<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-33447
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
DRIL-QUIP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3533 74-2162088
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS 77040
(713) 939-7711
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
LARRY E. REIMERT
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS 77040
(713) 939-7711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
WALTER J. SMITH THOMAS P. MASON
BAKER & BOTTS, L.L.P. ANDREWS & KURTH L.L.P.
3000 ONE SHELL PLAZA 4200 TEXAS COMMERCE TOWER
910 LOUISIANA HOUSTON, TEXAS 77002
HOUSTON, TEXAS 77002-4995 (713) 220-4200
(713) 229-1234
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(1) PRICE(2)(3) REGISTRATION FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share (4).... -- -- $126,500,000 $38,334(5)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(4) Includes associated rights to purchase preferred stock.
(5) A filing fee of $34,849 has previously been paid. An additional fee of
$3,485 is being paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION AND AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued October 17, 1997
5,000,000 Shares
[LOGO OF DRIL-QUIP APPEARS HERE]
COMMON STOCK
-----------
OF THE 5,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 2,500,000
SHARES ARE BEING SOLD BY THE COMPANY AND 2,500,000 SHARES ARE BEING SOLD BY
THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY
THE SELLING STOCKHOLDERS. PRIOR TO THIS OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL
BE BETWEEN $20 AND $22. SEE "UNDERWRITERS" FOR A DISCUSSION OF
THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.
-----------
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "DRQ."
-----------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREOF FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including under the Securities
Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Company and the Selling Stockholders have granted to the
Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 750,000 additional Shares at the price
to public less underwriting discounts and commissions for the purpose of
covering over-allotments, if any. If the Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions, proceeds to Company and proceeds to Selling Stockholders
will be $ , $ , $ and $ , respectively.
See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Andrews & Kurth L.L.P., counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1997 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSONS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 23
Management................................................................ 39
Certain Transactions...................................................... 44
Principal and Selling Stockholders........................................ 45
Shares Eligible for Future Sale........................................... 46
Description of Capital Stock.............................................. 47
Underwriters.............................................................. 54
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited consolidated financial information.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE>
[Map showing the locations of Dril-Quip's (i) manufacturing, engineering,
sales and service operations, (ii) sales and service operations and (iii)
sales representatives. Photographs of Dril-Quip's World Headquarters, Europe
Headquarters, Asia-Pacific Headquarters and Eldridge Road Facility.]
i
<PAGE>
[Illustrations of jack-up, platform, floating rig, tension leg platform and
spar installations, accompanied by a list of Dril-Quip products used in each
installation appear on pages ii-iv. The illustrations show where each product
is utilized. Illustrations of platform wellheads, mudline hanger systems,
platform production trees, diverters, specialty connectors, subsea wellheads,
wellhead connectors, subsea production trees and drilling and production riser
systems are also included.]
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus (i) gives effect to the
Company's 14.3686 for one stock split and its expected reorganization as a
Delaware corporation prior to the consummation of the Offering, and (ii)
assumes that the Underwriters' over-allotment option will not be exercised.
Unless otherwise indicated by the context, references herein to the "Company"
or "Dril-Quip" mean Dril-Quip, Inc., a Delaware corporation that is the issuer
of the Common Stock offered hereby, its predecessor and its subsidiaries.
THE COMPANY
Dril-Quip is one of the world's leading manufacturers of highly engineered
offshore drilling and production equipment which is well suited for use in
deepwater, harsh environment and severe service applications. The Company
designs and manufactures subsea equipment, surface equipment and offshore rig
equipment for use by major integrated, large independent and foreign national
oil and gas companies in offshore areas throughout the world. The Company's
principal products consist of subsea and surface wellheads, subsea and surface
production trees, mudline hanger systems, specialty connectors and associated
pipe, drilling and production riser systems, wellhead connectors and diverters.
The Company also provides installation and reconditioning services and rents
running tools for use in connection with the installation and retrieval of its
products. In 1996, the Company derived 82.1% of its revenues from the sale of
its products and 17.9% of its revenues from services.
Dril-Quip has developed its broad line of subsea equipment, surface equipment
and offshore rig equipment exclusively through its internal product development
efforts. The Company believes that it has achieved significant market share and
brand name recognition with respect to its established products due to the
technological capabilities, reliability, cost effectiveness and operational
timesaving features of these products. In particular, the Company's Quik-
Thread(R) and Quik-Stab(R) specialty connectors, MS-15(R) mudline hanger
systems and SS-10(R) and SS-15(R) subsea wellheads are among the most widely
used in the industry. The Company believes that, as of June 1, 1997, its subsea
wellhead equipment was being used on approximately 70% of the wells being
drilled in waters deeper than 3,000 feet worldwide. Since 1991, the Company has
introduced a number of new products, including diverters, wellhead connectors,
dual-bore and single-bore subsea production trees, subsea and platform valves,
platform wellheads, platform trees, drilling risers and Spar and tension leg
platform ("TLP") production risers.
The Company has grown consistently since its inception in 1981 and has been
profitable in every year since 1983. As a result of new product introductions,
increased market share in established product lines and increased offshore
drilling and production activity, the Company's revenues have increased from
$65.2 million in 1992 to $115.9 million in 1996 (an annual growth rate of
15.4%), and its net income has increased from $1.7 million in 1992 to $9.1
million in 1996 (an annual growth rate of 52.1%). From 1995 to 1996, the
Company's revenues and net income grew by 7% and 38%, respectively. For the six
months ended June 30, 1997, the Company's revenues were $68.7 million and its
net income was $5.1 million, representing a 24% increase in revenues and a 26%
increase in net income from the comparable period in 1996.
The Company has experienced increased demand for its products due to the
increased drilling and production activity in offshore areas throughout the
world during the last several years, particularly in deeper waters. The
increase in offshore drilling and production activity has been driven by a
number of factors, including (i) the prospect for relatively larger hydrocarbon
discoveries in deepwater areas and (ii) recent technological advances in
offshore drilling and production equipment (including those introduced by Dril-
Quip), seismic data collection and interpretation techniques, and drilling
techniques, which have enhanced the economics of offshore drilling and
production. In addition, several foreign national oil companies have recently
opened offshore areas for exploration and development by other parties,
including major integrated and large
3
<PAGE>
independent oil and gas companies. These factors have contributed to the
increase in the Company's backlog from approximately $56 million at December
31, 1996 to approximately $101 million at June 30, 1997, an 80% increase. The
Company intends to use the proceeds from the Offering to expand its
manufacturing capacity in order to satisfy the increased demand for its
products.
Dril-Quip markets its products through its offices and sales representatives
located in all of the major international energy markets throughout the world.
In 1996, the Company generated approximately 68% of its revenues from foreign
sales. The Company manufactures its products at its facilities located in
Houston, Texas; Aberdeen, Scotland; and Singapore, and maintains additional
facilities for fabrication and/or reconditioning in Norway, Denmark and
Australia. Dril-Quip's manufacturing operations are vertically integrated, with
the Company performing substantially all of its forging, heat treating,
machining, fabrication, inspection, assembly and testing at its own facilities.
Unlike essentially all of the Company's competitors, which depend on outside
sources for forging and heat treatment services, Dril-Quip owns a forge and
heat treatment facility that handles virtually all of the Company's
requirements. This vertically integrated manufacturing capability provides
Dril-Quip with competitive advantages because the Company is able to (i)
control the quality of its products from initial stages, (ii) control the costs
of its production and (iii) assure timely delivery of high-volume and
customized orders.
The Company was co-founded in 1981 by the current Board of Directors, Larry
E. Reimert, Gary D. Smith, J. Mike Walker and Gary W. Loveless (the
"Founders"). Together, Messrs. Reimert, Smith and Walker have over 75 years of
combined experience in the oilfield equipment industry, essentially all of
which has been with the Company and its major competitors. In addition, key
department managers have been with the Company over 10 years, on average. See
"Management." After the Offering, the Founders will collectively beneficially
own approximately 70% of the outstanding Common Stock (approximately 67% if the
over-allotment option is exercised in full).
STRATEGY
The Company's goal is to expand its existing market position in the offshore
oil and gas equipment and services sector while at the same time increasing its
earnings and cash flow per share to enhance overall stockholder value. Key
elements of the Company's strategy for achieving this goal are to:
. CONTINUE TO DEVELOP NEW PRODUCTS. The Company plans to utilize its
technological expertise to continue to develop and introduce new products
and product enhancements in both its existing product lines and new
product lines. For example, the Company has recently received purchase
orders for drilling risers, production risers and deepwater subsea
production trees. The Company believes that the strong brand name
recognition and reputation of its existing products will assist it in
successfully introducing new products to customers.
. INCREASE MANUFACTURING CAPACITY. To maintain and improve market share in
its major product lines, the Company plans to expand its manufacturing
capacity by approximately 90% during the three year period 1997 through
1999, approximately two-thirds of which is expected to be completed by
the end of 1998. The Company has been operating at close to full capacity
in recent years, and believes that this expansion is essential in order
to meet customer demand for its existing products and to continue its
strategy of developing new products.
. CONTINUE TO REDUCE COSTS AND INCREASE OPERATIONAL EFFICIENCIES. The
Company controls its costs through such activities as performing its own
forging and heat treatment, rebuilding quality used machine tools (rather
than purchasing new machine tools) and optimizing manufacturing
operations to increase the rate of production. Dril-Quip also plans to
expand its forging capacity to begin marketing forgings to third parties
in addition to supplying its own forging requirements. The Company
expects that this will provide additional cost efficiencies as well as
additional revenues, thereby contributing to profits.
4
<PAGE>
. CONTINUE EXPANSION INTO SELECTED INTERNATIONAL MARKETS. The Company's
products are currently utilized primarily in the Gulf of Mexico, the
North Sea and in selected markets in Southeast Asia, Australia and South
America. The Company has recently engaged international sales
representatives in several additional markets, including Mexico, West
Africa and the Middle East. The Company believes that there is
significant potential for increased sales through focused marketing
efforts in other active offshore areas in the world, such as China,
Argentina and the Caspian Sea.
. CAPITALIZE ON STRONG BALANCE SHEET. The Company plans to use a portion of
the net proceeds from the Offering initially to repay its existing
indebtedness. The Company believes that its strong balance sheet will
provide it with the financial flexibility to carry out its strategy to
design and develop new products, significantly increase manufacturing
capacity and expand its international presence.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company...................... 2,500,000 shares
The Selling Stockholders......... 2,500,000 shares
Total.......................... 5,000,000 shares
Common Stock to be outstanding
after the Offering................ 16,870,000 shares (1)
Use of Proceeds.................... To increase manufacturing capacity, improve
and expand facilities, and manufacture
additional running tools for rental. See
"Use of Proceeds."
Proposed New York Stock Exchange
Symbol............................ DRQ
</TABLE>
- --------
(1) Excludes an aggregate of 422,500 shares of Common Stock reserved for
issuance upon exercise of stock options to be granted at the closing of the
Offering under the Company's 1997 Incentive Plan (the "Incentive Plan").
See "Management--Incentive Plan," "Shares Eligible for Future Sale" and
Notes to the Company's Consolidated Financial Statements.
RISK FACTORS
Prospective purchasers should consider all of the information contained in
this Prospectus before making an investment in shares of Common Stock. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND
INDUSTRY DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $80,548 $108,390 $115,864 $55,346 $68,669
Cost of sales................... 58,604 76,471 77,863 37,602 47,725
Selling, general and
administrative expenses........ 11,673 13,597 15,031 7,253 7,839
Engineering and product
development expenses........... 6,069 5,769 6,971 3,245 4,109
------- -------- -------- ------- -------
76,346 95,837 99,865 48,100 59,673
Operating income................ 4,202 12,553 15,999 7,246 8,996
Interest expense................ 2,273 2,944 2,647 1,301 1,400
------- -------- -------- ------- -------
Income before income taxes...... 1,929 9,609 13,352 5,945 7,596
Income tax provision............ 635 3,023 4,234 1,885 2,483
------- -------- -------- ------- -------
Net income...................... $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
======= ======== ======== ======= =======
Earnings per share.............. $ .09 $ .46 $ .63 $ .28 $ .36
Weighted average shares
outstanding.................... 14,370 14,370 14,370 14,370 14,370
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating
activities..................... $ 2,422 $ 6,466 $ 5,185 $ 1,374 $ 2,437
Net cash used in investing ac-
tivities....................... (4,524) (5,659) (7,006) (2,756) (3,379)
Net cash provided by (used in)
financing activities........... 2,668 560 1,261 (351) 4
OTHER DATA:
EBITDA (1)...................... $ 8,069 $ 17,201 $ 20,387 $ 9,646 $11,604
Depreciation and amortization... 3,867 4,648 4,388 2,400 2,608
Capital expenditures............ 4,614 6,184 7,228 2,832 3,603
OFFSHORE INDUSTRY DATA (2):
Worldwide average contracted
offshore rig count............. 535.8 540.5 572.0 561.5 592.3
Worldwide average contracted
floating rig count (3)......... 143.0 139.4 152.8 150.7 159.0
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 52,877 $ 72,035
Total assets............................................ 113,823 129,459
Total debt.............................................. 32,489 --
Total stockholders' equity.............................. 54,911 103,036
</TABLE>
- --------
(1) EBITDA, or "earnings from continuing operations before interest expense,
interest income, income taxes, depreciation and amortization," is not a
generally accepted accounting principle measure, but is a supplemental
financial measurement used by the Company in the evaluation of its
business. EBITDA should not be construed as an alternative to net income or
to cash flow from operations or any other measure of performance in
accordance with generally accepted accounting principles, and is presented
solely as supplemental disclosure. EBITDA is a supplemental financial
measure commonly used by investors in the oil services industry and is
being presented because management believes that EBITDA provides
supplemental information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working capital.
Management monitors the trends in EBITDA closely, as well as the trends in
revenues and net income, to aid it in managing the business, controlling
costs and increasing revenues. Management believes that the recent
increases in EBITDA are indicative of the increased level of profitable
business activity experienced by the Company. Because EBITDA excludes some,
but not all, items that affect net income and this measure may vary among
companies, the EBITDA data presented above may not be comparable to
similarly titled measures of other companies.
(2) Data obtained from Offshore Data Services.
(3)Includes semisubmersible and drillship-type rigs.
(4) Adjusted to give effect to the Offering and the application of the
estimated net proceeds to the Company therefrom of approximately $48
million (assuming an initial public offering price of $21.00 per share).
See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby. All statements
other than statements of historical facts included in this Prospectus,
including, without limitation, statements regarding the Company's business
strategy, plans and objectives of management of the Company for future
operations and future industry conditions are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will be met. Important factors that could cause actual results to
differ materially from the Company's expectations are disclosed below and
elsewhere in this Prospectus.
VOLATILITY OF OIL AND NATURAL GAS PRICES AND CYCLICALITY OF THE OIL AND GAS
INDUSTRY
The Company's business is substantially dependent upon the condition of the
oil and gas industry and, in particular, the willingness of oil and gas
companies to make capital expenditures on exploration, drilling and production
operations offshore. The level of capital expenditures is generally dependent
on the prevailing view of future oil and gas prices, which are influenced by
numerous factors affecting the supply and demand for oil and gas, including
worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, coordination by the Organization of
Petroleum Exporting Countries ("OPEC"), the cost of exploring for and
producing oil and gas, the sale and expiration dates of offshore leases in the
United States and overseas, the discovery rate of new oil and gas reserves in
offshore areas and technological advances. Oil and gas prices and the level of
offshore drilling and production activity have been characterized by
significant volatility in recent years. Although hydrocarbon prices have
improved in recent years and the level of offshore exploration, drilling and
production activity has increased, there can be no assurance that such price
and activity levels will be sustained and that there will not be continued
volatility in the level of drilling and production related activities. A
significant and prolonged decline in hydrocarbon prices would likely have a
material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
INTERNATIONAL OPERATIONS
The Company has substantial international operations, with approximately
two-thirds of its revenues derived from foreign sales in each of 1994, 1995
and 1996. The Company operates its business and markets its products and
services in all of the significant oil and gas producing areas in the world
and is, therefore, subject to the risks customarily attendant to international
operations and investments in foreign countries. These risks include
nationalization, expropriation, war and civil disturbance, restrictive action
by local governments, limitation on repatriation of earnings, change in
foreign tax laws and change in currency exchange rates, any of which could
have an adverse effect on either the Company's ability to manufacture its
products in its facilities abroad or the demand in certain regions for the
Company's products or both. To date, the Company has not experienced any
significant problems in foreign countries arising from local government
actions or political instability, but there is no assurance that such problems
will not arise in the future. Interruption of the Company's international
operations could have a material adverse effect on its overall operations.
The Company conducts a portion of its business in currencies other than the
United States dollar, and the Company's operations are subject to fluctuations
in foreign currency exchange rates. The Company has generally endeavored to
protect itself against substantial foreign currency fluctuations by limiting
the amount of sales denominated in currencies other than United States dollars
and by contractual purchase price adjustments based on an exchange rate
formula related to U.S. dollars. There is no assurance that the Company will
be able to protect itself against such fluctuations in the future.
Historically, the Company has not conducted business in countries that limit
repatriation of earnings. However, as the Company expands its international
operations, it may begin operating in countries that have such limitations.
Further, there can be no assurance that the countries in which the Company
currently operates will not adopt policies limiting repatriation of earnings
in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Currency Risk."
7
<PAGE>
OPERATING RISKS
Potential Liabilities. Certain products of the Company are used in
potentially hazardous drilling, completion and production applications that
can cause personal injury, product liability and environmental claims.
Litigation arising from a catastrophic occurrence at a location where the
Company's equipment and/or services are used may in the future result in the
Company being named as a defendant in lawsuits asserting potentially large
claims. To the extent available, the Company maintains insurance coverage that
it believes is customary in the industry. Such insurance does not, however,
provide coverage for all liabilities (including liability for certain events
involving pollution), and there is no assurance that its insurance coverage
will be adequate to cover claims that may arise or that the Company will be
able to maintain adequate insurance at rates it considers reasonable. The
occurrence of an event not fully covered by insurance could have a material
adverse effect on the financial condition and results of operations of the
Company.
Competitive Project Bids. A portion of the Company's business consists of
designing, manufacturing, selling and installing equipment for major projects
pursuant to competitive bids, and the number of such projects in any year
fluctuates. The Company's profitability on such projects is critically
dependent on making accurate and cost effective bids and performing
efficiently in accordance with bid specifications. Various factors can
adversely affect the Company's performance on individual projects, with
potential adverse effects on project profitability.
Percentage-of-Completion Accounting. Some of the Company's revenues are
earned on a percentage-of-completion basis generally based on the ratio of
costs incurred to the total estimated costs. Accordingly, purchase order price
and cost estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in the
period when such estimates are revised. To the extent that these adjustments
result in a reduction or elimination of previously reported profits, the
Company would have to recognize a charge against current earnings, which could
be significant depending on the size of the project or the adjustment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
DEPENDENCE ON KEY EMPLOYEES
The Company depends to a large extent on the services of the Company's
executive management team, Mr. Larry E. Reimert, Mr. Gary D. Smith and Mr. J.
Mike Walker, the loss of any of whom could have a material adverse effect on
the Company's operations. Prior to the completion of the Offering, the Company
will enter into employment agreements with each of Messrs. Reimert, Smith and
Walker. See "Management--Employment Agreements."
DEPENDENCE ON SKILLED MACHINISTS AND TECHNICAL PERSONNEL
The Company believes that its success is dependent upon its ability to
continue to employ and retain skilled machinists and technical personnel. The
Company's ability to expand its operations depends in part on its ability to
increase its skilled labor force. The demand for such workers is high and the
supply is limited. While the Company believes that its wage rates are
competitive and that its relationship with its skilled labor force is good, a
significant increase in the wages paid by competing employers could result in
a reduction of the Company's skilled labor force, increases in the wage rates
paid by the Company or both. If either of these events were to occur, in the
near-term, the profits realized by the Company from work in progress would be
reduced and, in the long-term, the production capacity and profitability of
the Company could be diminished and the growth potential of the Company could
be impaired.
RELIANCE ON PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The Company's ability to develop new products and maintain technological
advantages is important to its future success. There can be no assurance that
the Company will be able to develop new products, successfully differentiate
itself from its competitors or adapt to evolving markets and technologies.
8
<PAGE>
The Company's ability to compete effectively will also depend on its ability
to continue to obtain patents on its proprietary technology and products. As
of June 30, 1997 the Company held 36 U.S. patents and 77 foreign patents.
Although the Company does not consider any single patent to be material to its
business as a whole, the inability to protect its future innovations through
patents could have a material adverse effect on the Company.
CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the Founders collectively will beneficially
own approximately 70% (67% if the Underwriters' over-allotment option is
exercised in full) of the outstanding shares of Common Stock. As a result,
they will be able to influence significantly and possibly control the outcome
of certain matters requiring a stockholder vote, including the election of
directors. Such ownership of Common Stock may have the effect of delaying or
preventing a change of control of the Company and may adversely affect the
voting and other rights of other stockholders. In addition, Messrs. Reimert,
Smith and Walker have entered into a Stockholders Agreement pursuant to which
each party has agreed to vote the shares of Common Stock held by such party to
elect to the Company's Board of Directors one designee of each of the other
parties. See "Principal and Selling Stockholders" and "Certain Transactions--
Stockholders Agreement."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally, including those specifically
directed to offshore operations. The adoption of laws and regulations
curtailing exploration and development drilling for oil and gas for economic
or other policy reasons could adversely affect the Company's operations by
limiting demand for the Company's products. The Company cannot determine the
extent to which its future operations and earnings may be affected by new
legislation, new regulations or changes in existing regulations.
The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for environmental damage without regard to negligence or fault on the
part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. See "Business--
Governmental Regulations."
COMPETITION
The Company faces significant competition from other manufacturers of
drilling and production equipment. Several of its primary competitors are
diversified multinational companies with substantially larger operating staffs
and greater capital resources than those of the Company and which, in some
instances, have been engaged in the manufacturing business for a much longer
time than the Company. See "Business--Competition."
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company's business is dependent on securing and maintaining customers by
promptly delivering reliable, high-performance products. For the year ended
December 31, 1996, one of the Company's customers, the Royal Dutch Shell Group
of Companies (aggregating orders placed by all of its worldwide affiliates),
9
<PAGE>
accounted for approximately 19% of revenues. The products that the Company may
sell to any particular customer depend on the size of that customer's capital
expenditure budget devoted to offshore drilling plans in a particular year and
on the results of competitive bids for major projects. Consequently, a
customer that accounts for a significant portion of revenues in one fiscal
year may represent an immaterial portion of revenues in subsequent years. See
"--Operating Risks--Competitive Project Bids." While the Company is not
dependent on any one customer or group of customers, the loss of one or more
of its significant customers could, at least on a short-term basis, have an
adverse effect on the Company's results of operations. See "Business--
Customers."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have a total of
16,870,000 shares of Common Stock outstanding. Of these shares, the 5,000,000
shares of Common Stock offered hereby (5,750,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restrictions or registration under the Securities Act of 1933, as amended (the
"Securities Act"), by persons other than "affiliates" of the Company, as
defined under the Securities Act. The remaining 11,870,000 shares of Common
Stock outstanding will be restricted securities as that term is defined by
Rule 144 as promulgated under the Securities Act. In addition, 422,500 shares
of Common Stock may be issued pursuant to options that will be issued under
the Company's incentive plan at an exercise price equal to the initial public
offering price in the Offering. See "Management--Executive Compensation."
Under Rule 144 (and subject to the conditions thereof, including volume
limitations), all of the 11,870,000 restricted shares will become eligible for
sale 90 days after the Offering. The directors and officers of the Company
have agreed that they will not, directly or indirectly, sell any shares of
Common Stock for a period of 180 days from the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated. The Company
will enter into a Registration Rights Agreement upon the consummation of the
Offering whereby it will agree to register under the Securities Act shares of
Common Stock held by Messrs. Reimert, Smith, Walker and Loveless and certain
of their related family limited partnerships to facilitate the sales thereof.
See "Certain Transactions--Registration Rights Agreement." Future sales of
substantial amounts of Common Stock in the public market following the
Offering could adversely affect the market price of the Common Stock. For
further information concerning Common Stock available for resale after the
Offering, see "Shares Eligible for Future Sale" and "Underwriters."
NO INTENTION TO PAY DIVIDENDS
The Company currently intends to retain any earnings for the future
operation and development of its business and does not currently anticipate
paying any dividends in the foreseeable future. The Company's existing credit
facilities restrict the payment of dividends. See "Dividend Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Notes to the Company's
Consolidated Financial Statements.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws, among other things,
provide for a classified Board of Directors with staggered terms, restrict the
ability of stockholders to take action by written consent, impose certain
supermajority voting requirements and authorize the Board of Directors to set
the terms of Preferred Stock. In addition, the Company's Certificate of
Incorporation and the Delaware General Corporation Law contain provisions that
impose restrictions on business combinations with interested parties. The
Company has also adopted a stockholder rights plan. The stockholder rights
plan, the provisions of the Company's Certificate of Incorporation and Bylaws
and the Delaware General Corporation Law may have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock."
10
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between
the Company and the Underwriters and may not be indicative of the price at
which the Common Stock will trade following the completion of the Offering.
See "Underwriters" for a discussion of the factors to be considered in
determining the initial public offering price. The completion of the Offering
provides no assurance that an active trading market for the Common Stock will
develop or, if developed, that it will be sustained. The market price of the
Common Stock could also be subject to significant fluctuation and may be
influenced by many factors, including variations in results of operations,
variations in natural gas and oil prices, investor perceptions of the Company
and the oil and natural gas industry, and general economic and other
conditions.
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their stock of $14.89
per share (assuming an initial public offering price of $21.00 per share). See
"Dilution."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, assuming an initial
public offering price of $21.00 per share, and after deducting underwriting
discounts, commissions and estimated expenses, are estimated to be
approximately $48 million ($55 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use the net proceeds for
capital expenditures to increase manufacturing capacity, improve and expand
facilities and manufacture additional running tools for rental. Dril-Quip
expects that these expenditures will be incurred over a three-year period and
that total capital expenditures for these purposes will be approximately $11
million in 1997 and approximately $23 million in 1998. In particular, the
Company expects to spend approximately $16 million to complete the planned
expansion at its Eldridge site in Houston, Texas, which is expected to be
completed in 1999. The Company plans to spend approximately $4.5 million in
1997 to add machine tools at its existing facilities, most of which will be
moved to the new facilities upon their completion. Pending application of the
proceeds for these purposes, the Company intends to use approximately $32
million to repay its bank indebtedness in full and the balance will be used
for working capital. Excess cash will be invested in short term investment
grade securities.
The Company's credit facilities with Bank One, Texas, National Association
("Bank One") are provided through a Credit Agreement dated March 30, 1994, as
amended, and currently consist of (i) a $25 million revolving credit facility
bearing interest at a rate of 1/4% over Bank One's base rate from day to day
(this facility terminates on June 1, 1999), (ii) a $3 million advancing credit
facility for the purchase of land and equipment and improvements to facilities
bearing interest at a rate of 1/2% over Bank One's base rate from day to day
(this facility terminates on October 1, 2001), and (iii) a $10.7 million term
loan bearing interest at 1/2% over Bank One's base rate from day to day that
matures on July 1, 1999. Indebtedness under the term loan was used for the
purchase of land, buildings, equipment and improvements to facilities, as well
as other capital expenditures. At June 30, 1997, $29.0 million was outstanding
under the Bank One credit facilities, bearing interest at an average rate of
8.85%, and approximately $7.7 million was available for drawdown under the
revolving facility.
The Company has three term loans with the Bank of Scotland: a June 7, 1996
loan, a September 19, 1994 loan and a December 12, 1991 loan. Each loan has a
120-month maturity. The June 7, 1996 and September 19, 1994 loans each bear
interest at 1.75% over the Bank of Scotland's base rate, and the December 12,
1991 loan bears interest at 1.5% over the Bank of Scotland's base rate.
Indebtedness under the Bank of Scotland term loans was used for the purchase
of land and buildings and to improve the Company's Aberdeen manufacturing
facilities. At June 30, 1997, $700,000, $600,000 and $1.7 million were
outstanding under the Bank of Scotland term loans, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company paid dividends of $.004 and $.007 per share of Common Stock in
1995 and 1996, respectively. However, the Company does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to retain any earnings for the future operation and development of its
business. The Board of Directors will review this policy on a regular basis in
light of the Company's earnings, financial condition and market opportunities.
The Company's existing credit facilities restrict the payment of dividends.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
12
<PAGE>
DILUTION
As of June 30, 1997, the net tangible book value of the Company was
approximately $54.8 million, or approximately $3.81 per share of Common Stock.
Net tangible book value per share represents the amount of the Company's
tangible book value (total book value of tangible assets less total
liabilities) divided by the total number of shares of Common Stock
outstanding. After giving effect to the receipt of the estimated net proceeds
from the Offering (net of estimated underwriting discounts and commissions and
Offering expenses) at an assumed initial public offering price of $21.00 per
share, the pro forma net tangible book value of the Common Stock outstanding
at June 30, 1997 would have been $6.11 per share, representing an immediate
increase in net tangible book value of $2.30 per share to current stockholders
and an immediate dilution of $14.89 per share (the difference between the
assumed initial public offering price and the net tangible book value per
share after the Offering) to persons purchasing Common Stock at the assumed
initial public offering price. The following table illustrates such per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $21.00
Net tangible book value per share before the Offering........... $3.81
Increase in net tangible book value per share attributable to
new investors.................................................. 2.30
-----
Pro forma net tangible book value per share after giving effect to
the Offering..................................................... 6.11
------
Dilution in net tangible book value per share to new investors.... $14.89
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
differences between the number of shares of Common Stock acquired from the
Company, the total consideration price and the average price per share paid to
the Company by existing stockholders and investors purchasing shares in the
Offering (based upon an assumed initial public offering price per share of
$21.00).
<TABLE>
<CAPTION>
SHARES AVERAGE
PURCHASED(1) TOTAL CONSIDERATION PRICE
------------------ ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Current stockholders(2).......... 14,370,000 85.2% $ 144,000 .3% $ .01
New investors(2)................. 2,500,000 14.8 52,500,000 99.7 21.00
---------- ----- ----------- -----
Total.......................... 16,870,000 100.0% $52,644,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Does not include approximately 422,500 shares of Common Stock issuable
pursuant to options to be granted to officers and employees of the Company
at the closing of the Offering. The exercise of such stock options will be
dilutive to the interests of new investors. See "Management--Incentive
Plan."
(2) Sales by the Selling Stockholders in the Offering will reduce the number
of shares of Common Stock held by existing stockholders to 11,870,000, or
70.4% of the shares of Common Stock outstanding after the Offering. New
investors will hold 29.6% of the shares of Common Stock outstanding after
the Offering.
13
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term debt and total
capitalization of the Company (i) as of June 30, 1997 and (ii) as adjusted for
the sale of the 2,500,000 shares of Common Stock offered by the Company hereby
at an assumed offering price of $21.00 per share and the application of the
net proceeds to the Company therefrom (after deducting underwriting discounts
and commissions and estimated Offering expenses payable by the Company). See
"Use of Proceeds." This table should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt:.................... $ 3,522 $ --
======= ========
Long-term debt, less current maturities:................... $28,967 $ --
Stockholders' equity(1):
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 14,370,000 shares issued and outstanding
(actual), 16,870,000 shares outstanding (as adjusted)... 144 169
Additional paid-in capital............................... -- 48,100
Retained earnings........................................ 54,765 54,765
Foreign currency translation adjustment.................. 2 2
------- --------
Total stockholders' equity............................. 54,911 103,036
------- --------
Total capitalization................................. $83,878 $103,036
======= ========
</TABLE>
- --------
(1) Does not include approximately 422,500 shares of Common Stock issuable
pursuant to options to be granted to officers and employees of the Company
at the closing of the Offering. See "Management--Incentive Plan."
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of and for each of the years ended December
31, 1994, 1995 and 1996 are derived from the audited consolidated financial
statements of the Company included elsewhere in this Prospectus. The selected
financial data presented below as of and for the years ended December 31, 1992
and 1993 are derived from audited consolidated financial statements of the
Company not included in this Prospectus. The selected consolidated financial
data as of and for the six-month periods ended June 30, 1996 and 1997 are
derived from the unaudited consolidated financial statements of the Company
that in the opinion of the Company's management reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of its financial condition and results of operations as of such
dates and for such periods. The results for the six-month period ended June
30, 1997 are not necessarily indicative of the results that may be expected
for the entire year. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $65,172 $82,553 $80,548 $108,390 $115,864 $55,346 $ 68,669
Cost of sales........... 48,120 61,704 58,604 76,471 77,863 37,602 47,725
Selling, general and
administrative
expenses............... 8,074 10,907 11,673 13,597 15,031 7,253 7,839
Engineering and product
development expenses... 4,494 5,152 6,069 5,769 6,971 3,245 4,109
------- ------- ------- -------- -------- ------- --------
60,688 77,763 76,346 95,837 99,865 48,100 59,673
Operating income........ 4,484 4,790 4,202 12,553 15,999 7,246 8,996
Interest expense........ 1,915 1,494 2,273 2,944 2,647 1,301 1,400
------- ------- ------- -------- -------- ------- --------
Income before income
taxes.................. 2,569 3,296 1,929 9,609 13,352 5,945 7,596
Income tax provision.... 916 886 635 3,023 4,234 1,885 2,483
------- ------- ------- -------- -------- ------- --------
Net income.............. $ 1,653 $ 2,410 $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
======= ======= ======= ======== ======== ======= ========
Earnings per share...... $ .12 $ .17 $ .09 $ .46 $ .63 $ .28 $ .36
Weighted average shares
outstanding............ 14,370 14,370 14,370 14,370 14,370 14,370 14,370
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by
operating activities... $ 776 $ 3,182 $ 2,422 $ 6,466 $ 5,185 $ 1,374 $ 2,437
Net cash used in
investing activities... (3,487) (6,413) (4,524) (5,659) (7,006) (2,756) (3,379)
Net cash provided by
(used in) financing
activities............. 3,914 1,448 2,668 560 1,261 (351) 4
OTHER DATA:
EBITDA(1)............... $ 8,050 $ 8,549 $ 8,069 $ 17,201 $ 20,387 $ 9,646 $ 11,604
Depreciation and
amortization........... 3,566 3,759 3,867 4,648 4,388 2,400 2,608
Capital expenditures.... 4,283 6,592 4,614 6,184 7,228 2,832 3,603
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $30,135 $30,913 $34,099 $ 40,682 $ 49,524 $ 52,877
Total assets............ 65,712 70,346 79,208 93,186 114,777 113,823
Total debt.............. 26,659 28,100 30,416 31,052 32,536 32,489
Total stockholders'
equity................. 28,048 30,267 32,903 39,501 50,882 54,911
</TABLE>
- -------
(1) EBITDA, or "earnings from continuing operations before interest expense,
interest income, income taxes, depreciation and amortization," is not a
generally accepted accounting principle measure, but is a supplemental
financial measurement used by the Company in the evaluation of its
business. EBITDA should not be construed as an alternative to net income
or to cash flow from operations or any other measure of performance in
accordance with generally accepted accounting principles, and is presented
solely as a supplemental disclosure. EBITDA is a supplemental financial
measure commonly used by investors in the oil services industry and is
being presented because management believes that EBITDA provides
supplemental information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working capital.
Management monitors the trends in EBITDA closely, as well as the trends in
revenues and net income, to aid it in managing the business, controlling
costs and increasing revenues. Management believes that recent increases
in EBITDA are indicative of the increased level of profitable business
activity experienced by the Company. Because EBITDA excludes some, but not
all, items that affect net income and this measure may vary among
companies, the EBITDA data presented above may not be comparable to
similarly titled measures of other companies.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto presented elsewhere in
this Prospectus.
OVERVIEW
Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. The Company's principal products consist
of subsea and surface wellheads, subsea and surface production trees, mudline
hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.
The market for offshore drilling and production equipment and services is
fundamentally driven by the exploration, development and production spending
of oil and gas companies, particularly with respect to offshore activities
worldwide. The Company has experienced increased demand for its products due
to the increased drilling and production activity in offshore areas throughout
the world during the last several years, particularly in deeper waters. The
recent increase in offshore drilling and production activity has been driven
by a number of factors, including (i) the prospect for relatively larger
hydrocarbon discoveries in deepwater areas and (ii) recent technological
advances in offshore drilling and production equipment (including those
introduced by Dril-Quip), seismic data collection and interpretation
techniques, and drilling techniques, which have enhanced the economics of
offshore drilling and production. In addition, several foreign national oil
companies have recently opened offshore areas for exploration and development
by other parties, including major integrated and large independent oil and gas
companies. These factors have contributed to the increase in the Company's
backlog from approximately $56 million at December 31, 1996 to approximately
$101 million at June 30, 1997, an 80% increase. See "Business--Industry
Overview."
The Company intends to use the proceeds from the Offering for a three-year
capital expansion program to increase manufacturing capacity, improve and
expand facilities and manufacture additional running tools for rental. The
Company plans to expand its manufacturing capacity by approximately 90% during
the three year period 1997 through 1999, approximately two-thirds of which is
expected to be completed by the end of 1998. The Company believes that its
increased capacity and improved facilities will enable the Company to achieve
higher sales volumes. In connection with the capacity expansion, the Company
plans to hire additional workers. See "Use of Proceeds" and "Business--
Strategy."
Revenues. Dril-Quip's revenues are generated by its two operating groups:
the Product Group and the Service Group. The Product Group manufactures
offshore drilling and production equipment, and the Service Group provides
installation and reconditioning services as well as rental running tools for
installation and retrieval of its products. In 1996, the Company derived 82.1%
of its revenues from the sale of its products and 17.9% of its revenues from
services. Revenues from the Service Group generally correlate to revenues from
product sales, as increased product sales generate increased revenues from
installation services and rental running tools. Revenues have increased over
the last three years principally as a result of increased sales volumes of the
Company's established products and services, the introduction of new products
and product enhancements and price increases for the Company's products and
services. These price increases have occurred due to an increase in demand and
capacity constraints experienced by the Company and its competitors.
Substantially all of Dril-Quip's sales are made on a purchase order basis.
Purchase orders are subject to change and/or termination at the option of the
customer. In case of a change or termination, the customer is required to pay
the Company for work performed and other costs necessarily incurred as a
result of the change or termination.
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<PAGE>
Historically, Dril-Quip recognized revenues upon the delivery of a completed
product. As the Company has begun manufacturing larger and more complex
projects that have longer manufacturing times, the Company has begun to
account for purchase orders covering such projects on a percentage of
completion basis. The Company expects that such larger and more complex
projects will increase the Company's sales and revenues and afford the Company
certain economies of scale because such projects generally utilize the
Company's products as component parts. The Company also expects that such
projects may have a stabilizing effect on the Company's operations, as the
Company will have a longer period of time over which to plan and to allocate
its resources. Finally, the Company expects to receive certain periodic
payments associated with such projects, rather than payment upon delivery.
Because the Company has only recently become involved in such manufacturing
projects, the use of percentage of completion accounting does not affect the
comparability of financial information to earlier periods. No purchase orders
would have been accounted for using the percentage of completion method prior
to 1997. For the first six months of 1997, one project representing 8.7% of
the Company's revenues was accounted for using percentage of completion
accounting. The Company expects that this percentage may increase in the
future. Revenues accounted for in this manner are generally recognized on the
ratio of costs incurred to the total estimated costs. Accordingly, price and
cost estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in the
period when such estimates are revised. Amounts received from customers in
excess of revenues recognized are classified as a current liability. The
Company historically has experienced some seasonality, with revenues and
operating income slightly lower during the first and third quarters compared
to the second and fourth quarters. The Company's revenues are affected by its
customers' capital expenditure budgeting process, which generally results in
lower revenues in the first quarter and higher revenues in the fourth quarter.
The increase in revenues recognized using percentage of completion accounting
may result in less fluctuation in revenues recognized from quarter to quarter.
See "Risk Factors--Operating Risks--Percentage of Completion Accounting."
As part of its capacity expansion, the Company plans to expand its capacity
for forging and heat treatment by adding additional facilities and machinery.
In the future, the Company plans to market forgings to third parties to the
extent its capacity allows, an activity which it expects will be an additional
source of revenues.
Foreign sales represent a significant portion of the Company's business. In
the six months ended June 30, 1997 and in each of fiscal 1996, 1995 and 1994,
the Company generated approximately two-thirds of its revenues from foreign
sales. In each period, approximately two-thirds of all products sold were
manufactured in the United States.
Cost of Sales. The principal elements of cost of sales are labor, raw
materials and manufacturing overhead. Variable costs, such as labor, raw
materials, supplies and energy, generally account for approximately two-thirds
of the Company's cost of sales. The Company has experienced increased labor
costs over the past few years due to the limited supply of skilled workers.
See "Risk Factors--Dependence on Skilled Machinists and Technical Personnel."
Fixed costs, such as the fixed portion of manufacturing overhead, constitute
the remainder of the Company's cost of sales. The Company continually seeks to
improve its efficiency and cost position. See "Business--Strategy." Cost of
sales as a percentage of revenues is also influenced by the product mix sold
in any particular quarter and market conditions. The Company's costs related
to its foreign operations do not significantly differ from its domestic costs.
Products and services are closely correlated. The Company's Service Group
generates revenue from the installation of Product Group items, rental of
running tools used to install the Company's Product Group items, and
reconditioning services of the Company's Product Group items. Although the
Company attempts to keep margins consistent between the components of an
order, products and services are generally marketed as a package, and customer
or market requirements can result in significant differences between margins
on products versus services. As a result, the Company only focuses and
evaluates performance based on the overall margin for the total order.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs associated with sales and marketing,
general corporate overhead, compensation expense, legal expenses and other
related administrative functions.
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Engineering and Product Development Expenses. Engineering and product
development expenses consist of new product development and testing, as well
as application engineering related to customized products.
Income Tax Provision. Dril-Quip's marginal tax rate has historically been
lower than the statutory rate due to benefits from its foreign sales
corporation. The Company expects that its marginal tax rate will rise slightly
as its income increases.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
% % % % %
<S> <C> <C> <C> <C> <C>
Revenues:
Product Group............................. 83.0% 83.7% 82.1% 81.1% 85.6%
Service Group............................. 17.0 16.3 17.9 18.9 14.4
----- ----- ----- ----- -----
Total................................... 100.0 100.0 100.0 100.0 100.0
Cost of sales............................... 72.8 70.6 67.2 67.9 69.5
Selling, general and administrative
expenses................................... 14.5 12.5 13.0 13.1 11.4
Engineering and product development
expenses................................... 7.5 5.3 6.0 5.9 6.0
----- ----- ----- ----- -----
Operating income............................ 5.2 11.6 13.8 13.1 13.1
Interest expense............................ 2.8 2.7 2.3 2.4 2.0
----- ----- ----- ----- -----
Income before income taxes.................. 2.4 8.9 11.5 10.7 11.1
Income tax provision........................ 0.8 2.8 3.6 3.4 3.6
----- ----- ----- ----- -----
Net income.................................. 1.6% 6.1% 7.9% 7.3% 7.4%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Revenues increased by $13.4 million, or 24%, to $68.7 million in
the six months ended June 30, 1997 from $55.3 million in the six months ended
June 30, 1996. This increase was primarily due to strong market demand, along
with increased manufacturing capacity, price increases and an increase in
project related sales of new products.
Cost of Sales. Cost of sales increased $10.1 million, or 27%, to $47.7
million for the six months ended June 30, 1997 from $37.6 million for the same
period in 1996. As a percentage of revenues, cost of sales increased from 68%
in 1996 to 69% in 1997. This increase in cost of sales as a percentage of
revenues was primarily due to sales of new products, which tend to initially
have lower margins, and higher labor costs, which was partially offset by
improved pricing.
Selling, General and Administrative Expenses. In the first six months of
1997, selling, general and administrative expenses increased by $586,000, or
8%, to $7.8 million from $7.3 million in the 1996 period. The increase was due
to an increased number of personnel to support higher sales volumes and
increased labor costs. Selling, general and administrative expenses decreased
as a percent of revenues from 13% to 11%.
Engineering and Product Development Expenses. In the first six months of
1997, engineering and product development expenses increased by $864,000, or
27%, to $4.1 million from $3.2 million in the same period in 1996. The
increase primarily reflects an increased number of personnel and, to a lesser
extent, increased development testing related to new products.
Interest Expense. Interest expense for the six months ended June 30, 1997
was approximately $1.4 million, an increase of $100,000 as compared to the
corresponding period in the prior year.
Net Income. Net income increased by approximately $1.0 million, or 24%, from
$4.1 million in the first six months in 1996 to $5.1 million in 1997 for the
reasons set forth above.
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<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased by $7.5 million, or approximately 7%, to $115.9
million in 1996 from $108.4 million in 1995. This increase was primarily due
to a small volume increase plus a slight increase in prices in the last half
of the year. There was continued strong market demand for the Company's
products and services, but revenues were limited by manufacturing capacity
constraints. Domestic sales accounted for $4.8 million, or 64% of the
increase.
Cost of Sales. Cost of sales increased $1.4 million, or 2%, to $77.9 million
for the year ended December 31, 1996 from $76.5 million for the year ended
December 31, 1995. Cost of sales increased due to higher sales volumes, offset
in part by decreases in costs. As a percentage of revenues, cost of sales
decreased from 71% in 1995 to 67% in 1996. This decrease was primarily due to
the effect of increased forging operations which resulted in lower per unit
costs than in the comparable prior period when more of the Company's forgings
were outsourced. In addition, price increases in the last half of the year
contributed to the decrease in cost of sales as a percentage of revenues.
Selling, General and Administrative Expenses. For the year ended December
31, 1996, selling, general and administrative expenses increased by $1.4
million, or 10%, to $15.0 million from $13.6 million in 1995, but remained at
approximately 13% of revenues in each year. This increase was primarily due to
the increased number of personnel on a worldwide basis required to meet sales
demand.
Engineering and Product Development Expenses. For the year ended December
31, 1996, engineering and product development expenses increased by $1.2
million, or 21%, to $7.0 million from $5.8 million in the same period in 1995.
The increase was due primarily to the addition of personnel needed to expand
new product development.
Interest Expense. Interest expense for the year ended December 31, 1996 was
$2.6 million, a decrease of $300,000, or 10%, from interest expense of $2.9
million for the prior year. The decrease was due to lower bank interest rates.
Net Income. Net income increased by $2.5 million, or 38%, from $6.6 million
for the year ended December 31, 1995 to $9.1 million in 1996 for the reasons
set forth above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues increased by $27.9 million, or 35%, to $108.4 million in
1995 from $80.5 million in 1994. This increase was due to increased sales
volumes of the Company's products and services. Foreign sales accounted for
$23.6 million, or 85%, of this increase.
Cost of Sales. Cost of sales increased $17.9 million, or 31%, to $76.5
million for the year ended December 31, 1995 from $58.6 million for the year
ended December 31, 1994. Cost of sales increased due to higher sales volumes
offset in part by decreases in costs. As a percentage of revenues, cost of
sales decreased from 73% in 1994 to 71% in 1995. This decrease was primarily
due to efficiencies associated with increased manufacturing volume, which
allowed allocation of fixed cost over a larger sales base, and increased
utilization of the Company's forging and heat treatment facilities, which
supplied all of the Company's heat treating requirements and a portion of its
forgings in 1995.
Selling, General and Administrative Expenses. For the year ended December
31, 1995, selling, general and administrative expenses increased by $1.9
million, or 16%, to $13.6 million from $11.7 million in 1994. The increase was
due to the increased number of personnel on a worldwide basis required to meet
sales demand and, to a lesser extent, increases in wages paid to personnel.
Engineering and Product Development Expenses. For the year ended December
31, 1995, engineering and product development expenses decreased by $300,000,
or 5%, to $5.8 million from $6.1 million in the same period in 1994. The
decrease was attributable to the large increase in revenues in 1995, which
delayed a portion
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<PAGE>
of the Company's new product development and testing. However, the Company
continued its product development program with respect to SingleBore(TM) and
dual bore subsea trees, platform wellheads and TLP equipment.
Interest Expense. Interest expense for the year ended December 31, 1995 was
$2.9 million, an increase of $600,000, or 30%, from interest expense of $2.3
million for the prior year. The increase was due to increased bank debt and
higher interest rates.
Net Income. Net income increased by $5.3 million, or 408%, from $1.3 million
for the year ended December 31, 1994 to $6.6 million in 1995 for the reasons
set forth above.
LIQUIDITY AND CAPITAL RESOURCES
The primary liquidity needs of the Company are to fund capital expenditures,
such as increasing manufacturing capacity, improving and expanding facilities
and manufacturing additional rental running tools; to fund payments of
principal and interest on indebtedness; and to fund working capital. The
Company's principal sources of funds have been cash flow from operations and
bank indebtedness.
Net cash provided by operating activities was $2.4 million in 1994, $6.5
million in 1995 and $5.2 million in 1996. For the six months ended June 30,
1997, net cash provided by operating activities was $2.4 million. Improvements
in cash flow from operating activities are principally the result of improved
operating results, offset in 1995, 1996 and 1997 by increased working capital
requirements attributable to increases in accounts receivable and inventory
due to increased sales. Accounts receivable at December 31, 1996 increased 27%
over December 31, 1995 levels compared to a 7% increase in revenues for the
year. The disproportionate increase in accounts receivable was due to timing
of cash receipts. Subsequent to December 31, 1996, accounts receivables as a
percentage of sales returned to levels more consistent with past periods.
Capital expenditures by the Company were $4.6 million, $6.2 million, $7.2
million and $3.6 million in 1994, 1995, 1996 and the six months ended June 30,
1997, respectively. Principal payments on long-term debt were $2.7 million,
$2.8 million, $3.2 million and $1.8 million in 1994, 1995, 1996 and the six
months ended June 30, 1997, respectively.
The Company has planned to spend approximately $50 million over a three-year
period for a capital expenditure program to increase manufacturing capacity,
improve and expand facilities and manufacture additional rental running tools.
Dril-Quip expects that total capital expenditures for these purposes will be
approximately $11 million in 1997 and approximately $23 million in 1998. In
particular, the Company expects to spend approximately $16 million to complete
the planned expansion at its Eldridge site in Houston, Texas, which is
expected to be completed in 1999. The Company plans to spend approximately
$4.5 million in 1997 to add machine tools at its existing facilities, most of
which will be moved to the new facilities upon their completion. The Company
plans to use the net proceeds from the Offering to fund these capital
expenditures. Pending application of the proceeds for these purposes, the
Company intends to use approximately $32 million to repay its bank
indebtedness in full and the balance will be used for working capital. Excess
cash will be invested in short-term investment grade securities. See "Use of
Proceeds."
The Company's credit facilities with Bank One are provided through a Credit
Agreement dated March 30, 1994, as amended, and currently consist of (i) a $25
million revolving credit facility bearing interest at a rate of 1/4% over Bank
One's base rate from day to day (this facility terminates on June 1, 1999),
(ii) a $3 million advancing credit facility for the purchase of land and
equipment and improvements to facilities bearing interest at a rate of 1/2%
over Bank One's base rate from day to day (this facility terminates on October
1, 2001), and (iii) a $10.7 million term loan bearing interest at 1/2% over
Bank One's base rate from day to day that matures on July 1, 1999.
Indebtedness under the term loan was used for the purchase of land, buildings,
equipment and improvements to facilities, as well as other capital
expenditures. At June 30, 1997, $29.0 million was outstanding under the Bank
One credit facilities, bearing interest at an average rate of 8.85%, and
approximately $7.7 million was available for drawdown under the revolving
facility.
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<PAGE>
In addition, the Company has three term loans with the Bank of Scotland to
finance land, buildings and improvements for its Aberdeen manufacturing
facility: a June 7, 1996 loan, a September 19, 1994 loan and a December 12,
1991 loan. Each loan has a 120-month maturity. The June 7, 1996 and
September 19, 1994 loans each bear interest at 1.75% over the Bank of
Scotland's base rate, and the December 12, 1991 loan bears interest at 1.5%
over the Bank of Scotland's base rate. At June 30, 1997, $700,000, $600,000
and $1.7 million were outstanding under these term loans, respectively.
BACKLOG
Backlog consists of firm customer orders for which a purchase order has been
received, satisfactory credit or financing arrangements exist and delivery is
scheduled. The Company's backlog at December 31, 1996 and June 30, 1997 was
approximately $56 million and approximately $101 million, respectively. The
Company expects to fill approximately 50% of the June 30, 1997 backlog by
December 31, 1997. The remaining backlog at June 30, 1997 consists of longer-
term projects that will be designed and manufactured to customer
specifications rather than sold out of inventory. All of the Company's
projects currently included in backlog are subject to change and/or
termination at the option of the customer. In the case of a change or
termination, the customer is required to pay the Company for work performed
and other costs necessarily incurred as a result of the change or termination.
GEOGRAPHIC AREAS
The Company's operations are divided into three geographic areas based upon
the locations of its manufacturing facilities: the United States (Houston,
Texas); Europe, Middle East and Africa (Aberdeen, Scotland) and Asia-Pacific
(Singapore). The United States area includes sales to both North and South
America. The area of Europe, Middle East and Africa includes primarily sales
to the North Sea with lesser sales to the Middle East and Africa. The Asia-
Pacific area includes sales primarily to Australia, Thailand, Malaysia and
Indonesia.
Revenues for each of these areas are dependent upon the ultimate sale of
products and services to the Company's customers. Revenues of the United
States area are also influenced by its sale of products to the European and
Asia-Pacific subsidiaries. Accordingly, the operating incomes of each area are
closely tied to third-party sales, and the operating income of the United
States area is also dependent upon its level of intercompany sales.
Total revenues increased by $27.9 million, or approximately 35%, to $108.4
million in 1995 from $80.5 million in 1994. This increase was primarily due to
revenue increases of $18.3 million in the Europe, Middle East and Africa area
and $8.1 million in the Asia-Pacific area, partially offset by a decrease in
export sales by the United States area of $2.6 million. Total revenues
increased by $7.5 million, or approximately 7%, to $115.9 million in 1996 from
$108.4 million in 1995. Domestic sales increases in the United States area
accounted for $4.8 million, or approximately 64%, of the increase.
