DRESSER INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 333-60778

DRESSER, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2795365
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

15455 DALLAS PARKWAY, SUITE 1100
ADDISON, TEXAS 75001
(Address of principal executive offices) (zip code)

(972) 361-9800
(Registrant's telephone number, including area code)

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

The number of shares outstanding of common stock (par value $0.01 per share) as
of August 8, 2002 was 1,000.

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DRESSER, INC.

INDEX

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DRESSER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

3

DRESSER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE INFORMATION)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

4

DRESSER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

5

DRESSER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Dresser, Inc. was originally incorporated in 1998, under the name of
Dresser Equipment Group, Inc. under the laws of the state of Delaware. The
certificate of incorporation was amended and restated on April 9, 2001 and again
on July 3, 2002. As used in this report, the terms "Dresser," "the Company,",
"we" or "us" refer to Dresser, Inc. and its subsidiaries and affiliates unless
the context indicates otherwise.

In January 2001, Halliburton Company ("Halliburton"), together with its
wholly owned subsidiary Dresser B.V. signed an Agreement and Plan of
Recapitalization (the "Agreement") with DEG Acquisitions, LLC, to effect the
sale of its businesses relating to, among other things, the design, manufacture
and marketing of three business segments known as flow control, measurement
systems and compression and power systems for customers primarily in the energy
industry. Halliburton originally acquired the businesses as part of its
acquisition of Dresser Industries, Inc. ("Dresser Industries") in 1998. Dresser
Industries' operations consisted of the Company's businesses and certain other
operating units retained by Halliburton following the consummation of the
recapitalization transactions. In order to accomplish this transaction,
Halliburton effected the reorganization of various legal entities that comprised
the Dresser Equipment Group ("DEG") business segment of Halliburton.

In connection with the recapitalization in April 2001, Dresser made
payments to Halliburton Company of approximately $1,300 million to redeem common
equity and purchase the stock of foreign subsidiaries. The recapitalization
transactions and related expenses were financed through the issuance of $300
million of senior subordinated debt (the "2001 notes"), $720 million of
borrowings under the credit facility, and approximately $400 million of common
equity contributed by DEG Acquisitions LLC, an entity owned by First Reserve
Corporation and Odyssey Investment Partners Fund, LP.

On July 3, 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing
shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc.,
a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the
100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation,
is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of
Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to
their prior direct ownership interests in Dresser.

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Generally Accepted Accounting Principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 2002,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K, for the year ended December 31, 2001.

Certain prior year amounts have been reclassified to conform to the current
year presentation. These changes had no impact on previously reported net income
or shareholders' deficit.

The consolidated financial information of the Company for periods prior to
March 31, 2001 has been prepared by management on a carve-out basis and reflects
the consolidated financial position, results of operations and cash flows of
Dresser in accordance with accounting principles generally accepted in the
United States. The consolidated financial statements exclude certain items which
were not transferred as a result of the Agreement and any financial effects from
Halliburton's decision to discontinue this business segment. In addition,
certain amounts in the financial statements have been estimated, allocated and
pushed down from Halliburton in a consistent manner in order to

6

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

depict the financial position, results of operations and cash flows of Dresser
on a stand-alone basis. However, the financial position, results of operations
and cash flows may not be indicative of what would have been reported if Dresser
had been a stand-alone entity or had been operated in accordance with the
Agreement during the periods prior to March 31, 2001.

NOTE 2. BUSINESS SEGMENT INFORMATION

We operate under three reportable segments: flow control, measurement
systems and compression and power systems. The business segments are organized
around the products and services provided to the customers each serves. During
the second quarter of 2002, we made changes to our internal corporate structure
with the reorganization of certain of our operating units. We believe these
changes will better serve our customers. Although we still report under three
reportable segments, the operating units that comprise each reportable segment
have changed. Flow control consists of all of the previous valve and actuator
product lines with the addition of the instruments, meters, regulators, and
piping specialties product lines. Measurement systems will now only have the
results of the retail fueling product line. Compression and power systems
components have not changed and the segment will continue to report the results
of the natural gas and blowers product lines.

Flow Control. The flow control segment designs, manufactures and markets
valves and actuators. These products are used to start, stop and control the
flow of liquids and gases and to protect process equipment from excessive
pressure. In addition, it is a leading supplier of natural gas meters,
regulators, digital and analog pressure and temperature gauges, transducers, and
piping specialties such as couplings and conductors. These systems and other
products are used to monitor liquids and gases.

Measurement Systems. The measurement systems segment is a leading supplier
of fuel dispensers, pumps, peripherals and point-of-sale systems and software
for the retail fueling industry.

Compression and Power Systems. The compression and power systems segment
designs, manufactures and markets natural gas fueled engines used primarily in
natural gas compression and power generation applications and rotary blowers and
vacuum pumps.

The table below presents revenues and operating income by segment. The
prior period information has been restated to conform to the current year
presentation.

7

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

NOTE 3. RECEIVABLES

Accounts receivable are stated at their estimated net realizable value.
Included in receivables are notes receivable of $7.6 million as of June 30, 2002
and December 31, 2001, respectively. Allowances for doubtful accounts of $6.1
million and $5.4 million as of June 30, 2002 and December 31, 2001,
respectively, are netted in the receivable balance.

