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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, for Use of the
[_] Preliminary Proxy Statement Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
VARCO INTERNATIONAL, INC.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
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[LOGO OF TUBOSCOPE APPEARS HERE] [LOGO OF VARCO APPEARS HERE]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Tuboscope Inc. and Varco International, Inc. have
agreed on a merger of equals designed to create one of the world's premier
oilfield services and equipment companies. The combined company will be named
"Varco International, Inc." and will be headquartered in Houston, Texas and
Orange, California.
If the merger is completed, Varco shareholders will receive 0.7125 shares of
Tuboscope common stock for each share of Varco common stock that they own.
Tuboscope stockholders will continue to own their existing shares after the
merger. We estimate that immediately after the merger Varco shareholders will
hold approximately 51% of the outstanding shares of the combined company and
Tuboscope stockholders prior to the merger will hold approximately 49%.
The merger cannot be completed unless the stockholders of both companies
approve it. Tuboscope stockholders will be asked to vote upon the merger at the
Tuboscope 2000 annual meeting of stockholders. Varco shareholders will be asked
to vote upon the merger at a special meeting of Varco shareholders. In
addition, Tuboscope stockholders will be asked to vote upon other proposals at
the Tuboscope meeting relating to:
. the election of six directors to serve on the Tuboscope board of
directors;
. the approval of amendments to Tuboscope's certificate of incorporation
to increase the number of authorized shares of Tuboscope common stock
and to increase the maximum number of authorized directors of Tuboscope;
. the approval of Tuboscope's Amended and Restated 1996 Equity
Participation Plan, which amends Tuboscope's Amended 1996 Equity
Participation Plan by, among other things, increasing the number of
shares of Tuboscope common stock available for issuance under the plan
and authorizing the payment of "performance based" compensation that
would be fully deductible for federal income tax purposes; and
. the ratification of the selection of Ernst & Young LLP as Tuboscope's
independent auditors for 2000.
Your vote is very important. Whether or not you plan to attend your meeting,
please take the time to vote by completing and mailing the enclosed proxy card
to us.
The dates, times and places of the meetings are as follows:
For Tuboscope stockholders: For Varco shareholders:
May 30, 2000, 10:00 a.m. May 30, 2000, 9:00 a.m.
The Doubletree Hotel The Doubletree Hotel
2001 Post Oak Boulevard 100 The City Drive
Houston, Texas 77056 Orange, California 92868
This proxy statement/prospectus provides you with detailed information about
the proposed merger and the other matters to be voted upon at your meeting. You
should consider the matters discussed under "Risk Factors" beginning on page 13
of the enclosed proxy statement/prospectus before voting.
Sincerely, Sincerely,
/s/ JOHN F. LAULETTA /s/ GEORGE BOYADJIEFF
John F. Lauletta George Boyadjieff
President and Chief Executive Officer Chairman of the Board and
Tuboscope Inc. Chief Executive Officer
Varco International, Inc.
Neither the Securities and Exchange Commission nor any state securities
regulators has approved the Tuboscope common stock to be issued under this
proxy statement/prospectus or determined if this proxy statement/prospectus
is accurate or adequate. Any representation to the contrary is a criminal
offense.
The proxy statement/prospectus is dated April 25, 2000 and is being first
mailed to Tuboscope stockholders and Varco shareholders on or about April 27,
2000.
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REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Tuboscope and Varco from documents that are not
included or delivered with this proxy statement/prospectus. This information is
available to you without charge upon your written or oral request. You can
obtain the documents incorporated by reference in this proxy
statement/prospectus by requesting them in writing or by telephone from the
appropriate company at the following addresses and telephone numbers:
Tuboscope Inc. Varco International, Inc.
2835 Holmes Road 743 North Eckhoff Street
Houston, Texas 77051 Orange, California 92868
Attention: James F. Maroney, III, Attention: Donald L. Stichler,
Secretary Secretary
Telephone: (713) 799-5100 Telephone: (714) 978-1900
To obtain timely delivery of requested documents prior to the meetings, you
must request them no later than May 22, 2000, which is five business days prior
to the date of the meetings.
See "Where You Can Find More Information" on page 112 of this proxy
statement/prospectus.
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[LOGO OF VARCO APPEARS HERE]
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 30, 2000
----------------
To the shareholders of Varco:
A special meeting of the shareholders of Varco International, Inc. will be
held on May 30, 2000, at The Doubletree Hotel, 100 The City Drive, Orange,
California 92868, starting at 9:00 a.m., local time, for the following
purposes:
1. To approve an Agreement and Plan of Merger, dated as of March 22, 2000,
between Varco and Tuboscope Inc. which provides that:
(a) Varco will be merged with and into Tuboscope, with Tuboscope
continuing as the surviving corporation under the name Varco
International, Inc.; and
(b) each issued and outstanding share of Varco common stock will be
converted into 0.7125 shares of Tuboscope common stock; and
2. To transact such other business as may properly come before the meeting
or any adjournments of the meeting.
The Varco board of directors has fixed the close of business on April 21,
2000 as the record date for determining the shareholders who are entitled to
notice of, and to vote at, the special meeting.
The approval of the merger agreement will require the affirmative vote of
the holders of a majority of the outstanding shares of Varco common stock as of
the record date.
All Varco shareholders are cordially invited to attend the Varco meeting in
person. However, to ensure your representation at the meeting, please take the
time to vote on the proposal submitted to you by completing and mailing the
enclosed proxy card in the enclosed postage-prepaid envelope. You may revoke
your proxy in the manner described in the accompanying proxy
statement/prospectus at any time before it is voted at the meeting. If you
sign, date and mail your proxy card without indicating how you wish to vote,
your proxy will be counted as a vote in favor of the merger agreement. If you
fail to return a properly executed proxy card and do not vote your shares in
person at the meeting, it will have the same effect as a vote against the
merger agreement.
By Order of the Board of Directors,
/s/ DONALD L. STICHLER
Donald L. Stichler
Secretary
Orange, California
April 25, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1
SUMMARY.................................................................... 1
The Companies............................................................. 1
The Meetings.............................................................. 2
Stockholders and Shareholders Entitled to Vote............................ 2
Purposes of the Meetings.................................................. 2
Share Ownership of Management and Directors............................... 3
The Merger................................................................ 3
Risk Factors.............................................................. 3
Recommendations........................................................... 3
Opinions of Financial Advisors............................................ 4
Interests of Certain Persons in the Merger................................ 4
Management Following the Merger........................................... 4
Conditions to the Merger.................................................. 4
Termination............................................................... 5
Dissenters' and Appraisal Rights.......................................... 5
Stock Option Agreements................................................... 5
Material United States Federal Income Tax Consequences.................... 5
Accounting Treatment...................................................... 6
Surrender of Certificates................................................. 6
Effects of the Merger on the Rights of Holders of Varco Common Stock...... 6
Stockholders Rights Agreement............................................. 6
Authorized Shares Amendment............................................... 6
Authorized Directors Amendment............................................ 6
Tuboscope's Amended and Restated 1996 Equity Participation Plan........... 7
Election of Tuboscope Directors........................................... 7
Ratification of Selection of Tuboscope's Independent Auditors............. 7
Selected Historical Financial Data--Tuboscope............................. 8
Selected Historical Financial Data--Varco................................. 9
Selected Unaudited Pro Forma Combined Financial Data...................... 10
Comparative Per Share Data................................................ 11
Comparative Market Price Information...................................... 12
RISK FACTORS............................................................... 13
Risks Relating to the Merger.............................................. 13
Risks Relating to Tuboscope and Varco..................................... 15
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS........................... 19
THE TUBOSCOPE ANNUAL MEETING............................................... 20
Date, Time and Place...................................................... 20
Matters to be Considered at the Tuboscope Annual Meeting.................. 20
The Tuboscope Board of Directors Recommendations.......................... 20
Vote Required............................................................. 20
Voting of Proxies......................................................... 21
Revocability of Proxies................................................... 21
Record Date; Stock Entitled to Vote; Quorum............................... 21
Solicitation of Proxies................................................... 22
THE VARCO SPECIAL MEETING.................................................. 23
Date, Time and Place...................................................... 23
</TABLE>
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Matters to be Considered at the Varco Special Meeting.................... 23
The Varco Board of Directors Recommendation.............................. 23
Vote Required............................................................ 23
Voting of Proxies........................................................ 23
Revocability of Proxies.................................................. 23
Record Date; Stock Entitled to Vote; Quorum.............................. 24
Solicitation of Proxies.................................................. 24
THE MERGER................................................................ 25
General.................................................................. 25
Background of the Merger................................................. 25
Reasons for the Merger................................................... 27
Opinions of Financial Advisors........................................... 29
Interests of Certain Persons in the Merger............................... 40
Determination of Exchange Ratio.......................................... 42
Regulatory Approval Required............................................. 42
Management and Operations Following the Merger........................... 43
Accounting Treatment..................................................... 43
Material United States Federal Income Tax Consequences................... 43
Dissenters' and Appraisal Rights......................................... 45
Listing of the Tuboscope Common Stock to be Issued in the Merger......... 46
Delisting and Deregistration of Varco Common Stock after the Merger...... 47
Federal Securities Law Consequences...................................... 47
THE MERGER AGREEMENT...................................................... 48
General.................................................................. 48
Conversion of Shares..................................................... 48
Procedure for the Exchange of Stock Certificates......................... 48
Representations and Warranties........................................... 49
Certain Covenants........................................................ 50
No Solicitation.......................................................... 52
Stock Options and Employee Benefits...................................... 53
Director and Officer Indemnification..................................... 53
Conditions to the Merger................................................. 54
Termination; Termination Fees and Expenses............................... 55
Amendment and Waiver..................................................... 58
THE STOCK OPTION AGREEMENTS............................................... 59
General.................................................................. 59
Exercise of the Option................................................... 59
Adjustments to Number and Type of Shares................................. 60
Limit on Total Profit.................................................... 60
Conditions to Delivery of Shares......................................... 60
Right of First Refusal................................................... 61
Right of Repurchase...................................................... 61
Registration Rights and Listing.......................................... 61
Assignability; Transfers................................................. 61
Effect of Stock Option Agreements........................................ 61
TUBOSCOPE................................................................. 62
Business................................................................. 62
General.................................................................. 62
Our Tubular Services Product Line........................................ 62
</TABLE>
ii
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<TABLE>
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Our Solids Control Products and Services Product Line................... 63
Our Coiled Tubing and Wireline Products Product Line.................... 64
Pipeline and Other Industrial Services.................................. 65
The History of Tuboscope................................................ 65
Security Ownership of Certain Beneficial Owners and Management.......... 65
VARCO.................................................................... 68
Business................................................................ 68
General................................................................. 68
Our Pipe Handling Systems............................................... 68
Our Rig Tools and Equipment............................................. 69
Our Instrumentation and Control Systems................................. 69
Our Pressure Control and Motion Compensation Systems.................... 69
Our Solids Control Equipment............................................ 70
The History of Varco.................................................... 70
Security Ownership of Certain Beneficial Owners and Management.......... 70
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.............. 72
Unaudited Pro Forma Condensed Combined Balance Sheet.................... 73
Unaudited Pro Forma Condensed Combined Statement of Operations December
31, 1999............................................................... 74
Unaudited Pro Forma Condensed Combined Statement of Operations December
31, 1998............................................................... 75
Unaudited Pro Forma Condensed Combined Statement of Operations December
31, 1997............................................................... 76
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.... 77
Unaudited Financial Projections......................................... 78
DESCRIPTION OF TUBOSCOPE CAPITAL STOCK................................... 79
General................................................................. 79
Preferred Stock......................................................... 79
Tuboscope Common Stock.................................................. 79
Delaware General Corporation Law........................................ 79
Transfer Agent.......................................................... 80
COMPARISON OF STOCKHOLDER RIGHTS......................................... 81
Capital Stock........................................................... 81
Number, Election and Removal of Directors............................... 81
Amendments to Charter and Bylaws........................................ 82
Special Meetings of Stockholders........................................ 83
Action Without a Meeting................................................ 83
Inspection of Stockholder List.......................................... 84
Limitation of Directors' Liability...................................... 84
Indemnification of Directors and Officers............................... 85
Dissenters' and Appraisal Rights........................................ 86
Rights Plan............................................................. 87
Interested Stockholder Transactions..................................... 88
AMENDMENT TO TUBOSCOPE'S CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF TUBOSCOPE COMMON STOCK................... 89
Reasons for the Authorized Shares Amendment............................. 89
Effects of the Authorized Shares Amendment.............................. 89
Vote Required for the Authorized Shares Amendment....................... 90
AMENDMENT TO TUBOSCOPE'S CERTIFICATE OF INCORPORATION TO INCREASE THE
MAXIMUM NUMBER OF AUTHORIZED DIRECTORS.................................. 91
Reasons for the Authorized Directors Amendment.......................... 91
Vote Required for the Authorized Directors Amendment.................... 91
</TABLE>
iii
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TUBOSCOPE'S AMENDED AND RESTATED 1996 EQUITY PARTICIPATION PLAN.......... 92
Reasons for Adopting Tuboscope's Amended and Restated 1996 Equity
Participation Plan..................................................... 92
Description of the Plan................................................. 93
Certain Federal Income Tax Consequences of the Proposed Amended and
Restated 1996 Equity Participation Plan................................ 96
Vote Required for the Proposed Plan and Recommendation.................. 98
ELECTION OF TUBOSCOPE DIRECTORS.......................................... 99
General................................................................. 99
Tuboscope Directors..................................................... 99
Meetings and Committees................................................. 100
Board Compensation and Benefits......................................... 101
Vote and Recommendation................................................. 101
Executive Officers...................................................... 101
Executive Compensation.................................................. 102
Management Agreements................................................... 105
Compensation Committee Report on Executive Compensation................. 105
Compensation Committee Interlocks and Insider Participation............. 109
Compliance With Section 16(a) of the Securities Exchange Act of 1934.... 109
Stockholder Return Performance Graph.................................... 110
Certain Relationships and Related Transactions.......................... 110
RATIFICATION OF SELECTION OF TUBOSCOPE'S INDEPENDENT AUDITORS............ 111
Reasons for the Selection of Tuboscope's Independent Auditors........... 111
Vote Required for Ratification of the Selection of Tuboscope's
Independent Auditors................................................... 111
STOCKHOLDER PROPOSALS.................................................... 111
LEGAL MATTERS............................................................ 112
EXPERTS.................................................................. 112
WHERE YOU CAN FIND MORE INFORMATION...................................... 112
Annex I--Agreement and Plan of Merger
Annex II-- Opinion of J.P. Morgan Securities Inc.
Annex III--Opinion of Credit Suisse First Boston Corporation
Annex IV--Chapter 13 of the California Corporations Code
Annex V--Tuboscope Stock Option Agreement
Annex VI--Varco Stock Option Agreement
Annex VII--Amended and Restated 1996 Equity Participation Plan
</TABLE>
iv
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why have Tuboscope and Varco proposed that the two companies merge?
A: Tuboscope and Varco are proposing to merge because we believe that the
combination will create a stronger, more competitive company capable of
achieving greater financial strength, operational efficiencies, earnings
power and growth potential than either Tuboscope or Varco would have on its
own. We believe the merger will allow the combined company to provide a
broader offering of oilfield equipment and services on both land and
offshore rigs.
Q: What will happen to my common stock in the merger?
A: In the merger, each share of your Varco common stock will be converted into
0.7125 shares of Tuboscope common stock. Each share of Tuboscope common
stock will be unaffected by the merger and remain outstanding. At that
ratio, Tuboscope stockholders and Varco shareholders will each own
approximately one-half of the combined company. After the merger, Varco will
cease to exist as a separate entity and, accordingly, no shares of Varco
common stock will exist.
Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly as possible. We
expect to complete the merger by May 31, 2000. If necessary or desirable,
either party may postpone the merger until December 31, 2000, and Tuboscope
and Varco may agree to an even later date.
Q: What do I need to do now?
A: We urge you to read this proxy statement/prospectus carefully, including its
annexes, and to consider how the merger would affect you as a stockholder.
You also may want to review the documents referenced under "Where You Can
Find More Information" on page 112.
Q: How do I vote?
A: Please indicate on your proxy card how you want to vote, and sign and mail
your proxy card in the enclosed postage-prepaid return envelope as soon as
possible so that your shares may be represented at your meeting. If you sign
and send in your proxy card and do not indicate how you want to vote, your
proxy will be counted as a vote in favor of each proposal applicable to you.
If you fail to return your proxy card and do not vote in person at your
meeting, the effect will be the same as a vote against the merger proposals
applicable to you.
Q: If my shares are held in a brokerage account, how will my shares be voted?
A: Your broker will not vote your shares for you unless you provide your broker
with written instructions on how to vote, except in the case of the
Tuboscope stockholders' votes on the election of directors and the
ratification of the selection of independent auditors. As a result, it is
important that you follow the directions provided by your broker regarding
how to instruct your broker to vote your shares.
Q: May I change my vote after I have mailed a signed proxy card?
A: Yes. You may change your vote in one of the following three ways at any time
before your proxy is voted at your meeting. First, you may send a written
notice stating that you would like to revoke your proxy. Second, you may
complete a new, later-dated proxy card. Third, you can attend the
appropriate meeting and vote in person. If you choose either of the first
two methods, you must submit your notice of revocation or your new proxy to
the Secretary of Varco if you are a Varco shareholder or to the Secretary of
Tuboscope if you are a Tuboscope stockholder, at the applicable address
listed below. If you have instructed a broker to vote your shares, you must
follow the directions received from your broker to change your vote or to
vote in person at your meeting.
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Q: Should I send my certificates now?
A: No. If you are a Varco shareholder, after the merger is completed, we will
send you written instructions for exchanging your stock certificates.
Tuboscope stockholders will not exchange their stock certificates.
Q: Whom do I call with questions?
A: Tuboscope stockholders who have questions about the merger should contact:
Joseph C. Winkler
Executive Vice President and
Chief Financial Officer
Tuboscope Inc.
2835 Holmes Road
Houston, Texas 77051
(713) 799-5100
Varco shareholders who have questions about the merger should contact:
Wallace K. Chan
Vice President-Finance
and Chief Financial Officer
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
(714) 978-1900
or
The Altman Group, Inc.
60 East 42nd Street
New York, New York 10165
(800) 206-0007
2
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SUMMARY
This summary may not contain all of the information that is important to
you. You should carefully read this entire document and the other documents we
refer to for a more complete understanding of the merger. In addition, we
incorporate by reference important business and financial information about
Tuboscope and Varco into this proxy statement/prospectus. You may obtain the
information incorporated by reference without charge by following the
instructions in the section "Where You Can Find More Information" on page 112.
We have included page references to direct you to a more complete description
of the topics in this summary.
The Companies
Tuboscope (Page 62)
Tuboscope is a leading supplier of technical services and highly-engineered
products to the oil and gas drilling, completion, remediation, production and
transmission industries worldwide.
Tuboscope has four main product lines:
. Tubular Services, which consists of:
(a) providing internal coating products and services for tubular goods,
such as drill pipe, tubing, line pipe and casing;
(b) inspecting and providing quality assurance services for tubular
goods;
(c) manufacturing fiberglass tubular goods; and
(d) selling and leasing proprietary equipment used to inspect tubular
products at steel mills;
. Solids Control Products and Services, which consists of selling and
renting technical equipment used in, and providing services related to,
separating drill cuttings from fluids used in oil and gas drilling
processes;
. Coiled Tubing and Wireline Products, which consists of selling highly-
engineered coiled tubing equipment, related pressure control equipment,
pressure pumping equipment, wireline units and related tools to
companies engaged in oil and gas well drilling, completion and
remediation services; and
. Pipeline and Other Industrial Services, which consists of:
(a) providing technical inspection services and quality assurance for
in-service pipelines used to transport oil and gas; and
(b) a wide variety of technical industrial inspection, monitoring and
quality assurance services related to constructing, operating and
maintaining major projects in energy-related industries.
For the year ended December 31, 1999, Tuboscope had total revenues of
approximately $385.5 million and a net loss of $7.2 million, or $0.16 per share
(diluted). For the quarter ended March 31, 2000, Tuboscope had total revenues
of $108.7 million and net income of $2.8 million, or $0.06 per share (diluted).
The mailing address of Tuboscope's principal executive offices is 2835
Holmes Road, Houston, Texas 77051, and the telephone number is (713) 799-5100.
Varco (Page 68)
Varco is engaged in the design, manufacture, sale and rental of drilling
tools, equipment and integrated systems and rig instrumentation used for oil
and gas drilling worldwide.
Varco has five divisions:
. the Varco Systems Division, which manufactures, sells and rents drilling
systems;
. the Varco BJ Division, which manufactures and sells oil tools;
1
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. the M/D Totco Division, which manufactures, sells and rents drilling rig
instrumentation and control products;
. the Shaffer Division, which manufactures and sells pressure control and
motion compensation equipment; and
. the Rigtech Division, which sells and rents solids control equipment and
fluid handling systems.
For the year ended December 31, 1999, Varco had total revenues of $592.8
million and net income of $37.0 million, or $0.56 per share (diluted). For the
quarter ended March 31, 2000, Varco had total revenues of $96.3 million and net
income of $6.0 million, or $0.09 per share (diluted).
The mailing address of Varco's principal executive offices is 743 North
Eckhoff Street, Orange, California 92868, and the telephone number is (714)
978-1900.
The Meetings
(Pages 20 and 23)
The Tuboscope annual meeting will be held on May 30, 2000, at The Doubletree
Hotel, 2001 Post Oak Boulevard, Houston, Texas, starting at 10:00 a.m., local
time.
The Varco special meeting will be held on May 30, 2000, at The Doubletree
Hotel, 100 The City Drive, Orange, California 92868, starting at 9:00 a.m.,
local time.
Stockholders and Shareholders
Entitled to Vote
(Pages 21 and 24)
Holders of record of shares of Tuboscope common stock at the close of
business on the record date are entitled to notice of, and to vote at, the
Tuboscope annual meeting. On the record date, there were 44,797,628 shares of
Tuboscope common stock outstanding, each of which will be entitled to one vote
on each matter to be acted upon at the Tuboscope annual meeting.
Holders of record of shares of Varco common stock at the close of business
on the record date are entitled to notice of, and to vote at, the Varco special
meeting. On the record date, there were 65,562,363 shares of Varco common stock
outstanding, each of which will be entitled to one vote on each matter to be
acted upon at the Varco special meeting.
Purposes of the Meetings
Tuboscope Annual Meeting (Page 20)
At the Tuboscope annual meeting, holders of Tuboscope common stock will be
asked to consider and vote upon proposals to approve:
. the merger agreement;
. an amendment to Tuboscope's certificate of incorporation, increasing the
number of shares of Tuboscope common stock authorized for issuance from
60,000,000 to 200,000,000;
. an amendment to Tuboscope's certificate of incorporation, increasing the
maximum number of authorized directors of Tuboscope from ten to fifteen;
. Tuboscope's Amended and Restated 1996 Equity Participation Plan, which
amends Tuboscope's Amended 1996 Equity Participation Plan by, among
other things, increasing the number of shares of Tuboscope common stock
reserved for issuance under the plan by 4,200,000, from 3,450,000 to
7,650,000, and authorizing the payment of "performance-based"
compensation that would be fully deductible for federal income tax
purposes;
. the election of six directors to serve on the Tuboscope board of
directors until the next annual meeting or until the election and
qualification of their respective successors;
. the ratification of the selection of Ernst & Young LLP as Tuboscope's
independent auditors for 2000; and
. any other matters that are properly brought before the Tuboscope annual
meeting or any adjournment or postponement of the meeting.
2
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The completion of the merger is conditioned upon Tuboscope's stockholders'
approval of the merger agreement and the amendment to Tuboscope's certificate
of incorporation increasing the number of authorized shares of Tuboscope common
stock, but is not conditioned upon the approval of any other proposal. In
addition, both amendments to Tuboscope's certificate of incorporation and
Tuboscope's Amended and Restated 1996 Equity Participation Plan will only
become effective if the merger agreement is approved. The election of the
six nominees and the ratification of the selection of Tuboscope's independent
auditors will be effective regardless of the outcome of the other matters to be
voted upon at the Tuboscope annual meeting.
Varco Special Meeting (Page 23)
At the Varco special meeting, holders of Varco common stock will be asked to
consider and vote upon:
. the merger agreement; and
. any other matters that are properly brought before the Varco special
meeting or any adjournment or postponement of the meeting.
Share Ownership of Management and Directors
On the record date, directors and executive officers of Tuboscope and their
affiliates held and are entitled to vote approximately 28.3% of the Tuboscope
common stock outstanding on that date. The vote required for approval of the
Tuboscope merger proposals is a majority of the outstanding shares of Tuboscope
common stock.
On the record date, directors and executive officers of Varco and their
affiliates held and are entitled to vote approximately 3.6% of the Varco common
stock outstanding on that date. The vote required for approval of the Varco
merger proposal is a majority of the outstanding shares of Varco common stock.
The Merger
(Page 25)
Upon completion of the merger, Varco will be merged with and into Tuboscope,
which will survive the merger. Each issued and outstanding share of Varco
common stock will be converted into 0.7125, referred to as the exchange ratio,
shares of Tuboscope common stock. The name of the combined company will be
Varco International, Inc. Each outstanding share of Tuboscope common stock will
remain outstanding and be unaffected by the merger.
Based upon the number of outstanding shares of Tuboscope common stock and
Varco common stock as of the record date, the holders of Varco common stock
immediately prior to the merger will own approximately 51% of the outstanding
shares of Tuboscope common stock immediately following the merger. This
percentage assumes no exercise or conversion of outstanding stock options or
warrants of Tuboscope or Varco.
Risk Factors
(Page 13)
In evaluating the merger and the proposals set forth in this proxy
statement/prospectus, you should carefully consider the "Risk Factors"
beginning on page 13.
Recommendations
The boards of directors of Tuboscope and Varco believe that the merger
represents a strategic fit between two leading companies with similar business
strategies, as well as complementary operations. Both boards of directors
believe that the combined company will have greater financial strength,
operating efficiencies, earning power and growth potential than either
Tuboscope or Varco would have on its own. See "The Merger-- Reasons for the
Merger" on page 27.
The Tuboscope board of directors has unanimously approved the merger
agreement, both amendments to Tuboscope's certificate of incorporation,
Tuboscope's Amended and Restated 1996 Equity Participation Plan, the nomination
of all six of the nominees and the selection of Tuboscope's independent
auditors, and recommends that holders of Tuboscope common stock vote FOR
approval of all proposals being presented.
3
<PAGE>
The Varco board of directors has unanimously approved the merger agreement
and recommends that holders of Varco common stock vote FOR the approval of the
merger agreement.
Opinions of Financial Advisors
Varco (Page 29)
On March 22, 2000, J.P. Morgan Securities, Inc. delivered its written
opinion to the Varco board of directors to the effect that, as of that date,
the exchange ratio was fair to the Varco shareholders from a financial point of
view.
The full text of J.P. Morgan's opinion, which sets forth the assumptions
made, procedures followed, matters considered and qualifications and
limitations on the review undertaken, is attached as Annex II and is to be
considered a part of this proxy statement/prospectus. Varco shareholders are
urged to read carefully J.P. Morgan's opinion in its entirety.
Tuboscope (Page 34)
Tuboscope's financial advisor, Credit Suisse First Boston Corporation, has
delivered a written opinion to the Tuboscope board of directors to the effect
that, as of the date of the opinion and based on and subject to the matters
described in the opinion, the exchange ratio provided for in the merger was
fair, from a financial point of view, to Tuboscope. The full text of Credit
Suisse First Boston's written opinion, dated March 22, 2000, is attached to
this document as Annex III. We encourage you to read this opinion carefully in
its entirety for a description of the procedures followed, assumptions made,
matters considered and limitations on the review undertaken. Credit Suisse
First Boston's opinion is directed to the Tuboscope board of directors and does
not constitute a recommendation to any stockholder as to any matters relating
to the merger.
Interests of Certain Persons in the Merger
(Page 40)
Directors and officers of Tuboscope and Varco have interests in the merger
as directors or officers that are different from, or in addition to, those of
other stockholders or shareholders. Pursuant to the merger agreement, the
combined company is obligated to indemnify each present and former director and
officer of Varco against certain liabilities and expenses incurred in
connection with claims relating to certain matters prior to the closing of the
merger. See also "The Merger Agreement--Director and Officer Indemnification"
on page 53. All of the options and restricted stock units held by certain
officers of Tuboscope will become fully vested as a result of the merger. Also,
the merger will trigger certain rights under agreements between Tuboscope and
some of its officers and between Varco and its executive officers.
Management Following the Merger
(Page 43)
The board of directors of the combined company following the merger will
consist of ten persons, five of whom are currently directors of Tuboscope and
are nominees for election at the Tuboscope annual meeting, and five of whom are
currently directors of Varco.
Upon the closing of the merger, George Boyadjieff, who is currently Chairman
of the Board and Chief Executive Officer of Varco, will serve as Chairman of
the Board and Chief Executive Officer of the combined company; John F.
Lauletta, who is currently President and Chief Executive Officer of Tuboscope,
will serve as President and Chief Operating Officer of the combined company;
and Joseph C. Winkler, who is currently Executive Vice President and Chief
Financial Officer of Tuboscope, will serve as Executive Vice President and
Chief Financial Officer of the combined company.
Conditions to the Merger
(Page 54)
The obligations of Tuboscope and Varco to complete the merger are subject to
the satisfaction of certain conditions, including:
. obtaining the requisite approvals of Tuboscope stockholders and Varco
shareholders;
. obtaining the requisite regulatory approvals;
4
<PAGE>
. the continuing accuracy at the time of the merger of the representations
and warranties made by Tuboscope and Varco in the merger agreement;
. the receipt of legal opinions with respect to tax matters;
. the receipt of a letter from Tuboscope's auditors with respect to the
appropriateness of pooling-of-interests accounting for the merger; and
. Varco shareholders shall not have made effective demands for appraisal
with respect to more than specified percentages of the outstanding
shares of Varco common stock.
Each party may waive the closing conditions referred to above. See also "The
Merger--Regulatory Approval Required" on page 42.
Termination
(Page 55)
The merger agreement may be terminated as follows:
. by mutual written consent of Tuboscope and Varco;
. at the option of either Tuboscope or Varco if the merger is not
completed by September 30, 2000, although either Tuboscope or Varco may
unilaterally extend this date to December 31, 2000; and
. upon the occurrence of certain other events.
Under some circumstances, either Tuboscope or Varco may be required to
reimburse the other for expenses of up to $5 million. Under certain other
circumstances, either Tuboscope or Varco may be required to pay the other a
termination fee of $30 million.
Dissenters' and Appraisal Rights
(Page 45)
Tuboscope stockholders will not be entitled to exercise dissenters' or
appraisal rights under Delaware law as a result of the merger.
If holders of 5% or more of the outstanding shares of Varco common stock
entitled to vote at the Varco special meeting vote against the merger agreement
and comply with certain procedures and requirements, Varco shareholders who
take these actions will be entitled to exercise dissenters' rights under the
provisions of Chapter 13 of the California Corporations Code. In accordance
with these provisions, dissenting Varco shareholders will have the right to be
paid in cash the fair market value (excluding any appreciation or depreciation
as a consequence of the merger) of their shares of Varco common stock as agreed
upon by Varco and the shareholder or, if they cannot agree, as determined by
appraisal, by fully complying with the procedures set forth in the California
Corporations Code. The failure of a dissenting Varco shareholder to comply
timely and properly with these procedures will result in the termination or
waiver of the appraisal rights.
Stock Option Agreements
(Page 59)
In connection with the merger agreement, Tuboscope and Varco entered into a
stock option agreement dated as of March 22, 2000, pursuant to which Tuboscope
granted Varco the right, under certain circumstances, to purchase up to
8,908,653 shares of Tuboscope common stock (representing approximately 19.9% of
the issued and outstanding shares of Tuboscope common stock) at a price of
$17.00 per share. Tuboscope and Varco also entered into a stock option
agreement dated as of March 22, 2000, pursuant to which Varco granted Tuboscope
the right, under certain circumstances, to purchase up to 13,023,985 shares of
Varco common stock (representing approximately 19.9% of the issued and
outstanding shares of Varco common stock) at a price of $14.56 per share. Each
option agreement limits to $35 million the total amount that Tuboscope or Varco
may receive from (1) the stock option and (2) any termination fee payable by
the other party if the merger agreement is terminated.
Material United States FederalIncome Tax Consequences
(Page 43)
The merger is intended to qualify as a reorganization under the Internal
Revenue Code, and
5
<PAGE>
it is a condition to the merger that Tuboscope and Varco receive tax opinions
from Latham & Watkins and Pircher, Nichols & Meeks, respectively, dated as of
the closing date, each to the effect that the merger will so qualify. Assuming
the merger qualifies as a reorganization, no gain or loss will be recognized by
Tuboscope, Varco, or Varco shareholders as a result of the merger, except with
respect to the receipt of cash in lieu of fractional shares of Tuboscope common
stock by Varco common shareholders. For a further discussion of the United
States federal income tax consequences of the merger, see also, "The Merger
Agreement--Conditions to the Merger" on page 54.
Accounting Treatment
(Page 43)
The merger will be accounted for as a pooling-of-interests for accounting
purposes in accordance with generally accepted accounting principles.
Surrender of Certificates
(Page 48)
Following the merger, the combined company will mail a letter of transmittal
to all holders of record of Varco common stock, which will contain instructions
for surrendering the holders' stock certificates in exchange for certificates
representing shares of Tuboscope common stock. Certificates should not be
surrendered until the letter of transmittal is received.
Effects of the Merger on the Rights of Holders of Varco Common Stock
(Page 81)
Upon completion of the merger, holders of Varco common stock will become
stockholders of Tuboscope as the surviving corporation. The internal affairs of
Tuboscope are governed by the Delaware General Corporation Law and Tuboscope's
certificate of incorporation and bylaws, which are different than the law
governing the internal affairs of Varco and the articles of incorporation and
bylaws of Varco.
Stockholders Rights Agreement
Tuboscope and Varco expect that the Tuboscope board of directors will adopt
a stockholders rights agreement for the combined company effective as of the
effective time of the merger.
If adopted, the rights to be issued under the stockholders rights agreement
will have certain anti-takeover effects. The rights will cause substantial
dilution to a person or group of persons that attempts to acquire the combined
company on terms not approved by the board of directors of the combined
company. The rights should not interfere, however, with any merger, other
business combination or acquisition of shares pre-approved by the board of
directors of the combined company.
Authorized Shares Amendment
(Page 89)
The first proposed amendment to Tuboscope's certificate of incorporation
would increase the number of authorized shares of Tuboscope common stock from
60,000,000 to 200,000,000 shares. The amendment is needed in order for
Tuboscope to complete the merger and issue shares of Tuboscope common stock to
holders of Varco common stock as there are currently not enough authorized
shares of Tuboscope common stock to issue shares to the Varco shareholders in
the merger. Accordingly, the completion of the merger is conditioned on the
approval of this amendment to Tuboscope's certificate of incorporation. As a
result of the amendment, Tuboscope will have approximately 108,000,000
authorized shares of common stock available for issuance after the merger. This
amendment to Tuboscope's certificate of incorporation will only become
effective if the merger agreement is approved.
Varco shareholders will not be asked to vote on this amendment to
Tuboscope's certificate of incorporation at the Varco special meeting.
Authorized Directors Amendment
(Page 91)
The second proposed amendment to Tuboscope's certificate of incorporation
would increase the maximum number of authorized directors of Tuboscope from ten
to fifteen. Upon completion of the merger, Tuboscope would have ten directors.
To provide for flexibility to expand the size of the combined company's board
of directors
6
<PAGE>
after the merger, the managements of Tuboscope and Varco desire to increase the
maximum number of authorized directors. Approval of this amendment is not
necessary to complete the merger. However, this amendment will become effective
only if the merger agreement and the amendment to Tuboscope's certificate of
incorporation increasing its authorized shares are approved. This amendment
will require the approval of the holders of two-thirds of the outstanding
shares of Tuboscope common stock.
Varco shareholders will not be asked to vote on this amendment to
Tuboscope's certificate of incorporation at the Varco special meeting.
Tuboscope's Amended and Restated 1996 Equity Participation Plan
(Page 92)
At the Tuboscope annual meeting, the Tuboscope stockholders will be asked to
approve Tuboscope's Amended and Restated 1996 Equity Participation Plan, which
amends Tuboscope's Amended 1996 Equity Participation Plan by, among other
things, increasing the total number of shares of Tuboscope common stock
reserved for issuance under the plan by 4,200,000, from 3,450,000 to 7,650,000.
As of the record date, 463,491 shares of Tuboscope common stock were available
under Tuboscope's Amended 1996 Equity Participation Plan. The amended plan will
ensure that an adequate number of shares of common stock will be available for
future grants to provide incentives to employees of the combined company after
the merger. Approval of the amended plan is not necessary to complete the
merger. However, Tuboscope's Amended and Restated 1996 Equity Participation
Plan will only become effective if the merger proposals are approved.
Varco shareholders will not be asked to vote on Tuboscope's Amended and
Restated 1996 Equity Participation Plan at the Varco special meeting.
Election of Tuboscope Directors
(Page 99)
Tuboscope stockholders will be asked to elect six directors at the Tuboscope
annual meeting. The following individuals, each of whom is currently a director
of Tuboscope, have been nominated for election to the Tuboscope board of
directors: L.E. Simmons, John F. Lauletta, Jerome R. Baier, Eric L. Mattson,
Douglas E. Swanson and Jeffery A. Smisek.
If the proposals related to the merger are approved and the merger is
completed, the following will occur:
. the authorized number of directors will be increased to ten;
. all of the Tuboscope directors except Mr. Baier will become directors of
the combined company; and
. George Boyadjieff, George S. Dotson, Andre R. Horn, Eugene R. White and
James D. Woods, each of whom is currently a member of the Varco board of
directors, will become directors of the combined company.
Varco shareholders will not be asked to vote on the election of the
Tuboscope directors at the Varco special meeting.
Ratification of Selection of Tuboscope's Independent Auditors
(Page 111)
At the Tuboscope annual meeting, the Tuboscope stockholders will be asked to
ratify the selection of Ernst & Young LLP as Tuboscope's independent auditors
for the fiscal year ending December 31, 2000. Ernst & Young LLP has been
Tuboscope's independent auditors since 1988, and the Tuboscope board of
directors desires to continue to engage its services. Accordingly, the
Tuboscope board of directors, upon recommendation of its audit committee, has
reappointed Ernst & Young LLP to audit Tuboscope's and its subsidiaries'
financial statements for fiscal 2000 and report on these financial statements.
If Tuboscope stockholders do not ratify the selection, the Tuboscope board of
directors and its audit committee will reconsider the selection. Ratification
of the selection is not a condition to the merger.
Varco shareholders will not be asked to vote on the ratification of the
selection of Tuboscope's independent auditors.
7
<PAGE>
Selected Historical Financial Data--Tuboscope
The following selected historical financial data of Tuboscope for the years
ended December 31, 1995 through 1999 is derived from audited historical
financial statements of Tuboscope incorporated by reference in this proxy
statement/prospectus. The information in this section should be read along with
Tuboscope's consolidated financial statements, accompanying notes and other
financial information incorporated by reference in this proxy
statement/prospectus. See "Where You Can Find More Information" on page 112.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1995 1996(1) 1997 1998 1999(2)
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $190,015 $341,431 $525,231 $567,701 $385,474
Operating profit
(loss)................. 27,460 (21,281) 100,925 87,081 11,035
Net income (loss)....... 8,819 (49,599) 53,104 41,945 (7,156)
Earnings (Loss) Per
Common Share:
Basic................. 0.44 (1.35) 1.22 0.94 (0.16)
Diluted............... 0.44 (1.35) 1.14 0.89 (0.16)
Balance Sheet Data:
Working capital......... 44,623 74,393 81,294 114,099 86,822
Total assets............ 306,679 505,165 686,167 712,172 676,039
Total debt.............. 111,617 184,743 218,377 250,744 233,335
Common stockholders'
equity................. 121,441 218,902 300,033 339,074 333,497
Other Selected Financial
Data:
EBITDA(3)............... 42,570 72,633 125,515 116,084 52,236
Adjusted earnings before
goodwill
amortization(4)........ 10,129 28,010 58,385 48,592 5,185
Adjusted dilutive
earnings per share
before goodwill
amortization(4)........ 0.55 0.76 1.24 1.03 0.12
Net cash from operating
activities............. 21,581 10,563 46,868 59,435 49,674
Net cash used for
investing activities... (1,084) (60,457) (73,587) (74,651) (29,744)
Net cash from (used for)
financing activities... (19,875) 50,465 28,969 11,616 (23,116)
</TABLE>
- --------
(1) The 1996 net loss includes non-recurring charges of $68,610,000 (net of
tax) and an extraordinary charge of $6,373,000 (net of tax). Excluding
these charges, the 1996 net income would have been $25,384,000 or $0.69 per
share.
(2) The 1999 net loss includes non-recurring charges of $4,878,000 (net of
tax). Excluding these charges, the 1999 net loss would have been $2,278,000
or $(0.05) per share.
(3) "EBITDA" means earnings (loss) before interest, taxes, depreciation,
amortization, non-recurring transaction costs and write-offs and
extraordinary items. EBITDA should not be considered as an alternative to
net income or any other generally accepted accounting principles measure of
performance as an indicator of Tuboscope's operating performance or as a
measure of liquidity. Tuboscope believes that EBITDA is a widely accepted
financial indicator of a company's ability to service debt.
(4) Adjusted earnings before goodwill amortization excludes non-recurring
transaction costs and write-offs and extraordinary items. Adjusted earnings
before goodwill amortization or the related per share amount should not be
considered to be an alternative to net income or earnings per share or any
other generally accepted accounting principles measure of performance as an
indicator of Tuboscope's operating performance or as a measure of
liquidity. Tuboscope believes that adjusted earnings before goodwill
amortization and the related per share amounts are meaningful measures of
financial performance.
8
<PAGE>
Selected Historical Financial Data--Varco
The following selected historical financial data of Varco for the years
ended December 31, 1995 through 1999 is derived from audited historical
financial statements of Varco incorporated by reference in this proxy
statement/prospectus. The information in this section should be read along with
Varco's consolidated financial statements, accompanying notes and other
financial information incorporated by reference in this proxy
statement/prospectus. See "Where You Can Find More Information" on page 112.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $273,731 $368,422 $545,789 $740,979 $592,752
Operating profit........ 26,424 42,036 80,379 92,980 58,691
Net income.............. 14,439 24,542 49,875 60,338 36,965
Earnings Per Common
Share:
Basic................. 0.23 0.39 0.78 0.94 0.57
Diluted............... 0.23 0.38 0.76 0.92 0.56
Balance Sheet Data:
Working capital......... 89,187 120,246 137,477 176,299 216,853
Total assets............ 246,571 316,021 471,129 546,920 459,685
Total debt.............. 39,539 32,715 19,848 9,948 --
Common shareholders'
equity................. 151,179 195,508 253,199 319,367 360,748
Other Selected Financial
Data:
EBITDA(1)............... 38,711 55,285 97,350 117,501 81,740
Adjusted earnings before
goodwill
amortization(2)........ 15,566 25,662 50,988 63,857 38,130
Adjusted dilutive
earnings per share
before goodwill
amortization(2)........ 0.25 0.40 0.78 0.97 0.58
Net cash from (used in)
operating activities... 15,456 (1,118) 77,310 31,219 62,846
Net cash from (used in)
investing activities... 20,532 (10,364) (33,841) (34,963) (12,603)
Net cash from (used in)
financing activities... (38,019) 10,514 (9,436) (6,945) (6,775)
</TABLE>
- --------
(1) "EBITDA" means earnings before interest, taxes, depreciation, amortization
and the non-severance portion of the 1998 non-recurring special charge.
EBITDA is included because management understands that such information is
considered by certain lendors and investors to be an additional basis for
evaluating Varco's ability to pay interest, repay debt and make capital
expenditures. EBITDA should not be considered an alternative to income from
operations or to cash flows from operating activities (as determined with
generally accepted accounting principles) or as a measure of profitability
or liquidity. The EBITDA measures presented herein may not be comparable to
similarly titled measures of other companies.
(2) Adjusted earnings before goodwill amortization excludes the non-severance
portion of the non-recurring 1998 special charge. Adjusted earnings before
goodwill amortization or the related per share amount should not be
considered to be an alternative to net income or earnings per share or any
other generally accepted accounting principles measure of performance as an
indicator of Varco's operating performance or as a measure of liquidity.
Varco believes that adjusted earnings before goodwill amortization and the
related per share amounts are meaningful measures of financial performance.
9
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data
The following table sets forth certain unaudited pro forma combined
financial information for the combined company for the years ended December 31,
1997 through 1999 for the "Pro Forma Condensed Combined Statements of
Operations" and year ended December 31, 1999 for the "Pro Forma Condensed
Combined Balance Sheet" giving effect to the merger of Tuboscope and Varco
accounted for as a pooling-of-interests. The pro forma financial data was
derived from the unaudited pro forma condensed combined financial statements
and related notes included elsewhere in this proxy statement/prospectus.
The unaudited pro forma combined financial information is presented to show
what Tuboscope's and Varco's businesses might have looked like had they been
combined during the periods shown. The information below may not be indicative
of the results of operations or financial position of Tuboscope or Varco that
would actually have occurred if the merger had been completed or that will be
obtained by the combined company after the merger. Tuboscope stockholders and
Varco shareholders should read the information in this section along with
Tuboscope's and Varco's historical financial statements, accompanying notes and
other financial information incorporated by reference in this proxy
statement/prospectus. See "Where You Can Find More Information" on page 112.
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Pro Forma Combined Statements of
Operations:
Revenues............................... $1,070,318 $1,307,681 $ 975,848
Net income............................. 102,979 102,283 29,809
Basic earnings per share............... 1.16 1.13 0.33
Dilutive earnings per share............ 1.10 1.09 0.32
Pro Forma Combined Balance Sheet Data:
Working capital........................ $ 279,975
Total assets........................... 1,112,024
Total debt(1).......................... 233,335
Common stockholders' equity............ 672,745
Pro Forma Combined Other Data:
EBITDA(2).............................. $ 222,865 $ 233,585 $ 133,976
Adjusted earnings before goodwill
amortization(3)....................... 109,373 112,449 43,315
Adjusted dilutive earnings per share
before goodwill amortization(3)....... 1.17 1.20 0.47
Net cash from operating activities..... 124,178 90,654 112,520
Net cash used for investing
activities............................ (107,428) (109,614) (42,347)
Net cash from (used for) financing
activities............................ 19,533 4,671 (29,891)
</TABLE>
- --------
(1) The Unaudited Pro Forma Condensed Combined Balance Sheet reflects
consolidated cash holdings of $58.1 million. Management intends to pay off
outstanding debt with excess cash that would have approximated $50.0
million at December 31, 1999. If the $50.0 million of excess cash had been
reclassified against outstanding debt at December 31, 1999, the combined
debt to equity ratio would have been 27.3% and outstanding debt would have
been reduced to $183.3 million.
(2) "EBITDA" means earnings (loss) before interest, taxes, depreciation,
amortization, certain non-recurring charges and extraordinary items. EBITDA
should not be considered as an alternative to net income or any other
generally accepted accounting principles measure of performance as an
indicator of the combined company's operating performance or as a measure
of liquidity. Tuboscope and Varco believe that EBITDA is a widely accepted
financial indicator of a company's ability to service debt.
10
<PAGE>
(3) Adjusted earnings before goodwill amortization excludes certain non-
recurring charges and extraordinary items. Adjusted earnings before
goodwill amortization or the related per share amount should not be
considered to be an alternative to net income or earnings per share or any
other generally accepted accounting principles measure of performance as an
indicator of the combined company's operating performance or as a measure
of liquidity. Tuboscope and Varco believe that adjusted earnings before
goodwill amortization and the related per share amounts are meaningful
measures of financial performance.
Comparative Per Share Data
The following tables set forth historical per share data of Tuboscope and
Varco and unaudited combined per share data on a pro forma basis assuming that
the merger had been accounted for as a pooling-of-interests. The pro forma
combined financial data is not necessarily indicative of the operating results
or financial position that would have been achieved if the merger were
completed as of the beginning of the periods presented, nor is it necessarily
indicative of the future operating results or financial position of the
combined company. Tuboscope has never paid any cash dividends on its common
stock, and Varco has not paid a cash dividend on its common stock since 1982.
Tuboscope stockholders and Varco shareholders should read the information in
this section along with Tuboscope's and Varco's historical financial
statements, accompanying notes and other financial information incorporated by
reference in this proxy statement/prospectus. See "Where You Can Find More
Information" on page 112.
<TABLE>
<CAPTION>
Per Share Data For Fiscal Years Ended
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Historical--Tuboscope:
Net earnings (loss)--basic............. $1.22 $0.94 $(0.16)
Net earnings (loss)--diluted........... 1.14 0.89 (0.16)
Book value............................. 6.78 7.69 7.47
<CAPTION>
Per Share Data For Fiscal Years Ended
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Historical--Varco:
Net earnings--basic.................... $0.78 $0.94 $ 0.57
Net earnings--diluted.................. 0.76 0.92 0.56
Book value............................. 3.95 4.94 5.52
<CAPTION>
Per Share Data For Fiscal Years Ended
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Pro Forma Combined--Per Combined
Company Share:
Net earnings--basic.................... $1.16 $1.13 $ 0.33
Net earnings--diluted.................. 1.10 1.09 0.32
Book value............................. 6.15 7.30 7.61
Equivalent Pro Forma Combined--Per
Varco Share:
Net earnings--basic.................... $0.83 $0.81 $ 0.24
Net earnings--diluted.................. 0.78 0.78 0.23
Book value............................. 4.38 5.20 5.42
</TABLE>
11
<PAGE>
Comparative Market Price Information
Both Tuboscope common stock and Varco common stock are traded on the New
York Stock Exchange. Tuboscope common stock trades under the symbol "TBI," and
Varco common stock trades under the symbol "VRC." The table below sets forth,
for the quarters indicated, the reported high and low sales prices of Tuboscope
common stock and Varco common stock.
<TABLE>
<CAPTION>
Tuboscope Varco
Common Stock Common Stock
--------------- ---------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter................................. $24.063 $16.188 $28.125 $15.250
Second Quarter................................ 26.500 18.875 32.188 18.813
Third Quarter................................. 23.000 9.000 21.375 7.125
Fourth Quarter................................ 13.813 6.313 13.500 5.438
Fiscal Year Ended December 31, 1999:
First Quarter................................. $12.500 $ 5.000 $13.000 $ 6.938
Second Quarter................................ 15.250 7.750 12.688 8.688
Third Quarter................................. 16.875 12.375 14.250 9.563
Fourth Quarter................................ 16.500 10.000 12.625 9.188
Fiscal Year Ending December 31, 2000:
First Quarter................................. $19.875 $12.000 $15.875 $ 9.125
Second Quarter (through April 24, 2000)....... 16.938 13.875 13.000 10.313
</TABLE>
On March 21, 2000, the last full trading day prior to the public
announcement of the merger agreement, the New York Stock Exchange reported that
the last sale price of Tuboscope common stock was $17.00 per share, and the
last sale price of Varco common stock was $14.56 per share.
On April 24, 2000, the most recent practicable date prior to the printing of
this proxy statement/ prospectus, the New York Stock Exchange reported that the
last sale price of Tuboscope common stock was $16.563 per share, and the last
sale price of Varco common stock was $11.875 per share.
Because the market price of Tuboscope common stock is subject to
fluctuation, the market value of the shares of Tuboscope common stock that
holders of Varco common stock will receive in the merger may increase or
decrease prior to the merger.
We urge you to obtain current market quotations for Tuboscope common stock
and Varco common stock.
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RISK FACTORS
In addition to the other information included and incorporated by reference
in this proxy statement/prospectus, Tuboscope stockholders and Varco
shareholders should consider carefully the matters described below in
determining whether to approve the merger proposals.
Risks Relating to the Merger
We may not be able to effectively and efficiently integrate our operations.
Integrating the operations and management of Tuboscope and Varco will be a
complex process, and we cannot assure you that this integration will be
completed rapidly or will achieve all of the anticipated synergies and other
benefits we expect from the merger. Moreover, the integration of Tuboscope and
Varco will require significant management attention, which may temporarily
distract management from its usual focus on the daily operations of the
combined company. Management's inability to integrate successfully the
operations of Tuboscope and Varco, or any significant delay in achieving this
integration, could cause our business to suffer after the merger. See "The
Merger--Reasons for the Merger."
We may not be able to realize the expected benefits of the merger.
Achieving the benefits we expect from the merger will depend in large part
on integrating our technology, operations and personnel in a timely and
efficient manner to minimize the impact on customers, employees and management.
Among the challenges involved in this integration is demonstrating to our
customers the benefits of using the additional products and services to be
offered and that the merger will not lower client service standards. In
addition, we must persuade our personnel that our business cultures are
compatible. We cannot assure you that we will realize any of the anticipated
benefits of the merger, and failure to do so could adversely affect the
business of the combined company after the merger.
The combined company will incur significant merger-related charges.
We expect the total merger-related costs to be approximately $25 million,
consisting primarily of financial advisory, legal and accounting fees, employee
benefit costs, financial printing costs and other related charges. The amount
of these expenses is a preliminary estimate and is subject to change. In
addition, the combined company will incur certain integration costs, including
costs associated with consolidating administrative functions and the closure of
certain facilities.
The exchange ratio will not be adjusted for changes in stock prices.
The number of shares of Tuboscope common stock into which each share of
Varco common stock is to be converted in the merger is fixed at 0.7125 shares
of Tuboscope common stock for each share of Varco common stock. The market
value of Tuboscope common stock and/or Varco common stock at the effective time
of the merger may vary significantly from the price as of the date the merger
agreement was executed, the date of this proxy statement/prospectus or the date
on which Tuboscope stockholders and Varco shareholders vote on the merger.
These changes may result from a number of factors, including:
. market perception of the synergies expected to be achieved by the
merger;
. changes in the business, operations or prospects of Tuboscope or Varco;
. market assessments of the likelihood that the merger will be completed
and the timing of the merger; and
. general market and economic conditions.
Because the exchange ratio will not be adjusted to reflect changes in the
market value of Tuboscope common stock or Varco common stock, the market value
of the Tuboscope common stock issued in the merger,
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and the market value of the Varco common stock surrendered in the merger, may
be higher or lower than the value of these shares at the time the merger was
negotiated or approved by the Tuboscope board of directors and the Varco board
of directors. Neither Tuboscope nor Varco is permitted to terminate the merger
agreement or resolicit the vote of Tuboscope stockholders or Varco shareholders
because of changes in the market price of the Tuboscope common stock or Varco
common stock.
Tuboscope's and Varco's officers have conflicts of interest that may
influence them to support or approve the merger.
The executive officers of Varco and some officers of Tuboscope participate
in arrangements that provide them with interests in the merger that are
different from, or are in addition to, your interests as a stockholder or
shareholder.
In particular, certain of Tuboscope's officers have an agreement with
Tuboscope that provides that all of the unvested stock options and restricted
stock units held by these officers will become immediately vested upon
completion of a transaction that constitutes a change in control of Tuboscope.
The completion of the merger would constitute a change in control of Tuboscope
under these agreements and, as a result, all unvested stock options and
restricted stock units held by these officers will become immediately vested
upon the completion of the merger. As a result, the vesting of options to
purchase 818,866 shares of Tuboscope common stock and 251,290 restricted stock
units held by Tuboscope's officers will be accelerated upon the completion of
the merger. Also, because the merger constitutes a change in control, certain
officers of Tuboscope and Varco are entitled to enhanced severance benefits if,
within two years after the merger, the officer is terminated other than for
cause or if the officer terminates his employment for good reason. See "The
Merger--Interests of Certain Persons in the Merger."
As a result, these officers could be more likely to vote to approve the
merger agreement than if they did not hold these interests. You should consider
whether these interests may have influenced these officers to support or
recommend the merger.
If Tuboscope or Varco fails to obtain all required consents and waivers,
third parties may terminate or alter existing contracts.
Tuboscope and Varco are each required to obtain the consent of, and certain
waivers from, their lenders under their primary bank credit facilities in
connection with the merger. If the approvals and waivers are not obtained, the
credit facilities could be declared in default and the borrowings under the
credit facilities would become immediately due and payable. In addition,
certain other agreements with suppliers, customers, licensors or other business
partners may require Tuboscope or Varco to obtain the approval or waiver of
these other parties in connection with the merger. Tuboscope and Varco have
agreed to use reasonable efforts to secure the necessary approvals and waivers.
However, we cannot assure you that we will be able to obtain all of the
necessary approvals and waivers, and failure to do so could have a material
adverse effect on our business after the merger.
Failure to complete the merger or delays in completing the merger could
negatively impact Tuboscope's and Varco's stock prices and future business and
operations.
If the merger is not completed for any reason, Tuboscope and Varco may be
subject to a number of material risks, including the following:
. Tuboscope or Varco may be required to pay the other a termination fee of
$30 million or to reimburse the other for up to $5 million in merger
related expenses;
. the stock option held by Tuboscope to purchase up to 13,023,985 shares
of Varco common stock or the stock option held by Varco to purchase up
to 8,908,653 shares of Tuboscope common stock may become exercisable;
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. the price of Tuboscope or Varco common stock may decline to the extent
that the current market price of the common stock reflects a market
assumption that the merger will be completed; and
. costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed.
In addition, in response to the announcement of the merger, Varco's or
Tuboscope's customers may delay or defer purchasing decisions. Any delay or
deferral of purchasing decisions by customers could negatively affect the
business and results of operations of Tuboscope and Varco, regardless of
whether the merger is ultimately completed. Similarly, current and prospective
employees of Tuboscope and Varco may experience uncertainty about their future
roles with the companies until after the merger is completed or if the merger
is not completed. This may adversely affect the ability of Tuboscope and Varco
to attract and retain key management, marketing and technical personnel.
Further, if the merger is terminated and the Tuboscope or Varco board of
directors determines to seek another merger or business combination, we cannot
assure you that it will be able to find a transaction providing as much
stockholder value as this merger. While the merger agreement is in effect,
subject to certain limited exceptions, Tuboscope and Varco are prohibited from
soliciting, initiating or encouraging or entering into any extraordinary
transactions, such as a merger, sale of assets or other business combination,
with any third party.
Risks Relating to Tuboscope and Varco
Tuboscope and Varco face intense competition in their existing markets and
expect to face tough competition in any markets in which they seek to expand.
Both Tuboscope and Varco operate in highly competitive markets in which they
compete with various third parties. Tuboscope competes with national and
regional competitors in each of its four major product lines. Varco also faces
competition from national and regional competitors. These competitors may have
greater financial, technical, manufacturing and marketing resources than
Tuboscope or Varco, even on a combined basis, and may be in a better
competitive position. In addition, certain foreign jurisdictions and
government-owned petroleum companies located in some of the countries in which
Tuboscope and Varco operate have adopted policies or regulations which may give
local nationals in these countries competitive advantages over Tuboscope and
Varco and which could impact the operations of the combined company after the
merger.
We cannot assure you that the competitive environment in which Tuboscope and
Varco operate will not have an adverse effect on the combined company after the
merger.
Tuboscope has aggressively expanded its business, and the combined company
intends to maintain an aggressive growth strategy after the merger.
Tuboscope aggressively expanded and grew its business during the past
several years. Since January 1, 1997, Tuboscope has completed 25 acquisitions
or investments for common stock, cash and notes. In these transactions,
Tuboscope issued 2,415,842 shares of its common stock, paid $85.8 million in
cash and issued $15.8 million in notes. We anticipate that the combined company
will continue to pursue an aggressive growth strategy following the merger.
However, we cannot assure you that attractive acquisitions will be available to
us after the merger, at reasonable prices or at all. In addition, we cannot
assure you that we will successfully integrate the operations and assets of any
acquired business with our own or that our management will be able to manage
effectively the increased size of the combined company or operate a new line of
business. Any inability on the part of management to integrate and manage
acquired businesses and their assumed liabilities could adversely affect our
business and financial performance. In addition, after the merger, we may need
to incur substantial indebtedness to finance future acquisitions. We cannot
assure you that we will be able to obtain this financing or that, if available,
the financing will be on terms acceptable to us. Future acquisitions
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may result in increased depreciation and amortization expense, increased
interest expense, increased financial leverage or decreased operating income
for the combined company, any of which could cause our business to suffer.
Both Tuboscope's and Varco's operating results have fluctuated during recent
years and these fluctuations may continue for the combined company after the
merger.
Both Tuboscope and Varco have experienced in the past, and the combined
company may experience in the future, fluctuations in its quarterly operating
results. We cannot assure you that the combined company will realize expected
earnings growth or that earnings in any particular quarter will not fall short
of either a prior fiscal quarter or investors' expectations. The following
factors, in addition to others not listed, may affect the combined company's
quarterly operating results in the future:
. fluctuations in the oil and gas industry;
. competition;
. the ability to effectively and efficiently integrate the operations and
businesses of Tuboscope and Varco;
. the ability to service the debt obligations of the combined company;
. the ability to identify strategic acquisitions at reasonable prices;
. the ability to manage and control operating costs of the combined
company;
. fluctuations in political and economic conditions in the United States
and abroad; and
. the ability to protect Tuboscope's and Varco's intellectual property
rights.
Varco's operating results are heavily dependent on offshore rig activity and
this dependence may continue for the combined company after the merger.
Varco's business is heavily dependent on major retrofitting and/or upgrading
activity on existing offshore rigs and on the construction of new offshore
rigs. New orders relating to these activities have declined to a low level
during the past two years, and may remain at low levels for the foreseeable
future. Any improvement in offshore rig activity may fail to materialize for
any of the following reasons:
. continued low utilization of the existing offshore rigs;
. substantial cost overruns on many rigs built during the 1997-2000
period, resulting in poor economic returns; or
. less than acceptable results in finding economically viable oil and gas
discoveries in ultra deep water, where the majority of newly built rigs
are designed to operate.
There are risks associated with Tuboscope's and Varco's presence in
international markets, including political or economic instability and currency
restrictions.
Approximately 65% of Tuboscope's revenues in 1999 were derived from
operations outside the United States. Tuboscope's foreign operations include
significant operations in Europe, Latin America, Canada, the Far East and the
Middle East. Varco's products are sold for use in approximately 80 countries by
United States customers operating in the United States and abroad, as well as
by foreign customers such as privately-owned corporations and national oil
companies. Varco includes as an international sale any sale where the product
is designated for use other than in the United States. Revenues from products
sold for use outside the United States accounted for approximately 47% of
Varco's total revenues for the year ended December 31, 1999. Varco has
significant foreign operations in the United Kingdom, the Netherlands and
Singapore. Both
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companies' revenues and operations are subject to the risks normally
associated with conducting business in foreign countries, including uncertain
political and economic environments, which may limit or disrupt markets,
restrict the movement of funds or result in the deprivation of contract rights
or the taking of property without fair compensation. Government-owned
petroleum companies located in some of the countries in which Tuboscope or
Varco operates have adopted policies, or are subject to governmental policies,
giving preference to the purchase of goods and services from companies that
are majority-owned by local nationals. As a result of these policies,
Tuboscope and Varco rely on joint ventures, license arrangements and other
business combinations with local nationals in these countries. In addition,
political considerations may disrupt the commercial relationships between
Tuboscope and Varco and government-owned petroleum companies. Although neither
Tuboscope nor Varco has experienced any significant problems in foreign
countries arising from nationalistic policies, political instability, economic
instability or currency restrictions, we cannot assure you that these problems
will not arise in the future.
Tuboscope and Varco are dependent upon the oil and gas industry, which may
be volatile.
The oil and gas industry in which we participate historically has
experienced significant volatility. Demand for our services and products
depends primarily upon the number of oil rigs in operation, the number of oil
and gas wells being drilled, the depth and drilling conditions of these wells,
the volume of production, the number of well completions and the level of
workover activity. Drilling and workover activity can fluctuate significantly
in a short period of time, particularly in the United States and Canada. The
willingness of oil and gas operators to make capital expenditures to explore
for and produce oil and natural gas will continue to be influenced by numerous
factors over which we have no control, including:
. the ability of the members of the Organization of Petroleum Exporting
Countries to maintain price stability through voluntary production
limits, the level of production by non-OPEC countries and worldwide
demand for oil and gas;
. general economic and political conditions;
. costs of exploration and production;
. availability of new leases and concessions; and
. governmental regulations regarding, among other things, environmental
protection, taxation, price controls and product allocations.
Worldwide rig activity declined 21% in 1999 compared to 1998. The 1999
decline in rig activity has been sharpest in the U.S. market, where rig
activity in 1999 decreased 24.8% from 1998.
We cannot make any assurances as to the level of future oil and gas
industry activity or demand for our combined services and products after the
merger.
We cannot assure you that the combined company will be able to protect its
intellectual property rights.
Tuboscope and Varco rely on a combination of trade secret, copyright,
trademark, patent and other proprietary rights laws to protect their rights to
valuable intellectual property. Tuboscope and Varco cannot assure you that
these intellectual property rights can be successfully asserted in the future
or will not be invalidated, circumvented or challenged. Technological
developments may also create new risks to the combined company's ability to
protect its intellectual property. In addition, the laws of some foreign
countries in which the combined company's products and services may be sold do
not protect intellectual property rights to the same extent as the laws of the
United States. The failure of the combined company to protect its proprietary
information and any successful intellectual property challenges or
infringement proceedings against the combined company could adversely affect
our competitive position.
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We could be adversely affected if we fail to comply with any of the numerous
federal, state and local laws, regulations and policies that govern
environmental protection, zoning and other matters applicable to our
businesses.
These laws and regulations have changed frequently in the past and it is
reasonable to expect additional changes in the future. If existing regulatory
requirements change, we may be required to make significant unanticipated
capital and operating expenditures. We cannot assure you that our operations
will continue to comply with future laws and regulations. Governmental
authorities may seek to impose fines and penalties on us or to revoke or deny
the issuance or renewal of operating permits for failure to comply with
applicable laws and regulations. Under these circumstances, we might be
required to reduce or cease operations or conduct site remediation or other
corrective action which could adversely impact our operations and financial
condition.
Our businesses expose us to potential environmental liability.
Our businesses expose us to the risk that harmful substances may escape into
the environment, which could result in:
. personal injury or loss of life;
. severe damage to or destruction of property; or
. environmental damage and suspension of operations.
Our current and past activities, as well as the activities of our former
divisions and subsidiaries, could result in our facing substantial
environmental, regulatory and other liabilities. These could include the costs
of cleanup of contaminated sites and site closure obligations. These
liabilities could also be imposed on the basis of one or more of the following
theories:
. negligence;
. strict liability;
. breach of contract with customers; or
. as a result of our contractual agreement to indemnify our customers in
the normal course of our business, which is normally the case.
We may not have adequate insurance for potential environmental liabilities.
While Tuboscope and Varco maintain liability insurance, this insurance is
subject to coverage limits. In addition, certain policies do not provide
coverage for damages resulting from environmental contamination. We face the
following risks with respect to our insurance coverage:
. we may not be able to continue to obtain insurance on commercially
reasonable terms;
. we may be faced with types of liabilities that will not be covered by
our insurance;
. our insurance carriers may not be able to meet their obligations under
the policies; or
. the dollar amount of any liabilities may exceed our policy limits.
Even a partially uninsured claim, if successful and of significant size,
could have a material adverse effect on our consolidated financial statements.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains or incorporates by reference
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. These
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of management of Tuboscope and Varco, based on information
currently available to each company's management. When we use words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates,"
"should," "likely" or similar expressions, we are making forward-looking
statements. Forward-looking statements include statements by Tuboscope or Varco
concerning:
. financial projections;
. the benefits expected to result from the merger, including the synergies
that are expected to result in increased revenues, decreased expenses
and avoided expenses after the closing of the merger; or
. the expectations, beliefs, future plans and strategies, anticipated
developments and other matters that are not historical facts.
The management of Tuboscope and Varco caution the reader that the actual
results or experience could differ materially from the forward-looking
statements as a result of many factors, including:
. failure by Tuboscope and Varco to complete the merger on a timely basis
or at all;
. the inaccuracy of financial, regulatory and market trend projections
used by Tuboscope and Varco and their financial advisors in evaluating
the merger;
. competition in Tuboscope's and Varco's markets;
. the potential for rapid and significant changes in technology and their
effect on Tuboscope's or Varco's operations;
. failure to achieve anticipated cost savings and revenue enhancements as
a result of the merger;
. the risk that the combined company encounters greater than expected
costs and difficulties in integrating the businesses of Tuboscope and
Varco;
. inability to retain key personnel after the merger;
. operating, legal and regulatory risks; and
. economic, political and competitive forces affecting our businesses and
Tuboscope's and Varco's analysis of these forces.