Total operating income increased by $8.4 million to $12.6 million in 1995
from $4.2 million in 1994. Of this increase, $7.3 million, or approximately
87%, was due to the United States area, which experienced a modest increase in
third party sales coupled with an increase of $17.8 million, or approximately
143%, in intercompany sales in 1996. Total operating income rose by $3.4
million, or approximately 27%, to $16.0 million in 1996 from $12.6 million in
1995. This increase was primarily due to the United States area which
contributed $2.7 million, or approximately 79%, of the gain. Most of the
increase resulted from an increase of $4.8 million in the United States area's
domestic sales.
CURRENCY RISK
Through its subsidiaries, the Company conducts a portion of business in
currencies other than the United States dollar, principally the British pound
sterling and the Norwegian kroner. The Company generally attempts to minimize
its currency exchange risk by seeking international contracts payable in local
currency in amounts
21
<PAGE>
equal to the Company's estimated operating costs payable in local currency and
in U.S. dollars for the balance of the contract and by contractual purchase
price adjustments based on an exchange rate formula related to U.S. dollars.
Because of this strategy, the Company has not experienced significant
transaction gains or losses associated with changes in currency exchange rates
and does not anticipate such exposure to be material in the future. Exchange
losses were approximately $167,000 in 1994 and $0 in 1995, net of income
taxes. In 1996, the Company had an exchange gain of $163,000. The Company also
has significant investments in countries other than the United States,
principally its manufacturing operations in Aberdeen, Scotland and, to a
lesser extent, Singapore. The functional currency of these foreign operations
is the local currency and, accordingly, financial statement assets and
liabilities are translated at current exchange rates. Resulting translation
adjustments are reflected as a separate component of stockholders' equity and
have no current effect on earnings or cash flow. See "Risk Factors--
International Operations."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, which establishes alternative methods of accounting and disclosure for
employee stock-based compensation arrangements. The Company intends to account
for anticipated stock options using the intrinsic value method of accounting
which, based on the expected stock option plan design, will not result in the
recognition of compensation expense as the anticipated exercise price of the
options will equal or exceed the fair market value of the stock on the date of
grant. The Company will provide pro forma disclosure of net income and
earnings per share in the notes to the consolidated financial statements as if
the fair value based method of accounting had been applied.
22
<PAGE>
BUSINESS
GENERAL
Dril-Quip is one of the world's leading manufacturers of highly engineered
offshore drilling and production equipment which is well suited for use in
deepwater, harsh environment and severe service applications. The Company
designs and manufactures subsea equipment, surface equipment and offshore rig
equipment for use by major integrated, large independent and foreign national
oil and gas companies in offshore areas throughout the world. The Company's
principal products consist of subsea and surface wellheads, subsea and surface
production trees, mudline hanger systems, specialty connectors and associated
pipe, drilling and production riser systems, wellhead connectors and
diverters. The Company also provides installation and reconditioning services
and rents running tools for use in connection with the installation and
retrieval of its products. In 1996, the Company derived 82.1% of its revenues
from the sale of its products and 17.9% of its revenues from services.
Dril-Quip has developed its broad line of subsea equipment, surface
equipment and offshore rig equipment exclusively through its internal product
development efforts. The Company believes that it has achieved significant
market share and brand name recognition with respect to its established
products due to the technological capabilities, reliability, cost
effectiveness and operational timesaving features of these products. In
particular, the Company's Quik-Thread(R) and Quik-Stab(R) specialty
connectors, MS-15(R) mudline hanger systems and SS-10(R) and SS-15(R) subsea
wellheads are among the most widely used in the industry. The Company believes
that, as of June 1, 1997, its subsea wellhead equipment was being used on
approximately 70% of the wells being drilled in waters deeper than 3,000 feet
worldwide. Since 1991, the Company has introduced a number of new products,
including diverters, wellhead connectors, dual-bore and single-bore subsea
production trees, subsea and platform valves, platform wellheads, platform
trees, drilling risers and Spar and TLP production risers.
The Company has grown consistently since its inception in 1981 and has been
profitable in every year since 1983. As a result of new product introductions,
increased market share in established product lines and increased offshore
drilling and production activity, the Company's revenues have increased from
$65.2 million in 1992 to $115.9 million in 1996 (an annual growth rate of
15.4%), and its net income has increased from $1.7 million in 1992 to $9.1
million in 1996 (an annual growth rate of 52.1%). From 1995 to 1996, the
Company's revenues and net income grew by 7% and 38%, respectively. For the
six months ended June 30, 1997, the Company's revenues were $68.7 million and
its net income was $5.1 million, representing a 24% increase in revenues and a
26% increase in net income from the comparable period in 1996.
The Company has experienced increased demand for its products due to the
increased drilling and production activity in offshore areas throughout the
world during the last several years, particularly in deeper waters. The
increase in offshore drilling and production activity has been driven by a
number of factors, including (i) the prospect for relatively larger
hydrocarbon discoveries in deepwater areas and (ii) recent technological
advances in offshore drilling and production equipment (including those
introduced by Dril-Quip), seismic data collection and interpretation
techniques, and drilling techniques, which have enhanced the economics of
offshore drilling and production. In addition, several foreign national oil
companies have recently opened offshore areas for exploration and development
by other parties, including major integrated and large independent oil and gas
companies. These factors have contributed to the increase in the Company's
backlog from approximately $56 million at December 31, 1996 to approximately
$101 million at June 30, 1997, an 80% increase. The Company intends to use the
proceeds from the Offering to expand its manufacturing capacity in order to
satisfy the increased demand for its products. See "Use of Proceeds."
Dril-Quip markets its products through its offices and sales representatives
located in all of the major international energy markets throughout the world.
In 1996, the Company generated approximately 68% of its revenues from foreign
sales. The Company manufactures its products at its facilities located in
Houston, Texas; Aberdeen, Scotland; and Singapore, and maintains additional
facilities for fabrication and/or reconditioning in Norway, Denmark and
Australia. Dril-Quip's manufacturing operations are vertically integrated,
with the
23
<PAGE>
Company performing substantially all of its forging, heat treating, machining,
fabrication, inspection, assembly and testing at its own facilities. Unlike
essentially all of the Company's competitors, which depend on outside sources
for forging and heat treatment services, Dril-Quip owns a forge and heat
treatment facility that handles virtually all of the Company's requirements.
This vertically integrated manufacturing capability provides Dril-Quip with
competitive advantages because the Company is able to (i) control the quality
of its products from initial stages, (ii) control the costs of its production
and (iii) assure timely delivery of high-volume and customized orders.
The Company was co-founded in 1981 by the current Board of Directors, Larry
E. Reimert, Gary D. Smith, J. Mike Walker and Gary W. Loveless. Together,
Messrs. Reimert, Smith and Walker have over 75 years of combined experience in
the oilfield equipment industry, essentially all of which has been with the
Company and its major competitors. In addition, key department managers have
been with the Company over 10 years, on average. See "Management." After the
Offering, the Founders will collectively beneficially own approximately 70% of
the outstanding Common Stock (approximately 67% if the over-allotment option
is exercised in full).
The Company was incorporated as a Delaware corporation on August 12, 1997.
The Company's operations represent the original business, which was
incorporated as a Texas corporation on March 12, 1981. The Company's principal
executive offices are located at 13550 Hempstead Highway, Houston, Texas 77040
and its telephone number is (713) 939-7711.
INDUSTRY OVERVIEW
The market for offshore drilling and production equipment and services is
fundamentally driven by the exploration, development and production spending
of oil and gas companies, particularly with respect to offshore activities
worldwide. Industry exploration, development and production spending primarily
depends on the cash flow of oil and gas producers, which is a function of
current and anticipated future oil and gas production volumes and prices and
operating costs of oil and gas producers. Oil and gas prices are influenced
significantly by a variety of factors beyond the control of oil and gas
companies, including worldwide demand for oil and gas, production levels,
governmental policies regarding exploration and development of reserves and
political factors in production countries. Fundamental economics in the oil
and gas sector have improved in recent years and supply and demand for crude
oil and natural gas is currently relatively balanced with demand rising and
inventories comparatively low. Much of the incremental supply in recent years
has come from areas outside OPEC, particularly in offshore regions such as the
North Sea, the Gulf of Mexico and offshore Southeast Asia. These factors have
contributed to generally higher, and relatively more stable, oil and gas
prices during the last several years.
Since 1995, offshore exploration, development and production activity has
increased considerably due to, among other factors, (i) favorable oil and gas
prices, (ii) significant improvement in the financial condition of many oil
and gas companies in recent years, (iii) increasing worldwide demand for
hydrocarbons, (iv) the potential for relatively large oil and gas discoveries
in various offshore areas, particularly previously unexplored deepwater areas,
(v) the opening of new offshore areas for foreign investment, including areas
offshore of Brazil, China and West Africa, and (vi) royalty relief granted by
the U.S. government for oil and gas produced from wells drilled in newly
acquired deepwater blocks in the Gulf of Mexico. In addition, technological
advances in exploration, development and production techniques, including
seismic data collection and interpretation (particularly with respect to 3-D
seismic data), drilling techniques (such as the use of deviated, horizontal
and multilateral wells), subsea completion and production equipment, and
mobile production units have contributed to increased offshore activity by oil
and gas companies. These factors have facilitated exploration for and
development of new reserves in deepwater and harsh environment offshore areas,
allowed the development of oil and gas fields that were considered
commercially marginal and extended development and production of reserves from
existing fields.
The increased exploration, development and production activity in offshore
areas has resulted in significant increases in the amount of oil and gas
produced from offshore areas in recent years. According to the
24
<PAGE>
International Energy Agency, (i) worldwide non-OPEC offshore oil production
grew 41% from 10.9 million barrels of oil per day (mmbopd) in 1990 to 15.3
mmbopd in 1996, and (ii) worldwide non-OPEC offshore oil production is
anticipated to grow an additional 26% from 15.3 mmbopd in 1996 to 19.3 mmbopd
in 2000. This increased activity has resulted in increased demand for drilling
and production equipment and services, as evidenced by the increase in the
average worldwide contracted utilization rate for all marketed offshore
drilling rigs from 76% for the year ended December 31, 1992 to 93% for the
first six months of 1997. Increased interest in offshore exploration,
development and production is also evidenced by the significant rise in
activity in the Gulf of Mexico lease sales held by the Department of the
Interior's Mineral Management Service. In the most recent Central Gulf of
Mexico lease sale held in March 1997, there were a record 1,790 bids received
for 1,032 blocks (out of 5,059 blocks available) at an average price of
approximately $799,000 per block. This compares to the May 1995 Central Gulf
of Mexico lease sale when only 880 bids were received on 588 blocks (out of
5,810 blocks available) at an average of approximately $523,000 per block.
Recently, several offshore drilling contractors have announced plans to
upgrade existing rigs to equip them with the capability to drill in deeper
water and harsher environments or to build new deepwater capable rigs. At June
30, 1997, there were approximately 31 semisubmersible rigs and ten drillship-
type rigs worldwide capable of drilling in greater than 2,450 feet of water.
Based on reports from Offshore Data Services related to new drilling rig
construction, it is anticipated that by the year 2000 there will be 48
semisubmersible-rigs and 22 drillship-type rigs capable of this deepwater
drilling. In addition, there are four new TLPs and three new Spars planned or
under construction for utilization by the year 2000. At the end of 1996, there
were only six TLPs and one Spar in operation worldwide. In addition, based on
industry reports related to new floating production, storage and offloading
monohulled moored vessel ("FPSO") construction, the number of FPSO ships will
increase from 63 FPSOs in operation worldwide at the end of 1996 to 110 by the
year 2001 and the number of floating production semisubmersibles will increase
from 33 to 51 over the same period. An increase in the number of wells drilled
and produced in deepwater or harsh environments should likewise increase the
demand for deepwater offshore equipment and services. The foregoing statements
concerning future industry conditions are forward-looking statements, and,
although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will be met. See "Risk Factors."
STRATEGY
The Company's goal is to expand its existing market position in the offshore
oil and gas equipment and services sector while at the same time increasing
its earnings and cash flow per share to enhance overall stockholder value. Key
elements of the Company's strategy for achieving this goal are to:
. CONTINUE TO DEVELOP NEW PRODUCTS. The Company plans to utilize its
technological expertise to continue to develop and introduce new products
and product enhancements in both its existing product lines and new product
lines. For example, the Company has recently received purchase orders for
drilling risers, production risers and deepwater subsea production trees.
In 1996, approximately 30% of the Company's revenues were derived from the
sale of products and product enhancements introduced since 1991. Of the
Company's approximately $101 million backlog at June 30, 1997, at least 45%
was attributable to orders for products and product enhancements developed
since 1991. The Company intends to focus its future new product
developments and product enhancements on areas where it believes it will be
able to achieve a significant market position. The Company believes that
the strong brand name recognition and reputation of its existing products
will assist it in successfully introducing new products to customers.
. INCREASE MANUFACTURING CAPACITY. To maintain and improve market share in
its major product lines, Dril-Quip plans to expand its manufacturing
capacity by approximately 90% during the three-year period 1997 through
1999, approximately two-thirds of which is expected to be completed by the
end of 1998. The Company has been operating at close to full capacity in
recent years, and believes that this expansion is essential in order to
meet customer demand for its existing products and to continue its strategy
of developing new products. The Company owns a 218-acre site in Houston,
Texas where it plans to build additional manufacturing facilities during
the three-year period 1997 through 1999. To increase
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manufacturing capacity while the construction of the new facilities is in
progress, the Company is adding machine tools at its existing facilities,
most of which will be transported to and utilized at the new facilities when
they are completed.
. CONTINUE TO REDUCE COSTS AND INCREASE OPERATIONAL EFFICIENCIES. Dril-Quip
has historically controlled its costs through such activities as performing
its own forgings and heat treatment, rebuilding quality used machine tools
(rather than purchasing new machine tools) and optimizing manufacturing
operations to increase the rate of production. Although it will need to
purchase some new machine tools in order to expand its manufacturing
capacity as rapidly as planned, the Company has an inventory of used machine
tools that it will continue to rebuild and upgrade in order to control
overall costs. Dril-Quip also plans to expand its forging capacity and to
begin marketing forgings to third parties in addition to supplying its own
forging requirements. The Company expects that this will provide additional
cost efficiencies as well as additional revenues, thereby contributing to
profits.
. CONTINUE EXPANSION INTO SELECTED INTERNATIONAL MARKETS. The Company's
products are currently utilized primarily in the Gulf of Mexico, the North
Sea and in selected markets in Southeast Asia, Australia and South America.
The Company has recently engaged international sales representatives in
several additional markets, including Mexico, West Africa and the Middle
East. Dril-Quip believes that there is significant potential for increased
sales through focused marketing efforts in other active offshore areas in
the world, such as China, Argentina and the Caspian Sea.
. CAPITALIZE ON STRONG BALANCE SHEET. The Company plans to use a portion of
the net proceeds from the Offering initially to repay its existing
indebtedness. The Company believes that its strong balance sheet will
provide it with the financial flexibility to carry out its strategy to
design and develop new products, significantly increase manufacturing
capacity and expand its international presence. In addition, the Company may
investigate potential acquisition opportunities as they arise. However, the
Company currently has not identified any such acquisition opportunities, and
there can be no assurance that any will arise in the future.
PRODUCTS AND SERVICES
PRODUCT GROUP
Dril-Quip designs, manufactures, fabricates, inspects, assembles, tests and
markets subsea equipment, surface equipment and offshore rig equipment. The
Company's products are used to explore for oil and gas on offshore drilling
rigs, such as floating rigs and jack-ups, and for drilling and production of
oil and gas wells on offshore platforms, TLPs, Spars and moored vessels such as
FPSOs. TLPs are floating production platforms that are connected to the ocean
floor via vertical mooring tethers (called tension legs). A Spar is a floating
cylindrical structure approximately six or seven times longer than its diameter
that is anchored in place (like a Spar buoy). FPSOs are floating production,
storage and offloading monohull moored vessels. Major oil companies are
actively pursuing TLPs, Spars and FPSOs as cost-effective means of producing
oil and gas from water depths in excess of 1,000 feet. The Company believes
that sales of its equipment in connection with TLPs, Spars and FPSOs are
potentially important sources of future revenues. The following table
illustrates the Company's products and their uses in various methods of
exploration, development and production:
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SUBSEA EQUIPMENT
SUBSEA WELLHEADS
The subsea wellhead is installed at the ocean floor and is interconnected
during drilling to the structure/vessel through the drilling riser. The
wellhead system provides a means of supporting and sealing each of the
multiple casing strings for well control. Major components include a guide
structure, wellhead housing, casing hangers, and seal assemblies configured
to specific well requirements.
[DIAGRAM OF SUBSEA WELLHEAD APPEARS HERE]
Subsea Wellhead
MUDLINE HANGER SYSTEMS
The mudline hanger system supports the weight of multiple casing strings at
the ocean floor while drilling a well. The mudline hanger system
incorporates disconnect features for abandonment after the drilling phase
and reconnect features for tie-back to a platform or subsea tree for the
production phase.
[DIAGRAM OF MUDLINE HANGER SYSTEM APPEARS HERE]
Mudline Hanger System
EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL
. Floating Rigs
. TLPs
. Spars
. Jack-up Rigs
. Platforms
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<PAGE>
SUBSEA EQUIPMENT (CONTINUED)
SPECIALTY CONNECTORS
Specialty connectors are used to join lengths of large diameter conductor
or casing used in offshore drilling operations. The specialty connector is
welded to the pipe prior to shipment offshore and provides fast, easy make-
up.
[DIAGRAM APPEARS HERE]
Quik-Thread/Multi-Thread
Connectors
[DIAGRAM APPEARS HERE]
Quik-Stab Connector
SUBSEA PRODUCTION TREES
The subsea production tree is used to control the flow of oil and gas from
a production well. The main components are remotely controlled valves,
wellhead connector, flowline connector, control equipment and tree cap
specially designed and configured into an assembly which is installed onto
the subsea wellhead at the ocean floor. Subsea production trees
typically produce back via flowlines to a central control point located
on a production structure/vessel.
[DIAGRAM APPEARS HERE]
Single Bore Subsea Production Tree
[DIAGRAM APPEARS HERE]
Dual Bore Subsea Production Tree
EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL
. Jack-up Rigs
. Platforms
. Floating Rigs
. TLPs
. Spars
. Platforms
. TLPs
. Spars
. FPSOs
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<PAGE>
SURFACE EQUIPMENT
PLATFORM WELLHEADS
The platform wellhead is installed at the surface on a platform or
production structure/vessel during drilling and provides a means of
supporting and sealing each of the multiple casing strings for well
control. The system includes a wellhead housing, casing hangers, seal
assemblies, and valves which are configured to specific well requirements.
[DIAGRAM APPEARS HERE]
PLATFORM PRODUCTION TREES
The platform production tree is located on the production deck of the
platform or production structure/vessel and is used to control the flow of
oil and gas from a producing well. The main components are surface
controlled valves, manual wellhead connector, controls and tree cap, which
are designed and configured into an assembly specific to the well
requirements.
[DIAGRAM APPEARS HERE]
EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL
Platform Wellhead
. Jack-up Rigs
. Platforms
. TLPs
. Spars
Platform Production Trees
. Platforms
. TLPs
. Spars
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<PAGE>
OFFSHORE RIG EQUIPMENT
DRILLING AND PRODUCTION RISER SYSTEMS
Drilling riser systems provide the vertical conduit between the floating
drilling vessel and the subsea wellhead. Through the riser, equipment is
guided into the well and drilling fluids are returned to the surface. The
drilling riser also provides a means of well control through auxiliary integral
high pressure tubes attached to the main riser body.
Drilling Riser
[DIAGRAM APPEARS HERE]
Production riser systems provide the vertical conduit from the subsea wellhead
to the floating production platform. Oil and gas flows to the surface for
processing through the production riser.
[DIAGRAM APPEARS HERE]
Production Riser
WELLHEAD CONNECTOR
The wellhead connector provides remote connection of the drilling
riser to the blowout preventer stack (BOP), and the BOP to the wellhead.
The wellhead connector is also used to connect the subsea production tree
or production riser to the subsea wellhead.
[DIAGRAM APPEARS HERE]
Wellhead Connector
DIVERTERS
The diverter is located at the surface and diverts gases off the rig during
the drilling operation to provide protection from shallow gas blowouts.
[DIAGRAM APPEARS HERE]
Diverter
EXPLORATION
OR PRODUCTION
STRUCTURE/
VESSEL
. Floating Rigs
. TLPs
. Spars
. TLPs
. Spars
. Floating Rigs
. TLPs
. Spars
. Jack-up Rigs
. Floating Rigs
. Platforms
. TLPs
. Spars
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<PAGE>
Subsea Equipment. Subsea equipment is used in the drilling and production of
offshore oil and gas wells around the world. Included in the subsea equipment
product line are subsea wellheads, mudline hanger systems, specialty
connectors and associated pipe, subsea production trees, valves and TLP and
Spar well systems. Management believes that, based solely upon its internal
analysis, the Company has achieved a current market share of approximately 30%
in its subsea wellhead, mudline hanger system and specialty connector markets.
Dril-Quip's subsea production tree sales have increased steadily since their
introduction in 1992.
Subsea wellheads are pressure-containing forged and machined metal housings
in which casing hangers are landed and sealed subsea to suspend casing
(downhole pipe). As drilling depth increases, successively smaller diameter
casing strings are installed, each suspended by an independent casing hanger.
Subsea wellheads are utilized when drilling from floating drilling rigs,
either semi-submersible or drillship types, and TLPs and Spars. Management
believes that Dril-Quip's SS-15(R) and SS-10(R) wellheads are two of the most
widely used subsea wellheads in the world. Competitive advantages of the
Company's subsea wellheads include proprietary metal-to-metal seal technology
and simple installation procedures. These features are ideally suited to
subsea applications when a combination of high pressures, elevated
temperatures and corrosive environments are present. The Company generally
supplies subsea wellheads to customers from inventory.
Mudline hanger systems are used in jack-up drilling operations to support
the weight of the various casing strings at the ocean floor while drilling a
well. They also provide a method to disconnect the casing strings in an
orderly manner at the ocean floor after the well has been drilled, and
subsequently reconnect to enable production of the well by either tying it
back vertically to a subsequently-installed platform or by installing a subsea
tree. Dril-Quip's MS-15(R) mudline hanger systems are technologically advanced
products designed for simple operation while providing high load and high
pressure capacity. The Company believes many customers prefer its mudline
hanger systems to those manufactured by its competitors because of their
higher pressure and load capacity and field-proven reliability. The Company
generally supplies mudline hanger systems to customers from inventory.
Large diameter weld-on specialty connectors (threaded or stab type) are used
in offshore wells drilled from floating drilling rigs, jack-ups, fixed
platforms, TLPs and Spars. Specialty connectors join lengths of conductor or
large diameter (16-inch or greater) casing. Specialty connectors provide a
more rapid connection than other methods of connecting lengths of pipe, and,
although more expensive, their use becomes economically attractive when time
savings are considered, particularly as the rig day rate charged by offshore
drilling contractors increases. Connectors may be sold individually or as an
assembly after being welded to sections of Company or customer supplied pipe.
Dril-Quip's weld-on specialty connectors are designed to prevent cross
threading and provide a quick, convenient method of joining casing joints with
structural integrity compatible with casing strength. The Company generally
supplies specialty connectors individually or specialty connectors welded to
pipe from inventory.
A subsea production tree is an assembly composed of valves, a wellhead
connector, control equipment and various other components installed on a
subsea wellhead or a mudline hanger system and used to control the flow of oil
and gas from a producing well. Subsea trees may be either stand alone
satellite type or template mounted cluster arrangements. Both types typically
produce via flowlines to a central control point located on a platform, TLP,
Spar or FPSO. The use of subsea production trees has become an increasingly
important method for producing wells located in hard-to-reach deepwater areas
or economically marginal fields located in shallower waters. The Company is an
established manufacturer of more complicated dual-bore production trees, which
are used in severe service applications. In addition, Dril-Quip manufactures a
patented single bore (SingleBore(TM)) subsea completion system which features
a hydraulic mechanism instead of a wireline-installed mechanism that allows
the operator to plug the tubing hanger annulus remotely from the surface via a
hydraulic control line and subsequently unplug it when the well is put on
production. This mechanism eliminates the need for an expensive multibore
installation and workover riser, thereby saving both cost and installation
time. The Company's subsea production trees are generally custom designed and
manufactured to customer specifications.
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<PAGE>
Surface Equipment. Surface equipment is principally used for flow control on
offshore production platforms, TLPs and Spars. Included in the Company's
surface equipment product line are platform wellheads and platform production
trees. Dril-Quip's development of platform wellheads and platform production
trees was facilitated by adaptation of its existing subsea wellhead and tree
technology to surface wellheads and trees.
Platform wellheads are pressure-containing forged and machined metal
housings in which casing hangers are landed and sealed at the platform deck to
suspend casings. The Company emphasizes the use of metal-to-metal sealing
wellhead systems with operational time-saving features which can be used in
high pressure, high temperature and corrosive drilling and production
applications. Dril-Quip believes that its SU-90(R) unitized platform wellheads
are superior to typical industry wellheads because they offer time savings,
safety and technological benefits to its customers.
After installation of the wellhead, platform production trees, consisting of
gate valves, a wellhead connector, controls, tree cap and associated
equipment, are installed on the wellhead to control and regulate oil or gas
production. Platform production trees are similar to subsea production trees
but utilize less complex equipment and more manual, rather than hydraulically
activated, valves and connectors. Platform wellheads and platform production
trees and associated equipment are designed and manufactured in accordance
with customer specifications.
Offshore Rig Equipment. Offshore rig equipment includes drilling and
production riser systems, wellhead connectors and diverters. The drilling
riser system consists of (i) lengths of riser pipe and associated riser
connectors that secure one to another; (ii) the telescopic joint, which
connects the entire drilling riser system to the diverter at the rig and
provides a means to compensate for vertical motion of the rig relative to the
ocean floor; and (iii) the wellhead connector, which provides a means for
remote connection and disconnection of the drilling riser system to and from
the BOP stack. Production risers provide a vertical conduit from the subsea
wellhead to a TLP, Spar or FPSO. The wellhead connector also provides remote
connection/disconnection of the BOP stack, production tree or production riser
to/from the wellhead. Diverters are used to provide protection from shallow
gas blowouts and to divert gases off of the rig during the drilling operation.
Wellhead connectors and drilling and production riser systems are also used
on both TLPs and Spars, which are being installed more frequently in deepwater
applications. The Company believes that its diverter is the simplest and most
reliable currently on the market, and that its DX(R) wellhead connector offers
the best combination of structural integrity and operational features of any
connector currently on the market. The Company has recently introduced
drilling and production risers as new product lines. The principal market for
offshore rig equipment is new rigs, rig upgrades, TLPs and Spars. Diverters,
drilling and production risers and wellhead connectors are generally designed
and manufactured to customer specifications.
SERVICE GROUP
Dril-Quip's Service Group provides field installation services,
reconditioning of its products which are customer-owned, and rental running
tools for installation and retrieval of its products. These services are
provided from the Company's worldwide locations and represented approximately
18% of revenues in 1996.
Field Installation. Dril-Quip provides field installation services through
the use of its technicians. These technicians assist in the onsite
installation of Company products and are available on a 24-hour call out from
the Company's facilities located in Houston, Texas; Aberdeen, Scotland;
Stavanger, Norway; Esbjerg, Denmark; Singapore; and Perth, Australia.
Reconditioning. The Company provides reconditioning of its products at its
facilities in Houston, Texas; Aberdeen, Scotland; Stavanger, Norway; and
Singapore.
Rental. The Company rents running and installation tools for use in
installing its products. These tools are used to install and retrieve Company
products which are purchased by customers. Running tools are available from
Dril-Quip's locations in Houston, Texas; Aberdeen, Scotland; Stavanger,
Norway; Esbjerg, Denmark; Singapore; and Perth, Australia.
32
<PAGE>
MANUFACTURING
Dril-Quip has major manufacturing facilities in Houston, Texas; Aberdeen,
Scotland; and Singapore. Each location conducts a broad variety of processes,
including machining, fabrication, inspection, assembly and testing. The
Houston facility provides forged and heat treated products to all the major
manufacturing facilities. The manufacturing process is illustrated in the
following diagram.
[MANUFACTURING CHART APPEARS HERE]
The Company's Houston and Aberdeen manufacturing plants are ISO 9001 and
American Petroleum Institute certified. See "--Properties--Major Manufacturing
Facilities." Dril-Quip maintains its high standards of product quality through
the use of quality assurance specialists who work with product manufacturing
personnel throughout the manufacturing process by inspecting and documenting
equipment as it is processed through the Company's manufacturing facilities.
The Company has the capability to manufacture various products from each of
its product lines at its major manufacturing facilities and believes that this
localized manufacturing capability is essential in order to compete with the
Company's major competitors.
The Company's manufacturing process is vertically integrated, performing, in
house, essentially all of its forging, heat treatment, machining, fabrication,
inspection, assembly and testing. This vertically integrated manufacturing
capability provides competitive advantages because Dril-Quip is able to (i)
control the quality of its products from initial stages, (ii) control the cost
of its production and (iii) assure timely delivery of high-volume and
customized orders. The Company's primary raw material is cast steel ingots,
from which it produces steel shaped forgings at its forging and heat treatment
facility. The Company routinely purchases four different grades of steel
ingots from approximately four suppliers on a purchase order basis and does
not have any long-term supply contracts.
33
<PAGE>
The Company acquired land and used equipment, and all equipment was rebuilt
to essentially "like new" condition to provide the Company with a modern
forging and heat treatment facility in Houston. This was done to reduce costs
and in anticipation of forging capacity shortages which could result if the
demand for forgings increased significantly. Dril-Quip now performs
essentially all of its own heat treatment and produces most of its forging
requirements. The Company's Houston facility also provides forgings and heat
treatment for its Aberdeen and Singapore facilities. The Company's major
competitors depend on outside sources for all or a substantial portion of
their forging and heat treatment requirements. With the expansion of its
forging capacity, the Company plans to begin marketing its forgings to third
party customers.
Dril-Quip's manufacturing facilities utilize state-of-the-art computer
numerically controlled ("CNC") machine tools and equipment, which contribute
to the Company's product quality and timely delivery. The Company has also
developed a cost effective, in-house machine tool rebuild capability, which
produces "like new" machine upgrades with customized features to enhance the
economic manufacture of its specialized products. The Company purchases
quality used machine tools as they become available and stores them at its
facilities to be rebuilt and upgraded as the need arises. Purchasing and
rebuilding used machine tools is a competitive advantage, allowing Dril-Quip
to add machine tools at lower overall costs than its competitors. Rebuilding
used machine tools also allows for greater customization suitable for
manufacturing Dril-Quip proprietary product lines. This provides the added
advantage of requiring only in-house expertise for repairs and maintenance of
these machines. A significant portion of the Company's manufacturing capacity
growth has been through the rebuild/upgrade of quality used machine tools,
including the replacement of outdated control systems with state-of-the-art
CNC controls.
In the last two years, as demand for offshore exploration and production
equipment has increased significantly, the Company has been operating at close
to full capacity. The Company plans to expand its manufacturing capacity by
approximately 90% during the three-year period 1997 through 1999,
approximately two-thirds of which is expected to be completed by the end of
1998. The first of the additional manufacturing facilities is currently under
construction and is expected to be completed by the end of 1998. The Company
believes that this capital expansion program will allow it to prudently manage
its growth in response to customer demand for its products. The Company has
already begun adding machine tools at its existing facilities that it will
move to the new facilities when they are completed. In order to expand its
capacity as rapidly as planned, the Company expects that it will supplement
its inventory of used machine tools, which it plans to rebuild and upgrade,
with purchases of new and additional used machine tools.
PERCENTAGE OF COMPLETION ACCOUNTING
Historically, Drip-Quip recognized revenues upon the delivery of a completed
product. As the Company has begun manufacturing larger and more complex
projects that have longer manufacturing times, the Company has begun to
account for purchase orders covering such projects on a percentage of
completion basis. The Company expects that such larger and more complex
projects will increase the Company's sales and revenues and afford the Company
certain economies of scale because such projects generally utilize the
Company's products as component parts. The Company also expects that such
projects may have a stabilizing effect on the Company's operations, as the
Company will have a longer period of time over which to plan and to allocate
its resources. Finally, the Company expects to receive certain periodic
payments associated with such projects, rather than payment upon delivery.
Because the Company has only recently become involved in such manufacturing
projects, the use of percentage of completion accounting does not affect the
comparability of financial information to earlier periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
CUSTOMERS
The Company's principal customers are major integrated oil and gas
companies, large independent oil and gas companies and foreign national oil
and gas companies. Offshore drilling contractors and engineering and
construction companies also represent a minor, but steadily increasing,
customer base. The Company's customers are generally oil and gas companies
that are well-known participants in offshore exploration and production, who
34
<PAGE>
depend on high quality, efficient, reliable products, such as those produced
by Dril-Quip, for their offshore activities, particularly in deepwater areas.
The Company is not dependent on any one customer or group of customers. In
1996, the Company's top 15 customers represented approximately 50% of total
revenues, with the Royal Dutch Shell Group of Companies (aggregating orders
placed by all of its worldwide affiliates), accounting for approximately 19%
of revenues. The number and variety of the Company's products required in a
given year by any one customer depends upon the amount of that customer's
capital expenditure budget devoted to offshore exploration and production in
any single year and on the results of competitive bids for major projects.
Consequently, a customer that accounts for a significant portion of revenues
in one fiscal year may represent an immaterial portion of revenues in
subsequent years.
Due to the demanding operating conditions in the offshore drilling and
production sector and high costs associated with equipment failure, customers
prefer manufacturers of highly reliable products, with established
qualifications and experience, such as Dril-Quip. The Company strives to build
strong long-term relationships with its customers by maintaining its
reputation as a manufacturer of high-quality, efficient and reliable products,
by developing new products to meet its customer's needs and by responding
promptly to customer orders. See "Risk Factors--Reliance on Significant
Customers" and "--Competition."
MARKETING AND SALES
Dril-Quip markets its products and services throughout the world directly
through its sales personnel in two domestic and six international locations.
In addition, in certain foreign markets where the Company does not maintain
offices, it utilizes independent sales representatives to enhance its
marketing and sales efforts. Locations in which Dril-Quip has sales
representatives include the United Arab Emirates, Saudi Arabia, China, Canada,
the Philippines, Brazil, Indonesia, Malaysia, Kuwait, Brunei, Oman, Qatar and
West Africa. Although they do not have authority to contractually bind the
Company, these representatives market the Company's products in their
respective territories in return for sales commissions. The Company also
places print advertising from time to time in trade and technical publications
targeted to its customer base. It also participates in industry conferences
and trade shows to enhance industry awareness of its products.
The Company's customers generally order products on a purchase order basis.
Orders are typically filled within two weeks to three months after receipt of
a purchase order, depending on the type of product and whether it is sold out
of inventory or requires some customization. Contracts for certain of the
Company's larger, more complex products, such as subsea production trees,
drilling risers and equipment for TLPs and Spars can take a year or more to
complete.
The primary factors influencing a customer's decision to purchase the
Company's products are the quality, reliability and reputation of the product,
price and technologically superior features. Timely delivery of equipment is
also very important to customer operations and the Company maintains an
experienced sales coordination staff to help assure such delivery. For large
drilling and production system orders, project management teams coordinate
customer needs with engineering, manufacturing and service organizations, as
well as with subcontractors and vendors.
The Company historically has experienced some seasonality, with revenues and
operating income slightly lower during the first and third quarters compared
to the second and fourth quarters. The Company's revenues are affected by its
customers' capital expenditure budgeting process, which generally results in
lower revenues in the first quarter and higher revenues in the fourth quarter.
PRODUCT DEVELOPMENT AND ENGINEERING
The technological demands of the oil and gas industry continue to increase
as offshore exploration and drilling expand into more hostile environments.
Conditions encountered in these environments include well
35
<PAGE>
pressures of up to 15,000 psi (pounds per square inch), mixed flows of oil and
gas under high pressure that may also be highly corrosive and water depths in
excess of 5,000 feet. Since its founding, Dril-Quip has actively engaged in
continuing product development to generate new products and improve existing
products. When developing new products, the Company typically seeks to design
the most technologically advanced version for a particular application to
establish its reputation and qualification in that product. Thereafter, the
Company leverages its expertise in the more technologically advanced product
to produce less costly and complex versions of the product for less demanding
applications. The Company also focuses its activities on reducing the overall
cost to the customer, which includes not only the initial capital cost but
also operating costs associated with its products. The reliable performance of
Dril-Quip's products during installation and during the life of the field is
one of the most important factors to the customer.
All of the Company's products have been developed from internally generated
designs, and the Company has continually introduced new products and product
enhancements since its founding in 1981. Product developments that began in
1991 have led to a series of new products, including diverters, wellhead
connectors, SingleBore(TM) subsea trees, improved severe service dual bore
subsea trees, subsea and platform valves, platform wellheads, platform trees,
subsea tree workover riser systems, drilling risers and TLP and Spar
production riser systems. For the year ended December 31, 1996, more than 30%
of the Company's total revenues were from the sales of products and product
enhancements developed since 1991. In addition, of the Company's approximately
$101 million backlog at June 30, 1997, at least 45% was attributable to orders
for products and product enhancements developed since 1991.
Dril-Quip's product development work is conducted at its facilities in
Houston, Texas and Aberdeen, Scotland. In addition to the work of its product
development staff, the Company's application engineering staff provides
engineering services to customers in connection with the design and sales of
its products.
The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees than
on any individual patent, trademark or copyright. Nevertheless, as part of its
ongoing product development and manufacturing activities, Dril-Quip's policy
has been to seek patents when appropriate on inventions concerning new
products and product improvements. As of June 30, 1997, the Company held 36
United States patents and 77 foreign patents and had applications pending for
four United States patents and 17 foreign patents. All patent rights for
products developed by employees are assigned to the Company. Virtually all of
the Company's products have components that are covered by patents. The
Company's existing patents expire at various times beginning in 2001.
Dril-Quip has 12 U.S. registered trademarks, including Dril-Quip(R), Quik-
Thread(R), Quick-Stab(R), Multi-Thread(R), MS-15(R), SS-15(R), SS-10(R), SU-
90(R) and DX(R). The Company has registered its trademarks in the countries
where such registration is deemed material.
Although in the aggregate the Company's patents and trademarks are of
considerable importance to the manufacturing and marketing of many of its
products, the Company does not consider any single patent or trademark or
group of patents or trademarks to be material to its business as a whole,
except the Dril-Quip(R) trademark. The Company also relies on trade secret
protection for its confidential and proprietary information. The Company
routinely enters into confidentiality agreements with its employees and
suppliers. There can be no assurance, however, that others will not
independently obtain similar information or otherwise gain access to the
Company's trade secrets.
COMPETITION
Dril-Quip faces significant competition from other manufacturers of
exploration and production equipment. Several of its primary competitors are
diversified multinational companies with substantially larger operating staffs
and greater capital resources than those of the Company and which, in many
instances, have been engaged in the manufacturing business for a much longer
time than the Company. However, Dril-Quip believes it has a significant
position in its oil and gas drilling and production equipment markets,
particularly with respect to its high performance and time-saving products. In
these markets, the Company competes principally with ABB
36
<PAGE>
Vetco Gray Inc. (a subsidiary of Asea Brown Boveri, more commonly referred to
as ABB), the petroleum production equipment segment of Cooper Cameron
Corporation, the Petroleum Equipment Group of FMC Corporation and Kvaerner
National Ltd. (a division of Kvaerner A.S.).
Because of their relative size and diversity of products, several of these
companies have the ability to provide "turnkey" services for offshore drilling
and production applications, which enables them to use their own products to
the exclusion of Dril-Quip's products. The Company also competes to a lesser
extent with a number of other companies in various products. The principal
competitive factors in the petroleum drilling and production equipment markets
are quality, reliability and reputation of the product, price, technology,
service and timely delivery. See "Risk Factors--Competition."
PROPERTIES
MAJOR MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
BUILDING
SIZE LAND
(APPROXIMATE (APPROXIMATE
LOCATION SQUARE FEET) ACREAGE) OWNED OR LEASED
-------- ------------ ------------ ----------------
<S> <C> <C> <C>
Houston, Texas
--13550 Hempstead Highway.......... 175,000 15 Owned
12,000 -- Leased (offices)
--6401 N. Eldridge Parkway......... 280,000 218 Owned
Aberdeen, Scotland................... 110,000 10 Owned
9,400 -- Leased (offices)
Singapore............................ 13,000 1.8 Leased
</TABLE>
Dril-Quip's manufacturing facilities in Houston and Aberdeen are capable of
manufacturing each of its products, and the facility in Singapore is capable
of manufacturing most of the Company's established products. The Company's
Eldridge site in Houston, Texas consists of 218 acres, of which approximately
70% is available for additional buildings and machine tools. The Company plans
to focus its domestic capacity expansion at the Eldridge site.
SALES, SERVICE AND RECONDITIONING FACILITIES
<TABLE>
<CAPTION>
BUILDING
SIZE LAND
(APPROXIMATE (APPROXIMATE
LEASED LOCATION SQUARE FEET) ACREAGE) ACTIVITY
--------------- ------------ ------------ -----------------------------
<S> <C> <C> <C>
New Orleans, Louisiana.. 2,300 -- Sales/Service
Beverwijk, Holland...... 5,200 0.2 Sales/Warehouse
Perth, Australia........ 13,300 1.4 Sales/Service/
Reconditioning/Warehouse
Stavanger, Norway....... 15,700 2.4 Sales/Service/Reconditioning/
Warehouse/Fabrication
Esbjerg, Denmark........ 7,800 0.5 Sales/Service/Reconditioning/
Warehouse
</TABLE>
The Company also performs sales, service and reconditioning activities at
its facilities in Houston, Aberdeen and Singapore. As part of its capital
expansion, the Company plans to expand its facilities in Stavanger to meet
growing demands for its products and services. Under the Company's existing
credit facilities, substantially all of the properties and assets of the
Company are subject to mortgages and security interests in favor of the
Company's lenders.
37
<PAGE>
EMPLOYEES
The total number of the Company's employees as of June 30, 1997 was 926. Of
these, 580 were located in the United States. The Company's employees are not
covered by collective bargaining agreements, and the Company considers its
employee relations to be good.
GOVERNMENTAL REGULATIONS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil
and gas industry and, therefore, is affected by changing taxes, price controls
and other laws and regulations relating to the oil and gas industry generally,
including those specifically directed to offshore operations. The adoption of
laws and regulations curtailing exploration and development drilling for oil
and gas for economic or other policy reasons could adversely affect the
Company's operations by limiting demand for the Company's products.
Recently, increased concern has been raised over the protection of the
environment. Offshore drilling in certain areas has been opposed by
environmental groups and, in certain areas, has been restricted. To the extent
that new laws or other governmental actions prohibit or restrict offshore
drilling or impose additional environmental protection requirements that
result in increased costs to the oil and gas industry in general and the
offshore drilling industry in particular, the business of the Company could be
adversely affected. The Company cannot determine to what extent its future
operations and earnings may be affected by new legislation, new regulations or
changes in existing regulations.
The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for the environmental damage without regard to negligence or fault on
the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. Compliance with
environmental laws and regulations may require the Company to obtain permits
or other authorizations for certain activities and to comply with various
standards or procedural requirements. The Company believes that its facilities
are in substantial compliance with current regulatory standards.
Based on the Company's experience to date, the Company does not currently
anticipate any material adverse effect on its business or consolidated
financial position as a result of future compliance with existing
environmental laws and regulations controlling the discharge of materials into
the environment. However, future events, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies, or stricter or different interpretations of existing laws
and regulations, may require additional expenditures by the Company, which may
be material.
LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any pending legal proceedings, which, in the opinion of management, are
expected to have a material adverse effect on the Company's consolidated
results of operations or financial position.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages (as of August 31, 1997) and
positions of the Company's directors, the person nominated to become a
director of the Company upon completion of the Offering and the Company's
executive officers:
<TABLE>
<CAPTION>
DIRECTOR'S
TERM
NAME AGE POSITION ENDING
---- --- -------- ----------
<S> <C> <C> <C>
Larry E. Reimert........... 50 Co-Chairman of the Board and Director 2000
Gary D. Smith.............. 55 Co-Chairman of the Board and Director 2000
J. Mike Walker............. 54 Co-Chairman of the Board and Director 1999
Gary W. Loveless........... 54 Director 1999
James M. Alexander......... 45 Director(1) 1998
Jerry M. Brooks............ 45 Chief Accounting Officer
</TABLE>
- --------
(1) Appointment will become effective upon completion of the Offering.
The Company's Board of Directors is divided into three classes with
staggered terms of office, initially ending as set forth above. Thereafter,
the term for each class will expire on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for such class. Each director holds office until the
next annual meeting of stockholders for the election of directors of his class
and until his successor has been duly elected and qualified. Officers serve at
the discretion of the Board of Directors.
Larry E. Reimert is Co-Chairman of the Board with principal responsibility
for engineering, product development and finance. He has been the Director--
Engineering, Product Development and Finance, as well as a member of the Board
of Directors, since the Company's inception in 1981. Prior to that, he worked
for Vetco Offshore, Inc. in various capacities, including as Vice President of
Technical Operations, Vice President of Engineering and Manager of
Engineering. Mr. Reimert holds a BSME degree from the University of Houston
and a MBA degree from Pepperdine University.
Gary D. Smith is Co-Chairman of the Board with principal responsibility for
sales, service, training and administration. He has been the Director--Sales,
Service, Training and Administration, as well as a member of the Board of
Directors, since the Company's inception in 1981. Prior to that, he worked for
Vetco Offshore, Inc. in various capacities, including as General Manager and
Vice President of Sales and Service.
J. Mike Walker is Co-Chairman of the Board with principal responsibility for
manufacturing, purchasing and facilities. He has been the Director--
Manufacturing, Purchasing and Facilities, as well as a member of the Board of
Directors, since the Company's inception in 1981. Prior to that, he served as
the Director of Engineering, Manager of Engineering and Manager of Research
and Development with Vetco Offshore, Inc. Mr. Walker holds a BSME degree from
Texas A&M University, a MSME degree from the University of Texas at Austin and
a Ph.D. in mechanical engineering from Texas A&M University.
Gary W. Loveless has been an outside director since the Company's inception
in 1981. From 1986 to 1997, he held various positions with Great Western
Resources Corporation, most recently as Chief Executive Officer and Director.
In 1997, Great Western Resources Corporation was purchased by Forcenegy Inc.,
and Mr. Loveless currently serves as Vice President/Onshore Exploration and
Production of Forcenegy Inc. He holds a BSME from Texas A&M University and a
MSME from the University of Texas at Austin.
James M. Alexander will become an outside director of the Company upon
completion of the Offering. Since December 1996, he has served as the Vice
President, Chief Financial Officer and Secretary of Spinnaker Exploration
Company, L.L.C. From November 1995 to December 1996, Mr. Alexander was
President of
39
<PAGE>
Alexander Consulting, Inc. He was the Senior Vice President and Chief
Financial Officer of Enron Global Power & Pipelines L.L.C. from November 1994
to June 1995, and served as its President from June until November 1995. Prior
to that time, Mr. Alexander was President of Alexander Corporate Financial
Consulting, Inc. from June 1992 to November 1994. Mr. Alexander holds a BA
from Yale College and an MBA from Harvard University.
Jerry M. Brooks has been Chief Accounting Officer since he joined the
Company in 1992. From 1980 to 1991, he held various positions with Chiles
Offshore Corporation, most recently as Chief Financial Officer, Secretary and
Treasurer. Mr. Brooks holds a BBA in Accounting and an MBA from the University
of Texas at Austin. He is a certified public accountant.
Upon completion of the Offering, there will be two committees of the Board
of Directors: an Audit Committee and a Compensation Committee. The initial
members of the Audit Committee will be Mr. Loveless and Mr. Alexander. The
Audit Committee will recommend the appointment of independent public
accountants to conduct audits of the Company's financial statements and review
with the independent accountants the plan and results of the auditing
engagement. The Audit Committee will also review the scope and results of
procedures for internal auditing of the Company and the adequacy of the
Company's system of internal accounting controls. The initial members of the
Compensation Committee will be Mr. Loveless and Mr. Alexander. The
Compensation Committee will approve, or in some cases, recommend to the Board,
remuneration arrangements and other compensation plans involving the Company's
directors, executive officers and certain other employees whose compensation
exceeds specified levels. The Compensation Committee will also act on the
granting of stock options, including grants made under the Incentive Plan to
the Company's directors and executive officers.
DIRECTOR COMPENSATION
Gary W. Loveless, one of the Company's directors, was paid fees totaling
$25,000 for his services as a director of the Company for the year ended
December 31, 1996. Commencing with the consummation of the Offering, each
director who is not an employee of the Company (a "Nonemployee Director") and
who is elected or appointed on or after completion of the Offering will
receive an annual fee of $35,000, plus a fee of $1,000 for attendance at each
Board of Directors meeting and $1,000 for each committee meeting (unless held
on the same day as a Board of Directors meeting). All directors will be
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof and for other expenses incurred in
their capacity as directors. Directors who are employees of the Company will
not receive additional compensation for serving as directors.
OFFICER AND DIRECTOR INDEMNIFICATION
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Delaware
General Corporation Law. The Bylaws include related provisions meant to
facilitate the indemnitee's receipt of such benefits. These provisions cover,
among other things: (i) specification of the method of determining entitlement
to indemnification and the selection of independent counsel that will in some
cases make such determination; (ii) specification of certain time periods by
which certain payments or determinations must be made and actions must be
taken; and (iii) the establishment of certain presumptions in favor of an
indemnitee. The benefits of certain of these provisions are available to an
indemnitee only if there has been a change in control (as defined therein).
The Company has entered into indemnification agreements with its directors and
officers that provide for similar protections.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain summary
information concerning the compensation paid or accrued by the Company during
the year ended December 31, 1996 to the Company's
40
<PAGE>
executive officers whose combined salary and bonus from the Company during
such period exceeded $100,000 (collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
--------------------------- ------ -------- ---------------
<S> <C> <C> <C>
Larry E. Reimert............................. $413,462 $200,000 $3,000
Co-Chairman of the Board
Gary D. Smith................................ $413,462 $200,000 $3,000
Co-Chairman of the Board
J. Mike Walker............................... $413,462 $200,000 $3,000
Co-Chairman of the Board
Jerry M. Brooks.............................. $107,566 $ 15,000 $2,151
Chief Accounting Officer
</TABLE>
- --------
(1) Other annual compensation for each named executive officer during 1996 did
not exceed the lesser of $50,000 or 10% of the annual compensation earned
by such individual.
(2) The amounts shown represent contributions by the Company under its 401(k)
Profit Sharing Plan and Company payments of life insurance premiums.
EMPLOYMENT AGREEMENTS
Prior to the completion of the Offering, the Company expects to enter into
employment agreements with each of Messrs. Reimert, Smith and Walker. The
following summary of these agreements, which will be effective on the closing
of the Offering, does not purport to be complete and is qualified by reference
to them, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Each of these agreements
provides for an annual base salary in an amount not less than $350,000, and
will entitle the employee to participate in all of the Company's incentive,
savings, retirement and welfare benefit plans in which other executive
officers of the Company participate. Each agreement also provides for a bonus
of $250,000 payable on or before December 31, 1997, and thereafter an annual
performance bonus equal to up to 120% of the executive's annual base salary,
with the precise amount of the bonus determined based on specific Company
performance goals. The performance goals, which are equally weighted, are
based on (i) the Company's annual earnings before interest and taxes ("EBIT")
measured against the Company's annual budget or plan, and (ii) the Company's
annual return on capital (defined as EBIT divided by total assets less current
liabilities) compared to a peer group of companies. In addition, each
agreement provides that the employee will receive an annual grant of a number
of Options (as defined below) under the Incentive Plan equal to the employee's
base salary multiplied by three and divided by the market price of the Common
Stock on the grant date. Each agreement provides that the employee's
compensation, including his annual base salary, annual performance bonus and
annual grant of Options, shall be reviewed at least annually by the
Compensation Committee and shall be subject to increase at any time and from
time to time on a basis determined by the Compensation Committee, in the
exercise of its sole discretion.
Each of the employment agreements has an initial five-year term, provided
that at the end of the second year of such initial term and on every
anniversary thereafter, the term will be automatically extended for one year,
such that the remaining term of the agreement shall never be less than three
years. Each agreement will be subject to the right of the Company and the
employee to terminate the employee's employment at any time. Each agreement
provides that, upon termination of employment because of death or disability,
or if employment is terminated by the Company for any reason (except under
certain limited circumstances defined as "for cause" in the agreement), or if
employment is terminated by the employee subsequent to a change of control (as
defined) or with good reason (as defined), the employee will generally be
entitled to (i) a lump sum cash payment equal to the employee's base salary
through the date of termination, together with any deferred compensation
previously awarded and any accrued vacation time, (ii) a lump sum cash payment
equal to the
41
<PAGE>
annual base salary that would have been paid to the employee beginning on the
date of termination and ending on the latest possible date of termination of
the employment in accordance with the agreement, (iii) a lump sum cash payment
equal to the annual bonus calculated in accordance with the agreement for the
remaining employment period (assuming for such purpose that the annual bonus
payable for each applicable period during the remaining employment period
would equal the highest annual bonus paid during the last three years prior to
the date of termination), (iv) immediate vesting of any stock options or
restricted stock previously granted to such employee and outstanding as of the
time immediately prior to the date of his termination, or a cash payment in
lieu thereof, and (v) continued participation in medical, dental and life
insurance coverage until the employee receives equivalent coverage and
benefits under other plans of a subsequent employer or the later of the death
of the employee, the death of the employee's spouse and the youngest child of
the employee reaching age 21. The Company will also pay the employee any such
amount as may be necessary to hold the employee harmless from the consequences
of any resulting excise or other similar purpose tax relating to "parachute
payments" under the Internal Revenue Code of 1986, as amended.