NOTE 4. INVENTORIES

Inventories are stated at the lower of cost or market. A portion of the
United States inventory costs is determined using the last-in, first-out (LIFO)
method. All other inventories are valued on a first-in, first-out (FIFO) basis.

Inventories on a LIFO method represented $70.1 million and $91.0 million of
our inventories as of June 30, 2002 and December 31, 2001, respectively. The
excess of FIFO over LIFO costs as of June 30, 2002 and December 31, 2001, were
$69.8 million and $72.2 million, respectively. Inventories are summarized as
follows:

NOTE 5. ACQUISITIONS

On April 5, 2002, we acquired the net assets of Modern Supply Company,
Inc., Ponca Fabricators, Inc. and Quality Fabricators, Inc. (the "Modern
Acquisition"). The results of the operations for the Modern Acquisition have
been included in the condensed consolidated financial statements since that
date. The businesses of the Modern Acquisition were principally engaged in the
business of distributing, repairing and servicing our small diameter ball valve,
gate valve, check valve and actuation products in the United States market. With
the Modern Acquisition, we established a more direct control of the distribution
and marketing channel for small valves and spare parts. It is consistent with
our strategy of expanding and developing the service and aftermarket business of
our flow control segment. The purchase price was approximately $28.0 million. We
paid cash of $21.4 million, including $0.5 million of closing costs, and assumed
$7.1 million in debt.

Additionally, we issued 250,000 shares of class B common stock to DEG
Acquisitions, LLC for $10.0 million. The proceeds were used to finance the
purchase of the Modern Acquisition.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.

8

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

The goodwill was assigned to our flow control segment. Of the goodwill
recorded, the total amount is expected to be deductible for tax purposes.

NOTE 6. DEBT

In March 2002, we issued an additional $250.0 million of 9 3/8% senior
subordinated notes due 2011 under the indenture that governs the 2001 notes. The
notes were issued at 102.5% of their principal amounts plus accrued interest
from October 15, 2001. We recorded a $6.3 million premium, which is amortized
over the term of the notes, and recorded as a reduction to interest expense. The
net proceeds were used to repay existing indebtedness under the Tranche A term
loans of the credit facility. As a result of the repayment of debt under the
Tranche A term loans, we recorded a loss of $12.9 million during the first
quarter of 2002, which represented the write-off of an allocable portion of debt
issuance costs associated with the Tranche A term loans.

In March 2002, we also obtained an amendment to the credit facility. The
amendment revised certain financial covenants to provide us with greater
financial flexibility. The amendment also increased from $95 million to $195
million, the amount by which the Tranche B term loan of the credit facility can
be increased.

Fees paid in connection with the issuance of the notes and the amendment
were $5.5 million and $1.0 million, respectively, at the time of closing. The
deferred financing fees are amortized to interest expense on a straight-line
basis (which approximates the effective interest method) over the terms of the
respective debt.

In June 2002, we obtained a second amendment to the credit facility, which
allowed for the modification of our corporate structure. See Note 11.

In June 2002, we also made a voluntary prepayment of $30.0 million on our
credit facility, which extinguished our Tranche A term loans. As a result of the
early extinguishment of debt we recorded a loss of $0.3 million, which
represented the write-off of the remaining unamortized debt issuance costs
associated with the Tranche A term loans. These costs have been reflected as
interest expense in our condensed consolidated statements of operations.

In connection with the acquisition of Modern Supply, we assumed $7.1
million of debt in the form of two notes. The first note has a principal balance
of $4.5 million, bears interest at 9.75% and matures August 31, 2002. The

9

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

second note has a principal balance of $2.6 million, bears interest at the
prime rate plus 2.0% and matures January 2008. The notes are collateralized by
the accounts receivable and inventory of Modern Supply Company, Inc.

NOTE 7. DERIVATIVE INSTRUMENTS

In March 2002, the principal balance of our Euro Tranche A term loan was
significantly reduced with the use of proceeds from the note offering.
Subsequently, the loan was extinguished in June 2002. As a result of the
principal reduction in March 2002, an interest rate swap, which was designated
as a hedge on the Euro Tranche A, was no longer eligible to receive accounting
treatment as a hedge. As a result, changes in the fair market value of the
interest rate swap were recorded through earnings rather than accumulated other
comprehensive income. The unrealized loss was reclassified from accumulated
other comprehensive income and we recorded a charge to earnings of $0.6 million
during the first quarter of 2002, which is reflected in interest expense in our
condensed consolidated statements of operations. This swap was terminated in
April 2002.

In April 2002, we entered into a fair value interest rate swap, which was
not eligible to receive accounting treatment as a hedge. The interest rate swap
has a notional amount of $100.0 million and matures in October 2003. We receive
a fixed rate of 9.375% and pay a variable rate of LIBOR plus 6.20% (8.06% at
June 30, 2002). At June 30, 2002, the interest rate swap had a fair market value
of $0.9 million. This amount has been reflected as a reduction to interest
expense in our condensed consolidated statements of operations.