In addition, these risks and uncertainties include those uncertainties and
risk factors identified, among other places, under "Summary--Selected Unaudited
Pro Forma Combined Financial Data," "Risk Factors," "The Merger--Reasons for
the Merger," "--Opinions of Financial Advisors," and "Unaudited Pro Forma
Condensed Combined Financial Statements."
You should consider the cautionary statements contained or referred to in
this section in connection with any subsequent written or oral forward-looking
statements that may be issued by Tuboscope or Varco or persons acting on their
behalf. Neither Tuboscope nor Varco undertakes any obligation to release
publicly any revisions to any forward-looking statements contained in this
proxy statement/prospectus to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events.
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THE TUBOSCOPE ANNUAL MEETING
Date, Time and Place
This proxy statement/prospectus is being furnished to holders of Tuboscope
common stock in connection with the solicitation of proxies by the Tuboscope
board of directors for use at the Tuboscope annual meeting of stockholders to
be held on May 30, 2000, at The Doubletree Hotel, 2001 Post Oak Boulevard,
Houston, Texas, starting at 10:00 a.m., local time, and at any adjournment or
postponement of the annual meeting.
Matters to be Considered at the Tuboscope Annual Meeting
At the Tuboscope annual meeting, Tuboscope stockholders will be asked to
consider and vote upon proposals to approve:
. the merger agreement, which provides for:
(a) the merger of Varco with and into Tuboscope, with Tuboscope
continuing as the surviving corporation under the name Varco
International, Inc.; and
(b) the conversion of each issued and outstanding share of Varco common
stock into 0.7125 shares of Tuboscope common stock;
. an amendment to Tuboscope's certificate of incorporation, increasing the
number of shares of Tuboscope common stock authorized for issuance from
60,000,000 to 200,000,000;
. an amendment to Tuboscope's certificate of incorporation, increasing the
maximum number of authorized directors of Tuboscope from ten to fifteen;
. Tuboscope's Amended and Restated 1996 Equity Participation Plan, which
amends Tuboscope's Amended 1996 Equity Participation Plan by, among
other things, increasing the number of shares of Tuboscope common stock
reserved for issuance under the plan by 4,200,000, from 3,450,000 to
7,650,000, and authorizing the payment of "performance-based"
compensation that would be fully deductible for federal income tax
purposes;
. the election of six directors to serve until the next annual meeting or
until the election and qualification of their respective successors;
. the ratification of the selection of Ernst & Young LLP as Tuboscope's
independent auditors for 2000; and
. any other matters that are properly brought before the Tuboscope annual
meeting or any adjournment or postponement of the meeting.
The Tuboscope Board of Directors Recommendations
The Tuboscope board of directors has unanimously approved the merger
agreement, both amendments to Tuboscope's certificate of incorporation,
Tuboscope's Amended and Restated 1996 Equity Participation Plan, the nomination
of the nominees to serve on the Tuboscope board of directors and the selection
of Tuboscope's independent auditors, and recommends that holders of Tuboscope
common stock vote FOR the proposals being presented.
Vote Required
The approval of the merger agreement and the amendment to Tuboscope's
certificate of incorporation increasing the number of authorized shares of
Tuboscope common stock will require the affirmative vote of the holders of a
majority of the outstanding shares of Tuboscope common stock. The approval of
the amendment to Tuboscope's certificate of incorporation increasing the
maximum number of authorized directors of Tuboscope will require the
affirmative vote of the holders of two-thirds of the outstanding shares of
Tuboscope common stock. The approval of Tuboscope's Amended and Restated 1996
Equity Participation Plan will require the affirmative vote of the holders of a
majority of the shares of Tuboscope common stock represented at the annual
meeting. The ratification of the selection of Tuboscope's independent auditors
will require the
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affirmative vote of the holders of a majority of the shares of Tuboscope common
stock represented and entitled to vote at the Tuboscope annual meeting. For the
election of the nominees to the Tuboscope board of directors, the six nominees
receiving the highest vote totals will be elected. The completion of the merger
is conditioned upon the approval of the merger agreement and the amendment to
Tuboscope's certificate of incorporation increasing the number of authorized
shares of Tuboscope common stock, but is not conditioned upon the approval of
the amendment to Tuboscope's certificate of incorporation increasing the
maximum number of authorized directors of Tuboscope, the approval of
Tuboscope's Amended and Restated 1996 Equity Participation Plan, the election
of the six nominees to the Tuboscope board of directors or the ratification of
the selection of Tuboscope's independent auditors. However, each amendment to
Tuboscope's certificate of incorporation and Tuboscope's Amended and Restated
1996 Equity Participation Plan will only become effective if the merger
agreement is approved. The election of the six nominees to the Tuboscope board
of directors and the ratification of the selection of Tuboscope's independent
auditors are not conditioned upon the approval of any other proposal being
submitted to Tuboscope stockholders.
Voting of Proxies
All shares of Tuboscope common stock which are entitled to vote and are
represented at the Tuboscope annual meeting by properly executed proxies
received prior to or at the annual meeting, and not revoked, will be voted at
the Tuboscope annual meeting in accordance with the instructions indicated on
the proxies. If no instructions are indicated, the proxies will be voted for
approval of the merger agreement, both amendments to Tuboscope's certificate of
incorporation and Tuboscope's Amended and Restated 1996 Equity Participation
Plan, for each of the six nominees to the Tuboscope board of directors and for
the ratification of the selection of Tuboscope's independent auditors.
If any other matters are properly presented at the Tuboscope annual meeting
for consideration, including, among other things, consideration of a motion to
adjourn the Tuboscope annual meeting to another time or place, including for
the purposes of soliciting additional proxies or allowing additional time for
the satisfaction of conditions to the merger, the persons named in the proxy
will have discretion to vote on these matters in accordance with their best
judgment. Proxies voted against all of the proposals at the Tuboscope annual
meeting will not be voted in favor of adjournment for the purpose of the
continued solicitation of proxies.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
. filing with the Secretary of Tuboscope, at or before the voting at the
Tuboscope annual meeting, a written notice of revocation bearing a later
date than the proxy;
. duly executing a proxy with a later date and delivering it to the
Secretary of Tuboscope before the voting at the Tuboscope annual
meeting; or
. attending the Tuboscope annual meeting and voting in person, although
attendance at the meeting will not by itself constitute a revocation of
a proxy.
Any written notice of revocation or subsequent proxy should be sent to
Tuboscope Inc., 2835 Holmes Road, Houston, Texas 77051, Attention: Secretary,
or hand delivered to the Secretary of Tuboscope at or before the voting at the
Tuboscope annual meeting.
Record Date; Stock Entitled to Vote; Quorum
The Tuboscope board of directors has fixed April 21, 2000 as the record date
for determining the Tuboscope stockholders entitled to notice of and to vote at
the Tuboscope annual meeting. Accordingly, only Tuboscope stockholders of
record on the record date will be entitled to notice of and to vote at the
Tuboscope annual meeting. As of the record date, 44,797,628 shares of Tuboscope
common stock, constituting all of the voting stock of Tuboscope, were
outstanding and entitled to vote, which shares were held by approximately
201 holders of record. Each holder of shares of Tuboscope common stock on the
record date is entitled to one vote per share. Votes may be cast either in
person or by a properly executed proxy.
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The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Tuboscope common stock entitled to vote
at the Tuboscope annual meeting is necessary for a quorum. Shares of Tuboscope
common stock represented in person or by proxy will be counted for the purpose
of determining whether a quorum is present at the Tuboscope annual meeting.
Abstentions will have the same effect as a vote against the merger agreement
and both amendments to Tuboscope's certificate of incorporation since these
proposals require the affirmative vote of the holders of a specified percentage
of the outstanding shares of Tuboscope common stock. Abstentions by
stockholders represented at the meeting will have the same effect as a vote
against Tuboscope's Amended and Restated 1996 Equity Participation Plan since
this proposal requires the affirmative vote of the holders of a majority of the
Tuboscope common stock represented at the meeting. Abstentions by stockholders
represented at the meeting will have the same effect as a vote against the
ratification of the selection of Tuboscope's independent auditors since this
proposal requires the affirmative vote of the holders of a majority of the
Tuboscope common stock represented and entitled to vote at the meeting.
Abstentions will have no effect on the election of the six nominees to the
Tuboscope board of directors.
Shares represented by "broker non-votes," that is, shares held by brokers or
nominees which are represented at a meeting but with respect to which the
broker or nominee is not empowered to vote on a particular proposal, will be
counted as present for purposes of determining whether there is a quorum at the
Tuboscope annual meeting. The New York Stock Exchange rules provide that
brokers and nominees cannot vote the shares that they hold on behalf of other
people either for or against the proposals being presented, other than the
election of directors and the ratification of the selection of Tuboscope's
independent auditors, without specific instructions from the person who
beneficially owns those shares. Therefore, if your shares are held by a broker
or other nominee and you do not give them instructions on how to vote your
shares, this will have the same effect as voting against the proposal to
approve the merger agreement, the proposals to approve the amendments to
Tuboscope's certificate of incorporation and the proposal to approve
Tuboscope's Amended and Restated 1996 Equity Participation Plan. However,
because broker non-votes represent shares as to which the beneficial owner has
not empowered the broker to vote at the meeting, these shares are considered
not entitled to vote, and thus broker non-votes will have no effect on the
election of the six nominees to the Tuboscope board of directors or the
ratification of the selection of Tuboscope's independent auditors.
As of the record date, directors and executive officers of Tuboscope and
their affiliates may be deemed to have or share beneficial ownership of
approximately 33.1% of the outstanding shares of Tuboscope common stock. Each
of the directors and executive officers of Tuboscope has advised Tuboscope that
he intends to vote or direct the vote of all shares of Tuboscope common stock
over which he has or shares voting control for approval of each of the
proposals being presented at the annual meeting. See "Tuboscope--Security
Ownership of Certain Beneficial Owners and Management."
Solicitation of Proxies
All expenses of Tuboscope's solicitation of proxies, including the cost of
mailing this proxy statement/prospectus to Tuboscope stockholders, will be
borne by Tuboscope. In addition to solicitation by use of the mails, proxies
may be solicited by directors, officers and employees of Tuboscope in person or
by telephone or other means of communication. These directors, officers and
employees will not receive additional compensation, but may be reimbursed for
reasonable out-of-pocket expenses in connection with this solicitation. In
addition, Tuboscope has retained the services of Morrow & Company to assist in
the solicitation of proxies by Tuboscope. Tuboscope will pay $5,000, plus
reimbursement for some out of-pocket expenses, to Morrow & Company for its
services. Tuboscope will make arrangements with brokerage houses, custodians,
nominees and fiduciaries to forward proxy solicitation materials to beneficial
owners of shares held of record by these brokerage houses, custodians, nominees
and fiduciaries. Tuboscope will reimburse these brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in forwarding
the proxy materials.
Tuboscope stockholders will not receive new stock certificates upon the
completion of the merger. Accordingly, please do not send stock certificates
with your proxy.
22
<PAGE>
THE VARCO SPECIAL MEETING
Date, Time and Place
This proxy statement/prospectus is being furnished to holders of Varco
common stock in connection with the solicitation of proxies by the Varco board
of directors for use at the Varco special meeting to be held on May 30, 2000,
and at any adjournment or postponement of the special meeting. The Varco
special meeting will be held at The Doubletree Hotel, 100 The City Drive,
Orange, California 92868, starting at 9:00 a.m., local time.
Matters to be Considered at the Varco Special Meeting
At the Varco special meeting, holders of Varco common stock will be asked to
consider and vote upon proposals to approve:
. the merger agreement, which provides for:
(a) the merger of Varco with and into Tuboscope, with Tuboscope
continuing as the surviving corporation under the name Varco
International, Inc.; and
(b) the conversion of each issued and outstanding share of Varco common
stock into 0.7125 shares of Tuboscope common stock; and
. any other matters that are properly brought before the Varco special
meeting, or any adjournment or postponement of the meeting.
The Varco Board of Directors Recommendation
The Varco board of directors has unanimously approved the merger agreement
and recommends that holders of Varco common stock vote FOR the merger
agreement.
Vote Required
The approval of the merger agreement will require the affirmative vote of
the holders of a majority of the outstanding shares of Varco common stock.
Voting of Proxies
All shares of Varco common stock which are entitled to vote and are
represented at the Varco special meeting by properly executed proxies received
prior to or at the special meeting, and not revoked, will be voted at the Varco
special meeting in accordance with the instructions indicated on those proxies.
If no instructions are indicated, the proxies will be voted for approval of the
merger agreement.
If any other matters are properly presented at the Varco special meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Varco special meeting to another time or place, including for the
purposes of soliciting additional proxies or allowing additional time for the
satisfaction of conditions to the merger, the persons named in the proxy will
have discretion to vote on these matters in accordance with their best
judgment. Proxies voted against the merger agreement will not be voted in favor
of adjournment for the purpose of the continued solicitation of proxies.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
. filing with the Secretary of Varco, at or before the voting at the Varco
special meeting, a written notice of revocation bearing a later date
than the proxy;
. duly executing a proxy with a later date and delivering it to the
Secretary of Varco before the voting at the Varco special meeting; or
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. attending the Varco special meeting and voting in person, although
attendance at the meeting will not by itself constitute a revocation of
a proxy.
Any written notice of revocation or subsequent proxy should be sent to Varco
International, Inc., 743 North Eckhoff Street, Orange, California 92868,
Attention: Secretary, or hand delivered to the Secretary of Varco at or before
the voting at the Varco special meeting.
Record Date; Stock Entitled to Vote; Quorum
The Varco board of directors has fixed April 21, 2000 as the record date for
determining the Varco shareholders entitled to notice of and to vote at the
Varco special meeting. Accordingly, only Varco shareholders of record on the
record date will be entitled to notice of and to vote at the Varco special
meeting. As of the record date, 65,562,363 shares of Varco common stock were
outstanding and entitled to vote, which shares were held by approximately 2,700
holders of record. Each holder of shares of Varco common stock on the record
date is entitled to one vote per share. Votes may be cast either in person or
by a properly executed proxy.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Varco common stock entitled to vote at
the Varco special meeting is necessary for a quorum. Shares of Varco common
stock represented in person or by proxy will be counted for the purpose of
determining whether a quorum is present at the Varco special meeting.
Abstentions will have the same effect as a vote against the merger agreement
since this proposal requires the affirmative vote of the holders of a majority
of the outstanding shares of Varco common stock.
Shares represented by broker non-votes at the Varco special meeting will be
counted as present for purposes of determining whether there is a quorum at the
Varco special meeting. The New York Stock Exchange rules provide that brokers
and nominees cannot vote the shares that they hold on behalf of other people
either for or against the merger proposal without specific instructions from
the person who beneficially owns those shares. Therefore, if your shares are
held by a broker or other nominee and you do not give them instructions on how
to vote your shares on the merger proposal, this will have the same effect as
voting against this proposal.
As of the record date, directors and executive officers of Varco and their
affiliates may be deemed to have or share beneficial ownership of approximately
5.3% of the outstanding shares of Varco common stock. Each of the directors and
executive officers of Varco has advised Varco that he intends to vote or direct
the vote of all shares of Varco common stock over which he has or shares voting
control for approval of the merger agreement. See "Varco--Security Ownership of
Certain Beneficial Owners and Management."
Solicitation of Proxies
All expenses of Varco's solicitation of proxies, including the cost of
mailing this proxy statement/prospectus to Varco shareholders, will be borne by
Varco. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Varco in person or by
telephone or other means of communication. These directors, officers and
employees will not receive additional compensation, but may be reimbursed for
reasonable out-of-pocket expenses in connection with this solicitation. In
addition, Varco has retained The Altman Group, Inc., a proxy solicitation firm,
to assist Varco with soliciting proxies for the Varco special meeting, at a
cost of approximately $30,000 plus reimbursement of reasonable out-of-pocket
expenses. Varco will make arrangements with brokerage houses, custodians,
nominees and fiduciaries to forward proxy solicitation materials to beneficial
owners of shares held of record by these brokerage houses, custodians, nominees
and fiduciaries. Varco will reimburse these brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in forwarding
the proxy materials.
You should not send in any stock certificates with your proxies. A
transmittal form with instructions for the surrender of stock certificates for
Varco common stock will be mailed to you as soon as practicable after
completion of the merger.
24
<PAGE>
THE MERGER
This section of the proxy statement/prospectus describes material aspects of
the proposed merger. While we believe that the description covers the material
terms of the merger, this summary may not contain all of the information that
is important to you. You should read this proxy statement/prospectus, the
merger agreement and the other documents referred to carefully for a more
complete understanding of the merger.
General
The merger will be completed if the required approvals of the Tuboscope
stockholders and Varco shareholders are obtained and all other conditions to
the merger are satisfied or waived. Upon completion of the merger, Varco will
be merged with and into Tuboscope, and the name of the surviving corporation
will be changed to Varco International, Inc. Tuboscope will survive the merger
and the separate corporate existence of Varco will cease. In the merger, each
issued and outstanding share of Varco common stock will be converted into
0.7125 shares of Tuboscope common stock. Each outstanding share of Tuboscope
common stock will remain outstanding and be unaffected by the merger.
Based on the number of outstanding shares of Tuboscope common stock and
Varco common stock as of the record date, the holders of Varco common stock
immediately prior to the merger would own approximately 51% of the outstanding
shares of the combined company immediately after the merger. This percentage
assumes no exercise or conversion of the outstanding stock options and other
convertible securities of Tuboscope or Varco.
After the merger, each outstanding option to purchase Varco common stock
will be converted into an option to purchase shares of common stock of the
combined company. See "The Merger Agreement--Stock Options and Employee
Benefits."
Background of the Merger
In early 1999, George Boyadjieff, Chairman and Chief Executive Officer of
Varco, contacted L. E. Simmons, Chairman of Tuboscope, regarding the
possibility of a merger between Varco and Tuboscope. At a subsequent meeting in
mid-1999, Mr. Boyadjieff again expressed Varco's interest in a merger. However,
at that time, Tuboscope was in negotiations concerning a business combination
with another company and was not in a position to discuss a transaction with
Varco.
In early December, 1999, Mr. Boyadjieff called Mr. Simmons and arranged for
a meeting which took place on January 12, 2000 in Houston, Texas. The call and
meeting followed a series of meetings and discussions between each party and
Credit Suisse First Boston regarding the merits of a potential merger. At the
January 12 meeting, Mr. Simmons, John Lauletta, Tuboscope's President and Chief
Executive Officer, and Mr. Boyadjieff discussed the potential benefits of a
merger and agreed that a combination would likely be structured as a merger of
equals.
Over the next three weeks, representatives of Varco and Tuboscope had
several telephone conversations in which they discussed the merits and terms of
a potential merger, an overview of each company's business operations and the
outlook for the each company's operating results and markets. In addition, Mr.
Simmons, Mr. Lauletta and Joseph Winkler, Tuboscope's Executive Vice President
and Chief Financial Officer, met with representatives of Credit Suisse First
Boston to evaluate the prospects of Varco's business and to review the
strategic fit between the two companies. As of January 14, 2000, Tuboscope and
Varco entered into a confidentiality agreement for the exchange of information
which contained customary terms and conditions.
On February 3, 2000, Messrs. Lauletta, Winkler and Boyadjieff and Richard
Kertson, then Varco's Vice President-Finance and Chief Financial Officer, met
to discuss numerous issues related to a potential merger, including several
possible management structures of the combined company and the roles of senior
officers in the combined company.
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<PAGE>
On February 10, 2000, Messrs. Simmons, Lauletta and Winkler discussed the
potential merger and its potential benefits with the Tuboscope board of
directors at a regular meeting of the board. Later that day, Mr. Simmons and
Mr. Boyadjieff met, together with representatives of Credit Suisse First
Boston, to discuss the potential merger. Mr. Simmons indicated that he had
discussed the potential merger with the Tuboscope board of directors and that
the board was generally in favor of pursuing further discussions with Varco.
On February 17, 2000, Mr. Boyadjieff briefed the Varco board of directors on
the merger discussions with Tuboscope, and Mr. Kertson presented an overview of
Tuboscope's business and historical financial results. It was the consensus of
the board that Mr. Boyadjieff should pursue merger discussions with Tuboscope.
On February 18, 2000, Mr. Boyadjieff called Mr. Simmons to indicate that the
Varco board of directors had authorized Varco management to continue
discussions concerning a merger with Tuboscope.
On February 23, 2000, Mr. Boyadjieff and Mr. Kertson met with
representatives of J.P. Morgan to discuss the potential terms of a merger with
Tuboscope, including the range of ownership for the Varco shareholders.
On February 25, 2000, Mr. Simmons, Mr. Lauletta, Mr. Winkler and Mr.
Boyadjieff met to discuss the relative interest each company's stockholders
would have in the combined company. Mr. Simmons presented his analysis of the
proposed merger, which focused on the historical and projected earnings before
interest, taxes, depreciation and amortization and other non-cash expenses, or
EBITDA, of the two companies. The parties discussed the potential range of
ownership for each company and generally viewed a 50/50 ownership as possibly
acceptable to both companies. The parties also discussed the relative
historical trading prices of the Varco common stock and the Tuboscope common
stock and noted that a 50/50 ownership deal might result in a premium for one
company or the other at the time of agreement depending upon then current
trading prices.
Between March 1, 2000 and March 7, 2000, the parties met and discussed
further the proposed terms of a merger, their expectations for the combined
company, the relative ownership of the combined company and the possible
management structure of the combined company.
On March 2 and 6, 2000, representatives of J.P. Morgan held teleconferences
with Mr. Boyadjieff and Mr. Kertson to discuss the potential terms for a merger
with Tuboscope, and J.P. Morgan reviewed financial information regarding the
merger, including a range of ownership for Varco shareholders in the combined
company.
On March 7, 2000, Mr. Simmons and Mr. Boyadjieff met with the intent of
discussing the relative ownership of the combined company. At this meeting, the
parties contemplated an equal split of ownership of the combined company by
each company's stockholders based on the fully diluted shares of each company
at the time of signing a merger agreement, but acknowledged that several open
issues needed to be resolved before entering into an agreement, including
issues related to management structure and due diligence review.
Between March 9, 2000 and March 22, 2000, representatives of Tuboscope and
Varco, together with their legal and financial advisors, conducted due
diligence and held numerous telephonic meetings to discuss and negotiate the
terms and conditions of the merger agreement and the stock option agreements.
On March 14, 2000, the Tuboscope board of directors discussed in general the
merits of a merger given the current business environment. The board also
discussed whether it was in the best interests of Tuboscope for management to
divert its attention from executing Tuboscope's strategic plan to pursue
discussions with Varco or any other company. After discussion, the board
determined that it would be in Tuboscope's best interests for management to
continue its current discussions regarding the proposed merger with Varco.
On March 15, 2000, representatives of Varco and Varco's legal and financial
advisors and representatives of Tuboscope and Tuboscope's legal advisors held a
meeting in Costa Mesa, California at which the parties discussed the proposed
structure of the merger, general comments on the proposed merger agreement and
due diligence matters.
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On March 16, 2000, the Varco board of directors held a meeting in Orange,
California. Mr. Kertson made a presentation to the board regarding the proposed
transaction, including the principal terms of the merger, Tuboscope's evolution
and product lines, historical and combined financial information for Varco and
Tuboscope, and comparative historical market prices for Varco's and Tuboscope's
common stocks. Following Mr. Kertson's presentation, J.P. Morgan made a
presentation to the board regarding its preliminary fairness opinion with
respect to the proposed exchange ratio. The members of the board asked various
questions and engaged in a lengthy discussion of the proposed merger.
On March 17, 2000, the Tuboscope board of directors held a meeting in
Houston, Texas at which Mr. Lauletta and Mr. Winkler reviewed the progress of
discussions with Varco since the previous board meeting. Representatives of
Credit Suisse First Boston also attended the meeting. After thorough
discussion, the board authorized Tuboscope management to continue pursuing
discussions for a merger with Varco.
On the morning of March 22, 2000, the Tuboscope board of directors held a
telephonic meeting to discuss the final terms of the proposed merger with
Varco. Prior to the meeting, each board member received drafts of the proposed
merger agreement and the proposed stock option agreements. At the meeting,
Tuboscope's management and legal and financial advisors reviewed with the
board:
. the principal terms of the merger agreement and related documents;
. the potential benefits and risks of the transaction with Varco; and
. the strategic rationale for, and financial analyses relating to, the
proposed merger.
In addition, at this meeting, Credit Suisse First Boston rendered to the
Tuboscope board of directors its opinion to the effect that, as of the date of
the opinion and based on and subject to the matters described in the opinion,
the exchange ratio provided for in the merger was fair, from a financial point
of view, to Tuboscope. Following lengthy discussion, the Tuboscope board of
directors determined that the proposed merger was advisable and unanimously
approved the merger agreement and the stock option agreements and unanimously
resolved to recommend that the Tuboscope stockholders approve the merger
agreement.
On the morning of March 22, 2000, the Varco board of directors held a
telephonic meeting to discuss the final terms of the proposed business
combination of Tuboscope and Varco. Prior to the meeting, each board member
received drafts of the proposed merger agreement and the proposed stock option
agreements. At the meeting, Varco's management and legal and financial advisors
reviewed with the board:
. the principal terms of the merger agreement and related documents;
. the potential benefits and risks of the transaction with Tuboscope; and
. the strategic rationale for, and financial analyses relating to, the
proposed merger.
In addition, at this meeting, J.P. Morgan rendered to the Varco board of
directors its opinion to the effect that, as of the date of the opinion and
based on and subject to the matters described in the opinion, the exchange
ratio provided for in the merger was fair, from a financial point of view, to
Varco's shareholders. Following lengthy discussion, the Varco board of
directors determined that the proposed merger was advisable and unanimously
approved the merger agreement and the stock option agreements and unanimously
resolved to recommend that the Varco shareholders approve the merger agreement.
The merger agreement and the stock option agreements between Tuboscope and
Varco were signed by the parties on the afternoon of March 22, 2000 and,
thereafter, Tuboscope and Varco issued a joint press release announcing the
execution of the merger agreement.
Reasons for the Merger
In reaching its decision to approve the merger agreement and the merger and
to recommend adoption of the merger agreement by Tuboscope stockholders and
Varco shareholders, both the Tuboscope board of
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directors and the Varco board of directors consulted with their managements, as
well as their legal and financial advisors, and independently considered the
proposed merger agreement and the transactions contemplated by the merger
agreement. In unanimously approving the merger agreement and the merger, the
Tuboscope board of directors and the Varco board of directors considered a
number of factors, including the following:
. current industry, market and economic conditions;
. the strategic fit between the two companies and the potential for a
combined company with greater financial strength;
. the ability of the combined company to offer expanded product and
service offerings;
. the ability to expand Tuboscope's and Varco's customer bases;
. the complementary nature of the companies' product and service
offerings;
. the operating efficiencies and the earnings power of the combined
company;
. Tuboscope's business, financial condition, results of operations,
assets, management, competitive position, operating performance, trading
performance and prospects, including, in the case of the Tuboscope board
of directors, Tuboscope's prospects if it were to continue as a separate
company;
. Varco's business, financial condition, results of operations, assets,
management, competitive position, operating performance, trading
performance and prospects, including, in the case of the Varco board of
directors, Varco's prospects if it were to continue as a separate
company; and
. the financial condition of the combined company after the transaction,
including its market capitalization, revenues, profits and earnings per
share.
In the course of deliberations, the Tuboscope board of directors and the
Varco board of directors also considered a number of additional factors
relevant to the merger, including:
. the possibility of strategic alternatives to the merger for enhancing
long-term stockholder value, including investigating strategic
transactions with other companies;
. the exchange ratio;
. the market price of Tuboscope common stock over the last several years
and the potential for an increase or decrease in the market price of
Tuboscope common stock in the future;
. the market price of Varco common stock over the last several years;
. the potential for improved trading liquidity for stockholders of the
combined company;
. in the case of the Tuboscope board of directors, the opinion of Credit
Suisse First Boston to the effect that, as of the date of the opinion
and based on and subject to the matters described in the opinion, the
exchange ratio provided for in the merger was fair, from a financial
point of view, to Tuboscope;
. in the case of the Varco board of directors, the opinion of J.P. Morgan
that, as of the date of the merger agreement and subject to the
considerations set forth in the opinion, the exchange ratio provided for
in the merger was fair to the Varco shareholders from a financial point
of view;
. the terms and conditions of the merger agreement, including the
termination fees, the stock option agreements and the closing
conditions;
. the expected qualification of the merger as a reorganization under
Section 368(a) of the Internal Revenue Code;
. the expected accounting of the merger as a pooling-of-interests;
. the impact of the merger on Tuboscope's and Varco's customers, suppliers
and employees;
. the likelihood of the merger being approved by the appropriate
regulatory authorities;
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. the likelihood that the merger will be completed; and
. the effect of the public announcement of the merger on the market price
of Tuboscope's and Varco's common stock.
The Tuboscope board of directors and the Varco board of directors also
identified and considered a number of potentially negative factors in its
deliberations concerning the merger, including:
. the risk that, despite Tuboscope's and Varco's efforts after the merger,
the combined company may lose key personnel;
. the risk that a significant number of Tuboscope's and Varco's customers
and suppliers might cease doing business with the combined company;
. the difficulty of managing operations in the different geographic
locations in which Tuboscope and Varco operate; and
. the risk that the potential benefits of the merger might not be fully
realized.
The Tuboscope board of directors and the Varco board of directors determined
that Tuboscope and Varco could avoid or mitigate these and other risks, and
that, overall, these risks were outweighed by the potential benefits of the
merger.
The above discussion of the factors considered by the Tuboscope board of
directors and the Varco board of directors in making their decisions is not
intended to be exhaustive. In view of the variety of factors considered in
connection with their evaluation of the merger agreement and the merger, the
two boards of directors did not find it practicable to, and did not, quantify
or otherwise assign relative weight to the specific factors considered in
reaching its determination. In addition, individual members of the Tuboscope
board of directors and the Varco board of directors may have given different
weight to different factors.
Opinions of Financial Advisors
The financial information reviewed by each company's financial advisor
included projections of future operations of each of Varco and Tuboscope
prepared by the management teams of the respective companies and independently
by financial analysts who publish research reports on each of the companies.
The projections used vary based on their source and the time that they were
prepared. Actual results of the companies could differ materially from the
projections used as a result of many factors, including those described under
"Risk Factors" and "Information Regarding Forward-Looking Statements."
Varco
Pursuant to an engagement letter, dated March 10, 2000, Varco retained J.P.
Morgan Securities Inc. as its financial advisor and to deliver a fairness
opinion in connection with the proposed merger.
At the meeting of the Varco board of directors on March 16, 2000, J.P.
Morgan rendered its oral opinion that, as of that date, and subject to
completion of due diligence and review of final documentation, the exchange
ratio was fair to Varco's shareholders from a financial point of view. J.P.
Morgan confirmed its oral opinion by delivering its written opinion to the
Varco board of directors, dated March 22, 2000, to the same effect.
The full text of J.P. Morgan's written opinion, which sets forth, among
other things, the assumptions made, matters considered and limits on the review
undertaken by J.P. Morgan in rendering its opinion, is attached as Annex II and
is incorporated by reference with the consent of J.P. Morgan. This opinion
should be read carefully and in its entirety. J.P. Morgan's opinion is
addressed to the Varco board of directors, is directed only to the fairness of
the exchange ratio, does not address any other aspect of the merger and does
not constitute a
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recommendation to any Varco shareholder as to how to vote with respect to the
merger. The summary of the opinion of J.P. Morgan set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion.
In rendering its opinion, J.P. Morgan reviewed, among other things:
. the merger agreement;
. certain publicly available information concerning the businesses of
Varco and Tuboscope and of certain other companies engaged in businesses
that J.P. Morgan deemed comparable to those of Varco and Tuboscope, and
the reported market prices for the securities of certain other companies
that J.P. Morgan deemed comparable;
. publicly available terms of certain transactions involving companies
comparable to Varco and Tuboscope and the consideration received for
those companies;
. current and historical market prices of the common stock of Varco and
Tuboscope;
. the audited financial statements of Varco and Tuboscope for the fiscal
years ended December 31, 1995 through 1999, and the unaudited quarterly
financial statements of Varco and Tuboscope for the periods ended March
31, June 30 and September 30 for each of the years 1995 through 1999;
. certain agreements with respect to outstanding indebtedness or
obligations of Varco and Tuboscope;
. certain internal financial analyses and forecasts prepared by the
managements of Varco and Tuboscope, including the amount and timing of
cost savings expected to result from the merger; and
. the terms of other business combinations that J.P. Morgan deemed
relevant.
In addition, J.P. Morgan held discussions with certain members of the
management of Varco and Tuboscope with respect to certain aspects of the
merger, and the past and current business operations of Varco and Tuboscope,
the financial condition and future prospects and operations of Varco and
Tuboscope, and the effects of the merger on the financial condition and future
prospects and operations of Varco and Tuboscope, and certain other matters J.P.
Morgan deemed necessary or appropriate to its inquiry. In addition, J.P. Morgan
conducted summary level due diligence with management of Varco and Tuboscope
and considered other information as it deemed appropriate for the purposes of
its opinion.
In giving its opinion, J.P. Morgan relied upon and assumed, without
independent verification, the accuracy and completeness of all information that
was publicly available or was furnished to it by Varco and Tuboscope or
otherwise reviewed by it, and J.P. Morgan did not assume any responsibility or
liability for this information. J.P. Morgan did not conduct any valuation or
appraisal of any assets or liabilities, nor were any valuations or appraisals
provided to J.P. Morgan. J.P. Morgan assumed that financial analyses and
forecasts provided to it were reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management
as to the expected future results of operations, synergies and financial
condition of Varco and Tuboscope to which the analyses or forecasts relate.
J.P. Morgan assumed that these expected future results of operations and
synergies would be realized as described by management. J.P. Morgan also
assumed that the merger will have the tax consequences described in discussions
with, and materials furnished to it by, representatives of the Company, and
that the other transactions contemplated by the merger agreement will be
consummated as described in the merger agreement. J.P. Morgan relied as to all
legal matters relevant to rendering its opinion upon the advice of counsel.
J.P. Morgan's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of the opinion. Subsequent developments may affect the opinion. However,
J.P. Morgan does not have any obligation to update, revise, or reaffirm this
opinion. J.P. Morgan expressed no opinion as to the price at which the combined
company's common stock will trade at any future time. J.P. Morgan's opinion
related only to the fairness, from a financial point of view, to Varco's
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<PAGE>
shareholders of the exchange ratio, and J.P. Morgan did not express any opinion
as to any other alternative transactions that may have been considered or
available to the management or the board of directors of Varco.
In accordance with customary investment banking practices, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following table summarizes some of the material financial analyses utilized by
J.P. Morgan in conjunction with providing its opinion. These and other
financial analyses performed by J.P. Morgan are described below. This table
should be read with the more detailed description set forth below:
<TABLE>
<CAPTION>
Implied
Varco Exchange
Valuation Methodology Contribution Ratio
- --------------------- ------------ ------------
<S> <C> <C>
Discounted Cash Flow Analysis....................... 49.1%--52.7% 0.69x--0.79x
Perpetuity Value Analysis........................... 48.7%--59.2% 0.68x--1.03x
Comparable Company Analysis......................... 46.0%--53.1% 0.61x--0.81x
Comparable Transaction Analysis..................... 45.2%--53.8% 0.59x--0.83x
Relative Contribution Analysis...................... 46.8%--66.3% 0.63x--1.40x
Relative Market Value Analysis...................... 47.5%--58.4% 0.65x--1.00x
Varco's Shareholders Approximate Continuing
Ownership Position in Combined Company............. 50.0% 0.7125x
</TABLE>
Discounted Cash Flow Analysis. J.P. Morgan conducted a discounted cash flow
analysis for the purpose of determining the fully diluted equity value per
share for Varco's and Tuboscope's common stock. J.P. Morgan calculated the
unlevered free cash flows that Varco and Tuboscope are expected to generate
during fiscal years 2000 through 2001 based upon information and financial
projections prepared by management of both companies and upon management
projections adjusted by J.P. Morgan to reflect a more moderate cyclical
recovery in revenues and EBITDA for Varco. J.P. Morgan also calculated
estimated terminal values based on multiples of equity value plus net debt,
commonly referred to as FV, to historical average earnings before interest,
tax, depreciation and amortization and other non-cash expenses, commonly
referred to as EBITDA, from 10.0x to 12.0x, based upon selected FV/ EBITDA
trading multiples of similar publicly-traded companies for each company. The
unlevered free cash flows and estimates of terminal values for Varco were
discounted to present values using a range of discount rates from 10% to 12%,
which were chosen by J.P. Morgan based upon an analysis of the weighted average
cost of capital of Varco. The unlevered free cash flows and estimates of
terminal values for Tuboscope were discounted to present values using a range
of discount rates from 9% to 11%, which were chosen by J.P. Morgan based upon
an analysis of the weighted average cost of capital of Tuboscope. The present
value of the unlevered free cash flows and the range of terminal asset values
for Varco and Tuboscope were then adjusted for Varco's and Tuboscope's 1999
fiscal year-end excess cash and total debt. The discounted cash flow analysis
resulted in an implied contribution to the combined company by Varco of between
49.1% and 52.7%, which implies an exchange ratio of 0.69x to 0.79x.
Perpetuity Value Analysis. J.P. Morgan also conducted a perpetuity value
analysis based on historical average EBITDA for the purpose of determining the
fully diluted equity value per share for Varco's and Tuboscope's common stock.
J.P. Morgan calculated the average annualized quarterly EBITDA during the
periods ended March 31, June 30, September 30, and December 31 for each of the
years 1995 through 1999, which in J.P. Morgan's view reflects the most recent
business cycle in the oil service sector. J.P. Morgan capitalized in perpetuity
the average annualized quarterly historical EBITDA figures for Varco and
Tuboscope, respectively, based upon discount rates ranging from 10% to 12% and
9% to 11%, respectively. The perpetuity values for Varco and Tuboscope were
then adjusted for Varco's and Tuboscope's 1999 fiscal year-end excess cash and
total debt. The perpetuity value analysis resulted in an implied contribution
to the combined company by Varco of between 48.7% and 59.2%, which implies an
exchange ratio of 0.68x to 1.03x.
Comparable Company Analysis. J.P. Morgan reviewed and compared financial
information relating to Varco and Tuboscope to corresponding financial
information, ratios and public market multiples for selected
31
<PAGE>
publicly-traded companies engaged in businesses which J.P. Morgan judged to be
analogous to Varco and Tuboscope, respectively. The companies selected by J.P.
Morgan were as follows:
<TABLE>
<CAPTION>
Varco Trading Comparables Tuboscope Trading Comparables
- ------------------------- -----------------------------
<S> <C>
Dril-Quip, Inc. Smith International, Inc.
Weatherford International, Inc. BJ Services Co.
Smith International, Inc. Newpark Resources, Inc.
National-Oilwell, Ltd. ICO, Inc.
Cooper Cameron Corporation
Tesco Corporation
IRI International Corporation
</TABLE>
J.P. Morgan noted that none of these companies are identical to either Varco
or Tuboscope. Accordingly, a comparison of these companies to Varco or
Tuboscope is not purely mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading values of the comparable companies.
J.P. Morgan analyzed relevant trading multiples for Varco and Tuboscope,
including, among others (i) FV divided by EBITDA; (ii) share price divided by
after-tax operating cash flow per share; and (iii) share price divided by
earnings per share, commonly referred to as EPS. Each multiple was calculated
on a one and two-year prospective basis using selected analysts' estimates for
EBITDA and First Call estimates for after-tax operating cash flow and EPS.
J.P. Morgan observed that the relative contribution by Varco to the combined
company based on the comparable company analyses would have been between 46.0%
and 53.1%, depending on the selected measure used, which implies an exchange
ratio of 0.61x to 0.81x.
Comparable Transaction Analysis. Using publicly available information, J.P.
Morgan reviewed and compared financial information relating to the following
selected transactions which it deemed relevant since 1995:
Varco Transaction Comparables
-----------------------------
Emerson Electric Co. / Daniel Industries Inc.
Schlumberger Ltd. / Camco International Inc.
EVI, Inc. / Weatherford Enterra Inc.
Halliburton Co. / Dresser Industries Inc.
Smith International, Inc. / Wilson Industries, Inc.
National-Oilwell, Ltd. / Dreco Energy Services Ltd.
Baker Hughes Inc. / Drilex International Inc.
Camco International Inc. / Production Operators Corp.
Weatherford International, Inc. / Enterra Corp.
Tuboscope Transaction Comparables
---------------------------------
Halliburton Co. / Dresser Industries Inc.
Smith International, Inc. / Wilson Industries, Inc.
Baker Hughes Inc. / Drilex International Inc.
Camco International Inc. / Production Operators Corp.
Baker Hughes Inc. / Petrolite Corp.
BJ Services Co. / Nowsco Well Service, Ltd.
Tuboscope Inc. / Drexel Oilfield Services
32
<PAGE>
J.P. Morgan analyzed relevant transaction multiples including, among others:
(i) FV divided by EBITDA; (ii) share price divided by after-tax operating cash
flow per share; and (iii) share price divided by EPS. Each multiple was
calculated on a last twelve months' basis as well as on a one and two-year
prospective basis using selected analysts' estimates for EBITDA and First Call
estimates for after-tax operating cash flow and EPS.
J.P. Morgan observed that the relative contribution by Varco to the combined
company based on the selected transaction analyses would have been between
45.2% and 53.8%, depending on the selected measure used, which implies an
exchange ratio of 0.59x to 0.83x.
Relative Contribution Analysis. J.P. Morgan reviewed and analyzed selected
measures of historical and forecast financial contribution of Varco and
Tuboscope to the combined company. Using actual 1999 results and management
forecasts for 2000 and 2001 for Varco and Tuboscope, J.P. Morgan analyzed the
following relative contribution measures: (i) EBITDA; (ii) net income; and
(iii) net income plus depreciation and amortization adjusted for non-recurring
charges. J.P. Morgan also analyzed the relative book value of equity for each
company as of December 31, 1999. Analyzing selected measures J.P. Morgan deemed
relevant, J.P. Morgan observed that the relative contribution of equity value
by Varco to the combined company would have been between 46.8% and 66.3%,
depending on the selected measure used, which implies an exchange ratio of
0.63x to 1.40x.
Relative Market Value Analysis. J.P. Morgan reviewed and analyzed the
relative equity value contributions of Varco and Tuboscope to a pro forma
combined entity based upon historical relative market values. The following
historical periods were reviewed:
<TABLE>
<CAPTION>
Varco diluted Tuboscope diluted Implied Implied
equity value equity value Varco Exchange
Period per share per share ownership Ratio
- ------ ------------- ----------------- --------- --------
<S> <C> <C> <C> <C>
Average for the twelve
months prior to
March 20, 2000............ $10.92 $13.85 52.5% 0.79x
Average for the 180 trading
days prior to
March 20, 2000............ $11.20 $14.45 52.1% 0.78x
Average for the 90 trading
days prior to
March 20, 2000............ $10.76 $14.99 50.2% 0.72x
Average for the ten trading
days prior to
March 20, 2000............ $13.39 $17.69 51.5% 0.76x
At closing on March 20,
2000...................... $13.25 $16.44 53.1% 0.81x
</TABLE>
J.P. Morgan also analyzed the frequency of the ratio of Varco's share price
to Tuboscope's share price during the twelve months prior to March 20, 2000 on
a daily basis. During this period, J.P. Morgan observed that, approximately 88%
of the time, Varco's implied ownership was between 47.5% and 58.4%, which
implies an exchange ratio of 0.65x to 1.00x.
J.P. Morgan also analyzed the historical multiples of share price to
selected analysts' estimates of projected after-tax operating cash flow for
Varco and Tuboscope during the most recent business cycle for the oil service
industry, which J.P. Morgan judged to be during the period from 1995 through
1999. During this period, J.P. Morgan observed that Tuboscope generally traded
at a higher price / after-tax operating cash flow multiple than Varco during
the first half of the cycle, and that Varco generally traded at a higher price
/ after-tax operating cash flow multiple during the second half of the cycle.
J.P. Morgan also observed that current business conditions in the oil service
industry are representative of the first half of an oil service business cycle,
and that Varco's currently lower price / after-tax operating cash flow
multiples and relative contribution of forecast EBITDA and after-tax operating
cash flow in 2001 are consistent with J.P. Morgan's analysis of the past oil
service business cycle.
Pro Forma Merger Analysis. J.P. Morgan analyzed the then-current pro forma
combined company after-tax operating cash flow and EBITDA per share forecasts
for 2000 and 2001 based on internal financial projections prepared by Varco and
Tuboscope and their respective management. The analysis showed, assuming
33
<PAGE>
synergies of $10 million per year, on an equivalent share basis, that the
merger would be accretive to after-tax operating cash flow in 2000 and 2001,
and accretive to EPS in 2001, to Varco's shareholders.
The summary set forth above is not a complete description of the analyses or
data presented by J.P. Morgan. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. J.P. Morgan believes that the summary set forth above and
its analyses must be considered as a whole and that selecting portions of them,
without considering all of its analyses, would create an incomplete view of the
processes underlying its analyses and opinion. J.P. Morgan based its analyses
on assumptions that it deemed reasonable, including assumptions concerning
general business and economic conditions and industry-specific factors. The
other principal assumptions upon which J.P. Morgan based its analyses are set
forth above under the description of each analysis. J.P. Morgan's analyses are
not necessarily indicative of actual values or actual future results that might
be achieved, which values or results may be higher or lower than those
indicated. Moreover, J.P. Morgan's analyses are not and do not purport to be
appraisals or otherwise reflective of the prices at which businesses actually
could be bought or sold.
As part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to advise Varco and to deliver a
fairness opinion with respect to the merger on the basis of this experience and
its familiarity with Varco.
For services rendered in connection with the merger and the delivery of its
opinion, Varco has agreed to pay J.P. Morgan a fee of $3,500,000, payable as
follows: (i) $150,000 upon signing of its engagement letter; (ii) $1,000,000
upon announcement of the merger; and (iii) $2,350,000 upon closing of the
merger. In addition, if the merger agreement is terminated under circumstances
pursuant to which a termination fee is paid to Varco, Varco has agreed to pay
J.P. Morgan a fee equal to 20% of any termination fee for its services, up to a
maximum of $3,000,000, less any amounts paid to J.P. Morgan under (i) and (ii)
above. Varco has also agreed to reimburse J.P. Morgan for its expenses incurred
in connection with its services, including the fees and disbursements of
counsel, and will indemnify J.P. Morgan against certain liabilities.
J.P. Morgan has in the past provided financial advisory services to Varco,
and an affiliate of J.P. Morgan maintains a banking relationship with Varco for
which it has received customary fees. In the ordinary course of their
businesses, J.P. Morgan and its affiliates may actively trade the debt and
equity securities of Varco and Tuboscope for their own accounts or for the
accounts of customers and, accordingly, they may at any time hold long or short
positions in these securities.
Tuboscope
Credit Suisse First Boston has acted as Tuboscope's exclusive financial
advisor in connection with the merger. Tuboscope selected Credit Suisse First
Boston based on Credit Suisse First Boston's experience, expertise and
reputation, and its familiarity with Tuboscope's business. Credit Suisse First
Boston is an internationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, Tuboscope
requested that Credit Suisse First Boston evaluate the fairness, from a
financial point of view, to Tuboscope of the exchange ratio provided for in the
merger. On March 22, 2000, at a meeting of the Tuboscope board held to consider
the merger, Credit Suisse First Boston rendered to the Tuboscope board an oral
opinion, which opinion was confirmed by delivery of a written opinion dated
March 22, 2000, to the effect that, as of that date and based on and subject to
the matters described in its opinion, the exchange ratio was fair, from a
financial point of view, to Tuboscope.
34
<PAGE>
The full text of Credit Suisse First Boston's written opinion dated March
22, 2000 to the Tuboscope board, which sets forth the procedures followed,
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex III and is incorporated into this document by reference.
Holders of Tuboscope common stock are urged to read this opinion carefully in
its entirety. Credit Suisse First Boston's opinion is addressed to the
Tuboscope board and relates only to the fairness of the exchange ratio from a
financial point of view to Tuboscope, does not address any other aspect of the
proposed merger or any related transaction and does not constitute a
recommendation to any stockholder as to any matters relating to the merger. The
summary of Credit Suisse First Boston's opinion in this document is qualified
in its entirety by reference to the full text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and related documents, as well as publicly available business and
financial information relating to Tuboscope and Varco. Credit Suisse First
Boston also reviewed other information relating to Tuboscope and Varco,
including financial forecasts, which Tuboscope and Varco provided to or
discussed with Credit Suisse First Boston, and met with the managements of
Tuboscope and Varco to discuss the businesses and prospects of Tuboscope and
Varco.
Credit Suisse First Boston also considered financial and stock market data
of Tuboscope and Varco and compared those data with similar data for other
publicly held companies in businesses similar to Tuboscope and Varco and
considered, to the extent publicly available, the financial terms of other
business combinations and transactions recently announced or completed. Credit
Suisse First Boston also considered other information, financial studies,
analyses and investigations and financial, economic and market criteria that it
deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information that was
provided to or otherwise reviewed by it and relied on that information being
complete and accurate in all material respects. With respect to financial
forecasts, Credit Suisse First Boston was advised, and assumed, that the
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of Tuboscope and Varco as
to the future financial performance of Tuboscope and Varco and the potential
synergies and strategic benefits anticipated to result from the merger,
including the amount, timing and achievability of those synergies and benefits.
Credit Suisse First Boston also assumed, with the Tuboscope board's consent,
that the merger will be treated as a pooling-of-interests in accordance with
generally accepted accounting principles and as a tax-free reorganization for
federal income tax purposes.
Credit Suisse First Boston was not requested to, and did not, make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of Tuboscope or Varco, and was not furnished with any evaluations or
appraisals. Credit Suisse First Boston's opinion was necessarily based on
information available to, and financial, economic, market and other conditions
as they existed and could be evaluated by, Credit Suisse First Boston on the
date of its opinion. Credit Suisse First Boston did not express any opinion as
to what the value of Tuboscope common stock actually would be when issued in
the merger or the prices at which Tuboscope common stock would trade after the
merger. Although Credit Suisse First Boston evaluated the exchange ratio from a
financial point of view, Credit Suisse First Boston was not requested to, and
did not, recommend the specific consideration payable in the merger, which
consideration was determined between Tuboscope and Varco. No other limitations
were imposed on Credit Suisse First Boston with respect to the investigations
made or procedures followed in rendering its opinion.
In preparing its opinion to the Tuboscope board, Credit Suisse First Boston
performed a variety of financial and comparative analyses, including those
described below. The summary of Credit Suisse First Boston's analyses described
below is not a complete description of the analyses underlying Credit Suisse
First Boston's opinion. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
and relevant methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, a fairness opinion is not
readily susceptible to summary description. In arriving at its opinion, Credit
Suisse First Boston made qualitative judgments as to the
35
<PAGE>
significance and relevance of each analysis and factor that it considered.
Accordingly, Credit Suisse First Boston believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors
or focusing on information presented in tabular format, without considering all
analyses and factors or the narrative description of the analyses, could create
a misleading or incomplete view of the processes underlying its analyses and
opinion.
In its analyses, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Tuboscope and Varco. No
company, transaction or business used in Credit Suisse First Boston's analyses
as a comparison is identical to Tuboscope or Varco or the proposed merger, and
an evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed.
The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not necessarily purport to be appraisals or to reflect the prices
at which businesses or securities actually may be sold. Accordingly, Credit
Suisse First Boston's analyses and estimates are inherently subject to
substantial uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one of
many factors considered by the Tuboscope board in its evaluation of the
proposed merger and should not be viewed as determinative of the views of the
Tuboscope board or management with respect to the merger or the exchange ratio.
The following is a summary of the material financial analyses underlying
Credit Suisse First Boston's opinion, dated March 22, 2000, delivered to the
Tuboscope board in connection with the merger. The financial analyses
summarized below include information presented in tabular format. In order to
fully understand Credit Suisse First Boston's financial analyses, the tables
must be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses. Considering the
data in the tables below without considering the full narrative description of
the financial analyses, including the methodologies and assumptions underlying
the analyses, could create a misleading or incomplete view of Credit Suisse
First Boston's financial analyses.
Aggregate Exchange Ratio Reference Range. Credit Suisse First Boston derived
implied exchange ratio reference ranges for Tuboscope and Varco based on a
discounted cash flow analysis, selected companies analysis and selected
acquisition analysis more fully described below. Based on the equity reference
ranges for Tuboscope and Varco implied by those analyses, Credit Suisse First
Boston derived the following aggregate implied exchange ratio reference range,
as compared to the exchange ratio in the merger:
<TABLE>
<CAPTION>
Aggregate Implied Exchange Ratio Range Merger Exchange Ratio
-------------------------------------- ---------------------
<S> <C>
0.51 to 1.03 0.7125
</TABLE>
Discounted Cash Flow Analysis. Credit Suisse First Boston estimated the
present value of the stand-alone, unlevered, after-tax free cash flows that
each of Tuboscope and Varco could produce over calendar years 2000 through
2005, based on internal estimates of the managements of Tuboscope and Varco and
adjustments to those estimates, reflecting the potential for higher revenue
growth and margins, developed by the management of Tuboscope. Ranges of
estimated terminal values were calculated by multiplying calendar year 2005
earnings before interest, taxes, depreciation and amortization, commonly
referred to as EBITDA, for each of Tuboscope and Varco by EBITDA multiples
ranging from 7.0x to 8.0x. The free cash flows of Tuboscope and Varco were then
discounted to present value using discount rates of 9.5% to 10.5% for Tuboscope
and 11.0% to 12.0% for Varco. This analysis indicated an implied exchange ratio
reference range of 0.60 to 0.89.
36
<PAGE>
Selected Companies Analysis. Credit Suisse First Boston compared financial,
operating and stock market data of Tuboscope to corresponding data of the
following publicly traded companies in the oil services business:
. BJ Services Company
. National-Oilwell, Inc.
. Smith International, Inc.
. Varco
. Weatherford International, Inc.
In addition, Credit Suisse First Boston compared financial operating and
stock market data of Varco to corresponding data of the following publicly
traded companies in the oil services business:
. Cooper Cameron Corporation
. Dril-Quip, Inc.
. National-Oilwell, Inc.
. Tuboscope
Credit Suisse First Boston reviewed adjusted market values, calculated as
equity market value, plus total debt and minority interests, less cash, as
multiples of estimated calendar years 2000 and 2001 EBITDA and equity market
values as multiples of estimated calendar years 2000 and 2001 after-tax cash
flow and net income. Credit Suisse First Boston then applied a range of
selected multiples derived from the selected companies of estimated calendar
years 2000 and 2001 EBITDA, after-tax cash flow and net income to corresponding
financial data of Tuboscope and Varco. All multiples were based on closing
stock prices on March 20, 2000. Estimated financial data for the selected
companies were based on publicly available research analysts' estimates,
estimated financial data for Tuboscope were based on internal estimates of the
management of Tuboscope, and estimated financial data for Varco were based on
internal estimates of the managements of Tuboscope and Varco. This analysis
indicated an implied exchange ratio reference range of 0.54 to 1.09.
Selected Mergers and Acquisitions Analysis. Credit Suisse First Boston
analyzed the implied transaction multiples paid or proposed to be paid in the
following selected merger and acquisition transactions in the oil services
business:
Selected Mergers and Acquisitions for Tuboscope
<TABLE>
<CAPTION>
Acquiror Target
- -------- ------
<S> <C>
National-Oilwell, Inc. IRI International Corporation
Schlumberger Limited Camco International, Inc.
Halliburton Company Dresser Industries, Inc.
EVI, Inc. Weatherford Enterra, Inc.
National-Oilwell, Inc. Phoenix Energy Products, Inc.
BJ Services Company Nowsco Well Service Limited
Tuboscope Vetco International Corporation Drexel Oilfield Services, Inc.
Dresser Ltd. Wheatley TXT Corporation
Tuboscope Baker Hughes Incorporated
(BHTS Eastern Hemisphere Division)
</TABLE>
37
<PAGE>
Selected Mergers and Acquisitions for Varco
<TABLE>
<CAPTION>
Acquiror Target
- -------- ------
<S> <C>
National-Oilwell, Inc. IRI International Corporation
National-Oilwell, Inc. Hitec ASA
Aker RGI ASA Aker Maritime ASA
Schlumberger Limited Camco International, Inc.
National-Oilwell, Inc. Dreco Energy Services Ltd.
Energy Ventures, Inc. XL Systems, Inc.
Cooper Cameron Corporation Ingram Cactus Company
Weatherford Enterra, Inc. NODECO AS
Inverness/Phoenix L.L.C., First Reserve National-Oilwell, Inc.
Corporation and management
Baroid Corporation Sub Sea International, Inc.
Cooper Industries Inc. Cameron Iron Works Inc.
</TABLE>
Credit Suisse First Boston compared purchase prices in the selected
transactions as multiples of latest 12 months revenues, EBITDA and earnings
before interest and taxes, commonly referred to as EBIT. Credit Suisse First
Boston then applied a range of selected multiples derived from the selected
transactions of latest 12 months revenues, EBITDA and EBIT to the average
revenues, EBITDA and EBIT of Tuboscope and Varco over calendar years 1996
through 1999. All multiples were based on publicly available financial
information. This analysis indicated an implied exchange ratio reference range
of 0.64 to 1.31.
Relative Analyses. Credit Suisse First Boston also conducted the following
relative analyses and compared the exchange ratio in the merger of 0.7125 with
the exchange ratios implied by these analyses:
Relative Contribution Analysis. Credit Suisse First Boston performed an
exchange ratio analysis, based on internal estimates of the managements of
Tuboscope and Varco, comparing the relative contributions of Tuboscope and
Varco to the estimated calendar years 2000 and 2001 revenues, EBITDA, EBIT, net
income and after-tax cash flows of the combined company. Exchange ratios
implied by the relative contributions of revenues, EBITDA and EBIT were
adjusted for each company's financial leverage. This analysis yielded, after
adjustment for extraordinary items, an implied exchange ratio reference range
of 0.63 to 1.21, as indicated in the following table:
<TABLE>
<CAPTION>
Implied
Exchange
Ratios
--------
<S> <C>
Revenues
2000E........................................................... 0.78
2001E........................................................... 0.84
EBITDA
2000E........................................................... 0.70
2001E........................................................... 0.70
EBIT
2000E........................................................... 0.63
2001E........................................................... 0.66
Net Income
2000E........................................................... 1.21
2001E........................................................... 0.83
After-Tax Cash Flow
2000E........................................................... 0.69
2001E........................................................... 0.63
</TABLE>
38
<PAGE>
Historical Stock Trading Analysis. Credit Suisse First Boston performed an
exchange ratio analysis comparing the average daily closing stock prices for
Tuboscope and Varco one year, six months, three months, one month and one week
preceding March 20, 2000 and on March 20, 2000. This comparison yielded an
implied exchange ratio reference range of 0.692 to 0.806, as indicated in the
following table:
<TABLE>
<CAPTION>
Implied
Period Exchange Ratio
------ --------------
<S> <C>
One year...................................................... 0.788
Six months.................................................... 0.773
Three months.................................................. 0.692
One month..................................................... 0.708
One week...................................................... 0.805
March 20, 2000................................................ 0.806
</TABLE>
Pro Forma Merger Analysis. Credit Suisse First Boston analyzed the potential
pro forma effect of the merger on Tuboscope's earnings per share and cash flow
per share for estimated calendar years 2000 and 2001 based both on internal
estimates of the managements of Tuboscope and Varco and publicly available
research analysts' estimates, both before and after giving effect to potential
cost savings and other synergies anticipated by the managements of Tuboscope
and Varco to result from the merger. This analysis assumed that the merger
would qualify for pooling-of-interests accounting treatment. Based on the
exchange ratio in the merger of 0.7125, this analysis indicated that the
proposed merger would be accretive with or without synergies in each of the
years analyzed on an earnings per share basis, accretive with synergies in each
of the years analyzed on a cash flow per share basis, and dilutive without
synergies in each of the years analyzed on a cash flow per share basis
utilizing management estimates. The actual results achieved by the combined
company may vary from projected results and the variations may be material.
Other Factors. In the course of preparing its opinion, Credit Suisse First
Boston also reviewed and considered other information and data, including:
. the quarterly earnings performance of Tuboscope and Varco over the
period 1995 through 2000 based on publicly available research analysts'
estimates;
. the trading characteristics of Tuboscope common stock and Varco common
stock and the relationship between movements in Tuboscope common stock
and Varco common stock and movements in the common stock of the selected
companies;
. selected market premium data in selected transactions in the oil
services business announced during the period 1997 to 2000;
. the maximum, minimum and current ratio of enterprise value to gross
invested capital for Tuboscope, Varco and selected oil service companies
over the period 1994 through 1999; and
. the pro forma capitalization of Tuboscope and stockholder profiles of
Tuboscope and Varco.
Miscellaneous. Tuboscope has agreed to pay Credit Suisse First Boston for
its financial advisory services upon completion of the merger an aggregate fee
equal to 0.55% of Tuboscope's market value on a diluted basis, plus the net
debt of Tuboscope, up to a maximum fee of $6.0 million. In addition, if the
merger agreement is terminated under circumstances pursuant to which a
termination fee is paid to Tuboscope, Tuboscope has agreed to pay Credit Suisse
First Boston a fee equal to a minimum of $600,000 and up to a maximum of $1.5
million. Tuboscope also has agreed to reimburse Credit Suisse First Boston for
its reasonable out-of-pocket expenses, including reasonable fees and expenses
of legal counsel and any other advisor retained by Credit Suisse First Boston,
and to indemnify Credit Suisse First Boston and related parties against
liabilities, including liabilities under the federal securities laws, arising
out of its engagement.
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<PAGE>
Credit Suisse First Boston and its affiliates have in the past provided
services to Tuboscope and Varco, and are currently participating in a bank
credit facility to Tuboscope, unrelated to the proposed merger, for which
services Credit Suisse First Boston and its affiliates have received and will
receive compensation. In the ordinary course of business, Credit Suisse First
Boston and its affiliates may actively trade the debt and equity securities of
both Tuboscope and Varco for their own accounts and for the accounts of
customers and, accordingly, may at any time hold long or short positions in
those securities.
Interests of Certain Persons in the Merger
When considering the recommendations of the Tuboscope and Varco boards of
directors, you should be aware that certain Tuboscope and Varco directors and
officers have interests in the merger that are different from, or are in
addition to, your interests.
In particular, ten executive officers of Tuboscope are parties to severance
agreements with Tuboscope. These agreements provide that all of the unvested
stock options and restricted stock awards held by these officers will become
immediately vested upon completion of a transaction that constitutes a change
in control of Tuboscope. The completion of the merger will constitute a change
in control of Tuboscope under these agreements and, as a result, all unvested
stock options and restricted stock units held by these officers will become
immediately vested upon the completion of the merger. As a result, the vesting
of options to purchase 818,866 shares of Tuboscope common stock and 251,290
restricted stock units held by Tuboscope's officers will be accelerated upon
the completion of the merger.
In addition, these severance agreements provide severance benefits in the
event that a covered officer is terminated by Tuboscope other than for cause,
which is limited to events such as conviction of a felony involving moral
turpitude, dishonesty or breach of trust, commission of theft, fraud,
embezzlement or misappropriation, serious dereliction of duty, and unauthorized
disclosure of confidential information. The severance benefits are enhanced in
the case of a change in control of Tuboscope, such as the merger, and are
available if, within two years of the change in control, the officer is
terminated other than for cause or if the officer terminates his employment for
good reason. Under the agreements, a "good reason" includes failure to re-elect
the officer to any corporate office or a reduction in the officer's authority
or responsibility, which the officer determines has detrimentally and
materially affected the terms of his employment, a material reduction in
compensation or benefits, and relocation to an office more than 50 miles away.
Upon a qualifying termination following a change in control of Tuboscope, the
covered officers would be entitled to change in control severance benefits,
including the following:
. base salary for a period ranging from 18 months to three years,
depending upon the particular officer, payable on a regular payroll
basis;
. a cash bonus for the salary payout period ranging from 40% to 60% of
base salary, depending upon the particular officer, payable in
installments with base salary;
. full vesting of all accrued benefits under Tuboscope's pension, profit
sharing, 401(k) and similar plans;
. continued participation in Tuboscope's medical and dental health
benefits and disability coverage or equivalent coverage during the
payout period, subject to reduction to the extent that the officer
receives similar benefits from another employer;
. full vesting of all outstanding and unvested restricted stock awards
under Tuboscope's stock plans;
. the gross-up of certain payments, subject to excise taxes under the
Internal Revenue Code as "parachute payments," so that the officer
receives the same amount he would have received had there been no
applicable excise taxes;
. full vesting as of the date of termination of all bonus awards under
Tuboscope's Value Plan; and
. an extended option exercise period.
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The Tuboscope officers covered by these severance agreements, their titles, the
terms of their payout periods, and their bonus percentages are as follows:
<TABLE>
<CAPTION>
Name Title Payout Period Bonus %
---- ----- ------------- -------
<S> <C> <C> <C>
John F. Lauletta........ President and Chief Executive 3 years 60%
Officer
Joseph C. Winkler....... Executive Vice President and 2 years 50%
Chief Financial Officer
Charles N. Gricher...... Vice President, Solids Control 18 months 40%
Technology
James F. Maroney, III... Vice President, Secretary and 18 months 40%
General Counsel
Joe E. McAnally......... Vice President-Coiled 18 months 40%
Tubing/Wireline
John M. Nelson.......... Vice President and General 18 months 40%
Manager-Coating Services
Kenneth L. Nibling...... Vice President-Human Resources 18 months 40%
and Administration
Haynes B. Smith, III.... Vice President-Western Hemisphere 18 months 40%
Operations
Peter J. Stuart......... Vice President-Eastern Hemisphere 18 months 40%
Operations
Clay C. Williams........ Vice President and General 18 months 40%
Manager-Pipeline Services
</TABLE>
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In March 2000, Varco entered into severance agreements with nine of its
executive officers. The completion of the merger will constitute a change in
control as defined in these agreements. These agreements are substantially
identical to the Tuboscope severance agreements described above, except that
there is no vesting of performance awards or restricted stock awards because
Varco's plans do not provide these benefits, and although all stock options
would vest in connection with any future change in control, they will not vest
in connection with the merger. In addition, the agreement with Michael W.
Sutherlin provides for a retention bonus in the amount of $600,000, payable to
Mr. Sutherlin if he does not exercise his right to terminate his employment for
good reason for a period of 12 months following the merger. If after Mr.
Sutherlin receives his retention bonus he terminates his employment for good
reason within the two-year period following the merger, his retention bonus
would be offset against his severance pay and bonus. The Varco officers covered
by these severance agreements, their titles, the terms of their payout periods,
and their bonus percentages are as follows:
<TABLE>
<CAPTION>
Name Title Payout Period Bonus %
---- ----- ------------- -------
<S> <C> <C> <C>
George Boyadjieff....... Chairman of the Board and Chief 3 years 60%
Executive Officer
Michael W. Sutherlin.... President and Chief Operating 3 years 60%
Officer
Wallace K. Chan......... Vice President-Finance and Chief 2 years 50%
Financial Officer
Robert J. Gondek........ Vice President and President-M/D 18 months 40%
Totco Division
Mark A. Merit........... Vice President and President- 18 months 40%
Shaffer Division
Roger D. Morgan......... Vice President and President- 18 months 40%
Varco Systems Division
Dietmar Neidhardt....... President-Rigtech Division 18 months 40%
James G. Renfro......... President-Varco BJ Division 18 months 40%
Donald L. Stichler...... Vice President, Controller- 18 months 40%
Treasurer and Secretary
</TABLE>
Pursuant to the merger agreement, Tuboscope has agreed to indemnify each
present and former director and officer of Varco against all liabilities or
expenses incurred in connection with claims relating to matters that occur
prior to the closing of the merger. See "The Merger Agreement--Director and
Officer Indemnification."
Determination of Exchange Ratio
The exchange ratio for the Varco common stock was determined through arm's-
length negotiations between Tuboscope and Varco.
Regulatory Approval Required
Antitrust. The merger is subject to the requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, which prevents some transactions
from being completed until required information and materials are furnished to
the Antitrust Division of the Department of Justice and the Federal Trade
Commission. In addition, a waiting period must expire. Tuboscope and Varco
filed the required notifications and report forms with the Department of
Justice and the Federal Trade Commission on March 31, 2000, and applied for
early termination of the waiting period. Unless terminated earlier, the
applicable waiting period expires on April 30, 2000.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds even after expiration
of the waiting period. Accordingly, at any time before or after the completion
of the merger, either the Antitrust Division of the Department of Justice or
the Federal Trade
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Commission could take any action under the antitrust laws as it deems necessary
or desirable in the public interest, or other persons, including private
parties, could take action under the antitrust laws, including seeking to
enjoin the merger. Additionally, at any time before or after the completion of
the merger, any state could take any action under the antitrust laws as it
deems necessary or desirable in the public interest. We cannot assure you that
a challenge to the merger will not be made or that, if a challenge were made,
it would be defeated.