Each agreement also provides that, during the term of the agreement and
after termination thereof, the employee shall not divulge any of the Company's
confidential information, knowledge or data. In addition, each agreement
requires the employee to disclose and assign to the Company any and all
conceptions and ideas for inventions, improvements and valuable discoveries
made by the employee which pertain primarily to the material business
activities of the Company. Each agreement also provides that, in the event
that the agreement is terminated for cause or the employee voluntarily resigns
(other than following a change of control or for good reason), for one year
thereafter the employee will not within any country with respect to which he
has devoted substantial attention to the material business interests of the
Company, (i) accept employment or render services to a competitor of the
Company or (ii) enter into or take part in business that would be competitive
with the Company.
INCENTIVE PLAN
Prior to the completion of the Offering, the Company expects to adopt the
Incentive Plan. The objectives of the Incentive Plan are (i) to attract and
retain key employees, (ii) to encourage the sense of proprietorship of these
persons in the Company and (iii) to stimulate the active interest of these
persons in the development and financial success of, the Company by making
awards ("Awards") under the Incentive Plan.
The Company plans to reserve 1,700,000 shares of Common Stock to use in
connection with the Incentive Plan. Persons eligible for Awards are employees
holding positions of responsibility with the Company or any of its
subsidiaries and whose performance can have a significant effect on the
success of the Company.
The Board of Directors will administer the Incentive Plan with respect to
all employees other than executive officers. The Compensation Committee will
administer the Incentive Plan with respect to executive officers. The Board
has the exclusive power to administer the Incentive Plan, to take all actions
specifically contemplated thereby or necessary or appropriate in connection
with the administration thereof, to interpret the Incentive Plan and to adopt
such rules, regulations and guidelines for carrying out its purposes as the
Board may deem necessary or proper, all of which powers will be exercised in
the best interests of the Company and in keeping with the objectives of such
plan. The Board may, in its discretion, among other things, (i) extend or
accelerate the exercisability of, accelerate the vesting of, or eliminate or
make less restrictive any restrictions contained in, any Award, (ii) waive any
restriction or other provision of the Incentive Plan or in any Award or (iii)
otherwise amend or modify any Award in any manner that is either not adverse
to that participant holding the Award or consented to by that participant. The
Board also may delegate to certain senior officers of the Company its duties
under the Incentive Plan.
The Board of Directors may amend, modify, suspend or terminate the Incentive
Plan for the purpose of addressing any changes in legal requirements or for
any other lawful purpose, except that no amendment or alteration that would
adversely affect the rights of any participant under any Award previously
granted to such participant shall be made without the consent of such
participant. The Board of Directors may make certain
42
<PAGE>
adjustments in the event of any subdivision, split or combination of
outstanding shares of Common Stock, any declaration of a stock dividend
payable in shares of Common Stock, any recapitalization or capital
reorganization of the Company, any consolidation or merger of the Company with
another corporation or entity, any adoption by the Company of any plan of
exchange affecting the Common Stock or any distribution to holders of Common
Stock of securities or property (other than normal cash dividends).
Awards to employees may be in the form of (i) rights to purchase a specified
number of shares of Common Stock at a specified price ("Options"), (ii) rights
to receive a payment, in cash or Common Stock, equal to the excess of the fair
market value or other specified value of a number of shares of Common Stock on
the date the right is exercised over a specified strike price, (iii) grants of
restricted or unrestricted Common Stock or units denominated in Common Stock,
(iv) grants denominated in cash and (v) grants denominated in cash, Common
Stock, units denominated in Common Stock or any other property which are made
subject to the attainment of one or more performance goals ("Performance
Awards"). An Option may be either an incentive stock option ("ISO") that
qualifies, or a nonqualified stock option ("NSO") that does not qualify, with
the requirements of Section 422 of the Internal Revenue Code. The Committee
will determine the employees to receive Awards and the terms, conditions and
limitations applicable to each such Award, which conditions may, but need not,
include continuous service with the Company, achievement of specific business
objectives, attainment of specified growth rates, increases in specified
indices or other comparable measures of performance. Performance Awards may
include more than one performance goal, and a performance goal may be based on
one or more business criteria applicable to the grantee, the Company as a
whole or one or more of the Company's business units and may include one or
more of the following: increased revenues, net income, stock price, market
share, earnings per share, return on equity or assets or decrease in costs.
On the date the Offering closes, Options under the Incentive Plan will be
granted to certain employees of the Company to purchase a total of
approximately 422,500 shares of Common Stock at an exercise price per share
equal to the initial public offering price per share set forth on the cover
page of this Prospectus. These awards include Options to be granted to each of
Messrs. Reimert, Smith and Walker to purchase 50,000 shares of Common Stock
(assuming an initial public offering price of $21.00 per share). All such
Options will have a term of ten years and become exercisable in cumulative
annual increments of one-fourth of the total number of shares of Common Stock
subject thereto, beginning on the first anniversary of the date of the grant.
The foregoing description summarizes the principal terms and conditions of
the Incentive Plan, does not purport to be complete and is qualified in its
entirety by reference to the Incentive Plan, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Upon completion of the Offering, the Company will establish a Compensation
Committee. In the past, matters with respect to the compensation of executive
officers of the Company were determined by the members of the Board of
Directors as a whole. Messrs. Reimert, Smith and Walker, who were members of
the Board of Directors, participated in deliberations concerning compensation.
43
<PAGE>
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
In connection with the Offering, the Company will enter into a registration
rights agreement among the Company and Messrs. Reimert, Smith, Walker,
Loveless, Reimert Family Partners, Ltd., Four Smith's Company, Ltd. and
Loveless Enterprises, Ltd. (the "Registration Rights Agreement"). The
Registration Rights Agreement will provide for registration rights pursuant to
which, upon the request of any of Messrs. Reimert, Smith and Walker (the
"Requesting Holders"), the Company will file a registration statement under
the Securities Act to register the Common Stock subject to the agreement
("Registrable Securities") held by such Requesting Holders and any other
stockholders who are parties to the Registration Rights Agreement and who
desire to sell Registrable Securities pursuant to such registration statement,
subject to a maximum of two requests by each of Messrs. Reimert, Smith and
Walker or their successors and assigns. The first such request may not be made
until after 180 days following the closing of the Offering. In addition,
subject to certain conditions and limitations, the Registration Rights
Agreement will provide that Messrs. Reimert, Smith, Walker and Loveless may
participate in any registration by the Company (including any registration
resulting from any exercise of a demand right under the Registration Rights
Agreement) of any of its equity securities in an underwritten offering. The
registration rights covered by the Registration Rights Agreement will
generally be transferable to transferees (whether by assignment or by death of
the holder) of the Registrable Securities covered thereby. The Registration
Rights Agreement will terminate when all Registrable Securities have been (i)
distributed to the public pursuant to a registration statement covering such
securities that has been declared effective under the Securities Act, or (ii)
distributed to the public in accordance with the provisions of Rule 144 (or
any similar provision then in force) under the Securities Act. An aggregate of
11,870,000 outstanding shares of Common Stock and 150,000 shares of Common
Stock issuable upon exercise of outstanding options (assuming an initial
public offering price of $21.00 per share) will be subject to the Registration
Rights Agreement.
STOCKHOLDERS AGREEMENT
Messrs. Reimert, Smith, Walker, Reimert Family Partners, Ltd. and Four
Smith's Company, Ltd. are parties to a stockholders agreement (the
"Stockholders Agreement") pursuant to which each party has agreed to vote the
shares of Common Stock held by such party to elect to the Company's Board of
Directors one designee of Mr. Reimert and Reimert Family Partners, Ltd. (the
"Reimert Stockholders"), one designee of Mr. Smith and Four Smith's Company,
Ltd. (the "Smith Stockholders") and one designee of Mr. Walker. The rights
under the Stockholders Agreement are transferable to any heir or legal
representative of Messrs. Reimert, Smith or Walker who acquires Common Stock
upon the death of such stockholder and who agrees to be bound by the
provisions of such Agreement. In the event the Reimert Stockholders,
collectively, the Smith Stockholders, collectively, or Mr. Walker (or their
permitted transferees as described in the preceding sentence), own less than
10% of the total number of issued and outstanding shares of Common Stock of
the Company, the rights and obligations of such person under the Stockholders
Agreement are terminated.
CONSULTING SERVICES
In 1996, the Company paid Alexander Consulting, Inc., of which Mr. James M.
Alexander is the sole shareholder, fees totalling $50,000 for consulting
services. In 1997, the Company has paid Mr. Alexander fees totalling $85,000
for certain consulting services rendered to the Company. Mr. Alexander will be
appointed to the Board of Directors of the Company upon completion of the
Offering.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
current beneficial ownership of shares of Common Stock, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than 5% of the Common Stock, (ii) each of
the Company's directors and named executive officers, (iii) all current
executive officers and directors as a group and (iv) each of the Selling
Stockholders. See "Risk Factors--Control by Certain Stockholders."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1) (2)
NAME OF BENEFICIAL --------------------- SHARES ---------------------
OWNER(3)(4) NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
------------------ ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Larry E. Reimert(5)...... 4,311,000 30% 750,000 3,561,000 21.11%
Gary D. Smith(6)......... 4,311,000 30 750,000 3,561,000 21.11
J. Mike Walker........... 4,311,000 30 750,000 3,561,000 21.11
Gary W. Loveless(7)...... 1,437,000 10 250,000 1,187,000 7.04
James M. Alexander....... -- -- -- -- --
Jerry M. Brooks.......... -- -- -- -- --
All directors and execu-
tive officers as a group
(6 persons)............. 14,370,000 100% 2,500,000 11,870,000 70.37%
</TABLE>
- --------
(1) Shares of Common Stock subject to options that are expected to become
exercisable upon the consummation of the Offering are deemed outstanding
for computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership of
any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(4) The address of each such person is 13550 Hempstead Highway, Houston, Texas
77040.
(5) Includes 4,310,545 shares of Common Stock held by Reimert Family Partners,
Ltd., a limited partnership of which Mr. Reimert is the Managing General
Partner, and with respect to which he exercises voting and investment
power.
(6) Includes 4,310,545 shares of Common Stock held by Four Smith's Company,
Ltd., a limited partnership of which Mr. Smith and his wife, Gloria Jean
Smith, are the Managing General Partners, and with respect to which they
exercise voting and investment power. Mrs. Smith may also be deemed to be
the beneficial owner of such shares.
(7) Includes 1,436,848 shares of Common Stock held by Loveless Enterprises,
Ltd., a limited partnership of which Loveless Enterprises, L.L.C. is the
Managing General Partner. Mr. Loveless is the sole manager of Loveless
Enterprises, L.L.C., and exercises voting and investment power with
respect to such shares.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, approximately 16,870,000 shares of Common
Stock will be outstanding. The shares of Common Stock sold in the Offering
will be freely tradeable without restriction or further registration under the
Securities Act, except for certain manner of sale, volume limitations and
other restrictions with respect to any shares purchased in the Offering by an
affiliate of the Company (a "Company Affiliate"), which will be subject to the
resale limitations of Rule 144 under the Securities Act. Under Rule 144 under
the Securities Act, a person is an affiliate of an entity if such person
directly or indirectly controls or is controlled by or is under common control
with such entity and may include certain officers and directors, principal
stockholders and certain other stockholders with special relationships. This
Prospectus may not be used by Company Affiliates in connection with any resale
of shares of Common Stock acquired in the manner described above.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who
may be deemed "affiliates" of the Company, would be entitled to sell within
any three-month period a number of shares of Common Stock that does not exceed
the greater of (i) 1% of the then-outstanding shares of Common Stock (i.e.,
168,700 shares immediately after consummation of the Offering) and (ii) the
average weekly trading volume during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions as to the manner of sale,
notice requirements and the availability of current public information about
the Company. In addition, under Rule 144(k), if a period of at least two years
has elapsed since the later of the date restricted securities were acquired
from the Company or the date they were acquired from an affiliate of the
Company, a stockholder who is not an affiliate of the Company at the time of
sale and who has not been an affiliate for at least three months prior to the
sale would be entitled to sell shares of Common Stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
Rule 144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof.
Upon the consummation of the Offering, 11,870,000 shares of Common Stock
outstanding will be restricted securities as that term is defined by Rule 144,
and, subject to the conditions thereof, including volume limitations, will
become eligible for sale 90 days after the Offering. The Company will enter
into a Registration Rights Agreement upon the consummation of the Offering
whereby it will agree to register under the Securities Act shares of Common
Stock held by Messrs. Reimert, Smith, Walker and Loveless and certain of their
related family limited partnerships. See "Certain Transactions."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan. Shares of Common Stock
issued pursuant to such plan generally will be available for sale in the open
market by holders who are not Company Affiliates and, subject to the volume
and other limitations of Rule 144, by holders who are Company Affiliates.
Subject to certain exceptions, each of the Company and the directors,
executive officers and certain other stockholders of the Company has agreed
that, without the prior written consent of Morgan Stanley & Co. Incorporated
on behalf of the Underwriters, it will not, during the period ending 180 days
after the date of this Prospectus, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer,
lend or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangements that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or other securities, in cash or
otherwise. See "Underwriters."
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Prior to the Offering, there has been no public market for the Common Stock
and no prediction can be made of the effect, if any, that sales of Common
Stock or the availability of shares for sale will have on the market price
prevailing from time to time. Following the Offering, sales of substantial
amounts of Common Stock in the public market or otherwise, or the perception
that such sales could occur, could adversely affect the prevailing market
price for the Common Stock.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share. Following consummation of the Offering there
will be approximately 16,870,000 shares of Common Stock outstanding (assuming
the over-allotment option is not exercised), and no shares of Preferred Stock
will be outstanding. The following summary does not purport to be complete,
and reference is made to the more detailed provisions of the Company's
Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws,
which are filed as exhibits to the registration statement of which this
Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, each share being entitled
to one vote. There are no cumulative voting rights, meaning that the holders
of a majority of the shares voting for the election of directors can elect all
the directors if they choose to do so. The Common Stock carries no preemptive
rights and is not convertible, redeemable or assessable, or entitled to the
benefits of any sinking fund. The holders of Common Stock are entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy" for
information regarding dividend policy.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine the powers,
designations, preferences and relative, participating, optional or other
rights (including, without limitation, voting powers, full or limited,
preferential rights to receive dividends or assets upon liquidation, rights of
conversion or exchange into Common Stock, Preferred Stock of any Series or
other securities, redemption provisions and sinking fund provisions) between
series and between the Preferred Stock or any series thereof and the Common
Stock, and the qualifications, limitations or restrictions of such rights.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might
impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would
provide a required percentage vote of the stockholders. In addition, under
certain circumstances, the issuance of Preferred Stock could adversely affect
the voting power of the holders of the Common Stock. Although the Board of
Directors is required to make any determination to issue such stock based on
its judgment as to the best interests of the stockholders of the Company, the
Board of Directors could act in a manner that would discourage an acquisition
attempt or other transaction that some or even a majority of the stockholders
might believe to be in their best interests or in which stockholders might
receive a premium for their stock over the then market price of such stock.
The Board of Directors does not at present intend to seek stockholder approval
prior to any issuance of currently authorized stock, unless otherwise required
by law or the rules of any market on which the Company's securities are
traded.
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For purposes of the Rights Agreement described below, the Company Board has
authorized the creation of a series of Preferred Stock designated as "Series A
Junior Participating Preferred Stock" (the "Series A Preferred Stock"). An
aggregate of 500,000 shares of Preferred Stock have been reserved for issuance
as Series A Preferred Stock. Series A Preferred Stock will rank junior to all
other series of Preferred Stock that have been or may be established by the
Company Board with respect to the payment of dividends and the distribution of
assets upon liquidation. In general, the voting, dividend and liquidation
rights of Series A Preferred Stock are designed in such a way that one one-
hundredth of a share of Series A Preferred Stock will be substantially
equivalent from an economic point of view to one share of Common Stock. For a
statement of the rights and privileges of Series A Preferred Stock, reference
is made to the form of Certificate of Designations which is included as an
exhibit to this Registration Statement.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from the Company a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Preferred Stock at a specified purchase price
per Fractional Share, subject to adjustment in certain events (the "Purchase
Price"). The following summary description of the Rights does not purport to
be complete and is qualified in its entirety by reference to the Rights
Agreement between the Company and a Rights Agent (the "Rights Agreement"), the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part and is incorporated herein by reference.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock
offered hereby, and no separate certificates for the Rights ("Rights
Certificates") will be distributed. The Rights will separate from the Common
Stock and a "Distribution Date" will, with certain exceptions, occur upon the
earlier of (i) 10 days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the date of the announcement being the
"Stock Acquisition Date") or (ii) 10 business days following the commencement
of a tender offer or exchange offer that would result in a person's becoming
an Acquiring Person. Larry E. Reimert, Gary D. Smith, J. Mike Walker, Reimert
Family Partners, Ltd. and Four Smith's Company, Ltd. (the "Major
Stockholders"), each of whom will both prior to and, immediately after
consummation of the Offering be the beneficial owner of more than 15% of the
outstanding shares of Common Stock, will not be deemed to be an Acquiring
Person as a result of such ownership position or any subsequent increase in
ownership position. Additionally, a transferee of Common Stock (an "Individual
Major Stockholder Transferee") owned by Larry E. Reimert, Gary D. Smith, or J.
Mike Walker (the "Individual Major Stockholders") who as a result of such
transfer becomes the beneficial owner of 15% or more of the outstanding Common
Stock will not be deemed to be an Acquiring Person if (a) such transferee
receives such Common Stock directly from an Individual Major Stockholder by
will or intestate succession or (b) such transfer is made (i) directly from an
Individual Major Stockholder or an Individual Major Stockholder Transferee to
a spouse, sibling or lineal descendant of an Individual Major Stockholder or
lineal descendant of a spouse of an Individual Major Stockholder or (ii)
directly from an Individual Major Stockholder or an Individual Major
Stockholder Transferee to a trust, family partnership or similar family-
related or family-controlled entity for estate planning purposes, all of the
interests of which are owned by an Individual Major Stockholder, a spouse,
sibling or lineal descendant of an Individual Major Stockholder or lineal
descendant of a spouse of an Individual Major Stockholder or any distributees
under the will of any of the foregoing persons, successors of such persons by
intestate succession or trusts for the benefit of any of the foregoing persons
(an "Estate Planning Vehicle"), unless and until such Individual Major
Stockholder Transferee, together with his affiliates and associates, becomes
the beneficial owner of additional shares of Common Stock constituting 1% or
more of the then-outstanding shares of Common Stock or any other person who is
the beneficial owner of at least 1% of the then-outstanding shares of Common
Stock becomes an affiliate or associate of such Individual Major Stockholder
Transferee. Reimert Family Partners, Ltd. shall cease to be a Major
Stockholder at such time as all of the interests in such partnership are not
owned by Larry E. Reimert, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession, trusts
for the benefit of any
48
<PAGE>
of the foregoing persons and Wave Enterprises, Inc. Four Smith's Company, Ltd.
shall cease to be a Major Stockholder at such time as all of the interests in
such partnership are not owned by Gary D. Smith, his spouse, siblings, lineal
descendants, lineal descendants of his spouse, any distributees under the will
of any of the foregoing persons, successors of such persons by intestate
succession, and trusts for the benefit of any of the foregoing persons. An
Estate Planning Vehicle shall cease to be an Individual Major Stockholder
Transferee at such time as all of the interests therein cease to be owned by
an Individual Major Stockholder, a spouse, sibling or lineal descendant of an
Individual Major Stockholder or a lineal descendant of a spouse of an
Individual Major Stockholder or any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession or
trusts for the benefit of any of the foregoing persons. In certain
circumstances the Distribution Date may be deferred by the Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with those
certificates, (b) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the date that is the tenth anniversary of the
adoption of the Rights Plan, unless earlier redeemed or exchanged by the
Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of Common Stock as of the close of business on
the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common
Stock issued prior to the Distribution Date will be issued with Rights. Shares
of Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board of Directors, no
other shares of Common Stock issued after the Distribution Date will be issued
with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
Common Stock at a price and on terms that a majority of directors of the
Company who are unaffiliated with an Acquiring Person or offeror determines to
be fair to and otherwise in the best interests of the Company and its
stockholders (a "Permitted Offer")), each holder of a Right will thereafter
have the right to receive, upon exercise of such Right, a number of shares of
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a Current Market Price (as defined in the Rights
Agreement) equal to two times the exercise price of the Right. Notwithstanding
the foregoing, following the occurrence of any Triggering Event (as defined
below), all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by or transferred to an Acquiring
Person (or by certain related parties) will be null and void in the
circumstances set forth in the Rights Agreement. Rights are not exercisable
following the occurrence of any Flip-In Event until such time as the Rights
are no longer redeemable by the Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the time
an Acquiring Person becomes such, (i) the Company is acquired in a merger or
other business combination transaction (other than certain mergers that follow
a Permitted Offer) or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights that are
voided as set forth above) shall thereafter have the right to receive, upon
exercise, a number of shares of common stock of the acquiring company having a
Current Market Price equal to two times the exercise price of the Right. Flip-
In Events and Flip-Over Events are collectively referred to as "Triggering
Events."
The number of outstanding Rights associated with a share of Common Stock, or
the number of Fractional Shares of Preferred Stock issuable upon exercise of a
Right and the Purchase Price, are subject to adjustment in the event of a
stock dividend on, or a subdivision, combination or reclassification of, the
Common Stock occurring prior to the Distribution Date. The Purchase Price
payable, and the number of Fractional Shares of
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<PAGE>
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution in the
event of certain transactions affecting the Preferred Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu
thereof, an adjustment in cash may be made based on the market price of the
Series A Preferred Stock on the last trading date prior to the date of
exercise. Pursuant to the Rights Agreement, the Company reserves the right to
require prior to the occurrence of a Triggering Event that, upon any exercise
of Rights, a number of Rights be exercised so that only whole shares of Series
A Preferred Stock will be issued.
At any time until 10 days following the first date of public announcement of
the occurrence of a Flip-In Event, the Company may redeem the Rights in whole,
but not in part, at a price of $.01 per Right, payable, at the option of the
Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock
then outstanding or the occurrence of a Flip-Over Event, the Company may, at
its option, exchange the Rights (other than Rights owned by an Acquiring
Person or an affiliate or an associate of an Acquiring Person, which will have
become void), in whole or in part, at an exchange ratio of one share of Common
Stock, and/or other equity securities deemed to have the same value as one
share of Common Stock, per Right, subject to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors in order to cure any
ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption shall be made at such time as the Rights are not
redeemable. Until a Right is exercised, the holder thereof, as such, will have
no rights to vote or to receive dividends or any other rights as a stockholder
of the Company.
The Rights will have certain antitakeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the
Company without the approval of the Company's Board of Directors. As a result,
the overall effect of the Rights may be to render more difficult or discourage
any attempt to acquire the Company, even if such acquisition may be favorable
to the interests of the Company's stockholders. Because the Board of Directors
can redeem the Rights or approve a Permitted Offer, the Rights should not
interfere with a merger or other business combination approved by the Board.
The Rights are being issued to protect the Company's stockholders from
coercive or abusive takeover tactics and to afford the Company's Board of
Directors more negotiating leverage in dealing with prospective acquirors.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors of the Company to the
Company or its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for
50
<PAGE>
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited the
Company and its stockholders. The Company's Bylaws provide indemnification to
the Company's officers and directors and certain other persons with respect to
certain matters, and the Company has entered into agreements with each of its
directors providing for indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written
consent. The Bylaws provide that special meetings of the stockholders can be
called only by any Chairman of the Board, the President or a majority of the
Board of Directors of the Company.
Pursuant to the Certificate of Incorporation, certain transactions
involving, among other persons, any person who is a beneficial owner of 10% or
more of the aggregate voting power of all outstanding stock of the Company (a
"related person") require the affirmative vote of the holders of both (i) at
least 80% of the outstanding voting stock and (ii) at least 66 2/3% of the
outstanding voting stock not beneficially owned by the related person.
Transactions subject to such approval include certain mergers or
consolidations of the Company or sales or transfers of assets and properties
having an aggregate fair market value of $10 million or more. Notwithstanding
the foregoing, the Certificate of Incorporation provides that none of the
Major Stockholders shall be a related person. Additionally, an Individual
Major Stockholder Transferee who as a result of such transfer becomes the
beneficial owner of 10% or more of the outstanding Common Stock will not be
deemed to be a related person if (a) such transferee receives such Common
Stock directly from an Individual Major Stockholder by will or intestate
succession or (b) such transfer is made (i) directly from an Individual Major
Stockholder or from a person that is an Individual Major Stockholder
Transferee to a spouse, sibling or lineal descendant of an Individual Major
Stockholder or lineal descendant of a spouse of an Individual Major
Stockholder or (ii) directly from an Individual Major Stockholder or from a
person that is otherwise an Individual Major Stockholder Transferee to an
Estate Planning Vehicle for estate planning purposes, unless and until such
Individual Major Stockholder Transferee, together with his affiliates and
associates, becomes the beneficial owner of additional shares of Common Stock
constituting 1% or more of the then-outstanding shares of Common Stock or any
other person who is the beneficial owner of at least 1% of the then-
outstanding shares of Common Stock becomes an affiliate or associate of such
Individual Major Stockholder Transferee. Reimert Family Partners, Ltd. shall
cease to be a Major Stockholder at such time as all of the interests in such
partnership are not owned by Larry E. Reimert, his spouse, siblings, lineal
descendants, lineal descendants of his spouse, any distributees under the will
of any of the foregoing persons, successors of such persons by intestate
succession, trusts for the benefit of any of the foregoing persons and Wave
Enterprises, Inc. Four Smith's Company, Ltd. shall cease to be a Major
Stockholder at such time as all of the interests in such partnership are not
owned by Gary D. Smith, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession, and
trusts for the benefit of any of the foregoing persons. An Estate Planning
Vehicle shall cease to be an Individual Major Stockholder Transferee at such
time as all of the interests therein cease to be owned by an Individual Major
Stockholder, a spouse, sibling or lineal descendant of an Individual Major
Stockholder or a lineal descendant of a spouse of an Individual Major
Stockholder or any distributees under the will of any of the foregoing
persons, successors of such persons by intestate succession or trusts for the
benefit of any of the foregoing persons.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered three-year terms.
As a result, approximately one-third of the Company's Board of
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<PAGE>
Directors will be elected each year. The classified board provision could
prevent a party who acquires control of a majority of the outstanding voting
stock of the Company from obtaining control of the Board of Directors until
the second annual stockholders' meeting following the date the acquiror
obtains the controlling interest. See "Management."
The Certificate of Incorporation provides that the number of directors will
be no greater than 12 and no less than 3. The Certificate of Incorporation
further provides that directors may be removed only for cause (as defined in
the Certificate of Incorporation), and then only by the affirmative vote of
the holders of at least a majority of all outstanding voting stock entitled to
vote. This provision, in conjunction with the provisions of the Certificate of
Incorporation authorizing the Board of Directors to fill vacant directorships,
will prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees. In addition, the
Bylaws provide that the Compensation Committee will consist solely of members
who are not employees of the Company and the Audit Committee will include at
least a majority of members who are not employees of the Company.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii)
upon consummation of the transaction that resulted in the interested
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 stock held by directors who are also
officers of the corporation and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer) or (iii)
following the transaction in which such person became an interested
stockholder, the business combination was approved by the board of directors
of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock
of the corporation not owned by the interested stockholder. Under Section 203,
the restrictions described above also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of a majority of the corporation's directors, if such extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors prior to any person becoming an interested stockholder during the
previous three years or were recommended for election or elected to succeed
such directors by a majority of such directors.
STOCKHOLDER PROPOSALS
The Company's Bylaws contain provisions requiring that advance notice be
delivered to the Company of any business to be brought by a stockholder before
an annual meeting of stockholders, and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors of the Company. Generally, such advance notice provisions provide
that written notice must be given to the Secretary of the Company by a
stockholder (i) in the event of business to be brought by a stockholder before
an annual meeting, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, (a) with respect to an election to be held at the annual meeting
of stockholders, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the tenth day following the
52
<PAGE>
day on which notice of the date of the special meeting was mailed to
stockholders or public disclosure of the date of the special meeting was made,
whichever first occurs. Such notice must set forth specific information
regarding such stockholder and such business or director nominee, as described
in the Company's Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
53
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
Representatives, have severally agreed to purchase, and the Company and the
Selling Stockholders have agreed to sell to them, severally, the respective
number of shares of Common Stock set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.....................................
Donaldson, Lufkin & Jenrette Securities Corporation...................
---------
Total............................................................... 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the Underwriters' over-allotment option described below) if
any such shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price
and other selling terms may from time to time be varied by the
Representatives.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to an aggregate of 750,000 additional shares of Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth next to the names of all Underwriters in the
preceding table.
Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Common Stock offered by them.
54
<PAGE>
The Common Stock has been approved for listing on The New York Stock
Exchange under the symbol "DRQ".
Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will
not, during the period ending 180 days after the date of this Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The
restrictions in this paragraph do not apply to (w) Common Stock issued or
options granted pursuant to the Company's Incentive Plan, (x) the sale of
Shares to the Underwriters, (y) the issuance by the Company of shares of
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date of this Prospectus of which the Underwriters
have been advised in writing or (z) transactions by any person other than the
Company relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Offering of the Shares.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
In 1996, the Company paid Alexander Consulting, Inc., of which Mr. James M.
Alexander is the sole shareholder, fees totalling $50,000 for consulting
services. In 1997, the Company has paid Mr. Alexander fees totalling $85,000
for certain consulting services rendered to the Company. Mr. Alexander will be
appointed to the Board of Directors of the Company upon completion of the
Offering.
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Representatives. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, earnings and certain other
financial operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Preliminary Prospectus is subject to
change as a result of market conditions and other factors.
55
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas.
Certain legal matters in connection with the sale of the Common Stock offered
hereby will be passed upon for the Underwriters by Andrews & Kurth L.L.P.,
Houston, Texas.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Offering, the Company will be subject to the informational
requirements of the Exchange Act, and in accordance therewith, will be
required to file periodic reports and other information with the Commission.
Such information can be inspected without charge after the Offering at the
public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Suite 1400, Northwest Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material may also be obtained
at prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a
Web site (http://www.sec.gov) that will contain all information filed
electronically by the Company with the Commission.
The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
including the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement, exhibits and schedules. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and, with respect to each such contract or document
filed as an exhibit to the Registration Statement, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits and
schedules thereto, may be inspected and copies thereof may be obtained as
described in the preceding paragraph with respect to periodic reports and
other information to be filed by the Company under the Exchange Act.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and as of
June 30, 1997 (unaudited)................................................. F-3
Consolidated Statements of Income for the Three Years in the Period Ended
December 31, 1996 and for the Six Months Ended June 30, 1996 and 1997
(unaudited)............................................................... F-4
Consolidated Statements of Cash Flows for the Three Years in the Period
Ended December 31, 1996 and for the Six Months Ended June 30, 1996 and
1997 (unaudited).......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three
Years in the Period Ended December 31, 1996 and for the Six Months Ended
June 30, 1997 (unaudited)................................................. F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Dril-Quip, Inc.
We have audited the accompanying consolidated balance sheets of Dril-Quip,
Inc., as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dril-Quip,
Inc., at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Houston, Texas
April 3, 1997, except Note
11 as to which the date is
October 16, 1997
F-2
<PAGE>
DRIL-QUIP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 (UNAUDITED)
----------------- JUNE 30,
ASSETS 1995 1996 1997
------ ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash....................................... $ 2,579 $ 1,361 $ 766
Trade receivables.......................... 20,150 25,514 24,514
Inventories................................ 38,670 51,571 51,858
Deferred taxes............................. 3,088 3,739 3,741
Prepaids and other current assets.......... 619 789 816
------- -------- --------
Total current assets..................... 65,106 82,974 81,695
Property, plant, and equipment, net.......... 27,602 31,384 31,675
Other assets................................. 478 419 453
------- -------- --------
Total assets............................. $93,186 $114,777 $113,823
======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable........................... $11,807 $ 14,965 $ 11,021
Current maturities of long-term debt....... 3,090 3,537 3,522
Accrued income taxes....................... 1,753 2,712 2,027
Customer prepayments....................... 1,104 7,215 6,610
Accrued compensation....................... 2,830 1,887 2,260
Other accrued liabilities.................. 3,840 3,134 3,378
------- -------- --------
Total current liabilities................ 24,424 33,450 28,818
Long-term debt............................... 27,962 28,999 28,967
Deferred taxes............................... 1,299 1,446 1,127
------- -------- --------
Total liabilities........................ 53,685 63,895 58,912
Stockholders' equity:
Preferred stock, 10,000,000 shares
authorized at $0.01 par value (none
issued)................................... -- -- --
Common stock:
50,000,000 shares authorized at $0.01 par
value (14,370,000 shares issued)......... 144 144 144
Additional paid-in capital................. -- -- --
Retained earnings.......................... 40,634 49,652 54,765
Foreign currency translation adjustment.... (1,277) 1,086 2
------- -------- --------
Total stockholders' equity............... 39,501 50,882 54,911
------- -------- --------
Total liabilities and stockholders'
equity.................................. $93,186 $114,777 $113,823
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 80,548 $ 108,390 $ 115,864 $ 55,346 $ 68,669
Cost and expenses:
Cost of sales......... 58,604 76,471 77,863 37,602 47,725
Selling, general, and
administrative....... 11,673 13,597 15,031 7,253 7,839
Engineering and
product development.. 6,069 5,769 6,971 3,245 4,109
---------- ---------- ---------- ---------- ----------
76,346 95,837 99,865 48,100 59,673
---------- ---------- ---------- ---------- ----------
Operating income........ 4,202 12,553 15,999 7,246 8,996
Interest expense........ 2,273 2,944 2,647 1,301 1,400
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 1,929 9,609 13,352 5,945 7,596
Income tax provision.... 635 3,023 4,234 1,885 2,483
---------- ---------- ---------- ---------- ----------
Net income.............. $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
========== ========== ========== ========== ==========
Earnings per share...... $ 0.09 $ 0.46 $ 0.63 $ 0.28 $ 0.36
========== ========== ========== ========== ==========
Weighted average shares. 14,370,000 14,370,000 14,370,000 14,370,000 14,370,000
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
-------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................... $ 1,294 $ 6,586 $ 9,118 $ 4,060 $ 5,113
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization. 3,867 4,648 4,388 2,400 2,608
Loss (gain) on sale of
equipment.................... (31) (111) (82) 18 (126)
Deferred income taxes......... (118) (426) (505) (710) (336)
Changes in operating assets
and liabilities:
Trade receivables........... 8 (4,025) (4,553) (2,836) 502
Inventories................. (5,755) (6,663) (10,815) (2,826) (1,146)
Prepaids and other assets... (447) 556 (144) (464) (18)
Trade accounts payable and
accrued expenses........... 3,604 5,901 7,778 1,732 (4,160)
------- ------- -------- ------- -------
Net cash provided by operating
activities..................... 2,422 6,466 5,185 1,374 2,437
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment...................... (4,614) (6,184) (7,228) (2,832) (3,603)
Proceeds from sale of equipment. 90 525 222 76 224
------- ------- -------- ------- -------
Net cash used in investing ac-
tivities....................... (4,524) (5,659) (7,006) (2,756) (3,379)
FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term
borrowings..................... 5,400 3,436 4,564 1,156 1,773
Principal payments on long-term
debt........................... (2,679) (2,823) (3,203) (1,507) (1,769)
Dividends paid.................. (53) (53) (100) -- --
------- ------- -------- ------- -------
Net cash provided by (used in)
financing activities........... 2,668 560 1,261 (351) 4
Effect of exchange rate changes
on cash activities............. (971) (232) (658) (265) 343
------- ------- -------- ------- -------
Increase (decrease) in cash..... (405) 1,135 (1,218) (1,998) (595)
Cash at beginning of period..... 1,849 1,444 2,579 2,579 1,361
------- ------- -------- ------- -------
Cash at end of period........... $ 1,444 $ 2,579 $ 1,361 $ 581 $ 766
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------- -------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993...... $144 $-- $32,860 $(2,737) $30,267
Net income...................... -- -- 1,294 -- 1,294
Translation adjustment.......... -- -- -- 1,395 1,395
Dividends ($.004 per share)..... -- -- (53) -- (53)
---- --- ------- ------- -------
Balance at December 31, 1994...... 144 -- 34,101 (1,342) 32,903
Net income...................... -- -- 6,586 -- 6,586
Translation adjustment.......... -- -- -- 65 65
Dividends ($.004 per share)..... -- -- (53) -- (53)
---- --- ------- ------- -------
Balance at December 31, 1995...... 144 -- 40,634 (1,277) 39,501
Net income...................... -- -- 9,118 -- 9,118
Translation adjustment.......... -- -- -- 2,363 2,363
Dividends ($.007 per share)..... -- -- (100) -- (100)
---- --- ------- ------- -------
Balance at December 31, 1996...... 144 -- 49,652 1,086 50,882
Net income (unaudited).......... -- -- 5,113 -- 5,113
Translation adjustment
(unaudited).................... -- -- -- (1,084) (1,084)
---- --- ------- ------- -------
Balance at June 30, 1997 (unau-
dited)........................... $144 $-- $54,765 $ 2 $54,911
==== === ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Dril-Quip, Inc. (the "Company"), manufactures offshore drilling and
production equipment which is well suited for use in deepwater, harsh
environment and severe service applications. The Company's principal products
consist of subsea and surface wellheads, subsea and surface production trees,
mudline hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. Dril-Quip also provides installation and
reconditioning services and rents running tools for use in connection with the
installation and retrieval of its products. The Company has three subsidiaries
that manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland,
and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ
Holdings PTY Ltd. is located in Perth, Australia.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated.
Interim Information
In the opinion of management, the unaudited consolidated interim financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial position as of
June 30, 1997, and the results of operations and cash flows for each of the
six-month periods ended June 30, 1997 and 1996. Although management believes
the unaudited interim related disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in annual audited financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of
operations and the cash flows for the six-month period ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables, and debt instruments. Cash equivalents
include only those investments having a maturity of three months or less at
the time of purchase. The carrying values of these financial instruments
approximate their respective fair values.
Inventories
The Company's inventories are reported at the lower of cost (first-in,
first-out method) or market.
F-7
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost, with depreciation
provided on a straight-line basis over their estimated useful lives.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided on income and expenses which are reported in
different periods for income tax and financial reporting purposes.
Revenue Recognition
The Company delivers most of its products on an as-needed basis by its
customers and records revenues as the products are shipped. Certain revenues
are derived from long-term contracts which generally require more than one
year to fulfill. Revenues and profits on long-term contracts are recognized
under the percentage-of-completion method based on a cost-incurred basis.
Losses, if any, on contracts are recognized when they become known. Contracts
for long-term projects contain provisions for customer progress payments.
Payments in excess of revenues recognized are included as a customer
prepayment liability.
Foreign Currency
The financial statements of foreign subsidiaries are translated into U.S.
dollars at current exchange rates except for revenues and expenses, which are
translated at average rates during each reporting period. Translation
adjustments are reflected as a separate component of shareholders' equity and
have no current effect on earnings or cash flows. These adjustments amounted
to a gain of $1,395,000 in 1994, a gain of $65,000 in 1995, and a gain of
$2,363,000 in 1996, net of allocated income taxes of $79,000, $37,000, and
$458,000, respectively.
Foreign currency exchange transactions are recorded using the exchange rate
at the date of the settlement. Exchange losses were approximately $167,000 in
1994 and $-0- in 1995, net of income taxes. In 1996, the Company had an
exchange gain of $163,000. These amounts are included in the consolidated
statements of income.
Earnings Per Share
Earnings per share amounts are based on weighted average number of shares
and common stock equivalents outstanding. Earnings per share on a fully
diluted basis are not presented since the effect is not material.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 (UNAUDITED)
--------------- JUNE 30,
1995 1996 1997
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and supplies.................... $10,028 $15,164 $16,851
Work in progress.............................. 7,208 13,356 17,769
Finished goods and purchased supplies......... 21,434 23,051 17,238
------- ------- -------
$38,670 $51,571 $51,858
======= ======= =======
</TABLE>
F-8
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL ---------------
LIVES 1995 1996
----------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements........................ 10-25 years $ 5,798 $ 6,910
Buildings.................................... 15-40 years 12,987 14,759
Machinery and equipment...................... 3-10 years 34,018 39,051
------- -------
52,803 60,720
Less accumulated depreciation................ 25,201 29,336
------- -------
$27,602 $31,384
======= =======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving lines of credit................................ $14,900 $16,600
Notes payable to bank.................................... 15,872 15,502
Other.................................................... 280 434
------- -------
31,052 32,536
Less current portion..................................... 3,090 3,537
------- -------
$27,962 $28,999
======= =======
</TABLE>
Subsequent to December 31, 1996, the Company renewed the terms of its
revolving line of credit. Accordingly, the debt, as of December 31, 1996, is
classified in accordance with the terms of the new agreement. The Company's
revolving lines of credit provide for borrowings of up to $25,000,000, with a
maturity date of June 1, 1999. Additionally, the Company has an advancing
credit note providing borrowings of up to $3,000,000 at prime plus 1/2% which
matures on October 1, 2001. At December 31, 1996, there were no borrowings
under this note.
Notes payable to bank include a note with an interest rate of prime plus
1/2%, maturing in July 1999, and a note with an interest rate of the Bank's
base rate plus 1 1/2% to 1 3/4%, maturing from February 2002 through December
2006.
Substantially all of the Company's assets are pledged under various lending
agreements. Interest paid on long-term debt for the years ended December 31,
1994, 1995, and 1996 was $2,352,000, $2,883,000, and $2,695,000, respectively.
Scheduled maturities of long-term debt are as follows: 1997--$3,537,000;
1998--$3,486,000; 1999--$23,592,000; 2000--$623,000; 2001--$528,000; and
thereafter--$770,000.
F-9
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic........................................... $2,130 $5,634 $ 9,068
Foreign............................................ (201) 3,975 4,284
------ ------ -------
Total............................................ $1,929 $9,609 $13,352
====== ====== =======
</TABLE>
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 620 $2,671 $3,408
Foreign.......................................... 133 778 1,331
----- ------ ------
Total current.................................. 753 3,449 4,739
Deferred:
Federal.......................................... 110 (825) (505)
Foreign.......................................... (228) 399 --
----- ------ ------
Total deferred................................. (118) (426) (505)
----- ------ ------
$635 $3,023 $4,234
===== ====== ======
</TABLE>
The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax statutory rate....................... 34.0% 34.0% 34.0%
Benefit of foreign sales corporation.................... (2.6) (1.4) (1.8)
Other................................................... 1.5 (1.1) (.5)
---- ---- ----
Effective tax rate...................................... 32.9% 31.5% 31.7%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax liability:
Fixed assets............................................. $1,299 $1,446
Deferred tax assets:
Deferred profit on intercompany sales.................... 1,913 2,499
Other--net............................................... 1,175 1,240
------ ------
Total deferred tax assets.................................. 3,088 3,739
------ ------
Net deferred tax asset..................................... $1,789 $2,293
====== ======
</TABLE>
F-10
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Undistributed earnings of the Company's foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not
practicable.
The Company paid approximately $1,708,000, $1,909,000, and $4,314,000 in
income taxes in 1994, 1995, and 1996, respectively.
7. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution 401(k) plan covering domestic
employees and a defined-contribution pension plan covering certain foreign
employees. The Company generally makes contributions to the plans equal to
each participant's eligible contributions for the plan year up to a specified
percentage of the participant's annual compensation. The Company's
contribution expense was $440,000, $501,000, and $548,000 in 1994, 1995, and
1996, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain office, shop, and warehouse facilities;
automobiles; and equipment and expenses all lease payments when incurred.
Total lease expense incurred was $1,076,000, $923,000, and $853,000 in 1994,
1995, and 1996, respectively. Annual minimum lease commitments at December 31,
1996 are as follows: 1997--$546,000; 1998--$491,000; 1999--$267,000; and
2000--$35,000.
The Company operates its business and markets its products and services in
most of the significant oil and gas producing areas in the world and is,
therefore, subject to the risk customarily attendant to international
operations and dependency on the condition of the oil and gas industry.
Additionally, products of the Company are used in potentially hazardous
drilling, completion, and production applications that can cause personal
injury, product liability, and environmental claims. Although exposure to such
risk has not resulted in any significant problems in the past, there can be no
assurance that future developments will not adversely impact the Company.
9. STOCKHOLDERS' EQUITY
In August 1996, the Company revised its capital structure and retired all
outstanding common stock and issued new common stock. The new common stock
includes shares with voting and nonvoting rights. These changes in the capital
structure have been retroactively reflected in the financial statements.
Earnings per share and dividends per share in prior years have been restated
to reflect the change in the capital structure.
F-11
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
United States:
Domestic......................................... $27,710 $ 31,945 $ 36,759
Export........................................... 8,520 5,938 7,561
Intercompany..................................... 12,464 30,243 28,188
------- -------- --------
Total United States............................ 48,694 68,126 72,508
Europe, Middle East, and Africa.................... 34,629 52,978 54,728
Asia-Pacific....................................... 10,005 18,150 16,944
Eliminations....................................... (12,780) (30,864) (28,316)
------- -------- --------
Total.......................................... $80,548 $108,390 $115,864
======= ======== ========
Operating Income
United States...................................... $ 3,670 $ 10,944 $ 13,693
Europe, Middle East, and Africa.................... 392 2,948 3,309
Asia-Pacific....................................... 86 2,113 1,825
Eliminations....................................... 54 (3,452) (2,828)
------- -------- --------
Total.......................................... $ 4,202 $ 12,553 $ 15,999
======= ======== ========
Identifiable Assets
United States...................................... $42,265 $ 44,627 $ 50,664
Europe, Middle East, and Africa.................... 30,405 39,823 59,564
Asia-Pacific....................................... 8,621 12,730 9,700
Eliminations....................................... (2,083) (3,994) (5,151)
------- -------- --------
Total.......................................... $79,208 $ 93,186 $114,777
======= ======== ========
</TABLE>
Export sales from the United States to unaffiliated customers consist of
sales to South America, Latin America, and Canada. Europe, Middle East and
Africa area consists of manufacturing operations located in Europe with sales
primarily to Europe's North Sea and limited export sales to Africa and the
Middle East. Asia-Pacific's sales are primarily to Australia, Thailand,
Malaysia, and Indonesia.
Eliminations of operating profits are related to intercompany inventory
transfers that are deferred until shipment is made to third-party customers.
General corporate expense is generally allocated to geographic areas based on
revenues.
One of the Company's customers, the Royal Dutch Shell Group of Companies
accounted for approximately 12%, 11% and 19% of consolidated sales in 1994,
1995, and 1996, respectively.
F-12
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INITIAL PUBLIC OFFERING
The Company filed a registration statement with the Securities and Exchange
Commission in August 1997 to register the sale of 5,000,000 shares of its
common stock (the "Offering"). Of the 5,000,000 shares, 2,500,000 shares are
being sold by the Company and 2,500,000 shares are being sold by Selling
Stockholders.
Before the consummation of the Offering, the Company effected a
recapitalization wherein each outstanding share of its non-voting common stock
was converted into 0.95 shares of its voting common stock. Thereafter, each
outstanding share of its voting common stock was converted into 15.12472
shares of voting common stock, resulting in 14,370,000 outstanding shares. The
existing corporation, Dril-Quip, Inc., a Texas corporation ("Dril-Quip--
Texas"), was merged (the "Merger") into Dril-Quip, Inc., a Delaware
corporation ("Dril-Quip--Delaware"). The Merger resulted in the Company's
reincorporation from Texas to Delaware. The Company anticipates authorized
common stock of 50 million shares, par value $0.01 per share, and 10 million
shares of preferred stock, par value $0.01 per share. The financial statements
have been retroactively restated to give effect to the recapitalization.
In addition, prior to the consummation of the Offering, the Company adopted
the Dril-Quip, Inc. 1997 Incentive Plan (the "Incentive Plan"). The Company
has reserved 1,700,000 shares of Common Stock for use in connection with the
Incentive Plan. Persons eligible for awards under the Incentive Plan are
employees holding positions of responsibility with the Company or any
subsidiaries and whose performance can have a significant effect on the
success of the Company. On the date the Offering closes, Options under the
Incentive Plan will be granted to certain employees of the Company to purchase
a total of 422,500 shares of Common Stock at an exercise price per share equal
to the initial public offering price per share.
F-13
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Illustrations of Dril-Quip's project capabilities appear here.
[Logo of Dril-Quip
appears here]
<PAGE>
[LOGO OF DRIL-QUIP APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than underwriting discounts
and commission) of the issuance and distribution of the securities being
registered, all of which shall be paid by the Company:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 31,364
NASD Filing Fee................................................. 10,850
New York Stock Exchange Fees.................................... 126,600
Printing Expenses............................................... 100,000
Legal Fees and Expenses......................................... 225,000
Accountants' Fees and Expenses.................................. 125,000
Blue Sky Fees and Expenses...................................... 5,000
Transfer Agent and Registrar Fees............................... 12,100
Miscellaneous Expenses.......................................... 64,086
--------
Total......................................................... $700,000
========
</TABLE>
- --------
* To be furnished by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe such person's conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement
or conviction or upon a plea of nolo contendere or its equivalent shall not,
of itself, create a presumption that the person did not act in good faith and
in a manner which such person reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had reasonable cause to believe that such person's conduct was
unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses that the Court of Chancery or such other court shall deem proper.
II-1
<PAGE>
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the circumstances because such person has met the applicable
standard of conduct set forth in subsections (a) and (b). Such determination
shall be made, with respect to a person who is a director or officer at the
time of such determination, (1) by the board of directors by a majority vote
of the directors who were not parties to such action, suit or proceeding, even
though less than a quorum or (2) by a committee of such directors designated
by majority vote of such directors, even though less than a quorum or (3) if
such a quorum is not obtainable or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it ultimately is determined that such person
is not entitled to be indemnified by the corporation as authorized in Section
145. Such expenses (including attorneys' fees) incurred by former directors
and officers or other employees and agents may be so paid upon such terms and
conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether
or not the corporation would have the power to indemnify such person against
such liability under the provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Certificate of Incorporation of the Company provides that a director of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or
II-2
<PAGE>
modification of such provision of the Restated Certificate of Incorporation by
the stockholders of the Company shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Company existing at the time of such repeal or modification.
Bylaws
The Bylaws of the Company provide that each person who was or is made a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was or has agreed to become a director or officer
of the Company or is or was serving or has agreed to serve at the request of
the Company as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director or officer
or in any other capacity while serving or having agreed to serve as a director
or officer, shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may thereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment) against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to serve in the capacity which initially entitled such person
to indemnity thereunder, and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the board of directors of the Company. The
Bylaws further provide that the right to indemnification conferred thereby
shall be a contract right and shall include the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the DGCL requires, the
payment of such expenses incurred by a current, former or proposed director or
officer in his or her capacity as a director or officer or proposed director
or officer (and not in any other capacity in which service was or is or has
been agreed to be rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such indemnified person, to
repay all amounts so advanced if it shall ultimately be determined that such
indemnified person is not entitled to be indemnified under the Bylaws or
otherwise. In addition, the Bylaws provide that the Company may, by action of
its board of directors, provide indemnification to employees and agents of the
Company, individually or as a group, with the same scope and effect as the
indemnification to employees and agents of the Company, individually or as a
group, with the same scope and effect as the indemnification of directors and
officers provided for in the Bylaws.
The Bylaws include related provisions meant to facilitate the indemnitee's
receipt of such benefits. These provisions cover, among other things: (i)
specification of the method of determining entitlement to indemnification and
the selection of independent counsel that will in some cases make such
determination; (ii) specification of certain time periods by which certain
payments or determinations must be made and actions must be taken; and (iii)
the establishment of certain presumptions in favor of an indemnitee. The
benefits of certain of these provisions are available to an indemnitee only if
there has been a change in control (as defined therein).
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the directors
and officers of the Company in certain circumstances.
Insurance
The Company intends to obtain a policy of liability insurance to insure its
officers and directors against losses resulting from certain acts committed by
them in their capacities as officers and directors of the Company.
II-3
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement.
*2.1 --Agreement and Plan of Merger by and Between Dril-Quip, Inc., a Texas
corporation, and Dril-Quip, Inc., a Delaware corporation.
3.1 --Certificate of Incorporation of the Company.
*3.2 --Restated Certificate of Incorporation of the Company.
*3.3 --Bylaws of the Company.
*3.4 --Form of Certificate of Designations for Series A Junior
Participating Preferred Stock.
*4.1 --Form of certificate representing Common Stock.
*4.2 --Form of Registration Rights Agreement among Dril-Quip, Inc. and
certain stockholders.
*4.3 --Form of Rights Agreement between Dril-Quip, Inc. and ChaseMellon
Shareholder Services, L.L.C., as rights agent.
*5.1 --Opinion of Baker & Botts, L.L.P.
10.1 --Credit Agreement between Bank One Texas, National Association and
Dril-Quip, Inc., dated March 30, 1994.
10.2 --First Amendment to Credit Agreement between Dril-Quip, Inc. and Bank
One Texas, National Association, dated December 20, 1994.
10.3 --Second Amendment to Credit Agreement between Dril-Quip, Inc. and
Bank One Texas, National Association, dated December 13, 1995.
10.4 --Third Amendment to Credit Agreement between Dril-Quip, Inc. and Bank
One Texas, National Association, dated February 14, 1997.
10.5 --Credit Agreement between Bank One Texas, National Association, and
Dril-Quip (Europe) Ltd., dated March 30, 1994.
10.6 --First Amendment to Credit Agreement between Dril-Quip (Europe) Ltd.
and Bank One Texas, National Association, dated December 20, 1994.
10.7 --Second Amendment to Credit Agreement between Dril-Quip (Europe) Ltd.
and Bank One Texas, National Association, dated December 13, 1995.
10.8 --Third Amendment to Credit Agreement between Dril-Quip (Europe) Ltd.
and Bank One Texas, National Association, dated February 14, 1997.