NOTE 8. COMPREHENSIVE INCOME

The following table sets forth the components of comprehensive income, net
of income tax expense:

NOTE 9. COMMITMENTS AND CONTINGENCIES

HALLIBURTON INDEMNIFICATIONS

In accordance with the Agreement, Halliburton has agreed to indemnify the
Company for certain items. The indemnification items generally include any
product liability claim or product warranty claim arising out of any products
relating to any discontinued product or service line of the Company. In
addition, Halliburton has generally agreed to indemnify the Company for any
product liability claim made prior to closing the Agreement, any environmental
liability claim against the Company, any loss, liability, damage or expense from
any legal proceeding initiated prior to closing of the Agreement, any loss,
liability, damage or expense relating to worker's compensation, general
liability, and automobile liability arising out of events or occurrences prior
to the closing as to which the

10

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

Company notifies Halliburton prior to the third anniversary of the closing date.
The maximum aggregate amount of losses indemnifiable by Halliburton pursuant to
the recapitalization agreement is $950.0 million. Based on these indemnity
rights, only liabilities related to exposures not specifically covered above
have been included in the consolidated financial statements.

ENVIRONMENTAL

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

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

In April 2001, the Company completed the recapitalization transaction.
Halliburton originally acquired the Company's businesses as part of its
acquisition of Dresser Industries in 1998. Dresser Industries' operations
consisted of the Company's businesses, as well as other operating units. As
Halliburton has publicly disclosed, it has been subject to numerous lawsuits
involving asbestos claims associated with, among other things, the operating
units of Dresser Industries that were retained by Halliburton or disposed of by
Dresser Industries or Halliburton prior to the recapitalization transaction.
These lawsuits have resulted in significant expense for Halliburton.

The Company has not historically incurred, and in the future the Company
does not believe that it will incur, any material liability as a result of the
past use of asbestos in products manufactured by the units of Dresser Industries
retained by Halliburton, or as a result of the past use of asbestos in products
manufactured by the businesses currently owned by the Company or any predecessor
entities of those businesses.

Pursuant to the recapitalization agreement, all liabilities related to
asbestos claims arising out of events occurring prior to the consummation of the
recapitalization transaction, are defined to be "excluded liabilities," whether
they resulted from activities of Halliburton, Dresser Industries or any
predecessor entities of any of the Company's businesses. The recapitalization
agreement further provides, subject to certain limitations and exceptions, that
Halliburton will indemnify the Company and hold it harmless against losses and
liabilities that the Company actually incurs which arise out of or result from
"excluded liabilities," as well as certain other liabilities in existence as of
the closing of the recapitalization transaction. The maximum aggregate amount of
losses indemnifiable by Halliburton pursuant to the recapitalization agreement
is $950.0 million. All indemnification claims are subject to notice and
procedural requirements that may result in Halliburton denying indemnification
claims for some losses.

The Company is responsible for evaluating and addressing the environmental
impact of sites where the Company is operating or has maintained operations. As
a result, the Company spends money each year assessing and remediating
contaminated properties to avoid future liabilities, to comply with legal and
regulatory requirements, or to respond to claims by third parties.

11

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangibles".

SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations," and eliminates the pooling of interest method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS No. 141 requires business combinations
initiated after June 30, 2001, to be accounted for using the purchase accounting
method. SFAS No. 141 also further clarifies the criteria for recognition of
intangible assets separately from goodwill. Our adoption of this standard did
not have any effect on our condensed consolidated financial statements.

SFAS No. 142 supercedes APB No. 17, "Intangible Assets," and eliminates the
requirement to amortize goodwill and intangible assets with indefinite useful
lives, addresses the amortization of intangible assets with defined lives and
requires impairment testing of intangible assets. Accordingly, as of January 1,
2002, we no longer amortize goodwill. In addition, we performed the transitional
impairment test required as of January 1, 2002 and determined there was no
impairment of our goodwill. If goodwill amortization was excluded for the three
and six months ended June 30, 2001, our net income would have increased by
approximately $2.1 million and $4.2 million, respectively. Adjusted net income
for the three and six months ended June 30, 2001, would have been $20.8 million
and $42.4 million, respectively.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity shall recognize
the cumulative effect of adoption of SFAS No. 143 as a change in accounting
principle. We are still evaluating the impact this statement may have on our
results of operations and financial position.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 primarily addresses significant issues
relating to the implementation of SFAS No. 121 and develops a single accounting
model for long-lived assets to be disposed of, whether previously held and used
or newly acquired. The provisions of SFAS No. 144 were effective for fiscal
years beginning after December 15, 2001. We adopted this statement on January 1,
2002. There was no impact to our operating results or financial position as a
result of adopting this standard.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendments of FASB No. 13 and Technical Corrections." SFAS No.
145 rescinds SFAS No. 4 "Reporting Gains and Losses from Extinguishment of
Debt," which required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item. SFAS No. 64, "Extinguishment of Debts Made
to Satisfy Sinking Fund Requirements," amended SFAS No. 4 and is no longer
necessary as SFAS No. 4 has been rescinded. SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers" established accounting requirements for the
effects of the transition to the provisions of the Motor Carrier Act of 1980. As
the transition is complete, SFAS No. 44 is no longer necessary. This statement
also amends SFAS No. 13, "Accounting for Leases" and requires that certain lease
modifications that have the economic effects similar to the sale-leaseback
transaction be accounted for in the same manner as a sale-leaseback transaction.
This statement also makes technical corrections to existing pronouncements. The
statement is effective for fiscal years beginning after May 15, 2002. We have
elected early application of this statement. During 2002, we extinguished our
Tranche A term loans, and as a result, we recorded a loss of $13.2 million,
which represented the write-off of unamortized debt issuance costs. These costs
have been

12

DRESSER, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

reflected as interest expense in our condensed consolidated statements of
operations, and have not been classified as an extraordinary item.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 supersedes guidance
provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We are still evaluating the impact this
statement may have on our results of operations and financial position.