Any Varco shareholder that acquires Tuboscope common stock valued in excess
of $15 million in the merger may also be required to make a filing under the
Hart-Scott-Rodino Act. We advise you to consult with legal advisors regarding
your potential filing obligation.
Foreign Regulatory Approvals. Because both Tuboscope and Varco have
international operations, they may be subject to review by foreign governmental
agencies. As of the date of this proxy statement/prospectus, Tuboscope and
Varco have made filings with regulatory authorities in Brazil.
Management and Operations Following the Merger
If the merger is completed, the board of directors of the combined company
will consist of the following ten people: John F. Lauletta, Eric L. Mattson,
L.E. Simmons, Jeffery A. Smisek and Douglas E. Swanson, all of whom are
currently directors of Tuboscope, and George Boyadjieff, George S. Dotson,
Andre R. Horn, Eugene R. White and James D. Woods, all of whom are currently
directors of Varco.
Upon the closing of the merger, the management of the combined company will
be as follows:
. George Boyadjieff, who is currently Chairman of the Board and Chief
Executive Officer of Varco, will serve as Chairman of the Board and
Chief Executive Officer of the combined company;
. John F. Lauletta, who is currently President and Chief Executive Officer
of Tuboscope, will serve as President and Chief Operating Officer of the
combined company; and
. Joseph C. Winkler, who is currently Executive Vice President and Chief
Financial Officer of Tuboscope, will serve as Executive Vice President
and Chief Financial Officer of the combined company.
The corporate headquarters of the combined company will be located in
Orange, California and Houston, Texas, at the location of the current
headquarters of Varco and Tuboscope.
Accounting Treatment
The merger is expected to be treated as a pooling-of-interests for
accounting and financial reporting purposes. Under this method of accounting,
the recorded assets and liabilities of Tuboscope and Varco will be carried
forward in the combined company at their recorded amounts, the operating
results of the combined company will include the operating results of Tuboscope
and Varco for the entire fiscal year in which the combination occurs, and the
reported operating results of the separate companies for prior periods will be
combined and restated as the operating results of the combined company. A
condition to the merger is that by the closing date Tuboscope and Varco shall
have each received a letter from Ernst & Young LLP regarding its concurrence
with the conclusions of Tuboscope's and Varco's management as to the
appropriateness of pooling-of-interests accounting, under Accounting Principles
Board Opinion No. 16, for the merger. See "The Merger Agreement--Conditions to
the Merger" and "Unaudited Pro Forma Condensed Combined Financial Statements."
Material United States Federal Income Tax Consequences
The following summary of material United States federal income tax
consequences of the merger to the Varco common shareholders is based upon
current provisions of the Internal Revenue Code of 1986, as amended, currently
applicable United States Treasury regulations and judicial and administrative
rulings and decisions as of the date hereof. The following summary is not
binding on the Internal Revenue Service, and no
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<PAGE>
rulings have been or will be sought from the Internal Revenue Service regarding
any matters relating to the merger. In addition, legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements set forth herein, possibly on a retroactive basis. This summary does
not purport to deal with all aspects of United States federal income taxation
that may be relevant to particular holders of Varco common stock in light of
their individual circumstances, nor with certain types of holders who are
subject to special treatment under the federal income tax laws (including,
without limitation, tax-exempt organizations; insurance companies; financial
institutions; broker-dealers; persons who hold such stock as part of a hedge,
appreciated financial position, straddle or conversion transaction; holders
whose functional currency is not the United States dollar; holders who acquired
their stock pursuant to the exercise of employee stock options or otherwise as
compensation or who receive in the merger Tuboscope common stock in excess of
the value of the Varco common stock surrendered in the merger; and holders who
are neither citizens nor residents of the United States, or that are foreign
corporations, foreign partnerships or foreign estates or trusts for United
States federal income tax purposes). The summary also assumes that a Varco
common shareholder holds its shares of Varco common stock as a capital asset.
Finally, no foreign, state or local tax considerations are addressed herein.
Consequently, each holder of Varco common stock is strongly urged to consult
its tax advisor regarding the tax consequences of the merger in light of each
such holder's particular circumstances, including the applicability and effect
of federal, state, local and foreign income and other tax laws.
Completion of the merger is conditioned upon, among other things, the
receipt by Tuboscope and Varco of tax opinions of Latham & Watkins and Pircher,
Nichols & Meeks, respectively, dated as of the closing date, each to the effect
that the merger will qualify for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. These opinions will be based on customary assumptions and representations
made by Varco and Tuboscope. An opinion of counsel represents counsel's best
legal judgment and is not binding on the Internal Revenue Service or any court.
The following discussion assumes that the merger constitutes a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code.
Consequences of the Merger
Based on the above assumptions and qualifications, the merger will generally
result in the following United States federal income tax consequences:
. no gain or loss will be recognized by Varco or Tuboscope solely as a
result of the merger;
. no gain or loss will be recognized by Varco common shareholders on the
exchange of their Varco common stock solely for Tuboscope common stock
(except to the extent of cash received in lieu of fractional shares);
. the holding period of Tuboscope common stock received will include the
holding period of shares of Varco common stock surrendered in the
merger;
. the aggregate tax basis of Tuboscope common stock received by Varco
common shareholders who exchange all of their Varco common stock solely
for Tuboscope common stock in the merger will be the same as the
aggregate tax basis of Varco common stock surrendered in the merger
(reduced by any portion of such tax basis allocable to a fractional
share of Tuboscope common stock for which cash is received); and
. cash payments received by Varco common shareholders in lieu of a
fractional share of Tuboscope common stock will be treated as capital
gain or loss measured by the difference, if any, between the cash
payment received and the portion of the tax basis in the shares of Varco
common stock allocable to the fractional share. This gain or loss will
be long-term capital gain or loss if the holder's holding period in the
Varco common stock exchanged for the fractional share of Tuboscope
common stock is more than one year at the time the merger is completed.
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<PAGE>
Varco Shareholders Exercising Dissenters' Rights
A Varco shareholder who exercises dissenters' rights and receives cash in
exchange for its Varco common stock will generally recognize capital gain or
loss equal to the difference between the cash received and the shareholder's
tax basis in the Varco common stock exchanged therefor.
Capital gains of non-corporate shareholders are generally taxable at a
maximum United States federal income tax rate of 20% if the shareholder's
holding period in its shares is more than one year at the time of the
completion of the merger. Capital gains of corporate shareholders are generally
taxable at the regular tax rates applicable to corporations.
Backup Withholding
Backup withholding at the rate of 31% may apply with respect to certain cash
payments received by a Varco common shareholder in connection with the merger
unless:
. the recipient is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact; or
. the recipient provides a correct taxpayer identification number,
certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup
withholding rules.
A Varco common shareholder who does not provide Tuboscope with its correct
taxpayer identification number may be subject to penalties imposed by the
Internal Revenue Service. Any amounts withheld under the backup withholding
rules may be allowed as a refund or a credit against the holder's federal
income tax liability, provided that the required information is furnished to
the Internal Revenue Service.
Dissenters' and Appraisal Rights
Tuboscope stockholders will not be entitled under Delaware law to exercise
dissenters' or appraisal rights as a result of the merger or to demand payment
for their shares. Tuboscope does not intend to make available these rights to
its stockholders.
If holders of 5% or more of the outstanding shares of Varco common stock
entitled to vote at the Varco special meeting vote against the merger proposal
and comply with certain other procedures, Varco shareholders of record who take
the required actions will be entitled to exercise dissenters' rights pursuant
to the provisions of Chapter 13 of the California Corporations Code. In
accordance with these provisions, dissenting Varco shareholders who fully
comply with the procedures set forth in the California Corporations Code will
have the right to be paid in cash the fair market value of their shares of
Varco common stock (excluding any appreciation or depreciation as a consequence
of the merger) as determined by agreement between the shareholder and Varco or
the combined company. If they cannot agree, the court will determine the fair
market value or order an appraisal of the shares. The failure of a dissenting
Varco shareholder to vote against the merger or to timely and properly comply
with the other procedures will result in the termination or waiver of such
rights. In addition, the merger agreement provides that a condition to
Tuboscope's obligation to close is that holders of more than 5.0% of the
outstanding shares of Varco common stock shall not have elected to exercise
their dissenters' rights pursuant to the California Corporations Code. The
merger agreement further provides that a condition to Varco's obligation to
close is that holders of more than 10% of the outstanding shares of Varco
common shall not have exercised these dissenters' rights. See "The Merger
Agreement--Conditions to the Merger." The text of Chapter 13 of the California
Corporations Code is attached as Annex IV.
Dissenters' rights cannot be validly exercised by persons other than Varco
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another person,
such as brokers, banks or nominees, should instruct the record holder to follow
the procedures outlined below if they wish to dissent from the merger with
respect to any or all of their shares.
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<PAGE>
Dissenting Varco shareholders must submit to Varco at its principal office,
743 North Eckhoff Street, Orange, California 92868, Attention: Secretary, a
written demand that Varco purchase for cash some or all of their shares. The
notice must state the number of shares held of record which the Varco
shareholder demands to be purchased and the amount claimed to be the "fair
market value" of those shares. The statement of fair market value will
constitute an offer by the dissenting Varco shareholder to sell the shares at
that price. A Varco shareholder's demand will not be effective unless it is
received not later than the date of the Varco special meeting.
If Varco shareholders have a right to require Varco or the combined company
to purchase their shares for cash under the dissenters' rights provisions of
the California Corporations Code, Varco will mail to each dissenting
shareholder a notice of approval of the merger within ten days after the date
Varco shareholders approve the merger, stating the price determined by it to
represent the "fair market value" of the dissenting shares, and a brief
description of the procedure to be followed if the shareholder desires to
exercise such dissenters' rights. The statement of price will constitute an
offer to purchase any dissenting shares at that price.
To perfect their dissenters' rights, Varco shareholders of record must:
. make written demand for the purchase of their dissenting shares upon
Varco on or before the date of the Varco special meeting;
. vote their shares against adoption and approval of the merger agreement;
and
. within 30 days after the mailing to shareholders by Varco or the
combined company of the notice of approval of the principal terms of the
merger, submit the certificate(s) representing their dissenting shares
to Varco or the combined company or its transfer agent for notation
thereon that they represent dissenting shares.
The notice of approval of the merger will specify the date by which the
submission of certificates for endorsement must be made, and a submission made
after that date will not be effective for any purpose. Your failure to follow
any of these procedures may result in your loss of statutory dissenters'
rights.
If a dissenting Varco shareholder and Varco or the combined company agree
that shares are dissenting shares and agree upon the price of the shares, Varco
or the combined company, upon surrender of the certificates, will make payment
of that amount (plus interest at the legal rate on judgments from the date of
the agreement) within 30 days after the shareholder and Varco or the combined
company reached the agreement. Any agreement between dissenting Varco
shareholders and Varco or the combined company fixing the "fair market value"
of any dissenting shares must be filed with the Secretary of Varco or the
combined company.
If Varco denies that the shares are dissenting shares, or Varco and a
dissenting shareholder fail to agree upon the "fair market value" of the
shares, the dissenting shareholder may, within six months after the date on
which notice of approval of the merger was mailed to the Varco shareholder,
file a complaint (or intervene in a pending action, if any) requesting that the
court determine whether the shares are dissenting shares and the "fair market
value" of the dissenting shares. The court may appoint one or more impartial
appraisers to determine the "fair market value" per share of the dissenting
shares. The costs of the action will be assessed or apportioned as the court
considers equitable, but if the "fair market value" is determined by the court
to exceed 125% of the price offered in the merger, Varco or the combined
company will be required to pay the costs including, in the discretion of the
court, attorneys' fees, fees of expert witnesses and interest at the legal rate
on judgments. A dissenting shareholder must bring an action within six months
after the date on which the notice of approval of the merger agreement was
mailed to the Varco shareholders, whether or not Varco responds within that
time to the shareholder's written demand that Varco or the combined company
purchase for cash shares voted against the merger agreement.
Listing of the Tuboscope Common Stock to be Issued in the Merger
Tuboscope will use its best efforts to cause the shares of Tuboscope common
stock to be issued in the merger to be approved for listing on the New York
Stock Exchange, subject to official notice of issuance,
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<PAGE>
before the completion of the merger. The listing of the shares of Tuboscope
common stock is a condition to the completion of the merger. At the time of the
merger, the trading symbol of Tuboscope's common stock will be changed to
"VRC."
Delisting and Deregistration of Varco Common Stock after the Merger
If the merger is completed, Varco common stock will be delisted from the New
York Stock Exchange and will be deregistered under the Securities Exchange Act
of 1934.
Federal Securities Law Consequences
All shares of Tuboscope common stock received by Varco shareholders in the
merger will be freely transferable, except that shares of Tuboscope common
stock received by persons who are deemed to be affiliates of Varco prior to the
merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act, or Rule 144 in the case of
persons who become affiliates of Tuboscope, or otherwise in compliance with, or
pursuant to an exemption from, the registration requirements of the Securities
Act. Persons deemed to be affiliates of Tuboscope or Varco are those
individuals or entities that control, are controlled by, or are under common
control with, the party and generally include executive officers, directors and
principal stockholders of the party. This proxy statement/prospectus does not
cover any resales of Tuboscope common stock received by affiliates of Varco in
the merger.
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<PAGE>
THE MERGER AGREEMENT
A copy of the merger agreement is attached to this proxy
statement/prospectus as Annex I and is incorporated by reference into this
proxy statement/prospectus. While the discussion below summarizes many of the
material provisions of the merger agreement, we urge you to read the merger
agreement in its entirety for a more complete description of the terms and
conditions of the merger.
General
The merger agreement provides that Varco will be merged with and into
Tuboscope at the effective time of the merger. Tuboscope will continue as the
surviving corporation in accordance with the Delaware General Corporation Law.
As part of the merger, Tuboscope's name will be changed so that the name of the
surviving corporation will be Varco International, Inc. At the effective time
of the merger, all the property, rights, privileges, immunities, powers and
franchises of Varco and Tuboscope before the merger will vest in the surviving
corporation, and all debts, liabilities and duties of Varco and Tuboscope
before the merger will become the debts, liabilities and duties of the
surviving corporation.
The merger will be completed after all conditions in the merger agreement
are met or waived and Tuboscope and Varco file a certificate of merger with the
Secretary of State of the State of Delaware and articles of merger with the
Secretary of State of the State of California. The merger agreement provides
that the closing of the merger will take place at a time and date agreed to by
Tuboscope and Varco but not later than the second business day after
satisfaction or waiver of the conditions to the merger. Tuboscope and Varco
have tentatively agreed, and they presently expect, that the merger will be
completed by May 31, 2000. However, Tuboscope and Varco may agree to a
different date.
Conversion of Shares
The merger agreement provides that each issued and outstanding share of
Varco common stock, other than dissenting shares and shares owned by Varco or
Tuboscope, will be converted into 0.7125 shares of Tuboscope common stock.
However, if prior to the merger, the outstanding shares of Varco common stock
or Tuboscope common stock are changed into a different number of shares or a
different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the exchange ratio will be adjusted accordingly.
Each share of Tuboscope common stock, other than any shares owned by Varco
which will be cancelled, will be unaffected by the merger and will remained
outstanding.
No fractional shares of Tuboscope common stock will be issued in the merger.
Each holder of Varco common stock who would have otherwise been entitled to
receive a fraction of a share of Tuboscope common stock will receive cash in
lieu of a fractional share of Tuboscope common stock. The amount of cash will
be equal to the relevant fraction times the average of the closing prices of a
share of Tuboscope common stock on the New York Stock Exchange on the ten
trading days prior to the date of the merger.
Procedure for the Exchange of Stock Certificates
Exchange of Stock Certificates. Tuboscope and Varco have designated
ChaseMellon Shareholder Services, L.L.C. to serve as exchange agent for the
exchange of certificates representing Varco common stock for certificates
representing Tuboscope common stock and for the payment of cash in lieu of
fractional shares. Promptly after the merger is completed, the exchange agent
will mail transmittal forms and exchange instructions to each holder of record
of Varco common stock. After receiving the transmittal form, each holder of
certificates formerly representing Varco common stock will be able to surrender
the certificates to the exchange agent and receive certificates evidencing the
appropriate number of whole shares of Tuboscope common stock. After the merger,
each certificate formerly representing Varco common stock, until surrendered
and exchanged, will be deemed, for all purposes, to evidence only the right to
receive a certificate representing
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<PAGE>
the number of whole shares of Tuboscope common stock which the holder's shares
of Varco common stock were converted in the merger, plus cash in lieu of
fractional shares, if any. For stockholder meeting quorum and notice purposes,
holders of unsurrendered Varco certificates will be considered to be record
holders of the shares of Tuboscope common stock represented by their Varco
certificates.
Dividends and Distributions. The holder of an unexchanged Varco certificate
will not be entitled to receive any dividends or other distributions otherwise
payable by Tuboscope until the certificate has been exchanged. Subject to
applicable laws, following surrender of the certificates by the holder,
Tuboscope will pay the holder any accrued and unpaid dividends and
distributions that have become payable between the effective time of the merger
and the time the certificate is surrendered, without interest.
Lost Certificates. A stockholder must provide an appropriate affidavit to
the exchange agent if any Varco common stock certificates are lost, stolen or
destroyed, in order to receive Tuboscope common stock or cash in lieu of
fractional shares in respect of the lost, stolen or destroyed certificates. In
addition, the surviving corporation may require the holder of lost, stolen or
destroyed certificates to post a bond as indemnity against any claim that may
be made against the surviving corporation or the exchange agent with respect to
the certificates.
No Liability. Neither the surviving corporation nor the exchange agent will
be liable to any former holder of shares of Varco common stock for shares of
Tuboscope common stock, or dividends or distributions made with respect to
those shares, delivered to a public official under any applicable abandoned
property, escheat or similar law.
Withholding Right. Either the surviving corporation or the exchange agent,
on behalf of the surviving corporation, is entitled to deduct and withhold from
the consideration payable to any former holder of shares of Varco common stock
the amount it is required to deduct and withhold from the consideration under
the Internal Revenue Code or any provision of state, local or foreign tax law.
Any amounts withheld will be treated as having been paid to the former holder
of the Varco common stock.
Please do not send in any stock certificates with your proxies. Please wait
for the transmittal form and instructions from the exchange agent.
Representations and Warranties
Tuboscope and Varco have made mutual representations and warranties in the
merger agreement relating to the following:
. their organization and the organization of their subsidiaries;
. their capital structures;
. the authorization, execution, delivery and enforceability of the merger
agreement and related matters;
. the absence of conflicts under their certificates or articles of
incorporation, bylaws, agreements and applicable laws;
. required consents or approvals;
. documents and financial statements filed with the Securities and
Exchange Commission and the accuracy of the information contained in
those documents and financial statements;
. the absence of material undisclosed liabilities;
. the absence of material adverse events or changes;
. taxes and tax returns;
. properties;
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. intellectual property;
. agreements, contracts and commitments;
. litigation;
. environmental matters;
. employee benefit plans;
. compliance with laws;
. accounting and tax matters;
. the accuracy of information contained in the registration statement
filed by Tuboscope and this proxy statement/prospectus;
. labor matters;
. insurance;
. the absence of existing discussions with other parties;
. opinions of financial advisors; and
. the inapplicability to the merger of anti-takeover laws.
In addition, Varco has made representations in the merger agreement with
respect to amendments to the Varco shareholder rights agreement and with
respect to the termination of the rights outstanding under the rights agreement
immediately prior to the effectiveness of the merger.
Certain Covenants
Covenants of Tuboscope and Varco. Tuboscope and Varco have agreed that,
during the period from the date of the merger agreement until the completion of
the merger, except as otherwise consented to in writing by the other party or
as contemplated by the merger agreement, each will, and will cause its
subsidiaries to:
. carry on its business in the ordinary course;
. pay its debts and taxes when due, subject to good faith disputes;
. pay or perform other obligations when due;
. use reasonable efforts to preserve intact its present business
organization, management team and business relationships;
. refrain from accelerating, amending or changing the period of
exercisability of options or restricted stock granted under any employee
stock plan or authorizing cash payments in exchange for any options
granted under any employee stock plan, except as required pursuant to
the plan or any related agreement;
. not declare or pay any dividends on or make other distributions in
respect of any of its capital stock;
. not effect certain other changes in its capitalization;
. not purchase or otherwise acquire any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with the
termination of service;
. not issue, sell, authorize or propose to issue or sell any shares of its
capital stock or securities convertible into shares of its capital
stock, or any subscriptions, rights, warrants or options to acquire or
other agreements obligating it to issue any shares or other convertible
securities, subject to certain exceptions;
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. not make any acquisitions involving total consideration of more than $3
million;
. not sell, lease, license or otherwise dispose of material properties or
assets outside the ordinary course of business;
. not increase the compensation payable to its officers or employees,
except for increases to employees consistent with past practices,
including bonuses;
. not grant additional severance or termination pay or enter into
employment or severance agreements with any employees or officers, other
than payments or agreements paid to or entered into with employees,
other than officers:
(a) in the ordinary course of business in accordance with past
practices, or
(b) in accordance with the performance of agreements in effect on the
date of the merger agreement;
. not enter into any collective bargaining agreement except as required by
law;
. not adopt or amend any benefit plan for any directors, officers or
employees;
. not amend its charter or bylaws, except as contemplated by the merger
agreement;
. not incur debt other than:
(a) in the case of Varco, up to $2 million under credit facilities in
effect on the date of the merger agreement and up to $1 million
under loan agreements entered into after the date of the merger
agreement; or
(b) in the case of Tuboscope, pursuant to credit agreements in effect
as of the date of the merger agreement or up to $1 million in
borrowings under loan agreements entered into after the date of the
merger agreement;
. not initiate, compromise or settle any material litigation or
arbitration proceeding;
. not modify, amend or terminate any material contract or waive, release
or assign any material rights or claims, except in the ordinary course
of business;
. not make or commit to any capital expenditure that would cause the total
capital budget furnished by each party to the other to be exceeded; and
. not take any action to jeopardize the treatment of the merger as a
pooling-of-interests for accounting purposes.
Certain Additional Agreements. In addition, Tuboscope and Varco also have
each agreed to use its best efforts to:
. cause the merger to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
. take all appropriate action to complete the merger promptly;
. obtain any required consents, licenses, permits, waivers, approvals,
authorizations or orders from governmental entities or other third
parties required to complete the merger;
. make all necessary filings and submissions required by federal, state
and foreign securities laws, antitrust laws and other applicable laws;
and
. obtain any governmental clearances required for the closing of the
merger, to respond to any government requests for information and to
contest and resist any government action which would prohibit the
merger.
However, neither Tuboscope nor Varco nor any of their subsidiaries are
required to divest any of their respective businesses, product lines or assets,
or to take or agree to take any other action or agree to any
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limitation, that could reasonably be expected to have a material adverse effect
on Tuboscope or on the combined company after the merger.
No Solicitation
Under the merger agreement, Tuboscope and Varco have each agreed not to:
. solicit, initiate, or encourage an acquisition proposal;
. engage in negotiations or discussions concerning, or provide any non-
public information to any third party or entity relating to, an
acquisition proposal; or
. agree to or recommend an acquisition proposal.
However, the Tuboscope board of directors and the Varco board of directors
may furnish non-public information to, or enter into discussions or
negotiations with, any third party regarding an unsolicited written acquisition
proposal, if:
. the board of directors believes in good faith, and after consultation
with its financial advisor, that the acquisition proposal is reasonably
capable of being completed on the terms proposed and would, if
completed, result in a transaction more favorable to its stockholders
than the merger;
. the board of directors determines in good faith, and after consultation
with outside legal counsel, that failure to take these actions would be
reasonably likely to be a breach of its fiduciary duties under
applicable law;
. prior to taking these actions, the board of directors receives an
executed confidentiality agreement from the third party with terms no
less favorable than those contained in the confidentiality agreement
between Tuboscope and Varco; and
. prior to taking these actions, Tuboscope or Varco, as applicable,
notifies the other party, orally and in writing, of the existence of the
acquisition proposal or a request for non-public information or access
to its properties, books or records in connection with an acquisition
proposal.
The Tuboscope board of directors and the Varco board of directors also may
respond to any tender offer that may be made in order to comply with the
requirements of Rule 14e-2 under the Securities Exchange Act of 1934.
Tuboscope and Varco each agree that if it receives an acquisition proposal
which its board of directors determines is more favorable, it will, for a
period of five days, offer to negotiate with the other to attempt to make
commercially reasonable adjustments to the merger agreement to enable the
merger to proceed.
An acquisition proposal is any inquiry or proposal that is, or could
reasonably be expected to lead to a proposal or offer for an alternative
transaction, which is:
. a transaction in which any third party acquires more than 25% of the
outstanding shares of Tuboscope or Varco common stock pursuant to a
tender offer, exchange offer or other transaction;
. a merger or similar combination involving Tuboscope or Varco where any
third party acquires more than 25% of the outstanding shares of
Tuboscope or Varco common stock, or the entity surviving the
combination;
. any other transaction in which a third party acquires control of assets
(including equity in subsidiaries) of Tuboscope or Varco with a value of
more than 25% of the total value of all of Tuboscope's or Varco's
assets; or
. any public announcement of a proposal, plan or intention to do any of
the transactions described above or any agreement to do any of the
above.
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Stock Options and Employee Benefits
Stock Options. As of the record date, Varco had outstanding options to
purchase a total of 3,130,259 shares of Varco common stock. These options were
issued under Varco's employee and non-employee directors stock option plans.
The merger agreement provides that each of these stock options will be assumed
by Tuboscope in the merger and will be converted into an option to purchase the
number of shares of Tuboscope common stock equal to 0.7125 times the number of
shares of Varco common stock which would have been received if the holder
exercised the option in full prior to the merger, rounded down to the nearest
whole share. The exercise price will be equal to the exercise price of Varco
common stock subject to the option before conversion divided by 0.7125, rounded
up to the nearest whole cent. The other terms of each option and the stock
plans and agreements under which the options were issued will continue to apply
in accordance with their terms.
Tuboscope has agreed to reserve enough shares of Tuboscope common stock to
cover the exercise of Varco stock options. As soon as practicable after the
merger is completed, Tuboscope will file a registration statement on Form S-8
with respect to the shares of Tuboscope common stock subject to these options
and has agreed to use its best efforts to maintain the effectiveness of the
registration statement for so long as these options remain outstanding.
The Varco board of directors will take any necessary actions to convert the
Varco stock options into options to acquire Tuboscope common stock as described
above without the consent of the holders of the Varco stock options.
Stock Purchase Plan. Under Varco's employee stock purchase plan, employees
may purchase Varco common stock at a discount through payroll deductions. The
stock purchase plan provides for six-month purchase periods ending on March 31
and September 30 of each year. At the end of a purchase period, payroll
deductions are applied to the purchase of Varco common stock at a price per
share equal to 85% of the fair market value of the Varco common stock at the
beginning or end of the plan period, whichever is lower. The merger agreement
provides for the boards of directors of Tuboscope and Varco to take all actions
required for Tuboscope to assume Varco's obligations under the stock purchase
plan with appropriate adjustments to substitute Tuboscope common stock for
Varco common stock. Tuboscope agrees to reserve enough shares of Tuboscope
common stock to cover the exercise of purchase rights under the plan. Tuboscope
may terminate the Varco stock purchase plan following the exercise of all
purchase rights outstanding at the time of the merger. Employees of Varco at
the time of the merger will be given credit for service with Varco for purposes
of determining eligibility to participate in Tuboscope's employee stock
purchase plan as of the six-month period beginning October 1, 2000.
Employee Benefits. From the date the merger is completed and until December
31, 2000, Tuboscope will provide the employees of the combined company who
were, prior to the merger, employees of Varco or its subsidiaries with benefits
which are not materially less favorable on the whole than the employee benefits
provided to those employees by Varco and its subsidiaries prior to the merger.
Director and Officer Indemnification
The merger agreement provides that, after the merger, Tuboscope will
indemnify and hold harmless each present and former director and officer of
Varco against all liabilities or expenses, including attorneys' fees, arising
out of any matters existing or occurring before the completion of the merger.
This right to indemnification will apply regardless of whether the claim was
asserted before or after the merger is completed. Tuboscope's indemnification
obligations will be to the fullest extent permitted under Delaware law and are
in addition to any other indemnification rights available to Varco's current
and former directors and officers.
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Conditions to the Merger
Joint Conditions to the Merger. The merger agreement provides that the
obligations of Tuboscope and Varco to effect the merger are subject to the
satisfaction or waiver of the following conditions:
. the Tuboscope stockholders must approve the merger agreement and the
amendment to Tuboscope's certificate of incorporation increasing the
number of authorized shares of Tuboscope common stock;
. the Varco shareholders must approve the merger agreement;
. any waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 must expire;
. all required approvals and clearances must be obtained from government
agencies under any other antitrust or competition law that applies to
any significant operations;
. all material governmental consents and approvals must be obtained and
all waiting periods imposed by any governmental entity must expire,
unless the failure to obtain approval or the continuation of the waiting
period of any of these is not reasonably likely to have a material
adverse effect;
. Tuboscope's registration statement must be effective under the
Securities Act of 1933 and not be the subject of a stop order or
proceeding seeking a stop order;
. the absence of any order, injunction, judgment, statute, rule or
regulation that makes the merger illegal or otherwise prohibits the
completion of the merger;
. the shares of Tuboscope common stock to be issued in the merger must be
approved for listing on the New York Stock Exchange; and
. receipt of a letter from Tuboscope's and Varco's accountants agreeing
with Tuboscope's management's conclusions that pooling-of-interests
accounting is applicable to the merger.
Tuboscope's Conditions to the Merger. In addition, the merger agreement
provides that Tuboscope's obligation to effect the merger is subject to the
satisfaction or waiver of the following conditions:
. Varco's representations and warranties must be true and correct as of
the date of the closing of the merger, except:
(a) to the extent the representations and warranties speak as of an
earlier date;
(b) for changes contemplated by the merger agreement; and
(c) where the failure to be true and correct, individually or in the
aggregate, has not had and is not reasonably likely to have a
material adverse effect upon Varco's business, properties,
financial condition or results of operations or the completion of
the merger;
. Varco must have performed, in all material respects, all of its
obligations under the merger agreement prior to the closing of the
merger;
. Tuboscope must receive a written legal opinion to the effect that the
merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code. See "The Merger--Material United States Federal Income Tax
Consequences"; and
. dissenters' rights shall not have been perfected with respect to more
than 5% of the outstanding shares of Varco common stock. See "The
Merger--Dissenters' and Appraisal Rights."
Varco's Conditions to the Merger. In addition, the merger agreement provides
that Varco's obligation to effect the merger is subject to the satisfaction or
waiver of the following conditions:
. Tuboscope's representations and warranties must be true and correct as
of the date of the closing of the merger, except:
(a) to the extent the representations and warranties speak as of an
earlier date;
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(b) for changes contemplated by the merger agreement; and
(c) where the failure to be true and correct, individually or in the
aggregate, has not had and is not reasonably likely to have a
material adverse effect upon Tuboscope's business, properties,
financial condition or results of operations or the completion of
the merger;
. Tuboscope must have performed, in all material respects, all of its
obligations under the merger agreement prior to the date of the closing
of the merger;
. Varco must receive a written legal opinion to the effect that the merger
will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. See
"The Merger--Material United States Federal Income Tax Consequences";
and
. dissenters' rights shall not have been perfected with respect to more
than 10% of the outstanding shares of Varco common stock. See "The
Merger--Dissenters' and Appraisal Rights."
Termination; Termination Fees and Expenses
Termination of the Merger Agreement. The merger agreement may be terminated
at any time prior to the completion of the merger, before or after approval of
the merger and related matters by the Tuboscope stockholders or the Varco
shareholders:
. by mutual written consent of Tuboscope and Varco; or
. by either Tuboscope or Varco if:
(a) the merger is not consummated by September 30, 2000, subject to
extension by either Tuboscope or Varco to December 31, 2000 by
providing notice of the extension prior to September 30, 2000, so
long as the terminating party did not prevent the completion of the
merger by failing to fulfill any of its obligations under the
merger agreement; or
(b) a court or other governmental entity has issued an order, decree or
ruling which cannot be appealed and which prohibits the completion
of the merger;
. by Tuboscope if:
(a) the Varco shareholders do not approve the merger agreement at
Varco's special meeting;
(b) the Varco board of directors withdraws or modifies its
recommendation of the merger;
(c) the Varco board of directors fails, within ten business days after
its receipt of Tuboscope's request, to reconfirm its recommendation
of the merger after Varco receives an acquisition proposal from a
third party;
(d) the Varco board of directors recommends an alternative transaction
to the Varco shareholders;
(e) a tender or exchange offer for 25% or more of the outstanding
shares of Varco common stock is commenced, other than by Tuboscope,
and the Varco board of directors recommends that the Varco
shareholders tender their shares in the tender or exchange offer or
fails to recommend that shareholders reject the tender or exchange
offer within ten business days after receipt of Tuboscope's request
to do so;
(f) Varco fails to call and hold a shareholders' meeting by September
30, 2000 or December 31, 2000, if the deadline has been extended,
so long as Tuboscope has not breached a representation, warranty,
covenant or agreement contained in the merger agreement which has
not been cured within 20 business days after receiving notice of
the breach; or
(g) Varco has breached a representation, warranty, covenant or
agreement contained in the merger agreement, which has not been
cured within 20 business days after receiving notice of the breach;
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. by Varco, if:
(a) the Tuboscope stockholders do not approve the merger agreement and
the amendment to Tuboscope's certificate of incorporation
increasing the number of authorized shares of Tuboscope common
stock at Tuboscope's annual meeting;
(b) the Tuboscope board of directors withdraws or modifies its
recommendation of the merger;
(c) the Tuboscope board of directors fails, within ten business days
after its receipt of Varco's request, to reconfirm its
recommendation of the merger after Tuboscope receives an
acquisition proposal from a third party;
(d) the Tuboscope board of directors recommends an alternative
transaction to the Tuboscope stockholders;
(e) a tender or exchange offer for 25% or more of the outstanding
shares of Tuboscope common stock is commenced, other than by Varco,
and the Tuboscope board of directors recommends that the Tuboscope
stockholders tender their shares in the tender or exchange offer or
fails to recommend that stockholders reject the tender or exchange
offer within ten business days after receipt of Varco's request to
do so;
(f) Tuboscope fails to call and hold a stockholders' meeting by
September 30, 2000 or December 31, 2000, if the deadline has been
extended, so long as Varco has not breached a representation,
warranty, covenant or agreement contained in the merger agreement
which has not been cured within 20 business days after receiving
notice of the breach; or
(g) Tuboscope has breached a representation, warranty, covenant or
agreement contained in the merger agreement, which has not been
cured within 20 business days after receiving notice of the breach.
If the merger agreement is terminated by either Tuboscope or Varco as
provided above, the merger agreement will become void and neither Tuboscope nor
Varco will have any continuing liabilities or obligations under the merger
agreement, except for:
. any obligation to reimburse expenses or pay a termination fee under the
circumstances described below; and
. its obligations to pay, and indemnify the other party against, any
investment bankers' fees or similar fees incurred by it.
In addition, the confidentiality agreement between Tuboscope and Varco will
remain in effect even if Tuboscope or Varco terminates the merger agreement.
Obligation to Pay Expenses. The merger agreement provides that, except as
set forth below, whether or not the merger is completed, each party will pay
its own expenses, except that Tuboscope and Varco will each pay one-half of the
expenses incurred in filing, printing and mailing this proxy
statement/prospectus.
In addition, Tuboscope has agreed to reimburse Varco for up to $5 million in
merger-related expenses incurred by Varco prior to the termination of the
merger agreement where Varco terminates the merger agreement because:
. Tuboscope's stockholders fail to approve the merger agreement and the
amendment to Tuboscope's certificate of incorporation increasing the
number of authorized shares of Tuboscope common stock, except that under
certain circumstances Varco is not entitled to reimbursement of expenses
if it is entitled to the termination fee discussed below;
. the failure of the merger to be completed by September 30, 2000, or
December 31, 2000, if the deadline is extended, as a result of the
failure of the closing conditions relating to the accuracy of
Tuboscope's representations and warranties or the performance by
Tuboscope of its covenants; or
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. Tuboscope breaches any representation, warranty, covenant or agreement
in the merger agreement and fails to cure the breach within 20 business
days after notice and the breach results in the failure of the closing
conditions relating to the accuracy of Tuboscope's representations and
warranties or the performance by Tuboscope of its covenants.
Varco has agreed to reimburse Tuboscope for up to $5 million in merger-
related expenses incurred by Tuboscope prior to termination of the merger
agreement where Tuboscope terminates the merger agreement because:
. Varco's shareholders fail to approve the merger agreement, except that
under certain circumstances Tuboscope is not entitled to reimbursement
of expenses if it is entitled to the termination fee discussed below;
. the failure of the merger to be completed by September 30, 2000, or
December 31, 2000, if the deadline is extended, as a result of the
failure of the closing conditions relating to the accuracy of Varco's
representations and warranties or the performance by Varco of its
covenants; or
. Varco breaches any representation, warranty, covenant or agreement in
the merger agreement and fails to cure the breach within 20 business
days after notice and the breach results in the failure of the closing
conditions relating to the accuracy of Varco's representations and
warranties or the performance by Varco of its covenants.
These expense reimbursements must be made within one business day after the
happening of the event giving rise to the payment obligation.
Obligation to Pay a Termination Fee. Tuboscope and Varco may be required to
pay a termination fee of $30 million under the following circumstances:
. Tuboscope will be required to pay Varco a termination fee of $30 million
if Varco terminates the merger agreement for any of the following
reasons:
(a) the Tuboscope stockholders do not approve the merger agreement and
the amendment to Tuboscope's certificate of incorporation
increasing the number of authorized shares of Tuboscope common
stock where a proposal for an alternative transaction has been made
and the Tuboscope board of directors withdraws or modifies its
recommendation of the merger or fails to reconfirm its
recommendation;
(b) the Tuboscope board of directors does any of the following:
. withdraws or modifies its recommendation of the merger;
. after receipt of an acquisition proposal, fails to reconfirm its
recommendation of the merger within ten business days of Varco's
request;
. recommends an alternative transaction to the Tuboscope
stockholders;
. after a tender or exchange offer for 25% or more of the
outstanding shares of Tuboscope common stock has commenced, the
board of directors recommends that Tuboscope stockholders tender
their shares in the tender or exchange offer or fails to
recommend that the Tuboscope stockholders reject the tender or
exchange offer within ten business days after receipt of Varco's
request to do so; or
. fails to call and hold a stockholders' meeting by September 30,
2000, or December 31, 2000, if the deadline is extended, unless
Varco has breached a representation, warranty, covenant or
agreement and the breach has not been cured within 20 business
days after notice; or
(c) Tuboscope completes an alternative transaction within twelve months
after the termination of the merger agreement.
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. Varco will be required to pay Tuboscope a termination fee of $30 million
if Tuboscope terminates the merger agreement for any of the following
reasons:
(a) the Varco shareholders do not approve the merger agreement where a
proposal for an alternative transaction has been made and the Varco
board of directors withdraws or modifies its recommendation of the
merger or fails to reconfirm its recommendation;
(b) the Varco board of directors does any of the following:
. withdraws or modifies its recommendation of the merger;
. after receipt of an acquisition proposal, fails to reconfirm its
recommendation of the merger within ten business days of
Tuboscope's request;
. recommends an alternative transaction to the Varco shareholders;
. after a tender or exchange offer for 25% or more of the
outstanding shares of Varco common stock has commenced, the board
of directors recommends that the Varco shareholders tender their
shares in the tender or exchange offer or fails to recommend that
the Varco shareholders reject the tender or exchange offer within
ten business days after receipt of Tuboscope's request to do so;
or
. fails to call and hold a shareholders' meeting by September 30,
2000, or December 31, 2000, if the deadline is extended, unless
Tuboscope has breached a representation, warranty, covenant or
agreement and the breach has not been cured within 20 business
days after notice; or
(c) Varco completes an alternative transaction within twelve months
after the termination of the merger agreement.
Tuboscope's or Varco's payment of the $30 million termination fee is the
sole and exclusive remedy of the other party with respect to the matters giving
rise to the payment obligation.
Amendment and Waiver
The merger agreement may be amended at any time by action taken by the
boards of directors of Tuboscope and Varco, before or after stockholder
approval of the merger agreement. However, once the merger agreement is
approved by the stockholders, no change can be made to the number of shares of
Tuboscope common stock into which the Varco common stock will be converted or
where further stockholder approval is required by law. Tuboscope and Varco also
may extend the time for performance of the obligations or other acts of the
other, may waive inaccuracies in the representations or warranties contained in
the merger agreement and may waive compliance with any agreements or conditions
contained in the merger agreement.
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THE STOCK OPTION AGREEMENTS
Copies of the Tuboscope stock option agreement and the Varco stock option
agreement are attached to this proxy statement/prospectus as Annexes V and VI.
While the discussion below summarizes many of the material provisions of the
stock option agreements, we urge you to read the Tuboscope stock option
agreement and the Varco stock option agreement in their entirety for a more
complete description of the terms and conditions of the agreements.
General
Concurrently with the execution and delivery of the merger agreement,
Tuboscope and Varco entered into the Tuboscope stock option agreement dated as
of March 22, 2000, pursuant to which Tuboscope granted to Varco the right,
under certain circumstances, to purchase up to 8,908,653 shares of Tuboscope
common stock (representing approximately 19.9% of the issued and outstanding
shares of Tuboscope common stock) at an exercise price of $17.00 per share.
Tuboscope and Varco also entered into the Varco stock option agreement dated as
of March 22, 2000, pursuant to which Varco granted to Tuboscope the right,
under certain circumstances, to purchase up to 13,023,985 shares of Varco
common stock (representing approximately 19.9% of the issued and outstanding
shares of Varco common stock) at an exercise price of $14.56 per share. The
terms and conditions of the Tuboscope stock option agreement and the Varco
stock option agreement are parallel in all material respects, except for
certain provisions in the Varco stock option agreement that relate to Varco's
shareholder rights agreement.
Exercise of the Option
Except as described below, Tuboscope and Varco may exercise their respective
options with respect to any or all the option shares only after the occurrence
of any event unconditionally entitling the exercising party to receive the
termination fee under the merger agreement. The right to purchase shares under
each stock option agreement expires at the earlier to occur of:
. the effective time of the merger;
. the termination of the merger agreement under circumstances which do not
entitle the option holder to receive the termination fee;
. the date the option holder recognizes a total profit from the
termination fee and the stock option equal to $35 million; and
. 180 days after the merger agreement is terminated due to circumstances
which entitle the option holder to receive the termination fee, subject
to extension if certain conditions to exercise have not been satisfied.
The option holder may exercise its option with respect to all or a portion
of its option shares by delivering to the option issuer an exercise notice
specifying the number of shares of common stock the option holder wishes to
purchase and the closing date for the purchase. Any purchase of option shares
is subject to applicable laws and regulations, including approval under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and obtaining any other
necessary regulatory approvals.
If the option becomes exercisable, then the option holder may elect, in lieu
of exercising the option to purchase shares of common stock, to be paid cash by
the option issuer equal to:
. the excess, if any, over the option exercise price of the higher of (i)
the highest price per share of common stock paid by any person in
connection with an alternative transaction and (ii) the average of the
closing prices of the shares on the New York Stock Exchange for the five
consecutive trading days ending five days prior to the date of notice of
the cash exercise; multiplied by
. all or any lesser number of shares specified by the option holder.
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In addition, at any time prior to 30 days after the first anniversary of the
termination of the merger agreement, an option holder may require the option
issuer to repurchase any option shares previously purchased by the option
holder, at a price per share equal to:
. the highest price per share of common stock paid by any person in
connection with an alternative transaction; or
. the average of the closing prices of the shares on the New York Stock
Exchange for the five consecutive trading days ending five days prior to
the date the option holder requested that the option issuer repurchase
the option shares.
Adjustments to Number and Type of Shares
The number and type of securities subject to an option and the purchase
price will be proportionally adjusted for any change in the option issuer's
common stock by reason of a stock dividend, stock split, split-up, merger,
recapitalization or other change in the corporate or capital structures of the
option issuer, to restore the option holder to its rights under the option
agreement, including the right to purchase 19.9% of the common stock of the
option issuer at an aggregate purchase price equal to the number of option
shares the option holder was entitled to purchase prior to the adjustment
multiplied by the option exercise price.
Limit on Total Profit
Each stock option agreement provides that in no event will the option
holder's total profit from the option plus any termination fee paid to the
option holder under the merger agreement exceed $35 million and, if the option
holder's total profit would otherwise exceed that amount, the option holder, at
its discretion, is required to do one or a combination of the following:
. deliver to the option issuer for cancellation option shares previously
purchased valued at the average closing price of the option issuer's
common stock on the New York Stock Exchange for the five trading days
ending on the trading day immediately before the date of delivery; or
. pay cash to the option issuer,
so that the option holder's total profit from the option plus the termination
fee paid to the option holder does not exceed $35 million.
In addition, each stock option agreement provides that the option may not be
exercised by the option holder for a number of option shares that would result
in a "notional total profit" which, together with the termination fee payable
to the option holder pursuant to the merger agreement, would exceed $35
million. Each stock option agreement defines "notional total profit" as total
profit from an exercise of the option assuming that the option shares to be
purchased plus all other option shares owned by the option holder were sold for
cash at the closing market price on the New York Stock Exchange for the option
issuer's common stock as of the close of business on the date of the exercise
notice, less customary brokerage commissions. The option holder may elect to
reduce the notional total profit by increasing the purchase price of the shares
being purchased.
Conditions to Delivery of Shares
The option issuer's obligation to deliver shares of common stock upon
exercise of an option is subject to the following conditions:
. the absence of any preliminary or permanent injunction or other court
order prohibiting the delivery of the shares;
. the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; and
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. the option holder must have the right to terminate the merger agreement
under circumstances that would entitle the option holder to receive the
termination fee.
Right of First Refusal
Before an option holder may sell any option shares purchased under an option
agreement (except for some limited exceptions), the option holder must first
give the option issuer the opportunity to purchase the shares at the price the
shares are proposed to be sold. The option issuer's right of first refusal
expires on the earlier of:
. 30 days after the first anniversary of the termination of the merger
agreement; and
. a change in control of the option issuer.
A change in control occurs if:
. any person acquires more than 50% of the common stock of the option
issuer;
. the option issuer enters an agreement for any merger or other business
combination; or
. the option issuer enters an agreement for the sale of 30% or more of its
assets.
Right of Repurchase
If a change in control of the option issuer has not occurred prior to the
first anniversary of the termination of the merger agreement, the option issuer
has the right to repurchase all, but not less than all, the option shares
acquired by the option holder under the option agreement. This repurchase right
is exercisable for 30 days after the first anniversary of the termination of
the merger agreement. The price per option share would be equal to greater of:
. the option exercise price; and
. the average of the closing prices for the option issuer's common stock
on the New York Stock Exchange for the five trading days ending five
days prior to the date the option issuer delivered notice of its desire
to repurchase the option shares.
Registration Rights and Listing
Tuboscope and Varco have certain rights to require registration under the
securities laws of any shares purchased under an option if necessary for it to
be able to sell those shares and to require the listing of the option shares on
the New York Stock Exchange.
Assignability; Transfers
The stock option agreements may not be assigned by Tuboscope or Varco
without the prior written consent of the other party, except that Tuboscope may
assign its rights under the Varco stock option agreement and Varco may assign
its rights under the Tuboscope option agreement to a wholly-owned subsidiary.
No assignment will relieve the assigning party of its obligations if the
transferee does not perform the obligations.
Effect of Stock Option Agreements
The stock option agreements are intended to increase the likelihood that the
merger will be completed on the terms set forth in the merger agreement.
Consequently, certain aspects of the stock option agreements may discourage
persons who might now or prior to the merger be interested in acquiring all of
or a significant interest in Tuboscope or Varco from considering or proposing
an acquisition, even if those persons were prepared to offer higher
consideration per share for Tuboscope common stock or Varco common stock than
that implicit in the 0.7125 exchange ratio.
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TUBOSCOPE
Business
The information in this section describes the business of Tuboscope as it is
currently conducted, without giving effect to the merger. For a more
comprehensive discussion of Tuboscope's business, you should read our recent
annual report on Form 10-K, which we filed with the Securities and Exchange
Commission on February 22, 2000.
General
Tuboscope is a supplier of technical services and highly-engineered products
to the oil and gas drilling, completion, production and transmission industries
worldwide. We operate primarily in North America and have operations in
approximately 49 countries, including countries located in Latin America,
Europe, Africa, the Middle East and the Far East.
We have four main product lines:
. Tubular Services;
. Solids Control Products and Services;
. Coiled Tubing and Wireline Products; and
. Pipeline and Other Industrial Services.
Our Tubular Services Product Line
Our Tubular Services product is our largest business line and operates in
the oilfield tubular markets of approximately 49 countries in North America,
Latin America, Europe, Africa, the Middle East and the Far East. We provide the
following products and services through our tubular services product line:
. internal coating products and services for tubulars;
. inspection and quality assurance services for tubular goods, such as
drill pipe, tubing, line pipe, coiled tubing and casing; and
. fiberglass tubulars, including tubing, casing and line pipe.
In addition, our Tubular Services product line includes the sale and leasing
of proprietary equipment used to inspect tubular products at steel mills.
Tubular Coating Products and Services for Tubulars. We develop, manufacture
and apply our proprietary tubular coatings, known as Tube-Kote(R) coatings, to
new and used tubulars. Tubular coatings help prevent corrosion of tubulars by
providing a tough plastic shield to isolate steel from corrosive oilfield
fluids such as CO\\2\\, H\\2\\S and brine. Delaying or preventing corrosion
extends the life of existing tubulars, reduces the frequency of well
remediation and reduces expensive interruptions in production for oil and gas
producers. In addition, we design our coatings to increase the fluid flow
through tubulars by decreasing or eliminating paraffin and scale build-up,
which can reduce or block oil flow in producing wells. The smooth inner
surfaces of coated tubulars often increase the fluid through-put on certain
high-rate oil and gas wells.
In 1998, we introduced TK(R)-Liner, a fiberglass liner product which offers
the strength of steel tubing and the corrosion resistance of fiberglass, and
which supplements our traditional plastic coating lines. In 1997, we acquired
Fiber Glass Systems, a leading provider of high pressure fiberglass tubulars
used in oilfield applications. Fiber Glass Systems has manufactured fiberglass
pipe since 1968 under the name "Star(R)" and was the first manufacturer of
high-pressure fiberglass pipe to be licensed by the API in 1992. Like coated
tubulars, fiberglass pipe is used to guard against corrosive fluids produced in
the oilfield.
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Tubular Inspection. Newly manufactured pipe sometimes contains serious
defects that are not detected at the mill. In addition, pipe can be damaged in
transit and during handling prior to use at the well site. As a result,
exploration and production companies often have new tubulars inspected before
they are placed in service to reduce the risk of tubular failures during
drilling, completion or production of oil and gas wells. We also inspect used
tubulars to detect service-induced flaws after the tubulars are removed from
operation. Used drill pipe and used tubing inspection programs allow operators
to replace defective lengths, thereby prolonging the life of the remaining pipe
and saving the customer the cost of unnecessary tubular replacements and
expenses related to tubular failures.
Our tubular inspection services employ all major non-destructive inspection
techniques, including electromagnetic, ultrasonic, magnetic flux leakage and
gamma ray. Our inspection services are provided both by mobile units which work
at the wellhead, as used tubing is removed from a well, and at fixed site
tubular inspection locations. We also provide an ultrasonic inspection service
for detecting potential fatigue cracks in the end area of used drill pipe, the
portion of the pipe that traditionally has been the most difficult to inspect.
Our tubular inspection facilities also offer a wide range of related services,
such as API thread inspection and ring and plug gauging, and a complete line of
reclamation services necessary to return tubulars to useful service, including
tubular cleaning and straightening, hydrostatic testing and re-threading.
In addition to our new and used tubular inspection and reclamation services,
we also offer a comprehensive proprietary tubular inventory management system,
TDSTM, which permits the real-time tracking of our customers' tubular
inventories within our facilities. The system permits our customers to dial-in
to monitor tubular inspection and coating progress.
We have pioneered many tubular inspection technologies used in the oilfield
and continue to expand our product offerings through innovation and
acquisition. In 1996, we installed our first proprietary high-speed full-body
ultrasonic tubular inspection unit, TruScope(R). The new service provides 100%
ultrasonic coverage of tubulars at a rate of up to 200 feet per minute. In
1997, we began offering a proprietary, patented external tubular connection
pressure test, the ISO-Gator(TM), for use at the rig site. In 1998, we
introduced a new coiled tubing inspection service with our electromagnetic CT
Scope(R).
Mill Systems and Sales. We engineer and fabricate inspection equipment for
steel mills and then sell or lease this equipment to our customers. The
equipment is operated by the steel mills and is used in quality control to
detect transverse, longitudinal and three-dimensional defects in the pipe
during the high-speed manufacturing process. Each piece of mill inspection
equipment is designed to customer specifications and is installed and serviced
by us. Since 1962, we have installed more than 80 units worldwide, in most
major steel mills. The equipment is manufactured at our Houston, Texas
facility.
Our Solids Control Products and Services Product Line
Our Solids Control Products and Services product line consists of selling
and renting of technical equipment used in, and providing of services related
to, separating of solid drill cuttings from fluids used in oil and gas drilling
processes. Our Solids Control Products and Services business serves oilfield
drilling markets and other small industrial markets in North America, Latin
America, Europe, Africa, the Middle East and the Far East.
Solids control is the application of highly-engineered products and services
to extract drill cuttings from fluids used in oil and gas drilling operations.
The removal of drill cuttings is required to permit the reuse of expensive
drilling fluids. By removing rock cuttings and other solid contaminants from
the fluids used in drilling operations, solids control equipment reduces the
volume of drilling fluids and solids which must be disposed of subsequent to
drilling operations, which minimizes the environmental impact of drilling and
reduces post-drilling reclamation costs. Efficient separation of rock cuttings
also reduces the volume of drilling fluids consumed by the operation, further
reducing drilling costs. Effective solids control also reduces the probability
of sticking and losing expensive downhole drilling equipment in the well bore
and the resulting
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need to redrill the well. Solids control technology also improves the
efficiency of the drilling process by preventing the recirculation and
subsequent recutting of solids at the drill bit and by reducing wear on
mechanical components such as mud pumps and mud motors.
We have a long history of introducing new solids control products and
services obtained both through our internal development and through acquiring
or licensing technologies from others. We acquired the Gumbo Chain from Nu-Tec,
Inc. in 1997, which provided us with a product that removes sticky shale or
"gumbo," which is encountered in certain geologic environments, from drilling
fluid. In 1998, we initiated operations on a unit which uses heat to desorb
hydrocarbons from drill cuttings. The processed cuttings are rendered inert and
can be disposed of with minimal environmental impact. We began operating a
second drill cuttings thermal desorption unit in the first quarter of 1999. We
also introduced our new Cobra(TM) shale shaker in 1998. The Cobra(TM) has a
small foot print and a lightweight design and is priced to compete in the more
price-sensitive segment of the market. In 1998, we enhanced our instrumentation
and cuttings slurrification and injection capabilities through acquisitions. We
also manufacture conventional and linear motion shale shakers, high speed and
conventional centrifuges, desanders, desilters, screens, degassers and closed
loop drilling fluids systems.
Our Coiled Tubing and Wireline Products Product Line
Our Coiled Tubing and Wireline Products product line consists of the sale of
highly-engineered coiled tubing equipment, related pressure control equipment,
pressure pumping equipment, wireline units and related tools to companies
engaged in providing oil and gas well drilling, completion and remediation
services.
Coiled tubing consists of flexible steel tubing manufactured in a continuous
string and spooled on a reel. It can extend several thousand feet in length and
is run in and out of the well bore at a high rate of speed by a hydraulically
operated coiled tubing unit. A coiled tubing unit is typically mounted on a
truck or skid and consists of a hydraulically operated tubing reel or drum, an
injector head which pushes or pulls the tubing in or out of the well bore and
various power and control systems. Coiled tubing is typically used with
sophisticated pressure control equipment which permits the operator to continue
to safely produce the well. We manufacture and sell both coiled tubing units
and the ancillary pressure control equipment used in these operations.
Coiled tubing provides a number of significant functional advantages over
the principal alternatives of conventional drillpipe and workover pipe. Coiled
tubing allows faster "tripping," since the coiled tubing can be reeled very
quickly on and off a drum and in and out of a well bore. In addition, the small
size of the coiled tubing unit compared to an average workover rig reduces
preparation time at the well site. Coiled tubing permits a variety of workover
and other operations to be performed without having to pull the existing
production tubing from the well and allows ease of operation in horizontal or
highly deviated wells. Thus, operations using coiled tubing can be performed
much more quickly and, in many instances, at a significantly lower cost.
Finally, use of coiled tubing generally allows continuous production of the
well, eliminating the need to temporarily stop the flow of hydrocarbons. As a
result, the economics of a workover are improved because the well can continue
to produce hydrocarbons and thus produce revenues while the well treatments are
occurring. Continuous production also reduces the risk of formation damage
which can occur when the well is "shut in."
There are certain limitations, however, to the use of coiled tubing. Coiled
tubing generally is made of high strength, alloy steel which wears down or
fatigues over time as a result of internal pressure, acidic operating
environments and normal bending cycles. Thus, operators must carefully monitor
the use of the tubing. In addition, coiled tubing will buckle if the weight the
coiled tubing is pushing becomes too great or if the tube becomes inhibited by
some obstacle or irregularity in the well bore. Buckling has not proven to be a
significant obstacle in most well remediation applications, and we believe it
will become less of an issue as the result of the availability of stronger and
larger diameter coiled tubing.
We have a long history of engineering new technologies and products for our
Coiled Tubing and Wireline Products markets. We recently introduced the DSH
"Sidedoor" Stripper/Packer, which allows packer and
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bushing replacement while the operator has coiled tubing in the wellbore, and
the CT Slimhole BHA Jetting Tool Assembly, a small diameter jetting tool, which
can traverse small diameter well completion configurations. Our coiled tubing
product offering also includes sophisticated downhole tools engineered to
enable oil and gas producers to re-enter complex multilateral wells, to install
coiled tubing velocity strings, to bypass electrical submersible pumps and to
perform a variety of other remediation and completion activities utilizing
coiled tubing.
Pipeline and Other Industrial Services
Our Pipeline and Other Industrial Services product line consists primarily
of providing technical inspection services and quality assurance for in-service
pipelines used to transport oil and gas. Additionally, this product line
includes a wide variety of technical industrial inspection, monitoring and
quality assurance services provided by Tuboscope for constructing, operating
and maintaining major projects in energy-related industries.
Pipeline Services. In-place inspection services for oil and gas pipelines
identify defects in the pipelines without removing or dismantling the pipelines
or disrupting the product flow, giving our customers a convenient and cost-
effective method of identifying defects in pipelines. We inspect pipelines by
launching a sophisticated survey instrument into the pipeline. Propelled by the
product flow, the instrument uses electromagnetics and digital and analog
recording devices to monitor the severity and location of internal and external
pitting-type corrosion as well as defects in the pipeline, providing a basis
for evaluation and repair by the customer. Once the test is complete, the
survey instrument is returned to us, refurbished and used for future pipeline
inspections.
Industrial Inspection Services. We also provide industrial inspection and
monitoring services for constructing, operating and maintaining major projects
in energy-related industries. Inspection techniques include the x-raying of
pipeline girth welds and ultrasonic or eddy current inspection of refinery
equipment. Monitoring services include various quality assurance and control
and supervision services. We provide most of these services during the
fabrication, installation and maintenance of energy-related facilities.
The History of Tuboscope
We are a successor to one of the first companies to provide tubular
inspection services to the oil and gas industry, which commenced operations in
1937. We have since grown through a series of mergers and acquisitions which
have added to our product lines. In addition, we entered the Solids Control
Products and Services and the Coiled Tubing and Wireline Products businesses on
April 24, 1996, when we merged with D.O.S., Ltd. Our principal executive
offices are located at 2835 Holmes Road, Houston, Texas 77051. Our telephone
number is (713) 799-5100.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of Tuboscope common stock as of the record date and as of the
completion of the merger for the following:
. each stockholder known by us to beneficially own 5% or more of the
outstanding shares of Tuboscope common stock;
. each of our directors (each of whom is a nominee for election at our
annual meeting);
. our chief executive officer and certain other highly compensated
executive officers of Tuboscope at the end of the last fiscal year; and
. all of our executive officers and directors as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
this rule, beneficial ownership includes any shares as to which the stockholder
has voting
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power or investment power and any shares that the stockholder has the right to
acquire within 60 days of the record date, through the exercise of any stock
option, warrant or other right. Unless otherwise indicated in the footnotes or
the table, each stockholder has sole voting and investment power or shares such
powers with his spouse, with respect to the shares shown as beneficially owned.
The information relating to beneficial ownership after the merger does not
include shares of Varco common stock beneficially owned by the listed
stockholders. We are not aware that any of these stockholders beneficially own
shares of Varco common stock.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------------------------
Before Merger After Merger
--------------------- ---------------------
Percent of Percent of
Beneficial Owner Shares Class Shares Class
- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Directors, Nominees and Executive
Officers
Jerome R. Baier(1)(2)............. 816,953 1.8% 816,953 *
John F. Lauletta(1)............... 310,552 * 715,159 *
Eric L. Mattson(1)................ 18,000 * 18,000 *
L.E. Simmons(3)................... 14,164,516 29.9 14,164,516 15.1%
Jeffery A. Smisek(1).............. 10,000 * 10,000 *
Douglas E. Swanson(1)............. 7,000 * 7,000 *
Joseph C. Winkler(1).............. 164,968 * 359,418 *
Haynes B. Smith, III(1)........... 61,198 * 162,330 *
Peter J. Stuart(1)................ 51,617 * 144,353 *
Clay C. Williams(1)............... 52,496 * 153,133 *
All directors and executive
officers as a group
(12 persons)(1).................. 15,880,049 33.1 16,864,537 17.6
5% Beneficial Holders
SCF-III, L.P.(4).................. 6,733,000 14.2 6,733,000 7.2
6600 Texas Commerce Tower
Houston, Texas 77002
DOS Partners, L.P.(5)............. 5,336,417 11.9 5,336,417 5.8
6600 Texas Commerce Tower
Houston, Texas 77002
Baker Hughes Incorporated(6)...... 3,102,347 6.7 3,102,347 3.3
3900 Essex Lane, Suite 1200
Houston, Texas 77027
Kadoorie McAuley International
Ltd.(7).......................... 3,394,316 7.6 3,394,316 3.7
23rd Floor, St. George's Building
2 Ice House Street, Central Hong
Kong
Actinium Holding Corporation(8)... 3,254,967 7.3 3,254,967 3.6
Nauru Trustee Corporation Building
Aiwo, Nauru
Franklin Resources, Inc.(9)....... 2,294,747 5.1 6,689,762 7.3
777 Mariners Island Boulevard, 6th
Floor
San Mateo, California 94404
</TABLE>
- --------
* Less than one percent of the shares of common stock outstanding on the record
date.
(1) Before merger totals include shares which may be purchased upon the
exercise of stock options which are exercisable as of the record date, or
become exercisable within 60 days thereafter, for the following:
Mr. Baier--38,000 shares; Mr. Lauletta--219,583 shares; Mr. Mattson--14,000
shares; Mr. Smisek-- 3,000 shares; Mr. Swanson--3,000 shares; Mr. Winkler--
103,716 shares; Mr. Smith--29,974 shares; Mr. Stuart--36,617 shares; Mr.
Williams--27,394 shares; and all directors and executive officers
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as a group--3,221,521 shares. After merger totals include (a) shares which
may be purchased upon the exercise of stock options which are exercisable as
of the record date or will become exercisable within 60 days thereafter or
upon completion of the merger and (b) shares which may be received upon
exercise of restricted stock units which are exercisable as of the record
date or will become exercisable within 60 days thereafter or upon completion
of the merger for the following: Mr. Lauletta--404,607 shares; Mr. Winkler--
194,450 shares; Mr. Smith--101,132 shares; Mr. Stuart--92,736 shares; Mr.
Williams--100,637 shares; and all directors and executive officers as a
group--984,488 shares.
(2) Includes 774,953 shares beneficially owned by The Northwestern Mutual Life
Insurance Company. Mr. Baier is Managing Director of Northwestern
Investment Management Company and, as such, has shared voting and
investment power with respect to the shares owned by The Northwestern
Mutual Life Insurance Company. However, Mr. Baier disclaims beneficial
ownership of these shares.
(3) Includes 5,366,417 shares which are beneficially owned by DOS Partners,
L.P. See footnote 5 below. The general partner of DOS Partners, L.P. is SCF
Partners, L.P. and the general partner of SCF Partners, L.P. is L.E.
Simmons & Associates, Incorporated, of which L.E. Simmons is the president,
a director and sole stockholder. Also includes 4,200,000 shares and
2,533,000 warrants which are beneficially owned by SCF-III, L.P. See
footnote 4 below. The general partner of SCF-III, L.P. is SCF-II, L.P. and
the general partner of SCF-II, L.P. is L.E. Simmons & Associates,
Incorporated. Also includes 1,999,999 shares which are beneficially owned
by FGSI Partners, L.P. The general partner of FGSI Partners, L.P. is SCF
Partners, L.P. and the general partner of SCF Partners, L.P. is L.E.
Simmons & Associates, Incorporated. Mr. Simmons disclaims beneficial
ownership of such securities except to the extent of his pecuniary interest
therein. Also includes 55,100 shares directly owned by Mr. Simmons and
6,000 shares subject to options exercisable by Mr. Simmons within 60 days
of the record date.
(4) According to Schedule 13D/A filed by SCF-III, L.P. dated May 2, 1996.
Includes 2,533,000 shares that may be acquired upon exercise of warrants.
See footnote 3.
(5) According to Schedule 13D/A filed by DOS Partners, L.P., dated May 2, 1996.
See footnote 3.
(6) According to Schedule 13D/A filed by Baker Hughes Incorporated, dated March
9, 2000.
(7) According to Schedule 13D filed by Kadoorie McAuley International Ltd.,
dated May 1, 1996. Kadoorie McAuley International Ltd. and its affiliate,
Kadoorie McAuley Holdings Ltd., and R.J. McAuley, who is deemed to control
Kadoorie McAuley Holdings Ltd., may be deemed to share voting and
dispositive power over these shares.
(8) According to Schedule 13D filed by Actinium Holding Corporation, dated May
1, 1996. These shares are owned by private trust companies, as trustees of
certain discretionary trusts for the benefit of the Kadoorie family. As a
result of these trusts, Michael D. Kadoorie is deemed to control Actinium
Holding Corporation, and Actinium Holding Corporation and Mr. Kadoorie may
be deemed to share voting and dispositive power of these shares.
(9) According to Schedule 13G filed by Franklin Resources, Inc., dated February
2, 2000. Represents shares owned by investment companies or other managed
accounts, which are advised by investment advisory subsidiaries of Franklin
Resources, Inc. The investment advisory subsidiaries of Franklin Resources,
Inc. exercise voting and dispositive power over the securities owned by its
advisory clients. Charles B. Johnson and Rupert H. Johnson, principal
stockholders of Franklin Resources, Inc., may be deemed to beneficially own
these shares. Franklin Resources, Inc., its investment advisory
subsidiaries and Messrs. Johnson and Johnson disclaim beneficial ownership
of these securities.
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VARCO
Business
The information in this section describes the business of Varco as it is
currently conducted, without giving effect to the merger. For a more
comprehensive discussion of Varco's business, you should read our recent annual
report on Form 10-K, which we filed with the Securities and Exchange Commission
on March 24, 2000.
General
Varco's principal products are drilling equipment, drilling rig
instrumentation and controls, pressure control and motion compensation
equipment, solids control equipment and fluid handling systems. We operate
through five independent but complementary Divisions, each providing a portion
of the equipment and systems which are integral to the drilling process. When
sold as replacement equipment or as a typical upgrade to an existing rig, the
products of our Divisions are usually purchased independently. However, when
equipping a new rig or providing a major retrofit of an existing offshore rig,
our products and systems are frequently sold as a "package," which often
involves some level of physical and electronic integration.
Although our products are used both offshore and onshore, the cost and
complexity of offshore drilling requires a substantially greater investment in
drilling equipment. Additionally, when our customers drill in extremely deep
water from a floating rig, such as a semi-submersible or drillship, they
require significantly more equipment than a jackup rig or fixed platform. For
example, the value of the equipment which we could potentially supply to a deep
water rig is approximately $50 million, as compared to approximately
$19 million for a harsh environment jackup or platform rig. By comparison, a
typical new land rig would create a potential of approximately $3 million of
revenue for Varco.
