal of Andersen, we did not
consult with Ernst & Young regarding either (1) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and either
a written report was provided to us or oral advice was provided that Ernst &
Young concluded was an important factor considered by us in reaching a decision
as to the accounting, auditing or financial reporting issue, or (2) any matter
that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
and the related instructions to Item 304) or a reportable event (as described in
Regulation S-K, Item 304(a)(1)(v)).
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
The Company's management team continues to review the Company's
internal controls and procedures and the effectiveness of those controls. Within
the 90 days prior to the date of this report, the Company conducted an
evaluation, under the supervision of and with the participation of the Company's
management, including the President and Chief Executive Officer and Vice
President and Chief Financial Officer, of the effectiveness of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based upon that evaluation, the President and Chief
Executive Officer and Vice President and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's disclosure
procedures subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or taken.
23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements
See index to consolidated financial statements set forth on
page F-1.
b. Reports on Form 8-K
On November 12, 2002, the Company filed a current report on
Form 8-K disclosing in Item 5 an updated description of the
Company's capital stock.
c. Exhibits
See the Exhibit Index appearing on page EX-1.
24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 21st DAY OF MARCH,
2003.
T-3 ENERGY SERVICES, INC.
By: /s/ STEVEN J. BRADING
----------------------------------------
STEVEN J. BRADING (CHIEF FINANCIAL
OFFICER AND VICE PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS AND IN THE CAPACITIES INDICATED
ON THE 21st DAY OF MARCH, 2003.
SIGNATURE TITLE
--------- -----
By: /s/ MICHAEL L. STANSBERRY President, Chief Executive Officer and Director
------------------------------------ (Principal Executive Officer)
MICHAEL L. STANSBERRY
By: /s/ STEVEN J. BRADING Vice President, Chief Financial Officer, Treasurer and
------------------------------------ Secretary (Principal Financial Officer)
STEVEN J. BRADING
By: /s/ JOEL V. STAFF Chairman of the Board
------------------------------------
JOEL V. STAFF
By: /s/ THOMAS R. DENISON Director
------------------------------------
THOMAS R. DENISON
By: /s/ JOSEPH R. EDWARDS Director
------------------------------------
JOSEPH R. EDWARDS
By: /s/ BEN A. GUILL Director
------------------------------------
BEN A. GUILL
By: /s/ STEVEN W. KRABLIN Director
------------------------------------
STEVEN W. KRABLIN
By: /s/ JAMES M. TIDWELL Director
------------------------------------
JAMES M. TIDWELL
25
CERTIFICATIONS
I, Michael L. Stansberry, certify that:
1. I have reviewed this annual report on Form 10-K of T-3 Energy
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ MICHAEL L. STANSBERRY
-------------------------
Michael L. Stansberry
Chief Executive Officer
March 21, 2003
26
CERTIFICATIONS
I, Steven J. Brading, certify that:
1. I have reviewed this annual report on Form 10-K of T-3 Energy
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ STEVEN J. BRADING
------------------------
Steven J. Brading
Chief Financial Officer
March 21, 2003
27
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
T-3 Energy Services, Inc., and Subsidiaries:
Report of Independent Auditors..................................................................... F-2
Report of Independent Public Accountants........................................................... F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001....................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000............................................................... F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000......................................................... F-7
Notes to Consolidated Financial Statements......................................................... F-8
Cor-Val, Inc., and Subsidiary, a Predecessor of T-3 Energy Services, Inc. and Subsidiaries:
Report of Independent Public Accountants........................................................... F-27
Consolidated Balance Sheet as of March 31, 1999.................................................... F-28
Consolidated Statements of Operations for the Eleven Month Period Ended February 29, 2000 and
the Year Ended March 31, 1999.................................................................. F-29
Consolidated Statements of Cash Flows for the Eleven Month Period Ended February 29, 2000 and
the Year Ended March 31, 1999.................................................................. F-30
Consolidated Statements of Stockholders' Equity for the Eleven Month Period Ended
February 29, 2000 and the Year Ended March 31, 1999............................................ F-31
Notes to Consolidated Financial Statements......................................................... F-32
Preferred Industries, Inc., a Predecessor of T-3 Energy Services, Inc. and Subsidiaries:
Report of Independent Public Accountants........................................................... F-39
Balance Sheets at December 31, 1999 and 1998....................................................... F-40
Statements of Operations for the Four Month Period Ended April 30, 2000 and the Years
Ended December 31, 1999 and 1998............................................................... F-41
Statements of Cash Flows for the Four Month Period Ended April 30, 2000 and
the Years Ended December 31, 1999 and 1998..................................................... F-42
Statements of Stockholders' Equity for the Four Month Period Ended
April 30, 2000 and the Years Ended December 31, 1999 and 1998.................................. F-43
Notes to Financial Statements...................................................................... F-44
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
T-3 Energy Services, Inc.:
We have audited the accompanying consolidated balance sheet of T-3
Energy Services, Inc. as of December 31, 2002, and the related consolidated
statements of operations, cash flows and stockholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of T-3
Energy Services, Inc. as of December 31, 2001 and for the two years then ended
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated March 8, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of T-3
Energy Services, Inc., at December 31, 2002, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the accompanying consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.
142 (Goodwill and Other Intangible Assets) "FAS 142" in 2002.
As discussed above, the financial statements of T-3 Energy Services,
Inc. as of December 31, 2001, and for each of the years in the two year period
ended December 31, 2001, were audited by other auditors who have ceased
operations. As described in Note 1, these financial statements have been revised
to include the transitional disclosures required by FAS 142. Our audit
procedures with respect to the disclosures in Note 1 for 2001 and 2000 included
(a) agreeing the previously reported net income to the previously issued
financial statements, (b) agreeing the adjustments to reported net income
representing amortization expense (net of tax effect) recognized in 2001 and
2000 related to goodwill to the Company's underlying records obtained from
management, and (c) testing