NOTE 11. SUBSEQUENT EVENT

In July 2002, Dresser modified its corporate structure by forming a
Delaware holding company and two Bermuda holding companies between the existing
shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc.,
a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the
100% holder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation,
is the 100% holder of Dresser Holdings, Ltd. The former direct shareholders of
Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to
their prior direct ownership interests in Dresser.

These holding companies have no assets or liabilities, other than common
stock holdings of Dresser, Inc., conduct no operations outside of Dresser, Inc.
and have no transactions to date other than those incidental to their formation.

NOTE 12. SUPPLEMENTAL GUARANTOR INFORMATION

In connection with our senior subordinated notes due 2011 (the "Notes"),
certain of our subsidiaries ("Subsidiary Guarantors") guaranteed, jointly and
severally, our obligation to pay principal and interest on the Notes on a full
and unconditional basis. The guarantors of the Notes will include only our
wholly-owned domestic subsidiaries. The following supplemental consolidating
condensed financial information presents the balance sheet as of June 30, 2002
and the statements of operations and cash flows for the six months ended June
30, 2002 and 2001, respectively. In the consolidating condensed financial
statements, the investments in wholly-owned subsidiaries are accounted for
using the equity method. Certain prior year amounts have been reclassified to
conform to the current presentation.

13

DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

14

DRESSER, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
(IN MILLIONS)

15

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

16

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
(IN MILLIONS)
(UNAUDITED)

17

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

18

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN MILLIONS)
(UNAUDITED)

19

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN MILLIONS)
(UNAUDITED)

20

DRESSER, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN MILLIONS)
(UNAUDITED)

21

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under Section 21E of the Securities and
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995. The words "believe," "expect," "anticipate," "intend," "estimate"
and other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements. Although forward-looking statements reflect management's good faith
beliefs, reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which may
cause our actual results, performance or achievements to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements. We undertake no obligation to publicly update
or revise any forward-looking statement, whether as a result of new information,
future events or otherwise. These forward-looking statements are subject to
numerous risks and uncertainties, including, but not limited to, the impact of
general economic conditions in the regions in which we do business; general
industry conditions, including competition and product, raw material and energy
prices; changes in exchange rates and currency values; capital expenditure
requirements; access to capital markets and the risks and uncertainties
described in "Certain Risk Factors".

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses and related disclosures
of contingent liabilities. In our Annual Report on Form 10-K for the year ended
December 31, 2001, we identified and disclosed critical accounting policies,
which included revenue recognition, inventory obsolescence, product warranties
and income taxes. We reviewed our policies and have determined that those
critical policies remain and have not changed since December 31, 2001.

OVERVIEW

We design, manufacture and market highly engineered equipment and services
sold primarily to customers in the energy industry. Our primary business
segments are flow control, measurement systems and compression and power
systems. We sell our products and services to customers, which include major oil
companies, multinational engineering and construction companies and other
industrial firms. Our total revenues by geographic region for the six months
ended June 30, 2002, consisted of North America (55.6%), Europe/Africa (22.7%),
Latin America (7.1%), Asia (9.8%) and the Middle East (4.8%). We have pursued a
strategy of customer, geographic and product diversity to mitigate the impact of
an economic downturn on our business in any one part of the world or in any
single business segment.

For the six months ended June 30, 2002, we generated revenue of $800.3
million, operating income of $67.3 million and earnings before interest, taxes,
depreciation, and amortization ("EBITDA") of $88.6 million.

MARKET FORCES

Our product offerings include valves, instruments, meters, natural gas
fueled engines, retail fuel dispensing systems, blowers and natural gas fueled
power generation systems. These products are used to produce, transport,
process, store and deliver oil and gas and their related by-products.

Long-term demand for energy infrastructure equipment and services is driven
by increases in worldwide energy consumption, which is a function of worldwide
population growth, rate of industrialization and the levels of energy
consumption per capita. In the short term, demand for our products is affected
by overall worldwide economic conditions and by fluctuations in the level of
activity and capital spending by major, national and independent oil and gas
companies, gas distribution companies, gas compression companies, pipeline
companies, power generation companies and petrochemical processing plants. The
level of oil and gas prices affects all of these activities and is a

22

significant factor in determining our primary customers' level of cash flow. Our
customer's cash flow and their outlook for future oil and natural gas prices
affects their capital spending which drives demand for our products.

Our customers have reduced their capital spending for 2002, and these
reductions have and will continue to negatively impact our business. We have not
seen signs of increases in capital spending and do not expect significant
changes in these areas in the coming quarter. The significant downturn in the
gas compression market from levels in 2001 greatly impacted our compression and
power systems segment as we saw sharp declines in the demand for new gas
compression engines throughout the first half of 2002 as compared to 2001. We
also saw weakness in global demand for fuel dispenser business and retail point
of sales systems due to reduced capital spending on retail fuel equipment by our
major customers. We expect our principal product lines will continue to be
affected by the same economic conditions seen in the first two quarters of this
year. Accordingly, we expect the third quarter results to be significantly down
from the third quarter 2001. See "Certain Risk Factors" included elsewhere in
the document.