While our five Divisions are all influenced primarily by general industry
and market conditions, each is also uniquely affected by factors specific to
its primary markets and products.
Our Pipe Handling Systems
Through our Varco Systems Division we design and manufacture systems and
equipment for rotating and handling the various types and sizes of pipe used on
a drilling rig. Our products are designed to make the drilling process more
productive and safer for our customers. At the time of their introduction,
Varco Systems' products have typically represented innovative new methods for
performing critical drilling functions.
Our principal products at the Varco Systems Division are the Top Drive
Drilling System, commonly referred to as the TDS, and pipe handling systems.
Introduced in 1982, the TDS is recognized as a more productive means of
drilling an oil or gas well than the traditional rotary table. Although the
initial applications were primarily offshore and high-cost land drilling where
the initial investment could be more quickly returned, more recently the TDS
concept has gained acceptance in conventional land drilling.
Sales of the TDS are primarily influenced by the construction of new
offshore rigs, retrofitting of land rigs and existing offshore rigs, and
replacement of previously sold units with newer, upgraded models. To a lesser
extent, we also derive revenue from the rental of TDS units.
Pipe handling systems are automated or semi-automated devices which provide
both vertical and horizontal pipe handling. Vertical pipe racking systems are
used to move sections of pipe between the storage ("racking") area on the rig
floor and the well center, and to provide the spinning and torquing functions
necessary to couple and uncouple sections of pipe. Horizontal pipe racking
systems are used to handle various sizes and types of pipe while stored on the
pipe deck of an offshore rig, transport pipe sections up to the rig floor, and
raise them to a vertical position from which they are passed to a vertical
racking system.
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We introduced automated pipe handling systems in 1987 and most units sold to
date have been for new offshore rigs. Although new rig construction has been
the predominant market, we are currently developing systems more specifically
directed to the retrofit market.
Our Rig Tools and Equipment
Our Varco BJ Division manufactures a complete line of conventional drilling
rig tools and equipment. Our product offering has evolved from the combination
of the original Varco products with several complementary and competitive
product lines acquired over the past 10 years. Examples of Varco BJ's products
include: elevators, devices which hold pipe while it is being lifted from, or
lowered into, the bore hole; slips, which grip pipe and hold it in suspension
while in the well; the spinning wrench, a pneumatic or hydraulic powered device
used to screw together and unscrew threaded pipe connections; manual tongs,
used to make up or break out connections; and casing elevators and spiders,
gripping devices used to hold heavy sections of casing while being lowered into
the well. Many of these products were original Varco innovations at the time of
their introduction, and we are regarded as the industry leader in providing
quality and reliability.
As the Varco product line has moved toward automation and the elimination of
personnel from the rig floor, our products have evolved to facilitate this
result by providing mechanization and remote activation to tools previously
operated manually. While products with these capabilities would be considered
mandatory when used in conjunction with a fully automated pipe handling system,
they provide sufficient safety and efficiency benefits that they are also sold
independently for upgrading existing rigs.
Our Instrumentation and Control Systems
Our M/D Totco Division designs and sells computer-based drilling information
and control systems, as well as conventional drilling rig instrumentation.
Instrumentation systems, at a minimum, consist of sensors which monitor and
measure various data relevant to drilling operations and an output or display
device. Their basic purpose is to provide the driller and other rig personnel
with the information necessary to operate the drilling rig. In recent years,
the drilling industry has moved from basic instrumentation toward computer-
based information and control systems designed to make the drilling process
safer and more efficient.
Leading that transition, we introduced the TOTAL system in 1991. It consists
of sensors, a Data Acquisition Unit ("DAQ") or computer processor, graphical
output devices, and data storage and transmission capability. In its basic
form, TOTAL collects data and presents it to the driller in an individually
configurable graphic or digital format, while also storing it for subsequent
analysis. More advanced capabilities include software applications that analyze
and interpret the data to assist rig personnel in optimizing drilling
operations and anticipating and avoiding potential problems.
In 1997 we introduced the Varco Integrated Control and Information System,
or V-ICIS, a computer-based system which combines the physical control of all
of our automated equipment, and potentially that of third parties, into a
common, user-friendly system which also incorporates the analytical
capabilities of the TOTAL system.
Like our other Divisions, M/D Totco's revenues are influenced by the overall
level of drilling activity, rig upgrade and refurbishment, and new rig
construction. In general, the nature of its products has caused the first two
of these elements to have a relatively greater impact on this portion of our
business than on Varco as a whole. In particular, the rental business, which
has typically constituted 40% to 45% of M/D Totco's revenues, is directly
influenced by the level of drilling activity, especially in North America.
Our Pressure Control and Motion Compensation Systems
We manufacture and sell pressure control and motion compensation equipment
through our Shaffer Division. Our pressure control equipment includes blowout
preventers ("BOP's") and the control systems that enable their remote
activation and riser, which is large diameter pipe used to connect a floating
offshore rig (semi-submersible or drillship) to the ocean floor. Motion
compensation equipment is used on floating rigs to offset the effect of wind
and wave action on the drilling process.
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We experienced dramatic growth at our Shaffer Division during the three
years 1996 through 1998 as a result of the increase in deepwater drilling (in
excess of 3,000 feet) and the demand for rigs having such capability. During
that period, Shaffer benefited from rig owners upgrading the water depth
capacity of existing rigs and from the building of new deepwater rigs. The
impact on Shaffer of either is substantial, as a new deepwater rig requires
equipment of the type supplied by Shaffer valued in excess of $30 million, and
a major upgrade offers a potential of approximately half that figure. New
orders relating to these new or upgraded deepwater drilling rigs declined
significantly during 1999 and it is uncertain when the demand for additional
rigs with deepwater drilling capability will materialize.
Our Solids Control Equipment
Our Rigtech Division designs and sells solids control equipment and fluid
handling systems. During drilling operations drilling fluid, or mud, is
circulated through the well bore to contain formation pressure, lubricate the
drill bit, and return cuttings to the surface. Rigtech's revenues result
primarily from the sale of solids removal equipment, primarily shale shakers,
which remove cuttings ("solids") from the drilling fluid so that it may be re-
circulated, and from the sale of spare and expendable parts for such equipment.
We have also developed equipment and systems which automate the process of
handling drilling fluids on a drilling rig. Included are devices which monitor
and control the mixing of drilling fluids, the dispensing of chemical
additives, and the movement of fluids between mixing hoppers, the mud pits
(from which it is pumped into the bore hole), and back through the cleaning
process.
The History of Varco
Varco was founded in 1908 and incorporated under the laws of the State of
California in 1911. During the late 1980s and early 1990s, Varco significantly
expanded its product lines by the acquisitions of the BJ Machinery Division and
the TOTCO Product Line of Baker Hughes Incorporated, the Martin-Decker Division
of Cooper Industries, Inc., the Shaffer Product Line of Bariod Corporation,
Metrox, Inc. and Rig Technology Limited. Our principal executive offices are
located at 743 North Eckhoff Street, Orange, California 92868. Our telephone
number is (714) 978-1900.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning the beneficial
ownership of Varco common stock as of the record date and as of the completion
of the merger for the following:
. each shareholder known by us to beneficially own 5% or more of the
outstanding shares of Varco common stock;
. each of our directors;
. our chief executive officer and certain other highly compensated
executive officers of Varco; and
. all of our executive officers and directors as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
this rule, beneficial ownership includes any shares as to which the shareholder
has voting power or investment power and any shares that the shareholder has
the right to acquire within 60 days of the record date through the exercise of
any stock option, warrant or other right. Unless otherwise indicated in the
footnotes or the table, each shareholder has sole voting and investment power
with respect to the shares shown as beneficially owned. The information
relating to beneficial ownership of shares of common stock of the combined
company after the merger does not include shares of Tuboscope common stock
beneficially owned by the listed shareholders. We are not aware that any of
these shareholders beneficially own shares of Tuboscope common stock.
70
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned
-----------------------------------------
Before Merger After Merger
-------------------- --------------------
Percent of Percent of
Beneficial Owner Shares Class Shares Class
- ---------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Directors and Executive Officers
George Boyadjieff(1)................ 723,250 1.1% 515,316 *
George S. Dotson(1)(2).............. 30,000 * 21,375 *
Andre R. Horn(1).................... 35,000 * 24,938 *
Richard A. Kertson(1)............... 100,977 * 71,946 *
Jack W. Knowlton(1)................. 72,800 * 51,870 *
Mark A. Merit(1).................... 94,108 * 67,052 *
Roger D. Morgan(1).................. 106,101 * 75,597 *
Leo J. Pircher(1)(3)(4)............. 661,258 1.0 471,146 *
Walter B. Reinhold(4)(5)............ 1,267,945 1.9 903,411 *
Carroll W. Suggs(1)................. 46,000 * 32,775 *
Michael W. Sutherlin(1)............. 146,184 * 104,156 *
Robert A. Teitsworth(1)............. 43,000 * 30,638 *
Eugene R. White(1).................. 65,000 * 46,313 *
James D. Woods(1)................... 24,000 * 17,100 *
All directors and executive officers
as a group(19 persons)(1).......... 3,547,476 5.3 2,527,577 2.7
5% Beneficial Holders
Franklin Resources, Inc.(6)......... 6,168,443 9.4 4,395,016 4.8
777 Mariners Island Boulevard, 6th
Floor
San Mateo, California 94404
</TABLE>
- --------
* Less than 1% of the shares of common stock outstanding on the record date.
(1) Includes shares which may be purchased upon the exercise of options which
are exercisable as of the record date, or become exercisable within 60 days
thereafter, for the following: Mr. Boyadjieff--483,193 shares; Mr. Dotson--
25,000 shares; Mr. Horn--27,500 shares; Mr. Kertson--49,755 shares;
Mr. Knowlton--45,000 shares; Mr. Merit--77,063 shares; Mr. Morgan--96,248
shares; Mr. Pircher--25,000 shares; Ms. Suggs--45,000 shares; Mr.
Sutherlin--52,669 shares; Mr. Teitsworth--20,000 shares; Mr. White--
20,000 shares; Mr. Woods--20,000 shares; and all directors and executive
officers as a group--1,207,346 shares.
(2) Does not include 1,000 shares held by Mr. Dotson's spouse with respect to
which she has sole voting and investment power and Mr. Dotson disclaims
beneficial ownership.
(3) Includes 459,058 shares held by trusts of which Mr. Pircher is the sole
trustee and has sole voting and investment power. Mr. Pircher disclaims
beneficial ownership of such shares.
(4) Includes 156,800 shares held by a trust of which Mr. Pircher and Mr.
Reinhold are trustees and share voting and investment power. Messrs.
Pircher and Reinhold disclaim beneficial ownership of such shares.
(5) Includes 200 shares Mr. Reinhold owns jointly with his spouse, with respect
to which he shares voting and investment power with his spouse. Also
includes 90,040 additional shares, all owned by Mr. Reinhold's spouse, with
respect to which Mr. Reinhold shares voting and investment power and
disclaims beneficial ownership. Does not include 182,273 shares with
respect to which Mr. Reinhold's spouse acts as custodian and with respect
to which she has sole voting and investment power and Mr. Reinhold
disclaims beneficial ownership.
(6) Franklin Resources, Inc., as the parent holding company for investment
advisory subsidiaries to closed-end investment companies or other managed
accounts, and Charles B. Johnson and Rupert H. Johnson, Jr., principal
shareholders of Franklin Resources are the beneficial owners of 6,168,443
shares. Franklin Advisors, Inc., an investment advisory subsidiary of
Franklin Resources, is the beneficial owner of 5,897,400 of such shares
with respect to which it has sole voting and dispositive power. Franklin
Management, Inc., also an investment advisory subsidiary of Franklin
Resources, has sole dispositive power with respect to 271,043 shares.
Franklin Small Cap Growth Fund, a registered investment company, has an
interest in more than 5% of the Varco common stock. The foregoing
information is taken from a Schedule 13G/A, dated February 2, 2000, filed
by Franklin Resources with the Securities and Exchange Commission.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following tables set forth certain unaudited pro forma condensed
combined financial information for the combined company giving effect to the
merger accounted for as a pooling-of-interests. The information presented is
derived from, should be read in conjunction with, and is qualified in its
entirety by reference to, the separate historical financial statements and the
notes thereto of Tuboscope and Varco incorporated in this proxy
statement/prospectus by reference.
The unaudited pro forma condensed combined balance sheet was prepared using
the historical balance sheets of Tuboscope and Varco as of December 31, 1999.
The fiscal year ends of Varco and Tuboscope are both December 31. The unaudited
pro forma condensed combined statements of operations for each of the three
years in the period ended December 31, 1999 were prepared using the historical
statements of operations of Tuboscope and Varco for the years ended December
31, 1999, 1998 and 1997.
The unaudited pro forma condensed combined financial information was
included for comparative purposes only and does not purport to be indicative of
the results of operations or financial position that actually would have been
obtained if the merger had been effected at the dates indicated or of the
financial position or results of operations that may be obtained in the future.
See "Where You Can Find More Information," "Summary--Selected Historical
Financial Data--Tuboscope," "--Selected Historical Financial Data--Varco," "--
Selected Unaudited Pro Forma Combined Financial Data" and "--Comparative Per
Share Data."
72
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
------------------ ---------------------------
Varco Tuboscope Adjustments Combined
-------- --------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.... $ 77,859 $ 5,258 $(25,000) (B) $ 58,117
Accounts receivable, net..... 140,399 109,908 -- 250,307
Inventory, net............... 67,811 70,890 -- 138,701
Prepaid expenses and other... 13,960 12,574 1,300 (B) 27,834
-------- -------- -------- ----------
Total current assets....... 300,029 198,630 (23,700) 474,959
Property and equipment, net.... 96,439 242,825 -- 339,264
Identified intangibles......... -- 21,685 -- 21,685
Goodwill, net.................. 32,229 210,114 -- 242,343
Other assets, net.............. 30,988 2,785 -- 33,773
-------- -------- -------- ----------
Total assets............... $459,685 $676,039 $(23,700) $1,112,024
======== ======== ======== ==========
Liabilities and Equity:
Current liabilities:
Accounts payable............. $ 29,643 $ 31,818 $ -- $ 61,461
Accrued liabilities.......... 51,884 42,842 -- 94,726
Income taxes payable......... 1,649 3,262 -- 4,911
Current portion of long-term
debt and short-term
borrowings.................. -- 33,886 -- 33,886
-------- -------- -------- ----------
Total current liabilities.. 83,176 111,808 -- 194,984
Long-term debt................. -- 199,449 -- 199,449
Pension liabilities and
postretirement obligations.... 6,898 8,658 -- 15,556
Deferred taxes payable......... -- 21,848 (2,200) (B) 19,648
Other liabilities.............. 8,863 779 -- 9,642
-------- -------- -------- ----------
Total liabilities.......... 98,937 342,542 (2,200) 439,279
Common stockholders' equity:
Common stock................. 55,702 461 (55,237) (A) 926
Paid-in capital.............. 106,184 314,313 55,237 (A) 475,734
Retained earnings............ 198,581 44,944 (21,500) (B) 222,025
Accumulated other
comprehensive income........ 281 (10,891) -- (10,610)
Less treasury stock.......... -- (15,330) -- (15,330)
-------- -------- -------- ----------
Total common stockholders'
equity.................... 360,748 333,497 (21,500) 672,745
-------- -------- -------- ----------
Total liabilities and
equity.................. $459,685 $676,039 $(23,700) $1,112,024
======== ======== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
73
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
December 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------- ------------------------
Varco Tuboscope Adjustments Combined
---------- ---------- ----------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue
Sales...................... $ 568,024 $ 140,563 $ -- $ 708,587
Services and rentals....... 24,728 244,911 (2,378)(C) 267,261
---------- ---------- ------ ----------
Total.................... 592,752 385,474 (2,378) 975,848
Costs and expenses
Cost of sales.............. 407,645 83,836 -- 491,481
Cost of services and
rentals................... 7,808 217,628 -- 225,436
Amortization of goodwill... -- 7,266 1,165 (D) 8,431
Selling, general, and
administrative............ 85,266 46,534 (1,165)(D) 130,635
Research and engineering
costs..................... 28,782 11,367 -- 40,149
Transaction costs,
severance, and write-
offs...................... 4,560 7,808 -- 12,368
---------- ---------- ------ ----------
Total.................... 534,061 374,439 -- 908,500
Operating profit............. 58,691 11,035 (2,378) 67,348
Other expense (income)
Interest expense........... 745 18,181 -- 18,926
Interest income............ -- (316) (2,378)(C) (2,694)
Foreign exchanges gains.... -- (473) -- (473)
Other...................... -- 1,527 -- 1,527
---------- ---------- ------ ----------
Income (loss) before income
taxes....................... 57,946 (7,884) -- 50,062
Provision (benefit) for
income taxes................ 20,981 (728) -- 20,253
---------- ---------- ------ ----------
Net income (loss)............ $ 36,965 $ (7,156) $ -- $ 29,809
========== ========== ====== ==========
Earnings (loss) per common
share
Basic earnings (loss) per
common share.............. $ 0.57 $ (0.16) $ -- $ 0.33
========== ========== ====== ==========
Dilutive earnings (loss)
per common share.......... $ 0.56 $ (0.16) $ -- $ 0.32
========== ========== ====== ==========
Weighted average number of
common shares outstanding
Basic...................... 65,046,000 44,314,495 $ -- 90,659,770
========== ========== ====== ==========
Dilutive................... 65,879,000 44,314,495 $ -- 92,693,264
========== ========== ====== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
74
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
December 31, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------- ------------------------
Varco Tuboscope Adjustments Combined
---------- ---------- ----------- ----------
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue
Sales...................... $ 699,966 $ 238,091 $ -- $ 938,057
Services and rentals....... 41,013 329,610 (999)(C) 369,624
---------- ---------- ------ ----------
Total.................... 740,979 567,701 (999) 1,307,681
Costs and expenses
Cost of sales.............. 484,165 141,708 -- 625,873
Cost of services and
rentals................... 11,688 264,993 -- 276,681
Amortization of goodwill... -- 6,647 1,119 (D) 7,766
Selling, general, and
administrative............ 109,079 54,534 (1,119)(D) 162,494
Research and engineering
costs..................... 34,567 12,738 -- 47,305
Transaction costs,
severance, and write-
offs...................... 8,500 -- -- 8,500
---------- ---------- ------ ----------
Total.................... 647,999 480,620 -- 1,128,619
Operating profit............. 92,980 87,081 (999) 179,062
Other expense (income)
Interest expense........... 1,823 18,122 -- 19,945
Interest income............ -- (601) (999)(C) (1,600)
Foreign exchanges losses... -- 848 -- 848
Other...................... -- 1,601 -- 1,601
---------- ---------- ------ ----------
Income before income taxes... 91,157 67,111 -- 158,268
Provision for income taxes... 30,819 25,166 -- 55,985
---------- ---------- ------ ----------
Net income................... $ 60,338 $ 41,945 $ -- $ 102,283
========== ========== ====== ==========
Earnings per common share
Basic earnings per common
share..................... $ 0.94 $ 0.94 $ -- $ 1.13
========== ========== ====== ==========
Dilutive earnings per
common share.............. $ 0.92 $ 0.89 $ -- $ 1.09
========== ========== ====== ==========
Weighted average number of
common shares outstanding
Basic...................... 64,451,000 44,686,631 -- 90,607,969
========== ========== ====== ==========
Dilutive................... 65,594,000 46,912,536 -- 93,648,261
========== ========== ====== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
75
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------- --------------------------
Varco Tuboscope Adjustments Combined
---------- ---------- ----------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue
Sales.................... $ 500,067 $ 189,892 $ -- $ 689,959
Services and rentals..... 45,722 335,339 (702) (C) 380,359
---------- ---------- ------ ----------
Total.................. 545,789 525,231 (702) 1,070,318
Costs and expenses
Cost of sales............ 334,729 120,460 -- 455,189
Cost of services and
rentals................. 13,199 236,510 -- 249,709
Amortization of
goodwill................ -- 5,281 1,113 (D) 6,394
Selling, general, and
administrative.......... 96,398 51,475 (1,113) (D) 146,760
Research and engineering
costs................... 21,084 10,580 -- 31,664
---------- ---------- ------ ----------
Total.................. 465,410 424,306 889,716
Operating profit........... 80,379 100,925 (702) 180,602
Other expense (income)
Interest expense......... 3,683 14,456 -- 18,139
Interest income.......... -- (331) (702) (C) (1,033)
Foreign exchanges
losses.................. -- 69 -- 69
Other.................... -- 1,782 -- 1,782
---------- ---------- ------ ----------
Income before income
taxes..................... 76,696 84,949 -- 161,645
Provision for income
taxes..................... 26,821 31,845 -- 58,666
---------- ---------- ------ ----------
Net income................. $ 49,875 $ 53,104 $ -- $ 102,979
========== ========== ====== ==========
Earnings per common share
Basic earnings per common
share................... $ 0.78 $ 1.22 $ -- $ 1.16
========== ========== ====== ==========
Dilutive earnings per
common share............ $ 0.76 $ 1.14 $ -- $ 1.10
========== ========== ====== ==========
Weighted average number of
common shares outstanding
Basic.................... 63,650,000 43,575,458 -- 88,926,083
========== ========== ====== ==========
Dilutive................. 65,201,000 46,946,432 -- 93,402,145
========== ========== ====== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
76
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Combined Financial Statements were
prepared for comparative purposes only and do not purport to indicate what
would have occurred had Varco and Tuboscope been merged at the beginning of the
periods presented, or what results may be in the future.
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the
conversion of each outstanding share of Varco common stock into 0.7125 shares
of Tuboscope common stock at the date and for the periods presented and
reflects the following pro forma adjustments:
(A) To reflect the assumed issuance of 46,550,553 shares of Tuboscope
common stock at an exchange ratio of 0.7125.
(B) To reflect nonrecurring charges of approximately $21.5 million which
will be expensed in connection with the merger, net of related tax
benefits of $3.5 million. The nonrecurring charges are primarily
related to transaction costs and employee benefit costs associated with
the merger. Such expenses are not reflected in the Unaudited Pro Forma
Condensed Combined Statement of Operations.
The Unaudited Pro Forma Condensed Combined Statements of Operations were
prepared to reflect the following reclassifications to give pro forma effect to
the merger:
(C) To reclassify interest income of Varco to conform financial
presentations.
(D) To reclassify goodwill amortization of Varco to conform financial
presentations.
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects
consolidated cash holdings of $58.1 million. Management intends to pay off
outstanding debt with excess cash that would have approximated $50.0 million at
December 31, 1999. If the $50.0 million of excess cash had been reclassified
against outstanding debt at December 31, 1999, the combined debt to equity
ratio would have been 27.4% and outstanding debt would have been reduced to
$183.3 million. The remaining debt includes $100 million of 7 1/2% senior notes
due in 2008.
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<PAGE>
UNAUDITED FINANCIAL PROJECTIONS
The financial projections set forth below reflect information that was
presented in the form of a joint slide show by the management of Varco and
Tuboscope on April 5, 2000 to institutional investors attending the Howard Weil
Twenty-eighth Annual Energy Conference. These financial projections were
included in a filing made by Tuboscope with the Securities and Exchange
Commission on April 5, 2000 pursuant to Rule 425 under the Securities Act of
1933.
The financial projections are "forward-looking statements" and Varco's,
Tuboscope's or the combined company's actual results may differ materially from
those set forth in the projections. See "Information Regarding Forward-Looking
Statements" and "Risk Factors" for a discussion of the risks you should
consider in reviewing the projections and other forward-looking statements
included in this proxy statement/prospectus.
Using financial analysts' estimates published by First Call, a market
research company, in March 2000 and various other financial analysts'
estimates, the management of Varco and Tuboscope prepared the following
financial projections for Varco, Tuboscope and the combined company for the
years ended December 31, 2000 and 2001.
. for Varco: projected revenue of approximately $350 million in 2000 and
approximately $442 million in 2001; projected earnings before interest,
taxes, depreciation and amortization of approximately $55 million in
2000 and approximately $75 million in 2001; and projected net income
plus depreciation and amortization of approximately $48 million in 2000
and approximately $59 million in 2001;
. for Tuboscope: projected revenue of approximately $457 million in 2000
and approximately $535 million in 2001; projected earnings before
interest, taxes, depreciation and amortization of approximately $80
million in 2000 and approximately $108 million in 2001; and projected
net income plus depreciation and amortization of approximately $50
million in 2000 and approximately $66 million in 2001; and
. for the combined company: projected earnings per share of $0.45 in 2000
and $0.82 in 2001; and projected net income plus depreciation and
amortization per share of $1.09 in 2000 and $1.46 in 2001.
The financial projections set forth above are inherently subject to
significant business, economic and competitive risks and uncertainties, all of
which are difficult to predict and many of which are beyond either Varco's or
Tuboscope's control. We cannot assure you that actual results will not be
significantly better or worse than the projected results. The inclusion of
these projections should not be regarded as a representation by Varco or
Tuboscope or any of their affiliates or representatives that the projected
results will be achieved. In addition, the financial projections were not
prepared in compliance with the published guidelines established by the
Securities and Exchange Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections.
Neither Varco nor Tuboscope, as a matter of course, publicly discloses
internal budgets, plans, estimates, forecasts or projections as to future
revenues, earnings or other financial information. Accordingly, Varco and
Tuboscope do not intend to, and specifically decline any obligation to, update
or otherwise revise the financial projections to reflect circumstances existing
since their preparation or to reflect the occurrence of unanticipated events.
In addition, Varco and Tuboscope do not intend to, and specifically decline any
obligation to, update or revise the financial projections to reflect changes in
general economic or industry conditions.
Neither Tuboscope nor Varco's independent accountants have compiled,
examined or applied any procedures to these financial projections, nor have
they expressed any opinion or other form of assurance on this information or
its achievability and assume no responsibility for, and disclaim any
association with, this information. The independent public accountants' reports
incorporated by reference in this proxy statement/prospectus relate to the
historical financial statements of Varco and Tuboscope. These reports do not
extend to these unaudited financial projections and should not be read to do
so.
78
<PAGE>
DESCRIPTION OF TUBOSCOPE CAPITAL STOCK
The following is a summary of the material terms of Tuboscope's capital
stock. Because it is only a summary, it does not contain all the information
that may be important to you. Accordingly, you should read carefully the more
detailed provisions of Tuboscope's certificate of incorporation and bylaws.
General
As of the date of this proxy statement/prospectus, Tuboscope's authorized
capital stock consists of:
. 5,000,000 shares of preferred stock, par value $.01 per share, none of
which are issued and outstanding; and
. 60,000,000 shares of common stock, par value $.01 per share, of which
44,797,628 shares were issued and outstanding as of the record date.
Preferred Stock
The Tuboscope board of directors is authorized to issue the Tuboscope
preferred stock in one or more series with such designations, powers,
preferences and rights and qualifications, limitations or restrictions as it
deems appropriate. Tuboscope may issue Tuboscope preferred stock in one or more
series, at any time or from time to time as the Tuboscope board of directors
determines, without further action of the stockholders.
Tuboscope Common Stock
Holders of Tuboscope common stock are entitled to dividends as may be
declared from time to time by the Tuboscope board of directors out of funds
legally available for that purpose. However, a restrictive covenant contained
in Tuboscope's Amended and Restated Secured Credit Agreement, dated as of
February 9, 1998, as amended, expressly prohibits Tuboscope from paying
dividends on the Tuboscope common stock except under certain circumstances.
Tuboscope has not paid any dividends on the Tuboscope common stock since its
inception.
Holders of Tuboscope common stock have no preemptive, redemption, conversion
or sinking fund rights. Holders of Tuboscope common stock are entitled to one
vote per share on all matters submitted to a vote of holders of Tuboscope
common stock and do not have any cumulative voting rights. Upon a liquidation,
dissolution or winding up of Tuboscope, the holders of Tuboscope common stock
are entitled to share equally and ratably in the assets of Tuboscope, if any,
remaining after the payment of all debts and liabilities of Tuboscope and the
liquidation preference of any outstanding Tuboscope preferred stock. As of the
record date, there were approximately 201 holders of record of Tuboscope common
stock. All issued and outstanding shares of Tuboscope common stock are validly
issued, fully paid and nonassessable.
Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law provides that, subject
to certain exceptions specified in Section 203, a corporation will not engage
in any business combination with any "interested stockholder" for a three-year
period following the date that stockholder becomes an interested stockholder
unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
. upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding:
(a) stock held by directors who are also officers; and
79
<PAGE>
(b) shares subject to employee stock plans in which employee
participants do not have the right to determine confidentially
whether plan shares will be tendered in a tender or exchange offer;
or
. on or subsequent to that date the business combination is approved by
the board of directors of the corporation and by the affirmative vote at
an annual or special meeting, and not by written consent, of at least 66
2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Except as specified in Section 203 of the Delaware General Corporation Law,
an interested stockholder includes a person that is:
. the owner of 15% or more of the outstanding voting stock of the
corporation;
. an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation, at any time
within three years immediately prior to the relevant date; or
. the affiliates and associates of an interested stockholder.
Under certain circumstances, Section 203 of the Delaware General Corporation
Law may make it more difficult for a person who would be an "interested
stockholder" to effect various business combinations with a corporation for a
three-year period, although the corporation's certificate of incorporation or
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. Tuboscope's certificate of incorporation does not exclude Tuboscope
from the restrictions imposed under Section 203 of the Delaware General
Corporation Law.
Transfer Agent
The transfer agent for the Tuboscope common stock is ChaseMellon Shareholder
Services, L.L.C.
80
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain of the material differences between
the rights of holders of Tuboscope common stock and the rights of holders of
Varco common stock. Tuboscope is organized under the laws of the State of
Delaware and Varco is organized under the laws of the State of California. The
rights of stockholders of the two corporations arise from both state laws and
the certificate of incorporation and bylaws of Tuboscope and the articles of
incorporation and bylaws of Varco, as applicable.
The following summary is not a complete statement or comparison of the
rights of holders of Tuboscope common stock or holders of Varco common stock
and is qualified in its entirety by reference to the Delaware General
Corporation Law and the California Corporations Code and the respective charter
and bylaw documents of Tuboscope and Varco.
----------------------------------------
Tuboscope Stockholder Rights
----------------------------------------
Capital Stock
The total number of authorized shares of Tuboscope capital stock is 65,000,000,
which consists of 60,000,000 shares of common stock, par value $.01 per share,
and 5,000,000 shares of preferred stock, par value $.01 per share. After the
merger, the total number of authorized shares of Tuboscope capital stock will
be 205,000,000, consisting of 200,000,000 shares of common stock, par value
$.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per
share.
Number, Election and Removal of Directors
Number of Directors
Under the Delaware General Corporation Law, the certificate of incorporation or
bylaws of a corporation may specify the number of directors of the corporation.
Tuboscope's certificate of incorporation and bylaws provide that the number of
directors of Tuboscope will be between one and ten, with the exact number of
directors to be fixed by the board of directors. The Tuboscope board of
directors is currently set at six, but will be increased to ten if the merger
is approved. In addition, if the proposed amendment to Tuboscope's certificate
of incorporation increasing the maximum number of authorized directors is
approved, the maximum number of authorized directors will be 15.
Election of Directors
Tuboscope's bylaws provide that directors will be elected at the annual meeting
of stockholders by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote. Under the Delaware General
Corporation Law, stockholders do not have the right to cumulative voting unless
a corporation's certificate of incorporation provides for
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Varco Shareholder Rights
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Capital Stock
The total number of authorized shares of Varco capital stock is 130,000,000,
which consists of 120,000,000 shares of common stock and 10,000,000 shares of
preferred stock.
Number, Election and Removal of Directors
Number of Directors
Under the California Corporations Code, the board of directors of a corporation
may fix the number of directors within a stated range set forth in the
corporation's articles of incorporation or bylaws. Varco's bylaws provide that
the number of directors will be not less than seven nor more than thirteen. The
Varco board of directors is currently set at ten.
Election of Directors
Varco's bylaws provide that directors will be elected at the annual meeting of
shareholders, but if such a meeting is not held the directors may be elected at
a special meeting of shareholders held for that purpose. Under the California
Corporations Code, shareholders have a right to cumulate their votes in the
election of directors so long as at least one
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cumulative voting. Tuboscope's certificate of incorporation does not provide
for cumulative voting. In addition, Tuboscope's certificate of incorporation
provides that no director may serve on the Tuboscope board of directors if a
majority of the directors determines that the director in question holds a
position with a competitor of Tuboscope.
Vacancies on the Board of Directors
Vacancies on the Tuboscope board of directors and newly created directorships
shall be filled by a majority of the directors then in office.
Removal
Under Tuboscope's certificate of incorporation, any of Tuboscope's directors or
its entire board of directors may be removed from office at any time, with
cause, by the holders of at least two-thirds of the outstanding shares of
Tuboscope common stock entitled to vote. In addition, under the Delaware
General Corporation Law, Tuboscope's directors or its entire board of directors
may be removed from office at any time, without cause, by the holders of at
least a majority of the outstanding shares of Tuboscope common stock entitled
to vote.
Amendments to Charter and Bylaws
Amendments to Charter
Most of the provisions of Tuboscope's certificate of incorporation may be
amended by the holders of a majority of the outstanding Tuboscope common stock
as provided under the Delaware General Corporation Law, since a greater vote is
not required by Tuboscope's certificate of incorporation. However, as permitted
by the Delaware General Corporation Law, the approval of two-thirds of the
outstanding shares of Tuboscope common stock is required to amend those
provision of Tuboscope's certificate of incorporation that:
. authorize the directors to determine that a person may not serve as a
director of Tuboscope if the director holds a position with
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Varco Stockholder Rights
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shareholder has given notice of its intention to cumulate its votes at the
meeting prior to the voting, unless, in the case of a listed corporation, its
charter documents eliminate such right. Varco's articles of incorporation do
not eliminate the right to cumulative voting. Under cumulative voting, each
share of stock normally having one vote is entitled to a number of votes equal
to the number of directors to be elected. A shareholder may give one nominee
all such votes or distribute its votes among as many nominees as the
shareholder desires.
Vacancies on the Board of Directors
Vacancies on the Varco board of directors (except for a vacancy created by the
removal of a director) may be filled by a majority of the directors then in
office. Any vacancy not filled by the directors may be filled by the holders of
a majority of the then outstanding shares.
Removal
Under the California Corporations Code, any director may be removed with or
without cause upon the approval of a majority of the outstanding shares of
common stock entitled to vote. No director, however, may be removed (unless the
entire board is removed) if the number of shares voted against the removal
would be sufficient to elect the director under cumulative voting. A director
may also be removed for cause under California law by the Superior Court in a
suit by shareholders holding at least 10% of the outstanding shares.
Amendments to Charter and Bylaws
Amendments to Charter
Under the California Corporations Code, amendments to the articles of
incorporation may be adopted if approved by the majority of the outstanding
shares (unless the articles provide for a greater proportion), except that
approval by the board of directors alone is sufficient for an amendment
effecting only a stock split, unless the corporation has more than one class of
shares outstanding.
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another company which the directors determine to be a competitor;
. set the authorized number of directors;
. give Tuboscope stockholders the authority to remove a director at any time
for cause by a vote of the holders of at least two-thirds of the outstanding
Tuboscope common stock; and
. deny the right of Tuboscope stockholders to act by written consent.
Amendments to Bylaws
The Delaware General Corporation Law provides that only the stockholders may
amend the bylaws of a corporation unless this authority is conferred upon the
board of directors in the certificate of incorporation. Tuboscope's certificate
of incorporation and bylaws provide that its bylaws may be amended or new
bylaws may be adopted by the stockholders or by the board of directors.
Special Meetings of Stockholders
Under the Delaware General Corporation Law, a special meeting of stockholders
may be called by the board of directors or by any other person authorized by
the certificate of incorporation or bylaws. Tuboscope's bylaws provide that a
special meeting of stockholders may be called by the president and must be
called by the president or secretary if:
. a majority of the board of directors requests a meeting; or
. stockholders owning a majority of the outstanding capital stock entitled to
vote request a meeting.
A request by stockholders to hold a special meeting must be in writing and
state the purpose of the proposed meeting.
Action Without a Meeting
The Delaware General Corporation Law provides that any action required or
permitted to be taken at a stockholders meeting may be taken without a meeting
by written consent, unless a corporation's certificate of incorporation
provides otherwise.
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Varco Shareholder Rights
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Amendments to Bylaws
Under the California Corporations Code, bylaws may be adopted, amended or
repealed either by approval of the holders of a majority of the outstanding
shares entitled to vote or by the approval of the board of directors (other
than an amendment fixing the authorized number of directors).
Special Meetings of Stockholders
The California Corporations Code provides that a special meeting of
shareholders may be called by:
. the board of directors;
. the chairman of the board of directors;
. the president;
. the holders of shares entitled to cast not less than 10% of the votes at the
meeting; or
. any additional persons as may be provided in the articles of incorporation
or bylaws.
Varco's bylaws provide that a special meeting of shareholders may also be
called by any vice president. In addition, the chairman of the board of
directors, president, vice president or secretary must call a special meeting
of shareholders upon written request that a meeting be called for any proper
purpose by any person entitled to call a special meeting of shareholders.
Action Without a Meeting
As permitted by the California Corporations Code, and as provided in Varco's
bylaws, any action required or permitted to be taken at a shareholders meeting
may be taken without a meeting by written consent of the holders of the number
of shares that
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Tuboscope Stockholder Rights
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Tuboscope's certificate of incorporation does not permit action by written
consent of stockholders.
Inspection of Stockholder List
The Delaware General Corporation Law permits any stockholder of record to
inspect the stockholder list for any purpose reasonably related to the person's
interest as a stockholder.
Limitation of Directors' Liability
As permitted by the Delaware General Corporation Law, Tuboscope's certificate
of incorporation provides that a director shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability for:
. any breach of the director's duty of loyalty to Tuboscope or its
stockholders;
. acts and omissions not in good faith or which involve intentional misconduct
or a knowing violation of law;
. liability associated with the unlawful payment of dividends or an unlawful
stock purchase or redemption; or
. any transaction from which the director derived an improper personal
benefit.
Tuboscope's certificate of incorporation further provides that if the Delaware
General Corporation Law is amended to authorize the further elimination or
limitation of the liability of a director, then the liability of a Tuboscope
director shall be further eliminated or limited to the fullest extent permitted
by law.
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Varco Shareholder Rights
----------------------------------------
would have been required to effect the action at a meeting.
Inspection of Stockholder List
The California Corporation Code permits any shareholder of record to inspect
the shareholder list for any purpose reasonably related to the person's
interest as a shareholder. California law also provides for an absolute right
to inspect and copy the shareholder list by persons holding 5% or more of the
corporation's outstanding voting shares or any shareholders holding 1% or more
of such shares who have filed a Schedule 14A with the Securities and Exchange
Commission relating to the election of directors.
Limitation of Directors' Liability
As permitted by California Corporations Code, Varco's articles of incorporation
provide that a corporation's director shall not be personally liable for
monetary damages for breach of a director's duties to the corporation and its
shareholders, except liability for:
. acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
. acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence
of good faith on the part of the director;
. any transaction from which a director derived an improper personal benefit;
. acts or omissions that show a reckless disregard for the director's duty to
the corporation or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders;
. acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation or its
shareholders;
. interested transactions between the corporation and a director in which the
director has a material financial interest; or
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Tuboscope Stockholder Rights
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Indemnification of Directors and Officers
The Delaware General Corporation Law provides that a corporation:
. may indemnify a director or officer who is a party to any action or
proceeding by reason of his position with the corporation against expenses,
judgments, fines and settlements actually and reasonably incurred if that
person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and, in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful;
. may indemnify a director or officer who is a party to any action by or in
the right of the corporation against expenses actually and reasonably
incurred by the person in connection with the defense or settlement of the
action if the person acted in good faith and in a manner the person
believed to be in or not opposed to the best interests of the corporation,
provided that, if such person is adjudged to be liable to the corporation,
indemnification of expenses is permitted only if and to the extent
determined by the court in the proceeding;
. shall indemnify a director or officer against expenses actually and
reasonably incurred in successfully defending, on the merits or otherwise,
any claim, issue or matter in any action or proceeding referred to above;
and
. may advance a director or officer the expenses incurred in defending any
action, if the corporation first receives a commitment from the person to
repay the amounts advanced if it is ultimately determined that the person
is not entitled to indemnification.
Tuboscope's bylaws provide for indemnification of its officers and directors
to the fullest extent provided by law.
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Varco Shareholder Rights
-----------------------------------------
. improper distributions, loans and guarantees.
Varco's articles of incorporation provide for the elimination of the liability
of directors for monetary damages to the fullest extent permissible under the
California Corporations Code.
Indemnification of Directors and Officers
The California Corporations Code provides that a corporation:
. may indemnify a director or officer who is a party to any action or
proceeding by reason of his position with the corporation against expenses,
judgments, fines and settlements, and other amounts actually and reasonably
incurred, if that person acted in good faith and in a manner the person
reasonably believed to be in the best interest of the corporation and, in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful;
. may indemnify a director or officer who is a party to any action by or in
the right of the corporation against expenses actually and reasonably
incurred by the person in connection with the defense or settlement of the
action if the person acted in good faith and in a manner the person
believed to be in the best interests of the corporation and its
shareholders, provided that if such person is adjudged to be liable to the
corporation in the performance of that person's duty to the corporation and
its shareholders, indemnification for expenses is permitted only if and to
the extent determined by the court in the proceedings;
. shall indemnify a director or officer against expenses actually and
reasonably incurred in successfully defending on the merits any claim,
issue or matter in any action or proceeding referred to above; and
. may advance a director or officer the expenses incurred in defending any
action if the corporation first receives a commitment from the person to
repay the amounts advanced if it is ultimately determined that the person
is not entitled to indemnification.
Varco's bylaws provide for the indemnification
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Tuboscope Stockholder Rights
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Dissenters' and Appraisal Rights
Under the Delaware General Corporation Law, a stockholder of a corporation who
does not vote in favor of certain merger or consolidation transactions and who
demands appraisal of his shares in connection therewith may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair value of his shares
together with a fair rate of interest, if any, in lieu of
-----------------------------------------
Varco Shareholder Rights
-----------------------------------------
of its officers and directors except to the extent prohibited under California
law, provided that no person will be indemnified for:
. any proceeding brought by such person unless authorized by the board of
directors;
. any amount paid in settlement unless the settlement was approved in writing
by Varco;
. any expenses, liabilities and losses except to the extent the losses exceed
the amount paid to the director or officer pursuant to any liability
insurance policy maintained by Varco;
. any expenses, liabilities and losses in connection with any action in which
judgment is rendered against the director or officer for an accounting of
profits made from the purchase or sale by the director or officer of Varco
securities pursuant to Section 16(b) of the Securities Exchange Act of 1934
or similar provisions of federal, state or local law;
. any expenses, liabilities and losses in connection with any action brought
by or on behalf of Varco for breach of the director's or officer's duty to
Varco and the Varco shareholders as a result of which the director or
officer may not be relieved of liability under California Corporations Code;
or
. any matter for which a court determines that indemnification is unlawful.
Varco's articles of incorporation provide that Varco is authorized to provide
indemnification of its officers and directors in excess of the indemnification
otherwise permitted by the California Corporations Code, subject to the
limitations on indemnification for breach of duty to the corporation or its
shareholders.
Dissenters' and Appraisal Rights
Under the California Corporations Code, if holders of 5% or more of the
outstanding shares of a corporation's stock entitled to vote at a meeting vote
against the approval of a merger or certain other transactions (including a
sale of assets in exchange for securities of another corporation) and comply
with certain procedural requirements, such shareholders will be entitled to
exercise dissenters' rights pursuant to which such shareholders will have
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Tuboscope Stockholder Rights
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the consideration he would otherwise receive in the transaction. Unless the
corporation's certificate of incorporation provides otherwise, appraisal rights
are not available:
. in connection with the merger or consolidation with another corporation the
shares of which are either listed on a national securities exchange
(including the New York Stock Exchange) or designated as a national market
security on Nasdaq or are held of record by more than 2,000 holders unless,
in connection with the transaction, the stockholders will receive for their
stock anything other than shares of stock of the surviving corporation,
shares of any other corporation which are either listed on a national
securities exchange or designated as a national market security on Nasdaq or
held of record by more that 2,000 holders, or cash in lieu of fractional
shares of the surviving corporation; or
. to stockholders of a corporation surviving a merger if no vote of such
stockholders is required to approve the merger or consolidation.
Tuboscope's certificate of incorporation does not provide for appraisal rights
where such rights are not afforded by the Delaware General Corporation Law.
Rights Plan
Tuboscope has not adopted a stockholders rights agreement. However, Tuboscope
and Varco expect that the Tuboscope board of directors will adopt a
stockholders rights agreement for the combined company effective as of or after
the effective time of the merger.
If adopted, the rights to be issued under the stockholders rights agreement
will have certain anti-takeover effects. The rights will cause substantial
dilution to a person or group of persons that attempts to acquire the combined
company on terms not approved by the board of directors of the combined
company. The rights should not interfere, however, with any merger, other
business combination or acquisition of shares pre-approved by the board of
directors of the combined company.
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Varco Shareholder Rights
----------------------------------------
the right to receive cash in the amount of the fair market value of their
shares together, in some cases, with interest, rather than the consideration
they would otherwise receive in the transaction. See "The Merger--Dissenters'
and Appraisal Rights."
Rights Plan
The Varco board of directors adopted a shareholder rights agreement in November
1997, which provides that each outstanding share of Varco common stock carries
with it one preferred share purchase right. Each right, when it becomes
exercisable, initially entitles the holder to purchase one one-thousandth of a
share of Series A participating preferred stock at an exercise price of $140.
One one-thousandth of a share of the Series A participating preferred stock is
intended to be the economic equivalent of one share of Varco common stock.
The rights become exercisable upon the earlier of:
. the date of a public announcement that a person has become an acquiring
person by acquiring 15% or more of the outstanding Varco common stock
without the prior approval of the Varco board of directors; or
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Tuboscope Stockholder Rights
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Interested Stockholder Transactions
The Delaware General Corporation Law provides that, subject to certain
exceptions, a corporation may not engage in any business combination with any
"interested stockholder" (generally defined to mean any beneficial owner of
more than 15% of the corporation's voting stock) for a three-year period
following the date that stockholder becomes an interested stockholder unless
certain actions are taken by the corporation's board of directors or
stockholders. See "Description of Tuboscope Capital Stock--Delaware General
Corporation Law."
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Varco Shareholder Rights
-----------------------------------------
. the tenth business day (or later at the discretion of the board of
directors) following the commencement of an exchange offer for 15% or more
of the outstanding Varco common stock.
The shareholder rights agreement also provides that:
. if any person becomes an acquiring person, each right, other than rights
owned by the acquiring person, will entitle the holder to purchase for the
exercise price Varco common stock having a value equal to twice the exercise
price; and
. if after any person becomes an acquiring person, there is a merger of Varco
or Varco sells more than 50% of its assets or earning power, each right,
other than rights owned by the acquiring person, will subject to some
exceptions, entitle the holder to purchase at the exercise price shares of
common stock of the other party to the transaction with a value equal to
twice the exercise price.
Prior to the time there is an acquiring person, Varco can redeem the rights for
$.01 per right.
On March 22, 2000, Varco amended the rights agreement to provide that Tuboscope
would not become an acquiring person under the agreement and the rights would
not become exercisable as a result of the merger or the stock option agreements
and that the rights would terminate immediately prior to the merger.
Interested Stockholder Transactions
Under the California Corporations Code, if a tender offer or a written proposal
for approval of a reorganization or for a sale of assets is made to some or all
of a corporation's shareholders by an "interested party," the interested party
must provide an affirmative written opinion as to the fairness of the
consideration to the shareholders of the corporation. An "interested party"
means a person who is a party to the transaction and:
. directly or indirectly controls the corporation that is the subject of the
tender offer or proposal;
. is, or is directly or indirectly controlled by, an officer or director of
the subject corporation; or
. is an entity in which a material financial interest is held by any director
or executive officer of the subject corporation.
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AMENDMENT TO TUBOSCOPE'S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF TUBOSCOPE COMMON STOCK
Reasons for the Authorized Shares Amendment
Tuboscope is authorized to issue a maximum of 60,000,000 shares of Tuboscope
common stock under its certificate of incorporation. There are currently not
enough authorized shares of Tuboscope common stock to issue shares to the Varco
shareholders in the merger, and Tuboscope's certificate of incorporation cannot
be amended to increase the number of authorized shares of Tuboscope common
stock under the Delaware General Corporation Law without the approval of the
Tuboscope stockholders. Accordingly, approval of this amendment by the
Tuboscope stockholders is necessary for the consummation of the merger. This
amendment to Tuboscope's certificate of incorporation will only become
effective if the merger agreement is approved.
If this amendment to Tuboscope's certificate of incorporation is approved by
Tuboscope stockholders, the first paragraph of the Second Restated Certificate
of Incorporation of Tuboscope Inc. will be amended and restated to read as
follows:
"FOURTH: The Company shall be authorized to issue two classes of shares
of stock to be designated respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Company shall have authority
to issue is 205,000,000. The total authorized number of shares of Common
Stock shall be 200,000,000 and each such share shall have a par value of
$.01. The total authorized number of shares of Preferred Stock shall be
5,000,000 and each such share shall have a par value of $.01."
The amendment would provide the number of shares of Tuboscope common stock
necessary to complete the merger and, when needed, for issuance from time to
time for any proper purpose approved by the Tuboscope board of directors. These
purposes may include:
. issuances to raise capital or effect corporate mergers, acquisitions or
other business combinations;
. stock dividends or splits;
. issuances under stock option and other employee benefit plans; and
. for other corporate purposes.
Although there are no present arrangements, agreements or understandings for
the issuance of additional shares of Tuboscope common stock, other than the
shares to be issued pursuant to the merger, employee benefit plans and in
connection with acquisitions in the ordinary course of business, the Tuboscope
board of directors believes that the availability of the additional authorized
shares for issuance upon approval of the Tuboscope board of directors without
the necessity for, or the delay inherent in, a meeting of the Tuboscope
stockholders will be beneficial to Tuboscope and the Tuboscope stockholders by
providing Tuboscope with the flexibility required to promptly consider and
respond to future business opportunities and needs as they arise. As a result
of the proposed amendment, there will be approximately 108 million authorized
but unissued shares of Tuboscope common stock available for issuance after the
merger, approximately 9,601,978 of which are or will be reserved for issuance
pursuant to stock options and warrants outstanding as of the record date.
Effects of the Authorized Shares Amendment
Tuboscope's stockholders should note that certain disadvantages may result
from the adoption of the proposed amendment. The Tuboscope stockholders could
experience a significant reduction in their interest in Tuboscope with respect
to earnings per share, voting, liquidation value and book and market value per
share if the additional authorized shares are issued.
The availability for issuance of additional shares of Tuboscope common stock
could also enable the Tuboscope board of directors to render more difficult or
discourage an attempt to obtain control of Tuboscope. For example, the issuance
of shares in a public or private sale, merger or similar transaction would
increase the
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number of outstanding shares. This could dilute the interest of a party
attempting to obtain control of Tuboscope. Tuboscope is not aware of any
pending or threatened efforts to obtain control of Tuboscope.
Each additional share of Tuboscope common stock authorized by this amendment
to Tuboscope's certificate of incorporation would have the same rights and
privileges as each share of Tuboscope common stock currently authorized or
outstanding. The number of authorized shares of preferred stock would remain
unchanged at 5,000,000 shares.
Vote Required for the Authorized Shares Amendment
The approval of the amendment to Tuboscope's certificate of incorporation
increasing the number of authorized shares of Tuboscope common stock will
require the affirmative vote of the holders of a majority of the outstanding
shares of Tuboscope common stock. See "The Tuboscope Annual Meeting--Vote
Required."
The Tuboscope board of directors recommends a vote FOR approval of the
amendment to Tuboscope's certificate of incorporation increasing the number of
authorized shares of Tuboscope common stock.
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AMENDMENT TO TUBOSCOPE'S CERTIFICATE OF INCORPORATION TO INCREASE THE MAXIMUM
NUMBER OF AUTHORIZED DIRECTORS
Reasons for the Authorized Directors Amendment
Tuboscope's certificate of incorporation currently provides that the number
of directors of Tuboscope will be not less than one and not more than ten. Upon
completion of the merger, the number of directors of the combined company will
be ten. To provide for flexibility to expand the size of the combined company's
board of directors after the merger, the managements of Tuboscope and Varco
desire to increase the maximum number of authorized directors. Pursuant to
Tuboscope's certificate of incorporation and the Delaware General Corporation
Law, Tuboscope's certificate of incorporation cannot be amended to increase the
maximum number of authorized directors of Tuboscope without the approval of the
Tuboscope stockholders. This amendment to Tuboscope's certificate of
incorporation will only become effective if the merger agreement and the
amendment to Tuboscope's certificate of incorporation increasing the number of
authorized shares of Tuboscope common stock are approved.
If this amendment to Tuboscope's certificate of incorporation is approved by
Tuboscope's stockholders, the first sentence of paragraph E of Article SIXTH
will be amended to read as follows:
"The number of directors which shall constitute the whole Board shall be
not less than one (1) nor more than fifteen (15)."
This amendment would allow the board of directors of the combined company to
expand the board to a maximum of fifteen members by board resolution. Tuboscope
and Varco anticipate that the combined company may expand the board of
directors in the future to add directors qualified to direct the management of
the combined company.
Vote Required for the Authorized Directors Amendment
The approval of the amendment to Tuboscope's certificate of incorporation
increasing the maximum number of authorized directors of Tuboscope will require
the affirmative vote of the holders of two-thirds of the outstanding shares of
Tuboscope common stock. See "The Tuboscope Annual Meeting--Vote Required."
The Tuboscope board of directors recommends a vote FOR approval of the
amendment to Tuboscope's certificate of incorporation increasing the maximum
number of authorized directors of Tuboscope.
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TUBOSCOPE'S AMENDED AND RESTATED
1996 EQUITY PARTICIPATION PLAN
Reasons for Adopting Tuboscope's Amended and Restated 1996 Equity Participation
Plan
As of March 30, 2000, the Tuboscope board of directors adopted Tuboscope's
Amended and Restated 1996 Equity Participation Plan, subject to stockholder
approval. The Amended and Restated 1996 Equity Participation Plan of Tuboscope
amends Tuboscope's Amended 1996 Equity Participation Plan by increasing the
total number of shares of Tuboscope common stock with respect to which awards
may be granted under the plan by 4,200,000 shares, from 3,450,000 shares to
7,650,000 shares, and authorizing the payment of "performance-based"
compensation that would be fully deductible for federal income tax purposes.
The plan was also amended to:
. clarify that the board of directors of Tuboscope has discretion to grant
awards to non-employee directors;
. permit the plan administrator to delegate to an executive officer or
committee of executive officers the plan administrator's authority to
grant awards to non-executive officers and other employees who are not
officers;
. extend the term of the plan until March 29, 2010;
. permit the transferability of awards in certain limited circumstances;
. prohibit the repricing of options; and
. change the name of the plan to the "Amended and Restated 1996 Equity
Participation Plan of Varco International, Inc." to reflect the name of
Tuboscope after the merger.
A copy of the Amended and Restated 1996 Equity Participation Plan is attached
to this proxy statement/prospectus as Annex VII.
As of the record date, 463,491 shares of Tuboscope common stock were
available under Tuboscope's Amended 1996 Equity Participation Plan. In
addition, as of the record date, approximately 2,767,961 shares of Varco common
stock were available under the Varco stock plans. However, effective as of
completion of the merger, Tuboscope intends to cancel the unused portion of the
Varco stock plans. As a result, the shares available under the Varco stock
plans will not be available for issuance after the merger.
The aggregate number of shares issuable upon exercise of currently
outstanding Tuboscope and Varco options and the number of shares that may be
granted in the future under the amended plan, including the 4,200,000 share
increase, totals approximately 10,482,469 shares, or 9.9% of the outstanding
shares of Tuboscope common stock on a fully diluted basis after giving effect
to the merger. The size of the proposed share increase under the plan was
based, in part, on the expected needs of the combined company in the future,
the historical grant practices of both companies, the growth stage of the
combined company, and the competitive practices of companies in the oilfield
services industry and companies of comparable size. The Tuboscope board of
directors believes that stockholder approval of the proposed amendment to the
plan is necessary to ensure that an adequate number of shares of Tuboscope
common stock will be available for future grants to provide sufficient
incentives to employees of the combined company after the merger.
Approval of the proposed plan is not necessary for approval of the merger
agreement, either amendment to Tuboscope's certificate of incorporation or the
consummation of the merger. However, the proposed amendment to the plan will
only become effective if the merger is consummated.
For information on stock prices relating to the Tuboscope common stock, see
"Summary--Comparative Market Price Information."
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Description of the Plan
The principal purposes of the plan are to provide incentives for officers,
key employees and consultants of Tuboscope and its subsidiaries through the
granting of options, restricted stock, stock appreciation rights, stock
payments and other awards, thereby stimulating their personal and active
interest in Tuboscope's development and financial success, and inducing them to
remain in Tuboscope's employ. In addition to awards made to officers, employees
and consultants, the plan provides for automatic annual option grants to non-
employee directors of Tuboscope and, at the discretion of the Tuboscope board
of directors, grants of options and other awards to non-employee directors.
The principal features of the plan, as amended by the proposed amendment,
are summarized below, but the summary is qualified by reference to the plan
itself, a copy of which is attached as Annex VII. We strongly encourage you to
read the plan carefully.
Shares Issuable Under the Plan. The total number of shares authorized for
issuance under the plan is 7,550,000, with 2,986,509 shares issued or subject
to outstanding options or other awards as of the record date. The shares
available under the plan may be either previously unissued shares or treasury
shares, and may be equity securities of Tuboscope other than its common stock.
The plan provides for appropriate adjustments in the number and kind of shares
subject to the plan and to outstanding awards pursuant to the plan upon a stock
split, stock dividend or certain other types of recapitalizations, including a
restructuring.
The maximum number of shares which may be subject to options, rights or
other awards granted under the plan to any individual in any calendar year is
400,000. The maximum number of shares that may be issued after the meeting upon
exercise of restricted stock, performance awards, dividend equivalents,
deferred stock or stock payments cannot exceed 25% of the total number of
shares which may be issued under the Plan.
If any portion of an award expires, lapses or is canceled without being
fully exercised, the shares which were subject to the unexercised portion of
the award will continue to be available for issuance under the plan. Shares
which are delivered or withheld upon exercise of any award in payment of the
exercise price or tax withholding obligations, and any restricted stock that is
forfeited or repurchased by Tuboscope, may be awarded under the plan, subject
to the total share limitation.
Administration. Except as to awards granted to non-employee directors of
Tuboscope, the plan is administered by Tuboscope's compensation committee or a
subcommittee of the Tuboscope board of directors, consisting of at least two
members of the board of directors, each qualifying as "non-employee directors"
for purposes of Rule 16b-3 of the Exchange Act of 1934 and as "outside
directors" for purposes of Section 162(m) of the Internal Revenue Code. The
board of directors administers the plan for award grants to non-employee
directors of Tuboscope. The committee may delegate to an executive officer or
committee of officers its authority to grant and administer awards to non-
executive officers. The applicable administrator is authorized to select the
individuals to whom awards are to be granted and to determine the number of
shares to be acquired upon exercise of the award and the terms and conditions
of the award, consistent with the plan. The applicable administrator is also
authorized to adopt, amend and rescind rules relating to the administration of
the plan.
Payment of Shares. The exercise or purchase price for all options, stock
appreciation rights, restricted stock and other rights to acquire Tuboscope
common stock, together with any applicable tax required to be withheld, must be
paid in full in cash at the time of exercise or purchase or may, with the
approval of the administrator, be paid in whole or in part in Tuboscope common
stock owned by the optionee, or issuable upon exercise of the award, and having
a fair market value on the date of exercise equal to the total exercise price
of the shares to be purchased. The administrator may also provide that the
purchase price may be payable within (a) thirty days after the date of
exercise, (b) through delivery of a notice that the optionee has placed a
market sell order with a broker for the shares issuable upon exercise and has
directed the broker to pay the exercise price with sale proceeds or (c) through
delivery of a full recourse promissory note.
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Amendment and Termination. Amendments to the plan to increase the number of
shares as to which awards may be granted or to change the maximum number of
shares that may be granted to any individual in any year, except for
adjustments resulting from stock splits and the like, require stockholder
approval. In all other respects the plan can be amended, modified, suspended or
terminated by the administrator, unless the action would otherwise require
stockholder approval as a matter of applicable law, regulation or rule.
Amendments of the plan will not, without the consent of the participant, affect
a participant's rights under an award previously granted, unless the award
itself otherwise expressly so provides. The plan expires on March 29, 2010.
Eligibility. Awards under the plan may be granted to individuals who are
employees or consultants of Tuboscope or any of its present or future
subsidiaries. Non-employee directors of Tuboscope receive automatic annual
grants of non-qualified stock options, and are eligible to receive other awards
at the discretion of the Board. More than one award may be granted to a plan
participant, but the total fair market value, which is determined at the time
of grant, of shares with respect to which an incentive stock option is first
exercisable by an optionee during any calendar year cannot exceed $100,000.
Awards under the Plan. The plan provides that the applicable administrator
may grant or issue stock options, stock appreciation rights, restricted stock,
deferred stock, dividend equivalents, performance awards, stock payments and
other stock related benefits or any combination thereof. Each grant or issuance
will be set forth in a separate agreement with the person receiving the award
and will indicate the type, terms and conditions of the award.
. Nonqualified Stock Options. Nonqualified stock options will provide for
the right to purchase Tuboscope common stock at a specified price, which
may be less than fair market value on the date of grant, but not less
than par value, and usually will become exercisable, in the discretion
of the committee, in one or more installments after the grant date.
Nonqualified stock options may be granted for any term specified by the
committee not exceeding ten years. Non-qualified options may not be
amended to reduce their exercise price, and no grant of a non-qualified
option may be conditioned upon the surrender of an option with an
exercise price in excess of the exercise price of the new option.
. Awards to Non-Employee Directors. The plan provides for certain
automatic grants of nonqualified stock options as follows:
(a) each non-employee director automatically will be granted an option
to purchase 4,000 shares of Tuboscope stock, subject to adjustment
upon certain corporate changes, on the date of each annual meeting
of stockholders at which the non-employee director continues on the
board of directors; and
(b) a person who is initially elected or appointed to the board of
directors and is at the time of election or appointment a non-
employee director automatically will be granted:
. an option to purchase 4,000 shares of Tuboscope stock, subject to
adjustment upon certain corporate changes, on the date of initial
election or appointment, provided that members of the board of
directors who are employees of Tuboscope who subsequently retire
from Tuboscope and remain on the board of directors will not
receive this initial option grant; and
. an option to purchase 4,000 shares of Tuboscope common stock on
an annual basis as described in (a) above.
The price per share of the shares subject to each such option
automatically granted to non-employee directors is equal to the fair
market value of a share of Tuboscope common stock on the date the
option was granted. The Board also has the authority to grant options
and other awards, to non-employee directors on a discretionary basis.
. Incentive Stock Options. Incentive stock options, if granted, will be
designed to comply with the provisions of the Internal Revenue Code and
will be subject to restrictions contained in the Internal
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Revenue Code, including exercise prices equal to at least the fair
market value of Tuboscope common stock on the grant date and a ten year
restriction on their term, but may be subsequently modified to
disqualify them from treatment as an incentive stock option. Incentive
stock options may be granted only to employees not exceeding ten years.
Incentive stock options may not be amended to reduce their exercise
price, and no grant of an incentive stock option may be conditioned upon
the surrender of an option with an exercise price in excess of the
exercise price of the new option.
. Restricted Stock. Restricted stock may be sold to participants at
various prices, but not below par value, and made subject to
restrictions determined by the committee. Typically, restricted stock
may be repurchased by Tuboscope at the original purchase price if the
conditions or restrictions are not met. In general, restricted stock may
not be sold or otherwise transferred or hypothecated, until the
restrictions are removed or expire. Purchasers of restricted stock,
unlike recipients of options, will have voting rights and may receive
dividends prior to the time when the restrictions lapse.
. Deferred Stock. Deferred stock may be awarded to participants, typically
without payment of consideration, but subject to vesting conditions
based on continued employment or on performance criteria established by
the administrator. Like restricted stock, deferred stock may not be sold
or otherwise transferred or hypothecated, until vesting conditions are
removed or expire. Unlike restricted stock, deferred stock will not be
issued until the deferred stock award has vested, and recipients of
deferred stock generally will have no voting or dividend rights prior to
the time when vesting conditions are satisfied.
. Stock Appreciation Rights. Stock appreciation rights may be granted in
connection with stock options or other awards, or separately. Stock
appreciation rights granted by the committee in connection with stock
options or other awards typically will provide for payments to the
holder based upon increases in the price of Tuboscope common stock over
the exercise price of the related option or other award, but
alternatively may be based upon criteria such as book value. There are
no restrictions specified in the plan on the exercise of stock
appreciation rights or the amount of gain realizable upon exercise,
although they can be imposed by the administrator in the stock
appreciation right agreements. The administrator may elect to pay stock
appreciation rights in cash or in Tuboscope common stock or in a
combination of cash and stock.
. Dividend Equivalents. Dividend equivalents may be credited to a
participant in the plan. They represent the value of the dividends per
share paid by Tuboscope, calculated with reference to the number of
shares covered by the stock options, stock appreciation rights or other
awards held by the participant.
. Performance Awards. Performance awards may be granted by the
administrator on an individual or group basis. Generally, these awards
will be based upon specific agreements and may be paid in cash or in
Tuboscope common stock or in a combination of cash and stock.
Performance awards may include "phantom" stock awards that provide for
payments based upon increases in the price of Tuboscope common stock
over a predetermined period. Performance awards may also include bonuses
which may be granted by the administrator on an individual or group
basis and which may be payable in cash or in Tuboscope common stock or
in a combination of cash and stock.
. Stock Payments. Stock payments may be authorized by the administrator in
the form of shares of Tuboscope common stock or an option or other right
to purchase Tuboscope common stock as part of a deferred compensation
arrangement in lieu of all or any part of compensation, including
bonuses, that would otherwise be payable to a participant in cash.
Miscellaneous Provisions. The plan specifies that Tuboscope may make loans
to plan participants to enable them to exercise options, purchase shares or
realize the benefits of other awards granted under the plan. The terms and
conditions of these loans, if any are made, will be set by the committee.
In consideration of the granting of an award, the employee or consultant
must agree in the written agreement embodying the award to remain in the employ
of, or to continue as a consultant for, Tuboscope or
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any of its subsidiaries for at least one year after the award is granted or a
shorter period fixed by agreement or by action of the committee following grant
of the award.
The dates on which options or other awards under the plan first become
exercisable and on which they expire will be set forth in individual stock
options or other agreements setting forth the terms of the awards. These
agreements generally will provide that options and other awards expire shortly
after termination of the optionee's status as an employee, consultant or
director, although the committee may provide that the options continue to be
exercisable following a termination or following a change in control of
Tuboscope, or because of the grantee's retirement, death, disability or
otherwise. Similarly, restricted stock granted under the plan which has not
vested generally will be subject to repurchase by Tuboscope upon the grantee's
termination of employment or consultancy, although the administrator may make
exceptions, based on the reason for termination or on other factors, in the
terms of an individual restricted stock agreement.
Without the consent of the administrator, no option, stock appreciation
right or other right to acquire Tuboscope common stock granted under the plan
may be assigned or transferred by the grantee, except by will or the laws of
intestate succession or pursuant to a qualified domestic relations order, as
defined by the Internal Revenue Code or Title I to the Employee Retirement
Income Security Act of 1974 or the rules thereunder, although the shares
underlying these rights may be transferred if all applicable restrictions have
lapsed. The administrator has the authority to permit gifts or contributions of
awards to certain family members and family trusts. During the lifetime of the
holder of any award, the award may be exercised only by the holder or any such
permitted family member or trust.
Tuboscope requires participants to discharge tax withholding obligations in
connection with the exercise of any option or other award granted under the
plan, or the lapse of restrictions on restricted stock, as a condition to the
issuance or delivery of stock or payment of other compensation pursuant
thereto. Shares held by, or to be issued to, a participant may also be used to
discharge tax withholding obligations related to exercise of options or receipt
of other awards, subject to the discretion of the administrator to disapprove
this use. In addition, the administrator may grant to employees a cash bonus in
the amount of any tax related to awards.