10.9 --Loan Agreement between Dril-Quip (Europe) Ltd. and the Bank of
Scotland, dated June 7, 1996.
10.10 --Loan Agreement between Dril-Quip (Europe) Ltd. and the Bank of
Scotland, dated September 19, 1994.
10.11 --Loan Agreement between Dril-Quip (Europe) Ltd. and the Bank of
Scotland, dated December 12, 1991.
*10.12 --Form of Employment Agreement between Dril-Quip, Inc. and each of
Messrs. Reimert, Smith and Walker.
*10.13 --Form of Dril-Quip, Inc. 1997 Incentive Plan.
21.1 --Subsidiaries of the Company.
*23.1 --Consent of Ernst & Young LLP.
*23.2 --Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1).
23.3 --Consent of James M. Alexander to be named as a director.
24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
+ To be filed by amendment.
II-4
<PAGE>
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the financial statements or notes thereto
included in this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates
representing the shares of Common Stock offered hereby in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as a
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON THE 17TH DAY OF OCTOBER, 1997.
DRIL-QUIP, INC.
/s/ J. Mike Walker
By __________________________________
J. Mike Walker
Co-Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON OCTOBER 17, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Larry E. Reimert Director and Co-Chairman of the Board
____________________________________ (Co-Principal Executive Officer and
Larry E. Reimert Principal Financial Officer)
/s/ Gary D. Smith Director and Co-Chairman of the Board
____________________________________ (Co-Principal Executive Officer)
Gary D. Smith
/s/ J. Mike Walker Director and Co-Chairman of the Board
____________________________________ (Co-Principal Executive Officer)
J. Mike Walker
/s/ Jerry Brooks Chief Accounting Officer
____________________________________ (Principal Accounting Officer)
Jerry M. Brooks
/s/ Gary W. Loveless Director
____________________________________
Gary W. Loveless
</TABLE>
II-6
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
MERGING
DRIL-QUIP, INC.
(A TEXAS CORPORATION)
WITH AND INTO
DRIL-QUIP, INC.
(A DELAWARE CORPORATION)
DATED: OCTOBER 13, 1997
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT is executed as of October 13, 1997 by and between Dril-
Quip, Inc., a Texas corporation (the "Merging Corporation") and Dril-Quip, Inc.,
a Delaware corporation (the "Surviving Corporation"), which corporations are
hereinafter sometimes referred to collectively as the "Constituent
Corporations."
ARTICLE 1
RECITALS
Section 1.1. Organization of the Parties. The Merging Corporation
is a corporation duly organized and existing under the laws of Texas. The
Surviving Corporation is a corporation duly organized and existing under the
laws of Delaware.
Section 1.2. Merging Corporation's Capital Stock. The Merging
Corporation has authorized capital stock consisting of 15,000,000 shares of
common stock, $0.01 par value per share, of which 14,370,000 shares are now duly
issued and outstanding.
Section 1.3. Surviving Corporation's Capital Stock. The Surviving
Corporation has authorized capital stock consisting of 50,000,000 shares of
common stock, $0.01 par value per share, of which 1,000 shares are now duly
issued and outstanding, and 10,000,000 shares of preferred stock, $0.01 par
value per share, none of which are now issued and outstanding. All issued and
outstanding shares of capital stock of the Surviving Corporation are owned by
the Merging Corporation.
Section 1.4. Desire to Merge. The Merging Corporation and the
Surviving Corporation desire to effect a statutory merger of the Merging
Corporation with and into the Surviving Corporation in the manner herein set
forth, and the Board of Directors of the signatories hereto have duly adopted
resolutions by written consent approving this Agreement and Plan of Merger (this
"Agreement").
In consideration of the premises, and the mutual covenants and
agreements herein contained, it is hereby agreed by and among the parties hereto
that the Merging Corporation shall be merged with and into the Surviving
Corporation in accordance with the applicable provisions of the Delaware General
Corporation Law, as amended (the "DGCL") and the Texas Business Corporation Act,
as amended (the "TBCA") and upon the following terms and conditions:
<PAGE>
ARTICLE 2
PARTIES TO PROPOSED MERGER
Section 2.1. The Merging Corporation. The name of the corporation
proposing to merge into the Surviving Corporation is Dril-Quip, Inc., a Texas
corporation.
Section 2.2. The Surviving Corporation. The name of the corporation
into which the Merging Corporation proposes to merge is Dril-Quip, Inc., a
Delaware corporation.
ARTICLE 3
TERMS AND CONDITIONS OF PROPOSED MERGER
AND MODE OF CARRYING IT INTO EFFECT
Section 3.1. General. At the Effective Time of the Merger (as
hereinafter defined and subject to the satisfaction of the conditions and
agreements set forth in Articles 5 and 6 hereto): (a) the Merging Corporation
shall merge into the Surviving Corporation, which shall survive the merger and
continue to be a Delaware corporation; (b) the Common Stock of the Surviving
Corporation outstanding at the Effective Time of the Merger shall be and remain
Common Stock of the Surviving Corporation in accordance with its terms; and (c)
the separate existence of the Merging Corporation shall cease.
Section 3.2. Effective Time of the Merger. The "Effective Time" of
the Merger with respect to the merger contemplated by this Agreement shall be
such time as the Secretary of State of the State of Texas has issued the
certificate of merger with respect to the Articles of Merger and the Certificate
of Ownership and Merger is filed with the Secretary of State of the State of
Delaware.
Section 3.3. Certificate of Incorporation. The certificate of
incorporation of the Surviving Corporation as in effect at the Effective Time
will continue in full force until amended as provided in that certificate or as
provided by law.
Section 3.4. Bylaws. The bylaws of the Surviving Corporation as in
effect at the Effective Time will continue in full force until amended as
provided in those bylaws or as provided by law.
Section 3.5. Directors and Officers. From and after the Effective
Time, until successors are duly elected or appointed in accordance with
applicable law, (i) the directors of the Surviving Corporation at the Effective
Time shall be the directors of the Surviving Corporation and (ii) the officers
of the Surviving Corporation at the Effective Time shall be the officers of the
Surviving Corporation.
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ARTICLE 4
MANNER AND BASIS OF CONVERTING
THE MERGING CORPORATION'S SHARES
Section 4.1. Conversion of Shares. At the Effective Time of the
Merger, by virtue of the Merger and without any action on the part of the holder
of the stock:
(a) each share of the capital stock of the Merging Corporation
that is held by the Merging Corporation or any subsidiary thereof as
treasury stock immediately prior to the Effective Time shall be canceled,
and no payment shall be made with respect thereto;
(b) subject to Section 4.3, each share of common stock of the
Merging Corporation outstanding immediately prior to the Effective Time
(other than shares referred to in clause (a)) shall be converted into the
right to receive one share of the common stock, par value $0.01 per share,
of the Surviving Corporation (the "Merger Consideration");
(c) each share of common stock of the Surviving Corporation
outstanding immediately prior to the Effective Time (all of which are owned
by the Merging Corporation) shall be canceled, and no payment shall be made
with respect thereto; and
Section 4.2. Surrender and Exchange of Shares.
(a) Promptly after the Effective Time, each certificate
representing shares of common stock of the Merging Corporation, other than
those held by Dissenting Shareholders (as defined in Section 4.3), will
thereafter represent a number of shares of common stock of the Surviving
Corporation equal to the number of shares specified on the certificate, and
will be exchanged for a new certificate upon presentation to the transfer
agent.
(b) Until surrendered in accordance with the terms hereof, each
certificate for shares of common stock of the Merging Corporation shall
after the Effective Time represent for all purposes only the right to
receive the Merger Consideration. Unless and until so surrendered, no
dividends or other distributions payable to the holders of common stock of
the Surviving Corporation, as to any time at or after the Effective Time,
will be paid to the holder of such outstanding certificates.
(c) If any portion of the Merger Consideration is to be issued to
a person other than the registered holder of the shares of the common stock
of the Merging Corporation represented by the certificate or certificates
surrendered in exchange therefor, it shall be a condition to such issuance
that any certificate or certificates so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the person
requesting such issuance shall pay to the Surviving Corporation any
transfer or other taxes required as a result of such issuance to a person
other than the registered holder of such
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shares of the common stock of the Merging Corporation or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is
not payable.
(d) From and after the Effective Time, there shall be no further
registration of transfers on the books of the Merging Corporation of shares
of common stock of the Merging Corporation that were outstanding
immediately prior to the Effective Time.
Section 4.3. Dissenting Shares. Notwithstanding Section 4.1, shares
of the common stock of the Merging Corporation outstanding immediately prior to
the Effective Time and held by a holder who makes a written demand for the
payment of the fair value of such holder's shares in the manner provided under
the DGCL or TBCA (a "Dissenting Shareholder") shall not be converted into the
right to receive the Merger Consideration, unless such holder shall have failed
to perfect or shall have effectively withdrawn or lost his right to payment of
the fair value of his shares of the common stock of the Merging Corporation
under the DGCL or TBCA. If, after the Effective Time, such holder shall have
failed to perfect or shall have effectively withdrawn or lost his right to
payment of the fair value of his shares of the common stock of the Merging
Corporation under the DGCL or TBCA, such shares of the common stock of the
Merging Corporation shall be treated as if they had been converted as of the
Effective Time into the right to receive the Merger Consideration. The Merging
Corporation shall give the Surviving Corporation prompt notice of any objections
or demands received by the Merging Corporation from any shareholder exercising
his right to dissent, and, prior to the Effective Time, the Surviving
Corporation shall have the right to participate in all negotiations and
proceedings with respect thereto. Prior to the Effective Time, the Merging
Corporation shall not, except with the prior written consent of the Surviving
Corporation, make any payment with respect to, or settle or offer or agree to
settle, any such demands.
ARTICLE 5
APPROVALS AND TERMINATION
Section 5.1. Corporate Approvals. Pursuant to Article 5.03 of the
TBCA, this Agreement and related matters shall be submitted to the shareholders
of the Merging Corporation to vote or consent with respect thereto.
Section 5.2. Termination. At any time prior to the Effective Time
of the Merger, this Agreement may be terminated and abandoned by the Merging
Corporation by appropriate resolution of its Board of Directors. In the event
of such termination and abandonment, this Agreement shall become void and
neither the Merging Corporation nor the Surviving Corporation or their
respective shareholders, directors or officers may be held liable in respect to
such termination or abandonment.
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ARTICLE 6
MISCELLANEOUS
Section 6.1. Further Assurances. If at any time the Surviving
Corporation shall consider or be advised that any further assignment, assurance
or other action is necessary or desirable to vest in the Surviving Corporation
the title to any property or right of the Merging Corporation or otherwise to
carry out the purposes of this Agreement, the proper officers, directors or
representatives of the Merging Corporation shall execute and make all such
proper assignments or assurances and take such other actions. The proper
officers, directors or representatives of the Surviving Corporation are hereby
authorized in the name of the Merging Corporation, or otherwise, to take any and
all such action.
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<PAGE>
EXECUTED as of the date first above written.
DRIL-QUIP, INC.
(a Texas corporation)
By:/s/ Gary D. Smith
-----------------
Name: Gary D. Smith
Title: Executive Vice President
DRIL-QUIP, INC.
(a Delaware corporation)
By:/s/ Gary D. Smith
-----------------
Name: Gary D. Smith
Title: Co-Chairman of the Board
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<PAGE>
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
DRIL-QUIP, INC.
Dril-Quip, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), hereby adopts this Restated Certificate of Incorporation,
which accurately restates and integrates the provisions of the existing
Certificate of Incorporation of the Corporation that are in effect on the date
hereof (the "Certificate of Incorporation") and further amends the provisions of
the Certificate of Incorporation as described below, and does hereby further
certify that:
1. The name of the Corporation is Dril-Quip, Inc. and the original
certificate of incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on August 12, 1997.
2. The Board of Directors of the Corporation duly adopted a
resolution proposing and declaring advisable the amendments to the Certificate
of Incorporation as described herein, and the Corporation's sole stockholder
duly adopted such amendments, all in accordance with the provisions of Sections
228, 242 and 245 of the DGCL.
3. The Certificate of Incorporation is hereby restated and further
amended to read in its entirety as follows:
RESTATED CERTIFICATE OF INCORPORATION
FIRST: The name of the Corporation is Dril-Quip, Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware or any successor statute (the "DGCL").
FOURTH: The aggregate number of shares of capital stock that the
Corporation shall have authority to issue is Sixty Million (60,000,000), divided
into Fifty Million (50,000,000) shares of common stock, par value $0.01 per
share ("Common Stock"), and Ten Million
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(10,000,000) shares of preferred stock, par value $0.01 per share ("Preferred
Stock"). Shares of any class of capital stock of the Corporation may be issued
for such consideration and for such corporate purposes as the Board of Directors
of the Corporation (the "Board of Directors") may from time to time determine.
Each share of Common Stock shall be entitled to one vote.
The Preferred Stock may be divided into and issued from time to time
in one or more series as may be fixed and determined by the Board of Directors.
The relative rights and preferences of the Preferred Stock of each series shall
be such as shall be stated in any resolution or resolutions adopted by the Board
of Directors setting forth the designation of the series and fixing and
determining the relative rights and preferences thereof, any such resolution or
resolutions being herein called a "Directors' Resolution." The Board of
Directors is hereby authorized to fix and determine the powers, designations,
preferences, and relative, participating, optional or other rights (including,
without limitation, voting powers, full or limited, preferential rights to
receive dividends or assets upon liquidation, rights of conversion or exchange
into Common Stock, Preferred Stock of any series or other securities, any right
of the Corporation to exchange or convert shares into Common Stock, Preferred
Stock of any series or other securities, or redemption provisions or sinking
fund provisions) as between series and as between the Preferred Stock or any
series thereof and the Common Stock, and the qualifications, limitations or
restrictions thereof, if any, all as shall be stated in a Directors' Resolution,
and the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers, all as shall be stated in a
Directors' Resolution.
No stockholder shall, by reason of the holding of shares of any class
or series of capital stock of the Corporation, have a preemptive or preferential
right to acquire or subscribe for any shares or securities of any class, whether
now or hereafter authorized, which may at any time be issued, sold or offered
for sale by the Corporation, unless specifically provided for in a Directors'
Resolution with respect to a series of Preferred Stock. Furthermore, Common
Stock is not convertible, redeemable or assessable, or entitled to the benefits
of any sinking fund.
Cumulative voting of shares of any class or series of capital stock
having voting rights is prohibited unless specifically provided for in a
Directors' Resolution with respect to a series of Preferred Stock.
FIFTH: (a) Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to the authority and powers conferred upon the Board of Directors by
the DGCL or by the other provisions of this Certificate of Incorporation, the
Board of Directors is hereby authorized and empowered to exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject to the provisions of the DGCL, this Certificate of
Incorporation and any Bylaws adopted by the stockholders of the Corporation;
provided, however, that no Bylaws hereafter adopted by the stockholders of the
Corporation, or any amendments thereto, shall invalidate any prior act of the
Board of Directors that would have been valid if such Bylaws or amendment had
not been adopted.
(b) Number, Election and Terms of Directors. The number of directors
that shall constitute the whole Board of Directors shall be fixed from time to
time by a majority of the directors then in office, but shall not be less than
three nor more than twelve, except in the case of an increase in the number of
directors by reason of any provisions contained in or established
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pursuant to Article FOURTH. From and after the first date of the closing of the
initial public offering of the Common Stock to the public for cash that has been
registered on a registration statement that has been filed with and declared
effective by the Securities and Exchange Commission (the "Initial Public
Offering Date"), the directors, other than those who may be elected by the
holders of any series of Preferred Stock, shall be divided into three classes,
Class I, Class II and Class III. Each director shall serve for a term ending on
the third annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors first elected to Class I shall
serve for a term expiring at the annual meeting next following the end of the
calendar year 1997, the directors first elected to Class II shall serve for a
term expiring at the annual meeting next following the end of the calendar year
1998, and the directors first elected to Class III shall serve for a term
expiring at the annual meeting next following the end of the calendar year 1999.
Each director shall hold office until the annual meeting at which such
director's term expires and, the foregoing notwithstanding, shall serve until
his successor shall have been duly elected and qualified or until his earlier
death, resignation or removal.
At each annual election, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall designate one or more directorships
whose term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes.
In the event of any change in the authorized number of directors, each
director then continuing to serve as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of
Directors shall specify the class to which a newly created directorship shall be
allocated.
Election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
(c) Removal of Directors. No director of the Corporation shall be
removed from office as a director by vote or other action of the stockholders or
otherwise except for cause, and then only by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of
directors, voting together as a single class. Except as may otherwise be
provided by law, cause for removal of a director shall be deemed to exist only
if: (i) the director whose removal is proposed has been convicted, or when a
director is granted immunity to testify when another has been convicted, of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (ii) such director has been found by the affirmative
vote of a majority of the entire Board of Directors at any regular or special
meeting of the Board of Directors called for that purpose or by a court of
competent jurisdiction to have been guilty of willful misconduct in the
performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which mental
incompetency directly affects his ability as a director of the Corporation.
(d) Vacancies. Except as provided in Article FOURTH hereof, newly
created directorships resulting from any increase in the number of directors and
any vacancies on the Board
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<PAGE>
of Directors resulting from death, resignation, removal or other cause shall be
filled by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified or until his earlier death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
SIXTH: From and after the Initial Public Offering Date, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected by any consent in writing by such stockholders. Except as
otherwise required by law, or as may be prescribed in a Directors' Resolution,
special meetings of stockholders of the Corporation may be called only by any
Chairman of the Board of Directors, or by any Chief Executive Officer of the
Corporation or by the President of the Corporation or by the Board of Directors
pursuant to a resolution approved by the affirmative vote of a majority of the
entire Board of Directors. The Corporation shall have such officers as are set
forth in the Bylaws, and shall initially have three Co-Chairmen of the Board of
Directors and Co-Chief Executive Officers, and references herein to the Chairman
of the Board of Directors or the Chief Executive Officer shall include any of
such persons.
SEVENTH: No director of the Corporation shall be personally liable to
the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing provisions
shall not eliminate or limit the liability of a director (i) for any breach of
such director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, as the same
exists or as such provision may hereafter be amended, supplemented or replaced,
or (iv) for any transactions from which such director derived an improper
personal benefit. If the DGCL is amended after the filing of this Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by such law, as so
amended. Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
EIGHTH: (a) In addition to any affirmative vote that may be
required by law, this Certificate of Incorporation or the Bylaws of the
Corporation, and except as otherwise expressly provided in paragraph (b) of this
Article EIGHTH:
(i) any merger, consolidation or share exchange of the Corporation or
any subsidiary of the Corporation with (A) any Related Person or (B) any
other Person (whether or not itself a Related Person) that is, or after
such merger, consolidation or share exchange would be, an Affiliate of a
Related Person; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Corporation or any subsidiary of the Corporation to any
Related Person or any
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Affiliate of any Related Person, or by any Related Person or any Affiliate
of any Related Person to the Corporation or any subsidiary of the
Corporation, of any assets or properties having an aggregate Fair Market
Value of $10,000,000 or more; or
(iii) any issuance or transfer by the Corporation or any subsidiary
of the Corporation of any securities of the Corporation or any subsidiary
of the Corporation to any Related Person or any Affiliate of any Related
Person (except (A) pursuant to the exercise, exchange or conversion of
securities exercisable for, exchangeable for or convertible into stock of
the Corporation or any subsidiary of the Corporation, which securities were
acquired by the Related Person prior to becoming a Related Person, or (B)
pursuant to a dividend or distribution paid or made, or the exercise,
exchange or conversion of securities exercisable for, exchangeable for or
convertible into stock of the Corporation or subsidiary of the Corporation,
which security is distributed pro rata to all holders of a class or series
of stock of the Corporation subsequent to the time the Related Person
became such, and provided in the case of this clause (B) that there is not
an increase of more than 1% in the Related Person's proportionate share of
the stock of any class or series of the Corporation or of the Voting Stock
of the Corporation as a result of such dividend or distribution); or
(iv) any dissolution of the Corporation voluntarily caused or proposed
by or on behalf of a Related Person or any Affiliate of any Related Person;
or
(v) any reclassification of securities (including any reverse stock
split) or recapitalization of the Corporation, or any merger, consolidation
or share exchange of the Corporation with any of its subsidiaries or any
other transaction (whether or not with or into or otherwise involving a
Related Person) that has the effect, either directly or indirectly, of
increasing by more than 1% the proportionate share of the outstanding stock
of any class or series or the securities convertible into stock of any
class or series of the Corporation or any subsidiary of the Corporation
which is directly or indirectly owned by any Related Person or any
Affiliate of any Related Person or otherwise increasing the voting power of
the outstanding stock of the Corporation or any subsidiary of the
Corporation possessed by any such Related Person or Affiliate; or
(vi) any series or combination of transactions having, directly or
indirectly, the same effect as any of the foregoing; or
(vii) any agreement, contract or other arrangement providing,
directly or indirectly, for any of the foregoing,
shall require the affirmative vote of the holders of (x) not less than 80% of
the then outstanding Voting Stock held by stockholders voting together as a
single class and (y) not less than 66-2/3% of the then outstanding Voting Stock
not Beneficially Owned, directly or indirectly, by any Related Person with
respect to such Business Combination, voting together as a single class. Such
affirmative vote shall be required, notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law, elsewhere in
this Certificate of Incorporation, in the
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Bylaws of the Corporation or in any agreement with any national securities
exchange or otherwise.
(b) The provisions of paragraph (a) shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by law, the Bylaws of the Corporation
and any other provision of this Certificate of Incorporation, if all of the
conditions specified in either of the following subparagraphs (i) and (ii) are
met:
(i) the cash, property, securities or other consideration to be
received per share by holders of each and every outstanding class or series
of shares of the Corporation in the Business Combination is, with respect
to each such class or series, either (A) the same in form and amount per
share as that paid by the Related Person in a tender offer in which such
Related Person acquired at least 50% of the outstanding stock of such class
or series and which was consummated not more than one year prior to the
date of such Business Combination or (B) not less in amount (as to cash) or
Fair Market Value (as to consideration other than cash) as of the date of
the determination of the Highest Per Share Price (as to property,
securities or other consideration) than the Highest Per Share Price
applicable to such class or series of shares; provided that in the event of
any Business Combination in which the Corporation survives, any shares
retained by the holders thereof shall constitute consideration other than
cash for purposes of this subparagraph (i); or
(ii) a majority of the Continuing Directors shall have expressly
approved such Business Combination either in advance of or subsequent to
such Related Person's having become a Related Person.
In the case of any Business Combination with a Related Person to which
subparagraph (ii) above does not apply, a majority of the Continuing Directors,
promptly following the request of a Related Person, shall determine the Highest
Per Share Price for each class or series of stock of the Corporation. Such
determination shall be announced not less than five days prior to the meeting at
which holders of shares vote on the Business Combination. Such determination
shall be final, unless the Related Person becomes the Beneficial Owner of
additional shares after the date of the earlier determination, in which case the
Continuing Directors shall make a new determination as to the Highest Per Share
Price for each class or series of shares prior to the consummation of the
Business Combination.
A Related Person shall be deemed to have acquired a share at the time
that such Related Person became the Beneficial Owner thereof. With respect to
shares owned by Affiliates, Associates and other Persons whose ownership is
attributable to a Related Person, if the price paid by such Related Person for
such shares is not determinable by a majority of the Continuing Directors, the
price so paid shall be deemed to be the higher of (i) the price paid upon the
acquisition thereof by the Affiliate, Associate or other Person or (ii) the
Share Price of the shares in question at the time when the Related Person became
the Beneficial Owner thereof.
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(c) For purposes of this Article EIGHTH:
(ii) The term "Affiliate," used to indicate a relationship to a
specified Person, shall mean a Person that directly, or indirectly through
one or more intermediaries, controls, is controlled by, or is under common
control with, such specified Person.
(iii) The term "Associate," used to indicate a relationship with a
specified Person, shall mean (A) any corporation, partnership, limited
liability company, association, joint venture or other organization (other
than the Corporation or any wholly owned subsidiary of the Corporation) of
which such specified Person is an officer or partner or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class of equity
securities; (B) any trust or other estate in which such specified Person
has a beneficial interest of 10% or more or as to which such specified
Person serves as trustee or in a similar fiduciary capacity; (C) any Person
who is a director or officer of such specified Person or any of its parents
or subsidiaries (other than the Corporation or any wholly owned subsidiary
of the Corporation); and (D) any relative or spouse of such specified
Person or of any of its Associates, or any relative of any such spouse, who
has the same home as such specified Person or such Associate.
(iv) A Person shall be a "Beneficial Owner" of any stock (A) which
such Person or any of its Affiliates or Associates beneficially owns,
directly or indirectly; or (B) which such Person or any of its Affiliates
or Associates has, directly or indirectly, (1) the right to acquire
(whether such right is exercisable immediately or only after the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (2) the right to vote pursuant to any agreement, arrangement
or understanding; or (C) which is beneficially owned, directly or
indirectly, by any other Person with which such Person or any of its
Affiliates or Associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of such stock;
or (D) of which such Person would be the Beneficial Owner pursuant to the
terms of Rule 13d-3 of the Exchange Act, as in effect on May 1, 1996.
Stock shall be deemed "Beneficially Owned" by the Beneficial Owner or
Owners thereof.
(v) The term "Business Combination" shall mean any transaction which
is referred to in any one or more of clauses (i) through (vii) of paragraph
(a) of this Article EIGHTH.
(vi) The term "Continuing Director" shall mean, with respect to a
Related Person, any director of the Corporation who is unaffiliated with
the Related Person and was a director prior to the time that the Related
Person became a Related Person, and any successor of a Continuing Director
who is unaffiliated with the Related Person and is recommended or nominated
to succeed a Continuing Director by a majority of the Continuing Directors.
Without limiting the generality of the foregoing, a director shall be
deemed to be affiliated with a Related Person if such director (A) is an
officer, director, employee or general partner of such Related Person; (B)
is an Affiliate or Associate of such Related Person; (C) is a relative or
spouse of such Related Person or of any such
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officer, director, general partner, Affiliate or Associate; (D) performs
services, or is a member, employee, greater than 5% stockholder or other
equity owner of any organization (other than the Corporation and its
subsidiaries) which performs services for such Related Person or any
Affiliate of such Related Person, or is a relative or spouse of any such
Person; or (E) was nominated for election as a director by such Related
Person.
(vi) The term "Estate Planning Vehicle" means a trust, family
partnership or similar family-related or family-controlled entity, all of
the interests of which are owned by an Individual Major Stockholder, a
spouse, sibling or lineal descendant of an Individual Major Stockholder or
lineal descendant of a spouse of an Individual Major Stockholder or any
distributees under the will of any of the foregoing persons, successors of
such persons by intestate succession or trusts for the benefit of any of
the foregoing persons.
(vii) The term "Fair Market Value" shall mean, in the case of
securities, the average of the closing sales prices during the 30-day
period immediately preceding the date in question of such security on the
principal United States securities exchange registered under the Exchange
Act on which such security is listed (or the composite tape therefor) or,
if such securities are not listed on any such exchange, the average of the
last reported sales price (if so reported) or the closing bid quotations
with respect to such security during the 30-day period preceding the date
in question on the NASDAQ system or any similar system then in use or, if
no such quotations are available, the fair market value on the date in
question of such security as determined in good faith by a majority of the
Continuing Directors; and in the case of property other than cash or
securities, the fair market value of such property on the date in question
as determined in good faith by a majority of the Continuing Directors.
(viii) The term "Highest Per Share Price" shall mean (A) as to
any class or series of stock of which the Related Person Beneficially Owns
10% or more of the outstanding shares, the highest price that can be
determined to have been paid or agreed to be paid for any share or shares
of that class or series by such Related Person in a transaction that either
(1) resulted in such Related Person's Beneficially Owning 10% or more
thereof or (2) was effected at a time when such Related Person Beneficially
Owned 10% or more thereof, (B) as to any class or series of stock of which
the Related Person Beneficially Owns shares, but not 10% or more of the
outstanding shares, the highest price that can be determined to have been
paid or agreed to be paid at any time by such Related Person for any share
or shares of that class or series that are then Beneficially Owned by such
Related Person or (C) as to any other class or series of stock, the amount
determined by a majority of the Continuing Directors, on whatever basis
they believe is appropriate, to be the per share price equivalent of the
highest price that can be determined to have been paid or agreed to be paid
at any time by the Related Person for any other class or series of stock.
In determining the Highest Per Share Price, all purchases by the Related
Person shall be taken into account regardless of whether the shares were
purchased before or after the Related Person became a Related Person and
the Highest Per Share Price will be appropriately adjusted to take into
account (w) distributions paid or payable in stock, (x) subdivisions of
outstanding stock, (y) combinations of shares of stock into a smaller
number of shares and (z) similar events.
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(ix) The term "Individual Major Stockholder" means Larry E.
Reimert, Gary D. Smith and J. Mike Walker.
(x) The term "Individual Major Stockholder Transferee" means a
transferee from an Individual Major Stockholder or an Individual Major
Stockholder Transferee of Common Stock previously owned by an Individual
Major Stockholder if (a) such transferee receives such Common Stock
directly from an Individual Major Stockholder by will or intestate
succession or (b) such transfer is made (i) directly from an Individual
Major Stockholder or from a person that is an Individual Major Stockholder
Transferee to a spouse, sibling or lineal descendant of an Individual Major
Stockholder or lineal descendant of a spouse of an Individual Major
Stockholder or (ii) directly from an Individual Major Stockholder or from a
person that is otherwise an Individual Major Stockholder Transferee to an
Estate Planning Vehicle for estate planning purposes; provided,that an
Estate Planning Vehicle shall cease to be an Individual Major Stockholder
Transferee at such time as all of the interests therein cease to be owned
by an Individual Major Stockholder, a spouse, sibling or lineal descendant
of an Individual Major Stockholder or a lineal descendant of a spouse of an
Individual Major Stockholder or any distributees under the will of any of
the foregoing persons, successors of such persons by intestate succession
or trusts for the benefit of any of the foregoing persons.
(xi) The term "Major Stockholder" shall mean each of the
Individual Major Stockholders, Reimert Family Partners, Ltd. or Four
Smith's Company, Ltd.; provided, however, that Reimert Family Partners,
Ltd. shall cease to be a Major Stockholder at such time as all of the
interests in such partnership are not owned by Larry E. Reimert, his
spouse, siblings, lineal descendants, lineal descendants of his spouse, any
distributees under the will of any of the foregoing persons, successors of
such persons by intestate succession, trusts for the benefit of any of the
foregoing persons and Wave Enterprises, Inc. and provided, further,
however, that Four Smith's Company, Ltd. shall cease to be a Major
Stockholder at such time as all of the interests in such partnership are
not owned by Gary D. Smith, his spouse, siblings, lineal descendants,
lineal descendants of his spouse, any distributees under the will of any of
the foregoing persons, successors of such persons by intestate succession,
and trusts for the benefit of any of the foregoing persons.
(xii) The term "Person" shall mean any individual, corporation,
limited liability company, association, partnership, joint venture, trust,
estate or other entity or organization.
(xiii) The term "Related Person" shall mean any Person (other
than the Corporation or any subsidiary of the Corporation and other than
any profit sharing, employee ownership or other employee benefit plan of
the Corporation or any subsidiary of the Corporation or any trustee of or
fiduciary with respect to any such plan when acting in such capacity) who
or which (A) is the Beneficial Owner of 10% or more of the aggregate voting
power
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of all outstanding stock of the Corporation; or (B) is an Affiliate
of the Corporation and at any time within the two-year period immediately
prior to the date in question was the Beneficial Owner of 10% or more of
the aggregate voting power of all outstanding stock of the Corporation; or
(C) is an assignee of or has otherwise succeeded to any shares of stock of
the Corporation which were at any time within the two-year period
immediately prior to the date in question Beneficially Owned by any Related
Person, if such assignment or succession shall have occurred in the course
of a privately negotiated transaction rather than an open market
transaction. For the purposes of determining whether a Person is a Related
Person, the number of shares of any class or series deemed to be
outstanding shall include shares of such class or series of which the
Person is deemed the Beneficial Owner, but shall not include any other
shares which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options,
otherwise. Notwithstanding the foregoing, the term Related Person shall
not include (a) any Major Stockholder, (b) an Individual Major Stockholder
Transferee who as a result of such transfer becomes the Beneficial Owner of
10% or more of the aggregate voting power of all outstanding stock of the
Corporation, unless and until such Individual Major Stockholder Transferee,
together with his Affiliates and Associates, becomes the Beneficial Owner
of additional shares of stock of the Corporation constituting 1% or more of
the then aggregate voting power of all outstanding stock of the Corporation
or any other Person who is the Beneficial Owner of at least 1% of the then
aggregate voting power of all outstanding stock of the Corporation becomes
an Affiliate or Associate of such Individual Major Stockholder Transferee
or (c) any Person expressly approved by a majority of the Continuing
Directors prior to or subsequent to the consummation of the transaction
pursuant to which such Person would otherwise have become a Related Person.
(xiv) The term "Voting Stock" shall mean all outstanding shares
of capital stock of the Corporation entitled to vote generally in the
election of directors, considered for the purpose of this Article EIGHTH as
one class. If the Corporation has shares of Voting Stock entitled to more
or less than one vote for any such share, each reference in this Article
EIGHTH to a proportion or percentage in voting power of Voting Stock shall
be calculated by reference to the portion or percentage of votes entitled
to be cast by the holders of such shares.
(d) Nothing contained in this Article EIGHTH shall be construed to
relieve any Related Person from any fiduciary obligation imposed by law.
(e) Notwithstanding any other provision of this Certificate of
Incorporation (and notwithstanding that a lesser percentage may be specified by
law), the affirmative vote of the holders of (x) not less than 80% of the then
outstanding Voting Stock held by stockholders, voting together as a single
class, and (y) not less than 66-2/3% of the then outstanding Voting Stock not
Beneficially Owned, directly or indirectly, by any Related Person, voting
together as a single class, shall be required to amend or repeal, or adopt any
provisions inconsistent with, this Article Eighth.
NINTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any
action on the part of the stockholders, except as may be otherwise provided by
applicable law or the Bylaws of the Corporation.
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TENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
Section 291 of Title 8 of the Delaware Code, or on the application of trustees
in dissolution or of any receiver or receivers appointed for the Corporation
under Section 279 of Title 8 of the Delaware Code, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If the majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed this 14th day of October, 1997.
DRIL-QUIP, INC.
By: /s/ Gary D. Smith
--------------------------
Gary D. Smith
Co-Chairman of the Board
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EXHIBIT 3.3
BYLAWS
OF
DRIL-QUIP, INC.
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of Dril-Quip, Inc. (the
"Corporation") required by the General Corporation Law of the State of
Delaware or any successor statute (the "DGCL"), to be maintained in the
State of Delaware, shall be the registered office named in the Certificate
of Incorporation of the Corporation, as it may be amended or restated in
accordance with the DGCL from time to time (the "Certificate of
Incorporation"), or such other office as may be designated from time to
time by the Board of Directors of the Corporation (the "Board of
Directors") in the manner provided by law. Should the Corporation maintain
a principal office within the State of Delaware such registered office need
not be identical to such principal office of the Corporation.
1.2 Other Offices. The Corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
determine from time to time or as the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings. Meetings of stockholders shall be held at such place
within or without the State of Delaware as may be designated by the Board
of Directors or the officer calling the meeting.
2.2 Annual Meeting. An annual meeting of the stockholders, for the election of
directors to succeed those whose terms expire and for the transaction of
such other business as may properly come before the meeting, shall be held
at such place, within or without the State of Delaware, on such date, and
at such time as the Board of Directors shall fix and set forth in the
notice of the meeting, which date shall be within thirteen months
subsequent to the last annual meeting of stockholders. At the annual
meeting of the stockholders, only such business shall be conducted as shall
have been properly brought before the annual meeting as set forth in
Section 2.8 hereof. Failure to hold the annual meeting at the designated
time shall not work a dissolution of the Corporation.
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2.3 Special Meetings. Special meetings of the stockholders may be called at
any time by the Chairman of the Board, the President (if any) or the Board
of Directors pursuant to a resolution approved by the affirmative vote of a
majority of the entire Board of Directors. Upon written request of any
person or persons who have duly called a special meeting, it shall be the
duty of the Secretary of the Corporation to fix the date of the meeting to
be held not less than ten nor more than 60 days after the receipt of the
request and to give due notice thereof. If the Secretary shall neglect or
refuse to fix the date of the meeting and give notice thereof, the person
or persons calling the meeting may do so. Every special meeting of the
stockholders shall be held at such place within or without the State of
Delaware as the Board of Directors may designate, or, in the absence of
such designation, at the registered office of the Corporation in the State
of Delaware.
2.4 Notice of Meeting. Written or printed notice of all meetings stating the
place, day and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered
not less than ten nor more than 60 days before the date of the meeting,
either personally or by mail, by or at the direction of the Chairman of the
Board, President (if any) or Secretary of the Corporation, to each
stockholder entitled to vote at such meeting. If mailed, such notice shall
be deemed to be delivered to a stockholder when deposited in the United
States mail addressed to such stockholder at such stockholder's address as
it appears on the stock transfer records of the Corporation, with postage
thereon prepaid.
2.5 Registered Holders of Shares; Closing of Share Transfer Records; and Record
Date.
(a) Registered Holders as Owners. Unless otherwise provided under
Delaware law, the Corporation may regard the person in whose name any
shares issued by the Corporation are registered in the stock transfer
records of the Corporation at any particular time (including, without
limitation, as of a record date fixed pursuant to paragraph (b) of
this Section 2.5) as the owner of those shares at that time for
purposes of voting those shares, receiving distributions thereon or
notices in respect thereof, transferring those shares, exercising
rights of dissent with respect to those shares, entering into
agreements with respect to those shares, or giving proxies with
respect to those shares; and neither the Corporation nor any of its
officers, directors, employees or agents shall be liable for regarding
that person as the owner of those shares at that time for those
purposes, regardless of whether that person possesses a certificate
for those shares.
(b) Record Date. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive a distribution by the Corporation
(other than a distribution involving a purchase or redemption by the
Corporation of any of its own shares) or a share dividend, or in order
to make a determination of stockholders for any other proper purpose,
the Board of Directors may fix in advance a date as the record date
for
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any such determination of stockholders, such date in any case to be
not more than 60 days and, in the case of a meeting of stockholders,
not less than ten days, prior to the date on which the particular
action requiring such determination of stockholders is to be taken.
The Board of Directors shall not close the books of the Corporation
against transfers of shares during the whole or any part of such
period.
If the Board of Directors does not fix a record date for any meeting of the
stockholders, the record date for determining stockholders entitled to
notice of or to vote at such meeting shall be at the close of business on
the day next preceding the day on which notice is given, or, if in
accordance with Section 7.3 of these Bylaws notice is waived, at the close
of business on the day next preceding the day on which the meeting is held.
2.6 Quorum of Stockholders; Adjournment. Unless otherwise provided in the
Certificate of Incorporation, a majority of the outstanding shares of
capital stock of the Corporation entitled to vote, present in person or
represented by proxy, shall constitute a quorum at any meeting of the
stockholders, and the stockholders present at any duly convened meeting may
continue to do business until adjournment notwithstanding any withdrawal
from the meeting of holders of shares counted in determining the existence
of a quorum. Unless otherwise provided in the Certificate of Incorporation
or these Bylaws, any meeting of the stockholders may be adjourned from time
to time by the chairman of the meeting or the holders of a majority of the
issued and outstanding stock, present in person or represented by proxy,
whether or not a quorum is present, without notice other than by
announcement at the meeting at which such adjournment is taken, and at any
such adjourned meeting at which a quorum shall be present any action may be
taken that could have been taken at the meeting originally called; provided
that if the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned meeting.
2.7 Voting by Stockholders.
(a) Voting on Matters Other than the Election of Directors. With respect
to any matters as to which no other voting requirement is specified by
the DGCL, the Certificate of Incorporation or these Bylaws, the
affirmative vote required for stockholder action shall be that of a
majority of the shares present in person or represented by proxy at
the meeting (as counted for purposes of determining the existence of a
quorum at the meeting). In the case of a matter submitted for a vote
of the stockholders as to which a stockholder approval requirement is
applicable under the stockholder approval policy of any stock exchange
or quotation system on which the capital stock of the Corporation is
traded or quoted, the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any
provision of the Internal Revenue Code, in each case for
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which no higher voting requirement is specified by the DGCL, the
Certificate of Incorporation or these Bylaws, the vote required for
approval shall be the requisite vote specified in such stockholder
approval policy, Rule 16b-3 or Internal Revenue Code provision, as the
case may be (or the highest such requirement if more than one is
applicable). For the approval of the appointment of independent public
accountants (if submitted for a vote of the stockholders), the vote
required for approval shall be a majority of the votes cast on the
matter.
(b) Voting in the Election of Directors. Unless otherwise provided in the
Certificate of Incorporation or these Bylaws in accordance with the
DGCL, directors shall be elected by a plurality of the votes cast by
the holders of outstanding shares of capital stock of the Corporation
entitled to vote in the election of directors at a meeting of
stockholders at which a quorum is present.
2.8 Business to be Conducted.
(a) At an annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have
been brought before the annual meeting (i) by or at the direction of
the Board of Directors or (ii) by any stockholder of the Corporation
who is a stockholder of record at the time of the giving of such
stockholder's notice provided for in this Section 2.8, who shall be
entitled to vote at such meeting and who complies with the
requirements of this Section 2.8 and as shall otherwise be proper
subjects for stockholder action and shall be properly introduced at
the meeting. For a proposal to be properly brought before an annual
meeting by a stockholder, in addition to any other applicable
requirements, the stockholder must have given timely advance notice
thereof in writing to the Secretary of the Corporation. To be timely,
a stockholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the Corporation not later than
the close of business on the 90th day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the
event that the date of the annual meeting is more than 30 days before
or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close
of business on the later of the 90th day prior to such annual meeting
or the 10th day following the day on which public announcement of the
date of such meeting is first made by the Corporation. Any such
stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a description of the proposal desired to be brought
before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business
and any other stockholders known by such stockholder to be supporting
such proposal, (iii) the class and number of shares of the
Corporation's stock that are beneficially owned by the stockholder on
the date of such notice,
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(iv) any financial interest of the stockholder in such proposal and
(v) a representation that the stockholder intends to appear in person
or by proxy at the meeting to bring the proposed business before the
annual meeting. The presiding officer of the annual meeting shall
determine whether the requirements of this paragraph (a) have been met
with respect to any stockholder proposal. If the presiding officer
determines that a stockholder proposal was not made in accordance with
the terms of this paragraph (a), he shall so declare at the meeting
and any such proposal shall not be acted upon at the meeting. At a
special meeting of stockholders, only such business shall be acted
upon as shall have been set forth in the notice relating to the
meeting required by Section 2.4 hereof or as shall constitute matters
incident to the conduct of the meeting as the presiding officer of the
meeting shall determine to be appropriate.
(b) Notwithstanding the foregoing provisions of this Section 2.8, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 2.8.
2.9 Proxies. Each stockholder entitled to vote at a meeting of stockholders
may authorize another person or persons to act for him by proxy. Proxies
for use at any meeting of stockholders shall be filed with the Secretary,
or such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies
shall be received and taken charge of and all ballots shall be received and
canvassed by the secretary of the meeting who shall decide all questions
relating to the qualification of voters, the validity of the proxies, and
the acceptance or rejection of votes, unless an inspector or inspectors
shall have been appointed by the chairman of the meeting, in which event
such inspector or inspectors shall decide all such questions.
2.10 Approval or Ratification of Acts or Contracts by Stockholders. The Board
of Directors in its discretion may submit any act or contract for approval
or ratification at any annual meeting of the stockholders, or at any
special meeting of the stockholders called for the purpose of considering
any such act or contract, and any act or contract that shall be approved or
be ratified by the vote of the stockholders holding a majority of the
issued and outstanding shares of stock of the Corporation entitled to vote
and present in person or by proxy at such meeting (provided that a quorum
is present), shall be as valid and as binding upon the Corporation and upon
all the stockholders as if it has been approved or ratified by every
stockholder of the Corporation.
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ARTICLE III
DIRECTORS
3.1 Number, Classification and Tenure and Composition.
(a) The powers of the Corporation shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board of Directors. From and
after the first date of the closing of the initial public offering of
the Common Stock to the public for cash that has been registered on a
registration statement that has been filed with and declared effective
by the Securities and Exchange Commission (the "Initial Public
Offering Date"), the Board of Directors shall be divided into three
classes as provided in the Certificate of Incorporation. Each
director shall hold office for the full term for which such director
is elected and until such director's successor shall have been duly
elected and qualified or until his earlier death or resignation or
removal in accordance with the Certificate of Incorporation or these
Bylaws.
(b) Within the limits specified in the Certificate of Incorporation, the
number of directors that shall constitute the whole Board of Directors
shall be fixed by, and may be increased or decreased from time to time
by, the affirmative vote of a majority of the members at any time
constituting the Board of Directors. Except as provided in the
Certificate of Incorporation, newly created directorships resulting
from any increase in the number of directors and any vacancies on the
Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors. Any
director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified
or until his earlier death, resignation or removal. No decrease in
the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
3.2 Qualifications. Directors need not be residents of the State of Delaware
or stockholders of the Corporation.
3.3 Nomination of Directors. Subject to such rights of the holders of one or
more outstanding series of Preferred Stock of the Corporation to elect one
or more directors in case of arrearages in the payment of dividends or
other defaults as shall be prescribed in the Certificate of Incorporation
or in the resolutions of the Board of Directors providing for the
establishment of any such series, only persons who are nominated in
accordance with the procedures set forth in this Section 3.3 shall be
eligible for election as, and to serve
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as, directors. Nominations of persons for election to the Board of
Directors may be made at a meeting of the stockholders at which Directors
are to be elected (i) by or at the direction of the Board of Directors or
(ii) by any stockholder of the Corporation who is a stockholder of record
at the time of the giving of such stockholder's notice provided for in this
Section 3.3, who shall be entitled to vote at such meeting in the election
of directors and who complies with the requirements of this Section 3.3.
Such nominations, other than those made by or at the direction of the Board
of Directors, shall be preceded by timely advance notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to, or mailed and received at, the principal executive offices of
the Corporation (i) with respect to an election to be held at the annual
meeting of the stockholders of the Corporation, not later than the close of
business on the 90th day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date
of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be
so delivered not later than the close of business on the later of the 90th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation; and (ii) with respect to an election to be held at a special
meeting of stockholders of the Corporation for the election of directors
not later than the close of business on the tenth day following the day on
which notice of the date of the special meeting was mailed to stockholders
of the Corporation as provided in Section 2.4 hereof or public disclosure
of the date of the special meeting was made, whichever first occurs. Any
such stockholder's notice to the Secretary of the Corporation shall set
forth (x) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number of shares of each class of
capital stock of the Corporation beneficially owned by such person, (iv)
the written consent of such person to having such person's name placed in
nomination at the meeting and to serve as a director if elected and (v) any
other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise
required, pursuant to Regulation 14A under the Exchange Act, and (y) as to
the stockholder giving the notice, (i) the name and address, as they appear
on the Corporation's books, of such stockholder and (ii) the number of
shares of each class of voting stock of the Corporation that are then
beneficially owned by such stockholder. The presiding officer of the
meeting of stockholders shall determine whether the requirements of this
Section 3.3 have been met with respect to any nomination or intended
nomination. If the presiding officer determines that any nomination was not
made in accordance with the requirements of this Section 3.3, he shall so
declare at the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section 3.3, a stockholder
shall also comply with all applicable requirements of the Exchange Act and
the rules and regulations thereunder with respect to the matters set forth
in this Section 3.3.
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3.4 Place of Meeting; Order of Business. Except as otherwise provided by law,
meetings of the Board of Directors, regular or special, may be held either
within or without the State of Delaware, at whatever place is specified by
the person or persons calling the meeting. In the absence of specific
designation, the meetings shall be held at the principal office of the
Corporation. At all meetings of the Board of Directors, business shall be
transacted in such order as shall from time to time be determined by the
Chairman of the Board, or in his absence by the President (if any), or by
resolution of the Board of Directors.
3.5 Regular Meetings. Regular meetings of the Board of Directors shall be held
at such place or places within or without the State of Delaware, at such
hour and on such day as may be fixed by resolution of the Board of
Directors, without further notice of such meetings. The time or place of
holding regular meetings of the Board of Directors may be changed by the
Chairman of the Board, or the President (if any), by giving written notice
thereof as provided in Section 3.7 hereof.
3.6 Special Meetings. Special meetings of the Board of Directors shall be
held, whenever called by the Chairman of the Board, the President (if any)
or by a written notice signed by a majority of the members of the Board of
Directors, at such place or places within or without the State of Delaware
as may be stated in the notice of the meeting.
3.7 Attendance at and Notice of Meetings. Written notice of the time and place
of, and general nature of the business to be transacted at, all special
meetings of the Board of Directors, and written notice of any change in the
time or place of holding the regular meetings of the Board of Directors,
shall be given to each director and may be given by any of the following
methods: (a) by mail or telegram sent to the last known business address
of such director at least four days before the meeting, (b) by facsimile to
the business facsimile number of such director transmitted at least one day
before the meeting or (c) orally at least one day before the meeting. For
purposes of the foregoing sentence, notice shall be deemed given (i) by
mail, when deposited in the U.S. mail, postage prepaid, or by telegram,
when the telegram is delivered to the telegraph company for transmittal,
(ii) by facsimile, when transmittal is confirmed by the sending facsimile
machine and (iii) orally, when communicated in person or by telephone to
the director or to a person at the business telephone number of the
director who may reasonably be expected to communicate it to the director.
In calculating the number of days notice received by a director, the date
the notice is given by any of the foregoing methods shall be counted, but
the date of the meeting to which the notice relates shall not be counted.
Notice of the time, place and purpose of a meeting may be waived in writing
before or after such meeting, and shall be equivalent to the giving of
notice. Participation in a meeting of the Board of Directors shall
constitute presence in person at such meeting, except when a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened. Except as otherwise herein provided, neither the
business to be transacted at, nor the purpose of,
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any regular or special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting.
3.8 Quorum of and Action by Directors. A majority of the directors in office
shall constitute a quorum of the Board of Directors for the transaction of
business; but a lesser number may adjourn from day to day until a quorum is
present. Except as otherwise provided by law or in these Bylaws, all
questions shall be decided by the vote of a majority of the directors
present.
3.9 Board and Committee Action Without a Meeting. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at a meeting of the Board of Directors or any
committee thereof may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the members of the
Board of Directors or such committee, as the case may be, and shall be
filed with the Secretary of the Corporation.
3.10 Board and Committee Telephone Meetings. Subject to the provisions required
or permitted by the DGCL for notice of meetings, unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, members of
the Board of Directors, or members of any committee designated by the Board
of Directors, may participate in and hold a meeting of such Board of
Directors or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
this Section 3.10 shall constitute presence in person at such meeting,
except when a person participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting
is not lawfully called or convened.
3.11 Compensation. Directors shall receive such compensation for their services
as shall be determined by the Board of Directors.
3.12 Removal. No director of the Corporation shall be removed from office as a
director by vote or other action of the stockholders or otherwise except
for cause, and then only by the affirmative vote of the holders of at least
a majority of the voting power of all outstanding shares of capital stock
of the Corporation generally entitled to vote in the election of directors,
voting together as a single class. Cause for removal of a director shall be
as provided by law or in the Certificate of Incorporation. Any proposal by
a stockholder to remove a director of the Corporation, in order to be
validly acted upon at any meeting, shall comply with paragraph (a) of
Section 2.8 hereof.
Notwithstanding the first paragraph of this Section 3.12, whenever
holders of outstanding shares of one or more series of Preferred Stock are
entitled to elect members of the Board of Directors pursuant to the
provisions applicable in the case of arrearages in the payment of dividends
or other defaults contained in the resolution or resolutions of
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the Board of Directors providing for the establishment of any such series,
any such director of the Corporation so elected may be removed in
accordance with the provision of such resolution or resolutions.
3.13 Committees of the Board of Directors.
(a) The Board of Directors, by resolution adopted by the Board of
Directors, may designate from among its members one or more
committees, each of which shall be comprised of one or more of its
members, and may designate one or more of its members as alternate
members of any committee, who may, subject to any limitations by the
Board of Directors, replace absent or disqualified members at any
meeting of that committee. Any such committee, to the extent provided
in such resolution, the Certificate of Incorporation or these Bylaws,
shall have and may exercise all of the authority of the Board of
Directors to the extent permitted by the DGCL. Any such committee may
authorize the seal of the Corporation to be affixed to all papers that
may require it. In addition to the above, such committee or
committees shall have such other powers and limitations of authority
as may be determined from time to time by resolution adopted by the
Board of Directors.
(b) The Board of Directors shall have the power at any time to change the
membership of any such committee and to fill vacancies in it. A
majority of the number of members of any such committee shall
constitute a quorum for the transaction of business unless a greater
number is required by a resolution adopted by the Board of Directors.
The act of the majority of the members of a committee present at any
meeting at which a quorum is present shall be the act of such
committee, unless the act of a greater number is required by a
resolution adopted by the Board of Directors. Each such committee may
elect a chairman and appoint such subcommittees and assistants as it
may deem necessary. Except as otherwise provided by the Board of
Directors, meetings of any committee shall be conducted in accordance
with Sections 3.5, 3.6, 3.7, 3.8, 3.9, 3.10 and 7.3 hereof. In the
absence or disqualification of a member of a committee, the member or
members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may
unanimously appoint another member of the board of directors to act at
the meeting in the place of any such absent or disqualified member.
Any member of any such committee elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation will be served thereby,
but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Election or appointment of a member of
a committee shall not of itself create contract rights.
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(c) Any action taken by any committee of the Board of Directors shall
promptly be recorded in the minutes and filed with the Secretary of
the Corporation.
ARTICLE IV
OFFICERS
4.1 Designation. The officers of the Corporation shall consist of one or more
Chairmen of the Board and a Secretary, and may include a President,
Treasurer and such Executive, Senior or other Vice Presidents, Assistant
Secretaries and other officers as may be elected or appointed by the Board
of Directors. The corporation shall initially have three Co-Chairmen of
the Board and Co-Chief Executive Officers, and references herein to the
"Chairman of the Board" and the "chief executive officer" shall mean any of
such persons. Any number of offices may be held by the same person.