STAND-ALONE COMPANY

The condensed consolidated financial information prior to March 31, 2001
has been derived from the consolidated financial statements of the DEG business
unit of Halliburton. The preparation of this information was based on certain
assumptions and estimates including allocations of costs from Halliburton, which
we believe are reasonable. The condensed consolidated financial statements may
not, however, necessarily reflect the results of operations, financial positions
and cash flows that would have occurred if our company had been a separate,
stand-alone entity during the periods prior to March 31, 2001.

RESULTS OF OPERATIONS

The following table presents selected financial information regarding each
of our segments for the three and six months ended June 30, 2002 and 2001,
respectively. During 2002, we made changes to our internal corporate structure
with the reorganization of certain of our operating units. We believe these
changes will better serve our customers. Although we still report under three
reportable segments, the operating units that comprise each reportable segment
have changed. The prior year information has been restated to conform to the
current year presentation.

23

24

THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001

CONSOLIDATED

Revenues. Revenues increased by $46.7 million, or 12.5%, to $420.1 million
in 2002 from $373.4 million in 2001. The increase in revenues was primarily
attributable to increases in our flow control segment, which offset decreases in
our compression and power system segment. Our flow control segment benefited
from acquisitions in 2001 and 2002 as well as increased sales volume in our
valve product lines. Our compression and power systems segment was negatively
impacted by declines in demand for natural gas compression, as compared to the
second quarter of 2001.

Cost of revenues. Cost of revenues as a percentage of revenues increased to
72.1% in 2002 from 69.0% in 2001. An unfavorable product mix affected our flow
control segment. In addition, our compression and power system segment was
negatively impacted by reduced manufacturing volume and resulting inefficiencies
and lower manufacturing absorption as compared to the second quarter of 2001.

Gross Profit. Gross profit increased by $1.5 million, or 1.3% to $117.4
million in 2002 from $115.9 million in 2001. As a percentage of revenues, gross
profit decreased to 27.9% in 2002 from 31.0% in 2001, primarily as a result of
the factors discussed above.

Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses increased by $9.7 million to
$82.8 million in 2002 from $73.1 million in 2001. Selling, engineering,
administrative and general expenses increased as a percentage of revenues, to
19.7% of revenues in 2002 from 19.6% of revenues in 2001. Increases in selling,
engineering, administrative and general expenses primarily related to higher
volume and acquisitions were in part offset by the suspension of goodwill
amortization in 2002. For the three months ended June 30, 2001, selling,
engineering, administrative and general expenses included $2.1 million of
amortization of goodwill.

Operating Income. Operating income decreased by $8.2 million, or 19.2%, to
$34.6 million in 2002 from $42.8 million in 2001. Operating income was impacted
primarily by declines in our compression and power systems segment. This segment
was impacted by the depressed demand for new gas compression engines. Declines
in our compression and power system segment were somewhat offset by increases in
our flow control segment and measurement systems segment.

Bookings and Backlog. Bookings for the three months ended June 30, 2002
were $396.0 million as compared to $392.0 million during the same period in
2001. Backlog at June 30, 2002 period was $406.4 million compared to $401.9
million at June 30, 2001, a 1.1% increase. Increased bookings and backlog in our
flow control segment were offset by declines in our measurement and compression
and power systems segments.

SEGMENT ANALYSIS

Flow Control. Revenues increased by $67.2 million, or 32.1%, to $276.3
million in 2002 from $209.1 million in 2001. Increases in our flow control
segment in part were attributable to acquisitions made in 2001 and 2002.
Revenues attributable to these acquisitions were approximately $33.3 million
with the remainder of the increase attributable to increased volume in our
on/off valve and our control valve product lines, which offset declines in our
instrument product lines.

Gross profit increased by $13.1 million, or 19.0%, to $81.9 million in 2002
from $68.8 million in 2001. However, as a percentage of revenue, gross margins
decreased to 29.6% in 2002 from 32.9% in 2001. In our on/off valve product line,
we had a substantial volume of low margin third-party buyouts associated with
large international projects. In the control valve and pressure relief valve
product lines, growth in lower margin original equipment sales for new
construction business combined with relatively flat higher margin part sales
resulted in overall lower margins.

25

Selling, engineering, administrative, and general expenses increased by
$8.5 million or 19.1%, to $53.1 million in 2002 from $44.6 million in 2001.
Increases in selling, engineering, administrative and general expenses primarily
related to higher volume and acquisitions. This was partially offset by the
suspension of goodwill amortization in 2002. As a percentage of revenue, these
costs decreased to 19.2% in 2002 from 21.3% in 2001.

Operating income increased by $4.6 million, or 19.0%, to $28.8 million in
2002 from $24.2 million in 2001. Increases in operating income were due in part
to the acquisitions, which represented $3.4 million in the second quarter of
2002, and increased sales volume in our valve product lines offsetting declines
in our instrument product lines.