Certain Federal Income Tax Consequences of the Proposed Amended and Restated
1996 Equity Participation Plan
The federal income tax consequences of the plan under current federal law
are summarized in the following discussion, which is intended for general
information only. In addition, the tax consequences described below are subject
to the limitation of the 1993 Omnibus Budget Reconciliation Act, or OBRA, as
discussed in further detail below. Alternative minimum tax, employment taxes
and state, local and foreign income taxes are not discussed, and may vary
depending on individual circumstances and from locality to locality.
Nonqualified Stock Options. The recipient of a nonqualified stock option
granted under the plan will not have taxable income upon the grant of the
option, nor will Tuboscope then be entitled to any deduction. Generally, upon
exercise of the nonqualified stock option the recipient will realize ordinary
income, and Tuboscope will be entitled to a deduction, in an amount equal to
the difference between the option exercise price and the fair market value of
the stock at the date of exercise. A recipient's basis in the stock for
purposes of determining gain or loss on the subsequent disposition of the
shares generally will be the fair market value of the stock on the date of
exercise of the nonqualified stock option.
Incentive Stock Options. There is no taxable income to the recipient of an
incentive stock option when the option is granted or when that option is
exercised. Gain realized by the recipient upon sale of stock issued on exercise
of an incentive stock option is taxable at capital gains rates and no tax
deduction is available to Tuboscope, unless the recipient disposes of the
shares within two years after the date of grant of the option or within one
year of the date the shares were transferred to the optionee. If this occurs,
the difference between the option exercise price and the fair market value of
the shares on the date of the option's exercise generally
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will be taxed at ordinary income rates and Tuboscope will be entitled to a
deduction to the extent the recipient must recognize ordinary income. An
incentive stock option exercised more than three months after the recipient's
termination of employment, other than by reason of death or disability, will be
taxed as an nonqualified stock option.
Stock Appreciation Rights. No taxable income is realized upon the receipt of
a stock appreciation right, but upon exercise of the stock appreciation right
the fair market value of the shares, or cash in lieu of shares, received will
be taxable as ordinary income to the recipient in the year of such exercise.
Tuboscope will be entitled to a deduction for compensation paid in the same
amount which the recipient realized as ordinary income.
Restricted Stock and Deferred Stock. A recipient to whom restricted or
deferred stock is issued will not have taxable income upon issuance and
Tuboscope will not then be entitled to a deduction, unless, in the case of
restricted stock, an election is made under Section 83(b) of the Internal
Revenue Code. However, when restrictions on shares of restricted stock lapse,
so that the shares are no longer subject to repurchase by Tuboscope or are
transferable, the recipient will realize ordinary income and Tuboscope will be
entitled to a deduction in an amount equal to the fair market value of the
shares at the date the restrictions lapse, less the purchase price. Similarly,
when deferred stock vests and is issued to the recipient, the recipient will
realize ordinary income and Tuboscope will be entitled to a deduction in an
amount equal to the fair market value of the shares at the date of issuance. If
an election is made under Section 83(b) with respect to restricted stock, the
recipient will realize ordinary income at the date of issuance equal to the
difference between the fair market value of the shares at that date less the
purchase price and Tuboscope will be entitled to a deduction in the same
amount. The Internal Revenue Code does not permit a Section 83(b) election to
be made with respect to deferred stock.
Dividend Equivalents. A recipient of a dividend equivalent award will not
realize taxable income at the time of grant and Tuboscope will not be entitled
to a deduction at that time. When a dividend equivalent is paid, the recipient
will recognize ordinary income and Tuboscope will be entitled to a
corresponding deduction.
Performance Awards. A recipient who has been granted a performance award
will not realize taxable income at the time of grant and Tuboscope will not be
entitled to a deduction at that time. When an award is paid, whether in cash or
stock, the recipient will have ordinary income in the amount of the cash or the
amount equal to the fair market value of the stock and Tuboscope will be
entitled to a corresponding deduction, unless such stock is restricted stock.
See "--Restricted Stock and Deferred Stock" above for a description of the tax
consequences of a payment of restricted stock.
Stock Payments. A recipient who receives a stock payment will be taxed when
the payment is made, unless such stock is restricted stock. When a stock
payment is made, the recipient will have ordinary income in the amount equal to
the fair market value of the stock and Tuboscope will be entitled to a
corresponding deduction. See "--Restricted Stock and Deferred Stock" above for
a description of the tax consequences of a payment of restricted stock.
The plan administrator may designate key employees as "Section 162(m)
Participants," whose compensation for a given fiscal year may be subject to the
limit on deductible compensation imposed by Section 162(m) of the Code. The
administrator may grant to Section 162(m) Participants restricted stock,
deferred stock, divided equivalents, performance awards and stock payments
intended to qualify as "performance-based" compensation under Section 162(m) of
the Internal Revenue Code. Such awards would vest or become exercisable upon
the attainment of company performance criteria selected in advance by the
administrator and which are related to one or more of the following performance
goals: (i) net income; (ii) pre-tax income; (iii) operating income; (iv) cash
flow; (v) earnings per share; (vi) earnings before any one or more of the
following items: interest, taxes, depreciation or amortization; (vii) return on
equity; (viii) return on invested capital or assets; (ix) cost reductions or
savings; (x) funds from operations and (xi) appreciation in the fair market
value of Tuboscope common stock. The maximum awards that may be granted in any
one year as
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such "performance-based" compensation may not exceed $1,000,000 for cash
payment awards or 400,000 shares for awards paid in stock (with any or no
purchase price payable for such shares).
Effect of 1993 Omnibus Budget Reconciliation Act on the Plan. Under OBRA,
income tax deductions of publicly-traded companies generally may be limited to
the extent the total compensation, including base salary, annual bonus, stock
option exercises and non-qualified benefits for an executive officer exceeds $1
million, in any one taxable year. However, under OBRA, the deduction limit does
not apply to certain "performance-based" compensation established by an
independent compensation committee which is adequately disclosed to, and
approved by, stockholders. Stock options and stock appreciation rights will
satisfy the performance-based exception if the awards are made by a qualifying
compensation committee, the plan sets the maximum number of shares that can be
granted to any particular employee within a specified period and the
compensation is based solely on an increase in the stock price after the grant
date (i.e., the stock option or stock appreciation right exercise price is
equal to or greater than the fair market value of the stock subject to the
award on the grant date). Performance or incentive awards granted under the
plan may qualify as "qualified performance-based compensation" for purposes of
Section 162(m) if such awards are granted or vest upon the preestablished
objective performance goals described above.
It is Tuboscope's policy generally to design Tuboscope's compensation
programs to conform with OBRA and related regulations so that total
compensation paid to any employee will not exceed $1 million in any one year,
except for compensation payments in excess of $1 million which qualify as
"performance-based." Tuboscope intends to administer its option grant program
so as to comply with the requirements of the performance-based compensation
exclusion under OBRA for options, including the requirements concerning option
pricing, plan administration and annual award limits. The proposed amendments
to the plan include provisions establishing the parameters by which Tuboscope
may grant or award restricted stock, performance awards, stock payments,
dividend equivalents, deferred stock, so as to qualify such awards as
"performance-based" compensation, thereby permitting the full deductibility of
such compensation. Tuboscope may, however, grant options or otherwise make
awards under the plan which may not meet the requirements of performance-based
compensation exclusion under OBRA, and thus may not be deductible, when sound
management of Tuboscope so requires.
Vote Required for the Proposed Plan and Recommendation
The affirmative vote of a majority of the shares represented at the
Tuboscope annual meeting is required for approval of Tuboscope's Amended and
Restated 1996 Equity Participation Plan.
The Tuboscope board of directors recommends a vote FOR approval of
Tuboscope's Amended and Restated 1996 Equity Participation Plan.
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ELECTION OF TUBOSCOPE DIRECTORS
General
Six directors are to be elected at the Tuboscope annual meeting. Directors
are elected at each Tuboscope annual meeting of stockholders and hold office
until their successors are duly elected and qualified at the next annual
meeting of stockholders. If the merger is completed, however, the following
will occur:
. one of Tuboscope's directors, Jerome R. Baier, will resign as a member
of the combined company's board of directors;
. the authorized number of directors to serve on the Tuboscope board of
directors will be increased from six to ten; and
. George Boyadjieff, George S. Dotson, Andre R. Horn, Eugene R. White and
James D. Woods, each of whom is currently a member of the Varco board of
directors, will be appointed to the board of directors of the combined
company until their successors are duly elected and qualified at the
next annual meeting of the combined company.
If any nominee should become unavailable to serve for any reason, proxies
will be voted for another nominee or nominees to be selected by the Tuboscope
board of directors. Tuboscope's certificate of incorporation currently requires
that there be a minimum of one and a maximum of ten members of the Tuboscope
board of directors.
Set forth below are the names and descriptions of the backgrounds of the
nominees for election as directors of Tuboscope. Each of the nominees currently
serves as a director of Tuboscope and was elected to his present term of office
or was appointed by the Tuboscope board of directors.
Tuboscope Directors
The Tuboscope directors are as follows:
<TABLE>
<CAPTION>
Name Age Position with Tuboscope
---- --- -----------------------
<S> <C> <C>
L.E. Simmons............. 53 Chairman of the Board
John F. Lauletta......... 55 Director, President and Chief Executive Officer
Jerome R. Baier.......... 48 Director
Eric L. Mattson.......... 48 Director
Douglas E. Swanson....... 61 Director
Jeffery A. Smisek........ 45 Director
</TABLE>
L.E. Simmons. Mr. Simmons has been a director and Chairman of the Board of
Tuboscope since April 1996. Mr. Simmons has for more than five years served as
President and a director of L.E. Simmons & Associates, Incorporated, which,
through an affiliate, manages private institutional investment partnerships.
Mr. Simmons also serves as a director of Zions Bancorporation.
John F. Lauletta. Mr. Lauletta has been the President and Chief Executive
Officer and a director of Tuboscope since April 1996. From 1993 to April 1996,
Mr. Lauletta was the President and Chief Executive Officer of D.O.S., Ltd. From
1973 until 1993, Mr. Lauletta was with Baker Hughes Incorporated, holding
several executive positions, including President of Exlog/TOTCO, President of
Milpark Drilling Fluids and Vice President of Baker Hughes INTEQ.
Jerome R. Baier. Mr. Baier has been a director of Tuboscope since 1988. Mr.
Baier is and has been a Managing Director of Northwestern Investment Management
Company since January 1998. From October 1996 to December 1997, Mr. Baier was
Vice President-Securities of the Northwestern Mutual Life Insurance Company.
From October 1989 to October 1996, Mr. Baier was Director-Securities of
Northwestern. For more than five years prior to October 1989, Mr. Baier was
Associate Director-Securities of Northwestern.
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Eric L. Mattson. Mr. Mattson has been a director of Tuboscope since January
1994. Mr. Mattson has been Chief Financial Officer of Netrail, Inc., an
Internet backbone and broadband service provider, since September 1999. From
July 1993 to May 1999, Mr. Mattson served as Senior Vice President and Chief
Financial Officer of Baker Hughes Incorporated. For more than five years prior
to 1993, Mr. Mattson was Vice President and Treasurer of Baker Hughes. Mr.
Mattson also serves as a director of Rental Service Corporation.
Douglas E. Swanson. Mr. Swanson has been a director of Tuboscope since
October 1997. Mr. Swanson is currently employed in private investments. Mr.
Swanson was the President, Chief Executive Officer and Chairman of the Board of
Cliffs Drilling Company from 1992 to July 1999. From 1978 to 1992, Mr. Swanson
was an Executive Vice President of Cliffs Drilling Company.
Jeffery A. Smisek. Mr. Smisek has been a director of Tuboscope since
February 1998. Mr. Smisek has been Executive Vice President, General Counsel
and Secretary of Continental Airlines since November 1996, and was previously
Senior Vice President, General Counsel and Secretary of Continental Airlines.
Prior to joining Continental Airlines in 1995, Mr. Smisek was a partner of
Vinson & Elkins L.L.P., a law firm, for more than five years.
The certificate of incorporation and bylaws of Tuboscope contain provisions
eliminating or limiting the personal liability of directors for violations of a
director's fiduciary duty to the extent permitted by the General Corporation
Law of the State of Delaware.
Meetings and Committees
The Tuboscope board of directors held seven meetings (including those held
by written consent) during the fiscal year ended December 31, 1999. Each
director attended at least 75% of the aggregate of the total number of meetings
of the Tuboscope board of directors held during such period and the total
number of meetings held during such period by all committees of the Tuboscope
board of directors on which that director served.
Tuboscope currently has standing audit, executive and compensation
committees but does not have a nominating committee. The Tuboscope audit
committee is comprised of Jerome R. Baier and Douglas E. Swanson. The Tuboscope
audit committee met twice during the fiscal year ended December 31, 1999. The
Tuboscope audit committee's responsibilities include:
. recommending the selection of Tuboscope's independent auditors to the
Tuboscope board of directors; and
. reviewing:
(a) the scope and results of the audit engagement with the independent
auditors and management;
(b) the adequacy of Tuboscope's internal accounting control procedures;
(c) the independence of the independent auditors;
(d) the range of audit and non-audit fees charged by the independent
auditors; and
(e) the impact on Tuboscope's financial statements of any new or
proposed changes in accounting principles or regulatory
requirements.
The Tuboscope compensation committee is comprised of Eric L. Mattson,
Jeffery A. Smisek and L.E. Simmons. The Tuboscope compensation committee met
four times (including those held by written consent) during the fiscal year
ended December 31, 1999. The Tuboscope compensation committee's
responsibilities include reviewing and approving the compensation of
Tuboscope's directors, officers and employees and performing other related
functions upon request of the Tuboscope board of directors.
The Tuboscope executive committee is comprised of L.E. Simmons, John F.
Lauletta and Eric L. Mattson. The Tuboscope executive committee met once during
the fiscal year ended December 31, 1999. The Tuboscope
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executive committee is a general advisory committee which reviews ongoing
operations of Tuboscope and performs other functions at the request of the
Tuboscope board of directors.
Board Compensation and Benefits
Each Tuboscope director who is neither an employee nor otherwise subject to
an agreement to provide services to Tuboscope is entitled to receive $15,000
per year as compensation for membership on the Tuboscope board of directors,
plus $1,500 for each attended regular and special meeting of the Tuboscope
board of directors. In addition, if such a director is a member of a standing
committee, he is entitled to receive an attendance fee of $1,000 for each
committee meeting attended in person and $500 for each committee meeting
attended telephonically.
Under the terms of Tuboscope's Amended 1996 Equity Participation Plan, each
non-employee director is automatically granted an initial option to purchase
4,000 shares of Tuboscope common stock on the date of such appointment or
election to the Tuboscope board of directors or on April 24, 1996 for those
non-employee directors serving at the time of initial plan adoption by the
stockholders. In addition, each non-employee director of Tuboscope is granted
automatically options to purchase an additional 4,000 shares on the date of
each Tuboscope annual meeting following the initial grant during which such
person continues as a non-employee director of Tuboscope. All options are
granted with an exercise price equal to the fair market value of Tuboscope
common stock on the date of grant. On May 13, 1999, Messrs. Baier, Mattson,
Simmons, Smisek and Swanson were each granted options to purchase 4,000 shares
of Tuboscope common stock at an exercise price of $13.375 per share.
Vote and Recommendation
Tuboscope directors will be elected by a favorable vote of a plurality of
the shares of Tuboscope common stock present and entitled to vote, in person or
by proxy, at the Tuboscope annual meeting. Abstentions or broker non-votes as
to the election of directors will not be treated as votes cast or shares
entitled to vote with respect to such election and, thus, will not affect the
election of the nominees receiving the plurality of votes. Unless instructed to
the contrary, the shares represented by the proxies will be voted FOR the
election of the six nominees named above as directors. Should any nominee
become unavailable to serve, the proxies will be voted for such other person or
persons as may be designated by the Tuboscope board of directors.
The Tuboscope board of directors recommends that you vote FOR the election
of the nominees named above.
Executive Officers
The following persons serve as Tuboscope's executive officers as of the date
of the proxy statement/prospectus:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John F. Lauletta........ 55 Director, President and Chief Executive Officer
Joseph C. Winkler....... 48 Executive Vice President, Chief Financial Officer and Treasurer
Martin I. Greenberg..... 60 Vice President, Controller, Assistant Secretary and Assistant Treasurer
James F. Maroney, III... 49 Vice President, Secretary and General Counsel
Kenneth L. Nibling...... 49 Vice President--Human Resources and Administration
Haynes B. Smith, III.... 48 Vice President--Western Hemisphere Operations
Peter J. Stuart......... 42 Vice President--Eastern Hemisphere Operations
</TABLE>
Set forth below are descriptions of the backgrounds of our executive
officers and their principal occupations for the past five years. For a
description of the background of Mr. Lauletta, see "Election of Tuboscope
Directors--Tuboscope Directors."
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Joseph C. Winkler. Mr. Winkler has been Executive Vice President, Chief
Financial Officer and Treasurer of Tuboscope since April 1996. From 1993 to
April 1996, Mr. Winkler served as the Chief Financial Officer of D.O.S., Ltd.
Prior to joining D.O.S., Ltd., he was Chief Financial Officer of Baker Hughes
INTEQ and served in a similar role for various companies owned by Baker Hughes
including Eastman/Teleco and Milpark Drilling Fluids. For ten years prior to
joining Baker Hughes, Mr. Winkler held the position of Chief Financial Officer
of an independent oil and gas producer after having spent several years with
Arthur Young & Company.
Martin I. Greenberg. Mr. Greenberg has been Vice President, Controller,
Assistant Secretary and Assistant Treasurer of Tuboscope since November 1991.
From June 1991 to November 1991, Mr. Greenberg was Vice President-Finance and
Controller of Tuboscope. Mr. Greenberg served as Vice President-Controller and
Assistant Secretary of Tuboscope from July 1990 to June 1991. Mr. Greenberg was
Assistant Controller of Tuboscope's wholly-owned subsidiary, Tuboscope Vetco
International, Inc. from January 1974 to July 1990.
James F. Maroney, III. Mr. Maroney has been Vice President of Tuboscope
since May 1991, Secretary of Tuboscope since January 1991 and General Counsel
of Tuboscope since November 1989. Mr. Maroney was Assistant Secretary of
Tuboscope from December 1989 to January 1991. Mr. Maroney was Associate General
Counsel and Head of Litigation for TransAmerican Natural Gas Corporation, a gas
production company, from 1987 to 1989. From 1985 to 1987, Mr. Maroney was in a
private law practice specializing in commercial litigation.
Kenneth L. Nibling. Mr. Nibling has been Vice President-Human Resources and
Administration of Tuboscope since December 1991. From July 1988 to November
1991, Mr. Nibling was Director of Human Resources for Union Texas Petroleum
Corp., an international exploration and production company. From January 1984
to July 1988, Mr. Nibling was Manager, Compensation and Employment for
Louisiana Land and Exploration Company.
Haynes B. Smith, III. Mr. Smith has been Vice President-Western Hemisphere
Operations of Tuboscope since February 1998 and of Tuboscope Vetco
International since April 1996. From May 1991 to April 1996, Mr. Smith was Vice
President and General Manager of Inspection Services of Tuboscope. From 1989 to
May 1991, Mr. Smith was Northeast Zone Manager of Tuboscope. From June 1972 to
1989, Mr. Smith held various sales and managerial positions with Tuboscope and
AMF Tuboscope Inc.
Peter J. Stuart. Mr. Stuart has been Vice President-Eastern Hemisphere
Operations of Tuboscope since February 1998 and of Tuboscope Vetco
International since April 1996. Mr. Stuart has been Managing Director of
Tuboscope (UK) Ltd. since January 1998 and of Tuboscope Vetco (UK) Ltd. since
April 1996. From March 1992 to April 1996, Mr. Stuart was Managing Director of
Drexel Equipment (UK) Ltd. From August 1985 to March 1992, Mr. Stuart was a
Project Engineer, and latterly Operations Manager, for D.O.S., Ltd.'s
operations in the United Kingdom. From August 1979 to July 1985, Mr. Stuart
held engineering positions with Sparrows Offshore and Halliburton in the United
Kingdom.
Tuboscope is not aware of any family relationships between any of the
foregoing directors or any of the foregoing executive officers or between any
director and any executive officer.
Executive Compensation
The following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to Tuboscope for the
fiscal years ended December 31, 1997, December 31, 1998 and December 31, 1999
of those persons, referred to as Named Executive Officers, who were either:
. the chief executive officer of Tuboscope;
. one of the other four most highly compensated executive officers of
Tuboscope whose annual salary and bonuses exceeded $100,000; or
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. up to two other executive officers who would have qualified under the
first two categories listed in this paragraph but for the fact that the
individual was not serving as an executive officer of Tuboscope at the
end of the 1999 fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
-------------------------------- ---------------------
Restricted Securities All Other
Name and Principal Stock Underlying Annual
Position Year Salary(1) Bonus Other(2) Awards(3) Options Compensation(4)
- ------------------ ---- --------- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. Lauletta........ 1999 $370,000 $ 0 $ 0 $ 0 366,942 $11,098
President and Chief 1998 376,046 0 0 332,028 43,680 11,783
Executive Officer 1997 306,558 352,700 94,272(5) 1,011,498 49,107 6,491
Joseph C. Winkler....... 1999 212,000 0 0 0 168,198 6,360
Executive Vice 1998 214,334 0 0 0 19,814 6,150
President, 1997 173,340 160,000 0 952,410 22,143 3,663
Chief Financial Officer
and Treasurer
Haynes B. Smith, III(6). 1999 187,000 0 0 0 81,771 5,610
Vice President--Western 1998 189,863 0 0 0 10,318 5,439
Hemisphere Operations
Clay C. Williams(7)..... 1999 168,000 0 0 0 81,771 840
Vice President-- 1998 170,558 0 0 0 10,318 4,687
Corporate Development 1997 138,165 95,880 0 503,474 11,429 2,935
Peter J. Stuart(6)...... 1999 164,095 0 0 0 81,771 8,759
Vice President--Eastern 1998 164,345 0 0 0 10,318 10,954
Hemisphere Operations
</TABLE>
- --------
(1) Includes amounts deferred by the Named Executive Officers under Tuboscope's
401(k) Thrift Savings Plan and Non-qualified Deferred Compensation Plan.
(2) Includes (a) living, travel and other expense reimbursement, (b) the cost
of Company-provided automobiles, (c) club dues reimbursement, and (d) the
value of the interest-free aspect of any outstanding loan, but only if such
payments to the Named Executive Officer exceed the lesser of $50,000 or 10%
of the total annual salary and bonus of the Named Executive Officer.
(3) Awards shown represent the value of the restricted stock units granted
pursuant to Tuboscope's Stock Ownership Program, employing the fair market
value of Tuboscope common stock on the date of grant (i.e., June 30, 1997
of $19.875 and on January 2, 1998 of $23.00). The value of the shares of
Tuboscope common stock underlying the unvested restricted stock units as of
December 31, 1999 were $829,675, $608,584, $376,365, $321,723 and $190,500
for Messrs. Lauletta, Winkler, Smith, Williams and Stuart, respectively,
based on the closing sales price of the Tuboscope common stock ($15.875) on
the New York Stock Exchange on December 31, 1999. Restrictions on the
restricted stock units generally lapse 10% per year for a period of ten
years, subject to accelerated vesting in certain circumstances, and are
subject to continued ownership of Tuboscope common stock in compliance with
the Stock Ownership Program. The unvested restricted stock units will
become 100% vested upon completion of the merger.
(4) Includes: (i) matching contributions by Tuboscope under Tuboscope's 401(k)
Thrift Savings Plan in 1999, 1998 and 1997 in the amounts of $1,762, $1,764
and $2,523, respectively, for Mr. Lauletta; $1,590, $2,000 and $3,663,
respectively, for Mr. Winkler; and $840, $4,687 and $2,935, respectively,
for Mr. Williams; and in 1999 and 1998 in the amounts of $3,039 and $3,295
for Mr. Smith; and (ii) matching contributions by Tuboscope under
Tuboscope's Non-qualified Deferred Compensation Plan in 1999, 1998 and 1997
in the amounts of $9,336, $10,019 and $3,968, respectively, for Mr.
Lauletta; and $4,770, $4,150 and $0, respectively, for Mr. Winkler, and in
1999 and 1998 in the amounts of $2,571 and $2,144 for Mr. Smith. Mr.
Williams did not participate in the Non-qualified Deferred Compensation
Plan in 1999, 1998 or 1997.
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Represents for Mr. Stuart contributions by Tuboscope, or one of its
subsidiaries, in the Tuboscope Holdings Ltd. pension plan in 1999 and 1998.
(5) Includes $79,107 representing the fair market value on April 10, 1997
($13.625) of 5,806 shares of Tuboscope common stock granted under the 1996
Equity Participation Plan.
(6) Messrs. Smith and Stuart became executive officers of Tuboscope on February
19, 1998. Compensation shown includes compensation over the full 1998
fiscal year.
(7) Mr. Williams became an executive officer of Tuboscope on February 6, 1997.
Compensation shown includes compensation over the full 1997 fiscal year.
The following table sets forth certain information with respect to grants of
stock options during fiscal 1999 to the Named Executive Officers pursuant to
Tuboscope's 1996 Equity Participation Plan, as amended.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percentage of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise or for Option Term(2)
Options Employees Base Price Expiration ---------------------
Name Granted(1) in Fiscal Year (per Share) Date 5% 10%
- ---- ---------- -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John F. Lauletta........ 366,942 22.5% $7.5625 1-27-09 $1,745,182 $4,222,634
Joseph C. Winkler....... 168,198 10.3 7.5625 1-27-09 799,952 2,027,236
Haynes B. Smith, III.... 81,771 5.0 7.5625 1-27-09 388,904 985,559
Clay C. Williams........ 81,771 5.0 7.5625 1-27-09 388,904 985,559
Peter J. Stuart......... 81,771 5.0 7.5625 1-27-09 388,904 985,559
</TABLE>
- --------
(1) The options reflected above become exercisable in five installments as
follows: 1/9 is vested on January 27, 2000; 2/9 is vested on January 27,
2001; 1/3 is vested on January 27, 2002; 2/9 is vested on January 28, 2003;
and 1/9 is vested on January 27, 2004. Options are granted for a term of
ten years, subject to earlier termination in certain events. The exercise
price is equal to the closing price of the Tuboscope common stock on the
New York Stock Exchange on the date of the grant. These options will become
fully exercisable upon completion of the merger.
(2) Assumes annual rates of stock price appreciation for illustrative purposes
only. Actual stock prices will vary from time to time based upon market
factors and Tuboscope's financial performance. No assurance can be given
that such rates will be achieved.
The following table sets forth certain information with respect to options
exercised during fiscal 1999 and exercisable and unexercisable options held by
the Named Executive Officers as of December 31, 1999.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Value
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options
on Exercise Realized(1) Options at Fiscal Year End at Fiscal Year End(2)
----------- ----------- ---------------------------- -------------------------
Exercisable Unexercisable(3) Exercisable Unexercisable
----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John F. Lauletta........ 25,000 $303,032 147,882 424,044 $1,295,972 $3,221,473
Joseph C. Winkler....... 20,000 244,250 71,042 188,788 634,814 1,411,985
Haynes B. Smith, III.... 15,890 151,051 11,059 96,339 14,288 725,196
Clay C. Williams........ 6,667 46,669 11,059 105,792 14,288 785,194
Peter J. Stuart......... 0 0 20,281 97,072 105,086 732,269
</TABLE>
- --------
(1) Determined by calculating the spread between the market value of the
Tuboscope common stock on the date of exercise and the exercise price of
the options.
(2) Based on the closing sales price of the Tuboscope common stock ($15.875) on
the New York Stock Exchange on December 31, 1999, minus the exercise price
of the option, multiplied by the number of shares to which the option
relates.
(3) The options held by the Named Executive Officers will become fully
exercisable upon completion of the merger.
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Management Agreements
Severance Agreements. In June 1997, Tuboscope adopted two severance plans in
order to provide financial security to its senior management and to match
similar plans adopted by competitors in Tuboscope's industry. These plans are
designed to retain and to motivate key employees of Tuboscope. One of the
severance plans, the standard severance plan, pertains to involuntary
terminations and the other severance plan, the change in control severance
plan, pertains to terminations following a change of control. The Chief
Executive Officer, all of the Named Executive Officers and other members of
Tuboscope's senior management team (currently numbering a total of 10) are
eligible for participation in the standard severance plan and the change of
control severance plan.
. Standard Severance Plan. The standard severance plan provides certain
officers of Tuboscope with severance compensation and benefits following
the termination of their employment with Tuboscope without "cause," as
defined in the plan. Upon an involuntary termination, the following
officers will have the following rights:
. Mr. Lauletta is entitled to receive two full years of his salary;
. Mr. Winkler is entitled to receive one and a half years of his
salary; and
. Messrs. Smith, Stuart and Williams (and all other covered officers)
are entitled to receive one full year of salary,
These payments are payable on a regular payroll basis following
termination throughout the duration of the severance payment period. If
a covered officer is re-employed during the severance payment period at
a salary greater than or equal to what the covered officer had received
at Tuboscope, the covered officer would receive 50% of full severance
pay for the remainder of the severance period. If the covered officer is
re-employed during the severance pay-out period at a salary less than
what was received at Tuboscope, the covered officer would receive the
difference in actual salary for the remainder of the severance period,
plus 50% of the aggregate severance pay remaining that would have been
paid throughout the severance period.
In addition to salary, Mr. Lauletta and Mr. Winkler would be eligible to
receive a full annual bonus in the year they are involuntarily
terminated, while all other covered officers would be eligible to
receive an annual bonus pro-rated to the date of their termination. All
covered officers would also be eligible to receive a value plan award
through the date of their termination and all restricted stock units
would become 100% vested. See "--Compensation Committee Report on
Executive Compensation."
. Change of Control Severance Plan. The change of control severance plan
provides income protection for eligible employees in the event of an
adverse change in the terms and conditions of employment resulting in
termination of employment by the participant or by Tuboscope within two
years following a change of control of Tuboscope. See "The Merger--
Interests of Certain Persons in the Merger" for a more detailed
discussion of Tuboscope's change of control severance plan.
In addition to the foregoing, a participant would receive upon a qualifying
termination under each of the plans, full medical, dental and automobile
benefits throughout the pay-out period and outplacement services of up to 15%
of base salary. The standard severance plan and change of control severance
plan are effective as of June 25, 1997, are specified in separate agreements
with each eligible participant and replace all previous severance and change of
control arrangements.
Compensation Committee Report on Executive Compensation
The compensation committee of the Tuboscope board of directors is pleased to
present its annual report which is intended to update stockholders on the
development of Tuboscope's executive compensation program.
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This report summarizes the responsibilities of the Tuboscope compensation
committee, the compensation policy and objectives that guide the development
and administration of the executive compensation program, each component of the
program, and the basis on which the compensation for the chief executive
officer, corporate officers and other key executives was determined for the
calendar year ended December 31, 1999.
During the 1999 fiscal year, the Tuboscope compensation committee was
comprised of the following board members: Eric L. Mattson, Chair, L.E. Simmons
and Jeffery A. Smisek. The Tuboscope compensation committee's responsibilities
are to oversee the development and administration of the total compensation
program for corporate officers and key executives, and administer the executive
incentive and stock plans. During the year, the Tuboscope compensation
committee met four times (including actions by unanimous written consent). In
June 1997, the Tuboscope compensation committee retained J.E. Stone &
Associates, an executive compensation and benefits consulting firm, to
undertake a comprehensive review and restructuring of the executive
compensation program following the merger of Tuboscope and D.O.S., Ltd.
Throughout 1997 and 1998, the Tuboscope compensation committee implemented the
initial recommendations made by HCC Employee Benefits (formerly J.E. Stone &
Associates). In January 1999, HCC presented to the Tuboscope compensation
committee a report, which included compensation studies from various executive
compensation consulting firms, and made further recommendations concerning
refining the compensation packages awarded to Tuboscope's executives and
management, particularly in light of the retrenchment in the oil industry. The
Tuboscope compensation committee implemented additional recommendations of HCC
in 1999.
Executive Compensation Philosophy
In designing its compensation programs, Tuboscope follows its belief that
compensation should reflect the value created for stockholders while supporting
the business strategies and long-range plans of Tuboscope and the markets
Tuboscope serves. The Tuboscope compensation committee reviews and determines
the compensation of the executive officers of Tuboscope based on a compensation
program that reflects the following themes:
. A compensation program that stresses Tuboscope's annual financial
performance and increase in value.
. A compensation program that strengthens the relationship between pay and
performance by providing variable, at-risk compensation based on
predetermined objective performance measures.
. A compensation program that will attract, motivate and retain high
quality employees who will enable Tuboscope to achieve its strategic and
financial performance goals.
. An annual incentive plan that supports a performance-oriented
environment with superior performance resulting in total annual
compensation above competitive levels.
. A long-term incentive plan that is designed to require executive
officers and certain senior management to own significant portions of
Tuboscope's stock and reward executive officers for the long-term
strategic management of Tuboscope and the enhancement of stockholder
value.
Section 162(m) of the Internal Revenue Code of 1986, as amended, currently
imposes a $1 million limitation on the deductibility of certain compensation
paid to Tuboscope's five highest paid executives. Excluded from the limitation
is compensation that is "performance based." For compensation to be performance
based, it must meet certain criteria, including being based on predetermined
objective standards approved by stockholders. The Tuboscope compensation
committee intends to design Tuboscope's compensation to conform to Section
162(m) of the Code and related regulations so that total compensation paid to
any employee will not exceed $1 million in any one year, except for
compensation payments which qualify as "performance based." Tuboscope may,
however, pay compensation or grant options or other rights which do not meet
the performance-based exclusion, and are thus not deductible, when sound
management of Tuboscope so requires. Any cash compensation payable under
Tuboscope's Annual Incentive Compensation Plan or the Value Plan currently does
not qualify as "performance based compensation" as defined by Section 162(m) of
106
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the Code. Tuboscope's proposed Amended and Restated 1996 Equity Participation
Plan includes provisions establishing the criteria by which awards, including
cash bonuses, may be paid to qualify such payments as "performance-based"
compensation as defined by Section 162(m) of the Internal Revenue Code.
Tuboscope stockholders are being asked to approve such criteria at the
Tuboscope special meeting. See "Tuboscope's Amended and Restated 1996 Equity
Participation Plan."
Executive Compensation Components
On an annual basis the Tuboscope compensation committee, in conjunction with
executive management, assesses the effectiveness of the overall program and
compares the compensation levels of its executives and the performance of
Tuboscope to the compensation received by executives and the performance of
similar companies. For 1999, the primary market comparisons were made to a
broad group of oilfield manufacturing and service companies, adjusted for size
and job responsibilities. Data sources include industry survey groups, national
survey databases, proxy disclosures and general trend data which are updated
annually.
The following is a discussion of the principal components of the executive
compensation program for fiscal 1999, each of which is intended to serve
Tuboscope's overall compensation philosophy.
Base Salary. The base salary program targets the median of the primary
comparison group. Each executive's salary is reviewed individually on an annual
basis. Salary adjustments are based on the individual's experience and
background, performance during the prior year, the general movement of salaries
in the marketplace, and Tuboscope's financial position. Due to these factors,
an executive's base salary may be above or below the primary comparison group
median at any point in time. Overall, the base salaries of the corporate
officers and key executives were established in 1999 on the basis of the 55th
percentile of the primary comparison group.
Performance Incentive Compensation. The Tuboscope compensation committee
administers management incentive plans for executive officers, general
managers, operations and sales managers and sales representatives. The goal of
the management incentive plans is to reward participants in proportion to the
performance of Tuboscope and/or the business unit/region for which they have
direct impact. Each of the plans reward participants according to predetermined
objective performance standards.
. Annual Incentive Compensation Plan. Tuboscope's Annual Incentive
Compensation Plan (which was adopted by the Tuboscope compensation
committee in 1997) rewards eligible employees for achievement of
objective measurable financial performance of Tuboscope as a whole, and,
in certain circumstances, on a business unit or regional or divisional
basis. The Annual Incentive Compensation Plan is available to executive
officers and senior management team members. The level of award is a
variable of the targeted performance of Tuboscope or the business or
regional unit compared to the actual performance of Tuboscope or the
business or regional unit. The performance measurements for all
participants in 1999 were Tuboscope's earnings before interest, taxes,
depreciation and amortization and Tuboscope's earnings before taxes. The
resulting performance incentive award is a percentage of the
participant's base salary, depending on the level of employee and how
close to target Tuboscope, unit or division performed. The retrenchment
in the oil industry and the low price of crude oil has led to less than
expected financial performance by Tuboscope. Due to the failure to meet
targeted financial performance, no member of the senior management team
earned an award for 1999 performance under the Annual Incentive
Compensation Plan.
. Intermediate Term Value Plan for Senior Management. Tuboscope's Value
Plan (adopted in 1997) is an incentive award program based on the
intermediate term performance of Tuboscope. This program is designed to
encourage and reward sustained growth of profits over the intermediate
term that are reflected in stockholder returns. Members of the senior
management team (currently totaling 10 members) are eligible for awards
under the Value Plan, with an opportunity to earn up to 1.25 times base
salary at the beginning of the performance period. The initial
performance period
107
<PAGE>
commenced January 1, 1997 and ended on December 31, 1999, and new three-
year performance periods commence each January 1 thereafter. The amount
of the performance award is determined at the end of the three year
performance period based on Tuboscope's actual three year cumulative
earnings per share compared to targeted cumulative earnings per share
and Tuboscope's total stockholder return ranking as compared to the peer
companies' stockholder return during the performance period. The initial
peer group of companies used for comparison of stockholder return
includes five comparable oil service companies of similar size. No pay
outs have been made under this plan to date.
Long-Term Incentive Compensation. The primary purpose of Tuboscope's long-
term incentive compensation is to encourage and facilitate personal stock
ownership by the executive officers and thus strengthen their personal
commitments to Tuboscope and provide a longer-term perspective in their
managerial responsibilities. This component of an executive officer's
compensation directly links the officer's interests with those of Tuboscope's
other stockholders. In addition, long-term incentives encourage management to
focus on the long-term development and prosperity of Tuboscope in addition to
annual operating profits. Tuboscope's primary forms of long-term incentive
compensation are stock options and the Stock Ownership Program.
. Stock Option Awards. The goal of the stock option program is to provide
a compensation program that is competitive within the industry while
directly linking a significant portion of the executive's compensation
to the enhancement of stockholder value. The ultimate value of any stock
option is based solely on the increase in value of the shares over the
grant price. Accordingly, stock options have value only if the stock
price appreciates from the date of grant. This at-risk component of
compensation focuses executives on the creation of stockholder value
over the long-term and encourages equity ownership in Tuboscope.
Tuboscope grants stock options to its key executives based on
competitive multiples of the optionee's base salary. Senior executives
typically receive a higher multiple and, as a result, have a greater
portion of their total compensation linked to increases in stockholder
value. In determining the appropriate grant multiples, Tuboscope
compares itself to publicly traded oilfield manufacturing and service
companies of comparable size and targets awards between the market
median and 75th percentile. Senior executives and managers are eligible
to receive stock options annually with other key managers becoming
eligible on a discretionary basis. Eligibility for an award does not
ensure receipt of a stock option award. Options are granted at the then
current market price and generally vest over a three year period with
one-third of the options granted vesting each year.
In January 1999, the Tuboscope compensation committee discussed that
the retrenchment in the oil industry and the low price of crude oil has
led to less than expected financial performance by Tuboscope and a
significant decrease in value of long-term incentives for the senior
management team. Due to Tuboscope's failure to meet targeted financial
performance, no member of the senior management team earned an annual
bonus for 1999 and, in addition, the Tuboscope compensation committee
decided against giving any salary increases. In order to reward
individual performance of the members of the senior management team and
to provide further incentives to enhance stockholder value, on January
27, 1999, the Tuboscope compensation committee granted stock options to
each member of the senior management team at three times the normal
annual grant level for 1999. The Tuboscope compensation committee
intended that these 1999 stock options are to be granted in lieu of
normal (based on multiples of salary) annual stock option grants to
members of the senior management team in 1999, 2000 and 2001. The 1999
stock options' vesting schedule is that which would apply as if the
grants were made over a three year period (i.e., 1999, 2000 and 2001).
All outstanding stock options held by certain executive officers of
Tuboscope will vest upon completion of the merger.
. Officer Stock Ownership Requirements. In 1997, the Tuboscope
compensation committee established a Stock Ownership Program that
requires members of Tuboscope's senior management team to achieve and
maintain specific levels of ownership of Tuboscope common stock. The
Tuboscope compensation committee adopted minimum ownership goals equal
to 300% of base salary
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for the Chief Executive Officer, 200% of base salary for the Executive
Vice President, and 100% of base salary for all other members of the
senior management team. Currently all 10 members of the senior
management team participate in the program. Participants were given the
option of choosing between achieving the minimum ownership goal or a
higher target ownership goal with a matching award by Tuboscope. The
targeted goals were 500%, 400% and 300% of base salary for the Chief
Executive Officer, Executive Vice President and other participants,
respectively. Those participants who chose the higher target ownership
goal received a matching award from Tuboscope of restricted stock units
in an amount equal to the shares of Tuboscope common stock owned by such
participant as of such date, but not to exceed 100% of the target
ownership goal. As a result, Tuboscope issued an aggregate of 327,891
restricted stock units on June 30, 1997 and 14,436 restricted stock
units on January 2, 1998 under Tuboscope's 1996 Equity Participation
Plan. The restrictions on the restricted stock units lapse 10% on each
June 30th, commencing June 30, 1998, for ten years, subject to
acceleration in certain events, and require that the employee maintain
ownership of shares of Tuboscope common stock in an amount equal to the
number of restricted stock units granted. All outstanding restricted
stock units held by certain executive officers of Tuboscope will vest
upon completion of the merger.
Compensation of the Chief Executive Officer. The Chief Executive Officer,
John Lauletta, participates in the executive compensation programs described
in this report. Mr. Lauletta's base salary was $370,000 in 1999. Mr.
Lauletta's salary was based on the factors discussed above in "Base Salary,"
including a review of market pay trends and his efforts following the merger
between Tuboscope and D.O.S., Ltd. Mr. Lauletta did not receive an Annual
Incentive Compensation Plan award for 1999. During 1999, Mr. Lauletta received
a grant under the 1996 Equity Participation Plan of 366,942 stock options
pursuant to pre-established guidelines based on multiples of his base salary,
representing three times the normal grant level for 1999 as discussed above.
Eric L. Mattson
L. E. Simmons
Jeffery A. Smisek
Date: April 12, 2000
The above report of the Tuboscope compensation committee will not be deemed
to be incorporated by reference in any filing by Tuboscope under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that Tuboscope specifically incorporates the same by reference.
Compensation Committee Interlocks and Insider Participation
In 1999, the Tuboscope compensation committee, which is responsible for the
compensation policies of Tuboscope with respect to its executive officers, was
comprised of Messrs. Mattson, Simmons and Smisek, none of whom is an employee
or officer of Tuboscope.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act, requires Tuboscope's directors and
executive officers, and persons who own more than 10% of a registered class of
Tuboscope's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. These persons are required by regulations
promulgated by the Securities and Exchange Commission to furnish Tuboscope
with copies of all Section 16(a) forms they file.
To Tuboscope's knowledge, based solely on its review of copies of such
reports received by Tuboscope or written representations from certain
reporting persons that no other reports were required, during the year ended
December 31, 1999, all of Tuboscope's directors and executive officers and
persons who own more than 10% of the outstanding shares of Tuboscope common
stock have complied with the reporting requirements of Section 16(a), except
Mr. Simmons who failed to timely file one report relating to one transaction
in 1998.
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Stockholder Return Performance Graph
The following line graph compares the yearly percentage change in the
cumulative total stockholder return on the Tuboscope common stock against the
cumulative total return of a peer index of 75 oil service companies prepared by
Simmons & Company International, an independent third party, known as the SCI
Upstream Index, and the Standard & Poor's 500 Stock Index, each for the period
from December 31, 1994 to December 31, 1999.
Assumes $100 invested in Tuboscope common stock, the SCI Upstream Index and
the Standard & Poor's 500 Stock Index on December 31, 1994 and the reinvestment
of any and all dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG TUBOSCOPE, S&P 500 INDEX AND PEER GROUP
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period SCI TUBOSCOPE
(Fiscal Year Covered) S&P UPSTREAM COMMON
500 INDEX STOCK
- ------------------- ---- -------- ---------
<S> <C> <C> <C>
12/31/94 $100 $100 $100
6/30/95 119 122 106
12/31/95 134 156 95
6/30/96 146 193 185
12/31/96 161 248 258
6/30/97 193 309 331
12/31/97 211 374 401
6/30/98 247 293 329
12/31/98 268 155 135
6/30/99 299 210 228
12/31/99 320 217 265
</TABLE>
Certain Relationships and Related Transactions
During 1999, Tuboscope sold goods and services in the aggregate amount of
approximately $1 million to Conemsco, Inc. representing approximately 0.2% of
total sales of Tuboscope during 1999. SCF III, L.P. indirectly owns
approximately 77% of Conemsco, Inc. and, as of the record date, owned
approximately 14.2% of Tuboscope. L.E. Simmons, a director of Tuboscope, may be
deemed to beneficially own the securities held by SCF III, L.P. See
"Tuboscope--Security Ownership of Certain Beneficial Owners and Management."
110
<PAGE>
RATIFICATION OF SELECTION OF TUBOSCOPE'S INDEPENDENT AUDITORS
Reasons for the Selection of Tuboscope's Independent Auditors
Ernst & Young LLP has been Tuboscope's independent auditors since 1988, and
the Tuboscope board of directors desires to continue to engage the services of
this firm for the fiscal year ending December 31, 2000. Accordingly, the
Tuboscope board of directors, upon the recommendation of its audit committee,
has reappointed Ernst & Young LLP to audit Tuboscope's and its subsidiaries'
financial statements for fiscal 2000 and report on these financial statements.
Tuboscope stockholders are being asked to vote upon ratification of this
selection. If Tuboscope stockholders do not ratify the selection, the Tuboscope
board of directors and its audit committee will reconsider the selection.
Neither Ernst & Young LLP nor any of its members has any relationship with
Tuboscope or any of its affiliates except in its capacity as Tuboscope's
auditors.
Representatives of Ernst & Young LLP are expected to be present at the
Tuboscope annual meeting and will have the opportunity to make statements if
they so desire and respond to appropriate questions from the Tuboscope
stockholders.
Vote Required for Ratification of the Selection of Tuboscope's Independent
Auditors
The affirmative vote of a majority of the shares represented and entitled to
vote at the Tuboscope annual meeting is required for ratification of the
selection of Ernst & Young LLP as Tuboscope's independent auditors for fiscal
2000.
The Tuboscope board of directors recommends a vote FOR ratification of the
selection of Ernst & Young LLP as Tuboscope's independent auditors for fiscal
2000.
STOCKHOLDER PROPOSALS
It is currently contemplated that Tuboscope's 2001 Annual Meeting of
Stockholders will be held on or about May 11, 2001. In the event that a
stockholder desires to have a proposal considered for presentation at
Tuboscope's 2001 Annual Meeting of Stockholders, and inclusion in the proxy
statement and form of proxy used in connection with such meeting, the proposal
must be forwarded in writing to the Secretary of Tuboscope so that it is
received no later than December 26, 2000. Any such proposal must comply with
the requirements of Rule 14a-8 promulgated under the Exchange Act.
If a stockholder, rather than placing a proposal in Tuboscope's proxy
statement as discussed above, commences his or her own proxy solicitation for
the 2001 Annual Meeting of Stockholders or seeks to nominate a candidate for
election or propose business for consideration at such meeting, Tuboscope must
receive notice of such proposal on or before March 13, 2001. If such notice is
not received by March 13, 2001 such notice will be considered untimely under
Rule 14a-4(c)(1) of the Commission's proxy rules, and Tuboscope will have
discretionary voting authority under proxies solicited for the 2001 Annual
Meeting of Stockholders with respect to such proposal, if presented at the
meeting. Proposals should be directed to the attention of the Secretary,
Tuboscope Inc., 2835 Holmes Road, Houston, Texas 77051.
Due to the contemplated merger, Varco does not currently expect to hold a
2000 annual meeting of shareholders, as Varco will not exist after the merger.
111
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LEGAL MATTERS
The validity of the shares of Tuboscope common stock to be issued in the
merger will be passed upon for Tuboscope by Latham & Watkins. Certain of the
tax consequences of the merger will be passed upon for Tuboscope by Latham &
Watkins and for Varco by Pircher, Nichols & Meeks. Leo J. Pircher, a member of
the firm of Pircher, Nichols & Meeks, is a director of Varco. Mr. Pircher owns
beneficially 20,400 shares of Varco common stock and holds options to purchase
an additional 25,000 shares. In addition, Mr. Pircher is a holder of record of,
and has sole or shared voting or investment power with respect to, 615,858
shares of Varco common stock in fiduciary capacities.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedules included in Tuboscope's Annual Report on
Form 10-K for the year ended December 31, 1999, as set forth in their report,
which is incorporated by reference in this proxy statement/prospectus.
Tuboscope's financial statements and schedules are incorporated by reference in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have also audited the consolidated
financial statements and schedule incorporated by reference in Varco's Annual
Report on Form 10-K for the year ended December 31, 1999, as set forth in their
report, which is incorporated by reference in this proxy statement/prospectus.
Varco's financial statements and schedule are incorporated by reference in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Tuboscope and Varco file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information we file with
the Securities and Exchange Commission at the following locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
You may call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services and at the web site maintained by the Securities and
Exchange Commission at "http://www.sec.gov." In addition, you may inspect
reports, proxy statement and other information that we file with the New York
Stock Exchange at the offices of the New York Stock Exchange at 20 Broad
Street, New York, New York 10005.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this proxy statement/prospectus, which means that
we can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. This
proxy statement/prospectus incorporates by reference the documents set forth
below that we have previously filed with the Securities and Exchange
Commission. These documents contain important information about our companies
and their finances.
The following Tuboscope documents filed with the Commission are incorporated
by reference in this proxy statement/prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1999; and
2. Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 23, 2000.
112
<PAGE>
The following Varco documents filed with the Commission are incorporated by
reference in this proxy statement/prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1999; and
2. Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 24, 2000.
We are also incorporating by reference all additional documents that we may
file with the Securities and Exchange Commission pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of
this proxy statement/prospectus and the date of the Tuboscope annual meeting
and the Varco special meeting.
Tuboscope filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the Tuboscope common stock to be issued to
the Varco shareholders in the merger. This proxy statement/prospectus is a part
of that registration statement and constitutes a prospectus of Tuboscope in
addition to being a proxy statement of Tuboscope and Varco for their meetings.
As allowed by Securities and Exchange Commission rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement/prospectus will be deemed
modified or superseded for purposes of this proxy statement/prospectus to the
extent that a statement contained in this proxy statement/prospectus or in any
subsequently filed document that also is or is deemed to be incorporated by
reference in this proxy statement/prospectus modifies or supersedes that
statement. Any statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute a part of this proxy
statement/prospectus.
Tuboscope has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to Tuboscope. Varco has
supplied all information contained or incorporated by reference in this proxy
statement/prospectus relating to Varco.
If you are a Tuboscope stockholder or a Varco shareholder, we may have sent
you some of the documents incorporated by reference, but you can obtain any of
them through us or the Securities and Exchange Commission. Documents
incorporated by reference are available from us without charge, excluding all
exhibits unless we have specifically incorporated by reference an exhibit in
this proxy statement/prospectus. Tuboscope stockholders and Varco shareholders
may obtain documents incorporated by reference in this proxy
statement/prospectus by requesting them in writing or by telephone from the
appropriate party at the following addresses:
<TABLE>
<S> <C>
Tuboscope Inc. Varco International, Inc.
2835 Holmes Road 743 North Eckhoff Street
Houston, Texas 77051 Orange, California 92868
Attn: Secretary Attention: Secretary
(713) 799-5100 (714) 978-1900
</TABLE>
If you would like to request documents from us, please do so by May 22, 2000
to receive them before the Tuboscope annual meeting or the Varco special
meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the matters being
considered at the meetings. We have not authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated April 25, 2000.
You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than April 25, 2000, and
neither the mailing of the proxy statement/prospectus to stockholders nor the
issuance of Tuboscope common stock in the merger shall create any implication
to the contrary.
113
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
between
Varco International, Inc.
and
Tuboscope Inc.
March 22, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I. THE MERGER.................................................... 1
Section 1.01 The Merger.............................................. 1
Section 1.02 Effective Time of the Merger............................ 1
Section 1.03 Closing................................................. 2
Section 1.04 Effects of the Merger................................... 2
Section 1.05 Certificate of Incorporation; Bylaws.................... 2
Section 1.06 Directors and Officers.................................. 2
ARTICLE II. CONVERSION OF SECURITIES..................................... 2
Section 2.01 Conversion of Capital Stock............................. 2
Section 2.02 Exchange of Certificates................................ 3
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF VARCO..................... 5
Section 3.01 Organization of Varco................................... 6
Section 3.02 Varco Capital Structure................................. 6
Section 3.03 Authority; No Conflict; Required Filings and Consents... 7
Section 3.04 SEC Filings; Financial Statements....................... 8
Section 3.05 No Undisclosed Liabilities.............................. 8
Section 3.06 Absence of Certain Changes or Events.................... 8
Section 3.07 Taxes................................................... 9
Section 3.08 Properties.............................................. 9
Section 3.09 Intellectual Property................................... 10
Section 3.10 Agreements, Contracts and Commitments................... 10
Section 3.11 Litigation.............................................. 10
Section 3.12 Environmental Matters................................... 10
Section 3.13 Employee Benefit Plans.................................. 11
Section 3.14 Compliance With Laws.................................... 11
Section 3.15 Accounting and Tax Matters.............................. 11
Section 3.16 Registration Statement; Proxy Statement/Prospectus...... 11
Section 3.17 Labor Matters........................................... 12
Section 3.18 Insurance............................................... 12
Section 3.19 No Existing Discussions................................. 12
Section 3.20 Opinion of Financial Advisor............................ 12
Section 3.21 Anti-Takeover Laws...................................... 12
Section 3.22 Rights Plan............................................. 13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF TUBOSCOPE.................. 13
Section 4.01 Organization of Tuboscope............................... 13
Section 4.02 Tuboscope Capital Structure............................. 13
Section 4.03 Authority; No Conflict; Required Filings and Consents... 14
Section 4.04 SEC Filings; Financial Statements....................... 15
Section 4.05 No Undisclosed Liabilities.............................. 15
Section 4.06 Absence of Certain Changes or Events.................... 15
Section 4.07 Taxes................................................... 16
Section 4.08 Properties.............................................. 16
Section 4.09 Intellectual Property................................... 16
Section 4.10 Agreements, Contracts and Commitments................... 16
Section 4.11 Litigation.............................................. 17
</TABLE>
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Section 4.12 Environmental Matters.................................. 17
Section 4.13 Employee Benefit Plans................................. 17
Section 4.14 Compliance With Laws................................... 18
Section 4.15 Accounting and Tax Matters............................. 18
Section 4.16 Registration Statement; Proxy Statement/Prospectus..... 18
Section 4.17 Labor Matters.......................................... 18
Section 4.18 Insurance.............................................. 19
Section 4.19 No Existing Discussions................................ 19
Section 4.20 Opinion of Financial Advisor........................... 19
Section 4.21 Anti-Takeover Laws..................................... 19
ARTICLE V. CONDUCT OF BUSINESS.......................................... 19
Section 5.01 Covenants of Varco..................................... 19
Section 5.02 Covenants of Tuboscope................................. 20
Section 5.03 Reorganization......................................... 22
Section 5.04 Cooperation............................................ 22
Section 5.05 Tuboscope Board Resolutions............................ 22
Section 5.06 Pooling Accounting..................................... 22
ARTICLE VI. ADDITIONAL AGREEMENTS....................................... 22
Section 6.01 No Solicitation........................................ 22
Section 6.02 Proxy Statement/Prospectus; Registration Statement..... 23
Section 6.03 NYSE Listings.......................................... 23
Section 6.04 Access to Information.................................. 23
Section 6.05 Shareholders/Stockholders Meetings..................... 24
Section 6.06 Legal Conditions to Merger............................. 24
Section 6.07 Public Disclosure...................................... 25
Section 6.08 Affiliate Legends...................................... 25
Section 6.09 NYSE Listing........................................... 26
Section 6.10 Stock Plans............................................ 26
Section 6.11 Brokers or Finders..................................... 27
Section 6.12 Indemnification........................................ 27
Section 6.13 Letter of Varco's Accountants.......................... 27
Section 6.14 Letter of Tuboscope's Accountants...................... 28
Section 6.15 Benefit Plans.......................................... 28
Section 6.16 Rights Plan............................................ 28
Section 6.17 Stock Option Agreements................................ 28
ARTICLE VII. CONDITIONS TO MERGER....................................... 28
Conditions to Each Party's Obligation To Effect the
Section 7.01 Merger................................................. 28
Section 7.02 Additional Conditions to Obligations of Varco.......... 29
Section 7.03 Additional Conditions to Obligations of Tuboscope...... 30
ARTICLE VIII. TERMINATION AND AMENDMENT................................. 30
Section 8.01 Termination............................................ 30
Section 8.02 Effect of Termination.................................. 31
Section 8.03 Fees and Expenses...................................... 31
Section 8.04 Amendment.............................................. 33
Section 8.05 Extension; Waiver...................................... 33
</TABLE>
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ARTICLE IX. MISCELLANEOUS............................................... 33
Nonsurvival of Representations, Warranties and
Section 9.01 Agreements............................................. 33
Section 9.02 Notices................................................ 33
Section 9.03 Interpretation......................................... 34
Section 9.04 Counterparts........................................... 34
Section 9.05 Entire Agreement; No Third Party Beneficiaries......... 34
Section 9.06 Governing Law.......................................... 35
Section 9.07 Assignment............................................. 35
Section 9.08 Waiver of Jury Trial................................... 35
</TABLE>
<TABLE>
<S> <C>
Schedule 1--List of Corporate Executive Officers
Exhibit "A"............. Tuboscope Stock Option Agreement
Exhibit "B"............. Varco Stock Option Agreement
Exhibit "C"............. Tuboscope Tax Matters Certificate (Pircher, Nichols & Meeks)
Exhibit "D"............. Varco Tax Matters Certificate (Pircher, Nichols & Meeks)
Exhibit "E"............. Tuboscope Tax Matters Certificate (Latham & Watkins)
Exhibit "F"............. Varco Tax Matters Certificate (Latham & Watkins)
</TABLE>
TOC-3
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
Cross Reference
Terms in Agreement
- ----- ---------------
<S> <C>
Acquisition Proposal............................................ Section 6.01(a)
Affiliate....................................................... Section 6.08
Affiliate Agreement............................................. Section 6.08
Agreement....................................................... Preamble
Agreement of Merger............................................. Section 1.02
Alternative Transaction......................................... Section 8.03(g)
Antitrust Laws.................................................. Section 6.06(b)
Bankruptcy and Equity Exception................................. Section 3.03(a)
Certificate of Merger........................................... Section 1.02
Certificates.................................................... Section 2.02(b)
CGCL............................................................ Section 1.02
Closing......................................................... Section 1.03
Closing Date.................................................... Section 1.03
Code............................................................ Preamble
Confidentiality Agreement....................................... Section 6.01(a)
Continuing Employee............................................. Section 6.15(a)
Costs........................................................... Section 6.12(a)
DGCL............................................................ Section 1.01
Effective Time.................................................. Section 1.02
Environmental Law............................................... Section 3.12(b)
ERISA........................................................... Section 3.13(a)
ERISA Affiliate................................................. Section 3.13(a)
Exchange Act.................................................... Section 3.03(c)
Exchange Agent.................................................. Section 2.02(a)
Exchange Fund................................................... Section 2.02(a)
Exchange Ratio.................................................. Section 2.01(b)
Governmental Entity............................................. Section 3.03(c)
Hazardous Substance............................................. Section 3.12(c)
HSR Act......................................................... Section 3.03(c)
Indemnified Parties............................................. Section 6.12(a)
IRS............................................................. Section 3.07(b)
Joint Proxy Statement........................................... Section 3.16
Matching Transaction............................................ Section 6.01(a)
Material Adverse Change......................................... Section 3.06
Material Leases................................................. Section 3.08
Merger.......................................................... Preamble
NYSE............................................................ Section 2.02(e)
Order........................................................... Section 6.06(b)
Outside Date.................................................... Section 8.01(b)
Registration Statement.......................................... Section 3.16
Rule 145........................................................ Section 6.08
SEC............................................................. Section 3.03(c)
Securities Act.................................................. Section 3.04(a)
Stock Option Agreements......................................... Preamble
Subsidiary...................................................... Section 3.01
Superior Proposal............................................... Section 6.01(a)
Surviving Corporation........................................... Section 1.01
Tax............................................................. Section 3.07(a)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Cross Reference
Terms in Agreement
- ----- ---------------
<S> <C>
Taxes........................................................... Section 3.07(a)
Third Party..................................................... Section 8.03(g)
Tuboscope....................................................... Preamble
Tuboscope Balance Sheet......................................... Section 4.04(b)
Tuboscope Common Stock.......................................... Section 2.01(a)
Tuboscope Disclosure Schedule................................... Article IV
Tuboscope Employee Plans........................................ Section 4.13(a)
Tuboscope Material Adverse Effect............................... Section 4.01
Tuboscope Material Contracts.................................... Section 4.10
Tuboscope Preferred Stock....................................... Section 4.02(a)
Tuboscope SEC Reports........................................... Section 4.04(a)
Tuboscope Stockholders' Meeting................................. Section 3.16
Tuboscope Stock Option Agreement................................ Preamble
Tuboscope Stock Plans........................................... Section 4.02(a)
Tuboscope Voting Proposal....................................... Section 6.05(a)
Varco Disclosure Schedule....................................... Article III
Varco Employee Plans............................................ Section 3.13(a)
Varco Material Adverse Effect................................... Section 3.01
Varco Material Contracts........................................ Section 3.10
Varco 1999 Annual Report........................................ Section 3.04(a)
Varco Preferred Stock........................................... Section 3.02(a)
Varco Rights.................................................... Section 3.02(b)
Varco Rights Plan............................................... Section 3.02(b)
Varco SEC Reports............................................... Section 3.04(a)
Varco Stock Option.............................................. Section 6.10(a)
Varco Stock Option Agreement.................................... Preamble
Varco Stock Plans............................................... Section 3.02(a)
Varco Shareholders' Meeting..................................... Section 3.16
</TABLE>
TOC-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of March 22, 2000,
by and between Varco International, Inc., a California corporation ("Varco"),
and Tuboscope Inc., a Delaware corporation ("Tuboscope").
WHEREAS, the board of directors of Varco deems it advisable and in the best
interests of Varco and its shareholders, and the board of directors of
Tuboscope deems it advisable and in the best interests of Tuboscope and its
stockholders, that Tuboscope and Varco combine their respective businesses in a
"merger of equals" transaction to be effected as set forth in this Agreement;
WHEREAS, the combination of Varco and Tuboscope shall be effected by the
terms of this Agreement through a merger in which the shareholders of Varco
will become stockholders of Tuboscope (the "Merger");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to each of Varco's and Tuboscope's willingness to
enter into this Agreement, Varco and Tuboscope have entered into (i) a Stock
Option Agreement dated as of the date of this Agreement and attached hereto as
Exhibit A (the "Tuboscope Stock Option Agreement"), pursuant to which Tuboscope
granted Varco an option to purchase shares of Common Stock of Tuboscope under
certain circumstances and (ii) a Stock Option Agreement dated as of the date of
this Agreement and attached hereto as Exhibit B (the "Varco Stock Option
Agreement" and together with the Tuboscope Stock Option Agreement, the "Stock
Option Agreements") pursuant to which Varco granted Tuboscope an option to
purchase shares of Common Stock of Varco under certain circumstances; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I.
THE MERGER
Section 1.01 The Merger. Upon the terms and subject to the conditions of
this Agreement and in accordance with the applicable provisions of the General
Corporation Law of the State of Delaware (the "DGCL") and the California
General Corporation Law (the "CGCL"), at the Effective Time (as defined in
Section 1.02 hereof), Varco shall merge with and into Tuboscope, the separate
corporate existence of Varco shall cease and Tuboscope shall continue as the
surviving corporation. Tuboscope, as the surviving corporation after the
Merger, is hereinafter sometimes referred to as the "Surviving Corporation".
Section 1.02 Effective Time of the Merger. As early as practicable on the
Closing Date, the parties shall cause the Merger to be consummated by (i)
filing with the Secretary of State of the State of Delaware a certificate of
merger or other appropriate documents (in any such case, the "Certificate of
Merger") in such form as is required by, and executed and, as applicable,
acknowledged in accordance with, the provisions of Section 252 of the DGCL,
(ii) filing with the Secretary of State of the State of California a merger
agreement or other appropriate documents (in any such case, the "Agreement of
Merger") in such form as is required by, and executed in accordance with, the
provisions of Sections 1101, 1102 and 1103 of the CGCL and (iii) making all
other filings, recordings or publications required under the DGCL and the CGCL
in connection with the Merger. The Merger shall become effective at 4:00 p.m.,
Houston time, on the later of the date of (i) the filing of the Certificate of
Merger with the Delaware Secretary of State in accordance with the DGCL and
(ii) the filing of the Agreement of Merger with the California Secretary of
State in accordance with the CGCL, or at
I-1
<PAGE>
such other time as the parties may agree and specify in such filings in
accordance with applicable law (the time the Merger becomes effective being the
"Effective Time").
Section 1.03 Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m., Houston time, on a date to be specified by Varco and
Tuboscope, which shall be no later than the second business day after
satisfaction of the latest to occur of the conditions set forth in Sections
7.01, 7.02(b) (other than the delivery of the officers' certificate referred to
therein) and 7.03(b) (other than the delivery of the officers' certificate
referred to therein) (provided that the other closing conditions set forth in
Article VII have been met or waived as provided in Article VII at or prior to
the Closing) (the "Closing Date"), at the corporate offices of Tuboscope at the
address indicated in Section 9.02 unless another date, place or time is agreed
to in writing by Varco and Tuboscope.
Section 1.04 Effects of the Merger. At the Effective Time, the effect of the
Merger shall be as provided by applicable law, including the DGCL and the CGCL.
Without limiting the generality of the foregoing and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
Varco and Tuboscope will vest in the Surviving Corporation, and all of the
debts, liabilities and duties of Varco and Tuboscope will become the debts,
liabilities and duties of the Surviving Corporation.
Section 1.05 Certificate of Incorporation; Bylaws. At the Effective Time,
the certificate of incorporation of Tuboscope, as amended and restated, shall
be further amended to provide that Article FIRST thereof shall read as follows:
"FIRST: The name of this corporation is Varco International, Inc. (hereinafter
referred to as the "Company").", and, as so amended, such certificate of
incorporation shall be the certificate of incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law. The by-laws of Tuboscope, as in effect immediately prior to the
Effective Time, shall be the by-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
Section 1.06 Directors and Officers. Prior to the filing of the Joint Proxy
Statement with the SEC, each of Varco and Tuboscope shall designate five (5)
individuals who shall be initial directors of the Surviving Corporation
effective as of the Effective Time. The individuals listed on Schedule I hereto
shall, from and after the Effective Time, be initial officers of the Surviving
Corporation and shall serve in the positions set forth next to their names
until their successors have been duly elected and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's certificate of incorporation and by-laws.
ARTICLE II.
CONVERSION OF SECURITIES
Section 2.01 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of capital stock of Tuboscope or Varco:
(a) Cancellation of Treasury Stock and Tuboscope-Owned Stock. All shares of
Common Stock of Varco ("Varco Common Stock") that are owned by Varco as
treasury stock and any shares of Varco Common Stock owned by Tuboscope or any
Subsidiary (as defined in Section 3.01) of Tuboscope shall be canceled and
retired and shall cease to exist and no stock of Tuboscope or other
consideration shall be delivered in exchange therefor. All shares of Common
Stock of Tuboscope, par value $.01 per share ("Tuboscope Common Stock"), owned
by Varco shall be canceled and retired and shall cease to exist and no stock of
Tuboscope or other consideration shall be delivered in exchange therefor.
(b) Capital Stock of Tuboscope. Except as provided in Section 2.01(a), each
issued and outstanding share of Tuboscope Common Stock shall be unaffected by
the Merger and shall remain outstanding.
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(c) Exchange Ratio for Varco Common Stock. Subject to Section 2.02, each
issued and outstanding share of Varco Common Stock (other than dissenting
shares referred to in Section 2.01(d) and shares to be canceled in accordance
with Section 2.01(a)) shall be converted into .7125 shares (the "Exchange
Ratio") of Tuboscope Common Stock. All such shares of Varco Common Stock, when
so converted, shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive certificates representing the shares of
Tuboscope Common Stock and any cash in lieu of fractional shares of Tuboscope
Common Stock to be issued or paid in consideration therefor upon the surrender
of such certificate in accordance with Section 2.02, without interest.