4.2 Powers and Duties. The officers of the Corporation shall have such powers
and duties as generally pertain to their offices, except as modified herein
or by the Board of Directors, as well as such powers and duties as from
time to time may be conferred by the Board of Directors. The Chairman of
the Board shall be the chief executive officer of the Corporation, shall
have general supervision over the business, affairs and property of the
Corporation, shall have such duties as may be assigned to him by the Board
of Directors and shall preside at meetings of the Board of Directors and at
meetings of the stockholders.
4.3 Vacancies. Whenever any vacancies shall occur in any office by death,
resignation, increase in the number of offices of the Corporation, or
otherwise, the same shall be filled by the Board of Directors, and the
officer so elected shall hold office until such officer's successor is
elected or appointed or until his earlier death, resignation or removal.
4.4 Removal. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment
the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent shall
not of itself create contract rights.
4.5 Action with Respect to Securities of Other Corporations. Unless otherwise
directed by the Board of Directors, the Chairman of the Board, or any
President, Vice President or Treasurer of the Corporation shall each have
power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of security holders of or with respect to any
action of security holders of any other corporation in which this
Corporation may hold securities and otherwise to exercise any and all
rights and powers that this
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Corporation may possess by reason of its ownership of securities in such
other corporation.
ARTICLE V
CAPITAL STOCK
5.1 Certificates for Shares. The certificates for shares of the capital stock
of the Corporation shall be in such form as may be approved by the Board of
Directors or any duly authorized committee thereof or may be uncertificated
shares. In the case of certificated shares, the Corporation shall deliver
certificates representing shares to which stockholders are entitled.
Certificates representing such certificated shares shall be signed by one
of the Chairmen of the Board, or a President or a Vice President (if any)
and either the Secretary or an Assistant Secretary of the Corporation, and
may bear the seal of the Corporation or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles. The stock
record books and the blank stock certificate books shall be kept by the
Secretary of the Corporation, or at the office of such transfer agent or
transfer agents as the Board of Directors may from time to time by
resolution determine. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by
the Corporation with the same effect as if such person were such officer at
the date of its issuance.
5.2 Transfer of Shares. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives upon
surrender and cancellation of certificates for a like number of shares.
5.3 Ownership of Shares. The Corporation shall be entitled to treat the holder
of record of any share or shares of capital stock of the Corporation as the
holder in fact thereof and, accordingly, shall not be bound to recognize
any equitable or other claim to or interest in such share or shares on the
part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
5.4 Regulations Regarding Certificates. The Board of Directors shall have the
power and authority to make all such rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of capital stock of the Corporation.
5.5 Lost or Destroyed Certificates. The Board of Directors may determine the
conditions upon which a new certificate of stock may be issued in place of
a certificate that is alleged to have been lost, stolen or destroyed; and
may, in its discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety, to indemnify the
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Corporation and each transfer agent and registrar against any and all
losses or claims that may arise by reason of the issue of a new certificate
in the place of the one so lost, stolen or destroyed.
ARTICLE VI
INDEMNIFICATION
6.1 General. The Corporation shall, to the fullest extent permitted by
applicable law in effect on the date of effectiveness of these Bylaws, and
to such greater extent as applicable law may thereafter permit, within 30
days after written demand is presented to the Corporation, indemnify and
hold Indemnitee (as this and all other capitalized words used in this
Article VI not previously defined in these Bylaws are defined in Section
6.16 hereof) harmless from and against any and all losses, liabilities,
claims, damages and, subject to Section 6.2, Expenses, whatsoever arising
out of any event or occurrence related to the fact that Indemnitee is or
was a director or officer of the Corporation or is or was serving in
another Corporate Status.
6.2 Expenses. If Indemnitee is, by reason of his Corporate Status, a party to
and is successful, on the merits or otherwise, in any Proceeding, he shall
be indemnified against all Expenses actually and reasonably incurred by him
or on his behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or
otherwise, as to any Matter in such Proceeding, the Corporation shall
indemnify Indemnitee against all Expenses actually and reasonably incurred
by him or on his behalf relating to such Matter. The termination of any
Matter in such a Proceeding by dismissal, with or without prejudice, shall
be deemed to be a successful result as to such Matter. To the extent that
the Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith.
6.3 Advances. In the event of any threatened or pending action, suit or
proceeding in which Indemnitee is a party or is involved and that may give
rise to a right of indemnification under this Article VI, following written
request to the Corporation by Indemnitee, the Corporation shall promptly
pay to Indemnitee amounts to cover expenses reasonably incurred by
Indemnitee in such proceeding in advance of its final disposition upon the
receipt by the Corporation of (i) a written undertaking executed by or on
behalf of Indemnitee providing that Indemnitee will repay the advance if it
shall ultimately be determined that Indemnitee is not entitled to be
indemnified by the Corporation as provided in this Agreement and (ii)
satisfactory evidence as to the amount of such expenses.
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6.4 Repayment of Advances or Other Expenses. Indemnitee agrees that Indemnitee
shall reimburse the Corporation for all expenses paid by the Corporation in
defending any civil, criminal, administrative or investigative action, suit
or proceeding against Indemnitee in the event and only to the extent that
it shall be determined pursuant to the provisions of this Article VI or by
final judgment or other final adjudication under the provisions of any
applicable law that Indemnitee is not entitled to be indemnified by the
Corporation for such expenses.
6.5 Request for Indemnification. To obtain indemnification, Indemnitee shall
submit to the Secretary of the Corporation a written claim or request.
Such written claim or request shall contain sufficient information to
reasonably inform the Corporation about the nature and extent of the
indemnification or advance sought by Indemnitee. The Secretary of the
Corporation shall promptly advise the Board of Directors of such request.
6.6 Determination of Entitlement; No Change of Control. If there has been no
Change of Control at the time the request for indemnification is submitted,
Indemnitee's entitlement to indemnification shall be determined in
accordance with Section 145(d) of the DGCL. If entitlement to
indemnification is to be determined by Independent Counsel, the Corporation
shall furnish written notice to Indemnitee within 10 days after receipt of
the request for indemnification, specifying the identity and address of
Independent Counsel. The Indemnitee may, within ten days after such written
notice of selection shall have been given, deliver to the Corporation a
written objection to such selection; provided, however, that such objection
may be asserted only on the ground that the Independent Counsel so selected
does not meet the requirements of "Independent Counsel" as defined in
Section 6.16 hereof, and the objection shall set forth with particularity
the factual basis of such assertion. If such written objection is so made
and substantiated, the Independent Counsel so selected may not serve as
Independent Counsel unless and until such objection is withdrawn or a court
has determined that such objection is without merit. If (i) the
determination of entitled to indemnification is to be made by Independent
Counsel pursuant to this Section and (ii) within 20 days after submission
by Indemnitee of a written request for indemnification pursuant to Section
6.5, no Independent Counsel shall have been selected and not objected to,
the Corporation or the Indemnitee may petition the Court of Chancery or
other court of competent jurisdiction for resolution of any objection which
shall have been made by the Indemnitee to the Corporation's selection of
Independent Counsel and/or for the appointment as Independent Counsel of a
person selected by the petitioned court or by such other person as the
petitioned court shall designate, and the person with respect to whom all
objections are so resolved or the person so appointed shall act as
Independent Counsel under this Section. If (i) Independent Counsel does
not make any determination respecting Indemnitee's entitlement to
indemnification hereunder within 90 days after receipt by the Corporation
of a written request therefor and (ii) any judicial proceeding or
arbitration pursuant to Section 6.10 is then commenced, Independent Counsel
shall be discharged and relieved of any further responsibility in such
capacity (subject to the applicable standards of professional conduct then
prevailing).
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6.7 Determination of Entitlement; Change of Control. If there has been a
Change of Control at the time the request for indemnification is submitted,
Indemnitee's entitlement to indemnification shall be determined in a
written opinion by Independent Counsel selected by Indemnitee. Indemnitee
shall give the Corporation written notice advising of the identity and
address of the Independent Counsel so selected. The Corporation may,
within ten days after such written notice of selection shall have been
given, deliver to the Indemnitee a written objection to such selection;
provided, however, that such objection may be asserted only on the ground
that the Independent Counsel so selected does not meet the requirements of
"Independent Counsel" as defined in Section 6.16 hereof, and the objection
shall set forth with particularity the factual basis of such assertion. If
such written objection is so made and substantiated, the Independent
Counsel so selected may not serve as Independent Counsel unless and until
such objection is withdrawn or a court has determined that such objection
is without merit. If (i) the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to this
Section and (ii) within 20 days after submission by Indemnitee of a written
request for indemnification pursuant to Section 6.5, no Independent Counsel
shall have been selected and not objected to, the Corporation or the
Indemnitee may petition the Court of Chancery or other court of competent
jurisdiction for resolution of any objection which shall have been made by
the Corporation to the Indemnitee's selection of Independent Counsel and/or
for the appointment as Independent Counsel of a person selected by the
petitioned court or by such other person as the petitioned court shall
designate, and the person with respect to whom all objections are so
resolved or the person so appointed shall act as Independent Counsel under
this Section, if (i) Independent Counsel does not make any determination
respecting Indemnitee's entitlement to indemnification hereunder within 90
days after receipt by the Corporation of a written request therefor and
(ii) any judicial proceeding or arbitration pursuant to Section 6.10 is
then commenced, Independent Counsel shall be discharged and relieved of any
further responsibility in such capacity (subject to the applicable
standards of professional conduct then prevailing).
6.8 Procedures of Independent Counsel. If a Change of Control shall have
occurred before the request for indemnification is sent by Indemnitee,
Indemnitee shall be presumed (except as otherwise expressly provided in
this Article VI) to be entitled to indemnification upon submission of a
request for indemnification in accordance with Section 6.5 hereof, and
thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a
determination of entitlement to indemnification unless the Corporation
provides information sufficient to overcome such presumption by clear and
convincing evidence or the investigation, review and analysis of
Independent Counsel convinces him by clear and convincing evidence that the
presumption should not apply.
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Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or
persons empowered under Section 6.6 or 6.7 hereof to determine entitlement
to indemnification shall not have made and furnished to Indemnitee in
writing a determination within 60 days after receipt by the Corporation of
the request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification unless Indemnitee knowingly misrepresented
a material fact in connection with the request for indemnification or such
indemnification is prohibited by applicable law. The termination of any
Proceeding or of any Matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Article VI) of itself
adversely affect the right of Indemnitee to indemnification or create a
presumption that Indemnitee did not act in good faith and in a manner that
he reasonably believed to be in or not opposed to the best interests of the
Corporation, or with respect to any criminal Proceeding, that Indemnitee
had reasonable cause to believe that his conduct was unlawful. A person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
of the Corporation shall be deemed to have acted in a manner not opposed to
the best interests of the Corporation.
For purposes of any determination hereunder, a person shall be deemed
to have acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation, or, with respect
to any criminal action or Proceeding, to have had no reasonable cause to
believe his conduct was unlawful, if his action is based on the records or
books of account of the Corporation or another enterprise or on information
supplied to him by the officers of the Corporation or another enterprise in
the course of their duties or on the advice of legal counsel for the
Corporation or another enterprise or on information or records given or
reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected
with reasonable care by the Corporation or another enterprise. The term
"another enterprise" as used in this Section shall mean any other
corporation or any partnership, limited liability company, association,
joint venture, trust, employee benefit plan or other enterprise of which
such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this paragraph
shall not be deemed to be exclusive or to limit in any way the
circumstances in which an Indemnitee may be deemed to have met the
applicable standards of conduct for determining entitlement to rights under
this Article.
6.9 Independent Counsel Expenses. The Corporation shall pay any and all
reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Article VI and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay
all reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may
serve
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if a timely objection has been made to his selection until a court has
determined that such objection is without a reasonable basis.
6.10 Adjudication. In the event that (i) a determination is made pursuant to
Section 6.6 or 6.7 hereof that Indemnitee is not entitled to
indemnification under this Article VI; (ii) advancement of Expenses is not
timely made pursuant to Section 6.3 hereof; (iii) Independent Counsel is to
determine Indemnitee's entitlement to indemnification hereunder, but does
not make that determination within 90 days after receipt by the Corporation
of the request for that indemnification; or (iv) payment of indemnification
is not made within five days after a determination of entitlement to
indemnification has been made or deemed to have been made pursuant to
Section 6.6, 6.7 or 6.8 hereof, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Delaware, or in any
other court of competent jurisdiction, of his entitlement to such
indemnification or advancement of Expenses. In the event that a
determination shall have been made that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant
to this Section 6.10 shall be conducted in all respects as a de novo trial
on the merits and Indemnitee shall not be prejudiced by reason of that
adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding commenced pursuant to this Section 6.10, the
Corporation shall have the burden of proving that Indemnitee is not
entitled to indemnification or advancement of Expenses, as the case may be.
If a determination shall have been made or deemed to have been made that
Indemnitee is entitled to indemnification, the Corporation shall be bound
by such determination in any judicial proceeding commenced pursuant to this
Section 6.10, or otherwise, unless Indemnitee knowingly misrepresented a
material fact in connection with the request for indemnification, or such
indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 6.10 that the procedures and
presumptions of this Article VI are not valid, binding and enforceable and
shall stipulate in any such proceeding that the Corporation is bound by all
provisions of this Article VI. In the event that Indemnitee, pursuant to
this Section 6.10, seeks a judicial adjudication to enforce his rights
under, or to recover damages for breach of, this Article VI, Indemnitee
shall be entitled to recover from the Corporation, and shall be indemnified
by the Corporation against, any and all Expenses actually and reasonably
incurred by him in such judicial adjudication, but only if he prevails
therein. If it shall be determined in such judicial adjudication that
Indemnitee is entitled to receive part but not all of the indemnification
or advancement of Expenses sought, the Expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be
appropriately prorated.
6.11 Participation by the Corporation. With respect to any such claim, action,
suit, proceeding or investigation as to which Indemnitee notifies the
Corporation of the commencement thereof: (a) the Corporation will be
entitled to participate therein at its own expense; (b) except as otherwise
provided below, to the extent that it may wish, the Corporation
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(jointly with any other indemnifying party similarly notified) will be
entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After receipt of notice from the Corporation to
Indemnitee of the Corporation's election so to assume the defense thereof,
the Corporation will not be liable to Indemnitee under this Article VI for
any legal or other expenses subsequently incurred by Indemnitee in
connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Indemnitee shall have the
right to employ his own counsel in such action, suit, proceeding or
investigation but the fees and expenses of such counsel incurred after
notice from the Corporation of its assumption of the defense thereof shall
be at the expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall
have reasonably concluded that there is a conflict of interest between the
Corporation and Indemnitee in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
counsel employed by Indemnitee shall be subject to indemnification pursuant
to the terms of this Article VI. The Corporation shall not be entitled to
assume the defense of any action, suit, proceeding or investigation brought
in the name of or on behalf of the Corporation or as to which Indemnitee
shall have made the conclusion provided for in (ii) above; and (c) the
Corporation shall not be liable to indemnify Indemnitee under this Article
VI for any amounts paid in settlement of any action or claim effected
without its written consent, which consent shall not be unreasonably
withheld. The Corporation shall not settle any action or claim in any
manner that would impose any limitation or unindemnified penalty on
Indemnitee without Indemnitee's written consent, which consent shall not be
unreasonably withheld.
6.12 Nonexclusivity of Rights. The rights of indemnification and advancement of
Expenses as provided by this Article VI shall not be deemed exclusive of
any other rights to which Indemnitee may at any time be entitled to under
applicable law, the Certificate of Incorporation, the Bylaws, any
agreement, a vote of stockholders or a resolution of directors, or
otherwise. No amendment, alteration or repeal of this Article VI or any
provision hereof shall be effective as to any Indemnitee for acts, events
and circumstances that occurred, in whole or in part, before such
amendment, alteration or repeal. The provisions of this Article VI shall
continue as to an Indemnitee whose Corporate Status has ceased for any
reason and shall inure to the benefit of his heirs, executors and
administrators. Neither the provisions of this Article VI or those of any
agreement to which the Corporation is a party shall be deemed to preclude
the indemnification of any person who is not specified in this Article VI
as having the right to receive indemnification or is not a party to any
such agreement, but whom the Corporation has the power or obligation to
indemnify under the provisions of the DGCL.
6.13 Insurance and Subrogation. The Corporation shall not be liable under this
Article VI to make any payment of amounts otherwise indemnifiable hereunder
if, but only to the extent
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that, Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
In the event of any payment hereunder, the Corporation shall be
subrogated to the extent of such payment to all the rights of recovery of
Indemnitee, who shall execute all papers required and take all action
reasonably requested by the Corporation to secure such rights, including
execution of such documents as are necessary to enable the Corporation to
bring suit to enforce such rights.
6.14 Severability. If any provision or provisions of this Article VI shall be
held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby; and, to the fullest extent
possible, the provisions of this Article VI shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal
or unenforceable.
6.15 Certain Actions For Which Indemnification Is Not Provided. Notwithstanding
any other provision of this Article VI, no person shall be entitled to
indemnification or advancement of Expenses under this Article VI with
respect to any Proceeding, or any Matter therein, brought or made by such
person against the Corporation.
6.16 Definitions. For purposes of this Article VI:
"Change of Control" means a change in control of the Corporation after both
the Initial Public Offering Date and after the date Indemnitee acquired his
Corporate Status, which shall be deemed to have occurred in any one of the
following circumstances occurring after such date: (i) there shall have
occurred an event required to be reported with respect to the Corporation
in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response
to any similar item on any similar schedule or form) promulgated under the
Exchange Act, whether or not the Corporation is then subject to such
reporting requirement; (ii) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) other than the Stockholder Group shall
have become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 30% or more of the combined voting power of the Corporation's
then outstanding voting securities; (iii) the Corporation is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board of Directors in
office immediately prior to such transaction or event constitute less than
a majority of the Board of Directors thereafter; or (iv) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors (including, for this purpose, any new
director whose election or nomination for election by the Corporation's
stockholders was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period)
cease for any reason to constitute at least a majority of the Board of
Directors.
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"Corporate Status" describes the status of Indemnitee as a director,
officer, employee, agent or fiduciary of the Corporation or of any other
corporation, partnership, limited liability company, association, joint
venture, trust, employee benefit plan or other enterprise that Indemnitee
is or was serving at the request of the Corporation.
"Court" means the Court of Chancery of the State of Delaware or any other
court of competent jurisdiction.
"Expenses" shall include all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
"Indemnitee" includes any officer or director of the Corporation who is, or
is threatened to be made, a witness in or a party to any Proceeding as
described in Section 6.1 or 6.2 hereof by reason of his Corporate Status.
"Independent Counsel" means a law firm, or a member of a law firm, that is
experienced in matters of corporation law and neither presently is, nor in
the five years previous to his selection or appointment has been, retained
to represent: (i) the Corporation or Indemnitee in any matter material to
either such party or (ii) any other party to the Proceeding giving rise to
a claim for indemnification hereunder.
"Matter" is a claim, a material issue or a substantial request for relief.
"Proceeding" includes any action, suit, arbitration, alternate dispute
resolution mechanism, investigation, administrative hearing or any other
proceeding, whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 6.10 hereof to
enforce his rights under this Article VI.
"Stockholder Group" shall mean, to the extent such group is deemed to be a
"person" under Section 13(d) of the Exchange Act, collectively, but not
individually, J. Mike Walker, Larry E. Reimert, Reimert Family Partners,
Ltd., Gary D. Smith and Four Smith's Company, Ltd.
6.17 Notices. Promptly after receipt by Indemnitee of notice of the
commencement of any action, suit or proceeding, Indemnitee shall, if he
anticipates or contemplates making a claim for expenses or an advance
pursuant to the terms of this Article VI, notify the Corporation of the
commencement of such action, suit or proceeding; provided, however, that
any delay in so notifying the Corporation shall not constitute a waiver or
release by Indemnitee of rights hereunder and that any omission by
Indemnitee to so notify the Corporation shall not relieve the Corporation
from any liability that it may have to
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Indemnitee otherwise than under this Article VI. Any communication required
or permitted to the Corporation shall be addressed to the Secretary of the
Corporation and any such communication to Indemnitee shall be addressed to
Indemnitee's address as shown on the Corporation's records unless he
specifies otherwise and shall be personally delivered or delivered by
overnight mail delivery. Any such notice shall be effective upon receipt.
6.18 Contractual Rights. The right to be indemnified or to the advancement or
reimbursement of Expenses (i) is a contract right based upon good and
valuable consideration, pursuant to which Indemnitee may sue as if these
provisions were set forth in a separate written contract between Indemnitee
and the Corporation, (ii) is and is intended to be retroactive and shall be
available as to events occurring prior to the adoption of these provisions
and (iii) shall continue after any rescission or restrictive modification
of such provisions as to events occurring prior thereto.
6.19 Indemnification of Employees, Agents and Fiduciaries. The Corporation, by
adoption of a resolution of the Board of Directors, may indemnify and
advance expenses to a person who is an employee, agent or fiduciary of the
Corporation including any such person who is or was serving at the request
of the Corporation as a director, officer, employee, agent or fiduciary of
any other corporation, partnership, joint venture, limited liability
company, trust, employee benefit plan or other enterprise to the same
extent and subject to the same conditions (or to such greater or lesser
extent and/or subject to lesser or greater conditions as the Board of
Directors may determine) under which it may indemnify and advance expenses
to an Indemnitee under this Article VI.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Bylaw Amendments. The Board of Directors shall have the power to adopt,
amend and repeal from time to time the Bylaws of the Corporation, subject
to the right of stockholders entitled to vote with respect thereto to amend
or repeal such Bylaws as adopted or amended by the Board of Directors.
Bylaws of the Corporation may be adopted, amended or repealed by the
affirmative vote of the holders of at least two-thirds of the combined
voting power of the outstanding shares of all classes of stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, at any annual meeting, or at any special
meeting if notice of the proposed amendment be contained in the notice of
said special meeting, or by the Board of Directors as specified in the
preceding sentence.
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7.2 Books and Records. The Corporation shall keep books and records of account
and shall keep minutes of the proceedings of its stockholders, its Board of
Directors and each committee of its Board of Directors.
7.3 Waiver of Notice. Whenever any notice is required to be given to any
stockholder, director or committee member under the provisions of the DGCL
or under the Certificate of Incorporation, as amended, or these Bylaws,
said notice shall be deemed to be sufficient if given (i) by telegraphic,
facsimile, cable or wireless transmission or (ii) by deposit of the same in
a post office box in a sealed prepaid wrapper addressed to the person
entitled thereto at his post office address, as it appears on the records
of the Corporation, and such notice shall be deemed to have been given on
the day of such transmission or mailing, as the case may be.
Whenever any notice is required to be given to any stockholder,
director or committee member under the provisions of the DGCL or under the
Certificate of Incorporation, as amended, or these Bylaws, a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be equivalent to the giving
of such notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to
the transaction of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders, directors, or members
of a committee of directors need be specified in any written waiver of
notice unless so required by the Certificate of Incorporation or these
Bylaws.
7.4 Resignations. Any director or officer may resign at any time. Such
resignations shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, the President (if any) or the Secretary of
the Corporation. The acceptance of a resignation shall not be necessary to
make it effective, unless expressly so provided in the resignation.
7.5 Seal. The seal of the Corporation shall be in such form as the Board of
Directors may adopt.
7.6 Fiscal Year. The fiscal year of the Corporation shall end on the 31st day
of December of each year or as otherwise provided by a resolution adopted
by the Board of Directors.
7.7 Facsimile Signatures. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be
used whenever and as authorized by the Board of Directors.
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7.8 Reliance upon Books, Reports and Records. Each director and each member of
any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon
the books of account or reports made to the Corporation by any of its
officers, or by an independent certified public accountant, or by an
appraiser selected with reasonable care by the Board of Directors or by any
such committee, or in relying in good faith upon other records of the
Corporation
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EXHIBIT 3.4
FORM OF
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
DRIL-QUIP, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
DRIL-QUIP, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Certificate of Incorporation of the said
Corporation, the said Board of Directors on October 17, 1997 adopted the
following resolution creating a series of 500,000 shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of the
Certificate of Incorporation, a series of Preferred Stock, par value $.01
per share, of the Corporation be and hereby is created, and that the
designation and number of shares thereof and the voting and other powers,
preferences and relative, participating, optional or other rights of the
shares of such series and the qualifications, limitations and restrictions
thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 500,000.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, however, that no decrease shall reduce the number of
shares of Series A Junior Participating Preferred Stock to less than the number
of shares then issued and outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
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2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock, in
preference to the holders of shares of any class or series of stock of the
Corporation ranking junior to the Series A Junior Participating Preferred Stock,
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the 15th day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $10 or (b) the Adjustment Number (as defined below) times the aggregate
per share amount of all cash dividends, and the Adjustment Number times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Junior Participating Preferred Stock. The "Adjustment Number" shall initially
be 100. In the event the Corporation shall at any time after October 17, 1997
(the "Rights Declaration Date") (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the
Series A Junior Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such
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shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Junior Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Junior Participating Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to a number of votes equal to the Adjustment
Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as otherwise provided herein, in the Certificate of
Incorporation or by law, the holders of shares of Series A Junior Participating
Preferred Stock, the holders of shares of any other class or series entitled to
vote with the Common Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C)(i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") that shall extend until such time
when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Junior Participating Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, (1) the number
of Directors shall be increased by two, effective as of the time of election of
such Directors as herein provided, and (2) the holders of Preferred Stock
(including holders of the Series A Junior Participating Preferred Stock) upon
which these or like voting rights have been conferred and are exercisable (the
"Voting Preferred Stock") with dividends in arrears in an amount equal to six
quarterly dividends thereon, voting as a class, irrespective of series, shall
have the right to elect such two Directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at
any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of at least one-third in number of the shares of Voting Preferred Stock
outstanding shall be
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present in person or by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of Voting Preferred Stock of
such voting right.
(iii) Unless the holders of Voting Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent of the total number of shares
of Voting Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Voting Preferred Stock, which
meeting shall thereupon be called by the Chairman of the Board, the President, a
Vice President or the Secretary of the Corporation. Notice of such meeting and
of any annual meeting at which holders of Voting Preferred Stock are entitled to
vote pursuant to this paragraph (C)(iii) shall be given to each holder of record
of Voting Preferred Stock by mailing a copy of such notice to him at his last
address as the same appears on the books of the Corporation. Such meeting shall
be called for a time not earlier than 20 days and not later than 60 days after
such order or request or, in default of the calling of such meeting within 60
days after such order or request, such meeting may be called on similar notice
by any stockholder or stockholders owning in the aggregate not less than ten
percent of the total number of shares of Voting Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, after the holders of Voting Preferred
Stock shall have exercised their right to elect Directors voting as a class, (x)
the Directors so elected by the holders of Voting Preferred Stock shall continue
in office until their successors shall have been elected by such holders or
until the expiration of the default period, and (y) any vacancy in the Board of
Directors may be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class or classes of stock which
elected the Director whose office shall have become vacant. References in this
paragraph (C) to Directors elected by the holders of a particular class or
classes of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Voting Preferred Stock as a class to elect Directors
shall cease, (y) the term of any Directors elected by the holders of Voting
Preferred Stock as a class shall terminate and (z) the number of Directors shall
be such number as may be provided for in the Certificate of Incorporation or By-
Laws irrespective of any increase made pursuant to the provisions of paragraph
(C) of this Section 3 (such number being subject, however, to change thereafter
in any manner provided by law or in the Certificate of Incorporation or By-
Laws). Any vacancies in the Board of Directors effected by the provisions of
clauses (y) and (z) in the preceding sentence may be filled by a majority of the
remaining Directors.
(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
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4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Junior Participating Preferred Stock, except dividends paid ratably on the
Series A Junior Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
any shares of Series A Junior Participating Preferred Stock, or any shares
of stock ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders
of Series A Junior Participating Preferred Stock, or to all such holders
and the holders of any such shares ranking on a parity therewith, upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to any conditions and restrictions on issuance set forth
herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made
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to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Series A Junior
Participating Preferred Stock shall have received $100 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation Preference,
no additional distributions shall be made to the holders of shares of Series A
Junior Participating Preferred Stock unless, prior thereto, the holders of
shares of Common Stock shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) the Adjustment Number. Following the payment of
the full amount of the Series A Liquidation Preference and the Common Adjustment
in respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall, subject to the
prior rights of all other series of Preferred Stock, if any, ranking prior
thereto, receive their ratable and proportionate share of the remaining assets
to be distributed in the ratio of the Adjustment Number to 1 with respect to
such Series A Junior Participating Preferred Stock and Common Stock, on a per
share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any, that
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6, but the sale, lease or conveyance of all or substantially all the
Corporation's assets shall be deemed to be a liquidation, dissolution or winding
up of the Corporation within the meaning of this Section 6.
7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination, share exchange or other transaction
in which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case each
share of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. Redemption. (A) The Corporation, at its option, may redeem
shares of the Series A Junior Participating Preferred Stock in whole at any time
and in part from time to time, at
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a redemption price equal to the Adjustment Number times the current per share
market price (as such term is hereinafter defined) of the Common Stock on the
date of the mailing of the notice of redemption, together with unpaid
accumulated dividends to the date of such redemption. The "current per share
market price" on any date shall be deemed to be the average of the closing price
per share of such Common Stock for the ten consecutive Trading Days (as such
term is hereinafter defined) immediately prior to such date; provided, however,
that in the event that the current per share market price of the Common Stock is
determined during a period following the announcement of (A) a dividend or
distribution on the Common Stock other than a regular quarterly cash dividend or
(B) any subdivision, combination or reclassification of such Common Stock and
the ex-dividend date for such dividend or distribution, or the record date for
such subdivision, combination or reclassification, shall not have occurred prior
to the commencement of such ten Trading Day period, then, and in each such case,
the current per share market price shall be properly adjusted to take into
account ex-dividend trading. The closing price for each day shall be the last
sales price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange, or, if
the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange but sales price
information is reported for such security, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ")
or such other self-regulatory organization or registered securities information
processor (as such terms are used under the Securities Exchange Act of 1934, as
amended) that then reports information concerning the Common Stock, or, if sales
price information is not so reported, the average of the high bid and low asked
prices in the over-the-counter market on such day, as reported by NASDAQ or such
other entity, or, if on any such date the Common Stock is not quoted by any such
entity, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock selected by the
Board of Directors of the Corporation. If on any such date no such market maker
is making a market in the Common Stock, the fair value of the Common Stock on
such date as determined in good faith by the Board of Directors of the
Corporation shall be used. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
but is quoted by NASDAQ, a day on which NASDAQ reports trades, or, if the Common
Stock is not so quoted, a Monday, Tuesday, Wednesday, Thursday or Friday on
which banking institutions in the State of New York are not authorized or
obligated by law or executive order to close.
(B) In the event that fewer than all the outstanding shares of the
Series A Junior Participating Preferred Stock are to be redeemed, the number of
shares to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by any other method that may be
determined by the Board of Directors in its sole discretion to be equitable.
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(C) Notice of any such redemption shall be given by mailing to the
holders of the shares of Series A Junior Participating Preferred Stock to be
redeemed a notice of such redemption, first class postage prepaid, not later
than the fifteenth day and not earlier than the sixtieth day before the date
fixed for redemption, at their last address as the same shall appear upon the
books of the Corporation. Each such notice shall state: (i) the redemption
date; (ii) the number of shares to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be redeemed
from such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on the close of business on such redemption date. Any notice that is mailed in
the manner herein provided shall be conclusively presumed to have been duly
given, whether or not the stockholder received such notice, and failure duly to
give such notice by mail, or any defect in such notice, to any holder of Series
A Junior Participating Preferred Stock shall not affect the validity of the
proceedings for the redemption of any other shares of Series A Junior
Participating Preferred Stock that are to be redeemed. On or after the date
fixed for redemption as stated in such notice, each holder of the shares called
for redemption shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the redemption price. If fewer than all the
shares represented by any such surrendered certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(D) The shares of Series A Junior Participating Preferred Stock shall
not be subject to the operation of any purchase, retirement or sinking fund.
9. Ranking. The Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise, and shall rank senior to the Common Stock
as to such matters.
10. Amendment. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Certificate of Incorporation
of the Corporation shall not be amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding shares
of Series A Junior Participating Preferred Stock, voting separately as a class.
11. Fractional Shares. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
A-8
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate and
does affirm the foregoing as true this ___ day of _______, 199_.
________________________
Co-Chairman of the Board
A-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 4.1
TEMPORARY CERTIFICATE-EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY
<S> <C> <C>
COMMON STOCK [LOGO OF DRIL-QUIP APPEARS HERE] $.01 PAR VALUE
NUMBER SHARES
DRIL-QUIP, INC. SEE REVERSE FOR LEGEND
THIS CERTIFICATE IS TRANSFERABLE IN INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 262037 10 4
NEW YORK, NY AND RIDGEFIELD PARK, NJ SEE REVERSE FOR CERTAIN RESTRICTIONS
THIS CERTIFIES THAT
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Dril-Quip, Inc. (hereafter referred to as the "Corporation") transferable on the books of the Corporation in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are
issued and shall be held subject to the provisions of the Certificate of Incorporation of the Corporation (copies of which are on
file with the Transfer Agent), to all of which the holder by acceptance hereof assents. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and facsimile signatures of its duly authorized officers.
Dated:
<S> <C> <C> <C>
/s/ LARRY E. REIMERT /s/ GARY D. SMITH /s/ J. MIKE WALKER [CORPORATE SEAL APPEARS HERE]
- ------------------------- -------------------------------------- ------------------------
Co-Chairman of the Board Co-Chairman of the Board and Secretary Co-Chairman of the Board
</TABLE>
Countersigned and Registered:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
By: as Transfer Agent
and Registrar
<PAGE>
[LOGO OF DRIL-QUIP APPEARS HERE]
DRIL-QUIP, INC.
This Corporation will furnish without change to each stockholder who so
requests the powers, designation, preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such statement may be obtained by a request in writing to the office of
the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
the certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ___________ Custodian __________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_____________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
- ---------------------------------------
| |
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Date ___________________________________
X_______________________________________
(SIGNATURE)
NOTICE:
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
ON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER. X_______________________________________
(SIGNATURE)
---------------------------------------------
| THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN |
| "ELIGIBLE GUARANTOR INSTITUTION" AS DEFINED |
| IN RULE 17Ad-18 UNDER THE SECURITIES |
| EXCHANGE ACT OF 1934, AS AMENDED. |
---------------------------------------------
| SIGNATURE(S) GUARANTEED BY: |
This certificate also evidences | |
and entitles the holder hereof | |
to certain Rights as set forth | |
in the Rights Agreement between | |
Dril-Quip, Inc. (the "Company") | |
and ChaseMellon Shareholder ---------------------------------------------
Services, L.L.C. (the "Rights
Agent") dated as of October 17,
1997 as it may from time to
time be supplemented or amended
(the "Rights Agreement"), the
terms of which are hereby
incorporated herein by
reference and a copy of which
is on file at the principal
offices of the Company. Under
certain circumstances, as set
forth in the Rights Agreement,
such Rights may be redeemed,
may be exchanged, may expire or
may be evidenced by separate
certificates and will no longer
be evidenced by this
certificate. The Company will
mail to the holder of this
certificate a copy of the
Rights Agreement, as in effect
on the date of mailing, without
charge promptly after receipt
of a written request therefor.
UNDER CERTAIN CIRCUMSTANCES SET
FORTH IN THE RIGHTS AGREEMENT,
RIGHTS BENEFICIALLY OWNED BY OR
TRANSFERRED TO ANY PERSON WHO
IS, WAS OR BECOMES AN ACQUIRING
PERSON OR AN AFFILIATE OR
ASSOCIATE THEREOF (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT), AND CERTAIN
TRANSFEREES THEREOF, WILL
BECOME NULL AND VOID AND WILL
NO LONGER BE TRANSFERABLE.
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") entered into and made
effective as of _________, 1997, by and among Dril-Quip, Inc., a Delaware
corporation (the "Company"), and the stockholders of the Company whose
signatures appear on the signature pages of this Agreement under the caption
"Stockholders" (referred to herein individually as a "Stockholder" and
collectively as the "Stockholders"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Board of Directors of the Company deems it in the best
interests of the Company to complete an initial public offering of shares of
common stock of the Company (the "IPO"); and
WHEREAS, in connection with the IPO, in order to facilitate future sales of
Common Stock of the Company held by the Stockholders, the Stockholders and the
Company desire to enter into this Agreement as herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings indicated:
"Agreement" shall have the meaning set forth above.
"Commission" shall mean the Securities and Exchange Commission, and any
successor thereto.
"Common Stock" shall mean the Company's Common Stock, par value $.01 per
share, or any successor class of the Company's Common Stock.
"Company" shall have the meaning set forth above.
"Demand Registration" shall have the meaning given it in Section 3 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" of a share of Common Stock means, as of a particular
date, (i) if shares of Common Stock are listed on a national securities
exchange, the mean between the highest and
-1-
<PAGE>
lowest sales price per share of Common Stock on the consolidated transaction
reporting system for the principal national securities exchange on which shares
of Common Stock are listed on that date, or, if there shall have been no such
sale so reported on that date, on the last preceding date on which such a sale
was so reported, (ii) if shares of Common Stock are not so listed but are quoted
on the Nasdaq National Market, the mean between the highest and lowest sales
price per share of Common Stock reported by the Nasdaq National Market on that
date, or, if there shall have been no such sale so reported on that date, on the
last preceding date on which such a sale was so reported, (iii) if the Common
Stock is not so listed or quoted, the mean between the closing bid and asked
price on that date, or, if there are no quotations available for that date, on
the last preceding date for which those quotations are available, as reported by
the Nasdaq Stock Market, or, if not reported by the Nasdaq Stock Market, by the
National Quotation Bureau Incorporated, or (iv) if shares of Common Stock are
not publicly traded, the most recent value determined by an independent
appraiser appointed by the Company for that purpose.
"Holder" shall mean any Person holding Registrable Securities.
"Inspectors" shall have the meaning given it in Section 5(a)(xiii) hereof.
"Management Stockholders" shall mean Larry E. Reimert, Gary D. Smith and J.
Mike Walker and each of their permitted successors and assigns.
"Person" shall mean any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or a political subdivision, agency or
instrumentality thereof or other entity or organization of any kind.
"Piggy-back Registration" shall have the meaning given it in Section 2(a)
hereof.
"Records" shall have the meaning given it in Section 5(a)(xiii) hereof.
"Registrable Securities" shall mean (i) the outstanding shares of Common
Stock held by the Stockholders as of the date hereof, (ii) shares of Common
Stock issuable upon exercise of options to purchase Common Stock granted on the
date of the IPO and (iii) any securities issued in exchange for, as a dividend
on, or in replacement of, or otherwise issued or distributed in respect of
(including securities issued in a stock dividend, split or recombination), any
shares of Common Stock referred to in clause (i) above; provided, however, that
any securities described in clause (i) or (ii) above shall cease to be
Registrable Securities when and to the extent that such securities (A) have been
distributed to the public pursuant to a registration statement covering such
securities that has been declared effective under the Securities Act, (B) may be
freely distributed in accordance with the provisions of Rule 144(k) (or any
similar provision then in force) under the Securities Act, (C) have been
transferred to any Person in a manner such that such securities are deemed to
cease being Registrable Securities pursuant to the provisions of Section 10(h)
of this Agreement, or (D) have been repurchased by the Company.
"Registration Expenses" shall have the meaning given it in Section 6
hereof.
-2-
<PAGE>
"Registration Notice" shall have the meaning given it in Section 2 hereof.
"Requesting Holders" shall have the meaning given it in Section 3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stockholder" and "Stockholders" shall have the meaning set forth above.
2. PIGGY-BACK REGISTRATION RIGHTS.
(a) Whenever the Company proposes to file a registration statement under
the Securities Act with the Commission with respect to an offering of Common
Stock for cash by the Company for its own account or for the account of any
other Person, other than a registration relating to the offering or issuance of
Common Stock in connection with (i) employee compensation or benefit plans on
Form S-8 or (ii) one or more acquisition transactions under a registration
statement on Form S-1 or S-4 (or their successor forms), then the Company shall
in each case give written notice (a "Registration Notice") of such proposed
filing to the Holders at least 20 days before the anticipated filing date. Such
notice shall specify the approximate date on which the Company proposes to file
such registration statement and shall offer the Holders the opportunity to
register such number of Registrable Securities as each such Holder may request
(a "Piggy-back Registration"). Each Holder desiring to participate in such
offering shall notify the Company no later than ten days following the receipt
of the Registration Notice of the aggregate number of shares of Registrable
Securities that such Holder desires to sell in the offering. The Company shall
use reasonable efforts to cause the managing underwriter or underwriters of a
proposed underwritten offering to permit the Holders requested to be included in
the registration for such offering to include such securities in such offering
on the same terms and conditions as any similar securities of the Company
included therein. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering advises the Company that the total amount of
Common Stock which the Company, such Holders and any other Persons intend to
include in such offering is sufficiently large to materially and adversely
affect the success of such offering, then the amount of Registrable Securities
to be offered for the accounts of Holders shall be reduced and allocated among
such Holders on a pro rata basis based upon the number of shares of Common Stock
that each such Holder has requested to be included in such registration
statement to the extent necessary, in the opinion of such managing underwriter,
to reduce the total amount of securities to be included in such offering to the
amount recommended by such managing underwriter; provided, however, that the
reduction imposed upon Holders shall not be greater, on a percentage basis with
respect to the Registrable Securities requested to be included, than the
reduction imposed upon other Persons whose piggy-back registration rights are
pari passu with those granted hereby with respect to the amount of securities
requested for inclusion in such registration.
(b) The Company may withdraw any registration statement and abandon any
proposed offering initiated by the Company without the consent of any Holder,
notwithstanding the request
-3-
<PAGE>
of any such Holder to participate therein in accordance with this provision, if
the Company determines to do so in its sole discretion.
3. DEMAND REGISTRATION RIGHTS.
(a) At any time after 180 days after the date of the final prospectus
relating to the IPO, any Management Stockholder beneficially owning Registrable
Securities then outstanding may request (the Management Stockholders making such
request being referred to herein as the "Requesting Holders") in writing that
the Company file a registration statement under the Securities Act covering the
registration of all or a part of the shares of Registrable Securities then
beneficially owned by such Requesting Holders (a "Demand Registration");
provided, however, that for such request to be effective, it must request the
registration of Registrable Securities having an aggregate Fair Market Value of
$10 million calculated as of the date the request for Demand Registration is
made; and provided, further, that the Company shall not be obligated to effect
more than six Demand Registrations pursuant to this Section 3, two of which may
be exercised by each of the Management Stockholders. Within ten days of the
receipt of such request, the Company shall give written notice of such request
to all other Holders and shall use its best efforts to effect as soon as
practicable the registration under the Securities Act in accordance with Section
5 hereof (including, without limitation, the execution of an undertaking to file
post-effective amendments) of all shares of Registrable Securities which the
Holders request be registered within 30 days after the mailing of such notice.
If the managing underwriter or underwriters of such offering advises the Company
that the total amount of securities which the Holders intend to include in such
offering is sufficiently large to materially and adversely affect the success of
such offering, then the amount of Registrable Securities to be offered shall be
reduced and allocated among such Holders (other than the Requesting Holder) on a
pro rata basis based upon the number of shares of Common Stock that each such
Holder has requested to be included in such registration statement to the extent
necessary, in the opinion of such lead managing underwriter, to reduce the total
amount of securities to be included in such offering to the amount recommended
by such managing underwriter. In connection with a Demand Registration, the
Requesting Holder in his sole discretion, shall determine whether (a) to proceed
with, withdraw from or terminate such offering, (b) to select, subject to the
approval of the Company, a managing underwriter or underwriters in connection
with such offering, (c) to enter into an underwriting agreement for such
offering, and (d) to take such actions as may be necessary to close the sale of
Registrable Securities contemplated by such offering, including, without
limitation, waiving any conditions to closing such sale that may not have been
fulfilled. In the event such Requesting Holder exercises its discretion under
this Section 3(a) to terminate a proposed Demand Registration, the terminated
Demand Registration shall not constitute a Demand Registration under this
Section 3 if the determination to terminate such Demand Registration (i) follows
the exercise by the Company of any of its rights provided by Section 3(b) or
(c), (ii) results from a material adverse change in the condition (financial or
other), results of operations or business of the Company or (iii) occurs prior
to the effective date of the registration statement. Notwithstanding the
foregoing, a registration will not count as the Demand Registration under this
-4-
<PAGE>
Section 3 unless the Requesting Holder is able to register and sell 100% of the
shares of Registrable Securities requested by him to be included in such
registration.
(b) Notwithstanding the provisions of Section 3(a), if the Company shall
furnish to the Requesting Holders a certificate signed by any Co-Chairman of the
Board of the Company stating that, in the good faith judgment of the Board of
Directors of the Company, it would be detrimental to the Company and its
stockholders for such registration statement to be filed or to become effective
and it is therefore beneficial to defer the filing or effectiveness of such
registration statement, the Company shall have the right to defer such filing or
effectiveness for a period of not more than 90 days after receipt of the request
of the Requesting Holders. The Company shall promptly give notice to the
Holders at the end of any delay period under this Section 3(b).
(c) Notwithstanding the foregoing provisions of this Section 3, if at the
time of any request by the Requesting Holders for a Demand Registration, the
Company has fixed plans to file within 90 days after such request for the sale
of any of its securities in a public offering under the Securities Act, no
Demand Registration shall be initiated under this Section 3 until 90 days after
the effective date of such registration unless the Company is no longer
proceeding diligently to effect such registration; provided, however, that the
Company shall provide the holders of Registrable Securities the right to
participate in such public offering pursuant to, and subject to, the provisions
of Section 2 hereof.
4. HOLDBACK AGREEMENTS; REQUIREMENTS OF HOLDERS.
(a) Restrictions on Public Sale by Holders of Registrable Securities. To
the extent not inconsistent with applicable law, each Holder agrees not to
effect any public sale or other distribution of equity securities of the Company
(or any securities convertible into or exchangeable or exercisable for equity
securities of the Company) during the 90-day period beginning on the effective
date of a registration statement filed by the Company with the Commission
(except for securities that may be included in such registration pursuant to the
provisions hereof or otherwise), but only if and to the extent requested in
writing by the Company or the managing underwriter or underwriters in the case
of an underwritten public offering.
(b) Cooperation by Holders. The offering of Registrable Securities by any
Holder shall comply in all respects with the applicable terms, provisions and
requirements set forth in this Agreement, and such Holder shall timely provide
the Company with all information and materials required to be included in a
registration statement that relate to such Holder, and to take all such action
as may be reasonably required in order not to delay the registration and
offering of the securities by the Company. The Company shall have no obligation
to include in such registration statement shares of a Holder who has failed to
furnish such information which, in the written opinion of counsel to the
Company, is required in order for the registration statement to be in compliance
with the Securities Act.
-5-
<PAGE>
5. REGISTRATION PROCEDURES.
(a) Whenever any Registrable Securities are to be registered pursuant to
Section 2 or 3 of this Agreement, the Company will use reasonable efforts to
effect the registration of such Registrable Securities as contemplated by such
Section. In connection with any Piggy-back Registration or Demand Registration,
the Company will, subject to Section 2 or 3 hereof (as applicable), as
expeditiously as possible:
(i) prepare and file with the Commission a registration statement
which includes the Registrable Securities and use its best efforts to cause
such registration statement to become and remain effective for a period of
at least 90 days (or such shorter period during which holders shall have
sold all Registrable Securities that they requested to be registered);
provided, however, that such 90-day period shall be extended for a period
equal to the period that a Stockholder agrees to refrain from selling any
securities included in such registration statement in accordance with
Section 5(b) hereof;
(ii) prepare and file with the Commission such amendments (including
post-effective amendments) to the registration statement, and such
supplements to the related prospectus as may be necessary (i) to keep the
registration statement effective, (ii) to appropriately reflect the plan of
distribution of the securities registered thereunder, (iii) for so long
thereafter as a dealer is required by law to deliver a prospectus in
connection with the offer and sale of the shares of Registrable Securities
covered by such registration statement and/or (iv) so that neither such
registration statement nor the related prospectus shall contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading and so that such registration statement and the related
prospectus will otherwise comply with applicable legal requirements;
(iii) provide to any Holder requesting to include shares of
Registrable Securities in such registration statement and a single counsel
for all holders of Registrable Securities requesting to include shares of
Registrable Securities in such registration statement, which counsel shall
be selected by the holders of a majority of shares of Registrable
Securities requested to be included in such registration statement in the
case of a registration under Section 2 hereof, and by the Requesting Holder
in the case of a registration under Section 3 hereof, and shall be
reasonably satisfactory to the Company, an opportunity to review and
provide comments with respect to such registration statement (and any post-
effective amendment thereto) prior to such registration statement (or post-
effective amendment) becoming effective;
(iv) furnish to any Holder of Registrable Securities included in such
registration statement and the underwriter or underwriters thereof, if any,
without charge, such number of conformed copies of the registration
statement and any post-effective amendment thereto and such number of
copies of the prospectus (including each preliminary prospectus) and any
-6-
<PAGE>
amendments or supplements thereto, and any documents incorporated by
reference therein, as such Holder or underwriter may reasonably request in
order to facilitate the disposition of the Registrable Securities being
sold by such Holder (it being understood that the Company consents to the
use of the prospectus and any amendment or supplement thereto by each
Holder of Registrable Securities covered by the registration statement and
the underwriter or underwriters thereof, if any, in connection with the
offering and sale of the Registrable Securities covered by the prospectus
or any amendment or supplement thereto);
(v) notify each Holder of Registrable Securities included in such
registration statement, and the managing underwriters participating in the
distribution pursuant to such registration statement promptly (A) when the
Company is informed that such registration statement or any post-effective
amendment to such registration statement becomes effective, (B) of any
request by the Commission for an amendment or any supplement to such
registration statement or any related prospectus, (C) of the issuance by
the Commission of any stop order suspending the effectiveness of such
registration statement or of any order preventing or suspending the use of
any related prospectus or the initiation or threat of any proceeding for
that purpose, (D) of the suspension of the qualification of any shares of
Registrable Securities included in such registration statement for sale in
any jurisdiction or the initiation or threat of a proceeding for that
purpose, (E) of any determination by the Company that any event has
occurred which makes untrue any statement of a material fact made in such
registration statement or any related prospectus or which requires the
making of a change in such registration statement or any related prospectus
in order that the same will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (F) of the
completion of the distribution contemplated by such registration statement
if it relates to an offering by the Company;
(vi) if at any time the Commission shall issue any stop order
suspending the effectiveness of a registration statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the
Registrable Securities under state securities or Blue Sky laws, the Company
shall use its best efforts to obtain the withdrawal or lifting of such
order at the earliest possible time;
(vii) upon the occurrence of any event (A) contemplated by Section
5(a)(v)(E) above or (B) that would cause such registration statement or the
prospectus contained therein not to be effective and usable for resale of
the Registrable Securities, the Company shall, as promptly as practicable
thereafter, prepare and file with the Commission a post-effective amendment
to the registration statement of a supplement to the related prospectus so
that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts to cause such amendment to
be declared effective and
-7-
<PAGE>
such registration statement and the related prospectus to become usable for
their intended purpose(s) as soon as practicable thereafter;
(viii) use its best efforts to cause all Registrable Securities
included in such registration statement to be listed, by the date of the
first sale of Registrable Securities pursuant to such registration
statement, on each securities exchange (including, for this purpose, the
Nasdaq National Market) on which the Common Stock of the Company is then
listed or proposed to be listed, if any;
(ix) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and use reasonable efforts to make
generally available to its securities holders within 18 months after the
effective date of the applicable registration statement an earnings
statement satisfying the provisions of Section 11(a) of the Securities Act;
(x) as promptly as practicable after filing with the Commission of any
document which is incorporated by reference into a registration statement,
deliver a copy of such document to each Holder of Registrable Securities
covered by such registration statement who requests such document;
(xi) on or prior to the date on which the registration statement is
declared effective, use its best efforts to register or qualify, and
cooperate with the Holders of Registrable Securities included in such
registration statement, the underwriter or underwriters thereof, if any,
and their counsel, in connection with the registration or qualification of
the Registrable Securities covered by the registration statement for offer
and sale under the securities or Blue Sky laws of each state and other
jurisdiction of the United States as any such Holder or underwriter
reasonably requests in writing, to use reasonable efforts to keep each such
registration or qualification effective, including through new filings, or
amendments or renewals, during the period such registration statement is
required to be kept effective and to do any and all other acts or things
necessary or advisable to enable the disposition in all such jurisdictions
of the Registrable Securities covered by the applicable registration
statement; provided, that the Company will not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service
of process or taxation in any such jurisdiction where it is not then so
subject;
(xii) cooperate with the Holders of Registrable Securities covered by
the registration statement and the managing underwriter or underwriters
thereof, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing securities
to be sold under the registration statement, and enable such securities to
be in such denominations and registered in such names as the managing
underwriter or underwriters, if any, or such Holders may request, subject
to the underwriters' obligation to return any certificates representing
securities not sold;
-8-
<PAGE>
(xiii) make available for inspection by any Holder of Registrable
Securities included in such registration statement, any underwriter
participating in any disposition pursuant to such registration statement,
and any attorney, accountant or other agent retained by any such seller or
underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to enable
them to exercise their due diligence responsibilities, and cause the
Company's officers, directors and employees to supply all Records
reasonably requested by any such Inspector in connection with such
registration statement; provided, that with respect to any Records that are
confidential, the Inspectors shall execute such confidentiality agreements
as the Company may reasonably request in order to ensure that the
confidentiality of confidential Records will be maintained;
(xiv) use its best efforts to obtain a "cold comfort" letter from the
Company's independent public accountants in customary form and covering
such matters of the type customarily covered by cold comfort letters as the
Holders of a majority of the Registrable Securities being sold may
reasonably request;
(xv) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(xvi) enter into such customary agreements (including an underwriting
agreement in customary form) as the underwriters, if any, may reasonably
request in order to expedite or facilitate the disposition of such shares
of Registrable Securities; and
(xvii) take such other actions as are reasonable and necessary to
comply with the requirements of the Securities Act.
(b) Each Holder, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5(a)(v)(E), will
forthwith discontinue disposition of the Registrable Securities until such
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 5(a)(vii) or until it is advised in writing by the
Company that the use of the prospectus may be resumed, and has received copies
of any additional or supplemental filings that are incorporated by reference in
the prospectus, and, if so directed by the Company, such Holder will, or will
request the managing underwriter or underwriters of such Registrable Securities,
if any, to deliver to the Company (at the Company's expense) all copies in their
possession or control, other than permanent file copies then in such Holder's
possession, of the prospectus covering such Registrable Securities current at
the time of receipt of such notice.
(c) If such registration statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (i) the insertion therein of language, in form and
substance satisfactory to such Holder, to the effect that the holding by such
Holder of such securities is not to be construed as a recommendation of such
Holder of the investment quality of the Company's securities covered thereby and
that such holding does not imply
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that such Holder will assist in meeting any future financial requirements of the
Company, or (ii) in the event that such reference to such Holder by name or
otherwise is not required by the Securities Act (or the rules or regulations
thereunder) or any similar federal statute (or regulation) then in force, the
deletion of the reference to such Holder.
6. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all Commission or National
Association of Securities Dealers, Inc. registration and filing fees, fees and
expenses (other than the pro rata portion of filing fees attributable, as
required by state law, to the securities to be sold) of compliance with
securities or Blue Sky laws (including fees and disbursements of counsel in
connection with Blue Sky qualifications of the Registrable Securities), printing
expenses, messenger and delivery expenses, internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the fees and expenses incurred in connection with
the listing of the securities to be registered on each securities exchange
(including, for this purpose, the Nasdaq National Market) on which similar
securities issued by the Company are then listed, fees and disbursements of
counsel for the Company and its independent certified public accountants
(including the expenses of any special audit or "cold comfort" letters required
by or incident to such performance), fees and disbursements of counsel for the
Holders, the fees and expenses of any special experts retained by the Company in
connection with such registration, and any out-of-pocket expenses of the Holders
of Registrable Securities incurred in connection with the registration of
Registrable Securities, excluding any underwriting fees, discounts or
commissions attributable to the sale of Registrable Securities (all such
expenses being herein called "Registration Expenses"), will be borne by the
Company; provided, that, with respect to the fees and expenses of legal counsel
for the Holders of Registrable Securities, the Company shall only be obligated
to pay the fees and expenses of one firm of legal counsel retained by Holders as
selected in accordance with Section 5(a)(iii) hereof. All Registration Expenses
will be paid by the Company whether or not the related registration statement is
declared effective. All expenses of Holders of Registrable Securities incident
to this Agreement which are not required to be paid for by the Company pursuant
to this Section 6 (including, without limitation, all underwriting commissions
and discounts applicable to shares of Registrable Securities included in a
registration statement pursuant to this Agreement) shall be paid by Holders of
Registrable Securities included or to be included in a registration statement,
with such Holders each paying their own expenses and a pro rata part (based on
the same proportion that the number of a Holder's Registrable Securities
included or to be included in the registration statement bears to the total
number of all Holders' Registrable Securities included or to be included in the
registration statement) of the common expenses of such Holders.
(b) Notwithstanding anything herein to the contrary, each seller of
Registrable Securities shall pay such portion of the Registration Expenses as
may be required by applicable law.
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7. INDEMNIFICATION; CONTRIBUTION.
(a) Indemnification by the Company. The Company will indemnify and hold
harmless, to the full extent permitted by law, each Holder which is a seller of
Registrable Securities covered by such registration statement, its officers,
directors, employees, agents and general or limited partners (and the directors,
officers, employees and agents thereof) and each other Person, if any, who
controls such Holder (within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act) (collectively, the "Holder Indemnitees")
from and against any loss, claim, damage, liability or action, joint or several,
to which any such Holder Indemnitee may become subject under the Securities Act,
at common law or otherwise, insofar as such loss, claim, damage, liability or
action arises out of or is based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any registration statement in which
such Registrable Securities were included as contemplated hereby or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (ii) any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary, final or summary prospectus, together with the documents
incorporated by reference therein (as amended or supplemented if the Company
shall have filed with the Commission any amendment thereof or supplement
thereto), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and in each such case the Company will reimburse each such Holder
Indemnitee for any legal or any other expenses incurred by him in connection
with investigating, defending or preparing to defend any such loss, claim,
damage, liability or action as such expenses are incurred; provided, that the
Company shall not be liable to any such Holder Indemnitee in any such case to
the extent that any such loss, claim, damage, liability or action arises out of
or is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement or amendment thereof or
supplement thereto, or in any such preliminary, final or summary prospectus, in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any such Holder Indemnitee relating to such Holder
Indemnitee specifically for inclusion therein; and provided, further, that the
Company shall not be liable to any such Holder Indemnitee with respect to any
preliminary prospectus to the extent that any such loss, claim, damage,
liability or expense of such Holder Indemnitee results from the fact that such
Holder Indemnitee sold Registrable Securities to a person to whom there was not
sent or given, at or prior to the written confirmation of such sale, a copy of
the prospectus (excluding documents incorporated by reference) or of the
prospectus as then amended or supplemented (excluding documents incorporated by
reference) if the Company has previously furnished copies thereof to such Holder
Indemnitee in compliance with Section 5 of this Agreement and the loss, claim,
damage, liability or expense of such Holder Indemnitee results from an untrue
statement or omission of a material fact contained in such preliminary
prospectus which was corrected in the prospectus (or the prospectus as amended
or supplemented). Such indemnity and reimbursement of expenses shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Holder Indemnitee and shall survive the transfer of such securities by such
Holder.
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(b) Conduct of Indemnification Proceeding. Promptly after receipt by a
Holder Indemnitee under Section 7(a) above of notice of the commencement of any
action, suit, proceeding, investigation or threat thereof made in writing with
respect to which a claim for indemnification may be made pursuant to this
Section 7, such Holder Indemnitee shall, if a claim in respect thereto is to be
made against the Company, give written notice to the Company of the threat or
commencement thereof; provided that the failure so to notify the Company shall
not relieve it from any liability which it may have to any Holder Indemnitee
except to the extent that the Company is actually prejudiced by such failure to
give notice; and provided, further that the failure to notify the Company shall
not relieve it from any liability the Company may have to an Holder Indemnitee
otherwise than under this Section 7. In case any such claim, action, suit,
proceeding or investigation shall be brought against any Holder Indemnitee and
it shall notify the Company of the threat or commencement thereof, the Company
shall be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such Holder Indemnitee.
Such Holder Indemnitee shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Holder Indemnitee unless (i) the
Company has agreed to pay such fees and expenses or (ii) the named parties to
any such action or proceeding include both such Holder Indemnitee and the
Company, and such Holder Indemnitee shall have been advised by counsel that
there may be one or more legal defenses available to such Holder Indemnitee
which are different from or additional to those available to the Company, in
which case, if such Holder Indemnitee notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company, the Company
shall not have the right to assume the defense of such action or proceeding on
behalf of such Holder Indemnitee; it being understood, however, that the Company
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all Holder Indemnitees. The Company
shall not (i) without the prior written consent of the Holder Indemnitee (which
consent shall not be unreasonably withheld), settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the Indemnitee is an actual or potential
party to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each Holder Indemnitee from all liability
arising out of such claim, action, suit or proceeding or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the Company or if there be a final judgment of the plaintiff in any such action,
the Company agrees to indemnify and hold harmless any Holder Indemnitee from and
against any loss or liability by reason of such settlement or judgment.
(d) Indemnification and Contribution of Underwriters. In connection with
any underwritten offering contemplated by this Agreement that includes
Registrable Securities, the Company will agree to customary provisions for
indemnification and contribution (consistent with
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the other provisions of this Section 7, except as may be otherwise agreed in
writing by the Company) in respect of losses, claims, damages, liabilities and
expenses of the underwriters of such offering.
8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may
participate in any underwritten registration hereunder unless such Holder (a)
agrees to sell such Holder's securities on the terms of and on the basis
provided in any underwriting arrangements approved by the Company and (b)
completes and executes all questionnaires, powers of attorney, custody
agreements, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements.
9. RULE 144. The Company covenants that, upon any registration statement
covering Company securities becoming effective, it will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the Commission thereunder (or, if the Company
is not required to file such reports, it will, upon the request of any Holder,
make publicly available other nonconfidential information so long as necessary
to permit sales under Rule 144 under the Securities Act), and it will take such
other action as any Holder may reasonably request, all to the extent required
from time to time to enable such Holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (b) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any Holder, the Company will deliver to
such Holder a written statement as to whether it has complied with such
requirements.
10. MISCELLANEOUS.
(a) Recapitalizations, Exchanges, etc. The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to the Registrable
Securities, to any and all shares of equity capital of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) that may be issued in respect of, in exchange for, or in
substitution of the Registrable Securities, in each case as the amounts of such
securities outstanding are appropriately adjusted for any equity dividends,
splits, reverse splits, combinations, recapitalizations and the like occurring
after the date of this Agreement.
(b) Notices. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed (i) if to Company, to: 13550 Hempstead Highway, Houston, Texas 77040,
Attention: Co-Chairman of the Board, (ii) if to a Stockholder, at such
Stockholder's address as shown on the stock transfer records of the Company, or
to such other address (as to a Stockholder) as such Stockholder may furnish to
the Company, or (as to the Company) as the Company may furnish to the
Stockholders except that notices of changes of address shall be effective only
upon receipt.
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(c) Applicable Law. This contract is entered into under, and shall be
construed in accordance with and governed for all purposes by, the laws of the
State of Texas, without regard to any principles of conflict of laws that, if
applied, might permit or require the application of the laws of a different
jurisdiction.
(d) Amendment and Waiver. This Agreement may be amended, and the
provisions hereof may be waived, only by a written instrument signed by (i) the
Holders of a majority of the Registrable Securities outstanding as of the date
of such determination and (ii) the Company; provided, that no amendment to this
Agreement may be made that materially and adversely affects the rights of any
Holder under this Agreement without the express written consent of such Holder.
No failure by either party hereto at any time to give notice of any breach by
the other party of, or to require compliance with, any condition or provision of
this Agreement shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
(e) Severability. It is a desire and intent of the parties that the terms,
provisions, covenants and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant or remedy of this Agreement or the application thereof to
any Person or circumstances shall, to any extent, be construed to be invalid or
unenforceable in whole or in part, then such term, provision, covenant or remedy
shall be construed in a manner so as to permit its enforceability under the
applicable law to the fullest extent permitted by law. In any case, the
remaining provisions of this Agreement or the application thereof to any Person
or circumstances other than those to which they have been held invalid or
unenforceable shall remain in full force and effect.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement.
(g) Headings; Use of Certain Terms. The section and paragraph headings in
this Agreement have been inserted for purposes of convenience of reference only
and shall not be used for interpretive purposes. As used in this Agreement, the
words "herein", "hereof", and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular paragraph,
subparagraph, section, subsection, or other subdivision. Whenever the context
may require, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns, pronouns
and verbs shall include the plural and vice versa.
(h) Binding Effect; Transfer of Rights Under this Agreement. Unless
otherwise provided herein, the provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and permitted assigns, and is not intended to
confer upon any other Person any right or remedies hereunder; provided, however,
that the rights and obligations of a Holder under this Agreement may be
transferred or assigned by a Holder only if such transferee (or such
distributee) shall, in connection with the transfer of such
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Registrable Securities, provide the Company with a duly executed addendum to
this Agreement, in form and substance reasonably satisfactory to the Company,
pursuant to which such transferee (or distributee) expressly and without
qualification (i) assumes all of the obligations of its transferor hereunder and
(ii) agrees itself to be bound by the terms hereof; provided, further, that any
such transfer shall not operate to release the transferring Holder from any of
its obligations hereunder existing on the date of such transfer. In the event
any Registrable Securities are transferred (or distributed) to a person who does
not provide the addendum referred to above in this Section 10(h), such
Registrable Securities shall be deemed to have ceased to be Registrable
Securities effective upon such transfer (or distribution).
(i) Entire Agreement; Termination. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
DRIL-QUIP, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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STOCKHOLDERS
------------
SHARES OWNED AT
STOCKHOLDERS TIME OF EXECUTION
- ------------ -----------------
- ------------------------------
Larry E. Reimert
- ------------------------------
Gary D. Smith
- ------------------------------
J. Mike Walker
- ------------------------------
Gary W. Loveless
REIMERT FAMILY PARTNERS, LTD.
By:
---------------------------
Larry E. Reimert, Managing
General Partner
FOUR SMITH'S COMPANY, LTD.
By:
---------------------------
Gary D. Smith, Managing
General Partner
LOVELESS ENTERPRISES, LTD.
By: LOVELESS ENTERPRISES, L.L.C.,
Its General Partner
By:
---------------------------
Gary W. Loveless, Manager
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<PAGE>
EXHIBIT 4.3
DRIL-QUIP, INC.
AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
RIGHTS AGENT
________________
RIGHTS AGREEMENT
DATED AS OF OCTOBER 17, 1997
<PAGE>
TABLE OF CONTENTS
Section 1. Certain Definitions............................................... 1
Section 2. Appointment of Rights Agent....................................... 9
Section 3. Issue of Rights Certificates...................................... 9
Section 4. Form of Rights Certificates....................................... 10
Section 5. Countersignature and Registration................................. 11
Section 6. Transfer, Split-Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen
Rights Certificates............................................... 12
Section 7. Exercise of Rights; Purchase Price................................ 12
Section 8. Cancellation and Destruction of Rights Certificates............... 14
Section 9. Reservation and Availability of Capital Stock..................... 15
Section 10. Preferred Stock Record Date...................................... 16
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights....................................... 17
Section 12. Certificate of Adjusted Purchase Price or Number of Shares....... 24
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.................................................... 24
Section 14. Fractional Rights and Fractional Shares.......................... 27
Section 15. Rights of Action................................................. 28
Section 16. Agreement of Rights Holders...................................... 28
Section 17. Rights Certificate Holder Not Deemed a Stockholder............... 29
Section 18. Concerning the Rights Agent...................................... 29
Section 19. Merger or Consolidation or Change of Name of Rights Agent........ 30
Section 20. Duties of Rights Agent........................................... 30
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Section 21. Change of Rights Agent........................................ 32
Section 22. Issuance of New Rights Certificates........................... 33
Section 23. Redemption and Termination.................................... 34
Section 24. Exchange...................................................... 34
Section 25. Notice of Certain Events...................................... 36
Section 26. Notices....................................................... 36
Section 27. Supplements and Amendments.................................... 37
Section 28. Successors.................................................... 38
Section 29. Determinations and Actions by the Board of Directors, etc..... 38
Section 30. Benefits of this Agreement.................................... 38
Section 31. Severability.................................................. 38
Section 32. Governing Law................................................. 39
Section 33. Counterparts.................................................. 39
Section 34. Descriptive Headings.......................................... 39
Exhibit A - Form of Certificate of Designations of Series A Junior
Participating Preferred Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Summary of Rights to Purchase Preferred Stock
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RIGHTS AGREEMENT
This Rights Agreement, dated as of October 17, 1997 (the "Agreement"),
between Dril-Quip, Inc., a Delaware corporation (the "Company"), and ChaseMellon
Shareholder Services, L.L.C. (the "Rights Agent"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, on October 17, 1997 (the "Rights Dividend Declaration Date"),
the Board of Directors of the Company authorized and declared a dividend of one
Right for each share of common stock, par value $.01 per share, of the Company
(the "Common Stock") outstanding at the close of business on October 17, 1997
(the "Record Date"), and has authorized the issuance of one Right (as such
number may hereinafter be adjusted pursuant to the provisions of Section 11(p)
hereof) for each share of Common Stock of the Company issued (whether originally
issued or delivered from the Company's treasury) between the Record Date and the
earlier of the Distribution Date (as hereinafter defined) and the Expiration
Date (as hereinafter defined), and, in certain circumstances provided for in
Section 22 hereof, after the Distribution Date, each Right initially
representing the right to purchase one Fractional Share (as hereinafter defined)
of Series A Junior Participating Preferred Stock of the Company, upon the terms
and subject to the conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms shall have the meanings indicated:
"Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding, but shall not
include any Exempt Person or any Major Stockholder; provided, however, that a
Person shall not be or become an Acquiring Person if such Person, together with
its Affiliates and Associates, shall become the Beneficial Owner of 15% or more
of the shares of Common Stock then outstanding solely as a result of a reduction
in the number of shares of Common Stock outstanding due to the repurchase of
Common Stock by the Company, unless and until such time as such Person or any
Affiliate or Associate of such Person shall purchase or otherwise become the
Beneficial Owner of additional shares of Common Stock constituting 1% or more of
the then outstanding shares of Common Stock or any other Person (or Persons) who
is (or collectively are) the Beneficial Owner of shares of Common Stock
constituting 1% or more of the then outstanding shares of Common Stock shall
become an Affiliate or Associate of such Person, unless, in either such case,
such Person, together with all Affiliates and Associates of such Person, is not
then the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding; provided further, that an Individual Major Stockholder Transferee
who as a result of a transfer of Common Stock from an Individual Major
Stockholder or an Individual Major Stockholder Transferee becomes the Beneficial
Owner of 15% or more of the outstanding Common Stock will
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not be deemed to be an Acquiring Person, unless and until such Individual Major
Stockholder Transferee, together with his Affiliates and Associates, becomes the
Beneficial Owner of additional shares of Common Stock constituting 1% or more of
the then-outstanding shares of Common Stock or any other Person who is the
Beneficial Owner of at least 1% of the then-outstanding shares of Common Stock
becomes an Affiliate or Associate of such Individual Major Stockholder
Transferee; and provided, further, that if the Board of Directors, with the
concurrence of a majority of the members of the Board of Directors who are not,
and are not representatives, nominees, Affiliates or Associates of, such Person
or an Acquiring Person, determines in good faith that a Person that would
otherwise be an "Acquiring Person" has become such inadvertently (including,
without limitation, because (i) such Person was unaware that it beneficially
owned a percentage of Common Stock that would otherwise cause such Person to be
an "Acquiring Person", (ii) such Person was aware of the extent of its
Beneficial Ownership of Common Stock but had no actual knowledge of the
consequences of such Beneficial Ownership under this Agreement or (iii) such
Person was otherwise exempted from this definition of Acquiring Person because
it is Reimert Family Partners, Ltd. or Four Smith's Company, Ltd. or an Estate
Planning Vehicle that is or becomes an Individual Major Stockholder Transferee,
and such Person thereafter became an Acquiring Person as a result of a change in
the ownership of such Person and such Person (and any other Person causing such
change in ownership) had no actual knowledge of the consequences of such change
in ownership of this Agreement) and without any intention of changing control of
the Company, and if such Person as promptly as practicable divested or divests
itself of Beneficial Ownership of a sufficient number of shares of Common Stock
so that such Person would no longer be an "Acquiring Person," then such Person
shall not be deemed to be or to have become an "Acquiring Person" for any
purposes of this Agreement.
At any time that the Rights are redeemable, the Board of Directors
may, generally or with respect to any specified Person or Persons, determine to
increase to a specified percentage greater than that set forth herein or
decrease to a specified percentage lower than that set forth herein or determine
a number of shares to be (but in no event less than or equal to the percentage
or number of shares of Common Stock then beneficially owned by such Person), the
level of Beneficial Ownership of Common Stock at which a Person or such Person
or Persons becomes an Acquiring Person.
"Adjustment Shares" shall have the meaning set forth in Section
11(a)(ii) hereof.
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act, as in effect on the
date of this Agreement.
"Associate" shall mean, with reference to any Person, (1) any
corporation, firm, partnership, association, unincorporated organization or
other entity (other than the Company or a Subsidiary of the Company) of which
such Person is an officer or general partner (or officer or general partner of a
general partner) or is, directly or indirectly, the Beneficial Owner of 10% or
more of any class of equity securities, (2) any trust or other estate in which
such Person has a substantial beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary
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<PAGE>
capacity and (3) any relative or spouse of such Person, or any relative of such
spouse, who has the same home as such Person.
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, is the "beneficial owner" of (as
determined pursuant to Rule 13d-3 of the General Rules and Regulations
under the Exchange Act as in effect on the date of this Agreement) or
otherwise has the right to vote or dispose of, including pursuant to any
agreement, arrangement or understanding (whether or not in writing);
provided, however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," any security under this subparagraph (i) as a
result of an agreement, arrangement or understanding to vote such security
if such agreement, arrangement or understanding: (A) arises solely from a
revocable proxy or consent given in response to a public (i.e., not
including a solicitation exempted by Rule 14a-2(b)(2) of the General Rules
and Regulations under the Exchange Act as in effect on the date of this
Agreement) proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the General Rules and
Regulations under the Exchange Act and (B) is not then reportable by such
Person on Schedule 13D under the Exchange Act (or any comparable or
successor report);
(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right or obligation to acquire
(whether such right or obligation is exercisable or effective immediately
or only after the passage of time or the occurrence of an event) pursuant
to any agreement, arrangement or understanding (whether or not in writing)
or upon the exercise of conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided, however, that a Person shall
not be deemed the "Beneficial Owner" of, or to "beneficially own," (A)
securities tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange, or (B) securities
issuable upon exercise of Rights at any time prior to the occurrence of a
Triggering Event, or (C) securities issuable upon exercise of Rights from
and after the occurrence of a Triggering Event which Rights were acquired
by such Person or any of such Person's Affiliates or Associates prior to
the Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) or (p) hereof in connection
with an adjustment made with respect to any Original Rights; or
(iii) that are beneficially owned, directly or indirectly, by (A) any
other Person (or any Affiliate or Associate thereof) with which such Person
or any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in writing) for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy or consent
as described in the proviso to subparagraph (i) of this definition) or
disposing of any voting securities of the Company or (B) any group (as that
term is used in Rule 13d-5(b) of
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the General Rules and Regulations under the Exchange Act) of which such
Person is a member;
provided, however, that nothing in this definition shall cause a Person engaged
in business as an underwriter of securities to be the "Beneficial Owner" of, or
to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting (including without
limitation securities acquired pursuant to stabilizing transactions to
facilitate a public offering in accordance with Rule 10b-7 promulgated under the
Exchange Act, or to cover overallotments created in connection with a public
offering) until the expiration of forty days after the date of such acquisition;
provided further, however, that no such Person shall be deemed to be an
Acquiring Person as a result of such Person's participation as an underwriter in
the Company's initial public offering. For purposes of this Agreement, "voting"
a security shall include voting, granting a proxy, acting by consent, making a
request or demand relating to corporate action (including, without limitation,
calling a stockholder meeting) or otherwise giving an authorization (within the
meaning of Section 14(a) of the Exchange Act as in effect on the date of this
Agreement) in respect of such security.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"close of business" on any given date shall mean 5:00 p.m., New York
time, on such date; provided, however, that if such date is not a Business Day,
it shall mean 5:00 p.m., New York time, on the next succeeding Business Day.
"Closing Price" of a security for any day shall mean the last sales
price, regular way, on such day or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, on such day,
in either case as reported in the principal transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange, or, if such security is not listed or admitted to trading on the New
York Stock Exchange, on the principal national securities exchange on which such
security is listed or admitted to trading, or, if such security is not listed or
admitted to trading on any national securities exchange but sales price
information is reported for such security, as reported by NASDAQ or such other
self-regulatory organization or registered securities information processor (as
such terms are used under the Exchange Act) that then reports information
concerning such security, or, if sales price information is not so reported, the
average of the high bid and low asked prices in the over-the-counter market on
such day, as reported by NASDAQ or such other entity, or, if on such day such
security is not quoted by any such entity, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in such
security selected by the Board of Directors of the Company. If on such day no
market maker is making a market in such security, the fair value of such
security on such day as determined in good faith by the Board of Directors of
the Company shall be used.
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"Common Stock" shall mean the common stock, par value $.01 per share,
of the Company, except that "Common Stock" when used with reference to equity
interests issued by any Person other than the Company shall mean the capital
stock of such Person with the greatest voting power, or the equity securities or
other equity interest having power to control or direct the management, of such
Person.
"Common Stock Equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Company" shall mean the Person named as the "Company" in the preamble
of this Agreement until a successor Person shall have become such or until a
Principal Party shall assume, and thereafter be liable for, all obligations and
duties of the Company hereunder, pursuant to the applicable provisions of this
Agreement, and thereafter "Company" shall mean such successor Person or
Principal Party.
"Current Market Price" shall have the meaning set forth in Section
11(d) hereof.
"Current Value" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Distribution Date" shall mean the earlier of (i) the close of
business on the tenth day (or, if such Stock Acquisition Date results from the
consummation of a Permitted Offer, such later date as may be determined by the
Company's Board of Directors as set forth below before the Distribution Date
occurs) after the Stock Acquisition Date (or, if the tenth day after the Stock
Acquisition Date occurs before the Record Date, the close of business on the
Record Date) or (ii) the close of business on the tenth Business Day (or such
later date as may be determined by the Company's Board of Directors as set forth
below before the Distribution Date occurs) after the date that a tender offer or
exchange offer by any Person (other than any Exempt Person) is first published
or sent or given within the meaning of Rule 14d-2(a) of the General Rules and
Regulations under the Exchange Act as then in effect, if upon consummation
thereof, such Person would be an Acquiring Person, other than a tender or
exchange offer that is determined before the Distribution Date occurs to be a
Permitted Offer. The Board of Directors of the Company may, to the extent set
forth in the preceding sentence, defer the date set forth in clause (i) or (ii)
of the preceding sentence to a specified later date or to an unspecified later
date to be determined by a subsequent action or event (but in no event to a date
later than the close of business on the tenth day after the first occurrence of
a Triggering Event).
"Equivalent Preferred Stock" shall have the meaning set forth in
Section 11(b) hereof.
"Estate Planning Vehicle" shall mean a trust, family partnership or
similar family-related or family-controlled entity, all of the interests of
which are owned by an Individual Major Stockholder, a spouse, sibling or lineal
descendant of an Individual Major Stockholder or lineal descendant of a spouse
of an Individual Major Stockholder or any distributees under the will of any of
the foregoing Persons, successors of such Persons by intestate succession or
trusts for the benefit of any of the foregoing Persons.
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"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
"Exempt Person" shall mean the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company,
and any Person organized, appointed or established by the Company for or
pursuant to the terms of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of the Company or any
Subsidiary of the Company.
"Expiration Date" shall mean the earliest of (i) the Final Expiration
Date, (ii) the time at which the Rights are redeemed as provided in Section 23
hereof, (iii) the time at which the Rights expire pursuant to Section 13(d)
hereof and (iv) the time at which all Rights then outstanding and exercisable
are exchanged pursuant to Section 24 hereof.
"Final Expiration Date" shall mean the close of business on October
17, 2007.
"Flip-In Event" shall mean an event described in Section 11(a)(ii)
hereof.
"Flip-In Trigger Date" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Flip-Over Event" shall mean any event described in clause (x), (y) or
(z) of Section 13(a) hereof, but excluding any transaction described in Section
13(d) hereof that causes the Rights to expire.
"Fractional Share" with respect to the Preferred Stock shall mean one
one-hundredth of a share of Preferred Stock.
"Individual Major Stockholders" shall mean Larry E. Reimert, Gary D.
Smith and J. Mike Walker.
"Individual Major Stockholder Transferee" shall mean a transferee from
an Individual Major Stockholder or an Individual Major Stockholder Transferee of
Common Stock previously owned by an Individual Major Stockholder if (a) such
transferee receives such Common Stock directly from an Individual Major
Stockholder by will or intestate succession or (b) such transfer is made (i)
directly from an Individual Major Stockholder or a Person that is an Individual
Major Stockholder Transferee to a spouse, sibling or lineal descendant or lineal
descendant of a spouse, of an Individual Major Stockholder or (ii) directly from
an Individual Major Stockholder or from an Individual Major Stockholder
Transferee to an Estate Planning Vehicle for estate planning purposes; provided,
that an Estate Planning Vehicle shall cease to be an Individual Major
Stockholder Transferee at such time as all of the interests therein cease to be
owned by an Individual Major Stockholder, a spouse, sibling or lineal descendant
of an Individual Major Stockholder or a lineal descendant of a spouse of an
Individual Major Stockholder or any distributees under the will
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of any of the foregoing Persons, successors of such Persons by intestate
succession or trusts for the benefit of any of the foregoing Persons.
"Major Stockholders" shall mean Larry E. Reimert, Gary D. Smith, J.
Mike Walker, Reimert Family Partners, Ltd. and Four Smith's Company, Ltd.;
provided, however, that Reimert Family Partners, Ltd. shall cease to be a Major
Stockholder at such time as all of the interests in such partnership are not
owned by Larry E. Reimert, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing Persons, successors of such Persons by intestate succession, trusts
for the benefit of any of the foregoing Persons and Wave Enterprises, Inc. and
further provided, however, that Four Smith's Company, Ltd. shall cease to be a
Major Stockholder at such time as all of the interests in such partnership are
not owned by Gary D. Smith, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing Persons, successors of such Persons by intestate succession, and
trusts for the benefit of any of the foregoing Persons.
"NASDAQ" shall mean the National Association of Securities Dealers,
Inc. Automated Quotations System.
"Original Rights" shall have the meaning set forth in the definition
of "Beneficial Owner."
"Permitted Offer" shall mean a tender offer or an exchange offer for
all outstanding shares of Common Stock at a price and on terms determined by at
least a majority of the members of the Board of Directors who are not, and are
not representatives, nominees, Affiliates or Associates of, an Acquiring Person
or the person making the offer, after receiving advice from one or more
investment banking firms, to be (a) at a price and on terms that are fair to
stockholders (taking into account all factors that such members of the Board
deem relevant including, without limitation, prices that could reasonably be
achieved if the Company or its assets were sold on an orderly basis designed to
realize maximum value) and (b) otherwise in the best interests of the Company
and its stockholders.
"Person" shall mean any individual, firm, corporation, partnership,
limited liability company, association, trust, unincorporated organization or
other entity.
"Preferred Stock" shall mean shares of Series A Junior Participating
Preferred Stock, par value $.01 per share, of the Company having the rights,
powers and preferences set forth in the form of Certificate of Designations
attached hereto as Exhibit A and, to the extent that there is not a sufficient
number of shares of Series A Junior Participating Preferred Stock authorized to
permit the full exercise of the Rights, any other series of Preferred Stock, par
value $.01 per share, of the Company designated for such purpose containing
terms substantially similar to the terms of the Series A Junior Participating
Preferred Stock.
"Principal Party" shall have the meaning set forth in Section 13(b)
hereof.
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"Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
"Record Date" shall have the meaning set forth in the recitals clause
at the beginning of this Agreement.
"Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.
"Rights" shall have the meaning set forth in the recitals clause at
the beginning of this Agreement.
"Rights Agent" shall mean the Person named as the "Rights Agent" in
the preamble of this Agreement until a successor Rights Agent shall have become
such pursuant to the applicable provisions hereof, and thereafter "Rights Agent"
shall mean such successor Rights Agent. If at any time there is more than one
Person appointed by the Company as Rights Agent pursuant to the applicable
provisions of this Agreement, "Rights Agent" shall mean and include each such
Person.
"Rights Certificates" shall mean the certificates evidencing the
Rights.
"Rights Dividend Declaration Date" shall have the meaning set forth in
the recitals clause at the beginning of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition and Section 23, shall
include, without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.
"Subsidiary" shall mean, with reference to any Person, any corporation
or other Person of which an amount of voting securities sufficient to elect at
least a majority of the directors or other persons performing similar functions
is beneficially owned, directly or indirectly, by such Person, or otherwise
controlled by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Summary of Rights" shall mean the Summary of Rights to Purchase
Preferred Stock sent pursuant to Section 3(b) hereof.
"Trading Day" with respect to a security shall mean a day on which the
principal national securities exchange on which such security is listed or
admitted to trading is open for the transaction of business, or, if such
security is not listed or admitted to trading on any national
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securities exchange but is quoted by NASDAQ, a day on which NASDAQ reports
trades, or, if such security is not so quoted, a Business Day.
"Triggering Event" shall mean any Flip-In Event or any Flip-Over
Event.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to (i) act as agent for the Company and (ii) to take
certain actions in respect of the holders of the Rights (who, in accordance with
Section 3 hereof, shall prior to the Distribution Date also be the holders of
the Common Stock) (although it is expressly agreed that the Rights Agent shall
not act as agent for such holders) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Rights Certificates.
(a) Until the Distribution Date, (x) the Rights will be evidenced
(subject to the provisions of paragraph (b) of this Section 3) by the
certificates for Common Stock registered in the names of the holders of the
Common Stock and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as practicable
after the Distribution Date, the Rights Agent will send by first-class, insured,
postage prepaid mail, to each record holder of the Common Stock as of the close
of business on the Distribution Date (other than any Person referred to in the
first sentence of Section 7(e)), at the address of such holder shown on the
records of the Company, one or more Rights Certificates, evidencing one Right
for each share of Common Stock so held, subject to adjustment as provided
herein. In the event that an adjustment in the number of Rights per share of
Common Stock has been made pursuant to Section 11(p) hereof, at the time of
distribution of the Rights Certificates, the Company shall make the necessary
and appropriate rounding adjustments (in accordance with Section 14(a) hereof)
so that Rights Certificates representing only whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As of and after
the Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.
(b) As promptly as practicable following the Record Date, the Company
will send a copy of a Summary of Rights to Purchase Preferred Stock, in
substantially the form attached hereto as Exhibit C to the record holders of
Common Stock as of the close of business on the Record Date, at the address of
such holder shown on the records of the Company. With respect to certificates
for Common Stock outstanding as of the Record Date, until the Distribution Date
or the earlier surrender for transfer thereof or the Expiration Date, the Rights
associated with the shares of Common Stock represented by such certificates
shall be evidenced by such certificates for Common Stock together with the
Summary of Rights, and the registered holders of the Common Stock shall also be
the registered holders of the associated Rights. Until the earlier of the
Distribution Date or the Expiration Date, the transfer of any of the
certificates for Common Stock outstanding on the Record Date, with or without a
copy of the Summary of Rights, shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
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(c) Rights shall be issued in respect of all shares of Common Stock
that are issued (whether originally issued or delivered from the Company's
treasury) after the Record Date but prior to the earlier of the Distribution
Date or the Expiration Date or, in certain circumstances provided in Section 22
hereof, after the Distribution Date. Certificates issued for shares of Common
Stock that shall so become outstanding or shall be transferred or exchanged
after the Record Date but prior to the earlier of the Distribution Date or the
Expiration Date shall also be deemed to be certificates for Rights, and shall
bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between Dril-Quip, Inc.
(the "Company") and ChaseMellon Shareholder Services, L.L.C. (the "Rights
Agent") dated as of October 17, 1997 as it may from time to time be
supplemented or amended (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at
the principal offices of the Company. Under certain circumstances, as set
forth in the Rights Agreement, such Rights may be redeemed, may be
exchanged, may expire or may be evidenced by separate certificates and will
no longer be evidenced by this certificate. The Company will mail to the
holder of this certificate a copy of the Rights Agreement, as in effect on
the date of mailing, without charge promptly after receipt of a written
request therefor. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS BENEFICIALLY OWNED BY OR TRANSFERRED TO ANY PERSON WHO
IS, WAS OR BECOMES AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), AND CERTAIN
TRANSFEREES THEREOF, WILL BECOME NULL AND VOID AND WILL NO LONGER BE
TRANSFERABLE.
With respect to such certificates containing the foregoing legend, until the
earlier of the Distribution Date or the Expiration Date, the Rights associated
with the Common Stock represented by such certificates shall be evidenced by
such certificates alone, and registered holders of Common Stock shall also be
the registered holders of the associated Rights, and the transfer of any of such
certificates shall also constitute the transfer of the Rights associated with
the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase
and of assignment to be printed on the reverse thereof), when, as and if issued,
shall be substantially in the form set forth in Exhibit B hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or quotation system
on which the Rights may from time to time be listed or quoted, or to conform to
usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights
Certificates, whenever issued, shall be dated as of the Record Date and on their
face shall entitle the holders thereof to purchase such number of Fractional
Shares of Preferred Stock as shall
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be set forth therein at the price set forth therein (such exercise price per
Fractional Share (or, as set forth in this Agreement, for other securities), the
"Purchase Price"), but the amount and type of securities purchasable upon the
exercise of each Right and the Purchase Price thereof shall be subject to
adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by a Person described in the
first sentence of Section 7(e), and any Rights Certificate issued pursuant to
Section 6 or Section 11 hereof upon transfer, exchange, replacement or
adjustment of any such Rights, shall contain (to the extent feasible) the
following legend, modified as applicable to apply to such Person:
The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the Rights
represented hereby [will] [have] become null and void in the circumstances
and with the effect specified in Section 7(e) of such Agreement.
The provisions of Section 7(e) of this Agreement shall be operative whether or
not the foregoing legend is contained on any such Rights Certificate. The
Company shall give notice to the Rights Agent promptly after it becomes aware of
the existence of any Acquiring Person or any Associate or Affiliate thereof.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof, which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be countersigned by the Rights Agent,
either manually or by facsimile signature, and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Rights Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company; and any Rights Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Rights Certificate, shall be a proper officer of the Company to sign such
Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates
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issued hereunder. Such books shall show the names and addresses of the
respective holders of the Rights Certificates, the number of Rights evidenced on
its face by each of the Rights Certificates and the certificate number and the
date of each of the Rights Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e), Section
13(d), Section 14 and Section 24 hereof, at any time after the close of business
on the Distribution Date, and at or prior to the close of business on the
Expiration Date, any Rights Certificate or Rights Certificates may be
transferred, split up, combined or exchanged for another Rights Certificate or
Rights Certificates, entitling the registered holder to purchase a like number
of Fractional Shares of Preferred Stock (or, following a Triggering Event,
Common Stock, other securities, cash or other assets, as the case may be) as the
Rights Certificate or Rights Certificates surrendered then entitled such holder
(or former holder in the case of a transfer) to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Rights Certificate or
Rights Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Rights Certificate or Rights Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) thereof or of the Affiliates or Associates thereof as
the Company shall reasonably request. Thereupon the Rights Agent shall, subject
to Section 4(b), Section 7(e), Section 13(d), Section 14 and Section 24 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment by the holder of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split-
up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will, subject to Section 4(b), Section 7(e), Section
13(d), Section 14 and Section 24, execute and deliver a new Rights Certificate
of like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price.
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without
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limitation, the restrictions on exercisability set forth in Section 9(c),
Section 11(a)(iii) and Section 23(a) hereof) in whole or in part at any time
after the Distribution Date upon surrender of the Rights Certificate, with the
form of election to purchase and the certificate on the reverse side thereof
duly completed and executed, to the Rights Agent at the principal office or
offices of the Rights Agent designated for such purpose, together with payment
of the aggregate Purchase Price with respect to the total number of Fractional
Shares of Preferred Stock (or other securities, cash or other assets, as the
case may be) as to which such surrendered Rights are then exercisable, at or
prior to the Expiration Date.
(b) The Purchase Price for each Fractional Share of Preferred Stock
pursuant to the exercise of a Right shall initially be $100, and shall be
subject to adjustment from time to time as provided in Sections 11 and 13(a)
hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate on the reverse
side thereof duly executed, accompanied by payment, with respect to each Right
so exercised, of the Purchase Price per Fractional Share of Preferred Stock (or
other shares, securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer tax,
the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly
(i)(A) requisition from any transfer agent of the shares of Preferred Stock (or
make available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of Fractional Shares of Preferred Stock to be
purchased, and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) if the Company, in its sole discretion,
shall have elected to deposit the shares of Preferred Stock issuable upon
exercise of the Rights hereunder with a depositary agent, requisition from the
depositary agent depositary receipts representing interests in such number of
Fractional Shares of Preferred Stock as are to be purchased (in which case
certificates for the shares of Preferred Stock represented by such receipts
shall be deposited by the transfer agent with the depositary agent) and the
Company will direct the depositary agent to comply with such request, (ii)
requisition from the Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 14 hereof, (iii) after receipt of
such certificates or depositary receipts, cause the same to be delivered to or
upon the order of the registered holder of such Rights Certificate, registered
in such name or names as may be designated by such holder and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof) may be made in cash
or by certified check, cashier's or official bank check or bank draft payable to
the order of the Company or the Rights Agent. In the event that the Company is
obligated to issue other securities (including Common Stock) of the Company, pay
cash and/or distribute other property pursuant to Section 11(a) or Section 13(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate. The Company reserves the right to
require prior to the occurrence of a Triggering Event that, upon exercise of
Rights, a number of Rights be exercised so that only whole shares of Preferred
Stock would be issued.
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(d) In case the registered holder of any Rights Certificate shall
exercise fewer than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Triggering Event, any Rights beneficially
owned by or transferred to (i) an Acquiring Person or an Associate or Affiliate
of an Acquiring Person other than any such Person that became such pursuant to a
Permitted Offer and the Board of Directors in good faith determines was not
involved in and did not cause or facilitate, directly or indirectly, such
Triggering Event, (ii) a direct or indirect transferee of such Rights from such
Acquiring Person (or any such Associate or Affiliate) who becomes a transferee
after such Triggering Event or (iii) a direct or indirect transferee of such
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with such Triggering Event and receives such
Rights pursuant to either (A) a transfer (whether or not for consideration) from
such Acquiring Person (or such Affiliate or Associate) to holders of equity
interests in such Acquiring Person (or such Affiliate or Associate) or to any
Person with whom such Acquiring Person (or such Affiliate or Associate) has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer that the Board of Directors of the Company determines
is part of a plan, arrangement or understanding that has as a primary purpose or
effect the avoidance of this Section 7(e), shall become null and void without
any further action, no holder of such Rights shall have any rights whatsoever
with respect to such Rights, whether under any provision of this Agreement or
otherwise, and such Rights shall not be transferable. The Company shall use all
reasonable efforts to ensure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but shall have no liability to any holder
of Rights Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates.
All Rights Certificates surrendered for the purpose of exercise, transfer,
split-up, combination or exchange shall, if surrendered to the Company or any of
its agents, be delivered to the Rights Agent for cancellation or in canceled
form, or, if surrendered to the Rights Agent, shall be canceled by it, and no
Rights Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Agreement. The Company shall deliver
to the Rights Agent for cancellation and retirement, and the Rights Agent shall
so cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled
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Rights Certificates to the Company, or shall, at the written request of the
Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of its
authorized and unissued shares of Common Stock and/or other securities or out of
its authorized and issued shares held in its treasury), the number of shares of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) that, as provided in this Agreement, including
Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of
all outstanding Rights.
(b) So long as any shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
and deliverable upon the exercise of the Rights are listed on any national
securities exchange or quoted on any trading system, the Company shall use its
best efforts to cause, from and after such time as the Rights become
exercisable, all shares reserved for such issuance to be listed on such
exchange, or quoted on such system, upon official notice of issuance upon such
exercise. Following the occurrence of a Triggering Event, the Company will use
its best efforts to list (or continue the listing of) the Rights and the
securities issuable and deliverable upon the exercise of the Rights on one or
more national securities exchanges or to cause the Rights and the securities
purchasable upon exercise of the Rights to be reported by NASDAQ or such other
transaction reporting system then in use.
(c) The Company shall use its best efforts to (i) prepare and file,
as soon as practicable following the first occurrence of a Flip-In Event or, if
applicable, as soon as practicable following the earliest date after the first
occurrence of a Flip-In Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined pursuant to this
Agreement (including in accordance with Section 11(a)(iii) hereof), a
registration statement on an appropriate form under the Securities Act with
respect to the securities purchasable upon exercise of the Rights, (ii) cause
such registration statement to become effective as soon as practicable after
such filing, and (iii) cause such registration statement to remain effective
(with a prospectus at all times meeting the requirements of the Securities Act)
until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities and (B) the Expiration Date. The Company will
also take such action as may be appropriate under, or to ensure compliance with,
the securities or "blue sky" laws of the various states in connection with the
exercisability of the Rights. The Company may temporarily suspend, for a period
of time not to exceed 90 days after the date set forth in clause (i) of the
first sentence of this Section 9(c), the exercisability of the Rights in order
to prepare and file such registration statement and permit it to become
effective. In addition, if the Company shall determine that the Securities Act
requires an effective registration statement under the Securities Act following
the Distribution Date, the Company may temporarily suspend the exercisability of
the Rights until such time as such a registration statement has been declared
effective. Upon any such suspension, the Company shall issue a public
announcement stating that
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the exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction if the requisite qualification in
such jurisdiction shall not have been obtained, the exercise thereof shall not
be permitted under applicable law or any required registration statement shall
not have been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Fractional Shares of Preferred
Stock (and, following the occurrence of a Triggering Event, Common Stock and/or
other securities) delivered upon exercise of Rights shall, at the time of
delivery of the certificates for such shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges that
may be payable in respect of the issuance or delivery of the Rights Certificates
and of any certificates for a number of Fractional Shares of Preferred Stock (or
Common Stock and/or other securities, as the case may be) upon the exercise of
Rights. The Company shall not, however, be required to pay any transfer tax that
may be payable in respect of any transfer or delivery of Rights Certificates to
a Person other than, or the issuance or delivery of a number of Fractional
Shares of Preferred Stock (or Common Stock and/or other securities, as the case
may be) in respect of a name other than that of, the registered holder of the
Rights Certificates evidencing Rights surrendered for exercise or to issue or
deliver any certificates for a number of Fractional Shares of Preferred Stock
(or Common Stock and/or other securities, as the case may be) in a name other
than that of the registered holder upon the exercise of any Rights until such
tax shall have been paid (any such tax being payable by the holder of such
Rights Certificate at the time of surrender) or until it has been established to
the Company's satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose name
any certificate for a number of Fractional Shares of Preferred Stock (or Common
Stock and/or other securities, as the case may be) is issued upon the exercise
of Rights shall for all purposes be deemed to have become the holder of record
of such shares (fractional or otherwise) of Preferred Stock (or Common Stock
and/or other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of
a Rights Certificate, as such, shall not be entitled to any rights of a
stockholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote,
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to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares
or Number of Rights. The Purchase Price, the number and kind of shares or other
securities subject to purchase upon exercise of each Right and the number of
Rights outstanding are subject to adjustment from time to time as provided in
this Section 11.
(a)(i) In the event the Company shall at any time after the
Rights Dividend Declaration Date (A) declare a dividend on the outstanding
shares of Preferred Stock payable in shares of Preferred Stock, (B)
subdivide the outstanding shares of Preferred Stock, (C) combine the
outstanding shares of Preferred Stock into a smaller number of shares or
(D) otherwise reclassify the outstanding shares of Preferred Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section 7(e) hereof,
the Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Preferred Stock or
capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after
such time shall be entitled to receive, upon payment of the Purchase Price
then in effect, the aggregate number and kind of shares of Preferred Stock
or capital stock, as the case may be, which, if such Right had been
exercised immediately prior to such date and at a time when the Preferred
Stock transfer books of the Company were open, he would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. If an event occurs that
would require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Sections 23 and 24 of this Agreement, in the
event any Person shall, at any time after the Rights Dividend Declaration
Date, become an Acquiring Person, unless the event causing such Person to
become an Acquiring Person is (1) a Flip-Over Event or (2) an acquisition
of shares of Common Stock pursuant to a Permitted Offer (provided that this
clause (2) shall cease to apply if such Acquiring Person thereafter becomes
the Beneficial Owner of any additional shares of Common Stock other than
pursuant to such Permitted Offer or a transaction set forth in Section
13(a) or 13(d) hereof), then, (x) the Purchase Price shall be adjusted to
be the Purchase Price immediately prior to the first occurrence of a Flip-
In Event multiplied by the number of Fractional Shares of Preferred Stock
for which a Right was exercisable immediately prior to such first
occurrence and (y) each holder of a Right (except as provided below in
Section 11(a)(iii) and in Section 7(e) hereof) shall thereafter have the
right to receive, upon exercise thereof at a price equal to the Purchase
Price in accordance with the terms of this Agreement, in lieu of shares of
Preferred Stock, such number of shares of Common Stock of the Company as
shall equal the result obtained by dividing the Purchase Price by 50% of
the Current Market Price per
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share of Common Stock on the date of such first occurrence (such number of
shares, the "Adjustment Shares"); provided that the Purchase Price and the
number of Adjustment Shares shall be further adjusted as provided in this
Agreement to reflect any events occurring after the date of such first
occurrence.
(iii) In the event that the number of shares of Common Stock
that are authorized by the Company's certificate of incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise
of the Rights is not sufficient to permit the exercise in full of the
Rights in accordance with the foregoing subparagraph (ii) of this Section
11(a), the Company shall, to the extent permitted by applicable law and
regulation, (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (computed using the Current
Market Price used to determine the number of Adjustment Shares) (the
"Current Value") over (2) the Purchase Price (such excess is herein
referred to as the "Spread"), and (B) with respect to each Right, make
adequate provision to substitute for the Adjustment Shares, upon the
exercise of the Rights and payment of the applicable Purchase Price, (1)
cash, (2) a reduction in the Purchase Price, (3) Common Stock or other
equity securities of the Company (including, without limitation, shares, or
units of shares, of preferred stock (including, without limitation, the
Preferred Stock) that the Board of Directors of the Company has determined
to have the same value as shares of Common Stock (such shares of preferred
stock are herein referred to as "Common Stock Equivalents")), (4) debt
securities of the Company, (5) other assets or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors of the
Company based upon the advice of a nationally recognized investment banking
firm selected by the Board of Directors of the Company; provided, however,
if the Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within 30 days following the later of (x) the
first occurrence of a Flip-In Event and (y) the date on which the Company's
right of redemption pursuant to Section 23(a) expires (the later of (x) and
(y) being referred to herein as the "Flip-In Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Purchase Price, shares of Common
Stock (to the extent available) and then, if necessary, cash, which shares
and/or cash have an aggregate value equal to the Spread. If the Board of
Directors of the Company shall determine in good faith that it is likely
that sufficient additional shares of Common Stock could be authorized for
issuance upon exercise in full of the Rights, the 30-day period set forth
above may be extended to the extent necessary, but not more than 90 days
after the Flip-In Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares (such
period, as it may be extended, the "Substitution Period"). To the extent
that the Company or the Board of Directors determines that some action need
be taken pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof,
that such action shall apply uniformly to all outstanding Rights, and (y)
may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant
to such first sentence and to determine the value thereof. In the event of
any such suspension, the
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Company shall issue a public announcement stating that the exercisability
of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For
purposes of this Section 11(a)(iii), the value of the Common Stock shall be
the Current Market Price per share of the Common Stock on the Flip-In
Trigger Date and the value of any Common Stock Equivalent shall be deemed
to have the same value as the Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within 45 calendar days after
such record date) Preferred Stock (or shares having the same rights, privileges
and preferences as the shares of Preferred Stock ("Equivalent Preferred Stock"))
or securities convertible into Preferred Stock or Equivalent Preferred Stock at
a price per share of Preferred Stock or per share of Equivalent Preferred Stock
(or having a conversion price per share, if a security convertible into
Preferred Stock or Equivalent Preferred Stock) less than the Current Market
Price per share of Preferred Stock on such record date, the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock that the
aggregate offering price of the total number of shares of Preferred Stock and/or
Equivalent Preferred Stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such Current Market Price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or Equivalent Preferred Stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price
may be paid by delivery of consideration, part or all of which may be in a form
other than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by
or held for the account of the Company shall not be deemed outstanding for the
purpose of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed, and in the event that such rights or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price that would then be in effect if such record date had not been
fixed.
(c) In case the Company shall fix a record date for a distribution to
all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation) of evidences of indebtedness, cash (other than a
regular quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
subscription rights or warrants (excluding those referred to in Section 11(b)
hereof), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the Current Market
Price per share of Preferred Stock on such record date, less the fair market
value (as determined in good faith by the Board of Directors
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of the Company, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent) of the portion of the
cash, assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a share of Preferred Stock and the
denominator of which shall be such Current Market Price per share of Preferred
Stock. Such adjustments shall be made successively whenever such a record date
is fixed, and in the event that such distribution is not so made, the Purchase
Price shall be adjusted to be the Purchase Price that would have been in effect
if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "Current
Market Price" per share of Common Stock of a Person on any date shall be
deemed to be the average of the daily Closing Prices per share of such
Common Stock for the 30 consecutive Trading Days immediately prior to such
date, and for purposes of computations made pursuant to Section 11(a)(iii)
hereof, the "Current Market Price" per share of Common Stock on any date
shall be deemed to be the average of the daily Closing Prices per share of
such Common Stock for the 10 consecutive Trading Days immediately following
such date; provided, however, that in the event that the Current Market
Price per share of Common Stock is determined during a period following the
announcement of (A) a dividend or distribution on such Common Stock other
than a regular quarterly cash dividend or the dividend of the Rights, or
(B) any subdivision, combination or reclassification of such Common Stock,
and the ex-dividend date for such dividend or distribution, or the record
date for such subdivision, combination or reclassification, shall not have
occurred prior to the commencement of the requisite 30 Trading Day or 10
Trading Day period, as set forth above, then, and in each such case, the
Current Market Price shall be properly adjusted to take into account ex-
dividend trading. If the Common Stock is not publicly held or not so
listed or traded, "Current Market Price" per share shall mean the fair
value per share as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed
with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the "Current
Market Price" per share (or Fractional Share) of Preferred Stock shall be
determined in the same manner as set forth above for the Common Stock in
clause (i) of this Section 11(d) (other than the last sentence thereof).
If the Current Market Price per share (or Fractional Share) of Preferred
Stock cannot be determined in the manner provided above or if the Preferred
Stock is not publicly held or listed or traded in a manner described in
clause (i) of this Section 11(d), the "Current Market Price" per share of
Preferred Stock shall be conclusively deemed to be an amount equal to 100
(as such number may be appropriately adjusted for such events as stock
splits, stock dividends and recapitalizations with respect to the Common
Stock occurring after the date of this Agreement) multiplied by the Current
Market Price per share of the Common Stock. If neither the Common Stock
nor the Preferred Stock is publicly held or so listed or traded, Current
Market Price per share of the Preferred Stock shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent and shall be conclusive for all purposes. For all purposes of this
Agreement, the
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Current Market Price of a Fractional Share of Preferred Stock shall be
equal to the Current Market Price of one share of Preferred Stock divided
by 100.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments that by reason of this Section 11(e) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a share of Common Stock or other share
or to the nearest ten-thousandth of a Fractional Share of Preferred Stock, as
the case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which mandates such
adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive in respect of such Right any shares of capital stock other
than Preferred Stock, thereafter the number of such other shares so receivable
upon exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (f), (g), (h), (i), (j), (k) and (m) hereof, and
the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Fractional Shares of
Preferred Stock purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of Fractional Shares of
Preferred Stock (calculated to the nearest one ten-thousandth of a Fractional
Share) obtained by (i) multiplying (x) the number of Fractional Shares of
Preferred Stock covered by a Right immediately prior to this adjustment by (y)
the Purchase Price in effect immediately prior to such adjustment of the
Purchase Price, and (ii) dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect, on or after the date of any adjustment of
the Purchase Price, to adjust the number of Rights in lieu of any adjustment in
the number of Fractional Shares of Preferred Stock purchasable upon the exercise
of a Right. Each of the Rights outstanding after the adjustment in the number
of Rights shall be exercisable for the number of Fractional Shares of Preferred
Stock for which a Right was exercisable immediately prior to such adjustment.
Each Right held of record prior to such adjustment of the number of Rights shall
become that number of
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Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Rights Certificates have been issued, shall be at least 10 days later
than the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of Fractional Shares of Preferred Stock issuable upon the exercise of
the Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per Fractional Share and the number of
Fractional Shares that were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then par value, if any, or the stated capital of
the number of Fractional Shares of Preferred Stock or of the number of shares of
Common Stock or other securities issuable upon exercise of a Right, the Company
shall take any corporate action that may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable such number of Fractional Shares of Preferred Stock or such number
of shares of Common Stock or other securities at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of Fractional Shares of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of Fractional Shares of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
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(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the current market price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities that by their terms are
convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11 hereafter made by the Company to holders of its Preferred Stock shall
not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time
that there is an Acquiring Person, (i) consolidate with any other Person, (ii)
merge with or into or be acquired pursuant to a share exchange by any other
Person, or (iii) sell, lease or transfer (or permit one or more Subsidiaries to
sell, lease or transfer), in one transaction or a series of related
transactions, assets or earning power aggregating more than 50% of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons, if (x) at the time of or immediately after such
consolidation, merger, share exchange, sale, lease or transfer there are any
rights, warrants or other instruments or securities of the Company or any other
Person outstanding or agreements, arrangements or understandings in effect that
would substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights, (y) prior to, simultaneously with or immediately after
such consolidation, merger, share exchange, sale, lease or transfer, the
stockholders or other equity owners of the Person who constitutes, or would
constitute, the "Principal Party" for purposes of Section 13(a) hereof shall
have received a distribution of Rights previously owned by such Person or any of
its Affiliates or Associates, or (z) the identity, form or nature of
organization of the Principal Party (including without limitation the selection
of the Person that will be the Principal Party as a result of the Company's
entering into one or more consolidations, mergers, share exchanges, sales,
leases, transfers or transactions with more than one party) would preclude or
limit the exercise of Rights or otherwise diminish substantially or eliminate
the benefits intended to be afforded by the Rights.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23, Section 24 or Section 27
hereof, take (or permit any Subsidiary to take) any action if the purpose of
such action is to, or if at the time such action is taken it is reasonably
foreseeable that such action will, diminish substantially or eliminate the
benefits intended to be afforded by the Rights.
(p) Notwithstanding Section 3(c) hereof or any other provision of
this Agreement to the contrary, in the event that the Company shall at any time
after the Rights Dividend Declaration Date and prior to the Distribution Date
(i) declare a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock,
(iii) combine the outstanding shares of Common Stock into a smaller number of
shares or (iv) otherwise reclassify the outstanding shares of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), the
number of Rights associated with each share of Common Stock then outstanding,
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or issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction (the "Adjustment
Fraction") the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event. In lieu of such
adjustment in the number of Rights associated with one share of Common Stock,
the Company may elect to adjust the number of Fractional Shares of Preferred
Stock purchasable upon the exercise of one Right and the Purchase Price. If the
Company makes such election, the number of Rights associated with one share of
Common Stock shall remain unchanged, and the number of Fractional Shares of
Preferred Stock purchasable upon exercise of one Right and the Purchase Price
shall be proportionately adjusted so that (i) the number of Fractional Shares of
Preferred Stock purchasable upon exercise of a Right following such adjustment
shall equal the product of the number of Fractional Shares of Preferred Stock
purchasable upon exercise of a Right immediately prior to such adjustment
multiplied by the Adjustment Fraction and (ii) the Purchase Price following such
adjustment shall equal the product of the Purchase Price immediately prior to
such adjustment multiplied by the Adjustment Fraction.
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 or Section 13
hereof, the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate and (c) mail a
brief summary thereof to each registered holder of a Rights Certificate (or, if
prior to the Distribution Date, to each registered holder of a certificate
representing shares of Common Stock) in accordance with Section 26 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, from and after the time an Acquiring Person
has become such, directly or indirectly, (x) the Company shall consolidate with,
or merge with and into, any other Person, and the Company shall not be the
continuing or surviving corporation of such consolidation or merger, (y) any
Person shall consolidate with, or merge with or into, the Company, and the
Company shall be the continuing or surviving corporation of such consolidation
or merger, or the Company shall be party to a share exchange, and, in connection
with such consolidation or merger or share exchange, all or part of the
outstanding shares of Common Stock shall be changed into or exchanged for stock
or other securities of the Company or any other Person or cash or any other
property, or (z) the Company shall sell, lease or otherwise transfer (or one or
more of its Subsidiaries shall sell, lease or otherwise transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the
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Company or any wholly owned Subsidiary of the Company or any combination thereof
in one or more transactions each of which complies (and all of which together
comply) with Section 11(o) hereof), then, and in each such case (except as may
be contemplated by Section 13(d) hereof), proper provision shall be made so
that: (i) the Purchase Price shall be adjusted to be the Purchase Price
immediately prior to the first occurrence of a Triggering Event multiplied by
the number of Fractional Shares of Preferred Stock for which a Right was
exercisable immediately prior to such first occurrence; (ii) on and after the
Distribution Date, each holder of a Right, except as provided in Section 7(e)
hereof, shall thereafter have the right to receive, upon the exercise thereof at
the Purchase Price in accordance with the terms of this Agreement, in lieu of
shares of Preferred Stock or Common Stock of the Company, such number of validly
authorized and issued, fully paid, nonassessable and freely tradeable shares of
Common Stock of the Principal Party (as such term is hereinafter defined), not
subject to any liens, encumbrances, rights of first refusal or other adverse
claims, as shall be equal to the result obtained by dividing the Purchase Price
by 50% of the Current Market Price per share of the Common Stock of such
Principal Party on the date of consummation of such Flip-Over Event; provided
that the Purchase Price and the number of shares of Common Stock of such
Principal Party issuable upon exercise of each Right shall be further adjusted
as provided in this Agreement to reflect any events occurring after the date of
such first occurrence of a Triggering Event or after the date of such Flip-Over
Event, as applicable; (iii) such Principal Party shall thereafter be liable for,
and shall assume, by virtue of such Flip-Over Event, all the obligations and
duties of the Company pursuant to this Agreement; (iv) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Flip-Over Event; (v) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock) in connection
with the consummation of any such transaction as may be necessary to assure that
the provisions hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to its shares of Common Stock thereafter deliverable upon
the exercise of the Rights; and (vi) the provisions of Section 11(a)(ii) hereof
shall be of no effect following the occurrence of any Flip-Over Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y) of
the first sentence of Section 13(a), (A) the Person that is the issuer of
any securities into which shares of Common Stock of the Company are
converted in such merger or consolidation or share exchange, or, if there
is more than one such issuer, the issuer the Common Stock of which has the
greatest aggregate market value, or (B) if no securities are so issued, (x)
the Person that survives such consolidation or is the other party to the
merger and survives such merger, or, if there is more than one such Person,
the Person the Common Stock of which has the greatest aggregate market
value or (y) if the Person that is the other party to the merger does not
survive the merger, the Person that does survive the merger (including the
Company if it survives); and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or
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earning power transferred pursuant to such transaction or transactions, or,
if each Person that is a party to such transaction or transactions receives
the same portion of the assets or earning power so transferred, or if the
Person receiving the greatest portion of the assets or earning power cannot
be determined, the Person the Common Stock of which has the greatest
aggregate market value;
provided, however, that in any such case, if the Common Stock of such Person is
not at such time and has not been continuously over the preceding twelve-month
period registered under Section 12 of the Exchange Act, and if (1) such Person
is a direct or indirect Subsidiary of another Person the Common Stock of which
is and has been so registered, "Principal Party" shall refer to such other
Person; (2) such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Stocks of all of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the issuer of the
Common Stock having the greatest aggregate market value; and (3) such Person is
owned, directly or indirectly, by a joint venture formed by two or more Persons
that are not owned, directly or indirectly, by the same Person, the rules set
forth in (1) and (2) above shall apply to each of the chains of ownership having
an interest in such joint venture as if such party were a "Subsidiary" of both
or all of such joint venturers and the Principal Parties in each such chain
shall bear the obligations set forth in this Section 13 in the same ratio as
their direct or indirect interests in such Person bear to the total of such
interests.
(c) The Company shall not consummate any Flip-Over Event unless each
Principal Party (or Person that may become a Principal Party as a result of such
Flip-Over Event) shall have a sufficient number of authorized shares of its
Common Stock that have not been issued or reserved for issuance to permit the
exercise in full of the Rights in accordance with this Section 13 and unless
prior thereto the Company and each such Principal Party shall have executed and
delivered to the Rights Agent a supplemental agreement providing for the terms
set forth in paragraphs (a) and (b) of this Section 13 and further providing
that, as soon as practicable after the date of such Flip-Over Event, the
Principal Party at its own expense will
(i) prepare and file a registration statement under the Securities
Act with respect to the Rights and the securities purchasable upon exercise
of the Rights on an appropriate form, and will use its best efforts to
cause such registration statement to (A) become effective as soon as
practicable after such filing and (B) remain effective (with a prospectus
at all times meeting the requirements of the Securities Act) until the
Expiration Date;
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the "blue sky"
laws of such jurisdictions as may be necessary or appropriate;
(iii) use its best efforts, if the Common Stock of the Principal
Party is or shall become listed on a national securities exchange, to list
(or continue the listing of) the Rights and the securities purchasable upon
exercise of the Rights on such securities exchange and, if the Common Stock
of the Principal Party shall not be listed on a national securities
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exchange, to cause the Rights and the securities purchasable upon exercise
of the Rights to be reported by NASDAQ or such other transaction reporting
system then in use; and
(iv) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates that comply
in all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Flip-Over Event
shall occur at any time after the occurrence of a Flip-In Event, the Rights that
have not theretofore been exercised shall thereafter become exercisable in the
manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction is consummated with a
Person or Persons who acquired shares of Common Stock pursuant to a Permitted
Offer (or a wholly owned subsidiary of any such Person or Persons), (ii) the
price per share of Common Stock offered in such transaction is not less than the
price per share of Common Stock paid to all holders of Common Stock whose shares
were purchased pursuant to such Permitted Offer, and (iii) the form of
consideration being offered to the remaining holders of shares of Common Stock
pursuant to such transaction is the same as the form of consideration paid
pursuant to such Permitted Offer. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates or scrip evidencing fractional Rights. In lieu
of such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the Closing Price
of one Right for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than, except as provided in Section 7(c) hereof,
fractions that are integral multiples of a Fractional Share of Preferred Stock)
upon exercise of the Rights or to distribute certificates or scrip evidencing
fractional shares of Preferred Stock (other than, except as provided in Section
7(c) hereof, fractions that are integral multiples of a Fractional Share of
Preferred Stock). Interests in fractions of shares of Preferred Stock in
integral multiples of a Fractional Share of Preferred Stock may, at the election
of the Company in its sole discretion, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it, provided that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the shares of Preferred Stock
represented by such depositary receipts. In lieu of fractional shares of
Preferred Stock that are
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not integral multiples of a Fractional Share of Preferred Stock, the Company may
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of one
one-hundredth of the Closing Price of a share of Preferred Stock for the Trading
Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall
not be required to issue fractions of shares of Common Stock upon exercise of
the Rights or to distribute certificates or scrip evidencing fractional shares
of Common Stock. In lieu of fractional shares of Common Stock, the Company may
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
Closing Price of one share of Common Stock for the Trading Day immediately prior
to the date of such exercise.
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of
this Agreement, other than rights of action vested in the Rights Agent pursuant
to Section 18 hereof, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered holders
of the Common Stock) and, where applicable, the Company; and any registered
holder of any Rights Certificate (or, prior to the Distribution Date, of the
Common Stock), without the consent of the Rights Agent or of the holder of any
other Rights Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Rights Certificate in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
After a Triggering Event, holders of Rights shall be entitled to recover the
reasonable costs and expenses, including attorneys' fees, incurred by them in
any action to enforce the provisions of this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right
by accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will not be evidenced
by Rights Certificates and will be transferable only in connection with the
transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates will be
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the
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Rights Agent designated for such purposes, duly endorsed or accompanied by a
proper instrument of transfer and with the form of assignment set forth on the
reverse side thereof and the certificate contained therein duly completed and
fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and
the Rights Agent may deem and treat the Person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of Fractional
Shares of Preferred Stock or any other securities of the Company that may at any
time be issuable upon the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Rights Certificate be construed to confer
upon the holder of any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in Section 25 hereof),
or to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other reasonable disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and
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expenses of defending against any claim of liability in the premises. In no case
will the Rights Agent be liable for special, indirect, incidental or
consequential loss or damages of any kind whatsoever, even if the Rights Agent
has been advised of the possibility of such damages.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement or other
paper or document believed by it, after proper inquiry or examination, to be
genuine and to be signed, executed and, where necessary, guaranteed, verified or
acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights
Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust or stock transfer business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto; provided, however, that such corporation
would be eligible for appointment as a successor Rights Agent under the
provisions of Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the Rights
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of a predecessor Rights Agent and
deliver such Rights Certificates so countersigned; and in case at that time any
of the Rights Certificates shall not have been countersigned, any successor
Rights Agent may countersign such Rights Certificates either in the name of the
predecessor or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of Rights
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and
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protection to the Rights Agent as to any action taken or omitted by it in good
faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "Current Market Price") be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by the
Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct. In no event shall the Rights Agent
be liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Rights Agent
has been advised of the likelihood of such loss or damage and regardless of the
form of action.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
Section 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after receipt of actual knowledge of any such adjustment);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of Preferred Stock
or Common Stock or other securities to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any shares of Preferred Stock or Common
Stock or other securities will, when so issued, be validly authorized and
issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
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(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, omission, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Company resulting from any such act,
omission, default, neglect or misconduct; provided, however, that reasonable
care was exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock and the Preferred Stock, by registered or
certified mail, and to the registered holders, if any, of the Rights
Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent (with or without cause) upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock and the Preferred Stock, by
registered or certified mail, and to the registered holders of the Rights
Certificates, if any, by first-class mail. If the Rights Agent shall resign or
be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. Notwithstanding the foregoing
provisions of this Section 21, in no event shall the resignation or removal of a
Rights
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Agent be effective until a successor Rights Agent shall have been appointed and
have accepted such appointment. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the registered holder of a Rights
Certificate (who shall, with such notice, submit his Rights Certificate for
inspection by the Company), then the Rights Agent or the registered holder of
any Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be (a) a corporation organized and
doing business under the laws of the United States or of the State of New York
(or of any other state of the United States so long as such corporation is
authorized to conduct a stock transfer or corporate trust business in the State
of New York), in good standing, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$50,000,000 or (b) an affiliate of a corporation described in clause (a) of this
sentence. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and the Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Rights Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the Expiration Date, the Company (a) shall, with respect to
shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement granted or awarded on or prior
to the Distribution Date, or upon the exercise, conversion or exchange of
securities issued by the Company on or prior to the Distribution Date, and (b)
may, in any other case, if deemed necessary or appropriate by the Board of
Directors of the Company, issue Rights Certificates representing the appropriate
number of Rights in connection with such issuance or sale; provided, however,
that (i) no such Rights Certificate shall be issued if, and to the extent that,
the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
Person to whom such Rights Certificate would be issued, and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
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Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) the close of business on the tenth day
following the first date of public announcement of the occurrence of a Flip-In
Event (or, if such date shall have occurred prior to the Record Date, the close
of business on the tenth day following the Record Date) and (ii) the Expiration
Date, cause the Company to redeem all but not less than all the then outstanding
Rights at a redemption price of $.01 per Right, as such amount may be
appropriately adjusted, if necessary, to reflect any stock split, stock dividend
or similar transaction occurring after the Rights Dividend Declaration Date
(such redemption price being hereinafter referred to as the "Redemption Price");
provided, however, that the Rights may not be redeemed following any merger to
which the Company is a party that (i) occurs when there is an Acquiring Person
and (ii) was not approved prior to such merger by the Board of Directors of the
Company and by the stockholders of the Company at a stockholders' meeting.
Notwithstanding anything contained in this Agreement to the contrary, the Rights
shall not be exercisable after the first occurrence of a Flip-In Event until
such time as the Company's right of redemption hereunder has expired. The
Company may, at its option, pay the Redemption Price in cash, shares of Common
Stock (based on the Current Market Price of the Common Stock at the time of
redemption) or any other form of consideration deemed appropriate by the Board
of Directors.
(b) Immediately upon the effectiveness of the action of the Board of
Directors of the Company ordering the redemption of the Rights (the
effectiveness of which action may be conditioned on the occurrence of one or
more events or on the existence of one or more facts or may be effective at some
future time), evidence of which shall be filed with the Rights Agent and without
any further action and without any notice, the right to exercise the Rights will
terminate and the only right thereafter of the holders of Rights shall be to
receive the Redemption Price for each Right so held. Promptly after the
effectiveness of the action of the Board of Directors ordering the redemption of
the Rights, the Company shall give notice of such redemption to the Rights Agent
and the registered holders of the then outstanding Rights by mailing such notice
to all such holders at each holder's last address as it appears upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the Company for the Common Stock. Any notice that is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of redemption shall state the method by
which the payment of the Redemption Price will be made.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any
time and from time to time after the occurrence of a Flip-In Event, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to the provisions of Section 7(e) hereof)
for shares of Common Stock or Common Stock Equivalents or any combination
thereof, at an exchange ratio of one share of Common Stock, or such number of
Common Stock Equivalents or units representing fractions thereof as would be
deemed to have the same value as one share of Common Stock, per Right,
appropriately adjusted, if necessary, to reflect
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<PAGE>
any stock split, stock dividend or similar transaction occurring after the
Rights Dividend Declaration Date (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors may not effect such exchange at any time after (i) any Person (other
than an Exempt Person), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of 50% or more of the shares of Common
Stock then outstanding or (ii) the occurrence of a Flip-Over Event.
(b) Immediately upon the effectiveness of the action of the Board of
Directors of the Company ordering the exchange of any Rights pursuant to and in
accordance with subsection (a) of this Section 24 (the effectiveness of which
action may be conditioned on the occurrence of one or more events or on the
existence of one or more facts or may be effective at some future time) and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of shares of Common Stock and/or Common Stock
Equivalents equal to the number of such Rights held by such holder multiplied by
the Exchange Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the registered holders of
such Rights at their last addresses as they appear upon the registry books of
the Rights Agent. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. Each such
notice of exchange will state the method by which the exchange of the shares of
Common Stock and/or Common Stock Equivalents for Rights will be effected and, in
the event of any partial exchange, the number of Rights that will be exchanged.
Any partial exchange shall be effected as nearly pro rata as possible based on
the number of Rights (other than Rights that have become void pursuant to the
provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In the event that the number of shares of Common Stock that are
authorized by the Company's certificate of incorporation but not outstanding or
reserved for issuance for purposes other than upon exercise of the Rights is not
sufficient to permit an exchange of Rights as contemplated in accordance with
this Section 24, the Company may, at its option, take all such action as may be
necessary to authorize additional shares of Common Stock for issuance upon
exchange of the Rights.
(d) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates or scrip evidencing fractional shares
of Common Stock. In lieu of such fractional shares of Common Stock, the Company
shall pay to the registered holders of Rights with regard to which such
fractional shares of Common Stock would otherwise be issuable an amount in cash
equal to the same fraction of the value of a whole share of Common Stock. For
purposes of this Section 24, the value of a whole share of Common Stock shall be
the Closing Price per share of Common Stock for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24, and the value of any
Common Stock Equivalent shall be deemed to have the same value as the Common
Stock on such date.
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<PAGE>
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with any other Person (other than a wholly owned Subsidiary of
the Company in a transaction that complies with Section 11(o) hereof), or to
effect any sale, lease or other transfer of all or substantially all the
Company's assets to any other Person or Persons (other than a wholly owned
Subsidiary of the Company in a transaction that complies with Section 11(o)
hereof), or (v) to effect the liquidation, dissolution or winding up of the
Company, or (vi) to be acquired pursuant to a share exchange, then, in each such
case, the Company shall give to each holder of record of a Rights Certificate,
to the extent feasible and in accordance with Section 26 hereof, a notice of
such proposed action, which shall specify the record date for the purposes of
such stock dividend, distribution of rights or warrants, or the date on which
such reclassification, consolidation, merger, sale, lease, transfer,
liquidation, dissolution or winding up is to take place and the date of
participation therein by the holders of the shares of Preferred Stock, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least 20 days prior to the record
date for determining holders of the shares of Preferred Stock for purposes of
such action, and in the case of any such other action, at least 20 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of the shares of Preferred Stock, whichever shall be the
earlier. The failure to give notice required by this Section 25 or any defect
therein shall not affect the legality or validity of the action taken by the
Company or the vote upon any such action.
(b) In case any Flip-In Event or Flip-Over Event shall occur, then
(i) the Company shall as soon as practicable thereafter give to each registered
holder of a Rights Certificate (or if occurring prior to the Distribution Date,
the registered holders of Common Stock), in accordance with Section 26 hereof, a
notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) or
Section 13(a) hereof, and (ii) all references in the preceding paragraph to
Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if
appropriate, other securities.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
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<PAGE>
Dril-Quip, Inc.
13550 Hempstead Highway
Houston, Texas 77040
Attention: Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
2323 Bryan Street, Suite 23000
Dallas, Texas 75201
Attention: R. John Davis
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by first-
class mail, postage prepaid, addressed to such holder at the address of such
holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Except as provided in the
last sentence of this Section 27, at any time when the Rights are then
redeemable, the Company may in its sole and absolute discretion and the Rights
Agent shall, if the Company so directs, supplement or amend any provision of
this Agreement in any respect without the approval of any holders of Rights or
holders of Common Stock. At any time when the Rights are not redeemable, except
as provided in the last sentence of this Section 27, the Company may and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights in order (i) to cure any
ambiguity, (ii) to correct or supplement any provision contained herein that may
be defective or inconsistent with any other provisions herein, (iii) to shorten
or lengthen any time period hereunder or (iv) to change or supplement the
provisions hereunder in any manner that the Company may deem necessary or
desirable; provided that no such amendment or supplement shall materially
adversely affect the interests of the holders of Rights (other than an Acquiring
Person or an Affiliate or Associate of an Acquiring Person); and further
provided that this Agreement may not be supplemented or amended pursuant to this
sentence to lengthen (A) a time period relating to when the Rights may be
redeemed or (B) any other time period unless the lengthening of such other time
period is for the purpose of protecting, enhancing or clarifying the rights of,
and/or the benefits to, the holders of Rights (other than any Acquiring Person
and its Affiliates and Associates). Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or
amendment is in compliance with the terms of this Section 27, the Rights Agent
shall execute such supplement or amendment; provided, however, that the Rights
Agent may, but shall not be obligated to, enter into any such supplement or
amendment that affects the Rights Agent's own rights, duties or immunities under
this Agreement. Notwithstanding anything contained in this
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<PAGE>
Agreement to the contrary, no supplement or amendment shall be made that
decreases the Redemption Price.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors,
etc. For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares of
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act as in effect on the date of this
Agreement. The Board of Directors of the Company (or, as set forth herein,
certain specified members thereof) shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors of the Company or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including, without limitation, a determination
to redeem or not redeem the Rights or to amend this Agreement). All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) that
are done or made by the Board of Directors of the Company in good faith, shall
(x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights, as such, and all other parties, and (y) not subject the
Board of Directors to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority 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;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, then, unless there has occurred any merger referred to
in the proviso to the first sentence of Section 23(a), the right of redemption
set forth in Section 23 hereof shall be reinstated
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<PAGE>
and shall not expire until the close of business on the tenth day following the
date of such determination by the Board of Directors of the Company. Without
limiting the foregoing, if any provision requiring that a determination be made
by less than the entire Board of Directors of the Company is held by a court of
competent jurisdiction or other authority to be invalid, void or unenforceable,
such determination shall then be made by the entire Board of Directors of the
Company.
Section 32. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
DRIL-QUIP, INC.
By ________________________________
Name:
Title: Co-Chairman of the Board
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
By _________________________________
Name:
Title:
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<PAGE>
Exhibit A
---------
FORM OF
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
DRIL-QUIP, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
DRIL-QUIP, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Certificate of Incorporation of the said
Corporation, the said Board of Directors on October 17, 1997 adopted the
following resolution creating a series of 500,000 shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of the
Certificate of Incorporation, a series of Preferred Stock, par value $.01
per share, of the Corporation be and hereby is created, and that the
designation and number of shares thereof and the voting and other powers,
preferences and relative, participating, optional or other rights of the
shares of such series and the qualifications, limitations and restrictions
thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 500,000.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, however, that no decrease shall reduce the number of
shares of Series A Junior Participating Preferred Stock to less than the number
of shares then issued and outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
A-1
<PAGE>
2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock, in
preference to the holders of shares of any class or series of stock of the
Corporation ranking junior to the Series A Junior Participating Preferred Stock,
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the 15th day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $10 or (b) the Adjustment Number (as defined below) times the aggregate
per share amount of all cash dividends, and the Adjustment Number times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Junior Participating Preferred Stock. The "Adjustment Number" shall initially
be 100. In the event the Corporation shall at any time after October 17, 1997
(the "Rights Declaration Date") (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the
Series A Junior Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such
A-2
<PAGE>
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Junior Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Junior Participating Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock shall
entitle the holder thereof to a number of votes equal to the Adjustment Number
on all matters submitted to a vote of the stockholders of the Corporation.
(B) Except as otherwise provided herein, in the Certificate of
Incorporation or by law, the holders of shares of Series A Junior Participating
Preferred Stock, the holders of shares of any other class or series entitled to
vote with the Common Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C)(i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") that shall extend until such time
when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Junior Participating Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, (1) the number
of Directors shall be increased by two, effective as of the time of election of
such Directors as herein provided, and (2) the holders of Preferred Stock
(including holders of the Series A Junior Participating Preferred Stock) upon
which these or like voting rights have been conferred and are exercisable (the
"Voting Preferred Stock") with dividends in arrears in an amount equal to six
quarterly dividends thereon, voting as a class, irrespective of series, shall
have the right to elect such two Directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at
any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of at least one-third in number of the shares of Voting Preferred Stock
outstanding shall be
A-3
<PAGE>
present in person or by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of Voting Preferred Stock of
such voting right.
(iii) Unless the holders of Voting Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent of the total number of shares
of Voting Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Voting Preferred Stock, which
meeting shall thereupon be called by the Chairman of the Board, the President, a
Vice President or the Secretary of the Corporation. Notice of such meeting and
of any annual meeting at which holders of Voting Preferred Stock are entitled to
vote pursuant to this paragraph (C)(iii) shall be given to each holder of record
of Voting Preferred Stock by mailing a copy of such notice to him at his last
address as the same appears on the books of the Corporation. Such meeting shall
be called for a time not earlier than 20 days and not later than 60 days after
such order or request or, in default of the calling of such meeting within 60
days after such order or request, such meeting may be called on similar notice
by any stockholder or stockholders owning in the aggregate not less than ten
percent of the total number of shares of Voting Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, after the holders of Voting Preferred
Stock shall have exercised their right to elect Directors voting as a class, (x)
the Directors so elected by the holders of Voting Preferred Stock shall continue
in office until their successors shall have been elected by such holders or
until the expiration of the default period, and (y) any vacancy in the Board of
Directors may be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class or classes of stock which
elected the Director whose office shall have become vacant. References in this
paragraph (C) to Directors elected by the holders of a particular class or
classes of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Voting Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Voting Preferred
Stock as a class shall terminate and (z) the number of Directors shall be such
number as may be provided for in the Certificate of Incorporation or By-Laws
irrespective of any increase made pursuant to the provisions of paragraph (C) of
this Section 3 (such number being subject, however, to change thereafter in any
manner provided by law or in the Certificate of Incorporation or By-Laws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
Directors.
(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
A-4
<PAGE>
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the Series
A Junior Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
any shares of Series A Junior Participating Preferred Stock, or any shares
of stock ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders
of Series A Junior Participating Preferred Stock, or to all such holders
and the holders of any such shares ranking on a parity therewith, upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to any conditions and restrictions on issuance set forth
herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made
A-5
<PAGE>
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Series A Junior
Participating Preferred Stock shall have received $100 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation Preference,
no additional distributions shall be made to the holders of shares of Series A
Junior Participating Preferred Stock unless, prior thereto, the holders of
shares of Common Stock shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) the Adjustment Number. Following the payment of
the full amount of the Series A Liquidation Preference and the Common Adjustment
in respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall, subject to the
prior rights of all other series of Preferred Stock, if any, ranking prior
thereto, receive their ratable and proportionate share of the remaining assets
to be distributed in the ratio of the Adjustment Number to 1 with respect to
such Series A Junior Participating Preferred Stock and Common Stock, on a per
share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any, that
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6, but the sale, lease or conveyance of all or substantially all the
Corporation's assets shall be deemed to be a liquidation, dissolution or winding
up of the Corporation within the meaning of this Section 6.
7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination, share exchange or other transaction
in which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case each
share of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. Redemption. (A) The Corporation, at its option, may redeem
shares of the Series A Junior Participating Preferred Stock in whole at any time
and in part from time to time, at
A-6
<PAGE>
a redemption price equal to the Adjustment Number times the current per share
market price (as such term is hereinafter defined) of the Common Stock on the
date of the mailing of the notice of redemption, together with unpaid
accumulated dividends to the date of such redemption. The "current per share
market price" on any date shall be deemed to be the average of the closing price
per share of such Common Stock for the ten consecutive Trading Days (as such
term is hereinafter defined) immediately prior to such date; provided, however,
that in the event that the current per share market price of the Common Stock is
determined during a period following the announcement of (A) a dividend or
distribution on the Common Stock other than a regular quarterly cash dividend or
(B) any subdivision, combination or reclassification of such Common Stock and
the ex-dividend date for such dividend or distribution, or the record date for
such subdivision, combination or reclassification, shall not have occurred prior
to the commencement of such ten Trading Day period, then, and in each such case,
the current per share market price shall be properly adjusted to take into
account ex-dividend trading. The closing price for each day shall be the last
sales price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange, or, if
the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange but sales price
information is reported for such security, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ")
or such other self-regulatory organization or registered securities information
processor (as such terms are used under the Securities Exchange Act of 1934, as
amended) that then reports information concerning the Common Stock, or, if sales
price information is not so reported, the average of the high bid and low asked
prices in the over-the-counter market on such day, as reported by NASDAQ or such
other entity, or, if on any such date the Common Stock is not quoted by any such
entity, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock selected by the
Board of Directors of the Corporation. If on any such date no such market maker
is making a market in the Common Stock, the fair value of the Common Stock on
such date as determined in good faith by the Board of Directors of the
Corporation shall be used. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
but is quoted by NASDAQ, a day on which NASDAQ reports trades, or, if the Common
Stock is not so quoted, a Monday, Tuesday, Wednesday, Thursday or Friday on
which banking institutions in the State of New York are not authorized or
obligated by law or executive order to close.
(B) In the event that fewer than all the outstanding shares of the
Series A Junior Participating Preferred Stock are to be redeemed, the number of
shares to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by any other method that may be
determined by the Board of Directors in its sole discretion to be equitable.
A-7
<PAGE>
(C) Notice of any such redemption shall be given by mailing to the
holders of the shares of Series A Junior Participating Preferred Stock to be
redeemed a notice of such redemption, first class postage prepaid, not later
than the fifteenth day and not earlier than the sixtieth day before the date
fixed for redemption, at their last address as the same shall appear upon the
books of the Corporation. Each such notice shall state: (i) the redemption
date; (ii) the number of shares to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be redeemed
from such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on the close of business on such redemption date. Any notice that is mailed in
the manner herein provided shall be conclusively presumed to have been duly
given, whether or not the stockholder received such notice, and failure duly to
give such notice by mail, or any defect in such notice, to any holder of Series
A Junior Participating Preferred Stock shall not affect the validity of the
proceedings for the redemption of any other shares of Series A Junior
Participating Preferred Stock that are to be redeemed. On or after the date
fixed for redemption as stated in such notice, each holder of the shares called
for redemption shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the redemption price. If fewer than all the
shares represented by any such surrendered certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(D) The shares of Series A Junior Participating Preferred Stock shall
not be subject to the operation of any purchase, retirement or sinking fund.
9. Ranking. The Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise, and shall rank senior to the Common Stock
as to such matters.
10. Amendment. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Certificate of Incorporation
of the Corporation shall not be amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding shares
of Series A Junior Participating Preferred Stock, voting separately as a class.
11. Fractional Shares. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
A-8
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate and
does affirm the foregoing as true this ___ day of _______, 199_.
----------------------------------
Co-Chairman of the Board
A-9
<PAGE>
Exhibit B
---------
[Form of Rights Certificate]
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER October 17, 2007 OR EARLIER IF REDEEMED OR EXCHANGED BY
THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS, WAS OR BECOMES AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND
VOID AND WILL NO LONGER BE TRANSFERABLE.
RIGHTS CERTIFICATE
DRIL-QUIP, INC.
This certifies that _____________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of October 17, 1997 as it may from time to time
be supplemented or amended (the "Rights Agreement"), between Dril-Quip, Inc., a
Delaware corporation (the "Company"), and ChaseMellon Shareholder Services,
L.L.C. (the "Rights Agent"), to purchase from the Company at any time prior to
5:00 p.m. (New York time) on October 17, 2007 at the principal office or offices
of the Rights Agent designated for such purpose, or its successors as Rights
Agent, one one-hundredth of a fully paid, nonassessable share (a "Fractional
Share") of Series A Junior Participating Preferred Stock (the "Preferred Stock")
of the Company, at a purchase price of $100 per one one-hundredth of a share
(the "Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase and related Certificate set
forth on the reverse hereof duly executed. The Purchase Price may be paid in
cash or by certified check, cashier's or official bank check or bank draft
payable to the order of the Company or the Rights Agent. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
Fractional Share set forth above, are the number and Purchase Price as of
October 17, 1997, based on the Preferred Stock as constituted at such date. The
Company reserves the right to require prior to the occurrence of a Triggering
Event (as such term is defined in the Rights Agreement) that a number of Rights
be exercised so that only whole shares of Preferred Stock will be issued.
B-1
<PAGE>
From and after the first occurrence of a Triggering Event (as such
term is defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by or transferred to (i) an Acquiring Person
or an Associate or Affiliate of an Acquiring Person (as such terms are defined
in the Rights Agreement), (ii) a transferee of any such Acquiring Person,
Associate or Affiliate, or (iii) under certain circumstances specified in the
Rights Agreement, a transferee of a person who, concurrently with or after such
transfer, became an Acquiring Person or an Affiliate or Associate of an
Acquiring Person, such Rights shall, with certain exceptions, become null and
void in the circumstances set forth in the Rights Agreement, and no holder
hereof shall have any rights whatsoever with respect to such Rights from and
after the occurrence of such Triggering Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities or assets that may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of Fractional Shares of Preferred Stock as the
Rights evidenced by the Rights Certificate or Rights Certificates surrendered
shall have entitled such holder to purchase. If this Rights Certificate shall
be exercised in part, the holder shall be entitled to receive upon surrender
hereof another Rights Certificate or Rights Certificates for the number of whole
Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate (i) may be redeemed by the Company at its option
at a redemption price of $.01 per Right, payable, at the election of the
Company, in cash or shares of Common Stock or such other consideration as the
Board of Directors may determine, at any time prior to the earlier of the close
of business on (a) the tenth day following the first public announcement of the
occurrence of a Flip-In Event (as such time period may be extended or shortened
pursuant to the Rights Agreement) and (b) the Expiration Date (as such term is
defined in the Rights Agreement) or (ii) may be exchanged in whole or in part
for shares of the Company's Common Stock, par value $.01 per share, and/or other
equity securities of the Company deemed to have the same value as shares of
Common Stock,
B-2
<PAGE>
at any time prior to a person's becoming the beneficial owner of 50% or more of
the shares of Common Stock outstanding or the occurrence of a Flip-Over Event.
No fractional shares of Preferred Stock are required to be issued upon
the exercise of any Right or Rights evidenced hereby (other than, except as set
forth above, fractions that are integral multiples of a Fractional Share of
Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts), but in lieu thereof a cash payment may be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of shares of
Preferred Stock or of any other securities of the Company that may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of October 17, 1997
ATTEST: DRIL-QUIP, INC.
________________________ By ________________________________
Secretary Title:
Countersigned:
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
By ______________________
Authorized Signature
B-3
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer any Rights evidenced by the Rights Certificate.)
FOR VALUE RECEIVED ________________________________________ hereby sells,
assigns and transfers unto_______________________________________________
(Please print name and address of transferee)
_________ Rights evidenced by this Rights Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
__________________ Attorney, to transfer the said Rights on the books of the
within-named Company, with full power of substitution.
Dated: _________________, 199__
----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another eligible guarantor institution (as defined pursuant to Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended).
B-4
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are
not being sold, assigned and transferred by or on behalf of a Person who is or
was an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person or who is a direct or indirect
transferee of an Acquiring Person or of an Affiliate or Associate of an
Acquiring Person.
Dated: _____________, 199__ __________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another eligible guarantor institution (as defined pursuant to Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended).
NOTICE
The signatures to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: DRIL-QUIP, INC.
The undersigned hereby irrevocably elects to exercise _________ Rights
represented by this Rights Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person that may be issuable upon the exercise of the
Rights) and requests that certificates for such shares (or other securities) be
issued in the name of and delivered to:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
Dated: ____________, 199__
----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another eligible guarantor institution (as defined pursuant to Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended).
B-6
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are
not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person or who is a direct or indirect transferee of an
Acquiring Person or of an Affiliate or Associate of an Acquiring Person.
Dated: _____________, 199__ __________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another eligible guarantor institution (as defined pursuant to Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended).
NOTICE
The signatures to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.
B-7
<PAGE>
Exhibit C
---------
UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS, WAS OR BECOMES AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT), AND CERTAIN TRANSFEREES THEREOF, WILL BECOME NULL AND
VOID AND WILL NO LONGER BE TRANSFERABLE.
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On October 17, 1997, the Board of Directors of Dril-Quip, Inc. (the
"Company") declared a dividend of one right to purchase preferred stock
("Right") for each outstanding share of the Company's Common Stock, par value
$.01 per share ("Common Stock"), to the stockholders of record at the close of
business on October 17, 1997. Each Right entitles the registered holder to
purchase from the Company a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par value
$.01 per share (the "Preferred Stock"), at a purchase price of $100 per
Fractional Share, subject to adjustment (the "Purchase Price"). The description
and terms of the Rights are set forth in a Rights Agreement dated as of October
17, 1997 as it may from time to time be supplemented or amended (the "Rights
Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent.
Initially, the Rights will be attached to all certificates
representing outstanding shares of Common Stock, and no separate certificates
for the Rights ("Rights Certificates") will be distributed. The Rights will
separate from the Common Stock and a "Distribution Date" will occur, with
certain exceptions, upon the earlier of (i) ten days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Common Stock (the date of
the announcement being the "Stock Acquisition Date"), or (ii) ten business days
following the commencement of a tender offer or exchange offer that would result
in a person's becoming an Acquiring Person. Larry E. Reimert, Gary D. Smith, J.
Mike Walker, Reimert Family Partners, Ltd. and Four Smith's Company, Ltd. (the
"Major Stockholders"), each of which will upon consummation of the Company's IPO
be the beneficial owner of more than 15% of the outstanding shares of Common
Stock, will not be deemed to be an Acquiring Person as a result of such
ownership position or any subsequent increase in ownership position.
Additionally, a transferee of Common Stock (an "Individual Major Stockholder
Transferee") owned by Larry E. Reimert, Gary D. Smith, or J. Mike Walker (the
"Individual Major Stockholders") who as a result of such transfer becomes the
beneficial owner of 15% or more of the outstanding Common Stock will not be
deemed to be an Acquiring Person if (a) such transferee receives such Common
Stock directly from an Individual Major Stockholder by will or intestate
succession or (b) such transfer is made (i) directly from an Individual Major
Stockholder or an Individual Major Stockholder Transferee to a spouse, sibling
or lineal descendant or lineal descendant of a spouse of an Individual Major
Stockholder or (ii) directly from an Individual Major Stockholder or from an
Individual Major Stockholder Transferee to a trust, family partnership or
similar family-related or family-controlled entity for estate planning purposes,
all of the interests of which are owned by an Individual Major Stockholder, a
spouse, sibling or lineal descendant of an Individual Major Stockholder or
lineal descendant of a spouse of an Individual Major Stockholder or any
distributees under the will of any of the foregoing persons, successors of such
persons by intestate succession or trusts for the benefit of any of the
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<PAGE>
foregoing persons (an "Estate Planning Vehicle"), unless and until such
Individual Major Stockholder Transferee, together with his affiliates and
associates, becomes the beneficial owner of additional shares of Common Stock
constituting 1% or more of the then-outstanding shares of Common Stock or any
other person who is the beneficial owner of at least 1% of the then-outstanding
shares of Common Stock becomes an affiliate or associate of such Individual
Major Stockholder Transferee. Reimert Family Partners, Ltd. shall cease to be a
Major Stockholder at such time as all of the interests in such partnership are
not owned by Larry E. Reimert, his spouse, siblings, lineal descendants, lineal
descendants of his spouse, any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession, trusts
for the benefit of any of the foregoing persons and Wave Enterprises, Inc. Four
Smith's Company, Ltd. shall cease to be a Major Stockholder at such time as all
of the interests in such partnership are not owned by Gary D. Smith, his spouse,
siblings, lineal descendants, lineal descendants of his spouse, any distributees
under the will of any of the foregoing persons, successors of such persons by
intestate succession, and trusts for the benefit of any of the foregoing
persons. An Estate Planning Vehicle shall cease to be an Individual Major
Stockholder Transferee at such time as all of the interests therein cease to be
owned by an Individual Major Stockholder, a spouse, sibling or lineal descendant
of an Individual Major Stockholder or a lineal descendant of a spouse of an
Individual Major Stockholder or any distributees under the will of any of the
foregoing persons, successors of such persons by intestate succession or trusts
for the benefit of any of the foregoing persons. In certain circumstances, the
Distribution Date may be deferred by the Board of Directors. Certain
inadvertent acquisitions will not result in a person's becoming an Acquiring
Person if the person promptly divests itself of sufficient Common Stock. Until
the Distribution Date, (a) the Rights will be evidenced by the Common Stock
certificates bearing the notation referred to below and will be transferred with
and only with such Common Stock certificates, (b) new Common Stock certificates
will contain a notation incorporating the Rights Agreement by reference and (c)
the surrender for transfer of any certificate for Common Stock will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on October 17, 2007, unless earlier redeemed or
exchanged by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of Common Stock as of the close
of business on the Distribution Date and, from and after the Distribution Date,
the separate Rights Certificates alone will represent the Rights. All shares of
Common Stock issued prior to the Distribution Date will be issued with Rights.
Shares of Common Stock issued after the Distribution Date in connection with
certain employee benefit plans or upon conversion of certain securities will be
issued with Rights. Except as otherwise determined by the Board of Directors,
no other shares of Common Stock issued after the Distribution Date will be
issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the directors of the
Company who are unaffiliated with an Acquiring Person
C-2
<PAGE>
determines to be fair to and otherwise in the best interests of the Company and
its stockholders (a "Permitted Offer")), each holder of a Right will thereafter
have the right to receive, upon exercise of such Right, a number of shares of
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a Current Market Price (as defined in the Rights
Agreement) equal to two times the exercise price of the Right. Notwithstanding
the foregoing, following the occurrence of any Triggering Event, all Rights that
are, or (under certain circumstances specified in the Rights Agreement) were,
beneficially owned by or transferred to an Acquiring Person (or by certain
related parties) will be null and void in the circumstances set forth in the
Rights Agreement. However, Rights are not exercisable following the occurrence
of any Flip-In Event until such time as the Rights are no longer redeemable by
the Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after
the time an Acquiring Person becomes such, (i) the Company is acquired in a
merger or other business combination transaction (other than certain mergers
that follow a Permitted Offer), or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights that
are voided as set forth above) shall thereafter have the right to receive, upon
exercise, a number of shares of common stock of the acquiring company having a
Current Market Price equal to two times the exercise price of the Right. Flip-
In Events and Flip-Over Events are collectively referred to as "Triggering
Events."
The number of outstanding Rights associated with a share of Common
Stock, or the number of Fractional Shares of Preferred Stock issuable upon
exercise of a Right and the Purchase Price, are subject to adjustment in the
event of a stock dividend on, or a subdivision, combination or reclassification
of, the Common Stock occurring prior to the Distribution Date. The Purchase
Price payable, and the number of Fractional Shares of Preferred Stock or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution in the event of certain
transactions affecting the Preferred Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Preferred Stock that are not integral multiples
of a Fractional Share are required to be issued and, in lieu thereof, an
adjustment in cash may be made based on the market price of the Preferred Stock
on the last trading date prior to the date of exercise. Pursuant to the Rights
Agreement, the Company reserves the right to require prior to the occurrence of
a Triggering Event that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Preferred Stock will be issued.
At any time until ten days following the first date of public
announcement of the occurrence of a Flip-In Event, the Company may redeem the
Rights in whole, but not in part, at a price of $.01 per Right, payable, at the
option of the Company, in cash, shares of Common Stock or such other
consideration as the Board of Directors may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
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At any time after the occurrence of a Flip-In Event and prior to a
person's becoming the beneficial owner of 50% or more of the shares of Common
Stock then outstanding or the occurrence of a Flip-Over Event, the Company may
exchange the Rights (other than Rights owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person, which will have become void),
in whole or in part, at an exchange ratio of one share of Common Stock, and/or
other equity securities deemed to have the same value as one share of Common
Stock, per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights should not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for the
common stock of the acquiring company as set forth above or are exchanged as
provided in the preceding paragraph.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of the Company as long as the
Rights are redeemable. Thereafter, the provisions of the Rights Agreement other
than the redemption price may be amended by the Board of Directors in order to
cure any ambiguity, defect or inconsistency, to make changes that do not
materially adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or to shorten or lengthen any time period
under the Rights Agreement; provided, however, that no amendment to lengthen the
time period governing redemption shall be made at such time as the Rights are
not redeemable.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an exhibit to the Company's Registration Statement on
Form S-1. A copy of the Rights Agreement is available free of charge from the
Company. This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
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EXHIBIT 5.1
BAKER & BOTTS
L.L.P.
ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
Austin Telephone: (713) 229-1234
Dallas Facsimile: (713) 229-1522
Moscow
New York
Washington, D.C.
063827.0101 October 17, 1997
Dril-Quip, Inc.
13550 Hempstead Highway
Houston, Texas 77040
Ladies and Gentlemen:
As set forth in the Registration Statement on Form S-1, Registration
No. 333-33447 (the "Registration Statement"), filed by Dril-Quip, Inc., a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the
Company's common stock, par value $.01 per share (the "Common Stock"), certain
legal matters in connection with the Common Stock are being passed upon for the
Company by us. The Registration Statement relates to the offering of an
aggregate of 5,000,000 shares of Common Stock (the "Shares"), consisting of
2,500,000 Shares to be issued and sold by the Company and 2,500,000 Shares to be
sold by the Selling Stockholders identified in the Registration Statement (the
"Selling Stockholders"), together with up to 750,000 shares of the Common Stock
(the "Additional Shares"), consisting of 375,000 Additional Shares that may be
issued and sold by the Company and 375,000 Additional Shares that may be issued
and sold by the Selling Stockholders pursuant to the underwriters' over-
allotment option as described in the Registration Statement. At your request,
this opinion is being furnished to you for filing as Exhibit 5.1 to the
Registration Statement.
We understand that the Shares and any Additional Shares are to be sold
pursuant to the terms of an Underwriting Agreement (the "Underwriting
Agreement") in substantially the form to be filed as Exhibit 1.1 to the
Registration Statement.
In our capacity as your counsel in the connection referred to above,
we have examined the Certificate of Incorporation and the Bylaws of the Company,
each as amended to date, the originals, or copies certified or otherwise
identified, of corporate records of the Company, including minute books of the
Company as furnished to us by the Company, certificates of public officials and
of representatives of the Company, statutes and other instruments and documents
as a basis for the opinions hereinafter expressed. In giving such opinions, we
have relied upon certificates of officers of the Company with respect to the
accuracy of the material factual matters contained in such certificates.
<PAGE>
Dril-Quip, Inc. -2- October 17, 1997
On the basis of the foregoing, and subject to the assumptions,
limitations and qualifications set forth herein, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly
existing under the laws of the State of Delaware.
2. When offered as described in the Registration Statement, and upon
(a) the taking of action by the duly authorized Pricing Committee of the
Board of Directors of the Company to approve the Underwriting Agreement and
(b) the sale of the Shares and any Additional Shares in accordance with the
terms and provisions of the Underwriting Agreement and as described in the
Registration Statement, the Shares and any Additional Shares will be duly
authorized by all necessary corporate action on the part of the Company,
validly issued, fully paid and nonassessable.
3. The Shares and the Additional Shares to be sold by the Selling
Stockholders have been duly authorized and will be, upon completion of the
merger of Dril-Quip, Inc., a Texas corporation, into the Company, validly
issued, fully paid and nonassessable.
The opinions set forth above are limited in all respects to the laws
of the State of Texas, the General Corporation Law of the State of Delaware and
the federal securities laws, each as in effect on the date hereof.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under "Legal Matters" in the
prospectus forming a part of the Registration Statement.
Very truly yours,
Baker & Botts, L.L.P.
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is by and between Dril-Quip, Inc., a
Delaware corporation (the "Company"), and _______________ (the "Executive"),
dated as of the _____ day of _____________, 1997 and is to be effective as of
the Agreement Effective Date (as defined herein).
In entering into this Agreement, the Board of Directors of the Company
(the "Board") desires to provide the Executive with substantial incentives to
serve the Company as one of its senior executives performing at the highest
level of leadership and stewardship, without distraction or concern over minimum
compensation, benefits or tenure, to manage the Company's future growth and
development, and maximize the returns to the Company's stockholders.
NOW, THEREFORE, in consideration of the foregoing and the mutual
provisions contained herein, and for other good and valuable consideration, the
parties hereto agree with each other as follows:
1. DEFINITIONS
A. Certain Definitions. As used herein, the following terms have the
meanings assigned to them below:
"Accrued Obligations" shall have the meaning set forth in Section
5(A).
"Affiliate" has the meaning ascribed to such term in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act, as in effect on the
Agreement Effective Date.
"Agreement" shall have the meaning set forth in the Preamble.
"Agreement Effective Date" means the date on which the Company first
receives payment for shares of Common Stock that it sells pursuant to a
Registration Statement on Form S-1 (Reg. No. 333-33447) filed under the
Securities Act of 1933.
"Annual Base Salary" shall have the meaning set forth in Section 3(A).
"Annual Bonus" shall have the meaning set forth in Section 3(B).
"Board" shall have the meaning set forth in the Preamble.
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"Cause" means for the Company's termination of the Executive's
employment: (i) the Executive's final conviction of a felony crime that
enriched the Executive at the expense of the Company; provided, however, that
after indictment, the Company may suspend the Executive from the rendition of
services, but without limiting or modifying in any other way the Company's
obligations under this Agreement; or (ii) the Executive's continuing failure to
substantially perform his duties and responsibilities hereunder (except by
reason of the Executive's incapacity due to physical or mental illness or
injury) for a period of 45 days after the Required Board Majority has delivered
to the Executive a written demand for substantial performance hereunder which
specifically identifies the bases for the Required Board Majority's
determination that the Executive has not substantially performed his duties and
responsibilities hereunder (that period being the "Grace Period"); provided,
that for purposes of this clause (ii), the Company shall not have Cause to
terminate the Executive's employment unless (a) at a meeting of the Board called
and held following the Grace Period in the city in which the Company's principal
executive offices are located, of which the Executive was given not less than 10
days' prior written notice and at which the Executive was afforded the
opportunity to be represented by counsel, appear and be heard, the Required
Board Majority shall adopt a written resolution which (1) sets forth the
Required Board Majority's determination that the failure of the Executive to
substantially perform his duties and responsibilities hereunder has (except by
reason of his incapacity due to physical or mental illness or injury) continued
past the Grace Period and (2) specifically identifies the bases for that
determination, and (b) the Company, at the written direction of the Required
Board Majority, shall deliver to the Executive a Notice of Termination for Cause
to which a copy of that resolution, certified as being true and correct by the
secretary or any assistant secretary of the Company, is attached.
"Change of Control" shall mean a change in control of the Corporation
after the Agreement Effective Date, which shall be deemed to have occurred in
any one of the following circumstances occurring after such date: (i) there
shall have occurred an event required to be reported with respect to the
Corporation in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item or any similar schedule or form) promulgated under
the Exchange Act, whether or not the Corporation is then subject to such
reporting requirement; (ii) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) other than the Stockholder Group shall have
become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing 30% or
more of the combined voting power of the Corporation's then outstanding voting
securities; (iii) the Corporation is a party to a merger, consolidation, sale of
assets or other reorganization, or a proxy contest, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter; or (iv) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors (including,
for this purpose, any new director whose election or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board of
Directors.
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"Code" means the Internal Revenue Code of 1986.
"Common Stock" means the Common Stock, par value $0.01 per share, of
the Company.
"Company" shall have the meaning set forth in the Preamble.
"Compensation Committee" means the committee of the Board to which the
Board has delegated duties respecting the compensation of executive officers and
the administration of incentive plans, if any, intended to qualify for the
Exchange Act Rule 16b-3 exemption.
"Compensatory Award" shall have the meaning set forth in Section
5(A)(iii).
"Confidential Information" shall have the meaning set forth in Section
9(A).
"Date of Termination" shall have the meaning set forth in Section
4(C).
"Disability" means the absence of the Executive from the Executive's
duties with the Company on a full-time basis for either (i) 180 consecutive
business days or (ii) in any two-year period, 270 nonconsecutive business days,
as a result of incapacity due to mental or physical illness which is determined
to be total and permanent by a physician selected by the Company or its insurers
and acceptable to the Executive or the Executive's legal representative (such
agreement as to acceptability not to be withheld unreasonably).
"Disability Effective Date" shall have the meaning set forth in
Section 4(A)(i).
"Employment Period" means the period commencing on the Agreement
Effective Date and ending on the fifth anniversary of the Agreement Effective
Date; provided, that on the second anniversary of the Agreement Effective Date
and each anniversary of the Agreement Effective Date thereafter, the Employment
Period shall automatically renew for an additional one year without any further
action by either the Company or the Executive, it being the intention of the
parties that there shall be continuously a remaining term of not less than three
years' duration of the Employment Period until an event has occurred as
described in, or one of the parties shall have made an appropriate election
pursuant to, the provisions of Section 4.
"Exchange Act" means the Securities Exchange Act of 1934.
"Executive" shall have the meaning set forth in the Preamble.
"Final Expiration Date" shall have the meaning set forth in Section
5(A)(ii).
"Good Reason" means:
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(i) the assignment to the Executive of any duties materially
inconsistent in any respect with the Executive's position (including
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 2 or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any material failure by the Company to comply with any of
the provisions of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office located more than 50 miles from 13550 Hempstead Highway, Houston,
Texas 77040;
(iv) any failure by the Company to comply with and satisfy the
requirements of Section 11(B), provided that (A) the successor described in
Section 11(B) has received, at least 10 days prior to the Date of
Termination, written notice from the Company or the Executive of the
requirements of such provision and (B) such failure to be in compliance and
satisfy the requirements of Section 11 shall continue as of the Date of
Termination; or
(v) any failure to reelect Executive as a member of the Board,
Co-Chairman of the Board and Co-Chief Executive Officer or the removal of
him from any of such positions.
"Highest Price Per Share" shall mean the highest price per share that
can be determined to have been paid or agreed to be paid for any share of Common
Stock at any time during the six-month period immediately preceding the
applicable date of determination. In determining the Highest Price Per Share,
the price paid or agreed to be paid will be appropriately adjusted to take into
account (i) distributions paid or payable in stock, (ii) subdivisions of
outstanding stock, (iii) combinations of shares of stock into a smaller number
of shares and (iv) similar events.
"1997 Plan" shall have the meaning set forth in Section 3(C).
"Option Grant Date" shall have the meaning set forth in Section 3(C).
"Person" means any individual, firm, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
entity.
"Prohibited Activity" shall have the meaning set forth in Section
10(A).
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"Relevant Geographic Area" shall have the meaning set forth in Section
10(A).
"Remaining Employment Period" shall have the meaning set forth in
Section 5(A)(ii).
"Required Board Majority" means a majority of the members of the Board
at that time, which majority shall include at least a majority of members who
have not been employees of the Company or any of its Affiliates.
"Stockholder Group" shall mean, to the extent such group is deemed to
be a "person" under Section 13(d) of the Exchange Act, collectively, but not
individually, J. Mike Walker, Larry E. Reimert, Reimert Family Partners, Ltd.,
Gary D. Smith and Four Smith's Company, Ltd.
"Window Period" shall mean the 365-day period immediately following
any Change of Control.
B. Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein to
any statute defined or referred to herein, including the Code and the
Exchange Act, shall be deemed references to that statute or any successor
statute, as the same may have been or may be amended or supplemented from
time to time, and any rules or regulations promulgated thereunder.
(ii) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import shall refer to this Agreement as a
whole and not to any provision of this Agreement, and the word "Section"
refers to a Section of this Agreement unless otherwise specified.
(iii) Whenever the context so requires, the singular number includes
the plural and vice versa, and a reference to one gender includes each
other gender and the neuter.
(iv) The word "including" (and, with correlative meaning, the word
"include") means including, without limiting the generality of any
description preceding such word, and the words "shall" and "will" are used
interchangeably and have the same meaning.
2. EMPLOYMENT
A. As of the Agreement Effective Date, the Company hereby agrees to
employ the Executive and the Executive hereby agrees to accept employment with
the Company, in accordance with, and subject to, the terms and provisions of
this Agreement, for the Employment Period.
B. During the Employment Period, (i) the Executive's position (including
status, offices, titles and reporting requirements), authority, duties and
responsibilities shall be at least
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commensurate in all material respects with the most significant of those held,
exercised and assigned on the Agreement Effective Date, which shall in any event
include status as Co-Chairman of the Board and Co-Chief Executive Officer of the
Company, and (ii) the Executive's services shall be performed within the
Houston, Texas metropolitan area.
C. During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote full attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period, it shall not be a violation of
this Agreement for the Executive to (i) serve on corporate, civic or charitable
boards or committees, (ii) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (iii) manage personal investments, so long
as such activities do not interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance with this
Agreement. It is expressly understood and agreed that to the extent that any
such activities have been conducted by the Executive prior to the Agreement
Effective Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Agreement
Effective Date shall not thereafter be deemed to interfere with the performance
of the Executive's responsibilities to the Company.
3. COMPENSATION
A. Annual Base Salary. An Annual Base Salary (the "Annual Base Salary")
shall be payable to the Executive by the Company as a guaranteed minimum annual
amount hereunder for each 12-month period during the period from the Agreement
Effective Date to the Date of Termination. The Annual Base Salary shall be
payable in the intervals consistent with the Company's normal payroll schedules
(but in no event less frequently than semi-monthly), and shall be payable at the
annual rate of $350,000.
B. Annual Bonus. In addition to the Annual Base Salary, the Executive
shall be awarded a cash bonus of $250,000 payable on or before December 31,
1997. For each 12-month period ending on September 30 (commencing with the 12-
month period ending September 30, 1998) or December 31 (commencing with the 12-
month period ending December 31, 1998), as the case may be, or portion thereof
during the Employment Period, the Executive shall be awarded an Annual Bonus
(the "Annual Bonus") calculated and paid in the manner provided in Exhibit 1 to
this Agreement.
C. Stock Options. As a long-term incentive, the Executive shall be
granted options to acquire such number shares of Common Stock on the Agreement
Effective Date and on the first and each subsequent anniversary of the Agreement
Effective Date (each, an "Option Grant Date") as shall equal (i) 300% of the
Executive's then-applicable Annual Base Salary divided by (ii) the Fair
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Market Value (as such term is defined on the Agreement Effective Date in the
Company's 1997 Incentive Plan (the "1997 Plan")) per share of Common Stock on
the Option Grant Date. Such options shall be granted pursuant to the 1997 Plan
or any successor or supplemental plan thereto, shall have a term of 10 years
from the Option Grant Date and shall vest at the rate of 25% per year on each
anniversary of the Option Grant Date.
D. Compensation Committee. The amount of the Annual Base Salary, and the
formulae used to determine the Annual Cash Bonus pursuant to Section 3(B) and
the number of shares subject to options granted pursuant to Section 3(C), shall
be reviewed at least annually by the Compensation Committee and shall be subject
to increase (but not decrease) at any time and from time to time on a basis
determined by the Compensation Committee, in the exercise of its sole
discretion. Any such action taken by the Compensation Committee shall be
evidenced by the written minutes or records of the Compensation Committee.
E. Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans that are tax-qualified under Section 401(a) of the Code,
and all plans that are supplemental to any such tax-qualified plans, in each
case to the extent that such plans are applicable generally to other executives
of the Company and its Affiliates, but in no event shall such plans provide the
Executive with incentive opportunities (measured with respect to both regular
and special incentive opportunities, to the extent, if any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities that are, in each case, less favorable to the Executive, in the
aggregate, than the most favorable plans of the Company and its Affiliates. As
used in this Agreement, the term "most favorable" shall, when used with
reference to any plans, practices, policies or programs of the Company and its
Affiliates, be deemed to refer to the plans, practices, policies or programs of
the Company and its Affiliates, as in effect at any time during the Employment
Period and provided generally to other executives of the Company or its
Affiliates, which are most favorable to the Executive.
F. Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company or its Affiliates
(including medical, prescription, dental, vision, disability, salary
continuance, group life and supplemental group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally to
other executives of the Company or its Affiliates, but in no event shall such
plans, practices, policies and programs provide the Executive with benefits that
are less favorable, in the aggregate, than the most favorable such plans,
practices, policies and programs of the Company and its Affiliates.
G. Reimbursement of Business and Other Expenses; Perquisites.
(i) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in
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accordance with the most favorable plans, practices, policies and programs
of the Company and its Affiliates.
(ii) Fringe Benefits and Perquisites. During the Employment Period,
the Executive shall be entitled to fringe benefits and perquisites in
accordance with the most favorable plans, practices, policies and programs
of the Company and its Affiliates applicable to similarly situated
executives, subject to the following:
(a) the Company shall maintain a flexible perquisites spending
account in the amount of $25,000 for each 12-month period in the
Employment Period for use by the Executive in paying the actual costs
of (1) annual country club, luncheon and health club membership dues,
(2) the portion of the costs of an automobile purchased or leased by
the Company for the Executive's use (including costs of insurance,
repair and maintenance) that is allocated to the Executive as a result
of his personal use of such automobile, (3) personal financial
(including tax) counseling and return preparation by a firm chosen by
the Executive, and (4) a mobile phone or phones, and shall pay to the
Executive in cash at the end of each 12-month period in the Employment
Period the remaining balance, if any, in such account; and
(b) the Company shall pay for the initiation membership fee
(including any bond requirements) for one country, luncheon or health
club on behalf of the Executive.
(iii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to secretarial and other assistance
to the extent needed to fulfill his corporate responsibilities, at least
equal to the most favorable of the foregoing provided to the Executive by
the Company and its Affiliates at any time during the Employment Period.
(iv) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans,
practices, policies and programs of the Company and its Affiliates. In
addition, the Company acknowledges that the Executive may have substantial
vacation time accrued during periods prior to the Agreement Effective Date.
The Company agrees that the Executive shall be entitled to take any and all
of such accrued vacation at any time notwithstanding any other provision of
this Agreement.
H. Personal Income Taxes. If the Executive relocates from a state
without a personal income tax at the time of his relocation to a state having a
personal income tax, or if the Executive resides in a state without a personal
income tax on the Agreement Effective Date which subsequently adopts a personal
income tax, then, in either case, the Company shall pay to the Executive such
additional compensation as is necessary (after taking into account all federal,
state and local taxes payable by the Executive as a result of the receipt of
such additional compensation) to place the
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Executive in the same after-tax position (including federal, state and local
taxes) he would have been in had no such excise or similar purpose tax (or
interest or penalties thereon) been paid or incurred.
4. TERMINATION OF EMPLOYMENT
A. Termination. This Agreement may be terminated at any time during the
Employment Period provided that the amounts and obligations set forth in Section
5 are paid and performed by the Company and only in the following events:
(i) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If
the Company determines in good faith that the Disability of the Executive
has occurred during the Employment Period, it may give to the Executive
written notice of its intention to terminate the Executive's employment. In
such event, the Executive's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by the Executive
(the "Disability Effective Date"), provided that, within the 30 days after
such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties.
(ii) Good Reason; During a Window Period. The Executive may
terminate his employment during the Employment Period (a) at any time for
Good Reason or (b) for any reason during a Window Period. The Company may
terminate the Executive's employment (x) for any reason, including for
Cause, during a Window Period or (y) for any reason other than for Cause at
any time.
(iii) Cause or Voluntary Resignation (other than during a Window
Period). The Company may terminate the Executive's employment during the
Employment Period for Cause and the Executive may terminate his employment
during the Employment Period for any reason. Any termination of this
Agreement that purportedly is pursuant to this Section 4(A)(iii) but which
meets the more specific requirements of a termination pursuant to Section
4(A)(ii) shall be deemed for all purposes of this Agreement to be a
termination pursuant to Section 4(A)(ii).
B. Notice of Termination. Any termination by the Company or the
Executive pursuant to Section 4(A)(ii) or 4(A)(iii) shall be communicated by a
"Notice of Termination" to the other party hereto. The failure by the Executive
or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive's or the Company's rights hereunder.
C. Date of Termination. For purposes of this Agreement, the term "Date
of Termination" means (i) if the Executive's employment is terminated pursuant
to Section 4(A)(ii) or
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<PAGE>
4(A)(iii), the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, and (ii) if the Executive's employment is
terminated by reason of the events set forth in Section 4(A)(i), the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
A. If, during the Employment Period, the Executive's employment is
terminated in accordance with Section 4(A)(i) or 4(A)(ii), the Company shall pay
or provide to or in respect of the Executive, within 10 days after the Date of
Termination, the following amounts and benefits:
(i) a lump sum in cash in an amount equal to the sum of (a) the
Executive's Annual Base Salary through the Date of Termination, (b) any
deferred compensation previously awarded to or earned by the Executive
(together with any accrued interest or earnings thereon) and (c)
compensation for all of the Executive's accrued vacation time based upon
the Executive's current Annual Base Salary, notwithstanding any limitation
on payment for accrued vacation then set forth in the Company's policies or
practices relating to payment for accrued vacation time, in each case to
the extent not theretofore paid (the sum of the amounts described in
clauses (a), (b) and (c) shall be hereinafter referred to as the "Accrued
Obligation"); and
(ii) a lump sum in cash in an amount equal to the Annual Base Salary
that would have been paid to the Executive pursuant to this Agreement for
the period (the "Remaining Employment Period") beginning on the Date of
Termination and ending on the latest possible date of termination of the
Employment Period in accordance with the definition of Employment Period if
the Executive's employment had not been terminated (the "Final Expiration
Date"); and
(iii) a lump sum in cash in an amount equal to the Annual Bonus that
would have been paid to the Executive pursuant to this Agreement for the
Remaining Employment Period, assuming for such purpose that the Annual
Bonus payable for each applicable period during the Remaining Employment
Term would equal the highest amount paid pursuant to Section 3(B) in
respect of the most recent three applicable 12-month periods (ending on
September 30 and December 31, as the case may be) prior to the Date of
Termination;
(iv) effective as of the Date of Termination, (a) immediate vesting
and exercisability of, and termination of any restrictions on sale or
transfer (other than any such restriction arising by operation of law)
with respect to, each and every stock option, restricted stock award,
restricted stock unit award and other equity-based award and performance
award (each, a "Compensatory Award") that is outstanding as of a time
immediately prior to the Date of Termination, (b) the extension of the term
during which each and every Compensatory Award may be exercised by the
Executive until the earlier of (x) the first
10
<PAGE>
anniversary of the Date of Termination or (y) the date upon which the right
to exercise any Compensatory Award would have expired if the Executive had
continued to be employed by the Company under the terms of this Agreement
until the Final Expiration Date and (c) at the sole election of Executive,
in exchange for any or all Compensatory Awards that are either denominated
in or payable in Common Stock, an amount in cash equal to the excess of (x)
the Highest Price Per Share over (y) the exercise or purchase price, if
any, of such Compensatory Awards; and
(v) continued participation in medical, dental and life insurance
coverage until Executive receives equivalent coverage and benefits under
the plans and programs of a subsequent employer (such coverage and benefits
to be determined on a coverage-by-coverage or benefit-by-benefit basis) or
the later of (a) the death of the Executive, (b) the death of the
Executive's spouse and (c) the youngest child of the Executive reaching age
21; provided that (x) if the executive is precluded from continuing his
participation in any benefit plan or program as provided in this clause
(v), he shall be provided with the after-tax economic equivalent of the
benefits provided under the plan or program in which he is unable to
participate for the period specified in this clause (v), (y) the economic
equivalent of any benefit foregone shall be deemed to be the lowest cost
that would be incurred by the Executive in obtaining such benefit himself
on an individual basis, and (z) payment of such after-tax economic
equivalent shall be made quarterly in advance.
B. If, during the Employment Period, the Executive's employment is
terminated in accordance with Section 4(A)(iii), this Agreement shall terminate
without further obligations to the Executive, other than for (i) the payment of
Accrued Obligations and (ii) unless the termination in accordance with Section
4(A)(iii) is for Cause, receipt of the benefits and payments specified in
Section 5(A)(v). In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination and
the benefits and payments specified in Section 5(A)(v) shall be provided as set
forth in such Section.
6. NON-EXCLUSIVITY OF RIGHTS.
Except as provided in Section 5, nothing in this Agreement (including
any termination pursuant to Section 4(A)(iii)) shall prevent or limit the
Executive's continuing or future participation in any plan, practice, policy or
program provided by the Company or any of its Affiliates and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its Affiliates. Amounts which are vested benefits or which
the Executive is otherwise entitled to receive under any plan, practice, policy
or program of, or any contract or agreement with, the Company or any of its
Affiliates at or subsequent to the Date of Termination shall be payable in
accordance with such plan, practice, policy or program or contract or agreement.
11
<PAGE>
7. FULL SETTLEMENT; RESOLUTION OF DISPUTES.
A. The Company's obligation to make payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any setoff, counterclaim, recoupment, defense, mitigation or other
claim, right or action which the Company may have against the Executive or
others. The Company agrees to pay promptly as incurred, to the full extent
permitted by law, all legal fees and expenses which the Executive may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any such payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the annual percentage rate which is three percentage
points above the interest rate shown as the Prime Rate in the Money Rates column
in the then most recently published edition of The Wall Street Journal
(Southwest Edition), or, if such rate is not then so published on at least a
weekly basis, the interest rate announced by Chase Manhattan Bank (or its
successor), from time to time, as its Base Rate (or prime lending rate), from
the date those amounts were required to have been paid or reimbursed to the
Executive until those amounts are finally and fully paid or reimbursed;
provided, however, that in no event shall the amount of interest contracted for,
charged or received hereunder exceed the maximum non-usurious amount of interest
allowed by applicable law.
B. If there shall be any dispute between the Company and the Executive
concerning (i) in the event of any termination of the Executive's employment by
the Company, whether such termination was for Cause or Disability or occurred
during a Window Period, or (ii) in the event of any termination of employment by
the Executive, whether Good Reason existed or whether such termination occurred
during a Window Period, then, unless and until there is a final, nonappealable
judgment by a court of competent jurisdiction declaring that such termination
was for Cause or Disability or that the determination by the Executive of the
existence of Good Reason was not made in good faith or that the termination did
not occur during a Window Period, the Company shall pay all amounts, and provide
all benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Section 5(A) as though such termination were by the Company
without Cause or by the Executive with Good Reason or during a Window Period;
provided, however, that the Company shall not be required to pay any disputed
amounts pursuant to this Section 7(B) except upon receipt of an undertaking by
or on behalf of the Executive to repay all such amounts to which the Executive
is ultimately adjudged by such court not to be entitled.
8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
Should any of the payments of Annual Base Salary, Annual Bonus, other
incentive or supplemental compensation, benefits, allowances, awards, payments,
reimbursements or other perquisites, or any other payment in the nature of
compensation, singly, in any combination or in the aggregate, that are provided
for hereunder to be paid to or for the benefit of the Executive be
12
<PAGE>
determined or alleged to be subject to an excise or similar purpose tax pursuant
to Section 4999 of the Code, or any successor or other comparable federal, state
or local tax law by reason of being a "parachute payment" (within the meaning of
Section 280G of the Code), the Company shall pay to the Executive such
additional compensation as is necessary (after taking into account all federal,
state and local taxes payable by the Executive as a result of the receipt of
such additional compensation) to place the Executive in the same after-tax
position (including federal, state and local taxes) he would have been in had no
such excise or similar purpose tax (or interest or penalties thereon) been paid
or incurred. The Company hereby agrees to pay such additional compensation
within the earlier to occur of (i) five business days after the Executive
notifies the Company that the Executive intends to file a tax return taking the
position that such excise or similar purpose tax is due and payable in reliance
on a written opinion of the Executive's tax counsel (such tax counsel to be
chosen solely by the Executive) that it is more likely than not that such excise
tax is due and payable or (ii) 24 hours of any notice of or action by the
Company that it intends to take the position that such excise tax is due and
payable. The costs of obtaining the tax counsel opinion referred to in clause
(i) of the preceding sentence shall be borne by the Company, and as long as such
tax counsel was chosen by the Executive in good faith, the conclusions reached
in such opinion shall not be challenged or disputed by the Company. If the
Executive intends to make any payment with respect to any such excise or similar
purpose tax as a result of an adjustment to the Executive's tax liability by any
federal, state or local tax authority, the Company will pay such additional
compensation by delivering its cashier's check payable in such amount to the
Executive within five business days after the Executive notifies the Company of
his intention to make such payment. Without limiting the obligation of the
Company hereunder, the Executive agrees, in the event the Executive makes any
payment pursuant to the preceding sentence, to negotiate with the Company in
good faith with respect to procedures reasonably requested by the Company which
would afford the Company the ability to contest the imposition of such excise or
similar purpose tax; provided, however, that the Executive will not be required
to afford the Company any right to contest the applicability of any such excise
or similar purpose tax to the extent that the Executive reasonably determines
(based upon the opinion of his tax counsel) that such contest is inconsistent
with the overall tax interests of the Executive.
9. CONFIDENTIAL INFORMATION.
A. The Executive shall hold in a fiduciary capacity for the benefit of
the Company all secret or confidential information, knowledge or data relating
to the Company or any of its Affiliates, and their respective businesses, which
shall have been obtained by the Executive during the Executive's employment by
the Company or any of its Affiliates and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement) (referred to herein as "Confidential
Information"). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it. In no event shall an asserted violation of the
provisions of this Section 9 constitute
13
<PAGE>
a basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement. Within 30 days of the termination of Executive's
employment for any reason, Executive shall return to Company all documents and
other tangible items of or containing Company information which are in
Executive's possession, custody or control.
B. The Executive shall disclose promptly to the Company any and all
conceptions and ideas for inventions, improvements and valuable discoveries,
whether patentable or not, which are conceived or made by the Executive solely
or jointly with any other Person or Persons during the Employment Period and
which pertain primarily to the material business activities of the Company, and
the Executive hereby assigns and agrees to assign all his interests therein to
the Company or to its nominee; whenever requested to do so by the Company, the
Executive shall execute any and all applications, assignments or other
instruments which the Company shall deem necessary to apply for and obtain
Letters of Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein. These obligations shall (i) continue
beyond the Date of Termination with respect to inventions, improvements and
valuable discoveries, whether patentable or not, conceived, made or acquired by
the Executive during the Employment Period and (ii) be binding upon the
Executive's assigns, executors, administrators and other legal representatives.
10. COVENANT NOT TO COMPETE
A. Executive recognizes that in each of the highly competitive businesses
in which the Company is engaged, personal contact is of primary importance in
securing new customers and in retaining the accounts and goodwill of present
customers and protecting the business of the Company. The Executive, therefore,
agrees that during the Employment Period and, if the Date of Termination occurs
by reason of the termination of Executive's employment in accordance with
Section 4(A)(iii), for a period of one year after the Date of Termination, he
will not, within any country with respect to which he has devoted substantial
attention to the material business interests of the Company or any of its
Affiliates as of the Date of Termination without regard, in either case, to
whether the Executive has worked at such location (the "Relevant Geographic
Area"), with respect to only the Relevant Geographic Area, (i) accept employment
or render service to any person that is engaged in a business directly
competitive with the business then engaged in by the Company or any of its
Affiliates or (ii) enter into or take part in or lend his name, counsel or
assistance to any business, either as proprietor, principal, investor, partner,
director, officer, executive, consultant, advisor, agent, independent
contractor, or in any other capacity whatsoever, for any purpose that would be
competitive with the business of the Company or any of its Affiliates (all of
the foregoing activities are collectively referred to as the "Prohibited
Activity").
B. In addition to all other remedies at law or in equity which the
Company may have for breach of a provision of this Section 10 by the Executive,
it is agreed that in the event of any breach or attempted or threatened breach
of any such provision, the Company shall be entitled, upon application to any
court of proper jurisdiction, to a temporary restraining order or preliminary
injunction (without the necessity of (i) proving irreparable harm, (ii)
establishing that monetary
14
<PAGE>
damages are inadequate or (iii) posting any bond with respect thereto) against
the Executive prohibiting such breach or attempted or threatened breach by
proving only the existence of such breach or attempted or threatened breach. If
the provisions of this Section 10 should ever be deemed to exceed the time,
geographic or occupational limitations permitted by the applicable law, the
Executive and the Company agree that such provisions shall be and are hereby
reformed to the maximum time, geographic or occupational limitations permitted
by the applicable law.
C. The covenants of the Executive set forth in this Section 10 are
independent of and severable from every other provision of this Agreement; and
the breach of any other provision of this Agreement by the Company or the breach
by the Company of any other agreement between the Company and the Executive
shall not affect the validity of the provisions of this Section 10 or constitute
a defense of the Executive in any suit or action brought by the Company to
enforce any of the provisions of this Section 10 or seek any relief for the
breach thereof by Executive.
D. The Executive acknowledges, agrees and stipulates that: (i) the terms
and provisions of this Agreement are reasonable and constitute an otherwise
enforceable agreement to which the terms and provisions of this Section 10 are
ancillary or a part of as contemplated by Tex. Bus. & Com. Code Ann. (S)(S)
15.50-15.52; (ii) the consideration provided by the Company under this Agreement
is not illusory; and (iii) the consideration given by the Company under this
Agreement, including the provision by the Company of Confidential Information to
the Executive as contemplated by Section 9, gives rise to the Company's interest
in restraining and prohibiting the Executive from engaging in the Prohibited
Activity within the Relevant Geographic Area as provided under this Section 10,
and the Executive's covenant not to engage in the Prohibited Activity within the
Relevant Geographic Area pursuant to this Section 10 is designed to enforce the
Executive's consideration (or return promises), including the Executive's
promise to not disclose Confidential Information under this Agreement.
11. GENERAL PROVISIONS.
A. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to principles
of conflict of laws that would require the application of the laws of any other
state or jurisdiction.
B. Successors.
(i) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's heirs, executors and other legal representatives.
(ii) This Agreement shall inure to the benefit of and be binding
upon the Company and may only be assigned to a successor described in
Section 11(B)(iii).
15
<PAGE>
(iii) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
C. Headings. The headings of Sections and subsections hereof are
included for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
D. Amendments; Waivers. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and heirs, executors and other legal representatives.
E. Notices. Any notice, demand, request, consent, approval, declaration,
delivery or other communication hereunder to be made pursuant to the provisions
of this Agreement shall be sufficiently given or made if in writing and (i)
delivered in person with receipt acknowledged, (ii) sent by registered or
certified mail, return receipt requested, postage prepaid, (iii) sent by
overnight courier with guaranteed next day delivery or (iv) sent by telex or
telecopier to the party to whom directed at the following address: 13550
Hempstead Highway, Houston, Texas 77040, or at such other address as may be
substituted by notice given as herein provided. The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice. Any notice or other communication hereunder shall be effective
when actually received by the addressee.
F. Severability. If any one or more of the provisions of this Agreement
shall, for any reason, be held or found by final judgment of a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect,
(i) such invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, (ii) this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein
(except that this clause (ii) shall not prohibit any modification allowed under
Section 10) and (iii) if the effect of a holding or finding that any such
provision is invalid, illegal or unenforceable is to modify to the Executive's
detriment, reduce or eliminate any compensation, reimbursement, payment,
allowance or other benefit to the Executive intended by the Company and the
Executive in entering into this Agreement, the Company shall, within 30 days
after the date of such finding or holding, negotiate and expeditiously enter
into an agreement with the Executive which contains alternative provisions
(reasonably acceptable to the Executive) that will restore to the Executive (to
the extent lawfully permissible) substantially the same economic, substantive
and income tax benefits and legal rights the Executive would have enjoyed had
such provision been upheld as legal, valid and enforceable.
16
<PAGE>
G. Tax Withholding. The Company may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
H. No Waiver. The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, including the right of the Executive to terminate employment for
Good Reason or during a Window Period pursuant to Section 4 of this Agreement,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
I. Entire Agreement. This agreement contains the complete and total
understanding of the parties concerning the subject matter hereof and expressly
supersedes any previous agreement between the parties relating to the subject
matter hereof as well as any agreement between Executive and Dril-Quip, Inc., a
Texas corporation.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
DRIL-QUIP, INC.
By:_________________________________
[Name]
[Title]
____________________________________
[Executive]
17
<PAGE>
EXHIBIT 1
---------
DRIL-QUIP ANNUAL INCENTIVE PLAN
-------------------------------
PERFORMANCE MEASURES AND AWARDS MATRIX
--------------------------------------
The Executive shall be entitled to an annual cash bonus equal to up to
120% of his then applicable Annual Base Salary, with (i) a bonus equal to up to
60% of the Annual Base Salary based on the Company's actual earnings before
interest and taxes ("EBIT") measured relative to the Company's budget or plan
for each 12-month period ended December 31 and (ii) a bonus equal to up to 60%
of the Annual Base Salary based on the Company's return on capital (defined as
(a) EBIT divided by (b) total assets less current liabilities) assessed relative
to the Company's industry peers during each 12-month period ended September 30.
The Company's budget or plan for each 12-month period utilized for purposes of
clause (i) above, and the companies comprising the Company's industry peers
utilized for purposes of clause (ii) above, shall be as proposed by the
Executive and approved by the Compensation Committee in the exercise of its
reasonable discretion. The calculation of EBIT and return on capital for each
applicable 12-month period shall be as determined by the Company's independent
public accountants and contained in a written report delivered to the Executive
and the Compensation Committee. The determination of the return on capital for
the industry peers, and the applicable performance percentages for purposes of
the Incentive Awards Matrix set forth below, shall be made by the Compensation
Committee in the exercise of its reasonable discretion. Amounts owing in
respect of clause (i) and clause (ii) above shall be paid no later than 90 days
following the end of each applicable 12-month period.
ANNUAL INCENTIVE AWARDS MATRIX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
EBIT ELEMENT ROCE ELEMENT
- -------------------------------------------------------------------------------------
EBIT ROCE ROCE
INCENTIVE PERFORMANCE INCENTIVE AS TOTAL AWARD
PAY AS % (RELATIVE % OPPORTUNITY
EBIT PERFORMANCE AS % OF BASE TO OF BASE (% OF BASE
OF BUDGET SALARY INDUSTRY SALARY SALARY)
PEERS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum 130% 60.0 75th%ile 60.0 120%
127 57.0 72 57.0 114
124 54.0 69 54.0 108
121 51.0 66 51.0 102
118 48.0 63 48.0 96
115 45.0 60 45.0 90
112 42.0 58 42.0 84
109 39.0 56 39.0 78
106 36.0 54 36.0 72
103 33.0 52 33.0 66
Target 100% 30.0 + 50%ile 30.0 = 60
97 28.0 48 28.0 56
94 26.0 46 26.0 52
91 24.0 44 24.0 48
88 22.0 42 22.0 44
85 20.0 40 20.0 40
82 18.0 38 18.0 36
79 16.0 36 16.0 32
76 14.0 34 14.0 28
73 12.0 32 12.0 24
Threshold 70% 10.0 30th %ile 10.0 20
less than 70% 0.0 0.0 0.0 0
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.13
1997 INCENTIVE PLAN
OF
DRIL-QUIP, INC.
1. Establishment of This Plan. Dril-Quip, Inc., a Delaware
corporation (the "Company"), hereby establishes this 1997 Incentive Plan of
Dril-Quip, Inc. (this "Plan"). References in this Plan to "Paragraphs" are to
Paragraphs of this Plan.
2. Definitions. As used in this Plan, the following terms have the
following respective meanings:
"Annual Meeting" means the annual meeting of the stockholders of the
Company which is held pursuant to Section 211(b) of the Delaware General
Corporation Law.
"Authorized Officer" means any Chairman of the Board (or any other
senior officer of the Company to whom any Chairman of the Board delegates,
by written notice to the Committee of that delegation, authority to execute
any Award Agreement).
"Award" means an Employee Award.
"Award Agreement" means any Employee Award Agreement.
"Board" means the Board of Directors of the Company.
"Cash Award" means an award denominated in cash.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" means the Board; provided, that, to the extent required in
order for Employee Awards to be exempt from Section 16 of the Exchange Act
by virtue of the provisions of Rule 16b-3, Committee shall mean a
Compensation Committee of the Board consisting of at least two members of
the Board who meet the requirements of the definition of "non-employee
director" set forth in Rule 16b-3(b)(3)(i) promulgated under the Exchange
Act.
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<PAGE>
"Common Stock" means the Common Stock, par value $0.01 per share, of
the Company.
"Company" means Dril-Quip, Inc., a Delaware corporation.
"Director" means an individual serving as a member of the Board.
"Dividend Equivalents" means, with respect to shares of Restricted
Stock, an amount equal to all dividends and other distributions (or the
economic equivalent thereof) that are payable to stockholders of record
during the Restriction Period applicable to those shares on a like number
of shares of Common Stock.
"Employee" means any salaried employee of the Company or any of its
Subsidiaries.
"Employee Award" means the grant under this Plan of any Option, SAR,
Stock Award, Cash Award or Performance Award, whether granted singly or in
combination or tandem with any other Award, to a Participant who is an
Employee on such terms and subject to such conditions and limitations as
the Committee may establish consistent with the terms of this Plan.
"Employee Award Agreement" means a written agreement between the
Company and a Participant who is an Employee which sets forth the terms,
conditions and limitations applicable to an Employee Award granted to that
Employee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value" of a share of Common Stock means, as of a
particular date, (i) if shares of Common Stock are listed on a national
securities exchange, the mean between the highest and lowest sales price
per share of Common Stock on the consolidated transaction reporting system
for the principal national securities exchange on which shares of Common
Stock are listed on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was
so reported, (ii) if shares of Common Stock are not so listed but are
quoted on the Nasdaq National Market, the mean between the highest and
lowest sales price per share of Common Stock reported by the Nasdaq
National Market on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was
so reported, (iii) if the Common Stock is not so listed or quoted, the
mean between the closing bid and asked price on that date, or, if there are
no quotations available for that date, on the last preceding date for which
those quotations are available, as reported by the Nasdaq Stock Market, or,
if not reported by the Nasdaq Stock Market, by the National Quotation
Bureau Incorporated, or (iv) if shares of Common Stock are not publicly
traded, the most recent value determined by an independent appraiser
appointed by the Company for that purpose; provided that the Fair Market
Value of Common
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<PAGE>
Stock subject to an Award granted or contingent upon the IPO shall be the
price to the public of Common Stock offered in the IPO as set forth on the
cover page of the prospectus relating to the IPO.
"Incentive Option" means an Option that is intended to comply with the
requirements set forth in Section 422 of the Code.
"IPO" means the first time a registration statement filed under the
Securities Act of 1933 and respecting an underwritten primary offering by
the Company of shares of Common Stock is declared effective under that Act
and the shares registered by that registration statement are issued and
sold by the Company (otherwise than pursuant to the exercise of any
overallotment option).
"IPO Closing Date" means the date on which the Company first receives
payment for the shares of Common Stock it sells in the IPO.
"Nonqualified Stock Option" means an Option that is not an Incentive
Option.
"Option" means a right to purchase a specified number of shares of
Common Stock at a specified price.
"Participant" means an Employee to whom an Award has been made under
this Plan.
"Performance Award" means an award made pursuant to this Plan to a
Participant who is an Employee the earning of which is subject to the
attainment of one or more Performance Goals.
"Performance Goal" means a standard established by the Committee to
determine in whole or in part whether a Performance Award will be earned.
"Restricted Stock" means any Common Stock whose transfer is restricted
or which is subject to forfeiture provisions as provided in the Award
Agreement relating thereto.
"Restriction Period" means a period of time beginning as of the
effective date as of which an Award of Restricted Stock is made pursuant to
this Plan and ending as of the date on which the Common Stock subject to
that Award is no longer restricted as to its transfer or subject to
forfeiture provisions.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, or
any successor to such rule.
"SAR" means a right to receive a payment, in cash or Common Stock,
equal to the excess of the Fair Market Value or other specified valuation
of a specified number of shares
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of Common Stock on the date the right is exercised over a specified strike
price, in each case, as determined by the Committee.
"Stock Award" means an award in the form of shares of Common Stock or
units denominated in shares of Common Stock.
"Subsidiary" means (i) in the case of a corporation, any corporation
of which the Company directly or indirectly owns shares representing more
than 50% of the combined voting power of the shares of all classes or
series of capital stock of that corporation which have the right to vote
generally on matters submitted to a vote of the stockholders of that
corporation and (ii) in the case of a partnership or other business entity
not organized as a corporation, any such business entity of which the
Company directly or indirectly owns more than 50% of the voting, capital or
profits interests (whether in the form of partnership interests, membership
interests or otherwise).
3. Objectives. The Company has designed this Plan (i) to attract
and retain key Employees, (ii) to encourage the sense of proprietorship of these
persons in the Company and (iii) to stimulate the active interest of these
persons in the development and financial success of the Company and its
Subsidiaries by making Awards under this Plan.
4. Eligibility. Key Employees eligible for Employee Awards are
those assigned or to be assigned positions of responsibility and whose
performance, in the judgment of the Committee, can have a significant effect on
the success of the Company and its Subsidiaries.
5. Common Stock Available for Awards. Subject to the provisions of
paragraph 15 hereof, there shall be available for Awards under this Plan granted
wholly or partly in Common Stock (including rights or options that may be
exercised for or settled in Common Stock) an aggregate of 1,700,000 shares of
Common Stock. No more than 1,700,000 shares of Common Stock will be used for
Awards of Incentive Options. The number of shares of Common Stock which are the
subject of Awards that are forfeited or terminated, expire unexercised, are
settled in cash in lieu of Common Stock or in a manner such that all or some of
the shares covered thereby are not issued to a Participant or are exchanged for
a consideration that does not involve Common Stock will again immediately become
available for Awards hereunder. The Committee may from time to time adopt and
observe such procedures concerning the counting of shares against the Plan
maximum as it may deem appropriate. The Board and the appropriate officers of
the Company will from time to time take whatever actions are necessary to file
any required documents with governmental authorities, stock exchanges and
transaction reporting systems to ensure that shares of Common Stock are
available for issuance pursuant to Awards.
6. Administration. (a) The Committee will administer this Plan.
(b) Subject to the provisions hereof, the Committee will have full and
exclusive power and authority to administer this Plan and to take all actions
that are specifically contemplated
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hereby or are necessary or appropriate in connection with the administration
hereof. The Committee also will have full and exclusive power to interpret this
Plan and to adopt such rules, regulations and guidelines for carrying out this
Plan as it may deem necessary or proper, all of which powers will be exercised
in the best interests of the Company and in keeping with the objectives of this
Plan. The Committee may, in its discretion, provide for the extension of the
exercisability of any Employee Award, accelerate the vesting or exercisability
of any Employee Award, eliminate or make less restrictive any restrictions
contained in any Employee Award, waive any restriction or other provision of
this Plan or any Employee Award or otherwise amend or modify any Employee Award
in any manner that is either (i) not adverse to the Participant to whom that
Employee Award was granted or (ii) consented to in writing by that Participant.
The Committee may grant an Employee Award to any individual who has agreed in
writing to become an Employee within six months after the date of that
agreement, provided that the effectiveness of that Award will be subject to the
condition that the individual actually becomes an Employee within that time
period. The Committee may correct any defect or supply any omission or reconcile
any inconsistency in this Plan or in any Employee Award in the manner and to the
extent the Committee deems necessary or desirable to further the purposes of
this Plan. Any decision of the Committee in the interpretation and
administration of this Plan will lie within its sole and absolute discretion and
will be final, conclusive and binding on all parties concerned.
(c) No member of the Committee or officer of the Company to whom the
Committee has delegated authority in accordance with the provisions of paragraph
7 of this Plan will be liable for anything done or omitted to be done by him or
her, by any member of the Committee or by any officer of the Company in
connection with the performance of any duties under this Plan, except for his or
her own willful misconduct or as expressly provided by statute.
7. Delegation of Authority. The Committee may delegate to any
Chairman of the Board and to other senior officers of the Company its duties
under this Plan on such terms and subject to such conditions or limitations as
the Committee may establish, except that the Committee may not delegate to any
person the authority to grant Awards to, or take other action with respect to,
Employee Participants who are subject to Section 16 of the Exchange Act.
8. Employee Awards. (a) The Committee will determine the type or
types of Employee Awards to be made and will designate from time to time the
Employees who are to receive Employee Awards. Each Employee Award will be
evidenced by an Employee Award Agreement containing such terms, conditions and
limitations as the Committee determines in its sole discretion and signed by
the Participant to whom the Employee Award is made and by an Authorized Officer
for and on behalf of the Company. Employee Awards may consist of those listed
in this paragraph 8(a) hereof and may be granted singly or in combination or
tandem with other Employee Awards. Employee Awards also may be made in
combination or tandem with, in replacement of, or as alternatives to grants or
rights under this Plan or any other employee plan of the Company or any of its
Subsidiaries, including the plan of any acquired entity. An Employee Award may
provide for the grant or issuance of additional, replacement or alternative
Employee Awards upon the occurrence of specified events, including the exercise
of the original Employee Award
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granted to a Participant. All or part of an Employee Award may be subject to
conditions established by the Committee, which may include, but are not limited
to, continuous service with the Company and its Subsidiaries, achievement of
specific business objectives, increases in specified indices, attainment of
specified growth rates and other comparable measurements of performance. If a
Participant holding an Employee Award ceases to be an Employee, any unexercised,
deferred, unexercisable, unvested or unpaid portion of that Employee Award will
be treated as set forth in the applicable Employee Award Agreement.
(i) Stock Option. An Employee Award may be in the form of an
Option. An Option awarded pursuant to this Plan may consist of an Incentive
Option or a Nonqualified Option. The price at which any share of Common
Stock may be purchased on the exercise of any Option will be not less than
the Fair Market Value of a share of the Common Stock on the date of grant
of that Option, and the Committee will determine the other terms,
conditions and limitations applicable to each Option, including its term
and the date or dates on which it becomes exercisable.
(ii) Stock Appreciation Right. An Employee Award may be in the form
of an SAR. The Committee will determine the terms, conditions and
limitations applicable to each SAR awarded pursuant to this Plan, including
its term and the date or dates on which it becomes exercisable.
(iii) Stock Award. An Employee Award may be in the form of a Stock
Award. The Committee will determine the terms, conditions and limitations
applicable to each Stock Award granted pursuant to this Plan.
(iv) Cash Award. An Employee Award may be in the form of a Cash
Award. The Committee will determine the terms, conditions and limitations
applicable to each Cash Award granted pursuant to this Plan.
(v) Performance Award. Without limiting the type or number of
Employee Awards that may be made under the other provisions of this Plan,
an Employee Award may be in the form of a Performance Award. A Performance
Award will be paid, vested or otherwise deliverable solely on account of
the attainment of one or more pre-established, objective Performance Goals
established by the Committee prior to the earlier to occur of (x) 90 days
after the commencement of the period of service to which the Performance
Goal relates or (y) the lapse of 25% of the period of service (as scheduled
in good faith at the time the goal is established), and in any event while
the outcome is substantially uncertain. A Performance Goal is objective if
a third party having knowledge of the relevant facts could determine
whether the goal is met. A Performance Goal may be based on one or more
business criteria, including, but not limited to, those that apply to the
individual, one or more lines or classes of products or services of the
Company, one or more business divisions, groups or units of the Company, or
the Company as a whole, and may include one or more of the following:
increased revenue, net income, stock price, market share, earnings per
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share, return on equity, return on assets or decrease in costs. Unless
otherwise stated, a Performance Goal need not be based on an increase or
positive result under a particular business criterion and could include,
for example, maintaining the status quo or limiting economic losses
(measured, in each case, by reference to specific business criteria). In
interpreting Plan provisions applicable to Performance Goals and
Performance Awards, it is the intent of this Plan to conform with the
standards of Section 162(m) of the Code and Treasury Regulation (S) 1.162-
27(e)(2)(i) or any successor law or regulation, and the Committee in
establishing such goals and interpreting the Plan will be guided by those
provisions. Prior to the payment of any compensation based on the
achievement of Performance Goals, the Committee must certify in writing
that the applicable Performance Goals were, in fact, satisfied. Subject to
the foregoing provisions, the Committee will determine the terms,
conditions and limitations applicable to Performance Awards.
(b) Notwithstanding anything to the contrary contained in this
Plan, the following limitations will apply to each Employee Award:
(i) no Participant may be granted, during any one-year period,
Employee Awards consisting of Options or SARs that are exercisable for more
than 300,000 shares of Common Stock;
(ii) no Participant may be granted, during any one-year period,
Stock Awards covering or relating to more than 10,000 shares of Common
Stock (the limitation set forth in this clause (ii), together with the
limitation set forth in clause (i) above, being hereinafter collectively
referred to as the "Stock-based Awards Limitations"); and
(iii) no Participant may be granted Employee Awards consisting of
cash or in any other form permitted under this Plan (other than Employee
Awards consisting of Options or SARs or otherwise consisting of shares of
Common Stock or units denominated in such shares) in respect of any one-
year period having a value determined on the date of grant in excess of
$1,000,000.
9. Payment of Awards. (a) General. Payment of Employee Awards may
be made in the form of cash or Common Stock, or a combination thereof, and may
include such restrictions as the Committee may determine, including, in the case
of Common Stock, restrictions on transfer and forfeiture provisions. If payment
of an Employee Award is made in the form of shares of Restricted Stock, the
applicable Award Agreement relating to those shares will specify whether they
are to be issued at the beginning or end of their Restriction Period. If shares
of Restricted Stock are to be issued at the beginning of their Restriction
Period, the certificates evidencing those shares (to the extent that those
shares are so evidenced) will contain appropriate legends and restrictions that
describe the terms and conditions of the restrictions applicable thereto. If
shares of Restricted Stock are to be issued at the end of their Restricted
Period, the right to receive those shares will be evidenced by book entry
registration or in such other manner as the Committee may determine.
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(b) Deferral. With the approval of the Committee, amounts payable in
respect of Employee Awards may be deferred and paid either in the form of
installments or as a lump-sum payment. The Committee may permit selected
Participants to elect to defer payments of some or all types of Employee Awards
in accordance with procedures the Committee establishes. Any deferred payment
of an Employee Award, whether elected by the Participant or specified by the
applicable Award Agreement or by the Committee, may be forfeited if and to the
extent that the applicable Award Agreement so provides.
(c) Dividends and Interest. Rights to dividends or Dividend
Equivalents may be extended to and made part of any Employee Award consisting of
shares of Common Stock or units denominated in shares of Common Stock, subject
to such terms, conditions and restrictions as the Committee may establish. The
Committee also may establish rules and procedures for the crediting of interest
on deferred cash payments and Dividend Equivalents for Employee Awards
consisting of shares of Common Stock or units denominated in shares of Common
Stock.
(d) Substitution of Awards. At the discretion of the Committee, a
Participant who is an Employee may be offered an election to substitute any
Employee Award for another Employee Award or Awards of the same or a different
type.
10. Stock Option Exercise. The price at which shares of Common
Stock may be purchased under an Option will be paid in full at the time of
exercise in cash or, if elected by the optionee, the optionee may purchase those
shares by means of tendering Common Stock or surrendering another Award,
including shares of Restricted Stock, valued at their Fair Market Value per
share on the date of exercise, or any combination thereof. The Committee will
determine acceptable methods for Participants who are Employees to tender Common
Stock or other Employee Awards; provided, that any Common Stock that is or was
the subject of an Employee Award may be so tendered only if it has been held by
the Participant for six months. The Committee may provide for procedures to
permit the exercise or purchase of Employee Awards by use of the proceeds to be
received from the sale of Common Stock issuable pursuant to an Employee Award.
Unless otherwise provided in the applicable Award Agreement, if shares of
Restricted Stock are tendered as consideration for the exercise of an Option,
the number of the shares issued on the exercise of the Option which equals the
number of shares of Restricted Stock used as consideration therefor will be
subject to the same restrictions as the Restricted Stock so submitted as well as
to any additional restrictions the Committee may impose.
11. Taxes. The Company will have the right to deduct applicable
taxes from any Employee Award payment and withhold, at the time of delivery or
vesting of cash or shares of Common Stock under this Plan, or at the time
otherwise required by applicable law, an appropriate amount of cash or number of
shares of Common Stock or a combination thereof for payment of taxes required by
law or to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for withholding of those taxes. The
Committee may permit withholding to be satisfied by the transfer to the Company
of shares of Common Stock theretofore owned by the holder of the Employee Award
with respect to which withholding is required. If shares of Common Stock
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are used to satisfy tax withholding, those shares will be valued at their Fair
Market Value per share when the tax withholding is required to be made. The
Committee may provide for loans, on either a short-term or demand basis, from
the Company to a Participant who is an Employee to permit the payment of taxes
required by law.
12. Amendment, Modification, Suspension or Termination. The Board
may amend, modify, suspend or terminate this Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose permitted
by law, except that no amendment or alteration that would adversely affect the
rights of any Participant under any Award previously granted to that Participant
will be made without the consent of that Participant.
13. Assignability. Unless otherwise determined by the Committee and
provided in the applicable Award Agreement, no Award or any other benefit under
this Plan will be assignable or otherwise transferable except by will or the
laws of descent and distribution or pursuant to 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. The Committee may
prescribe and include in any Award Agreement other restrictions on transfer.
Any attempted assignment of an Award or any other benefit under this Plan in
violation of this Paragraph 13 will be null and void.
14. Adjustments. (a) The existence of outstanding Awards will not
affect in any manner the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations, reorganizations or
other changes in the capital stock of the Company or its business or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
other stock (whether or not that issue is prior to, on a parity with or junior
to the Common Stock) or the dissolution or liquidation of the Company, or any
sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding of any kind, whether or not of a character similar
to that of the acts or proceedings enumerated above.
(b) If any subdivision, split or combination of outstanding shares of
Common Stock, or any declaration of a dividend payable in shares of Common
Stock, occurs, then, except with respect to the Awards outstanding immediately
prior to the Closing Date and consisting of Options, (i) the number of shares of
Common Stock reserved under this Plan, (ii) the number of shares of Common Stock
covered by outstanding Awards in the form of Common Stock or units denominated
in Common Stock, (iii) the exercise or other price in respect of such Awards,
(iv) the appropriate Fair Market Value and other price determinations for such
Awards, and (v) the Stock-based Awards Limitations each will be proportionately
adjusted by the Board to reflect the consequences of that occurrence. If any
recapitalization or capital reorganization of the Company, any consolidation or
merger of the Company with another corporation or entity, any adoption by the
Company of any plan of exchange affecting the Common Stock or any distribution
to holders of Common Stock of securities or property (other than normal cash
dividends) occurs, the Board will make appropriate adjustments to the amounts or
other items referred to in clauses (ii), (iii), (iv) and (v) of the preceding
sentence to give effect to that transaction; provided, that such adjustments
will be only those as are necessary to maintain the proportionate interest of
the holders of the Awards and
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preserve, without exceeding, the value of those Awards. In the event of a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Committee will be authorized to issue or
assume Awards by means of substitution of new Awards, as appropriate, for
previously issued Awards or to assume previously issued Awards as part of such
adjustment.
15. Restrictions. No Common Stock or other form of payment will be
issued with respect to any Award unless the Company is satisfied, on the basis
of advice of its counsel, that the issuance will comply with applicable federal
and state securities laws. Certificates evidencing shares of Common Stock
delivered under this Plan (to the extent that the shares are so evidenced) may
be subject to such stop-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any securities exchange or transaction
reporting system on which the Common Stock is then listed or to which it is
admitted for quotation and any applicable federal or state securities law. The
Committee may cause a legend or legends to be placed upon those certificates (if
any) to make appropriate reference to those restrictions.
16. Unfunded Plan. Insofar as it provides for Awards of cash, Common
Stock or rights thereto, this Plan will be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
cash, Common Stock or rights thereto under this Plan, any such accounts will be
used merely as a bookkeeping convenience. The Company will not be required to
segregate any assets that may at any time be represented by cash, Common Stock
or rights thereto, nor will this Plan be construed as providing for that
segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto to be granted under this
Plan. Any liability or obligation of the Company to any Participant with
respect to an Award of cash, Common Stock or rights thereto under this Plan
shall be based solely on any contractual obligations that may be created by this
Plan and any Award Agreement, and no such liability or obligation of the Company
will be deemed to be secured by any pledge or other encumbrance on any property
of the Company. Neither the Company nor the Board nor the Committee will be
required to give any security or bond for the performance of any obligation that
may be created by this Plan.
17. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, will be
governed by and construed in accordance with the laws of the State of Delaware.
18. Effectiveness. The Plan has been established by resolution of
the Board of Directors but is effective as of the day before the IPO Closing
Date.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" and to
the use of our report dated April 3, 1997 (except Note 11, as to which the
date is October 16, 1997), in the Registration Statement (Form S-1) and
related Prospectus of Dril-Quip, Inc. dated October 17, 1997.
Ernst & Young LLP
Houston, Texas
October 17, 1997