Bookings and Backlog. Bookings during the 2002 period of $252.3 million
were 17.9% above bookings during the 2001 period and 0.3% above the previous
quarter. Backlog at June 30, 2002 was $313.8 million, or 26.5% above June 30,
2001 and 7.5% below the previous quarter. Significant increases in demand in our
on/off product lines for 2002, particularly associated with large international
projects, are primarily responsible for increased bookings and backlog on a year
over year comparison. The decrease in backlog as compared to the first quarter
of 2002 can be attributed to the fulfillment of orders for a large offshore
project in Brazil, and improved throughput of a manufacturing facility in Italy.
Backlog attributable to the three acquisitions made in 2001 and 2002 was $39.1
million at June 30, 2002.

Measurement Systems. Revenues increased by $0.8 million, or 1.0%, to $78.9
million in 2002 from $78.1 million in 2001. Although revenues remained flat
during the quarter, declines in our U.S. markets due to weakness in the fuel
dispenser market were offset by stronger sales in certain international
locations.

Gross profit increased by $0.9 million, or 4.7%, to $20.0 million in 2002
from $19.1 million in 2001. As a percentage of revenue, gross margins increased
to 25.3% in 2002 from 24.5% in 2001. This increase is primarily attributable to
manufacturing cost savings resulting from certain cost reduction initiatives
implemented in U.S. plants earlier in the year.

Selling, engineering, administrative, and general expenses decreased $0.8
million, or 5.7%, to $13.3 million in 2002 from $14.1 million in 2001. Increases
in legal expenses and other reserves in 2002 were offset by the reduction in
amortization related to goodwill. As a percentage of revenue, these costs
decreased to 16.9% in 2002 from 18.1% in 2001.

Operating income increased by $1.7 million or 34.0%, to $6.7 million in
2002 from $5.0 million in 2001, primarily a result of the factors discussed
above.

Bookings and Backlog. Bookings during the 2002 period of $69.8 million were
15.8% below bookings during the 2001 period and 9.1% above the previous quarter.
Backlog at June 30, 2002 was $42.1 million, or 26.9% below June 30, 2001 and
14.8% below the previous quarter. The weak market conditions in 2002 and the
overall decline in the U.S. dispenser market led to lower bookings and backlog
in the 2002 period as compared to the prior year. The increase in bookings in
the second quarter of 2002 as compared to the first quarter of 2002 was impacted
by seasonality, with bookings in the first quarter typically impacted by the
delay in the release of capital funds of major oil companies.

Compression and Power Systems. Revenues decreased by $22.2 million, or
25.2%, to $65.9 million in 2002 from $88.1 million in 2001. Original equipment
sales for the second quarter decreased approximately $16.0 million from the
prior year due to sharply lower gas compression engine demand. Aftermarket part
sales decreased by approximately $4.9 million primarily attributable to
diminished gas compression fleet utilization.

Gross profit decreased by $12.5 million, or 44.6%, to $15.5 million in 2002
from $28.0 million in 2001. As a percentage of revenues, gross margins decreased
to 23.5% in 2002 from 31.8% in 2001. Margins were impacted by manufacturing
efficiency and rate variances associated with declining production volume, as
well as significant price competition on certain of our products.

26

Selling, engineering, administrative, and general expenses remained
relatively flat, decreasing by $0.6, or 4.7%, to $12.2 million in 2002 from
$12.8 million in 2001. Decreases in selling, engineering, administrative, and
general expenses in our natural gas engines business were offset by increases in
our blowers business. As a percentage of revenue, these costs increased to 18.5%
in 2002 from 14.5% in 2001. This percentage was impacted by the sharp decrease
in revenues, as a result of the factors discussed above, as costs stayed
relatively stable between the periods.

Operating income decreased by $11.9 million, or 78.3%, to $3.3 million in
2002 from $15.2 million in 2001, primarily as a result of the factors discussed
above.

Bookings and Backlog. Bookings during the 2002 period of $73.9 million were
22.3% below bookings during the 2001 period and 6.8% above the previous quarter.
Backlog at June 30, 2002 was $55.1 million, or 45.3% below June 30, 2001 and
15.0% above the previous quarter. The decline in the gas compression demand led
to a significant reduction in bookings and backlog on a year over year
comparison. In the second quarter of 2002, bookings and backlog benefited from
increased orders in the distributed power generation market and aftermarket
parts. These gains were somewhat offset by decreases in bookings and backlog in
the gas compression market.

SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001

CONSOLIDATED

Revenues. Revenues increased by $65.4 million, or 8.9%, to $800.3 million
in 2002 from $734.9 million in 2001. The increase in revenues was attributable
to increases in our flow control segment, which offset decreases in both our
measurement and compression and power system segments. Our flow control segment
benefited from acquisitions in 2001 and 2002 as well as increased sales volume
in our valve product lines. Our compression and power systems segment was
negatively impacted by declines in demand for natural gas compression, as
compared to 2001. Our measurement systems segment was negatively impacted by
reduced capital spending on retail fuel equipment.

Cost of revenues. Cost of revenues as a percentage of revenues increased to
72.0% in 2002 from 69.1% in 2001. Higher manufacturing costs and an unfavorable
product mix affected our flow control segment. In addition, our compression and
power system segment was negatively impacted by reduced manufacturing volume and
resulting inefficiencies and lower manufacturing absorption as compared to 2001.

Gross Profit. Gross profit decreased by $3.1 million, or 1.4% to $224.2
million in 2002 from $227.3 million in 2001. As a percentage of revenues, gross
profit also decreased to 28.0% in 2002 from 30.9% in 2001, primarily as a result
of the factors discussed above.