Notwithstanding the foregoing, if between the date of this Agreement and the
Effective Time the outstanding shares of Varco Common Stock or Tuboscope Common
Stock shall have been changed into a different number of shares or a different
class, by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, or any similar
event shall have occurred, then the Exchange Ratio contemplated shall be
correspondingly adjusted to provide to the holders of Varco Common Stock the
same economic effect as contemplated by this Agreement prior to such event.
(d) Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Varco Common Stock which are dissenting shares (as defined
in Section 1300(b) of the CGCL), if any, shall not be converted into or
represent a right to receive any shares of Tuboscope Common Stock, but the
holders thereof shall be entitled only to such rights as are granted by the
CGCL. Each holder of dissenting shares who becomes entitled to payment therefor
pursuant to the CGCL shall receive payment from the Surviving Corporation in
accordance with the CGCL; provided, however, that (i) if any such holder of
dissenting shares shall have failed to establish his entitlement to appraisal
rights as provided in the CGCL, (ii) if any such holder of dissenting shares
shall have effectively withdrawn his demand for appraisal thereof or lost his
right to appraisal and payment therefor under the CGCL or (iii) if neither any
holder of dissenting shares nor the Surviving Corporation shall have filed a
petition demanding a determination of the value of all dissenting shares within
the time provided in the CGCL, such holder or holders (as the case may be)
shall forfeit the right to appraisal of such shares of Varco Common Stock and
such shares of Varco Common Stock shall thereupon be deemed to have been
converted, as of the Effective Time, into and represent shares of Tuboscope
Common Stock, without interest thereon, as provided in Section 2.01(c) hereof.
Section 2.02 Exchange of Certificates. The procedures for exchanging
certificates which immediately prior to the Effective Time represented
outstanding shares of Varco Common Stock for certificates representing shares
of Tuboscope Common Stock pursuant to the Merger are as follows:
(a) Exchange Agent. At the Effective Time, Tuboscope shall make available to
a bank or trust company designated by Tuboscope and Varco (the "Exchange
Agent"), in trust for the benefit of the holders of certificates which
immediately prior to the Effective Time represented outstanding shares of Varco
Common Stock, for exchange in accordance with this Section 2.02, through the
Exchange Agent, certificates representing the shares of Tuboscope Common Stock
and an estimated amount of cash in lieu of fractional shares (such certificates
representing shares of Tuboscope Common Stock, together with any dividends or
distributions with respect thereto, and cash in lieu of fractional shares being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
2.01 upon conversion of outstanding shares of Varco Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Tuboscope shall cause the Exchange Agent to mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Varco Common Stock (the
"Certificates") whose shares were converted pursuant to Section 2.01 into the
right to receive certificates representing shares of Tuboscope Common Stock (i)
a letter of transmittal which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery
of the Certificates to the Exchange Agent and shall be in such form and have
such other provisions as Tuboscope and Varco may reasonably specify and
(ii) instructions for effecting the surrender of the Certificates in exchange
for certificates representing shares of Tuboscope Common Stock (plus cash in
lieu of fractional shares, if any, of Tuboscope Common Stock as provided
below). Upon surrender of a Certificate to the Exchange Agent or to such other
agent or agents as
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may be appointed by Tuboscope, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, and
such other documents as may reasonably be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Tuboscope Common Stock
into which the holder's shares of Varco Common Stock were converted pursuant to
Section 2.01(c) and a check representing cash in lieu of fractional shares
which the holder has the right to receive pursuant to Section 2.02(e), and the
Certificate so surrendered shall immediately be canceled. In the event of a
transfer of ownership of Varco Common Stock which is not registered in the
transfer records of Varco, a certificate representing the proper number of
shares of Tuboscope Common Stock determined in accordance with Section 2.01(c)
and a check representing cash in lieu of fractional shares which the holder is
entitled to receive pursuant to Section 2.02(e) may be issued to a transferee
if the Certificate representing such Varco Common Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have
been paid. Until surrendered as contemplated by this Section 2.02, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender, a certificate representing
shares of Tuboscope Common Stock into which the holders of shares of Varco
Common Stock were converted pursuant to Section 2.01(c) and a check
representing cash in lieu of any fractional shares of Tuboscope Common Stock as
contemplated by Section 2.02(e).
(c) Treatment of Unexchanged Shares. No dividends or other distributions
declared or made with respect to Tuboscope Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the certificates representing shares of Tuboscope
Common Stock represented thereby that the holder would be entitled to upon
surrender of such Certificate and no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to subsection (e) below, until the
holder of such Certificate shall surrender such Certificate in accordance with
this Section 2.02. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the holder of the
certificates representing whole shares of Tuboscope Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of Tuboscope Common
Stock to which such holder is entitled pursuant to subsection (e) below and the
amount of dividends or other distributions with a record date after the
Effective Time previously paid with respect to such whole shares of Tuboscope
Common Stock, and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Tuboscope Common Stock. For purposes of determining
quorums at meetings of stockholders of the Surviving Corporation and the
stockholders of the Surviving Corporation entitled to notice of, and to vote
at, meetings of stockholders, holders of unsurrendered Certificates shall be
considered record holders of the shares of Tuboscope Common Stock represented
thereby.
(d) No Further Ownership Rights in Varco Common Stock. All shares of
Tuboscope Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms hereof and any cash paid pursuant to subsection
(c) or (e) of this Section 2.02 shall be deemed to have been issued or paid in
full satisfaction of all rights pertaining to the shares of Varco Common Stock
represented thereby. Notwithstanding the foregoing, Tuboscope is obligated to
pay any dividends or make any other distributions with a record date prior to
the Effective Time which may have been declared or made by Varco on shares of
Varco Common Stock in accordance with the terms of this Agreement (to the
extent permitted under Section 5.01) prior to the date hereof and which remain
unpaid at the Effective Time. From and after the Effective Time, there shall be
no further registration of transfers on the stock transfer books of Varco of
the shares of Varco Common Stock which were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Section 2.02.
(e) No Fractional Shares. No certificate or script representing fractional
shares of Tuboscope Common Stock shall be issued in the Merger or upon the
surrender for exchange of Certificates, and such fractional share interests
will not entitle the owner thereof to vote or to any other rights of a
shareholder of Tuboscope.
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Notwithstanding any other provision of this Agreement, each holder of shares of
Varco Common Stock converted pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Tuboscope Common Stock (after
taking into account all Certificates delivered by such holder) shall receive,
in lieu thereof, cash (without interest) in an amount equal to such fractional
amount multiplied by the average of the last reported sales prices of Tuboscope
Common Stock, as reported on the New York Stock Exchange ("NYSE"), on each of
the ten trading days immediately preceding the date of the Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates for 180 days after the
Effective Time shall be delivered to the Surviving Corporation or otherwise on
the instruction of the Surviving Corporation, and any holders of Certificates
who have not previously complied with this Section 2.02 shall thereafter look
only to the Surviving Corporation for the certificates representing shares of
Tuboscope Common Stock, any cash in lieu of fractional shares of Tuboscope
Common Stock and any dividends or distributions with respect to Tuboscope
Common Stock to which such holders are entitled pursuant to Sections 2.01 and
2.02. Any portion of the Exchange Fund which remains undistributed to the
holders of Certificates for five years after the Effective Time (or such
earlier date immediately prior to such time as the Exchange Fund would
otherwise escheat or become the property of any public official or government)
shall, to the extent permitted by law, become the property of the Surviving
Corporation free and clear of any claims or interest of any holders of
Certificates previously entitled thereto.
(g) No Liability. None of the Surviving Corporation, the Exchange Agent or
any party hereto shall be liable to any former holder of shares of Varco Common
Stock for any portion of the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(h) Withholding Rights. Each of the Exchange Agent and the Surviving
Corporation shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any former holder of shares of
Varco Common Stock such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code and the rules and
regulations promulgated thereunder, or any provision of state, local or foreign
tax law. To the extent that amounts are so withheld by the Exchange Agent or
the Surviving Corporation, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Varco Common Stock in respect of which such deduction and withholding was made
by the Exchange Agent or the Surviving Corporation.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it on account of the alleged loss, theft or
destruction of such Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed Certificate the certificate representing the
shares of Tuboscope Common Stock and any cash in lieu of fractional shares, and
unpaid dividends and distributions on the certificate deliverable in respect
thereof pursuant to this Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF VARCO
Varco represents and warrants to Tuboscope that the statements contained in
this Article III are true and correct except as set forth herein and in the
disclosure schedule delivered by Varco to Tuboscope on or before the date of
this Agreement (the "Varco Disclosure Schedule"). The Varco Disclosure Schedule
shall be arranged in paragraphs corresponding to the numbered and lettered
paragraphs contained in this Article III and the disclosure in any paragraph
shall qualify other paragraphs in this Article III only to the extent that it
is reasonably apparent from a reading of such disclosure that it also qualifies
or applies to such other paragraphs.
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Section 3.01 Organization of Varco. Each of Varco and its Subsidiaries (as
defined below) is a corporation or unincorporated entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, has all requisite corporate or entity power to
own, lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign corporation or organization in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, properties, financial condition, or results of
operations of Varco and its Subsidiaries, taken as a whole (a "Varco Material
Adverse Effect"). Except as set forth in the Varco SEC Reports (as defined in
Section 3.04) filed prior to the date hereof, neither Varco nor any of its
Subsidiaries directly or indirectly owns any equity or similar interest in, or
any interest convertible into or exchangeable or exercisable for, any
corporation, partnership, joint venture or other business association or
entity, excluding securities in any publicly traded company held for investment
by Varco or its Subsidiaries and comprising less than five percent (5%) of the
outstanding stock of such compa ny. As used in this Agreement, the word
"Subsidiary" means, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (i) such party
or any other Subsidiary of such party is a general partner (excluding
partnerships, the general partnership interests of which held by such party or
any Subsidiary of such party do not have a majority of the voting interest in
such partnership) or (ii) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the board of directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.
Section 3.02 Varco Capital Structure.
(a) The authorized capital stock of Varco consists of 120,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock ("Varco Preferred
Stock"), of which 80,000 shares have been designated as "Series A Participating
Preferred Stock". As of March 15, 2000, (i) 65,447,165 shares of Varco Common
Stock were issued and outstanding, all of which are validly issued, fully paid
and nonassessable, (ii) no shares of Varco Preferred Stock were issued and
outstanding, and (iii) no shares of Varco Common Stock or Varco Preferred Stock
were held in the treasury of Varco or by Subsidiaries of Varco. The Varco
Disclosure Schedule shows the number of shares of Varco Common Stock reserved
for future issuance pursuant to warrants, stock options and restricted stock
awards granted and outstanding as of March 15, 2000 and the plans under which
such options or shares of restricted stock were granted or issued
(collectively, the "Varco Stock Plans"). Except for the issuance of shares of
Varco Common Stock in connection with the Varco Stock Plans (including the
exercise of options thereunder) or pursuant to the Varco 1980 Employee Stock
Purchase Plan and except as set forth in the Varco Disclosure Schedule, no
change in such capitalization has occurred between March 15, 2000 and the date
of this Agreement. All shares of Varco Common Stock subject to issuance as
specified above are duly authorized and, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be validly issued, fully paid and nonassessable. There are no
obligations, contingent or otherwise, of Varco or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Varco Common Stock or the
capital stock of any Subsidiary or to provide funds to or make any material
investment (in the form of a loan, capital contribution or otherwise) in any
such Subsidiary or any other entity other than guarantees of obligations of
Subsidiaries entered into in the ordinary course of business. All of the
outstanding shares of capital stock of each of Varco's Subsidiaries are duly
authorized, validly issued, fully paid and nonassessable and all such shares
(other than directors' qualifying shares in the case of foreign Subsidiaries)
are owned by Varco or another Subsidiary of Varco free and clear of all
security interests, liens, claims, pledges, agreements, limitations on Varco's
voting rights, charges or other encumbrances of any nature.
(b) Except as set forth in this Section 3.02 or as reserved for future
grants of securities under the Varco Stock Plans or the Varco Stock Option
Agreement, and except for the rights (the "Varco Rights") issued and issuable
under the Rights Agreement dated as of November 6, 1997 between Varco and
Harris Trust Company of California (the "Varco Rights Plan") and 80,000 shares
of Series A Participating Preferred Stock of Varco reserved for issuance upon
the exercise of the Varco Rights, there are no equity securities of any class
of Varco
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or any security exchangeable into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. Except as set forth in this
Section 3.02, there are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which Varco or any of its
Subsidiaries is a party or by which it is bound obligating Varco or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Varco or any of its Subsidiaries or
obligating Varco or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call,
right, commitment or agreement. To the best knowledge of Varco, there are no
voting trusts, proxies or other voting agreements or understandings with
respect to the shares of capital stock of Varco.
Section 3.03 Authority; No Conflict; Required Filings and Consents.
(a) Varco has all requisite corporate power and authority to enter into this
Agreement and the Varco Stock Option Agreement and to consummate the
transactions contemplated by this Agreement and the Varco Stock Option
Agreement. The execution and delivery of this Agreement and the Varco Stock
Option Agreement and the consummation of the transactions contemplated by this
Agreement and the Varco Stock Option Agreement by Varco have been duly
authorized by all necessary corporate action on the part of Varco, subject only
to the approval of this Agreement and the Merger by Varco's shareholders under
the CGCL. This Agreement and the Varco Stock Option Agreement have been duly
executed and delivered by Varco and constitute the valid and binding
obligations of Varco, enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles (the "Bankruptcy and Equity
Exception").
(b) The execution and delivery of this Agreement and the Varco Stock Option
Agreement by Varco do not, and the consummation of the transactions
contemplated hereby and thereby will not, (i) conflict with, or result in any
violation or breach of, any provision of the articles of incorporation or
bylaws of Varco, (ii) except as set forth in the Varco Disclosure Schedule,
result in any violation or breach of, or constitute (with or without notice or
lapse of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any material benefit)
under, or require a consent or waiver under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, contract or other
agreement, instrument or obligation to which Varco or any of its Subsidiaries
is a party or by which any of them or any of their properties or assets may be
bound, or (iii) conflict with or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Varco or any of its Subsidiaries or any of its or their
properties or assets, except in the case of (ii) and (iii) for any such
conflicts, violations, defaults, terminations, cancellations or accelerations
which are not, individually or in the aggregate, reasonably likely to have a
Varco Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Varco or any of its Subsidiaries in connection
with the execution and delivery of this Agreement and the Varco Stock Option
Agreement or the consummation of the transactions contemplated hereby or
thereby, except for (i) the filing of the pre-merger notification report under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR
Act"), (ii) the filing of the Agreement of Merger with the California Secretary
of State and the Certificate of Merger with the Delaware Secretary of State,
(iii) the filing of the Joint Proxy Statement (as defined in Section 3.16
below) with the Securities and Exchange Commission (the "SEC") in accordance
with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (iv)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable state securities laws and the
laws of any foreign country and the European Union, and (v) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not be reasonably likely to have a Varco Material
Adverse Effect.
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Section 3.04 SEC Filings; Financial Statements.
(a) Varco has filed and made available to Tuboscope all forms, reports and
documents required to be filed by Varco with the SEC since January 1, 1997
other than registration statements on Form S-8 (collectively, the "Varco SEC
Reports") and has furnished to Tuboscope and attached to the Varco Disclosure
Schedule a substantially final draft of its Annual Report on Form 10-K for the
year ended December 31, 1999 (the "Varco 1999 Annual Report"), which for the
purposes of this Agreement shall be deemed to have been filed with the SEC
immediately prior to the execution and delivery of this Agreement and,
accordingly, any reference in this Agreement to "the Varco SEC Reports, as
filed prior to the date hereof" shall include the Varco 1999 Annual Report. The
Varco SEC Reports (i) at the time filed, complied in all material respects with
the applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act, as the case may be, and (ii) did not
at the time they were filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in such Varco SEC Reports or necessary in order to make the statements
in such Varco SEC Reports, in the light of the circumstances under which they
were made, not misleading. The Varco 1999 Annual Report does not as of the date
hereof contain any untrue statement of a material fact or omit to state a
material fact which would be required to be stated in such Annual Report if
such Annual Report were filed as of the date hereof or necessary in order to
make the statements in such Annual Report, in the light of the circumstances
under which they were made, not misleading. None of Varco's Subsidiaries is
required to file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Varco SEC Reports complied as to form in
all material respects with the applicable published rules and regulations of
the SEC with respect thereto, was prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) and fairly presented the consolidated financial position of Varco
and its Subsidiaries as of the dates and the consolidated results of their
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
The audited balance sheet of Varco as of December 31, 1999 is referred to
herein as the "Varco Balance Sheet."
Section 3.05 No Undisclosed Liabilities. Except as disclosed in the Varco
SEC Reports filed prior to the date hereof, and except for normal or recurring
liabilities incurred since December 31, 1999 in the ordinary course of business
consistent with past practices, Varco and its Subsidiaries do not have any
liabilities, either accrued, contingent or otherwise (whether or not required
to be reflected in financial statements in accordance with generally accepted
accounting principles), and whether due or to become due, which individually or
in the aggregate are reasonably likely to have a Varco Material Adverse Effect.
Section 3.06 Absence of Certain Changes or Events. Except as disclosed in
the Varco SEC Reports filed prior to the date hereof, since the date of the
Varco Balance Sheet, Varco and its Subsidiaries have conducted their businesses
only in the ordinary course and in a manner consistent with past practice and,
since such date, there has not been (i) any material adverse change in the
financial condition, results of operations, business or properties (a "Material
Adverse Change") of Varco and its Subsidiaries, taken as a whole, or any
development or combination of developments of which the management of Varco is
aware that, individually or in the aggregate, has had, or is reasonably likely
to have, a Varco Material Adverse Effect; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to Varco or any of its
Subsidiaries having a Varco Material Adverse Effect; (iii) any material change
by Varco in its accounting methods, principles or practices to which Tuboscope
has not previously consented in writing; (iv) any revaluation by Varco of any
of its assets having a Varco Material Adverse Effect; or (v) any other action
or event that would have required the consent of Tuboscope pursuant to Section
5.01 of this Agreement had such action or event occurred after the date of this
Agreement and that, individually or in the aggregate, has had or is reasonably
likely to have a Varco Material Adverse Effect.
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Section 3.07 Taxes.
(a) For the purposes of this Agreement, a (i) "Tax" or, collectively,
"Taxes," means any and all federal, state, local or foreign gross receipts,
income, profits, sales, use, value added, ad valorem, transfer, gains,
franchise, withholding, payroll, recapture, employment, excise, unemployment,
social security, license, occupation, business organization, stamp,
environmental, property, severance, premium, custom duties, capital stock,
disability, registration, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty or addition
thereto, whether disputed or not, and any obligations under any agreements or
arrangements with any other person with respect to such amounts and any
liability for such amounts of a predecessor entity, and (ii) "Tax Return" shall
mean any return, declaration, report, claim for refund, or information return
or statement, including any schedule or attachment thereto, and including any
amendment thereof, filed or to be filed with any tax authority.
(b) Varco and each of its Subsidiaries have timely filed all Tax Returns and
reports required to be filed by them prior to the date of this Agreement
(taking into account extensions), except for any such returns which are not
likely, individually or in the aggregate, to have a Varco Material Adverse
Effect. All such Tax Returns are complete and correct in all respects, except
for any such omissions or errors which are not reasonably likely, individually
or in the aggregate, to have a Varco Material Adverse Effect. Varco and each of
its Subsidiaries have paid (or Varco has paid on its Subsidiaries' behalf) all
Taxes shown as due on such Tax Returns. Varco's most recent consolidated
financial statements reflect an adequate reserve for all Taxes payable by Varco
and its Subsidiaries for all taxable periods and portions thereof through the
date of such financial statements, except to the extent that any such Taxes are
not reasonably likely, individually or in the aggregate, to have a Varco
Material Adverse Effect. Except as set forth in the Varco Disclosure Schedule,
neither the Internal Revenue Service (the "IRS") nor any other taxing authority
has asserted any claim for Taxes, or to the actual knowledge of the executive
officers of Varco, is threatening to assert any claims for Taxes, which claims,
individually or in the aggregate, are reasonably likely to have a Varco
Material Adverse Effect. Except as set forth in the Varco Disclosure Schedule,
no deficiencies for any Taxes (other than those which are not reasonably
likely, individually or in the aggregate, to have a Varco Material Adverse
Effect) have been proposed, asserted or assessed against Varco or any of its
Subsidiaries that have not been fully paid or adequately provided for in the
appropriate financial statements of Varco and its Subsidiaries, no requests for
waivers of the time to assess any Taxes are pending, and none of Varco or any
of its Subsidiaries has waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency. Varco and each of its Subsidiaries have withheld or collected and
paid over to the appropriate governmental authorities (or are properly holding
for such payment) all Taxes required by law to be withheld or collected.
Neither Varco nor any of its Subsidiaries has made an election under Section
341(f) of the Code. There are no liens for Taxes upon the assets of Varco or
any of its Subsidiaries (other than liens for Taxes that are not yet due or
that are being contested in good faith by appropriate proceedings), except for
liens which are not reasonably likely, individually or in the aggregate, to
have a Varco Material Adverse Effect.
Section 3.08 Properties.
(a) Varco has provided to Tuboscope a true and complete list of all real
property leased by Varco or its Subsidiaries pursuant to leases providing for
the occupancy of facilities in excess of 10,000 square feet (collectively
"Material Leases"). Varco is not in default under any such Material Leases,
except where the existence of such defaults, individually or in the aggregate,
is not reasonably likely to have a Varco Material Adverse Effect.
(b) Varco has provided to Tuboscope a true and complete list of all real
property that Varco or any of its Subsidiaries owns. With respect to each such
item of real property, except for such matters that, individually or in the
aggregate, are not reasonably likely to have a Varco Material Adverse Effect:
(a) Varco or the identified Subsidiary has good and clear record and marketable
title to such property, free and clear of any security interest, easement,
covenant or other restriction, except for security interests, easements,
covenants and other restrictions which do not materially impair the current
uses or occupancy of such property; and (b) the
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improvements constructed on such property are in good condition, and all
mechanical and utility systems servicing such improvements are in good
condition, free in each case of material defects.
Section 3.09 Intellectual Property. Varco owns, or is licensed or otherwise
possesses legally enforceable rights to use, all trademarks, trade names,
service marks, copyrights, and any applications for such trademarks, trade
names, service marks and copyrights, know-how, computer software programs or
applications and tangible or intangible proprietary information or material
that are necessary to conduct the business of Varco as currently conducted,
subject to such exceptions that would not be reasonably likely to have a Varco
Material Adverse Effect.
Section 3.10 Agreements, Contracts and Commitments. Varco has not breached,
or received in writing any claim or notice that it has breached, any of the
terms or conditions of any material agreement, contract or commitment filed as
an exhibit to the Varco SEC Reports ("Varco Material Contracts") in such a
manner as, individually or in the aggregate, are reasonably likely to have a
Varco Material Adverse Effect. Each Varco Material Contract that has not
expired by its terms is in full force and effect.
Section 3.11 Litigation. Except as described in the Varco SEC Reports filed
prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against Varco pending or as to which Varco has
received any written notice of assertion, which, individually or in the
aggregate, is reasonably likely to have a Varco Material Adverse Effect or a
material adverse effect on the ability of Varco to consummate the transactions
contemplated by this Agreement.
Section 3.12 Environmental Matters.
(a) Except for matters that are specifically disclosed in the Varco SEC
Reports filed prior to the date hereof (with reference to a specifically named
site or claim) and except for such matters that, individually or in the
aggregate, are not reasonably likely to have a Varco Material Adverse Effect:
(i) Varco and its Subsidiaries comply, and within all applicable statutes of
limitations periods have complied, with all applicable Environmental Laws (as
defined in Section 3.12(b)); (ii) neither Varco nor its Subsidiaries are
subject to liability for any Hazardous Substance disposal or contamination on
any third party property; (iii) neither Varco nor any of its Subsidiaries are
subject to liability for any release of, or any exposure of any person or
property to, any Hazardous Substance; (iv) neither Varco nor any of its
Subsidiaries has received any notice, demand, letter, claim or request for
information alleging that Varco or any of its Subsidiaries may be in violation
of or liable under any Environmental Law; (v) neither Varco nor any of its
Subsidiaries is subject to any orders, decrees or injunctions issued by, or
other arrangements with, any Governmental Entity or is subject to any indemnity
or other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (vi) there are no
circumstances or conditions involving Varco or any of its Subsidiaries that
could reasonably be expected to cause Varco or any of its Subsidiaries to
become subject to any claims, liability, investigations or costs, or to
restrictions on the ownership, use or transfer of any property of Varco or any
of its Subsidiaries, pursuant to any Environmental Law.
(b) As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection,
preservation, investigation, remediation or restoration of environmental
quality, health and safety, or natural resources, or (B) noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property.
(c) As used herein, the term "Hazardous Substance" means: (A) any substance
that is listed, classified or regulated pursuant to or that could result in
liability under any Environmental Law; (B) any petroleum product or by-
product, asbestos-containing material, lead-containing paint or plumbing,
polychlorinated biphenyls, radioactive materials or radon; or (C) any other
substance which is the subject of regulatory action by any Governmental Entity
pursuant to any Environmental Law.
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Section 3.13 Employee Benefit Plans.
(a) Varco has listed in Section 3.13 of the Varco Disclosure Schedule all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance and other similar employee benefit plans, and all unexpired severance
agreements, written or otherwise, for the benefit of, or relating to, any
current or former employee of Varco or any trade or business (whether or not
incorporated) which is a member or which is under common control with Varco (an
"ERISA Affiliate") within the meaning of Section 414 of the Code, or any
Subsidiary of Varco (together, the "Varco Employee Plans").
(b) With respect to each Varco Employee Plan, Varco has made available to
Tuboscope, a true and correct copy of (i) the most recent annual report (Form
5500) filed with the IRS, (ii) such Varco Employee Plan, (iii) each trust
agreement and group annuity contract, if any, relating to such Varco Employee
Plan and (iv) the most recent actuarial report or valuation relating to a Varco
Employee Plan subject to Title IV of ERISA.
(c) With respect to the Varco Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Varco, there exists
no condition or set of circumstances in connection with which Varco could be
subject to any liability that is reasonably likely to have a Varco Material
Adverse Effect under ERISA, the Code or any other applicable law.
(d) With respect to the Varco Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the financial
statements of Varco, which obligations are reasonably likely to have a Varco
Material Adverse Effect.
(e) Except as disclosed in Varco SEC Reports filed prior to the date of this
Agreement, and except as set forth in the Varco Disclosure Schedule or as
provided for in this Agreement, neither Varco nor any of its Subsidiaries is a
party to any oral or written (i) agreement with any officer or other key
employee of Varco or any of its Subsidiaries, the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence
of a transaction involving Varco of the nature contemplated by this Agreement,
(ii) agreement with any officer of Varco providing any term of employment or
compensation guarantee extending for a period longer than one year from the
date hereof and for the payment of compensation in excess of $100,000 per
annum, or (iii) agreement or plan, including any stock option plan, stock
appreciation right plan, restricted stock plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by this
Agreement.
Section 3.14 Compliance With Laws. Varco has complied with, is not in
violation of, and has not received any notices of violation with respect to,
any federal, state or local statute, law or regulation with respect to the
conduct of its business, or the ownership or operation of its business, except
for failures to comply or violations which, individually or in the aggregate,
have not had and are not reasonably likely to have a Varco Material Adverse
Effect.
Section 3.15 Accounting and Tax Matters. To its knowledge, after consulting
with its independent auditors, neither Varco nor any of its Affiliates (as
defined in Section 6.10) has taken or agreed to take any action which would (i)
prevent Varco from accounting for the business combination to be effected by
the Merger as a pooling of interests of (ii) prevent the Merger from qualifying
as a reorganization under Section 368(a) of the Code.
Section 3.16 Registration Statement; Proxy Statement/Prospectus. The
information to be supplied by Varco for inclusion in the registration statement
on Form S-4 pursuant to which shares of Tuboscope Common Stock issued in the
Merger will be registered under the Securities Act (the "Registration
Statement"), shall not
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at the time the Registration Statement is declared effective by the SEC contain
any untrue statement of a material fact or omit to state any material fact
required to be stated in the Registration Statement or necessary in order to
make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied by Varco for inclusion in the joint proxy statement/prospectus to be
sent to Varco's shareholders and Tuboscope's stockholders in connection with
the meeting of Varco's shareholders to consider this Agreement and the Merger
(the "Varco Shareholders' Meeting") and in connection with the meeting of
Tuboscope's stockholders (the "Tuboscope Stockholders' Meeting") to consider
this Agreement, the Merger and an amendment to Tuboscope's certificate of
incorporation to increase the number of authorized shares of Tuboscope Common
Stock from 60,000,000 to 200,000,000 shares (the "Joint Proxy Statement") shall
not, on the date the Joint Proxy Statement is first mailed to Varco's
shareholders and Tuboscope's stockholders, at the time of the Varco
Shareholders' Meeting and the Tuboscope Stockholders' Meeting and at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading;
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the Varco
Shareholders' Meeting or the Tuboscope Stockholders' Meeting which has become
false or misleading. If at any time prior to the Effective Time any event
relating to Varco or any of its Affiliates, officers or directors should be
discovered by Varco which should be set forth in an amendment to the
Registration Statement or a supplement to the Joint Proxy Statement, Varco
shall promptly inform Tuboscope.
Section 3.17 Labor Matters. Neither Varco nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor
is any such contract or agreement presently being negotiated, nor is there, nor
has there been in the last five years, a representation question respecting any
of the employees of Varco or its Subsidiaries, and, to the best knowledge of
the executive officers of Varco, there are no campaigns being conducted to
solicit cards from employees of Varco or its Subsidiaries to authorize
representation by any labor organization, nor is Varco or its Subsidiaries a
party to, or bound by, any consent decree with, or citation by, any
governmental agency relating to employees or employment practices. Nor, as of
the date hereof, is Varco or any of its Subsidiaries the subject of any
material proceeding asserting that Varco or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain with
any labor union or labor organization nor, as of the date of this Agreement, is
there pending or, to the knowledge of the executive officers of Varco,
threatened, any material labor strike, dispute, walkout, work stoppage, slow-
down or lockout involving Varco or any of its Subsidiaries.
Section 3.18 Insurance. All material fire and casualty, general liability,
business interruption, product liability, and sprinkler and water damage
insurance policies maintained by Varco or any of its Subsidiaries are with
reputable insurance carriers and are in character and amount at least
equivalent to that carried by persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a Varco Material Adverse Effect.
Section 3.19 No Existing Discussions. As of the date hereof, Varco is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal (as defined in Section
6.01(a)).
Section 3.20 Opinion of Financial Advisor. The financial advisor of Varco,
J.P. Morgan Securities Inc., has delivered to Varco its opinion dated the date
of this Agreement to the effect that the Exchange Ratio is fair to the holders
of Varco Common Stock from a financial point of view.
Section 3.21 Anti-Takeover Laws. No "fair price," "moratorium," "control
share acquisition" or other similar anti-takeover statute or regulation is
applicable to Varco or (solely by reason of Varco's participation therein) the
Merger or the other transactions contemplated by this Agreement.
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Section 3.22 Rights Plan. The Varco Rights Plan has been amended so that (i)
Tuboscope is exempt from the definition of "Acquiring Person" contained in the
Varco Rights Plan, and no "Shares Acquisition Date" or "Distribution Date" or
"Triggering Event" (as such terms are defined in the Varco Rights Plan) will
occur as a result of the execution of this Agreement or the Tuboscope Stock
Option Agreement or the consummation of the Merger or the other transactions
contemplated by this Agreement or the Tuboscope Stock Option Agreement and (ii)
the Varco Rights Plan will terminate and the Varco Rights will expire
immediately prior to the Effective Time. The Varco Rights Plan, as so amended,
has not been further amended or modified, and a true and complete copy of such
amendment has been delivered to Tuboscope. The entering into of this Agreement
and the Varco Stock Option Agreement and the consummation of the transactions
contemplated hereby and thereby do not and will not result in the grant of any
rights to any person under the Varco Rights Plan or enable or require the Varco
Rights to be exercised or distributed.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF TUBOSCOPE
Tuboscope represents and warrants to Varco that the statements contained in
this Article IV are true and correct, except as set forth herein and in the
disclosure schedule delivered by Tuboscope to Varco on or before the date of
this Agreement (the "Tuboscope Disclosure Schedule"). The Tuboscope Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article IV and the disclosure in any
paragraph shall qualify other paragraphs in this Article IV only to the extent
that it is reasonably apparent from a reading of such disclosure that it also
qualifies or applies to such other paragraphs.
Section 4.01 Organization of Tuboscope. Each of Tuboscope and its
Subsidiaries is a corporation or unincorporated entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, has all requisite corporate or entity power to
own, lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign corporation or organization in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, properties, financial condition, or results of
operations of Tuboscope and its Subsidiaries, taken as a whole (a "Tuboscope
Material Adverse Effect"). Except as set forth in the Tuboscope SEC Reports (as
defined in Section 4.04) filed prior to the date hereof, neither Tuboscope nor
any of its Subsidiaries directly or indirectly owns any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any corporation, partnership, joint venture or other business association
or entity, excluding securities in any publicly traded company held for
investment by Tuboscope or its Subsidiaries and comprising less than five
percent (5%) of the outstanding stock of such company.
Section 4.02 Tuboscope Capital Structure.
(a) The authorized capital stock of Tuboscope consists of 60,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01
par value ("Tuboscope Preferred Stock"). As of March 15, 2000, (i) 44,767,104
shares of Tuboscope Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable, (ii) 1,424,700 shares of
Tuboscope Common Stock were held in the treasury of Tuboscope or by
Subsidiaries of Tuboscope and (iii) no shares of Tuboscope Preferred Stock were
issued and outstanding. The Tuboscope Disclosure Schedule shows the number of
shares of Tuboscope Common Stock reserved for future issuance pursuant to
warrants, stock options and restricted stock awards granted and outstanding as
of March 15, 2000 and the plans under which such options and restricted stock
awards were granted (collectively, the "Tuboscope Stock Plans"). Except for the
issuance of shares of Tuboscope Common Stock in connection with the Tuboscope
Stock Plans (including the exercise of options thereunder) or pursuant to the
Tuboscope Employee Qualified Stock Purchase Plan, the Tuboscope Deferred
Compensation Plan and the Tuboscope 401(K) Thrift Savings Plan and except as
set forth in the Tuboscope Disclosure Schedule, no change in such
capitalization has occurred between March 15, 2000 and the date of this
Agreement. As of the date of
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this Agreement, no shares of Tuboscope Preferred Stock are issued and
outstanding. All shares of Tuboscope Common Stock subject to issuance as
specified above are duly authorized and, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be validly issued, fully paid and nonassessable. There are no
obligations, contingent or otherwise, of Tuboscope or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of Tuboscope Common Stock
or the capital stock of any Subsidiary or to provide funds to or make any
material investment (in the form of a loan, capital contribution or otherwise)
in any such Subsidiary or any other entity other than guarantees of obligations
of Subsidiaries entered into in the ordinary course of business. All of the
outstanding shares of capital stock of each of Tuboscope's Subsidiaries are
duly authorized, validly issued, fully paid and nonassessable and all such
shares (other than directors' qualifying shares in the case of foreign
Subsidiaries) are owned by Tuboscope or another Subsidiary of Tuboscope free
and clear of all security interests, liens, claims, pledges, agreements,
limitations on Tuboscope's voting rights, charges or other encumbrances of any
nature.
(b) Except as set forth in this Section 4.02 or as reserved for future
grants of securities under the Tuboscope Stock Plans or the Tuboscope Stock
Option Agreement, there are no equity securities of any class of Tuboscope or
any security exchangeable into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. Except as set forth in this
Section 4.02, there are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which Tuboscope or any of its
Subsidiaries is a party or by which it is bound obligating Tuboscope or any of
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Tuboscope or any of its
Subsidiaries or obligating Tuboscope or any of its Subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the best knowledge of
Tuboscope, there are no voting trusts, proxies or other voting agreements or
understandings with respect to the shares of capital stock of Tuboscope.
Section 4.03 Authority; No Conflict; Required Filings and Consents.
(a) Tuboscope has all requisite corporate power and authority to enter into
this Agreement and the Tuboscope Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Tuboscope Stock Option Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of Tuboscope, subject only to the
approval of the Tuboscope Voting Proposal by Tuboscope's stockholders. This
Agreement and the Tuboscope Stock Option Agreement have been duly executed and
delivered by Tuboscope and constitute the valid and binding obligation of
Tuboscope, enforceable in accordance with its terms, subject to the Bankruptcy
and Equity Exception.
(b) The execution and delivery of this Agreement and the Tuboscope Stock
Option Agreement by Tuboscope do not, and the consummation of the transactions
contemplated hereby and thereby will not, (i) conflict with, or result in any
violation or breach of, any provision of the certificate of incorporation or
bylaws of Tuboscope, (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
any material benefit) under, or require a consent or waiver under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which Tuboscope or any
of its Subsidiaries is a party or by which any of them or any of their
properties or assets may be bound, or (iii) conflict with or violate any
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Tuboscope or any of its
Subsidiaries or any of its or their properties or assets, except in the case of
(ii) and (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which are not, individually or in the aggregate,
reasonably likely to have a Tuboscope Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Tuboscope or any of its Subsidiaries in connection with the
execution and delivery of this Agreement and the Tuboscope Stock Option
Agreement or the consummation
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of the transactions contemplated hereby or thereby, except for (i) the filing
of the pre-merger notification report under the HSR Act, (ii) the filing of the
Registration Statement with the SEC in accordance with the Securities Act,
(iii) the filing of the Certificate of Merger with the Delaware Secretary of
State and the Agreement of Merger with the California Secretary of State, (iv)
the filing of the Joint Proxy Statement with the SEC in accordance with the
Exchange Act, (v) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws and the laws of any foreign country and the European
Union, and (vi) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not be reasonably likely to
have a Tuboscope Material Adverse Effect.
Section 4.04 SEC Filings; Financial Statements.
(a) Tuboscope has filed and made available to Varco all forms, reports and
documents required to be filed by Tuboscope with the SEC since January 1, 1997
other than registration statements on Form S-8 (collectively, the "Tuboscope
SEC Reports"). The Tuboscope SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Act and
the Exchange Act, as the case may be, and (ii) did not at the time they were
filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated in such
Tuboscope SEC Reports or necessary in order to make the statements in such
Tuboscope SEC Reports, in the light of the circumstances under which they were
made, not misleading. None of Tuboscope's Subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Tuboscope SEC Reports complied as to form
in all material respects with the applicable published rules and regulations of
the SEC with respect thereto, was prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) and fairly presented the consolidated financial position of
Tuboscope and its Subsidiaries as of the dates and the consolidated results of
their operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount. The audited balance sheet of Tuboscope as of December 31,
1999 is referred to herein as the "Tuboscope Balance Sheet."
Section 4.05 No Undisclosed Liabilities. Except as disclosed in the
Tuboscope SEC Reports filed prior to the date hereof, and except for normal or
recurring liabilities incurred since December 31, 1999 in the ordinary course
of business consistent with past practices, Tuboscope and its Subsidiaries do
not have any liabilities, either accrued, contingent or otherwise (whether or
not required to be reflected in financial statements in accordance with
generally accepted accounting principles), and whether due or to become due,
which individually or in the aggregate are reasonably likely to have a
Tuboscope Material Adverse Effect.
Section 4.06 Absence of Certain Changes or Events. Except as disclosed in
the Tuboscope SEC Reports filed prior to the date hereof, since the date of the
Tuboscope Balance Sheet, Tuboscope and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been (i) any Material Adverse
Change in Tuboscope and its Subsidiaries, taken as a whole, or any development
or combination of developments of which the management of Tuboscope is aware
that, individually or in the aggregate, has had, or is reasonably likely to
have, a Tuboscope Material Adverse Effect; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to Tuboscope or any of its
Subsidiaries having a Tuboscope Material Adverse Effect; (iii) any material
change by Tuboscope in its accounting methods, principles or practices to which
Varco has not previously consented in writing; (iv) any revaluation by
Tuboscope of any of its assets having a Tuboscope Material Adverse Effect; or
(v) any other action or event that would have required the consent of Varco
pursuant to Section 5.02 of this Agreement had such action or event occurred
after the date of this Agreement and that, individually or in the aggregate,
has had or is reasonably likely to have a Tuboscope Material Adverse Effect.
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Section 4.07 Taxes. Tuboscope and each of its Subsidiaries have timely filed
all Tax Returns and reports required to be filed by them prior to the date of
this Agreement (taking into account extensions), except for any such returns
which are not likely, individually or in the aggregate, to have a Tuboscope
Material Adverse Effect. All such Tax Returns are complete and correct in all
respects, except for any such omissions or errors which are not reasonably
likely, individually or in the aggregate, to have a Tuboscope Material Adverse
Effect. Tuboscope and each of its Subsidiaries have paid (or Tuboscope has paid
on its Subsidiaries' behalf) all Taxes shown as due on such Tax Returns.
Tuboscope's most recent consolidated financial statements reflect an adequate
reserve for all Taxes payable by Tuboscope and its Subsidiaries for all taxable
periods and portions thereof through the date of such financial statements,
except to the extent that any such Taxes are not reasonably likely,
individually or in the aggregate, to have a Tuboscope Material Adverse Effect.
Neither the IRS nor any other taxing authority has asserted any claim for
Taxes, or to the actual knowledge of the executive officers of Tuboscope, is
threatening to assert any claims for Taxes, which claims, individually or in
the aggregate, are reasonably likely to have a Tuboscope Material Adverse
Effect. No deficiencies for any Taxes (other than those which are not
reasonably likely, individually or in the aggregate, to have a Tuboscope
Material Adverse Effect) have been proposed, asserted or assessed against
Tuboscope or any of its Subsidiaries that have not been fully paid or
adequately provided for in the appropriate financial statements of Tuboscope
and its Subsidiaries, no requests for waivers of the time to assess any Taxes
are pending, and none of Tuboscope or any of its Subsidiaries has waived any
statute of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency. Tuboscope and each of its
Subsidiaries have withheld or collected and paid over to the appropriate
governmental authorities (or are properly holding for such payment) all Taxes
required by law to be withheld or collected. Neither Tuboscope nor any of its
Subsidiaries has made an election under Section 341(f) of the Code. There are
no liens for Taxes upon the assets of Tuboscope or any of its Subsidiaries
(other than liens for Taxes that are not yet due or that are being contested in
good faith by appropriate proceedings), except for liens which are not
reasonably likely, individually or in the aggregate, to have a Tuboscope
Material Adverse Effect.
Section 4.08 Properties.
(a) Tuboscope has provided to Varco a true and complete list of all real
property leased by Tuboscope or its Subsidiaries pursuant to Material Leases.
Tuboscope is not in default under such Material Leases, except where the
existence of such defaults, individually or in the aggregate, is not reasonably
likely to have a Tuboscope Material Adverse Effect.
(b) Tuboscope has provided to Varco a true and complete list of all real
property that Tuboscope or any of its Subsidiaries owns. With respect to each
such item of real property, except for such matters that, individually or in
the aggregate, are not reasonably likely to have a Tuboscope Material Adverse
Effect: (a) Tuboscope or the identified Subsidiary has good and clear record
and marketable title to such property free and clear of any security interest,
easement, covenant or other restriction, except for security interests,
easements, covenants and other restrictions which do not materially impair the
current uses or occupancy of such property; and (b) the improvements
constructed on such property are in good condition, and all mechanical and
utility systems servicing such improvements are in good condition, free in each
case of material defects.
Section 4.09 Intellectual Property. Tuboscope owns, or is licensed or
otherwise possesses legally enforceable rights to use, all trademarks, trade
names, service marks, copyrights, and any applications for such trademarks,
trade names, service marks and copyrights, know-how, computer software programs
or applications, and tangible or intangible proprietary information or material
that are necessary to conduct the business of Tuboscope as currently conducted,
subject to such exceptions that would not be reasonably likely to have a
Tuboscope Material Adverse Effect.
Section 4.10 Agreements, Contracts and Commitments. Tuboscope has not
breached, or received in writing any claim or notice that it has breached, any
of the terms or conditions of any material agreement, contract or commitment
filed as an exhibit to the Tuboscope SEC Reports ("Tuboscope Material
Contracts") in
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such a manner as, individually or in the aggregate, are reasonably likely to
have a Tuboscope Material Adverse Effect. Each Tuboscope Material Contract that
has not expired by its terms is in full force and effect.
Section 4.11 Litigation. Except as described in the Tuboscope SEC Reports
filed prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against Tuboscope pending or as to which Tuboscope
has received any written notice of assertion, which, individually or in the
aggregate, is reasonably likely to have a Tuboscope Material Adverse Effect or
a material adverse effect on the ability of Tuboscope to consummate the
transactions contemplated by this Agreement.
Section 4.12 Environmental Matters. Except for matters that are specifically
disclosed in the Tuboscope SEC Reports filed prior to the date hereof (with
reference to a specifically named site or claim) and except for such matters
that, individually or in the aggregate, are not reasonably likely to have a
Tuboscope Material Adverse Effect: (i) Tuboscope and its Subsidiaries comply,
and within all applicable statute of limitation periods have complied, with all
applicable Environmental Laws; (ii) neither Tuboscope nor its Subsidiaries are
subject to liability for any Hazardous Substance disposal or contamination on
any third party property; (iii) neither Tuboscope nor any of its Subsidiaries
are subject to liability for any release of, or any exposure of any person or
property to, any Hazardous Substance; (iv) neither Tuboscope nor any of its
Subsidiaries has received any notice, demand, letter, claim or request for
information alleging that Tuboscope or any of its Subsidiaries may be in
violation of or liable under any Environmental Law; (v) neither Tuboscope nor
any of its Subsidiaries is subject to any orders, decrees or injunctions issued
by, or other arrangements with, any Governmental Entity or is subject to any
indemnity or other agreement with any third party relating to liability under
any Environmental Law or relating to Hazardous Substances; and (vi) there are
no circumstances or conditions involving any of its Subsidiaries that could
reasonably be expected to cause Tuboscope or any of its Subsidiaries to become
subject to any claims, liability, investigations or costs, or to restrictions
on the ownership, use or transfer of any property of Tuboscope or any of its
Subsidiaries, pursuant to any Environmental Law.
Section 4.13 Employee Benefit Plans.
(a) Tuboscope has listed in Section 4.13 of the Tuboscope Disclosure
Schedule all employee benefit plans (as defined in Section 3(3) of ERISA) and
all bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance and other similar employee benefit plans,
and all unexpired severance agreements, written or otherwise, for the benefit
of, or relating to, any current or former employee of Tuboscope or any ERISA
Affiliate of Tuboscope, or any Subsidiary of Tuboscope (together, the
"Tuboscope Employee Plans").
(b) With respect to each Tuboscope Employee Plan, Tuboscope has made
available to Varco, a true and correct copy of (i) the most recent annual
report (Form 5500) filed with the IRS, (ii) such Tuboscope Employee Plan, (iii)
each trust agreement and group annuity contract, if any, relating to such
Tuboscope Employee Plan and (iv) the most recent actuarial report or valuation
relating to a Tuboscope Employee Plan subject to Title IV of ERISA.
(c) With respect to the Tuboscope Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Tuboscope, there
exists no condition or set of circumstances in connection with which Tuboscope
could be subject to any liability that is reasonably likely to have a Tuboscope
Material Adverse Effect under ERISA, the Code or any other applicable law.
(d) With respect to the Tuboscope Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the financial
statements of Tuboscope, which obligations are reasonably likely to have a
Tuboscope Material Adverse Effect.
(e) Except as disclosed in Tuboscope SEC Reports filed prior to the date of
this Agreement, and except as provided for in this Agreement, neither Tuboscope
nor any of its Subsidiaries is a party to any oral or written
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(i) agreement with any officer or other key employee of Tuboscope or any of its
Subsidiaries, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving Tuboscope of
the nature contemplated by this Agreement, (ii) agreement with any officer of
Tuboscope providing any term of employment or compensation guarantee extending
for a period longer than one year from the date hereof or for the payment of
compensation in excess of $100,000 per annum, or (iii) agreement or plan,
including any stock option plan, stock appreciation right plan, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
Section 4.14 Compliance With Laws. Tuboscope has complied with, is not in
violation of, and has not received any notices of violation with respect to,
any federal, state or local statute, law or regulation with respect to the
conduct of its business, or the ownership or operation of its business, except
for failures to comply or violations which, individually or in the aggregate,
have not had and are not reasonably likely to have a Tuboscope Material Adverse
Effect.
Section 4.15 Accounting and Tax Matters. To its knowledge, after consulting
with its independent auditors, neither Tuboscope nor any of its Affiliates (as
defined in Section 6.10) has taken or agreed to take any action which would (i)
prevent Tuboscope from accounting for the business combination to be effected
by the Merger as a pooling of interests of (ii) prevent the Merger from
qualifying as a reorganization under Section 368(a) of the Code.
Section 4.16 Registration Statement; Proxy Statement/Prospectus. The
information in the Registration Statement (except for information supplied by
Varco for inclusion in the Registration Statement, as to which Tuboscope makes
no representation) shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information supplied by Tuboscope for inclusion in the Joint Proxy Statement
shall not, on the date the Joint Proxy Statement is first mailed to Tuboscope's
stockholders or Varco's shareholders, at the time of the Tuboscope
Stockholders' Meeting and the Varco Shareholder's Meeting and at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading;
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Tuboscope Stockholders' Meeting or the Varco Shareholders' Meetings which has
become false or misleading. If at any time prior to the Effective Time any
event relating to Tuboscope or any of its Affiliates, officers or directors
should be discovered by Tuboscope which should be set forth in an amendment to
the Registration Statement or a supplement to the Joint Proxy Statement,
Tuboscope shall promptly inform Varco.
Section 4.17 Labor Matters. Neither Tuboscope nor any of its Subsidiaries is
a party to or otherwise bound by any collective bargaining agreement, contract
or other agreement or understanding with a labor union or labor organization,
nor is any such contract or agreement presently being negotiated, nor is there,
nor has there been in the last five years, a representation question respecting
any of the employees of Tuboscope or its Subsidiaries, and, to the best
knowledge of the executive officers of Tuboscope, there are no campaigns being
conducted to solicit cards from employees of Tuboscope or its Subsidiaries to
authorize representation by any labor organization, nor is Tuboscope or its
Subsidiaries a party to, or bound by, any consent decree with, or citation by,
any governmental agency relating to employees or employment practices. Nor, as
of the date hereof, is Tuboscope or any of its Subsidiaries the subject of any
material proceeding asserting that Tuboscope or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain with
any labor union or labor organization nor, as of the date of this Agreement, is
there pending or, to the knowledge of the executive officers of Tuboscope,
threatened, any material labor strike, dispute, walkout, work stoppage, slow-
down or lockout involving Tuboscope or any of its Subsidiaries.
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Section 4.18 Insurance. All material fire and casualty, general liability,
business interruption, product liability, and sprinkler and water damage
insurance policies maintained by Tuboscope or any of its Subsidiaries are with
reputable insurance carriers and are in character and amount at least
equivalent to that carried by persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a Tuboscope Material Adverse Effect.
Section 4.19 No Existing Discussions. As of the date hereof, Tuboscope is
not engaged, directly or indirectly, in any discussions or negotiations with
any other party with respect to an Acquisition Proposal (as defined in Section
6.01(a)).
Section 4.20 Opinion of Financial Advisor. The financial advisor of
Tuboscope, Credit Suisse First Boston Corporation, has delivered to Tuboscope
an opinion, dated the date of this Agreement, to the effect that the Exchange
Ratio is fair to Tuboscope from a financial point of view.
Section 4.21 Anti-Takeover Laws. The restrictions contained in Section 203
of the DGCL with respect to a "business combination" (as defined in DGCL
Section 203) have been rendered inapplicable to the authorization, execution,
delivery and performance of the Agreement by Tuboscope or the consummation of
the Merger by Tuboscope. No other "fair price," "moratorium," "control share
acquisition" or other similar anti- takeover statute or regulation is
applicable to Tuboscope or (solely by reason of Tuboscope's participation
therein) the Merger or the other transactions contemplated by this Agreement.
ARTICLE V.
CONDUCT OF BUSINESS
Section 5.01 Covenants of Varco. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Varco agrees as to itself and its Subsidiaries (except
to the extent that Tuboscope shall otherwise consent in writing), to carry on
its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, to pay its debts and Taxes when due
subject to good faith disputes over such debts or Taxes, to pay or perform its
other obligations when due, and, to the extent consistent with such business,
use all reasonable efforts consistent with past practices and policies to
preserve intact its present business organization, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, and others having business dealings with
it. Varco shall promptly notify the other party of any material event or
occurrence not in the ordinary course of business of Varco. Except as expressly
contemplated by this Agreement, Varco shall not (and shall not permit any of
its respective Subsidiaries to), without the written consent of Tuboscope:
(a) Accelerate, amend or change the period of exercisability or vesting of
options or restricted stock granted under any employee stock plan of such party
or authorize cash payments in exchange for any options granted under any of
such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(b) Declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to such
party;
(c) Issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options to
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acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the
issuance of shares of Varco Common Stock pursuant to the exercise of options,
warrants and convertible securities outstanding on the date of this Agreement
or pursuant to Varco's 1980 Employee Stock Purchase Plan and (ii) the issuance
of Varco Rights in respect of shares of Varco Common Stock issued not in
contravention of this Agreement pursuant to Section 3(c) of the Varco Rights
Plan;
(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership
or other business organization or division, or otherwise acquire or agree to
acquire any assets (other than inventory and other items in the ordinary course
of business), except for all such acquisitions involving aggregate
consideration of not more than $3 million;
(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for transactions in the ordinary course of
business;
(f) (i) Increase or agree to increase the compensation payable or to become
payable to its officers or employees, except for increases in salary or wages
of employees in accordance with past practices (including bonuses), (ii) grant
any additional severance or termination pay to, or enter into any employment or
severance agreements with, any employees or officers, other than payments or
agreements paid to or entered into with employees (other than officers) in the
ordinary course of business in accordance with past practices or the
performance of agreements in effect on the date of this Agreement, (iii) enter
into any collective bargaining agreement (other than as required by law), or
(iv) establish, adopt, enter into or amend any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, trust, fund,
policy or arrangement for the benefit of any directors, officers or employees;
(g) Amend or propose to amend its charter or bylaws, except as contemplated
by this Agreement;
(h) Incur any indebtedness for borrowed money other than up to $2 million
(which may be denominated in foreign currency) in borrowings pursuant to credit
facilities in effect as of the date hereof and up to $1 million under loan
agreements entered into hereafter;
(i) Initiate, compromise, or settle any material litigation or arbitration
proceeding;
(j) Except in the ordinary course of business, modify, amend or terminate
any Varco Material Contract or waive, release or assign any material rights or
claims;
(k) Make or commit to make any capital expenditures that would cause the
aggregate capital budget furnished by Varco to Tuboscope to be exceeded; or
(l) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (k) above.
Section 5.02 Covenants of Tuboscope. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Tuboscope agrees as to itself and its respective
Subsidiaries (except to the extent that Varco shall otherwise consent in
writing), to carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, to pay its debts and
Taxes when due subject to good faith disputes over such debts or Taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, use all reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, and others having
business dealings with it. Tuboscope shall promptly notify the other party of
any material event or occurrence not in the ordinary course of business of
Tuboscope. Except as
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expressly contemplated by this Agreement, Tuboscope shall not (and shall not
permit any of its respective Subsidiaries to), without the written consent of
Varco:
(a) Accelerate, amend or change the period of exercisability or vesting of
options or restricted stock granted under any employee stock plan of such party
or authorize cash payments in exchange for any options granted under any of
such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(b) Declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to such
party;
(c) Issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock (including Tuboscope Common Stock
held in treasury) or securities convertible into shares of its capital stock,
or subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue any such shares or other
convertible securities, other than the issuance of shares of Tuboscope Common
Stock pursuant to the exercise of options, warrants or convertible securities
outstanding on the date of this Agreement or pursuant to the Tuboscope Employee
Qualified Stock Purchase Plan, the Tuboscope Deferred Compensation Plan and the
Tuboscope 401(K) Thrift Savings Plan;
(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership
or other business organization or division, or otherwise acquire or agree to
acquire any assets (other than inventory and other items in the ordinary course
of business), except for all such acquisitions involving aggregate
consideration of not more than $3 million;
(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for transactions in the ordinary course of
business;
(f) (i) Increase or agree to increase the compensation payable or to become
payable to its officers or employees, except for increases in salary or wages
of employees in accordance with past practices (including bonuses), (ii) grant
any additional severance or termination pay to, or enter into any employment or
severance agreements with, any employees or officers, other than payments or
agreements paid to or entered into with employees (other than officers) in the
ordinary course of business in accordance with past practices or the
performance of agreements in effect on the date of this Agreement, (iii) enter
into any collective bargaining agreement (other than as required by law), or
(iv) establish, adopt, enter into or amend any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, trust, fund,
policy or arrangement for the benefit of any directors, officers or employees;
(g) Amend or propose to amend its charter or bylaws, except as contemplated
by this Agreement;
(h) Incur any indebtedness for borrowed money other than pursuant to credit
agreements in effect as of the date hereof or up to $1 million (which may be
denominated in foreign currency) in borrowings under loan agreements entered
into hereafter;
(i) Initiate, compromise, or settle any material litigation or arbitration
proceeding;
(j) Except in the ordinary course of business, modify, amend or terminate
any Tuboscope Material Contract or waive, release or assign any material rights
or claims;
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(k) Make or commit to make any capital expenditures that would cause the
aggregate capital budget furnished by Tuboscope to Varco to be exceeded; or
(l) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (k) above.
Section 5.03 Reorganization. Varco and Tuboscope shall each use its best
efforts to cause the Merger to qualify as, and will not take or agree to take
any action that would prevent the Merger from qualifying as, a reorganization
within the meaning of Section 368(a) of the Code.
Section 5.04 Cooperation. Subject to compliance with applicable law, from
the date hereof until the Effective Time, each of Varco and Tuboscope shall
confer on a regular and frequent basis with one or more representatives of the
other party to report on the general status of ongoing operations and shall
promptly provide the other party or its counsel with copies of all filings made
by such party with any Governmental Entity in connection with this Agreement,
the Merger and the transactions contemplated hereby and thereby.
Section 5.05 Tuboscope Board Resolutions. The board of directors of
Tuboscope shall adopt such resolutions as shall be necessary for the
acquisition of equity securities (including options and other derivative
securities) of Tuboscope by officers or directors of Varco who are to become
officers or directors of Tuboscope in the Merger to be deemed an acquisition
from Tuboscope eligible for Rule 16b-3(d) under the Exchange Act.
Section 5.06 Pooling Accounting. From and after the date hereof and until
the Effective Time, neither Varco nor Tuboscope, nor any of their respective
Subsidiaries or other Affiliates shall knowingly take any action, or knowingly
fail to take any action, that is reasonably likely to jeopardize the treatment
of the Merger as a pooling of interests for accounting purposes.
ARTICLE VI.
ADDITIONAL AGREEMENTS
Section 6.01 No Solicitation.
(a) Varco and Tuboscope each shall not, directly or indirectly, through any
officer, director, employee, financial advisor, representative or agent of such
party (i) solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
an Alternative Transaction (as defined below) involving such party or any of
its Subsidiaries (any of the foregoing inquiries or proposals being referred to
in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal, or (iii) agree to or recommend
any Acquisition Proposal; provided, however, that nothing contained in this
Agreement shall prevent Varco or Tuboscope, or their respective Boards of
Directors, from (A) furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal to the
shareholders/stockholders of such party, if and only to the extent that (1) the
board of directors of such party believes in good faith (after consultation
with its financial advisor) that such Acquisition Proposal is reasonably
capable of being completed on the terms proposed and would, if consummated,
result in a transaction more favorable to its shareholders/stockholders than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Superior
Proposal") and the board of directors of such party determines in good faith
after consultation with outside legal counsel that failure to take such action
would be reasonably likely to constitute a breach of the fiduciary duties of
such board of directors to such party and its shareholders/stockholders under
applicable law, (2) prior to furnishing such non-public information to, or
entering into discussions or negotiations with, such person or entity, such
board of directors receives from such person or entity an executed
confidentiality agreement with terms no less favorable to such
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party than those contained in the Agreement dated January 14, 2000 between
Varco and Tuboscope (the "Confidentiality Agreement"), and (3) prior to
furnishing such non-public information or providing access to the properties,
books or records of such party, such party has complied with the provisions of
Section 6.01(b); or (B) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal. Each party agrees that, in
the event that it receives a Superior Proposal, for the five business day
period commencing on the date on which it delivers notice of such Superior
Proposal to the other party in accordance with Section 6.01(b), it shall offer
to negotiate with, and cause its respective financial and legal advisors to
negotiate with, the other party to attempt to make such commercially reasonable
adjustments in the terms and conditions of this Agreement as would enable such
party to proceed with the transactions contemplated herein.
(b) Varco and Tuboscope shall each notify the other party immediately after
receipt by Varco or Tuboscope (or their advisors) of any Acquisition Proposal
or any request for nonpublic information in connection with an Acquisition
Proposal or for access to the properties, books or records of such party by any
person or entity that informs such party that it is considering making, or has
made, an Acquisition Proposal. Such notice shall be made orally and in writing
and shall indicate in reasonable detail the identity of the offeror and the
terms and conditions of such proposal, inquiry or contact. Such party shall, to
the extent permitted by law, continue to keep the other party hereto informed,
on a current basis, of the status of any such discussions or negotiations and
the terms being discussed or negotiated.
Section 6.02 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practical after the execution of this Agreement, Varco
and Tuboscope shall prepare and file with the SEC the Joint Proxy Statement,
and Tuboscope shall prepare and file with the SEC the Registration Statement,
in which the Joint Proxy Statement will be included as a prospectus, provided
that Tuboscope may delay the filing of the Registration Statement until
approval of the Joint Proxy Statement by the SEC. Varco and Tuboscope shall use
all reasonable efforts to cause the Registration Statement to become effective
as soon after such filing as practical. The Joint Proxy Statement, and any
amendment or supplement thereto, shall include (i) the recommendation of the
board of directors of Tuboscope in favor of this Agreement, the Merger
(including a declaration that the Merger is advisable in accordance with
Section 251 of the DGCL), an amendment to Tuboscope's Second Restated
Certificate of Incorporation to increase the number of authorized shares of
Tuboscope Common Stock from 60,000,000 to 200,000,000 and (ii) the
recommendation of the board of directors of Varco in favor of this Agreement
and the Merger; provided that the board of directors of Tuboscope may withdraw
such recommendation if (but only if) (i) the board of directors of Tuboscope
has received a Superior Proposal, and (ii) such board of directors after
consultation with its outside legal counsel determines that it is reasonably
likely that a failure to recommend such Superior Proposal would constitute a
breach of its fiduciary duties under applicable law, and the board of directors
of Varco may withdraw such recommendation if (but only if) (i) the board of
directors of Varco has received a Superior Proposal, and (ii) such board of
directors after consultation with its outside legal counsel determines that it
is reasonably likely that a failure to recommend such Superior Proposal would
constitute a breach of its fiduciary duties under applicable law. Nothing is
this Section 6.02(a) shall release the obligations of Varco or Tuboscope to
hold the Varco Shareholders' Meeting and the Tuboscope Stockholders' Meeting,
respectively, in accordance with Section 6.05.
(b) Varco and Tuboscope shall make all necessary filings with respect to the
Merger under the Securities Act, the Exchange Act, applicable state blue sky
laws and the rules and regulations thereunder.
Section 6.03 NYSE Listings. Tuboscope agrees to continue the listing of
Tuboscope Common Stock on the NYSE during the term of this Agreement. Varco
agrees to continue the listing of Varco Common Stock on the NYSE during the
term of this Agreement.
Section 6.04 Access to Information. Upon reasonable notice, Tuboscope and
Varco shall each (and shall cause each of their respective Subsidiaries to)
afford to the officers, employees, accountants, counsel and other
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representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, each of Tuboscope and Varco
shall (and shall cause each of their respective Subsidiaries to) furnish
promptly to the other (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period
pursuant to the requirements of federal securities laws and (b) all other
information concerning its business, properties and personnel as such other
party may reasonably request. Unless otherwise required by law, the parties
will hold any such information which is nonpublic in confidence in accordance
with the Confidentiality Agreement. No information or knowledge obtained in any
investigation pursuant to this Section 6.04 shall affect or be deemed to modify
any representation or warranty contained in this Agreement or the conditions to
the obligations of the parties to consummate the Merger.
Section 6.05 Shareholders/Stockholders Meetings.
(a) Varco shall call a meeting of its shareholders, and Tuboscope shall call
a meeting of its stockholders, to be held as promptly as practicable for the
purpose of voting, in the case of Varco, upon this Agreement and the Merger
and, in the case of Tuboscope, upon this Agreement, the Merger and an amendment
to Tuboscope's Second Restated Certificate of Incorporation to increase the
number of authorized shares of Tuboscope Common stock from 60,000,000 to
200,000,000 (the "Tuboscope Voting Proposal"). Subject to Section 6.01(a) and
Section 6.02(a), Varco and Tuboscope shall use all reasonable efforts to
solicit proxies in favor of such matters. Varco and Tuboscope shall coordinate
and cooperate with respect to the timing of such meetings and shall use their
best efforts to hold such meetings on the same day and as soon as practicable
after the date hereof. The Varco shareholder vote required for the approval of
this Agreement and the Merger shall be a majority of the shares of Varco Common
Stock outstanding on the record date for the Varco Shareholders' Meeting. The
Tuboscope stockholder vote required for approval of the Tuboscope Voting
Proposal shall be a majority of the shares of Tuboscope Common Stock
outstanding on the record date for the Tuboscope Stockholders' Meeting.
(b) Tuboscope may also submit additional routine proposals to its
stockholders at the Tuboscope Stockholders' Meeting, separate from the proposal
referred to in Section 6.05(a), provided that Tuboscope shall consult with
Varco as to the submission of such proposals. The approval by Tuboscope's
stockholders of such additional proposals shall not be a condition to the
closing of the Merger under this Agreement.
Section 6.06 Legal Conditions to Merger.
(a) Tuboscope and Varco shall each use their best efforts to (i) take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary and proper under applicable law to consummate and make
effective the transactions contemplated hereby as promptly as practicable, (ii)
obtain from any Governmental Entity or any other third party any consents,
licenses, permits, waivers, approvals, authorizations, or orders required to be
obtained or made by Tuboscope or Varco or any of their Subsidiaries in
connection with the authorization, execution and delivery of this Agreement and
the Stock Option Agreements and the consummation of the transactions
contemplated hereby and thereby including, without limitation, the Merger, and
(iii) as promptly as practicable, make all necessary filings, and thereafter
make any other required submissions, with respect to this Agreement, the Stock
Option Agreements and the Merger required under (A) the Securities Act and the
Exchange Act, and any other applicable federal or state securities laws, (B)
the HSR Act and any related governmental request thereunder, and (C) any other
applicable law. Tuboscope and Varco shall cooperate with each other in
connection with the making of all such filings, including providing copies of
all such documents to the non-filing party and its advisors prior to filing
and, if requested, to accept all reasonable additions, deletions or changes
suggested in connection therewith. Tuboscope and Varco shall use their best
efforts to furnish to each other all information required for any application
or other filing to be made pursuant to the rules and regulations of any
applicable law (including all information required to be included in the Joint
Proxy Statement and the Registration Statement) in connection with the
transactions contemplated by this Agreement.
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(b) Varco and Tuboscope agree, and shall cause each of their respective
Subsidiaries, to cooperate and to use their respective best efforts to obtain
any government clearances or approvals required for Closing under the HSR Act,
the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other Federal, state or foreign law or,
regulation or decree designed to prohibit, restrict or regulate actions for the
purpose or effect of monopolization or restraint of trade (collectively
"Antitrust Laws"), to respond to any government requests for information under
any Antitrust Law, and to contest and resist any action, including any
legislative, administrative or judicial action, and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) (an "Order") that restricts, prevents or
prohibits the consummation of the Merger or any other transactions contemplated
by this Agreement under any Antitrust Law. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted by or on
behalf of any party hereto in connection with proceedings under or relating to
any Antitrust Law. Notwithstanding anything to the contrary in this Section
6.06, neither Varco nor Tuboscope nor any of their Subsidiaries shall be
required to divest any of their respective businesses, product lines or assets,
or to take or agree to take any other action or agree to any limitation, that
could reasonably be expected to have a material adverse effect on Tuboscope or
on Tuboscope combined with Varco after the Effective Time.
(c) Each of Tuboscope and Varco shall give (or shall cause their respective
Subsidiaries to give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, their best efforts to obtain any third party
consents related to or required in connection with the Merger that are (A)
necessary to consummate the transactions contemplated hereby, (B) disclosed or
required to be disclosed in the Tuboscope Disclosure Schedule or the Varco
Disclosure Schedule, as the case may be, or (C) required to prevent a Tuboscope
Material Adverse Effect or a Varco Material Adverse Effect from occurring prior
to or after the Effective Time.
Section 6.07 Public Disclosure. Varco and Tuboscope shall agree on the form
and content of the initial joint press release regarding the transactions
contemplated hereby, and thereafter shall consult with each other before
issuing any press release or otherwise making any public statement with respect
to the Merger or this Agreement and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by law.
Section 6.08 Affiliate Legends. Prior to the filing of the Joint Proxy
Statement with the SEC, Varco and Tuboscope will provide each other with a list
of those persons who are, in Varco's or Tuboscope's respective reasonable
judgment, "affiliates" of Varco or Tuboscope, respectively, within the meaning
of Rule 145 (each such person who is an "affiliate" of Varco or Tuboscope
within the meaning of Rule 145 is referred to as an "Affiliate") promulgated
under the Securities Act ("Rule 145"). Varco and Tuboscope shall provide each
other such information and documents as Tuboscope or Varco shall reasonably
request for purposes of reviewing such list and shall notify the other party in
writing regarding any change in the identity of its Affiliates prior to the
Closing Date. Varco and Tuboscope shall each use its best efforts to deliver or
cause to be delivered to each other by April 30, 2000 (and in any case prior to
the Effective Time) from each of its Affiliates, an executed Affiliate
Agreement, in form and substance satisfactory to Varco and Tuboscope, by which
each Affiliate of Varco agrees to comply with the applicable requirements of
Rule 145 and such requirements as may be necessary for the Merger to be treated
as a pooling of interests for accounting purposes and each Affiliate of
Tuboscope agrees to comply with such requirements as may be necessary for the
merger to be treated as a pooling of interests for accounting purposes (an
"Affiliate Agreement"). Tuboscope shall be entitled to place appropriate
legends on the certificates evidencing any Tuboscope Common Stock to be
received by such Affiliates of Varco pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the Tuboscope Common Stock, consistent with the terms of the Affiliate
Agreements (provided that such legends or stop transfer instructions shall be
removed, two years after the Effective Date, upon the request of any
stockholder that is not then an Affiliate of Tuboscope).
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Section 6.09 NYSE Listing. Tuboscope shall use its best efforts to cause the
shares of Tuboscope Common Stock to be issued in the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Closing Date.
Section 6.10 Stock Plans.
(a) At the Effective Time, each outstanding option to purchase shares of
Varco Common Stock (a "Varco Stock Option") under the Varco Stock Plans,
whether vested or unvested, shall constitute an option to acquire, on the same
terms and conditions as were applicable under such Varco Stock Option, the same
number of shares of Tuboscope Common Stock as the holder of such Varco Stock
Option would have been entitled to receive pursuant to the Merger had such
holder exercised such option in full immediately prior to the Effective Time
(rounded downward to the nearest whole number), at a price per share (rounded
upward to the nearest whole cent) equal to (y) the aggregate exercise price for
the shares of Varco Common Stock purchasable pursuant to such Varco Stock
Option immediately prior to the Effective Time divided by (z) the number of
full shares of Tuboscope Common Stock deemed purchasable pursuant to such Varco
Stock Option in accordance with the foregoing. It is intended that Varco Stock
Options converted into options to acquire Tuboscope Common Stock in accordance
with the foregoing shall qualify following the Effective Time as incentive
stock options as defined in Section 422 of the Code to the extent such Varco
Stock Options qualified as incentive stock options immediately prior to the
Effective Time, and the provisions of this Section 6.10 shall be applied
consistent with such intent.
(b) As soon as practicable after the Effective Time, Tuboscope shall deliver
to the participants in Varco Stock Plans appropriate notice setting forth such
participants' rights pursuant thereto and the grants pursuant to Varco Stock
Plans shall continue in effect on the same terms and conditions (subject to the
adjustments required by this Section 6.10 after giving effect to the Merger).
(c) Tuboscope shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Tuboscope Common Stock for delivery
under Varco Stock Plans assumed in accordance with this Section 6.10. As soon
as practicable after the Effective Time, Tuboscope shall file a registration
statement on Form S-8 (or any successor or other appropriate forms), or another
appropriate form with respect to the shares of Tuboscope Common Stock subject
to such options and shall use its best efforts to maintain the effectiveness of
such registration statement or registration statements (and maintain the
current status of the prospectus or prospectuses contained therein) for so long
as such options remain outstanding.
(d) The board of directors of Varco shall, prior to or as of the Effective
Time, take all necessary actions, if any, pursuant to and in accordance with
the terms of the Varco Stock Plans and the instruments evidencing the Varco
Stock Options, to provide for the conversion of the Varco Stock Options into
options to acquire Tuboscope Common Stock in accordance with this Section 6.10
without the consent of the holders of the Varco Stock Options.
(e) Prior to the Effective Time, Varco's board of directors (or, if
appropriate, any committee thereof) and Tuboscope's board of directors (or, if
appropriate, any committee thereof) shall adopt appropriate resolutions and
take all other actions necessary to provide that, effective at the Effective
Time, each right to purchase shares of Varco Common Stock outstanding at the
Effective Time (a "Varco Stock Purchase Right") under the Varco 1980 Employee
Stock Purchase Plan shall be assumed by Tuboscope and shall continue in effect
on the same terms and conditions as in effect immediately prior to the
Effective Time (subject to the adjustments in this Section), and each such
Varco Stock Purchase Right shall be converted automatically into a right to
purchase shares of Tuboscope Common Stock (a "New Stock Purchase Right"). Each
New Stock Purchase Right shall entitle the holder thereof to purchase the
number of shares of Tuboscope Common Stock determined under the terms and
conditions of the Varco Stock Purchase Plan, as amended as provided for herein,
at the exercise price determined as provided below. Effective at the Effective
Time, Tuboscope shall assume the Varco Stock Purchase Plan, shall amend the
Varco Stock Purchase Plan to substitute references to Tuboscope Common Stock
for references to Varco Common Stock therein and shall continue the Varco Stock
Purchase Plan with respect to
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the New Stock Purchase Rights; provided, however, that Tuboscope shall reserve
the right to terminate the Varco Stock Purchase Plan upon the exercise or other
termination of all New Stock Purchase Rights in accordance with the terms of
the Varco Stock Purchase Plan. The exercise price for a New Stock Purchase
Right shall be determined under the terms of the Varco Stock Purchase Plan,
provided that the fair market value of the "Stock" (as defined in the Varco
Stock Purchase Plan) on any day prior to the Closing Date shall equal the per
share fair market value of Varco Common Stock on such date, divided by the
Exchange Ratio; and, provided, further, that the fair market value of the
"Stock" (as defined in the Varco Stock Purchase Plan) on any date on or after
the Closing Date shall mean the fair market value of Tuboscope Common Stock on
such date. The adjustment provided herein with respect to any Varco Stock
Purchase Right shall be, and is intended to be, effective in a manner which is
consistent with Section 424(a) of the Code and the treasury registration
thereunder, and shall provide that the excess (if any) of the aggregate fair
market value of the shares of Tuboscope Common Stock over the aggregate
exercise price for a New Stock Purchase Right shall be no greater than the
excess (if any) of the aggregate fair market value of the shares of Varco
Common Stock over the aggregate exercise price for such Varco Stock Purchase
Right, and shall provide that the New Stock Purchase Right shall not give the
holder more favorable benefits than such holder had with respect to the Varco
Stock Purchase Right. Except as provided in this Section, after the Effective
Time, each New Stock Purchase Right shall be exercisable upon the same terms
and conditions as were applicable to the related Varco Stock Purchase Right
immediately prior to the Effective Time (except that with regard to such New
Stock Purchase Right, any references to Varco shall be deemed, as appropriate,
to mean Tuboscope). Tuboscope shall take all action necessary, on or prior to
the Effective Time, to authorize and reserve a number of shares of Tuboscope
Common Stock sufficient for issuance upon the exercise of New Stock Purchase
Rights as contemplated by this Section.
Section 6.11 Brokers or Finders. Each of Varco and Tuboscope represents, as
to itself, its Subsidiaries and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement
except J.P. Morgan Securities Inc. whose fees and expenses will be paid by
Varco in accordance with Varco's agreements with such firm, and Credit Suisse
First Boston Corporation, whose fees and expenses will be paid by Tuboscope in
accordance with Tuboscope's agreement with such firm. Each of Varco and
Tuboscope agrees to indemnify and hold the other harmless from and against any
and all claims, liabilities or obligations with respect to any such fees,
commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such party or any of its Affiliates.
Section 6.12 Indemnification.
(a) From and after the Effective Time, Tuboscope agrees that it will
indemnify and hold harmless each present and former director and officer of
Varco and its Subsidiaries (the "Indemnified Parties"), against any costs or
expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, liabilities or amounts paid in settlement (collectively, "Costs")
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any act or omission in their capacity as a
director or officer occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent permitted under Delaware law (and Tuboscope shall also advance expenses
as incurred to the fullest extent permitted under applicable law, provided the
Indemnified Party to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such Indemnified Party
is not entitled to indemnification).
(b) The provisions of this Section 6.12 are intended to be an addition to
the rights otherwise available to the current and former officers and directors
of Varco by law, charter, statute, bylaw or agreement, and shall operate for
the benefit of, and shall be enforceable by, each of the Indemnified Parties,
their heirs and their representatives.
Section 6.13 Letter of Varco's Accountants. Varco shall use reasonable best
efforts to cause to be delivered to Tuboscope and Varco a letter of Ernst &
Young LLP, Varco's independent auditors, dated a date within two business days
before the date on which the Registration Statement shall become effective and
addressed to
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Tuboscope, in form reasonably satisfactory to Tuboscope and customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement.
In connection with Tuboscope's efforts to obtain such letter, if requested by
Ernst & Young LLP, Varco shall provide a representation letter to Ernst & Young
LLP complying with SAS 72, if then required.
Section 6.14 Letter of Tuboscope's Accountants. Tuboscope shall use
reasonable best efforts to cause to be delivered to Varco and Tuboscope a
letter of Ernst & Young LLP, Tuboscope's independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to Varco, in form reasonably satisfactory
to Varco and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement. In connection with Varco's efforts to
obtain such letter, if requested by Ernst & Young LLP, Tuboscope shall provide
a representation letter to Ernst & Young LLP complying with the SAS 72, if then
required.
Section 6.15 Benefit Plans. Tuboscope agrees that, during the period
commencing at the Effective Time and ending December 31, 2000, the employees of
Varco and its Subsidiaries who remain in the employ of Tuboscope or any of its
Subsidiaries (a "Continuing Employee") will continue to be provided with
benefits under health insurance, vision care, life insurance, employee
assistance programs, flexible spending accounts, disability, vacation, holiday,
profit-sharing, section 401(k), dental and sick pay plans and stock option
plans which are not materially less favorable in the aggregate than those
currently provided by Varco and its Subsidiaries to such employees.
Section 6.16 Rights Plan. The board of directors of Varco has amended the
Varco Rights Plan, and shall take all further action (in addition to that
referred to in Section 3.22) reasonably requested in writing by Tuboscope, in
order to render the Varco Rights Plan inapplicable to the Merger and the other
transactions contemplated by this Agreement and the Stock Option Agreements.
Varco will not without the consent of Tuboscope further amend the Varco Rights
Plan, redeem the Varco Rights issued under the Varco Rights Plan or terminate
the Varco Rights Plan prior to the Effective Date (except as contemplated by
Section 3.22) unless required to do so by a court of competent jurisdiction;
provided, however, that Varco may take any of the foregoing actions if the
board of directors of Varco shall have determined to recommend an Acquisition
Proposal to the shareholders of Varco after determining that such Acquisition
Proposal constitutes a Superior Proposal in accordance with Section 6.02(a).
Section 6.17 Stock Option Agreements. Tuboscope and Varco each agrees to
fully perform their respective obligations under the Stock Option Agreements.
ARTICLE VII.
CONDITIONS TO MERGER
Section 7.01 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction or waiver prior to the Closing Date of the
following conditions:
(a) Stockholder/Shareholder Approval. This Agreement and the Merger shall
have been approved and adopted by the affirmative vote of the holders of a
majority of the shares of Varco Common Stock outstanding on the record date for
the Varco Shareholders' Meeting and the Tuboscope Voting Proposal shall have
been approved by the affirmative vote of the holders of a majority of the
shares of Tuboscope Common Stock outstanding on the record date for the
Tuboscope Stockholders' Meeting.
(b) Regulatory Approvals. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated, and
approvals and/or clearances shall have been obtained from (or decisions
indicating no objections to the Merger or other indications to that effect
satisfactory to Tuboscope
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shall have been made by) the European Commission (if applicable) and under any
other antitrust or competition law applicable to any significant operations.
(c) Approvals. Other than the filings provided for by Section 1.02, all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity the
failure of which to file, obtain or occur is reasonably likely to have a Varco
Material Adverse Effect or a Tuboscope Material Adverse Effect shall have been
filed, been obtained or occurred.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
(e) No Injunctions. No Governmental Entity or federal, state or foreign
court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any Order or statute, rule, regulation which is in effect
and which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
(f) NYSE. The shares of Tuboscope Common Stock to be issued in the Merger
shall have been approved for listing on the NYSE, subject to official notice of
issuance.
(g) Pooling Letters. Varco and Tuboscope shall have received a letter from
Ernst & Young LLP, addressed to Tuboscope regarding Ernst & Young LLP's
concurrence with Tuboscope's management conclusions, as to the appropriateness
of the pooling of interests accounting, under Accounting Principles Board
Opinion No. 16 for the Merger, as contemplated to be effected as of the date of
the letter, it being agreed that Varco and Tuboscope shall each provide
reasonable best cooperation to Ernst & Young LLP to enable it to issue such a
letter.
Section 7.02 Additional Conditions to Obligations of Varco. The obligation
of Varco to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived in writing exclusively by
Varco:
(a) Representations and Warranties. The representations and warranties of
Tuboscope set forth in this Agreement shall be true and correct as of the date
of this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date, except for (i) changes contemplated by this Agreement and
(ii) where the failures to be true and correct, individually or in the
aggregate, have not had and are not reasonably likely to have a Tuboscope
Material Adverse Effect or a material adverse effect upon the consummation of
the transactions contemplated hereby; and Varco shall have received a
certificate signed on behalf of Tuboscope by the chief executive officer and
the chief financial officer of Tuboscope to such effect.
(b) Performance of Obligations of Tuboscope. Tuboscope shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date; and Varco shall have received a
certificate signed on behalf of Tuboscope by the chief executive officer and
the chief financial officer of Tuboscope to such effect.
(c) Tax Opinion. Varco shall have received a written opinion from Pircher,
Nichols & Meeks, counsel to Varco, to the effect that the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code. In rendering such opinion, Pircher, Nichols &
Meeks shall receive and may rely upon representations contained in certificates
of Tuboscope and Varco substantially in the forms of Exhibits C and D attached
hereto.
(d) Dissenting Shares. Effective demands for payment under Chapter 13 of the
CGCL shall not have been received by Varco with respect to more than 10.0% of
the outstanding shares of Varco Common Stock.
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Section 7.03 Additional Conditions to Obligations of Tuboscope. The
obligation of Tuboscope to effect the Merger is subject to the satisfaction of
each of the following conditions, any of which may be waived, in writing,
exclusively by Tuboscope:
(a) Representations and Warranties. The representations and warranties of
Varco set forth in this Agreement shall be true and correct as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date, except for (i) changes contemplated by this Agreement and
(ii) where the failures to be true and correct, individually or in the
aggregate, have not had and are not reasonably likely to have a Varco Material
Adverse Effect or a material adverse effect upon the consummation of the
transactions contemplated hereby; and Tuboscope shall have received a
certificate signed on behalf of Varco by the chief executive officer and the
chief financial officer of Varco to such effect.
(b) Performance of Obligations of Varco. Varco shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date; and Tuboscope shall have received a
certificate signed on behalf of Varco by the chief executive officer and the
chief financial officer of Varco to such effect.
(c) Tax Opinion. Tuboscope shall have received a written opinion from Latham
& Watkins, counsel to Tuboscope, to the effect that the Merger will be treated
for Federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinion, Latham & Watkins shall
receive and may rely upon representations contained in certificates of
Tuboscope and Varco substantially in the forms of Exhibits E and F attached
hereto.
(d) Dissenting Shares. Effective demands for payment under Chapter 13 of the
CGCL shall not have been received by Varco with respect to more than 5.0% of
the outstanding shares of Varco Common Stock.
ARTICLE VIII.
TERMINATION AND AMENDMENT
Section 8.01 Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Sections 8.01(b) through 8.01(g), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of Varco or the stockholders of Tuboscope:
(a) by mutual written consent of Varco and Tuboscope; or
(b) by either Varco or Tuboscope if the Merger shall not have been
consummated by September 30, 2000 (provided that either Varco or Tuboscope may
extend such date to December 31, 2000 by providing written notice thereof to
the other party on or prior to September 30, 2000; September 30, 2000, as it
may be so extended, shall be referred to herein as the "Outside Date");
provided that the right to terminate this Agreement under this Section 8.01(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date); or
(c) by either Varco or Tuboscope if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order, decree
or ruling or taken any other nonappealable final action, in each case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; or
(d) by Tuboscope, if, at the Varco Shareholders' Meeting (including any
adjournment or postponement), the requisite vote of the shareholders of Varco
in favor of this Agreement and the Merger shall not have been obtained; or by
Varco if, at the Tuboscope Stockholders' Meeting (including any adjournment or
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postponement), the requisite vote of the stockholders of Tuboscope in favor of
the Tuboscope Voting Proposal shall not have been obtained; or
(e) by Varco, if (i) the board of directors of Tuboscope shall have
withdrawn or modified its recommendation of the Tuboscope Voting Proposal or
such board of directors shall have resolved to do so; (ii) after the receipt by
Tuboscope of an Acquisition Proposal, Varco requests in writing that the board
of directors of Tuboscope reconfirm its recommendation of the Tuboscope Voting
Proposal and the board of directors of Tuboscope fails to do so within 10
business days after its receipt of Varco's request; (iii) the board of
directors of Tuboscope shall have recommended to the stockholders of Tuboscope
an Alternative Transaction (as defined in Section 8.03(g)) or such board of
directors shall have resolved to do so; (iv) a tender offer or exchange offer
for 25% or more of the outstanding shares of Tuboscope Common Stock is
commenced (other than by Varco or an Affiliate of Varco) and the board of
directors of Tuboscope recommends that the stockholders of Tuboscope tender
their shares in such tender or exchange offer or the board of directors fails
to recommend that stockholders reject such tender or exchange offer within 10
business days after receipt of Varco's request to do so; or (v) for any reason
Tuboscope fails to call and hold the Tuboscope Stockholders' Meeting by the
Outside Date (provided that Varco's right to terminate this Agreement under
such clause (v) shall not be available if at such time Tuboscope would be
entitled to terminate this Agreement under Section 8.01(g)); or
(f) by Tuboscope, if (i) the board of directors of Varco shall have
withdrawn or modified its recommendation of this Agreement or the Merger or
such board of directors shall have resolved to do so; (ii) after the receipt by
Varco of an Acquisition Proposal, Tuboscope requests in writing that the board
of directors of Varco reconfirm its recommendation of this Agreement or the
Merger and the board of directors of Varco fails to do so within 10 business
days after its receipt of Tuboscope's request; (iii) the board of directors of
Varco shall have recommended to the shareholders of Varco an Alternative
Transaction (as defined in Section 8.03(g)) or such board of directors shall
have resolved to do so; (iv) a tender offer or exchange offer for 25% or more
of the outstanding shares of Varco Common Stock is commenced (other than by
Tuboscope or an Affiliate of Tuboscope) and the board of directors of Varco
recommends that the shareholders of Varco tender their shares in such tender or
exchange offer or the board of directors fails to recommend that shareholders
reject such tender or exchange offer within 10 business days after receipt of
Tuboscope's request to do so; or (v) for any reason Varco fails to call and
hold the Varco Shareholders' Meeting by the Outside Date (provided that
Tuboscope's right to terminate this Agreement under such clause (v) shall not
be available if at such time Varco would be entitled to terminate this
Agreement under Section 8.01(g)); or
(g) by Varco or Tuboscope, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth in
this Agreement, which breach (i) causes the conditions set forth in Section
7.02(a) or (b) (in the case of termination by Varco) or 7.03(a) or (b) (in the
case of termination by Tuboscope) not to be satisfied, and (ii) shall not have
been cured within 20 business days following receipt by the breaching party of
written notice of such breach from the other party.
Section 8.02 Effect of Termination. In the event of termination of this
Agreement as provided in Section 8.01, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Varco or
Tuboscope or their respective officers, directors, shareholders/stockholders or
Affiliates, except as set forth in Sections 6.11 and 8.03; provided that the
provisions of the Confidentiality Agreement, the Stock Option Agreements and
Sections 6.11 and 8.03 of this Agreement shall remain in full force and effect
and survive any termination of this Agreement.
Section 8.03 Fees and Expenses.
(a) Except as set forth in this Section 8.03, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expenses, whether or not the Merger
is consummated, except that each of Varco and Tuboscope will bear and pay
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one-half of the costs and expenses incurred in connection with the filing,
printing and mailing of the Joint Proxy Statement (including SEC filing fees).
(b) Tuboscope shall pay Varco up to $5,000,000 as reimbursement for expenses
of Varco actually incurred relating to the transactions contemplated by this
Agreement prior to termination (including, but not limited to, fees and
expenses of Varco's counsel, accountants and financial advisors, but excluding
any discretionary fees paid to such financial advisors), upon the termination
of this Agreement by Varco pursuant to (i) Section 8.01(d) as a result of the
failure to receive the requisite vote for approval of the Tuboscope Voting
Proposal by the stockholders of Tuboscope at the Tuboscope Stockholders'
Meeting (other than in the circumstances set forth in Section 8.03(c)(i)) or
(ii) Section 8.01(b) or Section 8.01(g), in each case as a result of the
failure to satisfy the conditions set forth in Section 7.02(a) and Section
7.02(b).
(c) Upon the earliest to occur of the following events:
(i) the termination of this Agreement by Varco pursuant to Section
8.01(d), if, prior to the Tuboscope Stockholders' Meeting, a proposal for
an Alternative Transaction (as defined below) reasonably capable of being
performed involving Tuboscope or which is a Superior Proposal shall have
been made and the board of directors of Tuboscope shall have withdrawn or
modified its recommendation or failed to reconfirm its recommendation of
this Agreement or the Merger;
(ii) the termination of this Agreement by Varco pursuant to Section
8.01(e); or
(iii) the consummation of an Alternative Transaction involving Tuboscope
within 12 months after the termination of this Agreement,
Tuboscope shall pay to Varco a fee of $30,000,000 (the "Tuboscope Termination
Fee").
Tuboscope's payment of the Tuboscope Termination Fee pursuant to this
subsection shall be the sole and exclusive remedy of Varco against Tuboscope
and any of its Subsidiaries and their respective directors, officers,
employees, agents, advisors or other representatives with respect to the
occurrences giving rise to such payment (other than as set forth in the
Tuboscope Stock Option Agreement).
(d) Varco shall pay Tuboscope up to $5,000,000 as reimbursement for expenses
of Tuboscope actually incurred relating to the transactions contemplated by
this Agreement prior to termination (including, but not limited to, fees and
expenses of Tuboscope's counsel, accountants and financial advisors, but
excluding any discretionary fees paid to such financial advisors), upon the
termination of this Agreement by Tuboscope pursuant to (i) Section 8.01(d) as a
result of the failure to receive the requisite vote for approval of this
Agreement and the Merger by the shareholders of Varco at the Varco
Shareholders' Meeting (other than in the circumstances set forth in Section
8.03(e)(i)) or (ii) Section 8.01(b) or Section 8.01(g), in each case as a
result of the failure to satisfy the conditions set forth in Section 7.03(a)
and Section 7.03(b).
(e) Upon the earliest to occur of the following events:
(i) the termination of this Agreement by Tuboscope pursuant to Section
8.01(d), if, prior to the Varco Shareholders' Meeting, a proposal for an
Alternative Transaction (as defined below) reasonably capable of being
performed involving Varco or which is a Superior Proposal shall have been
made and the board of directors of Varco shall have withdrawn or modified
its recommendation or failed to reconfirm its recommendation of this
Agreement or the Merger;
(ii) the termination of this Agreement by Tuboscope pursuant to Section
8.01(f); or
(iii) the consummation of an Alternative Transaction involving Varco
within 12 months after the termination of this Agreement,
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Varco shall pay to Tuboscope a fee of $30,000,000 (the "Varco Termination
Fee").
Varco's payment of the Varco Termination Fee pursuant to this subsection
shall be the sole and exclusive remedy of Tuboscope against Varco and any of
its Subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving rise
to such payment (other than as set forth in the Varco Stock Option Agreement).
(f) The expenses and fees, if applicable, payable pursuant to Section
8.03(b), 8.03(c), 8.03(d) or 8.03(e) shall be paid within one business day
after the first to occur of the events described in Section 8.03(b),
8.03(c)(i), (ii) or (iii), 8.03(d) or 8.03(e)(i), (ii) or (iii).
(g) As used in this Agreement, "Alternative Transaction" means either (i) a
transaction pursuant to which any individual, corporation, partnership, limited
partnership, limited liability company, association, trust, unincorporated
organization, entity or group (as defined in the Exchange Act) other than Varco
or Tuboscope or their respective affiliates (a "Third Party"), acquires more
than 25% of the outstanding shares of Tuboscope Common Stock or Varco Common
Stock, as the case may be, pursuant to a tender offer or exchange offer or
otherwise, (ii) a merger or other business combination involving Varco or
Tuboscope pursuant to which any Third Party acquires more than 25% of the
outstanding shares of Tuboscope Common Stock or Varco Common Stock, as the case
may be, or the entity surviving such merger or business combination, (iii) any
other transaction pursuant to which any Third Party acquires control of assets
(including for this purpose the outstanding equity securities of Subsidiaries
of Varco or Tuboscope, and the entity surviving any merger or business
combination including any of them) of Varco or Tuboscope having a fair market
value (as determined by the board of directors of Varco or Tuboscope, as the
case may be, in good faith) equal to more than 25% of the fair market value of
all the assets of Varco or Tuboscope, as the case may be, and its Subsidiaries,
taken as a whole, immediately prior to such transaction, or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
Section 8.04 Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the shareholders of Varco or the stockholders of Tuboscope, but,
after any such approval, no amendment shall be made which by law requires
further approval by such shareholders/stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
Section 8.05 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
ARTICLE IX.
MISCELLANEOUS
Section 9.01 Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Sections 1.04, 1.05, 1.06, 2.01,
2.02, 6.08, 6.10, 6.12, 6.15 and Article IX.
Section 9.02 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail
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(return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to Tuboscope, to
2835 Holmes Road
Houston, Texas 77051
Attn: Chief Executive Officer
Telecopy: (713) 799-5183
with a copy to:
Latham & Watkins
650 Town Center Drive
Costa Mesa, CA 92626-1925
Attn: Patrick T. Seaver, Esq.
Telecopy: (714) 755-8290
(b) if to Varco, to
743 North Eckhoff Street
Orange, California 92668
Attn: Chief Executive Officer
Telecopy: (714) 937-5029
with a copy to:
Pircher, Nichols & Meeks
1999 Avenue of the Stars
Los Angeles, CA 90067
Attn: Larry M. Meeks, Esq.
Telecopy: (310) 201-8922
Section 9.03 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available
if requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement", "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to
March 22, 2000.
Section 9.04 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.05 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein) (a) constitute
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) except as provided in Section 6.12 are not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder;
provided that the Confidentiality Agreement shall remain in full force and
effect until the Effective Time. Each party hereto agrees that, except for the
representations and warranties contained in this Agreement, neither Tuboscope
nor Varco makes any other representations or warranties, and each hereby
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disclaims any other representations and warranties made by itself or any of its
officers, directors, employees, agents, financial and legal advisors or other
representatives, with respect to the execution and delivery of this Agreement,
the documents and the instruments referred to herein, or the transactions
contemplated hereby or thereby, notwithstanding the delivery or disclosure to
the other or the other's representatives of any documentation or other
information with respect to any one or more of the foregoing.
Section 9.06 Governing Law. Except to the extent that the CGCL shall govern
the Merger, this Agreement shall be governed and construed in accordance with
the laws of the State of Delaware, without regard to the laws that might be
applicable under conflicts of laws principles.
Section 9.07 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
Section 9.08 Waiver of Jury Trial. Each party hereto hereby waives any right
to a trial by jury in connection with any action, suit or proceeding brought in
connection with this Agreement.
IN WITNESS WHEREOF, Varco and Tuboscope have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
VARCO INTERNATIONAL, INC.
/s/ George Boyadjieff
By: _________________________________
Name: George Boyadjieff
Title: Chief Executive Officer
TUBOSCOPE INC.
/s/ John F. Lauletta
By: _________________________________
Name: John Lauletta
Title: Chief Executive Officer
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SCHEDULE I
Officers
George Boyadjieff Chairman and Chief Executive Officer
John Lauletta President and Chief Operating Officer
Joseph Winkler Chief Financial Officer
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ANNEX II
[LETTERHEAD OF J.P. MORGAN]
March 22, 2000
The Board of Directors
Varco International, Inc.
743 N. Eckoff Street
Orange, CA 92868
Attention: Mr. George Boyadjieff
Chairman and Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of common stock of Varco International, Inc. (the
"Company") of the consideration proposed to be paid to them in connection with
the proposed merger (the "Merger") of the Company with Tuboscope Inc. (the
"Issuer"). Pursuant to the Agreement and Plan of Merger, dated as of March 22,
2000 (the "Agreement"), among the Company and the Issuer, the Company will
merge with and into Issuer, and each share of the common stock of the Company
issued and outstanding immediately prior to the effective time of the Merger
shall be converted into the right to receive 0.7125 shares of common stock, par
value $0.01 per share, of Issuer (the "Exchange Ratio"), subject to adjustment
as set forth in the Agreement.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the businesses of the Company and the
Issuer and of certain other companies engaged in businesses comparable to those
of the Company, and the reported market prices for certain other companies'
securities deemed comparable; (iii) publicly available terms of certain
transactions involving companies comparable to the Company and the
consideration received for such companies; (iv) current and historical market
prices of the common stock of the Company and the Issuer; (v) the audited
financial statements of the Company and the Issuer for the fiscal years ended
December 31, 1995 through 1999, and the unaudited quarterly financial
statements of the Company and the Issuer for the periods ended March 31, June
30, and September 30 for each of the years 1995 through 1999; (vi) certain
agreements with respect to outstanding indebtedness or obligations of the
Company and the Issuer; (vii) certain internal financial analyses and forecasts
prepared by the Company and the Issuer and their respective managements,
including the amount and timing of cost savings expected to result from the
Merger; and (viii) the terms of other business combinations that we deemed
relevant.
In addition, we have held discussions with certain members of the management
of the Company and the Issuer with respect to certain aspects of the Merger,
and the past and current business operations of the Company and the Issuer, the
financial condition and future prospects and operations of the Company and the
Issuer, the effects of the Merger on the financial condition and future
prospects of the Company and the Issuer, and certain other matters we believed
necessary or appropriate to our inquiry. We have reviewed such other financial
studies and analyses and considered such other information as we deemed
appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by the Company and the Issuer or
otherwise reviewed by us, and we have not assumed any responsibility or
liability therefor. We have not conducted any valuation or appraisal of any
assets or liabilities, nor have any such valuations or appraisals been provided
to us. In relying on financial analyses and forecasts provided to us, we have
assumed that they have been reasonably prepared based on assumptions reflecting
the best currently available estimates and
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judgments by management as to the expected future results of operations,
synergies and financial condition of the Company and the Issuer to which such
analyses or forecasts relate, and we have assumed that such expected future
results of operations and synergies will be realized as described by
management. We have also assumed that the Merger will have the tax consequences
described in discussions with, and materials furnished to us by,
representatives of the Company, and that the other transactions contemplated by
the Agreement will be consummated as described in the Agreement. We have relied
as to all legal matters relevant to rendering our opinion upon the advice of
counsel.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect this opinion
and that we do not have any obligation to update, revise, or reaffirm this
opinion. We are expressing no opinion herein as to the price at which the
Issuer's common stock will trade at any future time.
We have acted as financial advisor to the Company with respect to the
proposed Merger and will receive a fee from the Company for our services. We
will also receive an additional fee if the proposed Merger is consummated. In
the past we have performed various investment and commercial banking services
for the Company and have received customary compensation for such services. In
the ordinary course of their businesses, J.P. Morgan and its affiliates may
actively trade the debt and equity securities of the Company or the Issuer for
their own account or for the accounts of customers and, accordingly, they may
at any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the Exchange Ratio in the proposed Merger is fair, from a
financial point of view, to the holders of common stock of the Company.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote with respect to the Merger. This opinion
may not be disclosed, referred to, or communicated (in whole or in part) to any
third party for any purpose whatsoever except with our prior written consent in
each instance. This opinion may be reproduced in full in any filing made by the
Company or the Issuer in respect of the Merger with the Securities and Exchange
Commission; or in any proxy or information statement mailed to stockholders of
the Company but may not otherwise be disclosed publicly in any manner without
our prior written approval and must be treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ James R. Elliott, III
___________________________________
Name: James R. Elliott, III
Title: Managing Director
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ANNEX III
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
March 22, 2000
Board of Directors
Tuboscope Inc.
2835 Holmes Road
Houston, Texas 77051
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to Tuboscope Inc. ("Tuboscope") of the Exchange Ratio
(as defined below) set forth in the Agreement and Plan of Merger, dated as of
March 22, 2000 (the "Merger Agreement"), by and between Tuboscope and Varco
International, Inc. ("Varco"). The Merger Agreement provides for, among other
things, the merger of Varco with and into Tuboscope (the "Merger") pursuant to
which each outstanding share of the common stock, no par value, of Varco
("Varco Common Stock") will be converted into the right to receive 0.7125 (the
"Exchange Ratio") of a share of the common stock, par value $0.01 per share, of
Tuboscope (the "Tuboscope Common Stock").
In arriving at our opinion, we have reviewed the Merger Agreement and
certain related documents, and certain publicly available business and
financial information relating to Tuboscope and Varco. We have also reviewed
certain other information relating to Tuboscope and Varco, including financial
forecasts, provided to or discussed with us by Tuboscope and Varco, and have
met with the managements of Tuboscope and Varco to discuss the businesses and
prospects of Tuboscope and Varco. We have also considered certain financial and
stock market data of Tuboscope and Varco, and we have compared those data with
similar data for other publicly held companies in businesses similar to
Tuboscope and Varco, and we have considered, to the extent publicly available,
the financial terms of certain other business combinations and other
transactions which have recently been effected. We also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts, we have been advised, and have assumed,
that such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Tuboscope and
Varco as to the future financial performance of Tuboscope and Varco and the
potential synergies and strategic benefits (including the amount, timing and
achievability thereof) anticipated to result from the Merger. We also have
assumed, with your consent, that the Merger will be treated as a pooling of
interests in accordance with generally accepted accounting principles and as a
tax-free reorganization for federal income tax purposes. We have not been
requested to make, and have not made, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of Tuboscope of Varco, nor
have we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon information available to us, and financial, economic,
market and other conditions as they exist and can be evaluated, on the date
hereof. We are not expressing any opinion as to what the value of the Tuboscope
Common Stock actually will be when issued pursuant to the Merger or the prices
at which the Tuboscope Common Stock will trade subsequent to the Merger.
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Board of Directors
Tuboscope Inc.
March 22, 2000
Page 2
We have acted as financial advisor to Tuboscope in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We also will receive a fee upon
delivery of this opinion. We have in the past provided services to Tuboscope
and Varco unrelated to the proposed Merger, for which services we have received
compensation. In the ordinary course of business, Credit Suisse First Boston
Corporation and its affiliates may actively trade the securities of Tuboscope
and Varco for our and such affiliates' accounts and for the accounts of
customers and, accordingly, may at any time hold long or short positions in
such securities.
It is understood that this letter is for the information of the Board of
Directors of Tuboscope in connection with its evaluation of the Merger, does
not constitute a recommendation to any stockholder as to how such stockholder
should vote with respect to any matter relating to the Merger, and is not to be
quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other document used in connection with
the offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair, from a financial point of view, to
Tuboscope.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
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ANNEX IV
DISSENTERS' RIGHTS UNDER
THE CALIFORNIA CORPORATIONS CODE
Set forth below is an excerpt from the California Corporations Code
regarding dissenter's rights:
CALIFORNIA GENERAL CORPORATION LAW
CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
1300. Reorganization of short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the National Market System of the NASDAQ Stock Market, and the
notice of meeting of shareholders to act upon the reorganization summarizes
this section and Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the corporation or by any law
or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
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1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or
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contractual conditions to the reorganization are satisfied, whichever is later,
and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
1304. Action to determine whether shares are dissenting shares or fair market
value; limitation; joinder; consolidation; determination of issues;
appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with
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interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308. Rights of dissenting shareholders pending valuation; withdrawal of
demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. Suspension of right to compensation or valuation proceedings; litigation
of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
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1312. Right of dissenting shareholder to attack, set aside or rescind merger
or reorganization; restraining order or injunction; conditions.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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ANNEX V
TUBOSCOPE STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of March 22, 2000 (this "Agreement"), by
and between Varco, a California corporation (the "Grantee"), and Tuboscope, a
Delaware corporation (the "Grantor").
WHEREAS, the Grantee and the Grantor are entering into an Agreement and Plan
of Merger, dated as of the date hereof (the "Merger Agreement"), which
provides, among other things, for the merger (the "Merger") of the Grantee with
and into the Grantor;
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, the Grantee has requested that the Grantor grant to the Grantee an
option to purchase certain shares of the authorized and unissued Common Stock
of the Grantor (the "Common Stock") upon the terms and subject to the
conditions hereof; and
WHEREAS, in order to induce the Grantee to enter into the Merger Agreement,
the Grantor is willing to grant the Grantee the requested option.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein and in the Merger Agreement, the parties hereto
agree as follows:
1. The Option; Exercise; Adjustments; Payment of Spread; Termination.
(a) Contemporaneously herewith the Grantee and the Grantor are entering
into the Merger Agreement. Subject to the other terms and conditions set
forth herein, the Grantor hereby grants to the Grantee an irrevocable
option (the "Option") to purchase up to 8,908,653 shares (representing
approximately 19.9% of the outstanding shares of Common Stock as of the
date hereof) of Common Stock (the "Option Shares") at a cash purchase price
equal to $17.00 per Option Share (the "Purchase Price"). Subject to the
conditions set forth in Section 2, the Option may be exercised by the
Grantee, in whole or in part, at any time, or from time to time, following
the occurrence of any event as a result of which the Grantee is
unconditionally entitled to receive the Tuboscope Termination Fee (as
defined in the Merger Agreement) pursuant to Section 8.03(c) of the Merger
Agreement and prior to the termination of the Option in accordance with the
terms of this Agreement.
(b) Without limiting any restriction on the Grantor contained in this
Agreement or the Merger Agreement, in the event of any change in the number
of issued and outstanding shares of Common Stock by reason of any stock
dividend, stock split, split-up, recapitalization, merger or other change
in the corporate or capital structure of the Grantor, the number and type
of Option Shares subject to the Option and the purchase price per Option
Share shall be appropriately adjusted to restore the Grantee to its rights
hereunder, including its right to purchase Option Shares representing 19.9%
of the capital stock of the Grantor entitled to vote generally for the
election of the directors of the Grantor which is issued and outstanding
immediately prior to the exercise of the Option at an aggregate purchase
price equal to the Purchase Price multiplied by 8,908,653.
(c) In the event the Grantee wishes to exercise the Option, the Grantee
shall send a written notice to the Grantor (the "Exercise Notice")
specifying the total number of Option Shares that the Grantee wishes to
purchase and a date (subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act")) not later
than 10 business days and not earlier than the next business day following
the date such notice is given for the closing of such purchase.
(d) After the occurrence of any event as a result of which the Grantee
is unconditionally entitled to receive the Tuboscope Termination Fee
pursuant to Section 8.03(c) of the Merger Agreement, the Grantee may (i) at
any time the Option is then exercisable pursuant to the terms of Section
1(a) hereof elect, in lieu
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of exercising the Option to purchase Option Shares provided in Section 1(a)
hereof, to send a written notice to the Grantor (the "Cash Exercise
Notice") specifying a date not later than 20 business days and not earlier
than 10 business days following the date such notice is given on which date
the Grantor shall pay to the Grantee an amount in cash equal to the Spread
(as hereinafter defined) multiplied by all or such portion of the Option
Shares subject to the Option as Grantee shall specify, or (ii) at any time
prior to 30 days after the first anniversary of the Merger Termination Date
(as defined in Section 1(e)), if the Grantee has exercised the Option and
purchased the Option Shares hereunder, Grantee may send a written notice to
the Grantor (the "Put Notice") specifying a date not later than 20 business
days and not earlier than 10 business days following the date such notice
is given on which date the Grantee may sell to the Grantor Option Shares
purchased hereunder and the Grantor shall pay to the Grantee an amount in
cash equal to the higher of (m) the Alternative Purchase Price (as
hereinafter defined) or (n) the average of the closing sales prices of the
shares of Common Stock on the New York Stock Exchange (the "NYSE") for the
five trading days ending five days prior to the date the Put Notice is
given, multiplied by the number of such Option Shares to be sold by the
Grantee to the Grantor on such date (such purchase and sale to be closed in
a manner substantially consistent with the procedures outlined in Section 3
hereof). As used herein "Spread" shall mean the excess, if any, over the
Purchase Price of the higher of (x) if applicable, the highest price per
share of Common Stock (including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by any person in an Alternative
Transaction (as defined in Section 8.03(g) of the Merger Agreement) (the
"Alternative Purchase Price") or (y) the average of the closing sales
prices of the shares of Common Stock on the NYSE for the five trading days
ending five days prior to the date of the Cash Exercise Notice is given. If
the Alternative Purchase Price includes any property other than cash, the
Alternative Purchase Price shall be the sum of (A) the fixed cash amount,
if any, included in the Alternative Purchase Price plus (B) the fair market
value of such other property determined in accordance with the procedures
set forth in Section 7(b) (but using the date of the Cash Exercise Notice
or the Put Notice, as the case may be, is given). Upon exercise of the
Grantee's right to receive cash pursuant to Section 1(d)(i) and the payment
of such cash to the Grantee, the obligations of the Grantor to deliver
Option Shares pursuant to Section 3 shall be terminated with respect to
such number of Option Shares for which the Grantee shall have elected to be
paid the Spread.
(e) The right to exercise the Option shall terminate at the earliest of
(i) the Effective Time (as defined in the Merger Agreement), (ii) the
termination of the Merger Agreement pursuant to circumstances under which
the Grantee is not entitled to receive the Tuboscope Termination Fee
pursuant to Section 8.03(c) of the Merger Agreement, (iii) the date on
which the Grantee realizes a Total Profit equal to the Profit Limit (as
such terms are defined in Section 10) and (iv) 180 days after the date (the
"Merger Termination Date") on which the Merger Agreement is terminated
pursuant to circumstances under which the Grantee is entitled to receive
the Varco Termination Fee pursuant to Section 8.03(c) of the Merger
Agreement (the date referred to in clause (iv) being hereinafter referred
to as the "Option Expiration Date"); provided that if the Option cannot be
exercised or the Option Shares cannot be delivered to Grantee upon such
exercise because the conditions set forth in Section 2(a) or Section 2(b)
hereof have not yet been satisfied, the Option Expiration Date shall be
extended until 30 days after such impediment to exercise has been removed.
2. Conditions to Delivery of Option Shares. The Grantor's obligation to
deliver Option Shares upon exercise of the Option is subject to the following
conditions:
(a) No preliminary or permanent injunction or other order issued by any
federal or state court of competent jurisdiction in the United States
prohibiting the delivery of the Option Shares shall be in effect;
(b) Any applicable waiting periods under the HSR Act shall have expired
or been terminated; and
(c) The Grantee shall have become entitled to terminate the Merger
Agreement under circumstances that would entitle the Grantee to receive the
Tuboscope Termination Fee pursuant to Section 8.03(c) of the Merger
Agreement.
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3. The Closing.
(a) Any closing hereunder shall take place on the date specified by the
Grantee in its Exercise Notice at 9:00 A.M., local time, at the offices of
Latham & Watkins, 650 Town Center Drive, Costa Mesa, California, or, if the
conditions set forth in Section 2(a) or 2(b) have not then been satisfied,
on the second business day following the satisfaction of such conditions,
or at such other time and place as the parties hereto may agree (the
"Closing Date"). On the Closing Date, the Grantor will deliver to the
Grantee a certificate or certificates representing the Option Shares in the
denominations designated by the Grantee in its Exercise Notice and the
Grantee will purchase such Option Shares from the Grantor at the price per
Option Share equal to the Purchase Price. Unless otherwise specified in
this Agreement, any payment made by the Grantee to the Grantor, or by the
Grantor to the Grantee, pursuant to this Agreement shall be made by
certified or official bank check or by wire transfer of immediately
available funds to a bank designated by the party receiving such funds.
(b) Certificates for the Option Shares delivered on the Closing Date
will have typed or printed thereon a restrictive legend which will read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE REOFFERED OR
SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE TUBOSCOPE STOCK OPTION AGREEMENT DATED
AS OF MARCH 22, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE
SECRETARY OF TUBOSCOPE AT ITS PRINCIPAL EXECUTIVE OFFICES."
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act of 1933, as amended (the "Securities Act"), in the
above legend will be removed by delivery of substitute certificate(s) without
such reference if such Option Shares have been registered pursuant to the
Securities Act, such Option Shares have been sold in reliance on and in
accordance with Rule 144 under the Securities Act or Grantee has delivered to
Grantor a copy of a letter from the staff of the Securities and Exchange
Commission, or an opinion of counsel in form and substance reasonably
satisfactory to Grantor and its counsel, to the effect that such legend is not
required for purposes of the Securities Act and (ii) the reference to
restrictions pursuant to this Agreement in the above legend will be removed by
delivery of substitute certificate(s) without such reference if the Option
Shares evidenced by certificate(s) containing such reference have been sold or
transferred in compliance with the provisions of this Agreement under
circumstances that do not require the retention of such reference.
4. Representations and Warranties of the Grantor. The Grantor represents and
warrants to the Grantee that: (a) the Grantor is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has the requisite corporate power and authority to enter into and perform
this Agreement; (b) the execution and delivery of this Agreement by the Grantor
and the consummation by it of the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Grantor and this Agreement has
been duly executed and delivered by a duly authorized officer of the Grantor
and constitutes a valid and binding obligation of the Grantor, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights, to general equity principles and to
the California General Corporation Law; (c) the Grantor has taken all necessary
corporate action to authorize and reserve the Option Shares issuable upon
exercise of the Option and the Option Shares, when issued and delivered by the
Grantor upon the exercise of the Option in accordance with the terms of this
Agreement, will be duly authorized, validly issued, fully paid and non-
assessable and free of any lien, security interest or other adverse claim and
free of any preemptive rights; (d) except as otherwise required by the HSR Act
and, except for routine filings under the Securities Exchange Act of 1934, as
amended, and the listing of the Option Shares in accordance with Section 6, the
execution and delivery of this Agreement by the Grantor and the consummation by
it of the transactions
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contemplated hereby do not require the consent, waiver, approval or
authorization of or any filing with any person or public authority and will not
violate, require a consent or waiver under, result in a breach of or the
acceleration of any obligation under, or constitute a default under, any
provision of any charter or by-law, indenture, mortgage, lien, lease,
agreement, contract, instrument, order, law, rule, regulation, stock market
rule, judgment, ordinance, decree or restriction by which the Grantor or any of
its subsidiaries or any of their respective properties or assets is bound; and
(e) no "fair price," "moratorium," "control share acquisition" or other form of
antitakeover statute or regulation is or shall be applicable to the acquisition
of Option Shares pursuant to this Agreement.
5. Representations and Warranties of the Grantee. The Grantee represents and
warrants to the Grantor that: (a) the execution and delivery of this Agreement
by the Grantee and the consummation by it of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Grantee and this Agreement has been duly executed and delivered by a
duly authorized officer of the Grantee and constitutes a valid and binding
obligation of the Grantee; and (b) the Grantee is acquiring the Option and, if
and when it exercises the Option, will be acquiring the Option Shares issuable
upon the exercise thereof for its own account and not with a view to
distribution or resale in any manner which would be in violation of the
Securities Act.
6. Listing of Option Shares; HSR Act Filings; Governmental Consents. The
Grantor shall use its best efforts to cause the Option Shares to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Closing Date; provided, however, that if the Grantor is unable to effect such
listing on the NYSE by the Closing Date, the Grantor will nevertheless be
obligated to deliver the Option Shares upon the Closing Date. The Grantor shall
as promptly as practicable make all necessary filings with respect to this
Agreement and the Option required under the HSR Act and use its best efforts to
obtain all necessary approvals thereunder as promptly as practicable. Each of
the parties hereto will use its best efforts to obtain consents of all third
parties and governmental authorities, if any, necessary to the consummation of
the transactions contemplated herein.
7. Right of First Refusal. If the Grantee exercises the Option in whole or
in part and at any time thereafter and prior to the earlier of (a) the
occurrence of a Change in Control Event (as defined herein) or (b) 30 days
after the first anniversary of the Merger Termination Date, seeks to sell all
or any part of the Option Shares purchased (i) in a transaction registered
under the Securities Act (other than in a registered public offering in which
the underwriters are instructed to achieve a broad public distribution) or (ii)
in a transaction not required to be registered under the Securities Act (other
than in a transfer by operation of law upon consummation of a merger), it shall
give the Grantor (or a designee of the Grantor) the opportunity, in the
following manner, to purchase such Option Shares:
(a) The Grantee shall give notice to the Grantor in writing of its
intent to sell Option Shares (a "Disposition Notice"), specifying the
number of Option Shares to be sold, the price and, if applicable, the
identity of the proposed transferee and the material terms of any agreement
relating thereto. For purposes of this Section 7, if the Disposition Notice
is given with respect to the sale of the Option Shares pursuant to a tender
or exchange officer, it shall be assumed that all Option Shares tendered
will be accepted for payment. The Disposition Notice may be given at any
time, including prior to the giving of any Exercise Notice.
(b) The Grantor or its designee shall have the right, exercisable by
written notice given to the Grantee within five business days after receipt
of a Disposition Notice (or, if applicable, in the case of a proposed sale
pursuant to a tender or exchange offer for shares of Common Stock, by
written notice given to the Grantee at least two business days prior to the
then announced expiration date of such tender or exchange offer (the
"Expiration Date") if such Disposition Notice was given at least four
business days prior to such Expiration Date), to purchase all, but not less
than all, of the Option Shares specified in the Disposition Notice at the
price set forth in the Disposition Notice. If the purchase price specified
in the Disposition Notice includes any property other than cash, the
purchase price to be paid by the Grantor
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shall be an amount of cash equal to the sum of (i) the cash included in the
purchase price plus (ii) the fair market value of such other property at
the date of the Disposition Notice. If such other property consists of
securities with an existing public trading market, the average closing
price (or the average closing bid and asked price if closing prices are
unavailable) for such securities on their principal public trading market
for the five trading days ending five days prior to the date of the
Disposition Notice shall be deemed to equal the fair market value of such
property. If such other property consists of something other than cash or
securities with an existing public trading market and, at the time of the
closing referred to in paragraph (c) below, agreement on the value of such
other property has not been reached, the higher of (i) the cash included in
the purchase price and (ii) the average closing price of the Common Stock
on the NYSE for the five trading days ending five days prior to the date of
the Disposition Notice shall be used as the per share purchase price;
provided, however, that promptly after the closing, the Grantee and the
Grantor or its designee, as the case may be, shall settle any additional
amounts to be paid or returned as a result of the determination of fair
market value of such other property made by a nationally recognized
investment banking firm selected by the Grantor and approved by the Grantee
within 30 days of the closing. Such determination shall be final and
binding on all parties hereto. If, at the time of the purchase of any
Option Shares by the Grantor (or its designee) pursuant to this Section 7,
a tender or exchange offer is outstanding, then the Grantor (or its
designee) shall agree at the time of such purchase to promptly pay to
Grantee from time to time such additional amounts, if any, so that the
consideration received by Grantee with respect to each Option Share shall
be equal to the highest price paid for a share of Common Stock pursuant to
such tender or exchange, or pursuant to any other tender or exchange offer
outstanding at any time such tender or exchange offer is outstanding.
(c) If the Grantor exercises its right of first refusal hereunder, the
closing of the purchase of the Option Shares with respect to which such
right has been exercised shall take place within five business days after
the notice of such exercise (or, if applicable, in the case of a tender or
exchange offer, no later than one business day prior to the expiration date
of the offer if written notice was given within the time set forth in the
parenthetical in the first sentence of paragraph (b) above); provided,
however, that at any time prior to the closing of the purchase of Option
Shares hereunder, the Grantee may determine not to sell the Option Shares
and revoke the Disposition Notice and, by so doing, cancel the Grantor's
right of first refusal with respect to the disposition in question. The
Grantor (or its designee) shall pay for the Option Shares by wire transfer
of immediately available funds to a bank designated by the Grantee.
(d) If the Grantor does not exercise its right of first refusal
hereunder within the time specified for such exercise, the Grantee shall be
free for 90 days following the expiration of such time for exercise to sell
the Option Shares (or enter into an agreement to sell the Option Shares)
specified in the Disposition Notice, at the price specified in the
Disposition Notice or any price in excess thereof and otherwise on
substantially the same terms set forth in the Disposition Notice; provided
that if such sale is not consummated within such 90-day period (or the
agreement to sell entered into in such 90-day period is not thereafter
performed in accordance with its terms), then the provisions of this
Section 7 will again apply to the sale of such Option Shares.
(e) For purposes of the Agreement, a "Change in Control Event" shall be
deemed to have occurred if (i) any person has acquired beneficial ownership
of more than 50% (excluding the Option Shares) of the outstanding shares of
Common Stock or (ii) the Grantor shall have entered into an agreement,
including without limitation an agreement in principle, providing for a
merger or other business combination involving the Grantor or the
acquisition of 30% or more of the assets of the Grantor and its
subsidiaries, taken as a whole.
8. Repurchase of Option Shares. If a Change in Control Event has not
occurred prior to the first anniversary date of the Merger Termination Date,
then beginning on such anniversary date, the Grantor shall have the right to
purchase (the "Repurchase Right") all, but not less than all, of the Option
Shares at the greater of (i) the Purchase Price, or (ii) the average closing
price of the Common Stock on the NYSE for the five trading days ending five
days prior to the date the Grantor gives written notice of its intention to
exercise
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the Repurchase Right. If the Grantor does not exercise the Repurchase Right
within 30 days following the first anniversary of the Merger Termination Date,
the Repurchase Right shall terminate. In the event the Grantor wishes to
exercise the Repurchase Right, the Grantor shall send a written notice to the
Grantee specifying a date (not later than 10 business days and not earlier than
two business days following the date such notice is given) for the closing of
such purchase.
9. Registration Rights.
(a) In the event that the Grantee shall desire to sell any of the
Option Shares within two years after the purchase of such Option Shares
pursuant to the exercise of the Option, and such sale requires, in the
opinion of counsel to the Grantee, which opinion shall be reasonably
satisfactory to the Grantor and its counsel, registration of such Option
Shares under the Securities Act, the Grantor will cooperate with the
Grantee and any underwriters registering such Option Shares for resale,
including, without limitation, promptly filing and using its best efforts
to cause to be declared effective a registration statement which complies
with the requirements of applicable federal and state securities laws and
entering into an underwriting agreement with such underwriters upon such
terms and conditions as are customarily contained in underwriting
agreements with respect to secondary distributions; provided that the
Grantor shall not be required to have declared effective more than two
registration statements hereunder and shall be entitled to delay the filing
or effectiveness of any registration statement for up to 120 days in the
aggregate if the offering would, in the judgment of the Board of Directors
of the Grantor, require premature disclosure of any material corporate
development or otherwise interfere with or adversely affect any pending or
proposed offering of securities of the Grantor or any other material
transaction involving the Grantor.
(b) If the Common Stock is registered pursuant to the provisions of this
Section 9, the Grantor agrees (i) to furnish copies of the registration
statement and the prospectus relating to the Option Shares covered thereby
in such numbers as the Grantee may from time to time reasonably request and
(ii) if any event shall occur as a result of which it becomes necessary to
amend or supplement any registration statement or prospectus, to prepare
and file under the applicable securities laws such amendments and
supplements as may be necessary to keep available for at least 90 days a
prospectus covering the Common Stock meeting the requirements of such
securities laws, and to furnish to the Grantee such numbers of copies of
the registration statement and prospectus as amended or supplemented as may
reasonably be requested. The Grantor shall bear the cost of the
registration, including, but not limited to, all registration and filing
fees, printing expenses, and fees and disbursements of counsel and
accountants for the Grantor, except that the Grantee shall pay the fees and
disbursements of its counsel and the underwriting fees and selling
commissions applicable to the Option Shares sold by the Grantee. The
Grantor shall indemnify and hold harmless Grantee, its affiliates and its
officers and directors from and against any and all losses, claims,
damages, liabilities and expenses arising out of or based upon any
statements contained in, omissions or alleged omissions from, each
registration statement filed pursuant to this paragraph; provided, however,
that this provision does not apply to any loss, liability, claim, damage or
expense to the extent it arises out of any statement or omission made in
reliance upon and in conformity with written information furnished to the
Grantor by the Grantee, its affiliates or its officers expressly for use in
any registration statement (or any amendment thereto) or any preliminary
prospectus filed pursuant to this paragraph. The Grantor shall also
indemnify and hold harmless each underwriter and each person who controls
any underwriter within the meaning of either the Securities Act or the
Securities Exchange Act of 1934, as amended, against any and all losses,
claims, damages, liabilities and expenses arising out of or based upon any
statements contained in, omissions or alleged omissions from, each
registration statement filed pursuant to this paragraph; provided, however,
that this provision does not apply to any loss, liability, claim, damage or
expense to the extent it arises out of any statement or omission made in
reliance upon and in conformity with written information furnished to the
Grantor by the underwriters expressly for use in any registration statement
(or any amendment thereto) or any preliminary prospectus filed pursuant to
this paragraph.
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10. Profit Limitation.
(a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit (as hereinafter defined) exceed
$35,000,000 (the "Profit Limit") and, if it otherwise would exceed such
amount, the Grantee, at its sole election, shall either (i) deliver to the
Grantor for cancellation Option Shares previously purchased by Grantee
(valued at the average closing price of the Common Stock on the NYSE for
the five trading days ending on the trading date immediately preceding the
date of delivery, (ii) pay cash or deliver other consideration to the
Grantor, or (iii) undertake any combination thereof, so that Grantee's
Total Profit shall not exceed the Profit Limit after taking into account
the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, the Option
may not be exercised for a number of Option Shares as would, as of the date
of the Exercise Notice, result in a Notional Total Profit (as defined
below) of more than the Profit Limit and, if exercise of the Option
otherwise would exceed the Profit Limit, the Grantee, at its discretion,
may increase the Purchase Price for that number of Option Shares set forth
in the Exercise Notice so that the Notional Total Profit shall not exceed
the Profit Limit; provided that nothing in this sentence shall restrict any
exercise of the Option permitted hereby on any subsequent date at the
Purchase Price set forth in Section 1(a) hereof.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount of cash received by
Grantee pursuant to Section 8.03(c) of the Merger Agreement, (ii) (x) the
amount received by Grantee pursuant to the Grantor's repurchase of Option
Shares pursuant to Sections 1(d), 7 or 8 hereof, less (y) the Grantee's
aggregate purchase price for such Option Shares, (iii) the amount received
by Grantee in respect of a Cash Exercise Notice pursuant to Section 1(d)
hereof, and (iv) (x) the net cash amounts received by Grantee pursuant to
the sale of Option Shares (or any other securities into which such Option
Shares are converted or exchanged) to any unaffiliated party, less (y) the
Grantee's aggregate purchase price for such Option Shares.
(d) As used herein, the term "Notional Total Profit" with respect to any
number of Option Shares as to which Grantee may propose to exercise the
Option shall be the Total Profit determined as of the date of the Exercise
Notice assuming that the Option were exercised on such date for such number
of Option Shares and assuming that such Option Shares, together with all
other Option Shares held by Grantee and its affiliates as of such date,
were sold for cash at the closing market price for the Common Stock as of
the close of business on the preceding trading day (less customary
brokerage commissions).
11. Expenses. Each party hereto shall pay its own expenses incurred in
connection with this Agreement, except as otherwise specifically provided
herein.
12. Specific Performance. The Grantor acknowledges that if the Grantor fails
to perform any of its obligations under this Agreement, immediate and
irreparable harm or injury would be caused to the Grantee for which money
damages would not be an adequate remedy. In such event, the Grantor agrees that
the Grantee shall have the right, in addition to any other rights it may have,
to specific performance of this Agreement. Accordingly, if the Grantee should
institute an action or proceeding seeking specific enforcement of the
provisions hereof, the Grantor hereby waives the claim or defense that the
Grantee has an adequate remedy at law and hereby agrees not to assert in any
such action or proceeding the claim or defense that such a remedy at law
exists. The Grantor further agrees to waive any requirement for the securing or
posting of any bond in connection with obtaining any such equitable relief.
13. Notice. All notices, requests, demands and other communications
hereunder shall be sent in the manner and to the addresses set forth in the
Merger Agreement.
14. Parties in Interest. Nothing in this Agreement, express or implied, is
intended to confer upon any person other than the Grantor or the Grantee, or
their successors or assigns, any rights or remedies under or by reason of this
Agreement.
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15. Entire Agreement; Amendments. This Agreement, together with the Merger
Agreement and the other documents referred to therein, contains the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings,
oral or written, with respect to such transactions. The terms of this Agreement
may be amended, modified or waived only by an agreement in writing signed by
the party against whom such amendment, modification or waiver is sought to be
enforced.
16. Assignment. No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
party hereto, except that the Grantee may assign its rights and obligations
hereunder to any direct or indirect wholly-owned subsidiary of the Grantee
(provided that such assignment shall not relieve the Grantee of its obligations
hereunder if such transferee does not perform such obligations). Any Option
Shares sold or transferred by the Grantee to any other person or entity in
compliance with the terms hereof (other than a direct or indirect wholly-owned
subsidiary of the Grantee) shall no longer have the benefit of the rights
provided for herein with respect to such Option Shares (including without
limitation those set forth in Sections 1(d) and 9) and shall no longer be
subject to the restrictions or rights in favor of the Grantor provided for
herein with respect to such Option Shares (including without limitation those
set forth in Sections 7 and 8).
17. Headings. The section headings herein are for convenience only and shall
not affect the construction of this Agreement.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall constitute one and the same document.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (regardless of the laws that
might otherwise govern under applicable Delaware principles of conflicts of
law).
20. Survival. All representations and warranties contained in this Agreement
shall survive delivery of and payment for the Option Shares.
21. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
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IN WITNESS WHEREOF, the Grantee and the Grantor have caused this Agreement
to be duly executed and delivered on the day and year first above written.
TUBOSCOPE INC.
/s/ John F. Lauletta
By: _________________________________
John Lauletta
Chief Executive Officer
VARCO INTERNATIONAL, INC.
/s/ George Boyadjieff
By: _________________________________
George Boyadjieff
Chief Executive Officer
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<PAGE>
ANNEX VI
VARCO STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of March 22, 2000 (this "Agreement"), by
and between Tuboscope, a Delaware corporation (the "Grantee"), and Varco, a
California corporation (the "Grantor").
WHEREAS, the Grantee and the Grantor are entering into an Agreement and Plan
of Merger, dated as of the date hereof (the "Merger Agreement"), which
provides, among other things, for the merger (the "Merger") of Grantor with and
into the Grantee;
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, the Grantee has requested that the Grantor grant to the Grantee an
option to purchase certain shares of the authorized and unissued Common Stock
of the Grantor, together with any associated rights under the Rights Agreement,
dated as of November 6, 1997 (the "Varco Rights Agreement"), between Grantor
and Harris Trust Company of California, as amended (the "Common Stock") , upon
the terms and subject to the conditions hereof; and
WHEREAS, in order to induce the Grantee to enter into the Merger Agreement,
the Grantor is willing to grant the Grantee the requested option.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein and in the Merger Agreement, the parties hereto
agree as follows:
1. The Option; Exercise; Adjustments; Payment of Spread; Termination.
(a) Contemporaneously herewith the Grantee and the Grantor are entering
into the Merger Agreement, and Grantor has amended the Varco Rights
Agreement. Subject to the other terms and conditions set forth herein, the
Grantor hereby grants to the Grantee an irrevocable option (the "Option")
to purchase up to 13,023,985 shares (representing approximately 19.9% of
the outstanding shares of Common Stock as of the date hereof) of Common
Stock (the "Option Shares") at a cash purchase price equal to $14.56 per
Option Share (the "Purchase Price"). Subject to the conditions set forth in
Section 2, the Option may be exercised by the Grantee, in whole or in part,
at any time, or from time to time, following the occurrence of any event as
a result of which the Grantee is unconditionally entitled to receive the
Varco Termination Fee (as defined in the Merger Agreement) pursuant to
Section 8.03(e) of the Merger Agreement and prior to the termination of the
Option in accordance with the terms of this Agreement.
(b) Without limiting any restriction on the Grantor contained in this
Agreement or the Merger Agreement, in the event of any change in the number
of issued and outstanding shares of Common Stock by reason of any stock
dividend, stock split, split-up, recapitalization, merger or other change
in the corporate or capital structure of the Grantor, the number and type
of Option Shares subject to the Option and the purchase price per Option
Share shall be appropriately adjusted to restore the Grantee to its rights
hereunder, including its right to purchase Option Shares representing 19.9%
of the capital stock of the Grantor entitled to vote generally for the
election of the directors of the Grantor which is issued and outstanding
immediately prior to the exercise of the Option at an aggregate purchase
price equal to the Purchase Price multiplied by 13,023,985.
(c) In the event the Grantee wishes to exercise the Option, the Grantee
shall send a written notice to the Grantor (the "Exercise Notice")
specifying the total number of Option Shares that the Grantee wishes to
purchase and a date (subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act")) not later
than 10 business days and not earlier than the next business day following
the date such notice is given for the closing of such purchase.
(d) After the occurrence of any event as a result of which the Grantee
is unconditionally entitled to receive the Varco Termination Fee pursuant
to Section 8.03(e) of the Merger Agreement, the Grantee may
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(i) at any time the Option is then exercisable pursuant to the terms of
Section 1(a) hereof elect, in lieu of exercising the Option to purchase
Option Shares provided in Section 1(a) hereof, to send a written notice to
the Grantor (the "Cash Exercise Notice") specifying a date not later than
20 business days and not earlier than 10 business days following the date
such notice is given on which date the Grantor shall pay to the Grantee an
amount in cash equal to the Spread (as hereinafter defined) multiplied by
all or such portion of the Option Shares subject to the Option as Grantee
shall specify, or (ii) at any time prior to 30 days after the first
anniversary of the Merger Termination Date (as defined in Section 1(e)), if
the Grantee has exercised the Option and purchased the Option Shares
hereunder, Grantee may send a written notice to the Grantor (the "Put
Notice") specifying a date not later than 20 business days and not earlier
than 10 business days following the date such notice is given on which date
the Grantee may sell to the Grantor Option Shares purchased hereunder and
the Grantor shall pay to the Grantee an amount in cash equal to the higher
of (m) the Alternative Purchase Price (as hereinafter defined) or (n) the
average of the closing sales prices of the shares of Common Stock on the
New York Stock Exchange (the "NYSE") for the five trading days ending five
days prior to the date the Put Notice is given, multiplied by the number of
such Option Shares to be sold by the Grantee to the Grantor on such date
(such purchase and sale to be closed in a manner substantially consistent
with the procedures outlined in Section 3 hereof). As used herein "Spread"
shall mean the excess, if any, over the Purchase Price of the higher of (x)
if applicable, the highest price per share of Common Stock (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
any person in an Alternative Transaction (as defined in Section 8.03(g) of
the Merger Agreement) (the "Alternative Purchase Price") or (y) the average
of the closing sales prices of the shares of Common Stock on the NYSE for
the five trading days ending five days prior to the date of the Cash
Exercise Notice is given. If the Alternative Purchase Price includes any
property other than cash, the Alternative Purchase Price shall be the sum
of (A) the fixed cash amount, if any, included in the Alternative Purchase
Price plus (B) the fair market value of such other property determined in
accordance with the procedures set forth in Section 7(b) (but using the
date of the Cash Exercise Notice or the Put Notice, as the case may be, is
given). Upon exercise of the Grantee's right to receive cash pursuant to
Section 1(d)(i) and the payment of such cash to the Grantee, the
obligations of the Grantor to deliver Option Shares pursuant to Section 3
shall be terminated with respect to such number of Option Shares for which
the Grantee shall have elected to be paid the Spread.
(e) The right to exercise the Option shall terminate at the earliest of
(i) the Effective Time (as defined in the Merger Agreement), (ii) the
termination of the Merger Agreement pursuant to circumstances under which
the Grantee is not entitled to receive the Varco Termination Fee pursuant
to Section 8.03(e) of the Merger Agreement, (iii) the date on which the
Grantee realizes a Total Profit equal to the Profit Limit (as such terms
are defined in Section 10) and (iv) 180 days after the date (the "Merger
Termination Date") on which the Merger Agreement is terminated pursuant to
circumstances under which the Grantee is entitled to receive the Varco
Termination Fee pursuant to Section 8.03(e) of the Merger Agreement (the
date referred to in clause (iv) being hereinafter referred to as the
"Option Expiration Date"); provided that if the Option cannot be exercised
or the Option Shares cannot be delivered to Grantee upon such exercise
because the conditions set forth in Section 2(a) or Section 2(b) hereof
have not yet been satisfied, the Option Expiration Date shall be extended
until 30 days after such impediment to exercise has been removed.
2. Conditions to Delivery of Option Shares. The Grantor's obligation to
deliver Option Shares upon exercise of the Option is subject to the following
conditions:
(a) No preliminary or permanent injunction or other order issued by any
federal or state court of competent jurisdiction in the United States
prohibiting the delivery of the Option Shares shall be in effect;
(b) Any applicable waiting periods under the HSR Act shall have expired
or been terminated; and
(c) The Grantee shall have become entitled to terminate the Merger
Agreement under circumstances that would entitle the Grantee to receive the
Varco Termination Fee pursuant to Section 8.03(e) of the Merger Agreement.
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<PAGE>
3. The Closing.
(a) Any closing hereunder shall take place on the date specified by the
Grantee in its Exercise Notice at 9:00 A.M., local time, at the offices of
Pircher, Nichols & Meeks, 1999 Avenue of the Stars, Los Angeles,
California, or, if the conditions set forth in Section 2(a) or 2(b) have
not then been satisfied, on the second business day following the
satisfaction of such conditions, or at such other time and place as the
parties hereto may agree (the "Closing Date"). On the Closing Date, the
Grantor will deliver to the Grantee a certificate or certificates
representing the Option Shares in the denominations designated by the
Grantee in its Exercise Notice and the Grantee will purchase such Option
Shares from the Grantor at the price per Option Share equal to the Purchase
Price. Unless otherwise specified in this Agreement, any payment made by
the Grantee to the Grantor, or by the Grantor to the Grantee, pursuant to
this Agreement shall be made by certified or official bank check or by wire
transfer of immediately available funds to a bank designated by the party
receiving such funds.
(b) Certificates for the Option Shares delivered on the Closing Date
will have typed or printed thereon a restrictive legend which will read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE
REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN
THE VARCO STOCK OPTION AGREEMENT DATED AS OF MARCH 22, 2000, A
COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF VARCO AT
ITS PRINCIPAL EXECUTIVE OFFICES."
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act of 1933, as amended (the "Securities Act"), in the
above legend will be removed by delivery of substitute certificate(s) without
such reference if such Option Shares have been registered pursuant to the
Securities Act, such Option Shares have been sold in reliance on and in
accordance with Rule 144 under the Securities Act or Grantee has delivered to
Grantor a copy of a letter from the staff of the Securities and Exchange
Commission, or an opinion of counsel in form and substance reasonably
satisfactory to Grantor and its counsel, to the effect that such legend is not
required for purposes of the Securities Act and (ii) the reference to
restrictions pursuant to this Agreement in the above legend will be removed by
delivery of substitute certificate(s) without such reference if the Option
Shares evidenced by certificate(s) containing such reference have been sold or
transferred in compliance with the provisions of this Agreement under
circumstances that do not require the retention of such reference.
4. Representations and Warranties of the Grantor. The Grantor represents and
warrants to the Grantee that: (a) the Grantor is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has the requisite corporate power and authority to enter into and perform
this Agreement; (b) the execution and delivery of this Agreement by the Grantor
and the consummation by it of the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Grantor and this Agreement has
been duly executed and delivered by a duly authorized officer of the Grantor
and constitutes a valid and binding obligation of the Grantor, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights, to general equity principles and to
the California General Corporation Law; (c) the Grantor has taken all necessary
corporate action to authorize and reserve the Option Shares issuable upon
exercise of the Option and the Option Shares, when issued and delivered by the
Grantor upon the exercise of the Option in accordance with the terms of this
Agreement, will be duly authorized, validly issued, fully paid and non-
assessable and free of any lien, security interest or other adverse claim and
free of any preemptive rights; (d) except as otherwise required by the HSR Act
and, except for routine filings under the Securities Exchange Act of 1934, as
amended, and the listing of the Option Shares in accordance with Section 6, the
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execution and delivery of this Agreement by the Grantor and the consummation by
it of the transactions contemplated hereby do not require the consent, waiver,
approval or authorization of or any filing with any person or public authority
and will not violate, require a consent or waiver under, result in a breach of
or the acceleration of any obligation under, or constitute a default under, any
provision of any charter or by-law, indenture, mortgage, lien, lease,
agreement, contract, instrument, order, law, rule, regulation, stock market
rule, judgment, ordinance, decree or restriction by which the Grantor or any of
its subsidiaries or any of their respective properties or assets is bound; (e)
no "fair price," "moratorium," "control share acquisition" or other form of
antitakeover statute or regulation is or shall be applicable to the acquisition
of Option Shares pursuant to this Agreement; and (f) the Varco Rights Agreement
has been amended so that the Grantee is exempt from the definition of
"Acquiring Person" contained in the Varco Rights Agreement, and no "Shares
Acquisition Date" or "Distribution Date" or "Triggering Event" (as such terms
are defined in the Varco Rights Agreement) will occur as a result of the
execution of this Agreement by the Grantor or the exercise of the Option by the
Grantee.
5. Representations and Warranties of the Grantee. The Grantee represents and
warrants to the Grantor that: (a) the execution and delivery of this Agreement
by the Grantee and the consummation by it of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Grantee and this Agreement has been duly executed and delivered by a
duly authorized officer of the Grantee and constitutes a valid and binding
obligation of the Grantee; and (b) the Grantee is acquiring the Option and, if
and when it exercises the Option, will be acquiring the Option Shares issuable
upon the exercise thereof for its own account and not with a view to
distribution or resale in any manner which would be in violation of the
Securities Act.
6. Listing of Option Shares; HSR Act Filings; Governmental Consents. The
Grantor shall use its best efforts to cause the Option Shares to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Closing Date; provided, however, that if the Grantor is unable to effect such
listing on the NYSE by the Closing Date, the Grantor will nevertheless be
obligated to deliver the Option Shares upon the Closing Date. The Grantor shall
as promptly as practicable, make all necessary filings with respect to this
Agreement and the Option required under the HSR Act and use its best efforts to
obtain all necessary approvals thereunder as promptly as practicable. Each of
the parties hereto will use its best efforts to obtain consents of all third
parties and governmental authorities, if any, necessary to the consummation of
the transactions contemplated herein.
7. Right of First Refusal. If the Grantee exercises the Option in whole or
in part and at any time thereafter and prior to the earlier of (a) the
occurrence of a Change in Control Event (as defined herein) or (b) 30 days
after the first anniversary of the Merger Termination Date, seeks to sell all
or any part of the Option Shares purchased (i) in a transaction registered
under the Securities Act (other than in a registered public offering in which
the underwriters are instructed to achieve a broad public distribution) or (ii)
in a transaction not required to be registered under the Securities Act (other
than in a transfer by operation of law upon consummation of a merger), it shall
give the Grantor (or a designee of the Grantor) the opportunity, in the
following manner, to purchase such Option Shares:
(a) The Grantee shall give notice to the Grantor in writing of its
intent to sell Option Shares (a "Disposition Notice"), specifying the
number of Option Shares to be sold, the price and, if applicable, the
identity of the proposed transferee and the material terms of any agreement
relating thereto. For purposes of this Section 7, if the Disposition Notice
is given with respect to the sale of the Option Shares pursuant to a tender
or exchange officer, it shall be assumed that all Option Shares tendered
will be accepted for payment. The Disposition Notice may be given at any
time, including prior to the giving of any Exercise Notice.
(b) The Grantor or its designee shall have the right, exercisable by
written notice given to the Grantee within five business days after receipt
of a Disposition Notice (or, if applicable, in the case of a proposed sale
pursuant to a tender or exchange offer for shares of Common Stock, by
written notice given
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to the Grantee at least two business days prior to the then announced
expiration date of such tender or exchange offer (the "Expiration Date") if
such Disposition Notice was given at least four business days prior to such
Expiration Date), to purchase all, but not less than all, of the Option
Shares specified in the Disposition Notice at the price set forth in the
Disposition Notice. If the purchase price specified in the Disposition
Notice includes any property other than cash, the purchase price to be paid
by the Grantor shall be an amount of cash equal to the sum of (i) the cash
included in the purchase price plus (ii) the fair market value of such
other property at the date of the Disposition Notice. If such other
property consists of securities with an existing public trading market, the
average closing price (or the average closing bid and asked price if
closing prices are unavailable) for such securities on their principal
public trading market for the five trading days ending five days prior to
the date of the Disposition Notice shall be deemed to equal the fair market
value of such property. If such other property consists of something other
than cash or securities with an existing public trading market and, at the
time of the closing referred to in paragraph (c) below, agreement on the
value of such other property has not been reached, the higher of (i) the
cash included in the purchase price and (ii) the average closing price of
the Common Stock on the NYSE for the five trading days ending five days
prior to the date of the Disposition Notice shall be used as the per share
purchase price; provided, however, that promptly after the closing, the
Grantee and the Grantor or its designee, as the case may be, shall settle
any additional amounts to be paid or returned as a result of the
determination of fair market value of such other property made by a
nationally recognized investment banking firm selected by the Grantor and
approved by the Grantee within 30 days of the closing. Such determination
shall be final and binding on all parties hereto. If, at the time of the
purchase of any Option Shares by the Grantor (or its designee) pursuant to
this Section 7, a tender or exchange offer is outstanding, then the Grantor
(or its designee) shall agree at the time of such purchase to promptly pay
to Grantee from time to time such additional amounts, if any, so that the
consideration received by Grantee with respect to each Option Share shall
be equal to the highest price paid for a share of Common Stock pursuant to
such tender or exchange, or pursuant to any other tender or exchange offer
outstanding at any time such tender or exchange offer is outstanding.
(c) If the Grantor exercises its right of first refusal hereunder, the
closing of the purchase of the Option Shares with respect to which such
right has been exercised shall take place within five business days after
the notice of such exercise (or, if applicable, in the case of a tender or
exchange offer, no later than one business day prior to the expiration date
of the offer if written notice was given within the time set forth in the
parenthetical in the first sentence of paragraph (b) above); provided,
however, that at any time prior to the closing of the purchase of Option
Shares hereunder, the Grantee may determine not to sell the Option Shares
and revoke the Disposition Notice and, by so doing, cancel the Grantor's
right of first refusal with respect to the disposition in question. The
Grantor (or its designee) shall pay for the Option Shares by wire transfer
of immediately available funds to a bank designated by the Grantee.
(d) If the Grantor does not exercise its right of first refusal
hereunder within the time specified for such exercise, the Grantee shall be
free for 90 days following the expiration of such time for exercise to sell
the Option Shares (or enter into an agreement to sell the Option Shares)
specified in the Disposition Notice, at the price specified in the
Disposition Notice or any price in excess thereof and otherwise on
substantially the same terms set forth in the Disposition Notice; provided
that if such sale is not consummated within such 90-day period (or the
agreement to sell entered into in such 90-day period is not thereafter
performed in accordance with its terms), then the provisions of this
Section 7 will again apply to the sale of such Option Shares.
(e) For purposes of the Agreement, a "Change in Control Event" shall be
deemed to have occurred if (i) any person has acquired beneficial ownership
of more than 50% (excluding the Option Shares) of the outstanding shares of
Common Stock or (ii) the Grantor shall have entered into an agreement,
including without limitation an agreement in principle, providing for a
merger or other business combination involving the Grantor or the
acquisition of 30% or more of the assets of the Grantor and its
subsidiaries, taken as a whole.
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8. Repurchase of Option Shares. If a Change in Control Event has not
occurred prior to the first anniversary date of the Merger Termination Date,
then beginning on such anniversary date, the Grantor shall have the right to
purchase (the "Repurchase Right") all, but not less than all, of the Option
Shares at the greater of (i) the Purchase Price, or (ii) the average closing
price of the Common Stock on the NYSE for the five trading days ending five
days prior to the date the Grantor gives written notice of its intention to
exercise the Repurchase Right. If the Grantor does not exercise the Repurchase
Right within 30 days following the first anniversary of the Merger Termination
Date, the Repurchase Right shall terminate. In the event the Grantor wishes to
exercise the Repurchase Right, the Grantor shall send a written notice to the
Grantee specifying a date (not later than 10 business days and not earlier than
two business days following the date such notice is given) for the closing of
such purchase.
9. Registration Rights.
(a) In the event that the Grantee shall desire to sell any of the Option
Shares within two years after the purchase of such Option Shares pursuant
to the exercise of the Option, and such sale requires, in the opinion of
counsel to the Grantee, which opinion shall be reasonably satisfactory to
the Grantor and its counsel, registration of such Option Shares under the
Securities Act, the Grantor will cooperate with the Grantee and any
underwriters registering such Option Shares for resale, including, without
limitation, promptly filing and using its best efforts to cause to be
declared effective a registration statement which complies with the
requirements of applicable federal and state securities laws and entering
into an underwriting agreement with such underwriters upon such terms and
conditions as are customarily contained in underwriting agreements with
respect to secondary distributions; provided that the Grantor shall not be
required to have declared effective more than two registration statements
hereunder and shall be entitled to delay the filing or effectiveness of any
registration statement for up to 120 days in the aggregate if the offering
would, in the judgment of the Board of Directors of the Grantor, require
premature disclosure of any material corporate development or otherwise
interfere with or adversely affect any pending or proposed offering of
securities of the Grantor or any other material transaction involving the
Grantor.
(b) If the Common Stock is registered pursuant to the provisions of this
Section 9, the Grantor agrees (i) to furnish copies of the registration
statement and the prospectus relating to the Option Shares covered thereby
in such numbers as the Grantee may from time to time reasonably request and
(ii) if any event shall occur as a result of which it becomes necessary to
amend or supplement any registration statement or prospectus, to prepare
and file under the applicable securities laws such amendments and
supplements as may be necessary to keep available for at least 90 days a
prospectus covering the Common Stock meeting the requirements of such
securities laws, and to furnish to the Grantee such numbers of copies of
the registration statement and prospectus as amended or supplemented as may
reasonably be requested. The Grantor shall bear the cost of the
registration, including, but not limited to, all registration and filing
fees, printing expenses, and fees and disbursements of counsel and
accountants for the Grantor, except that the Grantee shall pay the fees and
disbursements of its counsel and the underwriting fees and selling
commissions applicable to the Option Shares sold by the Grantee. The
Grantor shall indemnify and hold harmless Grantee, its affiliates and its
officers and directors from and against any and all losses, claims,
damages, liabilities and expenses arising out of or based upon any
statements contained in, omissions or alleged omissions from, each
registration statement filed pursuant to this paragraph; provided, however,
that this provision does not apply to any loss, liability, claim, damage or
expense to the extent it arises out of any statement or omission made in
reliance upon and in conformity with written information furnished to the
Grantor by the Grantee, its affiliates or its officers expressly for use in
any registration statement (or any amendment thereto) or any preliminary
prospectus filed pursuant to this paragraph. The Grantor shall also
indemnify and hold harmless each underwriter and each person who controls
any underwriter within the meaning of either the Securities Act or the
Securities Exchange Act of 1934, as amended, against any and all losses,
claims, damages, liabilities and expenses arising out of or based upon any
statements contained in, omissions or alleged omissions from, each
registration statement filed pursuant to this
VI-6
<PAGE>
paragraph; provided, however, that this provision does not apply to any
loss, liability, claim, damage or expense to the extent it arises out of
any statement or omission made in reliance upon and in conformity with
written information furnished to the Grantor by the underwriters expressly
for use in any registration statement (or any amendment thereto) or any
preliminary prospectus filed pursuant to this paragraph.
10. Profit Limitation.
(a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit (as hereinafter defined) exceed
$35,000,000 (the "Profit Limit") and, if it otherwise would exceed such
amount, the Grantee, at its sole election, shall either (i) deliver to the
Grantor for cancellation Option Shares previously purchased by Grantee
(valued at the average closing price of the Common Stock on the NYSE for
the five trading days ending on the trading date immediately preceding the
date of delivery), (ii) pay cash or deliver other consideration to the
Grantor, or (iii) undertake any combination thereof, so that Grantee's
Total Profit shall not exceed the Profit Limit after taking into account
the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, the Option
may not be exercised for a number of Option Shares as would, as of the date
of the Exercise Notice, result in a Notional Total Profit (as defined
below) of more than the Profit Limit and, if exercise of the Option
otherwise would exceed the Profit Limit, the Grantee, at its discretion,
may increase the Purchase Price for that number of Option Shares set forth
in the Exercise Notice so that the Notional Total Profit shall not exceed
the Profit Limit; provided that nothing in this sentence shall restrict any
exercise of the Option permitted hereby on any subsequent date at the
Purchase Price set forth in Section 1(a) hereof.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount of cash received by
Grantee pursuant to Section 8.03(e) of the Merger Agreement, (ii) (x) the
amount received by Grantee pursuant to the Grantor's repurchase of Option
Shares pursuant to Sections 1(d), 7 or 8 hereof, less (y) the Grantee's
aggregate purchase price for such Option Shares, (iii) the amount received
by Grantee in respect of a Cash Exercise Notice pursuant to Section 1(d)
hereof, and (iv) (x) the net cash amounts received by Grantee pursuant to
the sale of Option Shares (or any other securities into which such Option
Shares are converted or exchanged) to any unaffiliated party, less (y) the
Grantee's aggregate purchase price for such Option Shares.
(d) As used herein, the term "Notional Total Profit" with respect to any
number of Option Shares as to which Grantee may propose to exercise the
Option shall be the Total Profit determined as of the date of the Exercise
Notice assuming that the Option were exercised on such date for such number
of Option Shares and assuming that such Option Shares, together with all
other Option Shares held by Grantee and its affiliates as of such date,
were sold for cash at the closing market price for the Common Stock as of
the close of business on the preceding trading day (less customary
brokerage commissions).
11. Expenses. Each party hereto shall pay its own expenses incurred in
connection with this Agreement, except as otherwise specifically provided
herein.
12. Specific Performance. The Grantor acknowledges that if the Grantor
fails to perform any of its obligations under this Agreement, immediate and
irreparable harm or injury would be caused to the Grantee for which money
damages would not be an adequate remedy. In such event, the Grantor agrees that
the Grantee shall have the right, in addition to any other rights it may have,
to specific performance of this Agreement. Accordingly, if the Grantee should
institute an action or proceeding seeking specific enforcement of the
provisions hereof, the Grantor hereby waives the claim or defense that the
Grantee has an adequate remedy at law and hereby agrees not to assert in any
such action or proceeding the claim or defense that such a remedy at law
exists. The Grantor further agrees to waive any requirement for the securing or
posting of any bond in connection with obtaining any such equitable relief.
13. Notice. All notices, requests, demands and other communications
hereunder shall be sent in the manner and to the addresses set forth in the
Merger Agreement.
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14. Parties in Interest. Nothing in this Agreement, express or implied, is
intended to confer upon any person other than the Grantor or the Grantee, or
their successors or assigns, any rights or remedies under or by reason of this
Agreement.
15. Entire Agreement; Amendments. This Agreement, together with the Merger
Agreement and the other documents referred to therein, contains the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings,
oral or written, with respect to such transactions. The terms of this Agreement
may be amended, modified or waived only by an agreement in writing signed by
the party against whom such amendment, modification or waiver is sought to be
enforced.
16. Assignment. No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
party hereto, except that the Grantee may assign its rights and obligations
hereunder to any direct or indirect wholly-owned subsidiary of the Grantee
(provided that such assignment shall not relieve the Grantee of its obligations
hereunder if such transferee does not perform such obligations). Any Option
Shares sold or transferred by the Grantee to any other person or entity in
compliance with the terms hereof (other than a direct or indirect wholly-owned
subsidiary of the Grantee) shall no longer have the benefit of the rights
provided for herein with respect to such Option Shares (including without
limitation those set forth in Sections 1(d) and 9) and shall no longer be
subject to the restrictions or rights in favor of the Grantor provided for
herein with respect to such Option Shares (including without limitation those
set forth in Sections 7 and 8).
17. Headings. The section headings herein are for convenience only and
shall not affect the construction of this Agreement.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall constitute one and the same document.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (regardless of the laws that
might otherwise govern under applicable Delaware principles of conflicts of
law).
20. Survival. All representations and warranties contained in this Agreement
shall survive delivery of and payment for the Option Shares.
21. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the Grantee and the Grantor have caused this Agreement
to be duly executed and delivered on the day and year first above written.
TUBOSCOPE INC.
/s/ John F. Lauletta
By: _________________________________
John Lauletta
Chief Executive Officer
VARCO INTERNATIONAL, INC.
/s/ George Boyadjieff
By: _________________________________
George Boyadjieff
Chief Executive Officer
VI-8
<PAGE>
ANNEX VII
THE AMENDED AND RESTATED
1996 EQUITY PARTICIPATION PLAN
OF
VARCO INTERNATIONAL, INC.
VARCO INTERNATIONAL, INC., a Delaware corporation (formerly named Tuboscope
Inc.), has adopted this Amended and Restated 1996 Equity Participation Plan of
Varco International, Inc., as amended and restated (the "Plan"), which amends
and restates the Amended 1996 Equity Participation Plan of Tuboscope Inc., for
the benefit of its eligible employees, consultants and directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for Directors, key Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock
and/or rights which recognize such growth, development and financial
success.
(2) To enable the Company to obtain and retain the services of
Directors, key Employees and consultants considered essential to the long
range success of the Company by offering them an opportunity to own stock
in the Company and/or rights which will reflect the growth, development and
financial success of the Company.
This plan was originally approved by the Company's stockholders on April 24,
1996, was first amended with stockholder approval on May 13, 1999.
ARTICLE I.
Definitions
1.1 General. Wherever the following terms are used in this Plan they shall
have the meaning specified below, unless the context clearly indicates
otherwise.
1.2 Administrator. "Administrator" shall mean the entity that conducts the
administration of the Plan (including the grant of Awards) as provided herein.
With reference to the administration of the Plan with respect to an Award
granted or to be granted to Independent Directors, the term "Administrator"
shall refer to the Board. With reference to the administration of the Plan with
respect to an Award granted or to be granted to Employees or consultants, the
term "Administrator" shall refer to the Committee, unless and to the extent
(a) the Board has assumed the authority for administration of all or any part
of the Plan as permitted in Section 9.2 or (b) the Committee has delegated the
authority for administration of all or part of the Plan as permitted by Section
9.5. With reference to the administration of the Plan with respect to an Award
granted or to be granted to Section 162(m) Participants and intended to qualify
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, as described in Section 2.3 the term "Administrator" shall refer to the
Committee comprised solely of two or more Directors each of whom qualify as an
"outside director" under Section 162(m) of the Code.
1.3 Award Limit. "Award Limit" shall mean four hundred thousand (400,000)
shares of Common Stock, the method of counting such Shares shall conform to any
requirements applicable to performance-based compensation under Section 162(m)
of the Code or the rules and regulations promulgated thereunder.
1.4 Award. "Award" shall mean an Option, Restricted Stock award, Performance
Award, Stock Appreciation Right, Dividend Equivalent award, Deferred Stock
award or Stock Payment which may be awarded or granted under the Plan
(collectively, "Awards").
1.5 Board. "Board" shall mean the Board of Directors of the Company.
1.6 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
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1.7 Committee. "Committee" shall mean the Compensation Committee of the
Board, or another committee or subcommittee of the Board, appointed as
provided in Section 9.1.
1.8 Common Stock. "Common Stock" shall mean the common stock of the
Company, par value $0.01 per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any warrants,
options or other rights to purchase Common Stock. Debt securities of the
Company convertible into Common Stock shall be deemed equity securities of the
Company.
1.9 Company. "Company" shall mean Varco International, Inc., a Delaware
corporation (formerly named Tuboscope Inc.), or any successor entity.
1.10 Corporate Transaction. "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to
change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Awards are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity but
in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
1.11 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under
Article VII of this Plan.
1.12 Director. "Director" shall mean a member of the Board.
1.13 Dividend Equivalent. "Dividend Equivalent" shall mean a right to
receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article VII of this Plan.
1.14 Employee. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.15 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.16 Fair Market Value. "Fair Market Value" of a share of Common Stock as
of a given date shall be (i) the closing price of a share of Common Stock on
the principal exchange on which shares of Common Stock are then trading, if
any (or as reported on any composite index which includes such principal
exchange), on the trading day previous to such date, or if shares were not
traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or (ii) if Common Stock is not traded on an
exchange but is quoted on Nasdaq or a successor quotation system, the mean
between the closing representative bid and asked prices for the Common Stock
on the trading day previous to such date as reported by Nasdaq or such
successor quotation system; or (iii) if Common Stock is not publicly traded on
an exchange and not quoted on Nasdaq or a successor quotation system, the Fair
Market Value of a share of Common Stock as established by the Administrator
acting in good faith.
1.17 Grantee. "Grantee" shall mean an Employee, consultant or Independent
Director granted a Performance Award, Dividend Equivalent, Stock Payment or
Stock Appreciation Right, or an award of Deferred Stock, under this Plan.
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<PAGE>
1.18 Incentive Stock Option. "Incentive Stock Option" shall mean an option
which conforms to the applicable provisions of Section 422 of the Code and
which is designated as an Incentive Stock Option by the Administrator.
1.19 Independent Director. "Independent Director" shall mean a member of the
Board who is not an Employee of the Company.
1.20 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean an
Option which is not designated as an Incentive Stock Option by the
Administrator.
1.21 Option. "Option" shall mean a stock option granted under Article III of
this Plan. An Option granted under this Plan shall, as determined by the
Administrator, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to Independent Directors and
consultants shall be Non-Qualified Stock Options.
1.22 Optionee. "Optionee" shall mean an Employee, consultant or Independent
Director granted an Option under this Plan.
1.23 Performance Award. "Performance Award" shall mean a cash bonus, stock
bonus or other performance or incentive award that is paid in cash, Common
Stock or a combination of both, awarded under Article VII of the Plan.
1.24 Performance Criteria. "Performance Criteria" shall mean the following
business criteria with respect to the Company, any Subsidiary or any division
or operating unit: (a) net income, (b) pre-tax income, (c) operating income,
(d) cash flow, (e) earnings per share, (f) return on equity, (g) return on
invested capital or assets, (h) cost reductions or savings, (i) funds from
operations, (j) appreciation in the fair market value of Common Stock and (k)
earnings before any one or more of the following items: interest, taxes,
depreciation or amortization.
1.25 Plan. "Plan" shall mean the Amended and Restated 1996 Equity
Participation Plan of Varco International Inc., as amended and/or restated from
time to time.
1.26 QDRO. "QDRO" shall mean a qualified domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder.
1.27 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded
under Article VI of this Plan.
1.28 Restricted Stockholder. "Restricted Stockholder" shall mean an
Employee, consultant or Independent Director granted an award of Restricted
Stock under Article VI of this Plan.
1.29 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
1.30 Section 162(m) Participant. "Section 162(m) Participant" shall mean any
key Employee designated by the Administrator as a key Employee whose
compensation for the fiscal year in which the key Employee is so designated or
a future fiscal year may be subject to the limit on deductible compensation
imposed by Section 162(m) of the Code.
1.31 Stock Appreciation Right. "Stock Appreciation Right" shall mean a stock
appreciation right granted under Article VIII of this Plan.
1.32 Stock Payment. "Stock Payment" shall mean (i) a payment in the form of
shares of Common Stock, or (ii) an option or other right to purchase shares of
Common Stock, as part of a deferred compensation
VII-3
<PAGE>
arrangement, made in lieu of all or any portion of the compensation, including
without limitation, salary, bonuses, commissions or fees, that would otherwise
become payable to a Grantee in cash, awarded under Article VII of this Plan.
1.33 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock
possessing 50 percent or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
1.34 Termination of Consultancy. "Termination of Consultancy" shall mean the
time when the engagement of Optionee, Grantee or Restricted Stockholder as a
consultant to the Company or a Subsidiary is terminated for any reason, with or
without cause, including without limitation, by resignation, discharge, death
or retirement; but excluding terminations where there is a simultaneous
commencement of employment with the Company or any Subsidiary. The
Administrator, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Consultancy, including, but
not by way of limitation, the question of whether a Termination of Consultancy
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.35 Termination of Directorship. "Termination of Directorship" shall mean
the time when an Optionee, Grantee or Restricted Stockholders who is an
Independent Director ceases to be a Director for any reason, including, but not
by way of limitation, a termination by resignation, failure to be elected,
death or retirement. The Board, in its sole and absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Directorship with respect to Independent Directors.
1.36 Termination of Employment. "Termination of Employment" shall mean the
time when the employee-employer relationship between the Optionee, Grantee or
Restricted Stockholder and the Company or any Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, a
termination by resignation, discharge, death, disability or retirement; but
excluding (i) terminations where there is a simultaneous reemployment or
continuing employment of an Optionee, Grantee or Restricted Stockholder by the
Company or any Subsidiary, (ii) at the discretion of the Administrator,
terminations which result in a temporary severance of the employee-employer
relationship, and (iii) at the discretion of the Administrator, terminations
which are followed by the simultaneous establishment of a consulting
relationship by the Company or a Subsidiary with the former employee. The
Administrator, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate an Employee's employment at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
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<PAGE>
ARTICLE II.
Shares Subject to Plan; Section 162(m) Performance Based Awards
2.1 Shares Subject to Plan.
(a) The shares of stock subject to Options, awards of Restricted Stock,
Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially
shares of the Company's Common Stock, par value $0.01 per share. The
aggregate number of such shares which may be issued upon exercise of such
Awards under the Plan shall not exceed Seven Million Six Hundred Fifty
Thousand (7,650,000). The shares of Common Stock issuable upon exercise of
such Awards may be either previously authorized but unissued shares or
treasury shares.
(b) The maximum number of shares which may be subject to Awards granted
under the Plan to any individual in any calendar year shall not exceed the
Award Limit.
(c) The maximum number of shares which may be issued after May 30, 2000
upon exercise of Restricted Stock, Performance Awards, Dividend
Equivalents, awards of Deferred Stock or Stock Payments shall not exceed
twenty-five percent (25%) of the aggregate number of shares which may be
issued under the Plan.
2.2 Add-back of Options and Other Rights. If any Option, or other right to
acquire shares of Common Stock under any other Award under this Plan, expires
or is canceled without having been fully exercised or is exercised or settled
in whole or in part for cash as permitted by this Plan, the number of shares
subject to such Option or other Award but as to which such Option or other
Award was not exercised prior to its expiration, cancellation, exercise or
settlement may again be optioned, granted or awarded hereunder, subject to the
limitations of Section 2.1. Shares of Common Stock which are delivered by the
Optionee or Grantee or withheld by the Company upon the exercise of any Option
or other Award under this Plan in payment of the exercise price thereof or tax
withholding thereon may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any share of Restricted Stock is
forfeited by the Grantee or repurchased by the Company pursuant to Section 6.6
hereof, such share may again be optioned, granted or awarded hereunder, subject
to the limitations of Section 2.1.
2.3 Provisions Applicable to Section 162(m) Participants.
(a) The Administrator, in its discretion, may determine whether an Award
is to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code.
(b) Notwithstanding anything in the Plan to the contrary, the
Administrator may grant any Award to a Section 162(m) Participant,
including Restricted Stock that is granted or the restrictions with respect
to which lapse upon the attainment of performance goals which are related
to one or more of the Performance Criteria and any performance or incentive
award described in Article VI or Article VII that is awarded or vests or
becomes exercisable or payable upon the attainment of performance goals
which are related to one or more of the Performance Criteria.
(c) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect
to any Award granted under Articles VI and VII which may be granted to one
or more Section 162(m) Participants, no later than ninety (90) days
following the commencement of any fiscal year in question or any other
designated fiscal period or period of service (or such other time as may be
required or permitted by Section 162(m) of the Code), the Administrator
shall, in writing:
(i) designate one or more Section 162(m) Participants;
(ii) select the Performance Criteria applicable to the fiscal year
or other designated fiscal period or period of service governing the
achievement of the Performance Criteria;
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<PAGE>
(iii) establish the various performance targets, in terms of an
objective formula or standard, and amounts of such Awards, which may be
earned for such fiscal year or other designated fiscal period or period
of service, upon the achievement of the performance targets; and
(iv) specify the relationship between Performance Criteria and the
performance targets and the amounts of such Awards to be earned by each
Section 162(m) Participant for such fiscal year or other designated
fiscal period or period of service, upon the achievement of the
performance targets.
(d) Following the completion of each fiscal year or other designated
fiscal period or period of service, the Administrator shall certify in
writing whether the applicable performance targets have been achieved for
such fiscal year or other designated fiscal period or period of service. In
determining the amount earned by a Section 162(m) Participant as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, the Administrator shall have the right to reduce (but not to
increase) the amount payable at a given level of performance to take into
account additional factors that the Administrator may deem relevant to the
assessment of individual or corporate performance for the fiscal year or
other designated fiscal period or period of service.
(e) The maximum Award granted or paid under Articles VI and VII payable
to a Section 162(m) Participant as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall not exceed $1,000,000
for cash awards and 400,000 shares for awards payable in stock (with any or
no purchase price for such shares) with respect to any fiscal year of the
Company.
(f) The payment or grant of an Award under Articles VI and VII as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code with respect to a performance period shall be conditioned upon the
Section 162(m) Participant's employment by the Company on the last day the
applicable fiscal year or other designated fiscal period or period of
service, provided, however, that the Administrator may make exceptions to
this requirement, in its sole discretion, in the case of a Section 162(m)
Participant's retirement, death or disability.
(g) No Award under Articles VI and VII may qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code for any
period including or following the Annual Meeting of Stockholders of the
Company for the year 2005, unless the stockholders of the Company, on or
before such date, reapprove the terms of this Section 2.3 or otherwise
approve the terms of performance-based compensation as required by Section
162(m) of the Code. In addition, no Award under Articles VI and VII may
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code if the provisions of this Section 2.3 are amended
in any way which changes the material terms of the performance goals,
including materially modifying the Performance Criteria, or which increases
the maximum Award payable or changes the eligibility requirements, without
obtaining stockholder approval of such amendments as required by Section
162(m) of the Code.
(h) Furthermore, notwithstanding any other provision of the Plan or any
Award which is granted to a Section 162(m) Participant and is intended to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section
162(m) of the Code) or any regulations or rulings issued thereunder that
are requirements for qualification as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed
amended to the extent necessary to conform to such requirements.
ARTICLE III.
Granting of Options
3.1 Eligibility. Any Employee or consultant selected by the Administrator
pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 3.4(c) and, at the discretion
of the Board, pursuant to Section 3.4(d).
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3.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing Subsidiary unless such Incentive Stock Option conforms to
the applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted unless such Option, when granted, qualifies as an "Incentive
Stock Option" under Section 422 of the Code. No Incentive Stock Option shall be
granted to any person who is not an Employee.
3.4 Granting of Options.
(a) The Administrator shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees or consultants (including Employees or
consultants who have previously received Options or other awards under
this Plan) such of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares to
be subject to such Options granted to the selected key Employees or
consultants;
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options and whether such Options are to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options, consistent
with this Plan; provided, however, that the terms and conditions of
Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Any Incentive Stock Option granted under this Plan may be modified
by the Administrator, with the consent of the Optionee, to disqualify such
option from treatment as an "Incentive Stock Option" under Section 422 of
the Code.
(c) During the term of the Plan, (i) a person who is an Independent
Director as of April 24, 1996 automatically shall be granted an option to
purchase four thousand (4,000) shares of Common Stock (subject to
adjustment as provided in Section 10.3) on the date of each annual meeting
of stockholders at which the Independent Director is reelected to the
Board, and (ii) a person who is initially elected or appointed to the Board
and is at the time of election or appointment an Independent Director
automatically shall be granted (A) an option to purchase four thousand
(4,000) shares of Common Stock (subject to adjustment as provided in
Section 10.3) on the date of such initial election or appointment and (B)
an option to purchase four thousand (4,000) shares of Common Stock (subject
to adjustment as provided in Section 10.3) on the date of each annual
meeting of stockholders after such initial election or appointment at which
the Independent Director is reelected to the Board. Members of the Board
who are employees of the Company who subsequently retire from the Company
and remain on the Board will not receive an initial Option grant pursuant
to clause (ii)(A) of the preceding sentence, but to the extent that they
are otherwise eligible, will receive, after retirement from the Company,
Options as described in the clause (ii)(B) of the preceding sentence. All
of the foregoing Option grants authorized by this Section 3.4(c) are
subject to stockholder approval of the Plan.
(d) The Administrator shall from time to time, in its absolute
discretion, and subject to applicable limitations of the Plan:
(i) Select from among the Independent Directors (including
Independent Directors who have previously received Options under the
Plan) such of them as in its opinion should be granted Options;
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(ii) Determine the number of shares to be subject to such Options
granted to the selected Independent Directors; and
(iii) Determine the terms and conditions of such Options, consistent
with the Plan.
ARTICLE IV.
Terms of Options
4.1 Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Administrator shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain
such terms and conditions as may be necessary to meet the applicable provisions
of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive
Stock Options shall contain such terms and conditions as may be necessary to
meet the applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each Option
shall be set by the Administrator; provided, however, that such price shall be
no less than the par value of a share of Common Stock and (i) in the case of
Incentive Stock Options and Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(c) of the Code, such price shall
not be less than 100% of the Fair Market Value of a share of Common Stock on
the date the Option is granted; (ii) in the case of Incentive Stock Options
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary such price shall not be less than 110%
of the Fair Market Value of a share of Common Stock on the date the Option is
granted; and (iii) in the case of Options granted to Independent Directors
pursuant to Section 3.4(c), such price shall equal 100% of the Fair Market
Value of a share of Common Stock on the date the Option is granted.
4.3 Option Term. The term of an Option shall be set by the Administrator in
its discretion; provided, however, that, (i) in the case of Non-Qualified Stock
Options, the term shall be not more than (10) years from the date the Option is
granted, and (ii) in the case of Incentive Stock Options, the term shall not be
more than ten (10) years from the date the Incentive Stock Option is granted,
or five (5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary. Except as limited by requirements of Section 422 of
the Code and regulations and rulings thereunder applicable to Incentive Stock
Options, the Administrator may extend the term of any outstanding Option in
connection with any Termination of Employment, Termination of Consultancy, or
Termination of Directorship of the Optionee, or amend any other term or
condition of such Option relating to such a termination.
4.4 Option Vesting.
(a) The period during which the right to exercise an Option in whole or
in part vests in the Optionee shall be set by the Administrator who may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted. At any time after grant of an Option,
the Administrator may, in its sole and absolute discretion and subject to
whatever terms and conditions it selects, accelerate the period during
which an Option vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Administrator either in the Stock Option Agreement or by
action following the grant of the Option.
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<PAGE>
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "Incentive Stock Options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company
and any Subsidiary) exceeds $100,000, such Options shall be treated as Non-
Qualified Options to the extent required by Section 422 of the Code. The
rule set forth in the preceding sentence shall be applied by taking Options
into account in the order in which they were granted. For purposes of this
Section 4.4(c), the Fair Market Value of stock shall be determined as of
the time the Option with respect to such stock is granted.
4.5 No Repricing. The Administrator shall not have the authority to amend
any then outstanding Option to reduce the exercise price payable for such
Option, or to require as a condition to the grant of a new Option, the
surrender of previously granted Option that has an exercise price in excess of
the exercise price of the proposed new Option grant.
4.6 Consideration. In consideration of the granting of an Option, the
Optionee shall agree, in the written Stock Option Agreement, to remain in the
employ of or to consult for, as applicable, the Company or any Subsidiary for a
period of at least one year (or such shorter period as may be fixed in the
Stock Option Agreement or by action of the Administrator following grant of the
Option) after the Option is granted. Nothing in this Plan or in any Stock
Option Agreement hereunder shall confer upon any Optionee any right to continue
in the employ of, or as a consultant for, the Company or any Subsidiary, or
shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Optionee at
any time for any reason whatsoever, with or without good cause, except as may
otherwise be provided in a written agreement with the Optionee.
ARTICLE V.
Exercise of Options
5.1 Partial Exercise. An exercisable Option may be exercised in whole or in
part. However, an Option shall not be exercisable with respect to fractional
shares and the Administrator may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option shall be
deemed exercised upon delivery of all of the following to the Secretary of the
Company or his office:
(a) A written notice complying with the applicable rules established by
the Administrator stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act of 1933, as amended, and
any other federal or state securities laws or regulations. The
Administrator may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates and
issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to Section
10.1 by any person or persons other than the Optionee, appropriate proof of
the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised.
However, the Administrator, may in its discretion (i) allow a delay in
payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through the
actual or constructive delivery of shares of Common Stock
VII-9
<PAGE>
owned by the Optionee, duly endorsed for transfer to the Company with a
Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in
whole or in part, through the surrender of shares of Common Stock then
issuable upon exercise of the Option having a Fair Market Value on the date
of Option exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iv) allow payment, in whole or in part, through
the delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the delivery
of a full recourse promissory note bearing interest (at no less than such
rate as shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Administrator; (vi)
allow payment, in whole or in part, through the delivery of a notice that
the Optionee has placed a market sell order with a broker with respect to
shares of Common Stock then issuable upon exercise of the Option, and that
the broker has been directed to pay a sufficient portion of the net
proceeds of the sale to the Company in satisfaction of the Option exercise
price, provided that payment of such proceeds is then made to the Company
upon settlement of such sale; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs
(i), (ii), (iii), (iv), (v) and (vi). In the case of a promissory note, the
Administrator may also prescribe the form of such note and the security to
be given for such note. The Option may not be exercised, however, by
delivery of a promissory note or by a loan from the Company when or where
such loan or other extension of credit is prohibited by law.
5.3 Conditions to Issuance of Stock Certificates. The Company shall not be
required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Administrator shall, in its absolute discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Administrator may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the
discretion of the Administrator may be in the form of consideration used by
the Optionee to pay for such shares pursuant to Section 5.2(d).
5.4 Rights as Stockholders. The holders of Options shall not be, nor have
any of the rights or privileges of, stockholders of the Company in respect of
any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
5.5 Ownership and Transfer Restrictions. The Administrator, in its absolute
discretion, may impose such restrictions on the ownership and transferability
of the shares purchasable upon the exercise of an Option as it deems
appropriate. Any such restriction shall be set forth in the respective Stock
Option Agreement and may be referred to on the certificates evidencing such
shares. The Administrator may require the Employee to give the Company prompt
notice of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock Option within (i) two years from the date of granting such
Option to such Employee or (ii) one year after the transfer of such shares to
such Employee. The Administrator may direct that the certificates evidencing
shares acquired by exercise of an Option refer to such requirement to give
prompt notice of disposition.
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<PAGE>
ARTICLE VI.
Award of Restricted Stock
6.1 Award of Restricted Stock.
(a) The Administrator shall from time to time, in its absolute
discretion:
(i) Select from among the key Employees, consultants or Independent
Directors (including those who have previously received other Awards
under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this
Plan.
(b) The Administrator shall establish the purchase price, if any, and
form of payment for Restricted Stock; provided, however, that such purchase
price shall be no less than the par value of the Common Stock to be
purchased. In all cases, legal consideration shall be required for each
issuance of Restricted Stock.
(c) Upon the selection of a key Employee, consultant or Independent
Director to be awarded Restricted Stock, the Administrator shall instruct
the Secretary of the Company to issue such Restricted Stock and may impose
such conditions on the issuance of such Restricted Stock as it deems
appropriate.
6.2 Restricted Stock Agreement. Restricted Stock shall be issued only
pursuant to a written Restricted Stock Agreement, which shall be executed by
the selected key Employee, consultant or Independent Director and an authorized
officer of the Company and which shall contain such terms and conditions as the
Administrator shall determine, consistent with this Plan.
6.3 Consideration. As consideration for the issuance of Restricted Stock, in
addition to payment of any purchase price, the Employee or consultant shall
agree, in the written Restricted Stock Agreement, to remain in the employ of,
or to consult for, the Company or any Subsidiary for a period of at least one
year after the Restricted Stock is issued (or such shorter period as may be
fixed in the Restricted Stock Agreement or by action of the Administrator
following grant of the Restricted Stock). Nothing in this Plan or in any
Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Restricted Stockholder at any time for any reason whatsoever, with or
without good cause.
6.4 Rights as Stockholders. Upon delivery of the shares of Restricted Stock
to the escrow holder pursuant to Section 6.7, the Restricted Stockholder shall
have, unless otherwise provided by the Administrator, all the rights of a
stockholder with respect to said shares, subject to the restrictions in his
Restricted Stock Agreement, including the right to receive all dividends and
other distributions paid or made with respect to the shares; provided, however,
that in the discretion of the Administrator, any extraordinary distributions
with respect to the Common Stock shall be subject to the restrictions set forth
in Section 6.5.
6.5 Restriction. All shares of Restricted Stock issued under this Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Administrator shall provide,
which restrictions may include, without limitation, restrictions concerning
voting rights and transferability and restrictions based on duration of
employment with the Company, Company performance and individual performance;
provided, however, that, unless the Administrator otherwise provides, no share
of Restricted Stock granted to a person subject to Section 16 of the Exchange
Act shall be sold, assigned or otherwise transferred until at least six months
have elapsed from (but excluding) the date on which the Restricted Stock was
issued, and provided, further, that by action taken after
VII-11
<PAGE>
the Restricted Stock is issued, the Administrator may, on such terms and
conditions as it may determine to be appropriate, remove any or all of the
restrictions imposed by the terms of the Restricted Stock Agreement. Restricted
Stock may not be sold or encumbered until all restrictions are terminated or
expire. Unless provided otherwise by the Administrator, if no consideration was
paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's
rights in unvested Restricted Stock shall lapse upon Termination of Employment,
Termination of Consultancy or Termination of Directorship, as applicable.
6.6 Repurchase of Restricted Stock. The Administrator shall provide in the
terms of each individual Restricted Stock Agreement that the Company shall have
the right to repurchase from the Restricted Stockholder the Restricted Stock
then subject to restrictions under the Restricted Stock Agreement immediately
upon a Termination of Employment, Termination of Consultancy or Termination of
Directorship, as applicable, between the Restricted Stockholder and the
Company, at a cash price per share equal to the price paid by the Restricted
Stockholder for such Restricted Stock; provided, however, that provision may be
made that no such right of repurchase shall exist in the event of a Termination
of Employment, Termination of Consultancy or Termination of Directorship
without cause, or following a change in control of the Company or because of
the Restricted Stockholder's retirement, death or disability, or otherwise.
6.7 Escrow. The Secretary of the Company or such other escrow holder as the
Administrator may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
6.8 Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Administrator shall cause a legend or legends
to be placed on certificates representing all shares of Restricted Stock that
are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.
ARTICLE VII.
Performance Awards, Dividend Equivalents,
Deferred Stock, Stock Payments
7.1 Performance Awards. Any key Employee, consultant or Independent Director
selected by the Administrator may be granted one or more Performance Awards.
The value of such Performance Awards may be linked to any one or more of the
Performance Criteria or other specific performance criteria determined
appropriate by the Administrator, in each case on a specified date or dates or
over any period or periods determined by the Administrator. In making such
determinations, the Administrator shall consider (among such other factors as
it deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee,
consultant or Independent Director.
7.2 Dividend Equivalents. Any key Employee, consultant or Independent
Director selected by the Administrator may be granted Dividend Equivalents
based on the dividends declared on Common Stock, to be credited as of dividend
payment dates, during the period between the date an Option, Stock Appreciation
Right, Deferred Stock or Performance Award is granted, and the date such
Option, Stock Appreciation Right, Deferred Stock or Performance Award is
exercised, vests or expires, as determined by the Administrator. Such Dividend
Equivalents shall be converted to cash or additional shares of Common Stock by
such formula and at such time and subject to such limitations as may be
determined by the Administrator.
7.3 Stock Payments. Any key Employee, consultant or Independent Director
selected by the Administrator may receive Stock Payments in the manner
determined from time to time by the Administrator. The number of shares shall
be determined by the Administrator and may be based upon the Fair Market Value,
book value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined appropriate by the Administrator,
determined on the date such Stock Payment is made or on any date thereafter.
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<PAGE>
7.4 Deferred Stock. Any key Employee, consultant or Independent Director
selected by the Administrator may be granted an award of Deferred Stock in the
manner determined from time to time by the Administrator. The number of shares
of Deferred Stock shall be determined by the Administrator and may be linked to
the market value, book value, net profits or other measure of the value of
Common Stock or other specific performance criteria determined to be
appropriate by the Administrator, in each case on a specified date or dates or
over any period or periods determined by the Administrator. Common Stock
underlying a Deferred Stock award will not be issued until the Deferred Stock
award has vested, pursuant to a vesting schedule or performance criteria set by
the Administrator. Unless otherwise provided by the Administrator, a Grantee of
Deferred Stock shall have no rights as a Company stockholder with respect to
such Deferred Stock until such time as the award has vested and the Common
Stock underlying the award has been issued.
7.5 Performance Award Agreement, Dividend Equivalent Agreement, Deferred
Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by
a written agreement, which shall be executed by the Grantee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Administrator shall determine, consistent with this Plan.
7.6 Term. The term of a Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment shall be set by the Administrator in its
discretion.
7.7 Exercise Upon Termination. A Performance Award, Dividend Equivalent,
award of Deferred Stock and/or Stock Payment is exercisable or payable only
while the Grantee is an Employee, consultant or Independent Director; provided
that the Administrator may determine that the Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or
paid subsequent to Termination of Employment or Termination of Consultancy
without cause, or following a change in control of the Company, or because of
the Grantee's retirement, death or disability, or otherwise.
7.8 Payment on Exercise. Payment of the amount determined under Section 7.1
or 7.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Administrator.
7.9 Consideration. In consideration of the granting of a Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee
shall agree, in a written agreement, to remain in the employ of, or to consult
for, the Company or any Subsidiary for a period of at least one year after such
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment is granted (or such shorter period as may be fixed in such agreement or
by action of the Administrator following such grant). Nothing in this Plan or
in any agreement hereunder shall confer on any Grantee any right to continue in
the employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at
any time for any reason whatsoever, with or without good cause.
ARTICLE VIII.
Stock Appreciation Rights
8.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right may be
granted to any key Employee, consultant or Independent Director selected by the
Administrator. A Stock Appreciation Right may be granted (i) in connection and
simultaneously with the grant of an Option, (ii) with respect to a previously
granted Option, or (iii) independent of an Option. A Stock Appreciation Right
shall be subject to such terms and conditions not inconsistent with this Plan
as the Administrator shall impose and shall be evidenced by a written Stock
Appreciation Right Agreement, which shall be executed by the Grantee and an
authorized officer of the Company. The Administrator, in its discretion, may
determine whether a Stock Appreciation Right is to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code and Stock
Appreciation Right Agreements evidencing Stock Appreciation Rights intended to
so qualify shall contain such terms and conditions as may be necessary to meet
the applicable provisions of section 162(m) of the Code.
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<PAGE>
8.2 Coupled Stock Appreciation Rights.
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number of
shares subject to the simultaneously or previously granted Option to which it
is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained
by subtracting the Option exercise price from the Fair Market Value of a share
of Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Administrator may impose.
8.3 Independent Stock Appreciation Rights.
(a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated
to any Option and shall have a term set by the Administrator. An ISAR shall be
exercisable in such installments as the Administrator may determine. An ISAR
shall cover such number of shares of Common Stock as the Administrator may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Administrator. An ISAR is exercisable only while the
Grantee is an Employee, consultant or Independent Director; provided that the
Administrator may determine that the ISAR may be exercised subsequent to
Termination of Employment, Termination of Consultancy or Termination of
Directorship without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Administrator may impose.
8.4 Payment and Limitations on Exercise.
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both,
as determined by the Administrator. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 hereinabove.
(b) Grantees of Stock Appreciation Rights may, in the discretion of the
Administrator, be required to comply with any timing or other restrictions
under Rule 16b-3 applicable to the settlement or exercise of a Stock
Appreciation Right.
8.5 Consideration. In consideration of the granting of a Stock Appreciation
Right, the Grantee shall agree, in the written Stock Appreciation Right
Agreement, to remain in the employ of, or to consult for, the Company or any
Subsidiary for a period of at least one year after the Stock Appreciation Right
is granted (or such shorter period as may be fixed in the Stock Appreciation
Right Agreement or by action of the Administrator following grant of the
Restricted Stock.) Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at
any time for any reason whatsoever, with or without good cause.
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ARTICLE IX.
Administration
9.1 Committee. The Compensation Committee of the Board (or another committee
or a subcommittee of the Board assuming the functions of the Administrator
under this Plan) shall serve as the Committee and shall consist of two or more
Directors appointed by and holding office at the pleasure of the Board,
provided, however, that grants to Employees who are considered reporting
persons under Section 16 of the Exchange Act are to be administered by a
committee or subcommittee consisting of two or more Directors each of whom
satisfies the applicable requirements of Rule 16b-3 and Section 162(m) of the
Code. Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
9.2 Duties and Powers of Administrator. It shall be the duty of the
Administrator to conduct the general administration of this Plan in accordance
with its provisions. The Administrator shall have the power to interpret this
Plan and the agreements pursuant to which Awards are granted or awarded, and to
adopt such rules for the administration, interpretation, and application of
this Plan as are consistent therewith and to interpret, amend or revoke any
such rules. Any Award under this Plan need not be the same with respect to each
Optionee, Grantee or Restricted Stockholder. Any such interpretations and rules
with respect to Incentive Stock Options shall be consistent with the provisions
of Section 422 of the Code. In its absolute discretion, the Board may at any
time and from time to time exercise any and all rights and duties of the
Committee under this Plan, except with respect to matters which under Rule 16b-
3 or Section 162(m) of the Code, or any regulations or rules issued thereunder,
are required to be determined in the sole discretion of the Committee.
9.3 Majority Rule; Unanimous Written Consent. The Administrator shall act by
a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Administrator.
9.4 Compensation; Professional Assistance; Good Faith Actions. Members of
the Committee shall receive such compensation for their services as members as
may be determined by the Board. All expenses and liabilities which the
Administrator may incur in connection with the administration of this Plan
shall be borne by the Company. The Administrator may employ attorneys,
consultants, accountants, appraisers, brokers, or other persons. The
Administrator, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Administrator in good faith shall be final and binding upon all Optionees,
Grantees, Restricted Stockholders, the Company and all other interested
persons. No members of the Administrator shall be personally liable for any
action, determination or interpretation made in good faith with respect to this
Plan or any Awards, and all members of the Administrator shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
9.5 Delegation of Authority to Grant Awards. The Committee may, but need
not, delegate from time to time some or all of its authority to grant (and
administer the terms of) Awards under the Plan to a committee consisting solely
of one or more members of the Committee or consisting solely of one or more
executive officers of the Company; provided, however, that the Committee may
not delegate its authority to grant or administer any such Awards to
individuals (i) who are subject on the date of the grant to the reporting rules
under Section 16(a) of the Exchange Act, (ii) who are Section 162(m)
Participants or (iii) who are executive officers of the Company. Any delegation
hereunder shall be subject to the restrictions and limits that the Committee
specifies at the time of such delegation of authority and may be rescinded at
any time by the Committee. At all times, any committee appointed under this
Section 9.5 shall serve in such capacity at the pleasure of the Committee.
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ARTICLE X
Miscellaneous Provisions
10.1 Not Transferable. Awards under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of
descent and distribution or pursuant to a QDRO or pursuant to the succeeding
paragraph, unless and until such Awards have been exercised, or the shares
underlying such Awards have been issued, and all restrictions applicable to
such shares have lapsed. No Award or interest or right therein shall be liable
for the debts, contracts or engagements of the Optionee, Grantee or Restricted
Stockholder or his successors in interest or shall be subject to disposition by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any
other means whether such disposition be voluntary or involuntary or by
operation of law by judgment, levy, attachment, garnishment or any other legal
or equitable proceedings (including bankruptcy), and any attempted disposition
thereof shall be null and void and of no effect, except to the extent that such
disposition is permitted by the preceding sentence.
Notwithstanding the foregoing provisions of this Section 10.1, the
Administrator, in its sole discretion, may determine to grant an Award, which,
by its terms or by resolution of the Administrator after its grant, may be
transferred by the Optionee, Grantee or Restricted Stockholder, in writing and
with prior written notice to the Administrator, by gift or contribution, to a
"family member" of the Optionee, Grantee or Restricted Stockholder (as defined
under the instructions to use of Form S-8), provided, that an Award that has
been so transferred shall continue to be subject to all of the terms and
conditions as applicable to the original Optionee, Grantee or Restricted
Stockholder, and the transferee shall execute any and all such documents
requested by the Administrator in connection with the transfer, including
without limitation to evidence the transfer and to satisfy any requirements for
an exemption for the transfer under applicable federal and state securities
laws.
During the lifetime of the Optionee or Grantee, only he may exercise an
Award (or any portion thereof) granted to him under the Plan unless it has been
disposed of pursuant to a QDRO or transferred pursuant to the foregoing
paragraph. After the death of the Optionee or Grantee, any exercisable portion
of an Award may, prior to the time when such portion becomes unexercisable
under the Plan or the applicable Award Agreement, be exercised by his personal
representative or by any person empowered to do so under the deceased
Optionee's, Grantee's or Restricted Stockholder's will or under the then
applicable laws of descent and distribution.
10.2 Amendment, Suspension or Termination of this Plan. This Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Administrator. However, without approval
of the Company's stockholders given within twelve months before or after the
action by the Administrator, no action of the Administrator may, except as
provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the
Award Limit, and no action of the Administrator may be taken that would
otherwise require stockholder approval as a matter of applicable law,
regulation or rule. No amendment, suspension or termination of this Plan shall,
without the consent of the holder of an Award, alter or impair any rights or
obligations under any Award theretofore granted or awarded, unless the award
itself otherwise expressly so provides. No Award may be granted or awarded
during any period of suspension or after termination of this Plan, and in no
event may any Incentive Stock Option be granted under this Plan after March 29,
2010.
10.3 Changes in Common Stock or Assets of the Company; Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 10.3(e), in the event that the Administrator
determines that any dividend or other distribution (whether in the form of
cash, Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company,
VII-16
<PAGE>
or other similar corporate transaction or event, in the Administrator's sole
discretion affects the Common Stock such that an adjustment is determined by
the Administrator to be appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available under the
Plan or with respect to an Award, then the Administrator shall, in such manner
as it may deem equitable, adjust any or all of:
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Awards may be granted
under the Plan (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares
which may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock
Payments, and in the number and kind of shares of outstanding
Restricted Stock or Deferred Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment.
(b) Subject to Section 10.3(e), in the event of any corporate
transaction or other event described in Section 10.3(a) which results in shares
of Common Stock being exchanged for or converted into cash, securities
(including securities of another corporation) or other property, the
Administrator will have the right to terminate this Plan as of the date of the
event or transaction, in which case all options, rights and other awards
granted under this Plan shall become the right to receive such cash, securities
or other property, net of any applicable exercise price.
(c) Subject to Sections 10.3(c)(vii) and 10.3(e), in the event of any
corporate transaction or other event described in Section 10.3(a) or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Administrator in its discretion is hereby authorized to take
any one or more of the following actions whenever the Administrator determines
that such action is appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the Plan
or with respect to any option, right or other award under this Plan, to
facilitate such transactions or events or to give effect to such changes in
laws, regulations or principles:
(i) In its discretion, and on such terms and conditions as it deems
appropriate, the Administrator may provide, either automatically or
upon the Optionee's request, for either the purchase of any such
Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock
for an amount of cash equal to the amount that could have been attained
upon the exercise of such Award or realization of the Optionee's rights
had such Award been currently exercisable or payable or the replacement
of such Award with other rights or property selected by the
Administrator in its sole discretion;
(ii) In its sole and absolute discretion, the Administrator may
provide, either by the terms of such Award or by action taken prior to
the occurrence of such transaction or event that it cannot be exercised
after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Administrator may provide,
either by the terms of such Award or by action taken prior to the
occurrence of such transaction or event, that, for a specified period
of time prior to such transaction or event, such Award shall be
exercisable as to all shares covered thereby, notwithstanding anything
to the contrary in (i) Section 4.4 or (ii) the provisions of such
Award;
(iv) In its discretion, and on such terms and conditions as it deems
appropriate, the Administrator may provide, either by the terms of such
Award or by action taken prior to the
VII-17
<PAGE>
occurrence of such transaction or event, that upon such event, such
option, right or award be assumed by the successor corporation, or a
parent or subsidiary thereof, or shall be substituted for by similar
options, rights or awards covering the stock of the successor
corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices;
(v) In its discretion, and on such terms and conditions as it deems
appropriate, the Administrator may make adjustments in the number and
type of shares of Common Stock (or other securities or property)
subject to outstanding Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents, or Stock Payments, and in the number and
kind of outstanding Restricted Stock or Deferred Stock and/or in the
terms and conditions of (including the grant or exercise price), and
the criteria included in, outstanding Awards and Awards which may be
granted in the future;
(vi) In its discretion, and on such terms and conditions as it deems
appropriate, the Administrator may provide either by the terms of a
Restricted Stock award or Deferred Stock award or by action taken prior
to the occurrence of such event that, for a specified period of time
prior to such event, the restrictions imposed under a Restricted Stock
Agreement or a Deferred Stock Agreement upon some or all shares of
Restricted Stock or Deferred Stock may be terminated, and, in the case
of Restricted Stock, some or all shares of such Restricted Stock may
cease to be subject to repurchase under Section 6.6 after such event;
and
(vii) In the event of a Corporate Transaction, to the extent that
the Board does not have the ability under Rule 16b-3 to take or to
refrain from taking the discretionary actions set forth above, each
Option granted to an Independent Director shall be exercisable as to
all shares covered thereby during the five days immediately preceding
the consummation of such Corporation Transaction.
(d) Subject to Section 10.3(e) and 10.8, the Administrator may, in its
discretion, include such further provisions and limitations in any Award
agreement or certificate, as it may deem equitable and in the best interests of
the Company.
(e) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 10.3 or in
any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would violate Section 16 or the exemptive
conditions of Rule 16b-3. The number of shares of Common Stock subject to any
such Award shall always be rounded to the next whole number.
(f) Notwithstanding the foregoing, in the event that the Company becomes
a party to a transaction that is intended to qualify for "pooling of interests"
accounting treatment and, but for one or more of the provisions of this Plan or
any Award Agreement would so qualify, then this Plan and any Award Agreement
shall be interpreted so as to preserve such accounting treatment, and to the
extent that any provision of the Plan or any Award Agreement would disqualify
the transaction from pooling of interests accounting treatment (including, if
applicable, an entire Award Agreement), then such provision shall be null and
void. All determinations to be made in connection with the preceding sentence
shall be made by the independent accounting firm whose opinion with respect to
"pooling of interests" treatment is required as a condition to the Company's
consummation of such transaction.
10.4 Tax Withholding. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Optionee, Grantee or
Restricted Stockholder of any sums required by federal, state or local tax law
to be withheld with respect to the issuance, vesting or exercise of any Award.
The Administrator may in its discretion and in whole or partial satisfaction of
the foregoing requirement allow such Optionee, Grantee or Restricted
Stockholder to elect to have the Company withhold shares of Common Stock
VII-18
<PAGE>
otherwise issuable under such Award (or allow the return of shares of Common
Stock) having a Fair Market Value in an amount not to exceed the sums necessary
to pay the tax withholding based on the minimum statutory withholding rates for
federal and state tax purposes, including payroll taxes, that are applicable to
such supplemental taxable income.
10.5 Loans. The Administrator may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an Award
under this Plan. The terms and conditions of any such loan shall be set by the
Administrator.
10.6 Forfeiture Provisions. Pursuant to its general authority to determine
the terms and conditions applicable to awards under the Plan, the Administrator
shall have the right (to the extent consistent with the requirements of Rule
16b-3) to provide, in the terms of Options or other Awards made under the Plan,
or to require the recipient to agree by separate written instrument, that (i)
any proceeds, gains or other economic benefit actually or constructively
received by the recipient upon any receipt or exercise of the Award, or upon
the receipt or resale of any Common Stock underlying such Award, must be paid
to the Company, and (ii) the Award shall terminate and any unexercised portion
of such award (whether or not vested) shall be forfeited, if (a) a Termination
of Employment, Termination of Consultancy or Termination of Directorship occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the award, or (b) the recipient at any time, or during a
specified time period, engages in any activity in competition with the Company,
or which is inimical, contrary or harmful to the interests of the Company, as
further defined by the Administrator.
10.7 Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of this Plan, this Plan, and
any Award granted or awarded, to any individual who is then subject to Section
16 of the Exchange Act, shall be subject to any additional limitations set
forth in any applicable exemptive rule under Section 16 of the Exchange Act
(including any amendment to Rule 16b-3 of the Exchange Act) that are
requirements for the application of such exemptive rule. To the extent
permitted by applicable law, the Plan, the Awards granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of this Plan,
any Option or Stock Appreciation Right intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall be subject
to any additional limitations set forth in Section 162(m) of the Code
(including any amendment to Section 162(m) of the Code) or any regulations or
rulings issued thereunder that are requirements for qualification as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
10.8 Effect of Plan Upon Options and Compensation Plans. The adoption of
this Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in this Plan shall be construed to
limit the right of the Company (i) to establish any other forms of incentives
or compensation for Employees, Directors or Consultants of the Company or any
Subsidiary or (ii) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
10.9 Compliance with Laws. This Plan, the granting and vesting of Awards
under this Plan and the issuance and delivery of shares of Common Stock and the
payment of money under this Plan or under Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments granted or
Restricted Stock or Deferred Stock awarded hereunder are subject to compliance
with all applicable federal and state laws, rules and regulations (including
but not limited to state and federal securities law and federal margin
requirements) and to such approvals by any listing, regulatory or governmental
authority as may, in the opinion of counsel for the Company, be necessary or
advisable in connection therewith. Any securities delivered under this Plan
shall be subject to such restrictions, and the person acquiring such securities
shall, if requested by the
VII-19
<PAGE>
Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. To the extent permitted by applicable law, the
Plan and the Awards granted or awarded hereunder shall be deemed amended to the
extent necessary to conform to such laws, rules and regulations.
10.10 Titles. Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this Plan.
10.11 Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Texas without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan, as amended and restated, was duly
adopted by the Board of Directors of Tuboscope Inc. on March 30, 2000 and was
approved by the requisite number of votes by the stockholders of Tuboscope Inc.
on May 30, 2000.
Executed on this day of , 2000.
_____________________________________
James F. Maroney, III
Vice President, Secretary
and General Counsel
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<PAGE>
Varco International, Inc.
Important: Please mark boxes to give voting instructions. [_]
[ ]
1. PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF MERGER DATED AS OF MARCH 22,
2000 BETWEEN TUBOSCOPE INC. AND VARCO INTERNATIONAL, INC. PURSUANT TO WHICH
VARCO INTERNATIONAL, INC. WILL MERGE WITH AND INTO TUBOSCOPE INC.
For Against Abstain
[_] [_] [_]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
The undersigned acknowledges receipt of
the Notice of Special Meeting of
Shareholders and of the Proxy
Statement/Prospectus.
Dated _____________________________, 2000
Signature(s) ____________________________
_________________________________________
Please sign exactly as your name appears.
Joint owners should each sign personally.
Where applicable, indicate your official
position or representative capacity.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING THE
ENCLOSED ENVELOPE.
PROXY PROXY
Varco International, Inc.
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby appoints GEORGE BOYADJIEFF and WALLACE K. CHAN, and
any of them, proxies of the undersigned, with full power of substitution, to
vote the stock of the undersigned at the special meeting of shareholders of
Varco International, Inc., to be held at The Doubletree Hotel, 100 The City
Drive, Orange, California 92868 on May 30, 2000 at 9:00 a.m. for the purposes
set forth on the reverse side.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
PLEASE MARK, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side)