Selling, Engineering, Administrative and General Expenses. Selling,
engineering, administrative and general expenses increased by $9.8 million to
$156.9 million in 2002 from $147.1 million in 2001. Selling, engineering,
administrative and general expenses decreased as a percentage of revenues, to
19.6% of revenues in 2002 from 20.0% of revenues in 2001. Increases in selling,
engineering, administrative and general expenses primarily related to higher
volume and acquisitions were generally offset by the suspension of goodwill
amortization in 2002. For the six months ended June 30, 2001, selling,
engineering, administrative and general expenses included $4.2 million of
amortization of goodwill. In addition, selling, engineering, administrative and
general expenses in 2001 included $4.0 million of expenses related to the
closure of a manufacturing facility.

Operating Income. Operating income decreased by $12.9 million or 16.1%, to
$67.3 million in 2002 from $80.2 million in 2001. The decline was primarily a
result of declines in our compression and power systems segment. This segment
was impacted by the depressed demand for new gas compression engines. Declines
in our compression and power system segment were somewhat offset by increases in
our flow control segment and measurement systems segment.

Bookings and Backlog. Bookings during the 2002 period of $780.7 million
were 0.4% below bookings during the same period in 2001. Increased bookings in
our flow control segment were offset by declines in our

27

measurement and compression and power systems segments. Backlog at June 30, 2002
period was $406.4 million compared to $401.9 million at June 30, 2001, a 1.1%
increase. Increased bookings and backlog in our flow control segment were offset
by declines in our measurement and compression and power systems segments.

SEGMENT ANALYSIS

Flow Control. Revenues increased by $109.9 million, or 26.9%, to $519.1
million in 2002 from $409.2 million in 2001. Increases in our flow control
segment in part were attributable to the acquisitions made. Revenues
attributable to these acquisitions were approximately $52.8 million, with the
remainder of the increase attributable to increased volume in our on/off valve
and our control valve product lines.

Gross profit increased by $18.6 million or 13.6%, to $155.1 million in 2002
from $136.5 million in 2001. However, as a percentage of revenue, gross margins
decreased to 29.9% in 2002 from 33.4% in 2001. The earnings associated with
favorable volume for certain of our products were negatively impacted by the
margin deterioration with higher manufacturing costs and unfavorable product
mix. In our on/off valve product line, we had a substantial volume of low margin
third-party buyouts associated with large international projects. Higher
manufacturing costs were impacted by throughput issues in a plant in Italy. In
the control valve and pressure relief valve product lines, growth in lower
margin original equipment sales for new construction business combined with
relatively flat higher margin part sales resulted in overall lower margins.

Selling, engineering, administrative, and general expenses increased by
$14.1 million or 16.6%, to $98.9 million in 2002 from $84.8 million in 2001.
Increases in selling, engineering, administrative and general expenses primarily
related to higher volume and acquisitions. This increase was offset somewhat by
the suspension of the amortization of goodwill. As a percentage of revenue,
these costs decreased to 19.1% in 2002 from 20.7% in 2001.

Operating income increased by $6.0 million, or 11.6%, to $56.2 million in
2002 from $51.7 million in 2001. Increases in operating income were due in part
to the acquisitions, as discussed above, which contributed approximately $4.8
million to the increase, with the remaining increase resulting from increased
volume.

Bookings and Backlog. Bookings during the 2002 period of $503.8 million
were 13.9% above bookings during the 2001 period. Backlog at June 30, 2002 was
$313.8 million, or 26.5% above backlog at June 30, 2001. Significant increases
in demand in our on/off product lines for 2002 particularly associated with
large international projects are primarily responsible for increased bookings
and backlog on a year over year comparison. Backlog attributable to the three
acquisitions made in 2001 and 2002 was $39.1 million at June 30, 2002.
Measurement Systems. Revenues decreased by $9.1 million, or 6.0%, to $143.2
million in 2002 from $152.3 million in 2001. The decrease in revenues was in
large part due to reduced capital spending on retail fuel equipment.

Gross profit decreased by $1.9 million, or 5.2%, to $34.8 million in 2002
from $36.7 million in 2001. This decrease primarily resulted from lower sales
volume. As a percentage of revenue, gross margins were 24.3% in 2002 as compared
to 24.1% in 2001.

Selling, engineering, administrative, and general expenses decreased by
$5.8 million or 18.5% to $25.6 million from $31.4 million in 2001. In the first
quarter of 2001, we recorded $4.0 million in expenses related to the closure and
relocation of a retail fuel dispenser facility. In addition, we realized savings
from cost reduction measures implemented earlier in the year. As a percentage of
revenue, these costs decreased to 17.9% in 2002 from 20.6% in 2001.

Operating income increased by $3.9 million, or 73.6%, to $9.2 million in
2002 from $5.3 million in 2001. This was primarily impacted by the $4.0 million
in expenses incurred in 2001 related to a plant closure discussed above. In
addition, the segment was impacted by lower sales volume, which was mitigated in
part by certain cost reduction measures implemented earlier in the year.

28

Bookings and Backlog. Bookings during the 2002 period of $133.8 million
were 15.8% below bookings during the 2001 period. Backlog at June 30, 2002 was
$42.1 million, or 26.9% below backlog at June 30, 2001. The weak market
conditions in 2002 and the overall decline in the U.S. dispenser market led to
lower bookings and backlog in the 2002 period as compared to the prior year.

Compression and Power Systems. Revenues decreased by $36.9 million, or
20.9%, to $139.9 million in 2002 from $176.8 million in 2001. Sales for our
products in our natural gas engine business for the second quarter decreased
approximately $24.1 million from the prior year due to sharply lower gas
compression engine demand and aftermarket part sales decreased by approximately
$9.3 million.

Gross profit decreased by $19.6 million or 36.3%, to $34.4 million in 2002
from $54.0 million in 2001. As a percentage of revenues, the gross margin
percentages decreased to 24.6% in 2002 from 30.5% in 2001. This decrease was
primarily a result of reduced manufacturing efficiency and rate variances
associated with declining production volume.

Selling, engineering, administrative, and general expenses remained
relatively flat decreasing by $0.1 million or 0.4% to $25.0 million in 2002 from
$25.1 million in 2001. Decreases in selling, engineering, administrative, and
general expenses in our natural gas engines business were offset by increases in
our blowers business. As a percentage of revenue, these costs increased to 17.9%
in 2002 from 14.2% in 2001. This percentage was impacted by the sharp decrease
in revenues, as a result of the factors discussed above, as costs stayed
relatively stable between the periods.

Operating income decreased by $19.5 million, or 67.5%, to $9.4 million in
2002 from $28.9 million in 2001. Our operating income was primarily impacted by
declines in orders for engines used in gas compression, as discussed above.

Bookings and Backlog. Bookings during the 2002 period of $143.1 million
were 21.7% below bookings during the 2001 period. Backlog at June 30, 2002 was
$55.1 million, or 45.3% below backlog at June 30, 2001. The decline in the gas
compression demand led to a significant reduction in booking and backlog on a
year over year comparison.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of cash is from operations. The primary cash uses are to
fund principal and interest payments on our debt, working capital and capital
expenditures. We expect to fund these cash needs with operating cash flow and,
if necessary, borrowings under the revolving credit portion of our credit
facility.

Cash and equivalents were $84.1 million and $101.3 million as of June 30,
2002 and 2001 respectively. A significant portion of our cash and equivalents
balances is utilized in our international operations and may not be immediately
available to service debt in the United States.

Net cash flow provided by operating activities was $42.3 million and $98.0
million for the six months ended June 30, 2002 and 2001, respectively.

Net cash flow used in investing activities was $29.9 million for the six
months ended June 30, 2002. The cash flow used in investing activities resulted
from the Modern Acquisition and capital expenditures. Net cash flow used in
investing activities was $1,304.6 million for the six months ended June 30, 2001
resulting from cash used to complete the recapitalization transaction of
$1,291.8 million and capital expenditures of $12.8 million.

Net cash flow used in financing activities was $23.3 million for the six
months ended June 30, 2002, resulting primarily from the repayment of debt with
the use of the proceeds from the issuance of additional senior subordinated
notes and the payment of deferred financing fees. In addition, we issued an
additional 250,000 shares of class B common stock for proceeds of $10.0 million.
Net cash flow provided by financing activities was $1,289.4

29

million for the six months ended June 30, 2001 resulting from the proceeds of
the 2001 notes and borrowings under the credit facility, along with cash from
the investors, which were used to complete the recapitalization transaction.

In March 2002, we issued an additional $250 million of 9-3/8% senior
subordinated notes due 2011 under the indenture that governs the 2001 notes. The
notes were issued at 102.5% of their principal amounts plus accrued interest
from October 15, 2001. We recorded a $6.3 million premium that is amortized over
the term of the notes, and recorded as a reduction to interest expense. The net
proceeds were used to repay existing indebtedness under the Tranche A term loans
of the credit facility. As a result of the repayment of debt under the Tranche A
term loans, we recorded a loss of $12.9 million, which represented the write-off
of an allocable portion of debt issuance costs associated with the Tranche A
term loans. Fees paid at closing in connection with the issuance were
approximately $5.5 million

In March 2002, we also obtained an amendment to our credit facility. The
amendment revised certain financial covenants to provide us with greater
financial flexibility. The amendment also increased from $95 million to $195
million, the amount by which the Tranche B term loan of the credit facility can
be increased. Fees paid in connection with the amendment were approximately $1.0
million. As discussed under "Market Forces," we have experienced weakness in
demand for some of our products as a result of general economic conditions. If
economic conditions do not improve in the second half of 2002, we may need to
seek approval from the lenders under our credit facility to modify the financial
ratios applicable to future periods.

In June 2002, we made a voluntary prepayment on our credit facility of $30
million, which extinguished our Tranche A term loans. As a result of the early
extinguishment of debt we recorded a loss of $0.3 million, which represented the
write-off of the remaining unamortized debt issuance costs associated with the
Tranche A term loans. These costs have been reflected as interest expense in our
condensed consolidated statements of operations.

As of June 30, 2002, we had $556.1 of senior subordinated notes, including
a $6.1 million premium, $427.1 million of debt consisting of the Tranche B term
loan under the credit facility, and $12.0 million of other long-term debt. In
addition, we have a $100.0 million revolving credit facility, subject to certain
conditions, of which $59.3 million was available and $40.7 million was reserved
for letters of credit as of June 30, 2002.

The following tables set forth the contractual cash commitments for debt
and lease obligations as well as commitments for the next several years: