<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
SMITH INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 1389 95-3822631
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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16740 HARDY STREET
P.O. BOX 60068
HOUSTON, TEXAS 77205
(281) 443-3370
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
NEAL S. SUTTON
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
SMITH INTERNATIONAL, INC.
16740 HARDY STREET
P.O. BOX 60068
HOUSTON, TEXAS 77205
(281) 233-5060
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
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ERIC A. BLUMROSEN MARCUS A. WATTS
GARDERE WYNNE SEWELL & RIGGS, L.L.P. LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P.
THREE ALLEN CENTER 3400 CHASE TOWER
333 CLAY AVENUE, SUITE 800 600 TRAVIS
HOUSTON, TEXAS 77002-4086 HOUSTON, TEXAS 77002
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this registration
statement and upon consummation of the merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER SHARE(2) AGGREGATE OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
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Common Stock, $1.00 par value.... 7,900,000 -- $97,118,000 $28,650
=================================================================================================================================
</TABLE>
(1) Represents the maximum number of shares of Common Stock issuable upon
consummation of the Merger described herein.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(f) of the Securities Act of 1933, as
amended. The registration fee was computed in accordance with Rule
457(f)(2) based upon the historical book value of the Common Stock, $25.00
par value per share, of Wilson Industries, Inc. ($97,118,000 as of
September 30, 1997).
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.
================================================================================
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WILSON INDUSTRIES, INC.
March , 1998
Dear Shareholders:
A special meeting of shareholders (the "Special Meeting") of Wilson
Industries, Inc., a Texas corporation ("Wilson"), will be held on April 27, 1998
at 10:00 a.m., Houston time, at 1302 Conti, Houston, Texas, to consider and vote
upon a proposal to approve and adopt the Merger Agreement dated as of January
19, 1998 (the "Merger Agreement") by and among Wilson, Smith International,
Inc., a Delaware corporation ("Smith"), and SII Acquisition Corp., a wholly
owned Texas subsidiary of Smith ("Merger Sub"). Pursuant to the terms of the
Merger Agreement, Merger Sub will merge with and into Wilson (the "Merger") with
Wilson continuing as the surviving corporation and a wholly owned subsidiary of
Smith. The attached Proxy Statement/Prospectus explains the terms of the
proposed Merger and provides other information concerning both Wilson and Smith.
We urge you to read these materials fully and carefully.
In connection with the approval of the Merger on January 21, 1998, Wilson's
Board of Directors received and took into account the written opinion of Morgan
Stanley & Co. Incorporated ("Morgan Stanley"), an investment banking firm
retained by Wilson, that, as of that date and based on the assumptions stated in
such opinion, the Merger consideration to be received by the holders of Wilson
common stock pursuant to the Merger Agreement is fair, from a financial point of
view, to such holders. Morgan Stanley's opinion is included in the attached
Proxy Statement/Prospectus.
For the Merger to become effective, among other conditions described in the
attached Proxy Statement/ Prospectus and the Merger Agreement, the holders of at
least two-thirds of the outstanding shares of Wilson's common stock must vote in
favor of the Merger. THE BOARD OF DIRECTORS OF WILSON BELIEVES THAT THE PROPOSED
MERGER IS IN THE BEST INTERESTS OF WILSON AND THE SHAREHOLDERS OF WILSON AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER.
You are cordially invited to attend the Special Meeting. Your vote is
important regardless of how many shares you own. Please review the attached
Proxy Statement/Prospectus and sign, date and mail your proxy in the envelope
provided. FAILURE TO VOTE BY PROXY OR IN PERSON AT THE SPECIAL MEETING IS THE
EQUIVALENT OF A VOTE AGAINST THE MERGER. Thank you for your prompt response and
cooperation.
Very truly yours,
Wallace S. Wilson
Chairman of the Board, President
and Chief Executive Officer
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WILSON INDUSTRIES, INC.
1301 CONTI
HOUSTON, TEXAS 77002
NOTICE OF SPECIAL MEETING OF THE SHAREHOLDERS
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Wilson Industries, Inc. ("Wilson") will be held on April 27, 1998
at 10:00 a.m., Houston time, at 1302 Conti, Houston, Texas, to consider and vote
upon a proposal to approve and adopt the Merger Agreement dated as of January
19, 1998 (the "Merger Agreement") by and among Wilson, Smith International,
Inc., a Delaware corporation ("Smith"), and SII Acquisition Corp., a wholly
owned Texas subsidiary of Smith ("Merger Sub"), whereby Merger Sub will merge
with and into Wilson (the "Merger") with Wilson continuing as the surviving
corporation and a wholly owned subsidiary of Smith.
Only holders of Wilson Common Stock of record at the close of business on
March 12, 1998 are entitled to notice of and to vote at the Special Meeting or
any adjournment or postponement thereof.
Shareholders are cordially invited and urged to attend the Special Meeting
in person. Those who will not attend and who wish their shares to be voted are
requested to sign, date and mail promptly the enclosed proxy in the postage
prepaid return envelope which is also enclosed. The specific details of the
Merger are fully described in the accompanying Proxy Statement/Prospectus and in
the Merger Agreement, a copy of which is attached to the Proxy
Statement/Prospectus as Appendix A.
By Order of the Board of Directors
Humberto G. Kuhn
Secretary
Houston, Texas
March , 1998
WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE URGED
TO SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY. SHAREHOLDERS WHO HAVE GIVEN
A PROXY MAY REVOKE THE PROXY AT ANY TIME BEFORE ITS EXERCISE AT THE SPECIAL
MEETING, AND SHAREHOLDERS THAT ARE PRESENT AT THE SPECIAL MEETING MAY WITHDRAW
THEIR PROXY AND VOTE IN PERSON. SHAREHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
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WILSON INDUSTRIES, INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 27, 1998
---------------------
SMITH INTERNATIONAL, INC.
(COMMON STOCK, $1.00 PAR VALUE)
PROSPECTUS
---------------------
This Proxy Statement/Prospectus is being furnished to shareholders of
Wilson Industries, Inc., a Texas corporation ("Wilson"), in connection with the
solicitation of proxies by its Board of Directors for use at a Special Meeting
of Shareholders (the "Special Meeting") to be held on April 27, 1998 at 10:00
a.m., Houston time, at 1302 Conti, Houston, Texas 77002 and any adjournment or
postponement thereof.
At the Special Meeting, shareholders of Wilson will be asked to consider
and vote upon a proposal to approve and adopt a Merger Agreement dated as of
January 19, 1998 (the "Merger Agreement") among Smith International, Inc., a
Delaware corporation ("Smith"), SII Acquisition Corp., a Texas corporation and a
direct wholly owned subsidiary of Smith ("Merger Sub"), and Wilson. The Merger
Agreement provides for the merger of Merger Sub with and into Wilson (the
"Merger"), as a result of which Wilson would become a direct wholly owned
subsidiary of Smith, and the outstanding shares of common stock, par value
$25.00 per share, of Wilson ("Wilson Common Stock") would be converted into the
right to receive an aggregate of 7,900,000 shares of common stock, par value
$1.00 per share, of Smith ("Smith Common Stock"). See "The Merger." A copy of
the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus. Under Texas law, holders of Wilson Common Stock will have
certain dissenters' rights of appraisal in connection with the Merger.
Smith has filed a registration statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering 7,900,000
shares of Smith Common Stock. Based on the market price of the Smith Common
Stock as of March 9, 1998, the market value of the consideration to be paid to
the holders of the Wilson Common Stock in the Merger would be $54 9/16 per share
of Wilson Common Stock for an aggregate total consideration for all outstanding
shares of approximately $431 million.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of Wilson on or about March , 1998.
On March 9, 1998, the closing price of Smith Common Stock as reported on
the New York Stock Exchange, Inc. (the "NYSE") was $54 9/16.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED IN EVALUATING THE SECURITIES OFFERED HEREBY.
---------------------
THE SHARES OF SMITH COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER 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
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
The date of this Proxy Statement/Prospectus is March , 1998
<PAGE> 5
AVAILABLE INFORMATION
Smith is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and other
information may be inspected and copied at the public reference facilities that
the Commission maintains at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the following Regional Offices of the Commission:
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information filed electronically by
Smith with the Commission that can be accessed over the Internet at
http://www.sec.gov. In addition, reports, proxy statements and other information
filed by Smith can be inspected at the offices of The New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, and at the offices of The
Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104.
Smith has filed with the Commission a registration statement on Form S-4
(together with all the amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the Smith
Common Stock issuable in connection with the Merger. Smith has provided the
information contained herein with respect to Smith and its subsidiaries, and
Wilson has provided the information with respect to Wilson and its subsidiaries.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement and any amendments hereto, including
exhibits filed as a part thereof, are available for inspection and copying as
set forth above. Statements contained in this Proxy Statement/Prospectus or in
any document incorporated in this Proxy Statement/Prospectus by reference as to
the contents of any contract or other document referred to herein or therein are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS REGARDING
SMITH BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS AND EXHIBITS SPECIFICALLY INCORPORATED BY REFERENCE ARE AVAILABLE TO
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, UPON REQUEST FROM INVESTOR
RELATIONS, SMITH INTERNATIONAL, INC., 16740 HARDY STREET, P.O. BOX 60068,
HOUSTON, TEXAS 77205, TELEPHONE NUMBER (281)433-3370. TO ENSURE TIMELY DELIVERY
OF THESE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY APRIL 16, 1998.
The following documents, which have been filed previously by Smith
(Commission File No. 1-8514) with the Commission pursuant to the Exchange Act
are hereby incorporated herein by reference:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997; and
(c) Current Report on Form 8-K dated March 6, 1998.
All documents and reports filed by Smith pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
respective dates of filing of such documents or reports. All information
appearing in this Proxy Statement/Prospectus or in any document incorporated
herein by reference is not necessarily complete and is qualified in its entirety
by the information and financial statements (including notes thereto) appearing
in the documents incorporated herein by reference and should be read together
with such information and documents.
ii
<PAGE> 6
Any statement contained herein or in a document all or a portion of which
is incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement/Prospectus to
the extent that a statement contained herein (or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein)
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Proxy Statement/
Prospectus except as so modified or superseded.
Smith hereby undertakes to provide, without charge, to each person,
including any beneficial owner of Wilson Common Stock, to whom a copy of this
Proxy Statement/Prospectus has been delivered, upon the written or oral request
of any such person, a copy of any and all of the documents indicated above which
have been or may be incorporated herein by reference, other than exhibits to
such documents, unless such exhibits are specifically incorporated herein by
reference. Requests for such documents should be directed to the party indicated
above.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus, and, if given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, any of the securities offered
by this Proxy Statement/Prospectus, or the solicitation of a proxy, in any
jurisdiction in which, or to any person to whom, it is unlawful to make such
offer or solicitation of an offer or proxy solicitation. Neither the delivery of
this Proxy Statement/Prospectus nor any distribution of the securities offered
hereby shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof or that there has been no change in the affairs of Smith or Wilson since
the date hereof.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus includes and incorporates by reference
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements relate to, among
other matters, analyses, including opinions from independent financial advisors
to the Board of Directors of Wilson as to the fairness, from a financial point
of view, of the Merger to the shareholders of Wilson, which are based on
forecasts of future results and estimates of amounts not yet determinable. Such
forward-looking statements also relate to the future prospects, developments and
business strategies for the operations of Smith and Wilson and the synergies
that are possible from the Merger. These forward-looking statements are
identified by their use of terms and phrases such as "anticipate," "believe,"
"expect," "plan," intend," "estimate," "project," "will," "could," "may,"
"predict," and similar terms and phrases and are contained in sections entitled
"Summary," "Risk Factors," "The Merger," "Information Concerning Wilson" and
other sections of this Proxy Statement/Prospectus and in the documents
incorporated herein by reference. These statements involve risks and
uncertainties that may cause actual future activities and results of operations
to be materially different from those suggested or described in this Proxy
Statement/Prospectus. These risks include changes in the level of petroleum
industry exploration and production expenditures, which may in turn be
influenced by the price of and demand for crude oil and natural gas, the
policies of the Organization of Petroleum Exporting Countries, worldwide
economic conditions and other market factors, political instability in foreign
counties in which Smith and Wilson operate, currency fluctuations and controls,
increased competition in Smith's and Wilson's markets, governmental restrictions
affecting oil and gas exploration, the ability of Smith to integrate and realize
anticipated synergies relating to the Merger, dependence on current managements,
the ability of Smith to achieve and execute internal business plans, and the
impact of any economic downturns and inflation. These risks are more
specifically described in Smith's Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q, which are incorporated herein by reference, and in the
section entitled "Risk Factors." Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those expected, estimated or projected.
iii
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TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. ii
FORWARD-LOOKING STATEMENTS.................................. iii
SUMMARY..................................................... 1
The Companies............................................. 1
Date, Place and Purpose of the Wilson Special Meeting..... 2
The Merger................................................ 2
Market Price and Dividend Information..................... 7
Smith Selected Historical Financial Information........... 8
Wilson Selected Historical Financial Information.......... 9
Smith Restated and Pro Forma Financial Information........ 10
Comparative Per Share Data................................ 11
Recent Developments....................................... 12
RISK FACTORS................................................ 13
THE WILSON SPECIAL MEETING.................................. 15
General................................................... 15
Matter to be Considered................................... 15
Record Date; Shares Entitled to Vote; Quorum.............. 15
Votes Required; Voting and Revocation of Proxies; Effect
of Abstentions and Non-Votes........................... 15
Solicitation of Proxies................................... 16
THE MERGER.................................................. 16
General Description of the Merger......................... 16
Background................................................ 17
Recommendation of Wilson's Board of Directors; Reasons for
the Merger............................................. 17
Opinion of Wilson's Financial Advisor..................... 18
Accounting Treatment...................................... 21
Certain Federal Income Tax Consequences................... 21
Regulatory Approvals...................................... 22
Resales of Smith Common Stock............................. 22
NYSE Listing of Common Stock.............................. 23
Dissenters' Rights........................................ 23
CERTAIN TERMS OF THE MERGER................................. 24
Conversion of Securities.................................. 24
Conditions to the Merger.................................. 25
Representations and Warranties............................ 27
Certain Covenants......................................... 27
No Solicitation of Acquisition Proposals.................. 28
Termination............................................... 29
Expenses and Termination Fee.............................. 29
Indemnification........................................... 30
Amendment and Waiver...................................... 30
Additional Agreements..................................... 31
Employee Matters.......................................... 32
Registration Rights Agreement............................. 32
RESTATED AND PRO FORMA CONDENSED FINANCIAL STATEMENTS....... 34
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iv
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DESCRIPTION OF SMITH CAPITAL STOCK......................................................................... 42
Common Stock............................................................................................. 42
Preferred Stock.......................................................................................... 42
Stockholder Rights Plan; Certain Other Anti-takeover Provisions.......................................... 43
Transfer Agent and Registrar............................................................................. 45
COMPARISON OF STOCKHOLDER RIGHTS........................................................................... 45
Voting Rights............................................................................................ 45
Amendments to Charter and Bylaws......................................................................... 46
Board of Directors....................................................................................... 46
Quorum Required for Directors Meeting.................................................................... 47
Removal of Directors..................................................................................... 47
Newly Created Directorships and Vacancies................................................................ 47
Stockholder Proposals.................................................................................... 47
Special Meetings of Stockholders......................................................................... 48
Action by Written Consent................................................................................ 48
Vote Required for Merger................................................................................. 49
Vote Required for Sale of Assets......................................................................... 49
Business Combinations.................................................................................... 50
Stockholder Rights Plan.................................................................................. 51
Preemptive Rights; Cumulative Voting..................................................................... 51
Supermajority Voting Provisions.......................................................................... 51
Dissenters' Rights....................................................................................... 51
Limitations on Director Liability........................................................................ 52
Indemnification.......................................................................................... 52
Dividends................................................................................................ 53
MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION...................................................... 54
INFORMATION CONCERNING WILSON.............................................................................. 54
Business of Wilson....................................................................................... 54
Legal Proceedings........................................................................................ 56
Market for Wilson Common Stock........................................................................... 56
Selected Financial Data.................................................................................. 58
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 59
Security Ownership of Certain Beneficial Owners of Wilson................................................ 64
Security Ownership of Management of Wilson............................................................... 65
Transactions with Certain Persons........................................................................ 65
LEGAL MATTERS.............................................................................................. 66
EXPERTS.................................................................................................... 66
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDIX A -- Merger Agreement
APPENDIX B -- Fairness Opinion of Morgan Stanley & Co. Incorporated
APPENDIX C -- Articles 5.11 through 5.13 of the Texas Business Corporation Act
(Dissenters' Rights)
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v
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. Reference is made to, and this Summary is
qualified in its entirety by, the more detailed information included elsewhere
or incorporated by reference in this Proxy Statement/Prospectus. Shareholders
are urged to read this Proxy Statement/Prospectus and the Appendices hereto in
their entirety. As used in this Proxy Statement/Prospectus, unless the context
otherwise requires, the term "Smith" means Smith International, Inc. and its
consolidated subsidiaries and the term "Wilson" means Wilson Industries, Inc.
and its consolidated subsidiaries. Certain capitalized terms used in this
summary are defined elsewhere in this Proxy Statement/Prospectus.
THE COMPANIES
SMITH INTERNATIONAL,
INC........................ Smith is a leading worldwide supplier of premium
products and services to the oil and gas
exploration and production industry. Smith provides
a comprehensive line of technologically-advanced
products and engineering services, including
drilling and completion fluid systems, solids
control equipment, waste management services,
three-cone drill bits, diamond drill bits, fishing
services, drilling tools, underreamers,
sidetracking systems and liner hangers. Smith
operates through five business units which provide
products and services throughout the world. Smith's
business units are: (i) M-I Fluids which provides
drilling and completion fluid systems and services;
(ii) M-I SWACO which provides solids control,
pressure control and rig instrumentation equipment
and waste management services; (iii) Smith Tool
which manufactures and sells three-cone drill bits
for use in the oil and gas industry and in mining
operations; (iv) Smith Drilling & Completions which
manufactures and markets products and services used
in drilling, workover, well completion, fishing and
well re-entry operations; and (v) Smith Diamond
Technology which manufactures and markets shear
drill bits featuring cutters made of
polycrystalline diamond or natural diamond. Smith
was incorporated in the State of California in
January 1937 and reincorporated under Delaware law
in May 1983. Smith's executive offices are
headquartered at 16740 Hardy Street, Houston, Texas
77032 and its telephone number at that location is
(281)443-3370.
WILSON INDUSTRIES, INC..... Wilson is a diversified supplier, servicer and
manufacturer serving the international petroleum
and petrochemical industries. Wilson also serves
the industrial maintenance, repair and operation
("MRO") and engineering and construction markets in
the United States. Wilson's operations are
conducted through its principal operating division,
Wilson Supply Company ("Wilson Supply"), and
Wilson's wholly owned subsidiary, Houston
Engineers, Inc. ("HE"). Wilson Supply operates an
extensive network of supply branches, service
centers and sales offices through which it markets
pipe, valves, fittings and other capital and
expendable maintenance products throughout the
world, predominantly in the Western Hemisphere. HE
is a worldwide supplier of downhole tools
specializing in the design, development and
manufacture of drilling and fishing tools. The
principal executive offices of Wilson are located
at 1301 Conti, Houston, Texas 77002, and its
telephone at that location is (713)237-3700. See
"Information Concerning Wilson -- Business of
Wilson."
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<PAGE> 10
DATE, PLACE AND PURPOSE OF THE WILSON SPECIAL MEETING
TIME, DATE AND PLACE....... The Special Meeting of the Shareholders of Wilson
(the "Special Meeting") will be held on April 27,
1998 at 10:00 a.m., Houston time, at 1302 Conti,
Houston, Texas 77002. See "The Wilson Special
Meeting -- General."
PURPOSE.................... The purpose of the Special Meeting is to approve
and adopt the Merger Agreement (the "Merger
Agreement") dated as of January 19, 1998 among
Smith, Wilson and SII Acquisition Corp., a wholly
owned Texas subsidiary of Smith ("Merger Sub"), and
the Merger of Merger Sub with and into Wilson (the
"Merger"). See "The Wilson Special
Meeting -- Matter to be Considered."
VOTE REQUIRED.............. Approval of the Merger Agreement requires the
affirmative vote of at least two-thirds of the
outstanding shares of Wilson Common Stock. No
approval by the holders of outstanding shares of
Smith Common Stock is required to approve the
Merger Agreement or the Merger. See "The Wilson
Special Meeting -- Votes Required; Voting and
Revocation of Proxies; Effect of Abstentions and
Non-Votes."
RECORD DATE; SHARES
ENTITLED TO VOTE........... Only holders of record of Wilson Common Stock at
the close of business on March 12, 1998 (the
"Record Date") are entitled to notice of and to
vote at the Special Meeting. On that date, there
were 371,533 shares of Wilson Common Stock
outstanding. Holders of Wilson Common Stock are
entitled to one vote for each share held. See "The
Wilson Special Meeting -- Record Date; Shares
Entitled to Vote; Quorum."
SECURITY OWNERSHIP OF
MANAGEMENT............... Directors and executive officers of Wilson and
their affiliates as of the Record Date beneficially
owned approximately 37.80% of the outstanding
shares of Wilson Common Stock. See "Information
Concerning Wilson -- Security Ownership of
Management of Wilson."
THE MERGER
EFFECT OF THE MERGER....... In the Merger, Merger Sub will merge with and into
Wilson. Wilson will be the surviving entity of the
Merger (the "Surviving Corporation") and will
become a direct wholly owned subsidiary of Smith.
See "The Merger -- General Description of the
Merger."
CONVERSION OF WILSON COMMON
STOCK.................... In the Merger, each share of Wilson Common Stock
will be converted into the right to receive 21.2633
shares of Smith Common Stock; Smith will issue an
aggregate of 7,900,000 shares of Smith Common Stock
in connection with the consummation of the Merger
(the "Merger Consideration"). Cash will be paid in
lieu of fractional shares. See "Certain Terms of
the Merger -- Conversion of Securities."
WILSON'S REASONS FOR THE
MERGER................... Wilson's Board of Directors (the "Wilson Board")
believes the Merger will, among other things,
provide the shareholders of Wilson with a more
diversified and liquid investment in a transaction
that is nontaxable for federal income tax purposes.
See "The Merger -- Recommendation of
2
<PAGE> 11
Wilson's Board of Directors; Reasons for the
Merger" and "-- Certain Federal Income Tax
Consequences."
RECOMMENDATION OF THE BOARD
OF DIRECTORS OF WILSON..... The Wilson Board believes that the terms of the
Merger are fair to and in the best interests of
Wilson and its shareholders and has unanimously
approved the Merger Agreement and the transactions
contemplated thereby. THE WILSON BOARD UNANIMOUSLY
RECOMMENDS THAT THE WILSON SHAREHOLDERS VOTE FOR
THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. See "The
Merger -- Recommendation of Wilson's Board of
Directors; Reasons for the Merger."
OPINION OF WILSON'S
FINANCIAL ADVISOR.......... Morgan Stanley & Co. Incorporated ("Morgan
Stanley") has delivered its written opinion dated
January 21, 1998 (the "Fairness Opinion") to the
Wilson Board to the effect that, as of the date of
such opinion and subject to the factors,
assumptions, qualifications and limitations set
forth therein, the consideration to be received by
the Wilson shareholders in the Merger is fair, from
a financial point of view, to the Wilson
shareholders. The Fairness Opinion was provided to
the Wilson Board for its information only and does
not address the merits of the underlying decision
by Wilson to enter into the Merger, nor does it
constitute a recommendation as to how any holder of
Wilson Common Stock should vote on the Merger. See
"The Merger -- Opinion of Wilson's Financial
Advisor." For information on the assumptions made,
matters considered and the qualifications and
limitations on the review by Morgan Stanley, see
"The Merger -- Opinion of Wilson's Financial
Advisor." Shareholders of Wilson are urged to read
the Fairness Opinion in its entirety, a copy of
which is attached as Appendix B to this Proxy
Statement/Prospectus.
EFFECTIVE TIME OF THE
MERGER..................... Unless otherwise agreed to by the parties, the
closing of the Merger (the "Closing") will occur as
soon as practicable (and in no event more than
three business days) after satisfaction or waiver
of the conditions set forth in the Merger
Agreement. The Merger will become effective upon
issuance of a Certificate of Merger by the
Secretary of State of the State of Texas or at such
other time specified in the Articles of Merger as
the effective time (the "Effective Time"). See "The
Merger -- General Description of the Merger."
MANAGEMENT OF WILSON AFTER
THE MERGER................. The directors and officers of Wilson immediately
prior to the Effective Time shall be the initial
directors and officers of the Surviving
Corporation, and such directors and officers shall
hold office in accordance with the articles of
incorporation and bylaws of the Surviving
Corporation until their respective successors are
duly elected or appointed and qualified. It is
anticipated that shortly after the Effective Time,
Smith, as sole shareholder of the Surviving
Corporation, will elect a new slate of directors.
In addition, it is likely that there will be
changes in the persons currently serving as
officers of Wilson.
CONDITIONS TO THE MERGER... The obligations of Wilson and Smith to consummate
the Merger are subject to certain conditions,
including: (i) the approval of the holders of at
least two-thirds of the outstanding shares of
Wilson Common Stock;
3
<PAGE> 12
(ii) the favorable opinion of counsel to both
Wilson and Smith that the Merger will qualify as a
tax-free reorganization; (iii) the qualification of
the Merger for "pooling-of-interests" accounting
treatment; and (iv) other conditions customary for
transactions of this nature. See "Certain Terms of
the Merger -- Conditions to the Merger."
REGULATORY MATTERS......... Consummation of the Merger is conditioned on the
expiration or termination of the applicable waiting
period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR
Act"), which waiting period was terminated on March
9, 1998. No material federal or state regulatory
approvals are required in order to consummate the
Merger. See "The Merger -- Regulatory Approvals."
NO SOLICITATION............ The Merger Agreement provides that neither Wilson
nor any of its subsidiaries shall, and each of them
shall not permit any of its officers, directors,
employees, agents or representatives to (i)
directly or indirectly, solicit or encourage any
inquiry, proposal or offer (including, without
limitation, any proposal or offer to its
shareholders) with respect to a merger,
acquisition, consolidation or similar transaction
involving, or any purchase of 10% or more of the
assets on a consolidated basis or 10% or more of
the capital stock of, Wilson; (ii) enter into any
agreement with respect to any such acquisition
proposal; (iii) participate in any discussions or
negotiations regarding, or furnish to any person
any information with respect to, the making of any
proposal that constitutes, or may reasonably be
expected to lead to, or to endorse, any such
acquisition proposal; (iv) engage in any
negotiations concerning such an acquisition
proposal; or (v) directly or indirectly, enter into
any agreement to, or make any public announcement
by or on behalf of Wilson of a plan or intention to
do any of the foregoing. Notwithstanding the
foregoing, Wilson may, in response to an
unsolicited written acquisition proposal, furnish
confidential or non-public information concerning
its business, properties or assets to a financially
capable corporation, partnership, person or other
entity or group and negotiate with such potential
acquiror if the Wilson Board in good faith
concludes that such acquisition proposal would
result in a transaction more favorable to Wilson's
shareholders than the Merger and based upon advice
of its outside legal counsel, the Wilson Board
determines in good faith that the failure to
provide such confidential or non-public information
to such potential acquiror would constitute a
breach of its fiduciary duty to its shareholders.
See "Certain Terms of the Merger -- No Solicitation
of Acquisition Proposals."
TERMINATION................ The Merger Agreement may be terminated and the
transactions contemplated thereby may be abandoned
at any time prior to the Closing Date: (i) by
mutual written consent executed by either party;
(ii) by either party if (a) since the date of the
Merger Agreement there has been a material adverse
change in the other party, or (b) there is an
inaccuracy or breach of any representation,
warranty or covenant of the other party set forth
in the Merger Agreement which breach has not been
cured within 30 days following receipt by the other
party of notice of such breach and which breach
results in or can reasonably be anticipated to
result in a material adverse effect; (iii) by
either party if the Closing Date shall not have
occurred, other than through the failure of any
such
4
<PAGE> 13
party to fulfill its obligations under the Merger
Agreement, on or before the expiration of 120 days
from the date of the Merger Agreement or such later
date agreed to in writing by the parties; (iv) by
either party if any court of competent jurisdiction
shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or
otherwise prohibiting the transactions contemplated
by the Merger Agreement and such order, decree,
ruling or other action shall have been final and
nonappealable; (v) by either party if the Merger
Agreement shall not have been approved or adopted
by the shareholders of Wilson; or (vi) by either
party if Wilson receives a superior acquisition
proposal after the expiration of two business days
following written notice to Smith by Wilson of its
intention to accept and pursue such superior
proposal and terminate the Merger Agreement. See
"Certain Terms of the Merger -- Termination."
EXPENSES; TERMINATION
FEE........................ Except as set forth below, Smith and Wilson will
each pay their own costs and expenses in connection
with the transactions contemplated by the Merger.
The Merger Agreement provides that Wilson will pay
Smith a termination fee of $20 million within five
days after receipt of notice from Wilson of its
intention to accept and pursue a superior
acquisition proposal and terminate the Merger
Agreement, which fee is intended, among other
things, to compensate Smith for its costs,
including lost opportunity costs, if the Merger is
not consummated as a result of certain actions or
inactions by Wilson. See "Certain Terms of the
Merger -- Expenses and Termination Fee."
INDEMNIFICATION............ The Merger Agreement provides all rights to
indemnification existing in favor of the present or
former directors, officers, employees and agents of
Wilson, or any of its subsidiaries, as provided in
Wilson's or any subsidiaries' organizational
documents and the indemnification agreement with
such person as in effect as of the date of the
Merger Agreement with respect to matters occurring
at or prior to the Effective Time shall survive the
Merger and shall continue in full force and effect
and without modification for a period of not less
than the statutes of limitation applicable to such
matters. Without limiting the foregoing, Wilson
shall, and after the Effective Time, the Surviving
Corporation or Smith shall, periodically advance
expenses as incurred with respect to the foregoing
to the fullest extent permitted under applicable
law; provided, however, that the person to whom the
expenses are advanced provides an undertaking to
repay such advance if it is ultimately determined
that such person is not entitled to
indemnification. The Merger Agreement further
provides that after the Effective Time, Smith
shall, to the fullest extent permitted under
applicable law, indemnify and hold harmless each of
the present or former directors, officers,
employees and agents of Wilson or any of its
subsidiaries against any costs or expenses
(including attorneys' fees), judgments, fines,
losses, claims, damages, liabilities and amounts
paid in settlement in connection with any actual or
threatened claim, action, suit, proceeding or
investigation, whether civil, criminal,
administrative or investigative, arising out of,
relating to, or in connection with any action or
omission occurring or alleged to have occurred
prior to the Effective Time or arising out of or
pertaining to the transactions contemplated by the
Merger Agreement, and to advance expenses in
connection with the foregoing. See "Certain Terms
of the Merger -- Indemnification."
5
<PAGE> 14
AMENDMENT AND WAIVER....... The Merger Agreement may be amended, modified,
terminated, rescinded or supplemented only by
written agreement of Wilson, Smith and Merger Sub.
Any failure of a party to comply with any
obligation, covenant, agreement or condition in the
Merger Agreement may be waived by the party
affected thereby only by a written instrument
signed by the party granting such waiver. No
waiver, or failure to insist upon strict
compliance, by any party of any condition or any
breach of any obligation, term, covenant,
representation, warranty or agreement contained in
the Merger Agreement, in any one or more instances,
shall be construed to be a waiver of, or estoppel
with respect to, any other condition or any other
breach of the same or any other obligation, term,
covenant, representation, warranty or agreement.
See "Certain Terms of the Merger -- Amendment and
Waiver."
DISSENTERS' RIGHTS......... Under the provisions of the Texas Business
Corporation Act (the "TBCA"), record holders of
Wilson Common Stock will be entitled to exercise
dissenters' rights with respect to the Merger. See
"The Merger -- Dissenters' Rights." Shareholders of
Wilson are urged to read Articles 5.11 through 5.13
of the TBCA, a copy of which is attached as
Appendix C to this Proxy Statement/Prospectus.
ACCOUNTING TREATMENT....... The Merger is intended to qualify as a "pooling of
interests" for accounting and financial reporting
purposes. See "The Merger -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............. As a condition to the consummation of the Merger,
Smith and Wilson will each receive an opinion of
their respective counsel to the effect that the
Merger will be treated for United States federal
income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
BOARD OF DIRECTORS OF SMITH
FOLLOWING THE MERGER..... As of the Effective Time, Smith shall appoint
Wallace S. Wilson, Wilson's Chairman of the Board,
as a Class I director of Smith with a term expiring
in 1999. See "Certain Terms of the
Merger -- Additional Agreements."
COMPARISON OF STOCKHOLDER
RIGHTS................... The rights of shareholders of Wilson are currently
governed by the TBCA, the Restated Articles of
Incorporation of Wilson, as amended (the "Wilson
Articles"), and the Bylaws of Wilson (the "Wilson
Bylaws"). Upon consummation of the Merger, Wilson
shareholders who receive Smith Common Stock will
become stockholders of Smith and their rights will
be governed by the Delaware General Corporation Law
(the "DGCL"), the Restated Certificate of
Incorporation of Smith (the "Smith Charter") and
the Restated Bylaws of Smith (the "Smith Bylaws"),
which differ in certain respects from the TBCA, the
Wilson Articles and the Wilson Bylaws. See
"Comparison of Stockholder Rights."
RESTRICTIONS ON RESALE OF
SECURITIES ISSUED IN THE
MERGER................... Shares of Smith Common Stock issued in the Merger
will be freely transferable, except shares issued
to persons who may be deemed "affiliates" of
Wilson. See "The Merger -- Resales of Smith Common
Stock."
6
<PAGE> 15
REGISTRATION RIGHTS........ Certain shareholders of Wilson will have the right
to request Smith to register for resale under the
Securities Act of 1933, as amended (the "Securities
Act"), those shares issued to such shareholders in
the Merger. Although shares of Smith Common Stock
issued to such shareholders are registered hereby,
such shares may be subject to certain resale
restrictions under Rules 144 and 145 of the
Securities Act. See "The Merger -- Resales of Smith
Common Stock" and "Certain Terms of the
Merger -- Registration Rights Agreement."
MARKET PRICE AND DIVIDEND INFORMATION
Smith Common Stock is traded on the New York Stock Exchange, Inc. (the
"NYSE") and the Pacific Stock Exchange under the symbol "SII." The following
table sets forth the high and low sales prices of Smith Common Stock for the
calendar quarters indicated, as reported in The Wall Street Journal's NYSE
Composite Transactions Reports.
SMITH COMMON STOCK
<TABLE>
<CAPTION>
MARKET PRICE
----------------------
YEAR ENDED DECEMBER 31, HIGH LOW
----------------------- ---- ---
<S> <C> <C>
1998
First Quarter (through March 9, 1998)....................... $62 $46 1/4
1997
First Quarter............................................... 49 1/2 38 1/2
Second Quarter.............................................. 61 3/4 42 5/8
Third Quarter............................................... 81 60 3/4
Fourth Quarter.............................................. 87 7/8 53 5/8
1996
First Quarter............................................... 25 1/2 19 7/8
Second Quarter.............................................. 33 3/8 24 3/8
Third Quarter............................................... 36 5/8 29 3/8
Fourth Quarter.............................................. 48 35 1/4
</TABLE>
On January 16, 1998, the last trading day prior to the public announcement
of the Merger, the closing sale price of Smith Common Stock as reported by the
NYSE was $52 7/8 per share. On March 9, 1998, the closing sale price per share
of Smith Common Stock was $54 9/16.
Smith has not paid dividends on Smith Common Stock since the first quarter
of 1986 and does not currently intend to pay any cash dividends in the
foreseeable future. The determination of the amount of future cash dividends to
be declared and paid on Smith Common Stock, if any, will depend upon Smith's
financial condition, earnings and cash flow from operations, the level of its
capital expenditures, its future business prospects and other factors that the
Board of Directors of Smith (the "Smith Board") deems relevant. In addition,
Smith's debt agreements contain covenants restricting the payment of cash
dividends to Smith's common stockholders based on net earnings and operating
cash flow formulas as defined therein.
Following the Merger, shares of Smith Common Stock will continue to be
traded on the NYSE and the Pacific Stock Exchange under the symbol "SII."
Shareholders are advised to obtain current market quotations for Smith
Common Stock. No assurance can be given as to the market price of Smith Common
Stock at or after consummation of the Merger.
There is no active trading market for Wilson Common Stock. For information
concerning dividends paid by Wilson, see "Information Concerning
Wilson -- Market for Wilson Common Stock."
7
<PAGE> 16
SMITH SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected financial information for each of the five years in
the period ended December 31, 1996 has been derived from the audited
consolidated financial statements of Smith. The selected financial data for the
nine months ended September 30, 1996 and 1997 have been derived from the
unaudited consolidated financial statements of Smith and include all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the interim periods. Results for the
interim periods are not necessarily indicative of results for the full year. The
financial information set forth below should be read in conjunction with the
historical consolidated financial statements of Smith, the related notes and
other financial information incorporated by reference in this Proxy
Statement/Prospectus. See "Incorporation of Certain Documents by Reference."
SMITH INTERNATIONAL, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------------- ---------------------
1992 1993 1994(1) 1995 1996 1996 1997
-------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $210,669 $220,712 $653,901 $874,544 $1,156,658 $819,749 $1,137,276
Gross profit.................. 71,535 79,963 221,274 292,540 392,062 274,630 394,499
Income (loss) before interest
and taxes................... 10,260 (1,325)(2) 60,104 86,248 132,520 90,121 153,940
Income(loss) from continuing
operations.................. 1,164 (3,995) 35,879 45,592 64,444 44,533 72,306
Net income (loss)............. $ (1,811)(3) $ 68,328(4) $ 35,879 $ 45,592 $ 64,444 $ 44,533 $ 72,306
Income (loss) per share from
continuing operations....... $ (0.02) $ (0.13) $ 0.92 $ 1.16 $ 1.62 $ 1.12 $ 1.80
OTHER DATA:
Depreciation and
amortization................ $ 22,737 $ 11,600 $ 21,802 $ 25,540 $ 31,601 $ 23,188 $ 33,875
Capital expenditures,
net(5)...................... 14,912 8,100 13,705 25,084 61,247 41,415 51,744
BALANCE SHEET DATA:
Current assets................ $296,224 $262,562 $421,596 $485,291 $ 665,277 $618,429 $ 766,143
Total assets.................. 370,482 348,486 619,780 702,844 1,074,582 973,625 1,254,053
Current liabilities........... 167,752 80,070 164,247 185,289 300,501 215,071 315,833
Long-term debt................ 46,000 46,000 115,000 117,238 228,443 243,768 277,517
Shareholders' equity.......... 149,785 214,466 253,121 300,886 368,536 346,626 438,333
</TABLE>
- ---------------
(1) On February 28, 1994, Smith acquired a 64% interest in M-I LLC from Dresser
Industries, Inc. in exchange for consideration of $160.0 million.
(2) In September 1993, Smith agreed to settle a class action civil lawsuit which
alleged violations of Section 1 of the Sherman Act. The loss from continuing
operations includes a $19.9 million charge related to the cost of
settlement, related legal fees and other costs and expenses.
(3) Net loss for 1992 includes a $3.0 million loss from discontinued operations.
(4) Net income for 1993 includes a $1.3 million charge related to the effect of
a change in accounting principle and a $73.6 million gain associated with
the sale of discontinued operations.
(5) Capital expenditures are presented net of any proceeds arising from
lost-in-hole sales and sales of fixed asset equipment replaced.
8
<PAGE> 17
WILSON SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected financial information for each of the five years in
the period ended December 31, 1996 has been derived from the audited
consolidated financial statements of Wilson. The selected financial data for the
nine months ended September 30, 1996 and 1997 have been derived from the
unaudited consolidated financial statements of Wilson and include all
adjustments (consisting only of normal recurring adjustments) that Wilson
management considers necessary for a fair presentation of the interim periods.
Results for the interim periods are not necessarily indicative of results for
the full year. The financial information set forth below should be read in
conjunction with the historical consolidated financial statements of Wilson, the
related notes and other financial information set forth in this Proxy
Statement/Prospectus.
WILSON INDUSTRIES, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $285,327 $370,954 $369,503 $395,934 $495,248 $360,124 $442,800
Gross profit.................... 50,767 70,180 68,933 70,554 89,286 64,808 82,920
Income (loss) before interest
and taxes..................... (802) 9,670 8,430 6,214 16,002 10,992 21,239
Income (loss) from continuing
operations.................... (623) 5,889 4,188 3,496 8,853 6,022 13,019
Net income (loss)............... $ (354)(1) $ 5,889 $ 4,188 $ 232(2) $ 8,853 $ 6,022 $ 13,019
Income (loss) per share from
continuing operations......... $ (1.61) $ 15.33 $ 10.95 $ 9.15 $ 23.31 $ 15.80 $ 34.69
Dividends declared and paid..... 348 230 383 382 380 295 282
OTHER DATA:
Depreciation and amortization... $ 6,092 $ 5,797 $ 6,539 $ 7,847 $ 9,347 $ 5,940 $ 7,445
Capital expenditures, net(3).... 7,017 4,911 9,790 8,675 13,295 7,926 21,848
BALANCE SHEET DATA:
Current assets.................. $ 94,939 $118,753 $126,775 $147,980 $176,845 $146,207 $190,554
Total assets.................... 118,889 140,798 154,056 178,293 212,680 177,972 243,644
Current liabilities............. 40,428 52,118 52,307 67,705 88,263 59,036 75,680
Long-term debt.................. 10,100 14,900 22,700 26,900 32,197 32,251 64,302
Stockholders' equity............ 67,943 72,114 76,652 75,885 85,657 81,096 97,118
</TABLE>
- ------------------
(1) Net loss for 1992 includes an extraordinary tax credit of $269.
(2) Net income for 1995 includes a $3,264 charge (net of tax benefit of $1,681)
for the cumulative effect of change in accounting for postretirement
benefits.
(3) Capital expenditures are presented net of any proceeds arising from sales of
fixed asset equipment replaced.
9
<PAGE> 18
SMITH RESTATED AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The following Restated and Pro Forma Financial Information for the periods
presented is based upon the historical financial statements of Smith and Wilson,
giving effect to the Merger under the "pooling-of-interests" method of
accounting and assumptions that Smith management believes are reasonable under
the circumstances. The Restated and Pro Forma Financial Information should be
read in conjunction with the Restated and Pro Forma Condensed Financial
Statements and the related notes, and the financial statements of Smith and
Wilson included or incorporated by reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $1,023,404 $1,270,478 $1,651,906 $1,580,076
Gross profit........................... 290,207 363,094 481,348 477,419
Income before interest and taxes....... 68,534 92,462 148,522 175,179
Income from continuing operations...... 40,067 49,088 73,297 85,325
Income per share from continuing
operations........................... $ 0.85 $ 1.04 $ 1.53 $ 1.78
OTHER DATA:
Depreciation and amortization.......... $ 28,341 $ 33,387 $ 40,948 $ 41,320
Capital expenditures, net.............. 23,495 33,759 74,542 73,592
BALANCE SHEET DATA:
Current assets......................... $ 548,371 $ 633,271 $ 842,122 $ 956,697
Total assets........................... 773,836 881,137 1,287,262 1,497,697
Current liabilities.................... 216,554 252,994 388,764 423,513
Long-term debt......................... 137,700 144,138 260,640 341,819
Shareholders' equity................... 326,509 376,771 454,193 503,527
</TABLE>
10
<PAGE> 19
COMPARATIVE PER SHARE DATA
The following tables present comparative per share information for Smith
and Wilson on a historical basis. It also includes per share information for
Smith on a pro forma basis assuming that the Merger had been consummated and
accounted for as a "pooling of interests" and for Wilson on an equivalent pro
forma basis assuming a conversion ratio of 21.2633. The historical comparative
per share data for each of the three years in the period ended December 31, 1996
has been derived from the audited consolidated financial statements of each of
the companies. The financial information for the nine months ended September 30,
1997 is unaudited; however, the financial statements from which the per share
data has been derived reflect all adjustments, consisting of normal recurring
adjustments, which management of each respective company considers necessary for
a fair presentation of the interim periods. The following data should be read in
conjunction with the Smith and Wilson consolidated financial statements and
related notes thereto included or incorporated by reference in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------- NINE MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
------ ------ ------- ------------------
<S> <C> <C> <C> <C>
SMITH -- HISTORICAL
Book value per share............................. N/R N/R $ 9.33 $ 11.06
Income per share from continuing operations...... $ 0.92 $ 1.16 1.62 1.80
WILSON -- HISTORICAL
Book value per share............................. N/R N/R 227.86 263.73
Cash dividends declared per share................ 1.00 1.00 1.00 0.75
Income per share from continuing operations...... 10.95 9.15 23.31 34.69
SMITH -- PRO FORMA (UNAUDITED)
Book value per share............................. N/R N/R 9.58 10.59
Cash dividends declared per share................ 0.01 0.01 0.01 0.01
Income per share from continuing operations...... 0.85 1.04 1.53 1.78
WILSON -- EQUIVALENT PRO FORMA (UNAUDITED)(1)
Book value per share............................. N/R N/R 203.70 225.18
Cash dividends declared per share................ 0.21 0.21 0.21 0.21
Income per share from continuing operations...... 18.07 22.11 32.53 37.85
</TABLE>
- ---------------
(1) The equivalent pro forma amounts were calculated by multiplying the
Smith-Pro Forma per share data by the 21.2633 conversion rate. The
conversion rate represents the number of shares of Smith Common Stock that a
holder of Wilson Common Stock would receive for each share held.
N/R -- Not required.
11
<PAGE> 20
RECENT DEVELOPMENTS
On February 2, 1998, Smith announced fourth quarter 1997 net income of
$30.0 million, or $0.75 per share on a diluted basis, compared with net income
of $19.9 million, or $0.50 per share on a diluted basis, in the fourth quarter
of 1996. Smith reported revenues of $425.9 million for the fourth quarter of
1997, a 26% increase over revenues of $336.9 million for the fourth quarter of
1996. For the year ended December 31, 1997, Smith reported net income of $102.4
million, or $2.55 per share on a diluted basis, on revenues of $1.6 billion
compared to net income of $64.4 million, or $1.62 per share on a diluted basis,
on revenues of $1.2 billion in the prior fiscal year. As of the date of the
mailing of this Proxy Statement/Prospectus, consolidated financial statements
for Smith for the year ended December 31, 1997 are not available. Such financial
statements will be filed with the Commission by March 30, 1998.
For the fourth quarter of 1997, Wilson reported net income of $6.0 million,
or $16.10 per share, compared with net income of $2.8 million, or $7.52 per
share, in the fourth quarter of 1996. Wilson reported net sales of $162.0
million for the fourth quarter of 1997, a 19.9% increase over net sales of
$135.1 for the fourth quarter of 1996. For the year ended December 31, 1997,
Wilson reported net income of $19.0 million, or $50.74 per share, on net sales
of $604.8 million, compared to net income of $8.9 million, or $23.30 per share,
on net sales of $495.2 million in the prior fiscal year. As of the date of the
mailing of this Proxy Statement/Prospectus, consolidated financial statements of
Wilson for the year ended December 31, 1997 are not available.
12
<PAGE> 21
RISK FACTORS
This Proxy Statement/Prospectus includes forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may," "predict" and similar terms and phrases are intended to
identify forward-looking statements. These statements involve risks and
uncertainties that may cause actual future activities and results of operations
to be materially different from those suggested or described in this Proxy
Statement/Prospectus. These risks include changes in the level of petroleum
industry exploration and production expenditures, which may in turn be
influenced by the price of and demand for crude oil and natural gas, the
policies of the Organization of Petroleum Exporting Countries ("OPEC"),
worldwide economic conditions and other market factors, political instability in
foreign counties in which Smith and Wilson operate, currency fluctuations and
controls, increased competition in Smith's and Wilson's markets, governmental
restrictions affecting oil and gas exploration, the ability of Smith to
integrate and realize anticipated synergies relating to the Merger, dependence
on current managements, the ability of Smith to achieve and execute internal
business plans, and the impact of any economic downturns and inflation.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS, SHAREHOLDERS OF WILSON SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISKS IN EVALUATING THE PROPOSAL TO BE VOTED ON AT THE SPECIAL MEETING
AND IN EVALUATING AN INVESTMENT IN SMITH COMMON STOCK.
Possible Dilution. Although Smith and Wilson believe that beneficial
synergies will result from the Merger, there can be no assurance that the
combining of the two companies' businesses, even if achieved in an efficient and
effective manner, will result in increased earnings per share. See "Restated and
Pro Forma Condensed Financial Statements."
Share Price Fluctuations Through the Effective Time. The price of Smith
Common Stock at the Effective Time may vary significantly from the price at the
date of execution of the Merger Agreement, the date hereof or the date on which
shareholders of Wilson vote on the Merger Agreement due to, among other factors,
market perception of the synergies expected to be achieved by the Merger,
changes in the business, operations or prospects of Smith or Wilson, market
assessments of the likelihood that the Merger will be consummated and the timing
thereof, and general market and economic conditions. Accordingly, shareholders
of Wilson may receive shares of Smith Common Stock with a market value different
from the value of such shares at the time the Merger was negotiated.
Federal Income Tax Consequences and Continuity of Interest. One of the
requirements for the Merger being treated as a "reorganization" that is
generally tax free under the Code is that the "continuity of interest"
requirement be met. Under this requirement, holders of Wilson Common Stock must
intend, at the time of the Merger, to retain a portion of their Smith Common
Stock, such that Wilson shareholders, as a group, have a significant equity
interest in Smith after the Merger. If former Wilson shareholders should
collectively sell in excess of 50% of the Smith Common Stock to be delivered at
the Effective Time within a relatively short period after the Effective Time,
for example one to two years, the Internal Revenue Service (the "Service") may
successfully contend that this requirement is not met. In such event, the Merger
would be a taxable transaction and former Wilson shareholders would recognize
taxable gain or loss as of the date of the Merger based on the difference
between the tax basis in their shares of Wilson Common Stock and the fair market
value of Smith Common Stock received by them on that date (even if such fair
market value declines after the Merger). It is anticipated that certain Wilson
shareholders will execute certificates representing their intention, at the time
of the Merger, to retain a sufficient portion of Smith Common Stock to be
delivered to Wilson shareholders at the Effective Time to satisfy the
"continuity of interest" requirement. Consummation of the Merger is conditioned
upon there being delivered prior to the closing to each of Smith and Wilson an
opinion of its respective counsel to the effect that the Merger will constitute
a reorganization under Section 368(a) of the Code. Counsel for Smith and Wilson
will rely on such "continuity of interest" certificates in rendering their
respective tax opinions. See "The Merger -- Certain Federal Income Tax
Consequences."
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Restrictions on Transfer of Shares of Smith Common Stock. Although shares
of Smith Common Stock to be received by shareholders of Wilson in connection
with the Merger have been registered under the Securities Act, such shares
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 144 under the Securities Act) of Wilson prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act (or, in the case of such persons who become
affiliates of Smith, Rule 144 under the Securities Act) or as otherwise
permitted under the Securities Act. Additionally, under generally accepted
accounting principles, the sale of Smith Common Stock or Wilson Common Stock by
an affiliate of either Smith or Wilson within 30 days prior to the Effective
Time or thereafter prior to the publication of financial results that include at
least 30 days of combined operations of Smith and Wilson after the Effective
Time could preclude "pooling-of-interests" accounting treatment of the Merger.
Furthermore, as previously noted, if former shareholders of Wilson should
collectively sell in excess of 50% of the Smith Common Stock to be delivered at
the Effective Time within a relatively short period after the Effective Time,
for example one to two years, the Service may seek to treat the Merger as a
taxable transaction, requiring the former shareholders of Wilson to recognize
taxable gain or loss as of the date of the Merger based on the difference
between the tax basis in their shares of Wilson Common Stock and the fair market
value of Smith Common Stock received by them on that date (even if such fair
market value declines after the Merger). See "The Merger -- Resales of Smith
Common Stock."
Smith's Dependence on Oil and Gas Industry. Smith's business and operations
are dependent on conditions in the oil and gas exploration and production
industry. There can be no assurance that current levels of oil and gas
exploration expenditures will be maintained or that demand for Smith's products
and services will reflect the level of such expenditures. The level of
exploration and development of oil and gas reserves is affected by both
short-term and long-term trends in oil and gas prices which, in turn, are
related to the demand for petroleum products and the current availability of oil
and gas resources. In recent years, oil and gas prices have been volatile and
have reacted to actual and perceived changes in demand and supply of oil and
natural gas, domestic and worldwide economic conditions, policies of OPEC in
setting and maintaining production levels and prices, the level of production by
non-OPEC countries and political instabilities in oil producing countries. In
this regard, there have been recent declines in the prevailing prices of oil and
natural gas as well as uncertainties as to the effect of the recent economic
downturn in Asia on world demand for oil. A significant or prolonged decline in
future oil and gas prices likely would result in reduced exploration and
development of oil and gas reserves and a decline in the demand for Smith's
products. Such reduced activity could have a material adverse effect on Smith's
financial condition and results of operations.
Competition. Competition in the oilfield service and equipment segments of
the oil and gas industry is intense and, in certain markets, is dominated by a
small number of large competitors, some of which have greater financial and
other resources than Smith. On February 26, 1998, Halliburton Company
("Halliburton") announced it had agreed to buy Dresser Industries, Inc.
("Dresser") in a transaction which is anticipated to close in the third or
fourth quarter of this year. Part of Dresser's operations include Baroid
Drilling Fluids ("Baroid"), a competitor of M-I LLC ("M-I"). It is unclear
whether Halliburton will be required to sell its 36% interest in M-I, and if so,
whether Smith will be able to buy Halliburton's interest in M-I on terms
acceptable to Smith. If the Halliburton/Dresser acquisition is consummated and
Halliburton disposes of its interest in M-I, Halliburton may compete through
Baroid with a number of the services and products currently provided by M-I.
Anti-Takeover Provisions of the Smith Charter and the Smith Bylaws. Certain
provisions of the Smith Charter and the Smith Bylaws and the adoption by the
Smith Board of a Stockholder Rights Plan could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding capital stock of Smith and could make
it more difficult to consummate certain types of transactions involving an
actual or potential change in control of Smith, such as a merger, tender offer
or proxy contest. See "Description of Smith Capital Stock -- Stockholder Rights
Plan; Certain Other Anti-Takeover Provisions."
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THE WILSON SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Wilson Board for use at the Special Meeting of
Wilson shareholders to be held on April 27, 1998 at the time and place set forth
in the accompanying notice and at any adjournments thereof.
MATTER TO BE CONSIDERED
At the Special Meeting, the shareholders of Wilson will consider and vote
upon a proposal to approve the Merger Agreement and the Merger.
THE WILSON BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER AND RECOMMENDS THAT WILSON SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER. SEE "THE MERGER -- BACKGROUND" AND "-- RECOMMENDATION
OF WILSON'S BOARD OF DIRECTORS; REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Wilson Board has fixed the close of business on March 12, 1998 as the
Record Date for determining holders entitled to notice of and to vote at the
Special Meeting. As of the Record Date, there were 371,533 shares of Wilson
Common Stock issued and outstanding, each of which entitles its holder to one
vote. The presence, either in person or by proxy, of the holders of a majority
of the issued and outstanding shares of Wilson Common Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum for the transaction of
business at the Special Meeting.
VOTES REQUIRED; VOTING AND REVOCATION OF PROXIES; EFFECT OF ABSTENTIONS AND
NON-VOTES
Under Texas law, the affirmative vote of the holders of at least two-thirds
of the outstanding shares of Wilson Common Stock is required for approval of the
Merger Agreement and the Merger.
All shares of Wilson Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH SHARES OF WILSON COMMON STOCK WILL BE VOTED FOR APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER. Wilson does not know of any matters other than
approval of the Merger Agreement and the Merger that are to come before the
Special Meeting. If any other matter or matters are properly presented for
action at the Special Meeting, the persons named in the enclosed form of proxy
will have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. A shareholder who has given a
proxy may revoke it at any time prior to its exercise by giving written notice
of revocation to the Secretary of Wilson, by signing and returning a later dated
proxy, or by voting in person at the Special Meeting. However, mere attendance
at the Special Meeting will not in and of itself have the effect of revoking the
proxy.
Votes cast by proxy or in person at the Special Meeting will be tabulated
by the election inspectors appointed for the Special Meeting and will determine
whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the shareholders for a vote. The failure
to submit a proxy or to vote at the Special Meeting will have the same effect as
a vote against the Merger Agreement and the Merger.
THE MATTER TO BE CONSIDERED AT THE SPECIAL MEETING IS OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF WILSON. ACCORDINGLY, WILSON SHAREHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
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<PAGE> 24
SOLICITATION OF PROXIES
Proxies will be solicited by mail, and may also be solicited personally, by
telephone, facsimile transmission or other means by the directors, officers and
employees of Wilson, with no special or extra compensation therefor, although
such officers, directors and employees may be reimbursed for out-of-pocket
expenses incurred in connection with the solicitation. Arrangements will also be
made with custodians, nominees and fiduciaries for the forwarding of soliciting
material to the beneficial owners of Wilson Common Stock held of record by such
persons, and Wilson may reimburse such custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses that they incur in that regard. Expenses
incurred in connection with the Merger, including those attributable to the
solicitation of proxies, will be paid by the party to the Merger Agreement
incurring the expense.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
General. The Merger Agreement provides that the Merger will be consummated
if the required approval of the Wilson shareholders is obtained and all other
conditions to the Merger are satisfied or waived. Upon consummation of the
Merger, Merger Sub will be merged with and into Wilson, and Wilson will become a
direct wholly owned subsidiary of Smith. Wilson shall continue as the Surviving
Corporation and shall succeed to and assume all of the rights and obligations of
Wilson and Merger Sub.
Effective Time. On the Closing Date, or as soon as practicable thereafter,
Wilson and Merger Sub will cause Articles of Merger to be filed with the
Secretary of State of the State of Texas. The Merger will become effective upon
the issuance of a Certificate of Merger by the Secretary of State of the State
of Texas or at such other time specified in the Articles of Merger as the
Effective Time.
Articles of Incorporation and Bylaws. Pursuant to the Merger Agreement, the
Wilson Articles and the Wilson Bylaws as in effect immediately prior to the
Effective Time shall be the articles of incorporation and bylaws of the
Surviving Corporation and thereafter shall continue to be its articles of
incorporation and bylaws until amended as provided therein and under the TBCA.
Directors and Officers. The directors and officers of Wilson immediately
prior to the Effective Time shall be the initial directors and officers of the
Surviving Corporation, and such directors and officers shall hold office in
accordance with the articles of incorporation and bylaws of the Surviving
Corporation until their respective successors are duly elected or appointed and
qualified. It is anticipated that shortly after the Effective Time, Smith, as
sole shareholder of the Surviving Corporation, will elect a new slate of
directors. In addition, it is likely that there will be changes in the persons
currently serving as officers of Wilson.
Conversion of Wilson Common Stock and the Stock of Merger Sub in the
Merger. At the Effective Time, each share of Wilson Common Stock issued and
outstanding immediately prior to the Effective Time, with certain exceptions as
set forth in the Merger Agreement, will be converted into the right to receive
21.2633 shares of Smith Common Stock. Each share of Wilson Common Stock held in
the treasury of Wilson immediately prior to the Effective Time will be canceled
and extinguished at the Effective Time without any conversion thereof and no
payment shall be made with respect thereto. Each share of common stock, par
value $1.00 per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall at the Effective Time be converted into one validly
issued, fully paid and nonassessable share of common stock of the Surviving
Corporation. Smith will issue an aggregate of 7,900,000 shares of Smith Common
Stock in connection with the consummation of the Merger. Based upon the
capitalization of Smith and Wilson as of March 6, 1998, the shareholders of
Wilson will own approximately 16.38% of the outstanding Smith Common Stock
following consummation of the Merger.
Fractional Shares. No certificates representing fractional shares of Smith
Common Stock will be issued in connection with the Merger. In lieu of any such
fractional share, each Wilson shareholder who would otherwise have been entitled
to a fractional share of Smith Common Stock will be paid an amount in cash equal
to the value of such fractional share of Smith Common Stock based upon the
closing price of one share
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<PAGE> 25
of Smith Common Stock on the NYSE on the last trading day prior to the Effective
Time. No interest shall be paid on such amount.
BACKGROUND
In October 1997, Wilson engaged the investment banking firm of Morgan
Stanley as financial advisor in connection with the possible sale of Wilson. In
October and November 1997, Morgan Stanley contacted numerous parties, including
Smith, to determine their respective interest in acquiring Wilson. Seven
different parties executed confidentiality agreements with Wilson and were
provided a copy of a confidential offering memorandum describing various aspects
of Wilson's business. Smith executed a confidentiality agreement and was
provided a copy of the offering memorandum on November 6, 1997. Certain parties
were invited to visit Wilson's data room in December 1997, and to attend various
meetings with members of Wilson's management. Smith visited Wilson's data room
on December 15 and 16, 1997, during which time they commenced a preliminary due
diligence investigation of Wilson.
On January 13, 1998, Smith submitted a letter of proposal to acquire Wilson
in exchange for shares of Smith Common Stock. The Smith proposal was accompanied
by suggested changes to a draft Merger Agreement which had been previously
prepared by Wilson's legal counsel and furnished to Smith. After exchanging
clarifying information on January 14-16, 1998, Morgan Stanley notified Smith
that Wilson was prepared to commence negotiations with Smith with a view to
developing a mutually acceptable definitive merger agreement. Smith, Wilson and
their respective financial and legal advisors commenced negotiating the terms of
the Merger Agreement on January 16, 1998 and completed their negotiations on
January 18, 1998. The Merger Agreement was signed on the afternoon of January
19, 1998 and was publicly announced on the morning of January 20, 1998. The
Merger Agreement was unanimously approved by the Wilson Board on January 21,
1998 at which time Morgan Stanley delivered the Fairness Opinion. The Merger
Agreement was unanimously approved by the Smith Board on January 22, 1998.
RECOMMENDATION OF WILSON'S BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Wilson Board believes that the terms of the Merger are fair to and in
the best interests of Wilson and its shareholders and has unanimously approved
the Merger Agreement and unanimously recommends its approval and adoption by
Wilson's shareholders.
In reaching its conclusion, the Wilson Board considered, among other
factors:
- Information concerning the financial performance and condition, business
operations and prospects of each of Wilson and Smith.
- Current industry, economic and market conditions, which have encouraged
business combinations and other strategic alliances in the oil and gas
service industry.
- The structure of the transaction and the terms of the Merger Agreement.
- The financial analysis and opinion of Morgan Stanley described below,
including Morgan Stanley's conclusion that the consideration to be
received in the Merger is fair, from a financial point of view, to the
holders of Wilson Common Stock.
- The expectation that the Merger will afford Wilson's shareholders the
opportunity to receive Smith Common Stock in a transaction that is
nontaxable for federal income tax purposes.
- The greater liquidity provided by Smith Common Stock in contrast to that
provided by Wilson Common Stock.
- The ability of the Wilson Board to entertain superior unsolicited
alternative proposals, negotiate and give information to third parties
and, subject to the payment of a $20 million termination fee to Smith,
terminate the Merger Agreement if the Wilson Board determines that any
such action is necessary in order for the Wilson Board to act in a manner
consistent with its fiduciary obligations under applicable law.
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<PAGE> 26
In view of the variety of factors considered in connection with its
evaluation of the Merger, the Wilson Board did not find it practicable or
necessary to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of the Wilson Board may have given different weights to
different factors.
OPINION OF WILSON'S FINANCIAL ADVISOR
Wilson retained Morgan Stanley to act as Wilson's financial advisor in
connection with the Merger. On January 21, 1998, Morgan Stanley delivered its
oral opinion to the Wilson Board (which was confirmed in writing later that day)
that, as of such date and subject to certain considerations set forth in the
written opinion, the consideration to be received by the holders of shares of
Wilson Common Stock pursuant to the Merger Agreement was fair from a financial
point of view to such holders.
THE FULL TEXT OF THE FAIRNESS OPINION DATED JANUARY 21, 1998, WHICH SETS
FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED, AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B
TO THIS PROXY STATEMENT/PROSPECTUS. WILSON SHAREHOLDERS ARE URGED TO, AND
SHOULD, READ THE FAIRNESS OPINION CAREFULLY AND IN ITS ENTIRETY. THE FAIRNESS
OPINION WAS PROVIDED TO THE WILSON BOARD AND IS DIRECTED ONLY TO THE FAIRNESS OF
THE MERGER CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF SHARES OF WILSON
COMMON STOCK PURSUANT TO THE MERGER AGREEMENT, FROM A FINANCIAL POINT OF VIEW TO
SUCH HOLDERS, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER. THE
SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THE PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with rendering its written opinion, Morgan Stanley, among
other things: (i) reviewed certain publicly available financial statements and
other information of Smith; (ii) reviewed certain internal financial statements
and other financial and operating data concerning Wilson prepared by the
management of Wilson; (iii) analyzed certain financial projections prepared by
the management of Wilson; (iv) discussed the past and current operations and
financial condition and the prospects of Wilson and Smith with senior executives
of Wilson and Smith; (v) compared the financial performance of Wilson and Smith
with that of certain other comparable publicly-traded companies; (vi) reviewed
the pro forma impact of the Merger on Smith's earnings per share, cash flow,
consolidated capitalization and financial ratios; (vii) reviewed the financial
terms, to the extent publicly available, of certain comparable acquisition
transactions; (viii) compared the financial performance of Wilson and Smith and
the prices and trading activity of the Smith Common Stock with that of certain
other comparable publicly-traded companies and their securities; (ix)
participated in discussions and negotiations among representatives of Wilson and
Smith and their financial and legal advisors; (x) reviewed the Merger Agreement
and certain related documents; and (xi) performed such other analyses and
considered such other factors as they have deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of its opinion. With respect to the
financial projections, Morgan Stanley assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of Wilson and Smith. Morgan
Stanley did not make any independent valuation or appraisal of the assets or
liabilities of Wilson or Smith, nor was Morgan Stanley furnished with any such
appraisals. In addition, Morgan Stanley assumed the Merger would be consummated
in accordance with the terms set forth in the Merger Agreement. The Fairness
Opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to Morgan Stanley as of, the date
of the opinion.
The following is a brief summary of the financial analyses performed by
Morgan Stanley and reviewed with the Wilson Board on January 21, 1998 in
connection with the preparation of the Fairness Opinion and with its
presentation to the Wilson Board on such date.
Comparable Companies Analysis. As part of its analysis, Morgan Stanley
compared certain financial information of Wilson with corresponding publicly
available information of a group of seven publicly traded oil service companies
that Morgan Stanley considered comparable in certain respects with Wilson (the
"Comparables"). In performing its analysis, Morgan Stanley analyzed the relative
value of Wilson by applying certain market trading multiples for the Comparables
to the estimated financial performance for Wilson (as
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<PAGE> 27
provided by the management of Wilson). Market information used in determining
these multiples is as of market close on January 20, 1998. The primary market
trading multiple used in the valuation analysis was market price to estimated
earnings per share for 1998 (which was a range of 13.4x to 16.3x for the
Comparables). Earnings per share estimates for the Comparables were based on
First Call estimates as of January 20, 1998. First Call is a data service that
monitors and publishes compilations of earnings estimates produced by selected
research analysts regarding companies of interest to institutional shareholders.
The implied range of values for Wilson Common Stock derived from the analysis of
the Comparables' market price to 1998 estimated earnings per share ranged from
approximately $370 million to $450 million.
No company utilized as a comparison in the Comparables analysis is
identical to Wilson or Smith. In evaluating the Comparables, Morgan Stanley made
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Wilson and Smith, such as the impact of competition on
Wilson or Smith and the industry generally, industry growth and the absence of
any adverse material change in the financial condition and prospects of Wilson
or Smith or the industry or in the financial markets in general. Mathematical
analyses (such as determining the average or the median) is not in itself a
meaningful method of using comparable company data.
Precedent Transaction Analysis. Morgan Stanley performed an analysis of
three precedent transactions ("Precedent Transactions") in the oilfield services
industry in 1997 that Morgan Stanley deemed comparable to the Merger in order to
calculate a valuation range for Wilson Common Stock. Multiples of Aggregate
Value to earnings before interest, taxes, depreciation and amortization
("EBITDA") for the latest twelve months ("LTM") and market value of equity to
LTM operating cash flow were applied to estimated 1997 EBITDA and operating cash
flow for Wilson (as provided by management of Wilson) to yield a range of equity
values for Wilson. Aggregate Value is defined as market value of equity plus
total debt. The multiple range of Aggregate Value to LTM EBITDA for the
Precedent Transactions was approximately 9x to 11x. The multiple range of market
value of equity to LTM operating cash flow for the Precedent Transactions was
approximately 12x to 14x. Such multiples were applied to estimated 1997 EBITDA
and operating cash flow for Wilson to yield an implied range of values for
Wilson Common Stock of approximately $357 million to $433 million.
No transaction utilized as a comparison in the Precedent Transaction
analysis is identical to the Merger. In evaluating the Precedent Transactions,
Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Wilson and Smith, such as
the impact of competition on Wilson or Smith and the industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of Wilson or Smith or the industry or in the financial
markets in general. Mathematical analysis (such as determining the average or
median) is not in itself a meaningful method of using precedent transaction
data.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow analysis to calculate ranges of implied values for Wilson Supply (including
Wilson Supply International (U.K.) Limited ("WSI")) and HE. Such implied values
for Wilson's component businesses were combined to determine a range of implied
values for Wilson. The analysis was performed based on financial projections for
Wilson Supply and Houston Engineers developed by management of Wilson. Morgan
Stanley utilized multiples of 2002 EBITDA ranging from 6.0x to 8.0x as the
terminal value of Wilson Supply and discount rates ranging from 12.0% to 14.0%.
Morgan Stanley utilized multiples of 2002 EBITDA ranging from 8.0x to 10.0x as
the terminal value of Houston Engineers and discount rates ranging from 12.0% to
14.0%. The discounted cash flow analysis indicated a range of implied values for
Wilson Common Stock of approximately $366 million to $456 million.
Contribution Analysis. Morgan Stanley reviewed the pro forma effects of the
Merger and computed the contribution to the combined company's pro forma
financial results attributable to each of Wilson and Smith. The computation
showed, among other things, that Wilson and Smith would contribute to the
combined company approximately 18.3% and 81.7%, respectively, of book value as
of September 30, 1997, and 17.5% and 82.5%, respectively, of 1997 estimated
earnings as provided by management for Wilson and based on First
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Call estimates for Smith and before inclusion of any estimates for cost savings
or operational synergies. Morgan Stanley calculated that the consideration to be
received by the holders of shares of Wilson Common Stock would result in an
allocation between the holders of Wilson Common Stock and Smith Common Stock of
pro forma ownership of the combined company equal to approximately 16.4% and
83.6%, respectively.
Pro Forma Analysis of the Merger. Morgan Stanley compared the estimated
1998 earnings per share ("EPS") of Smith Common Stock (based on First Call
estimates), on a stand-alone basis, to the estimated 1998 EPS of the common
stock of the combined companies on a pro forma basis. Morgan Stanley performed
this comparison under a scenario assuming the realization of the pre-tax cost
savings and operational synergies projected by Smith's management. Based on such
comparison, the proposed transaction would be moderately accretive to Smith's
stockholders on an EPS basis in 1998.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all its
analyses as a whole and did not attribute any particular weight to any analysis
or factor considered by it. Morgan Stanley believes that selecting any portion
of its analyses, without considering all analyses, would create an incomplete
view of the process underlying its opinion. In addition, Morgan Stanley may deem
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to be Morgan Stanley's view of the actual value of Wilson.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Wilson and Smith. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of Morgan Stanley's
analysis of the fairness, from a financial point of view, of the consideration
to be received by the holders of shares of Wilson Common Stock pursuant to the
Merger Agreement and were conducted in connection with the delivery of the
Fairness Opinion. The analyses do not purport to be appraisals or to reflect the
prices at which Wilson might actually be sold.
As described above, the Fairness Opinion and the information provided by
Morgan Stanley to the Wilson Board were two of a number of factors taken into
consideration by the Wilson Board in making its determination to recommend
approval of the Merger. Consequently, the Morgan Stanley analyses described
above should not be viewed as determinative of the opinion of the entire Wilson
Board or the view of the management with respect to the value of Wilson. The
consideration to be received by the holders of shares of Wilson Common Stock
pursuant to the Merger Agreement was determined through negotiations between
Wilson and its advisors and Smith, and was approved by the entire Wilson Board.
The Wilson Board retained Morgan Stanley based upon its experience and
expertise. Morgan Stanley is an internationally recognized investment banking
and advisory firm. As part of its investment banking business, Morgan Stanley is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuation for estate, corporate and other purposes. Morgan Stanley makes a
market in Smith Common Stock. In the ordinary course of its business, Morgan
Stanley and its affiliates may actively trade the debt and equity securities and
senior loans of Smith for their own account and for the accounts of customers
and, accordingly may at times hold a long or short position in such securities.
In the past, Morgan Stanley has provided financing services to Smith for which
services Morgan Stanley received customary fees.
Pursuant to a letter dated March 2, 1998, Wilson has agreed to pay Morgan
Stanley: (i) an advisory fee estimated to be between $100,000 and $150,000 which
is payable if the Merger is not consummated and (ii) a transaction fee which is
payable upon consummation of the transaction. Any advisory fee paid will be
credited against the transaction fee. In addition, Wilson has agreed, among
other things, to reimburse Morgan Stanley for all travel, legal and other
expenses incurred in connection with the services provided by Morgan Stanley,
and to indemnify and hold harmless Morgan Stanley and certain related parties
from and against certain
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liabilities and expenses, which may include certain liabilities under the
federal securities laws, in connection with its engagement.
ACCOUNTING TREATMENT
The Merger will be accounted for using the "pooling-of-interests" method of
accounting pursuant to Opinion No. 16 of the Accounting Principles Board. The
"pooling-of-interests" method of accounting assumes that the combining companies
have been merged from inception, and the historical financial statements for
periods prior to consummation of the Merger are restated as though the companies
had been combined from inception.
The Merger is conditioned on Smith and Wilson each receiving a letter from
Arthur Andersen LLP that the Merger is eligible to be accounted for as a
"pooling of interests" under generally accepted accounting principles and
applicable regulations of the Commission.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain federal income tax
consequences of the Merger. This discussion is based upon provisions of the
Code, existing regulations promulgated thereunder, judicial authorities and
current rulings and administrative practice of the Service, in each case as in
effect as of the date hereof and all of which are subject to change at any time,
possibly with retroactive effect. For purposes of this discussion, it is assumed
that shares of Wilson Common Stock are held as "capital assets" within the
meaning of Section 1221 of the Code (i.e., property held for investment). This
discussion does not address all aspects of federal income taxation that might be
relevant to particular holders of Wilson Common Stock in light of their status
or personal investment circumstances; nor does it discuss the consequences to
such holders who are subject to special treatment under the federal income tax
laws such as foreign persons, dealers in securities, regulated investment
companies, life insurance companies, other financial institutions, tax-exempt
organizations, pass-through entities, taxpayers who hold Wilson Common Stock as
part of a "straddle," "hedge", or "conversion transaction" or who have a
"functional currency" other than the United States dollar or to person who have
received their Wilson Common Stock as compensation. Further, this discussion
does not address the state, local or foreign tax consequences of the Merger.
Holders of Wilson Common Stock are advised to consult their own tax advisers
regarding the federal income tax consequences of the Merger in light of their
personal circumstances and the consequence under state, local and foreign tax
laws.
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code. It is a condition to the obligation of Smith to consummate the
Merger that Smith shall have received from its counsel, Gardere Wynne Sewell &
Riggs, L.L.P., an opinion to the effect that, for federal income tax purposes:
(i) the Merger will qualify as a "reorganization" within the meaning of Section
368(a) of the Code and (ii) no gain or loss will be recognized by Smith or
Merger Sub as a result of the Merger. It is a condition to the obligation of
Wilson to consummate the Merger that Wilson shall have received from its
counsel, Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., an opinion to the effect
that, for federal income tax purposes: (i) the Merger will qualify as a
"reorganization" within the meaning of Section 368(a) of the Code; (ii) each of
Smith, Merger Sub and Wilson are parties to the reorganization within the
meaning of Section 368(b) of the Code; (iii) no gain or loss will be recognized
by the shareholders of Wilson upon the receipt by them of shares of Smith Common
Stock in exchange for their shares of Wilson Common Stock pursuant to the
Merger, except with respect to cash received in lieu of fractional shares of
Smith Common Stock; and (iv) no gain or loss will be recognized by Wilson as a
result of the Merger. Such opinions are subject to certain assumptions and based
on certain representations made by officers and certain shareholders of Wilson
and officers of Smith and Merger Sub. Shareholders of Wilson should be aware
that such opinions are not binding upon the Service and no assurance can be
given that the Service will not adopt a contrary position or that a contrary
Service position would not be sustained by a court. No ruling from the Service
has been or will be requested in connection with the Merger.
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Assuming the Merger qualifies as a reorganization under Section 368(a) of
the Code, the following federal income tax consequences will occur:
(a) no gain or loss will be recognized by Smith, Merger Sub or Wilson in
connection with the Merger;
(b) no gain or loss will be recognized by a holder of Wilson Common Stock
who exchanges all of the holder's shares of Wilson Common Stock solely
for shares of Smith Common Stock in the Merger, except that gain or
loss will be recognized by such holder on the receipt of cash in lieu
of fractional shares;
(c) the aggregate basis of the shares of Smith Common Stock to be received
by a shareholder of Wilson in the Merger will be the same as the
aggregate basis of the shares of Wilson Common Stock surrendered in
exchange therefor (decreased by the amount of any tax basis allocable
to any fractional share of Smith Common Stock for which cash is
received);
(d) the holding period of the shares of Smith Common Stock to be received
by a shareholder of Wilson in the Merger will include the holding
period of the shares of Wilson Common Stock surrendered in exchange
therefor, provided that such shares of Wilson Common Stock are held as
capital assets at the Effective Time; and
(e) a shareholder of Wilson receiving cash in lieu of a fractional share
will recognize capital gain or loss upon such payment equal to the
difference, if any, between such shareholder's basis in the fractional
share (as described in paragraph (c) above) and the amount of cash
received, unless such payment, under each such shareholder's
particular facts and circumstances, is deemed to have the effect of a
dividend distribution and not a redemption treated as an exchange
under the principles of Section 302 of the Code.
EACH HOLDER OF WILSON COMMON STOCK IS URGED TO CONSULT WITH THE HOLDER'S
OWN TAX ADVISER WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER, INCLUDING
THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, MUNICIPAL, FOREIGN OR OTHER
TAXING JURISDICTION.
REGULATORY APPROVALS
The HSR Act prohibits Smith and Wilson from completing the Merger until
they have furnished certain information and materials to the Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice (the "Antitrust Division") and a required waiting period
has expired. Pursuant to the requirements of the HSR Act, Smith and Wilson have
each filed a Notification and Report Form for review under the HSR Act with the
FTC and the Antitrust Division. On March 9, 1998, the FTC notified Smith and
Wilson of the early termination of the waiting period applicable under the HSR
Act.
Even after the HSR Act waiting period has expired or been terminated, the
FTC or the Antitrust Division could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, including seeking
divestiture of substantial assets of Smith or Wilson. Consummation of the Merger
is conditioned upon, among other things, the absence of any pending or
threatened governmental proceeding or any judgment, decree or order of any
governmental authority or court or any other legal restraint that would prevent
the consummation of the Merger. See "Certain Terms of the
Merger -- Termination."
Smith and Wilson do not believe that any additional governmental filings in
the United States, other than the Articles of Merger, are required with respect
to the Merger. Smith and Wilson conduct operations in a number of foreign
countries where regulatory filings or approvals may be required in connection
with the consummation of the Merger. Smith and Wilson believe that all such
material filings and approvals have been made or obtained, or will be made or
obtained, as the case may be.
RESALES OF SMITH COMMON STOCK
The shares of Smith Common Stock to be received by shareholders of Wilson
in connection with the Merger have been registered under the Securities Act and,
except as set forth below, may be traded without restriction. The shares of
Smith Common Stock to be issued in the Merger and received by persons who are
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deemed to be "affiliates" (as that term is defined in Rule 144 under the
Securities Act) of Wilson prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act (or, in the case of such persons who become affiliates of Smith, Rule 144
under the Securities Act) or as otherwise permitted under the Securities Act.
Each affiliate of Wilson is required to execute a written agreement that such
affiliate will not sell, pledge, transfer or otherwise dispose of any shares of
Smith Common Stock issued to such affiliate pursuant to the Merger, except
pursuant to an effective registration statement or in compliance with Rule 145
under the Securities Act or an exemption from the registration requirements of
the Securities Act.
Under generally accepted accounting principles, the sale of Smith Common
Stock or Wilson Common Stock by an affiliate of either Smith or Wilson within 30
days prior to the Effective Time or thereafter prior to the publication of
financial results that include at least 30 days of combined operations of Smith
and Wilson after the Effective Time could preclude "pooling-of-interests"
accounting treatment of the Merger. Each affiliate of Wilson is required to
execute an agreement that such affiliate will not dispose of any Wilson Common
Stock or of any of the Smith Common Stock received or to be received by them
pursuant to the Merger until final results of operations of Smith covering at
least 30 days of combined operations of Smith and Wilson have been so published.
Additionally, at least 30 days prior to the Effective Time, Smith is required to
deliver to Wilson a list of the affiliates of Smith and each such affiliate is
required to execute an agreement that such affiliate will not dispose of any
Smith Common Stock until final results of operations of Smith covering at least
30 days of combined operations of Smith and Wilson have been so published.
NYSE LISTING OF COMMON STOCK
It is a condition to the Merger that the shares of Smith Common Stock to be
issued pursuant to the Merger be authorized for listing on the NYSE, subject to
official notice of issuance. Smith Common Stock is traded on the NYSE and the
Pacific Stock Exchange under the symbol "SII."
DISSENTERS' RIGHTS
Under the provisions of the TBCA, record holders of Wilson Common Stock
will be entitled to exercise dissenters' rights with respect to the Merger.
Accordingly, shares of Wilson Common Stock that are issued and outstanding
immediately prior to the Effective Time that are held by a shareholder who did
not vote in favor of the Merger and who complies with all of the relevant
provisions of the TBCA (the "Dissenting Shares") shall not be converted into the
right to receive the Merger Consideration and such shareholder shall be entitled
to receive an amount of cash equal to the fair value of his shares of Wilson
Common Stock. Any shareholder who desires to dissent from the Merger shall file
a written objection to the Merger with Wilson prior to the Special Meeting
stating that the shareholder will exercise his right to dissent if the Merger is
effective and giving the shareholder's address to which notice of the Effective
Time shall be sent. A vote against the Merger is not sufficient to perfect a
shareholder's dissenters' rights. If the Merger is effected, each shareholder
who sent notice to Wilson as described above and who did not vote in favor of
the Merger will be deemed to hold Dissenting Shares. Failure to vote against the
Merger will not constitute a waiver of dissenters' rights; however, a vote in
favor of the Merger will constitute such a waiver.
Within 10 days of the Effective Time, the Surviving Corporation shall
notify holders of Dissenting Shares in writing that the Merger has been
effected. Each holder so notified must, within 10 days of the delivery or
mailing of such notice, make a written demand on the Surviving Corporation for
payment of the fair value of the Dissenting Shares as estimated by the holder
thereof. Holders of Dissenting Shares who fail to make written demand within the
10 day period or fail to submit to Wilson certificates representing such shares
within 20 days after making such demand will lose their dissenters' rights and
will be bound by the terms of the Merger Agreement.
Within 20 days after receipt of the written demand described above, the
Surviving Corporation shall deliver or mail to the holder of Dissenting Shares
written notice (i) stating that the Surviving Corporation accepts the amount
claimed in the demand letter and agrees to pay that amount within 90 days after
the Effective Time upon surrender of the relevant certificates representing such
Dissenting Shares, or
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(ii) containing the Surviving Corporation's written estimate of the fair value
of such Dissenting Shares together with an offer to pay such amount within 90
days after the Effective Time if the Surviving Corporation receives notice
within 60 days after the Effective Time that the shareholder agrees to accept
such amount and surrender the relevant certificates. If the parties cannot agree
on the fair value of the Dissenting Shares within 60 days after the Effective
Time, either part may petition a court of competent jurisdiction to determine
the fair value of such shares in accordance with the provisions of the TBCA.
If any shareholder shall have failed to perfect or shall have effectively
withdrawn or lost such shareholder's dissenters' rights, the shareholder's
Dissenting Shares shall thereupon be deemed to have been converted into and to
have become exchangeable, as of the Effective Time, for the right to receive the
Merger Consideration without any interest thereon pursuant to the terms of the
Merger Agreement. The foregoing summary of the provisions of Articles 5.11
through 5.13 of the TBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to the full text of
Articles 5.11 through 5.13, a copy of which is attached hereto as Appendix C and
is incorporated herein by reference.
CERTAIN TERMS OF THE MERGER
The detailed terms of and conditions of the Merger are contained in the
Merger Agreement, which is included in full as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by reference. The following summary
description of certain provisions of the Merger Agreement is subject to the more
complete information set forth in the Merger Agreement.
CONVERSION OF SECURITIES
Exchange Procedures. At the Effective Time, each issued and outstanding
share of Wilson Common Stock (other than Dissenting Shares) shall be converted
into the right to receive, upon surrender to the paying agent for the Merger of
such related certificate or certificates for cancellation and subject to any
required withholding of taxes, a certificate or certificates representing the
number of whole shares of Smith Common Stock (of such denominations and
registered in such names as such holder may request) into which the shares of
Wilson Common Stock so surrendered shall have been converted. Each holder of
shares of the Wilson Common Stock who would otherwise be entitled to a
fractional share of Smith Common Stock shall be paid an amount in cash in
accordance with the Merger Agreement. Until so surrendered, each outstanding
certificate that prior to the Effective Time represented shares of Wilson Common
Stock shall be deemed from and after the Effective Time to evidence the right to
receive that number of full shares of Smith Common Stock into which such shares
of Wilson Common Stock shall have been converted and any cash in lieu of
fractional shares of Smith Common Stock, subject to any required withholding of
taxes. No interest shall be paid on the cash payable upon surrender of a
certificate or certificates.
Distributions with respect to Unexchanged Wilson Common Stock. Unless and
until any such outstanding certificates shall be surrendered, no dividends or
other distributions declared and payable to the holders of Smith Common Stock on
or after the Effective Time shall be paid to the holders of such outstanding
certificates which prior to the Effective Time represented shares of the Wilson
Common Stock; provided, however, that, upon surrender and exchange of such
outstanding certificates, there shall be paid to the record holders of the
certificates issued and exchanged therefor the amount, without interest thereon,
of dividends and other distributions, if any, that theretofore were declared and
became payable since the Effective Time with respect to the number of full
shares of Smith Common Stock issued to such holders.
Transfer of Ownership. If any certificate for shares of Smith Common Stock
is to be issued in a name other than that in which the certificate surrendered
in exchange therefor is registered, it shall be a condition of the issuance
thereof that the certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange shall have paid to Smith or the Surviving Corporation any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Smith Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of Smith or its
transfer agent that such tax has been paid or is not payable.
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Escheat. Neither Smith, the Surviving Corporation, nor any other person
shall be liable to any former holder of shares of Wilson Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
Lost, Stolen or Destroyed Certificates. In the event any certificate
formerly representing shares of Wilson Common Stock shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such certificate to be lost, stolen or destroyed and, if required by
Smith or the Surviving Corporation, the posting by such person of a bond in
customary amount as indemnity against any claim that may be made against Smith
or the Surviving Corporation with respect to such certificate, the Surviving
Corporation shall deliver in exchange for such lost, stolen or destroyed
certificate shares of Smith Common Stock and cash that would be deliverable upon
due surrender of the shares of the Wilson Common Stock represented by such lost,
stolen or destroyed certificate.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
WILSON SHAREHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME AS TO THE METHOD OF
EXCHANGING CERTIFICATES FORMALLY REPRESENTING SHARES OF WILSON COMMON STOCK.
WILSON SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE PAYING AGENT
UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. WILSON SHAREHOLDERS SHOULD NOT
RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
CONDITIONS TO THE MERGER
Conditions to the Obligations of Each Party to Consummate the Merger
The respective obligations of each party to consummate the Merger are
subject to the satisfaction of the following conditions:
Board of Directors Approval. The Merger Agreement shall have been
approved and adopted by the Wilson Board and the Smith Board. The Merger
Agreement was unanimously approved by the Wilson Board on January 21, 1998
and by the Smith Board on January 22, 1998.
Wilson Shareholder Approval. The Merger Agreement shall have been
approved and adopted by the shareholders of Wilson in accordance with the
applicable provisions of the TBCA.
Hart-Scott-Rodino Approval. Any applicable waiting period under the
HSR Act relating to the Merger shall have expired or been terminated. On
March 9, 1998, the FTC notified Smith and Wilson of the early termination
of the waiting period applicable under the HSR Act.
Illegality. No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of
the Merger.
NYSE Listing. The shares of Smith Common Stock to be issued in the
Merger shall have been approved for listing on the NYSE, subject to
official notice of issuance.
Opinions of Accountants. Wilson and Smith shall each have received a
letter from Arthur Andersen LLP, independent public accountants for each of
Wilson and Smith, dated the day of the Effective Time, in form and
substance reasonably satisfactory to each of Wilson and Smith, to the
effect that the Merger is eligible to be accounted for as a
"pooling-of-interests" transaction if consummated in accordance with the
Merger Agreement.
Additional Conditions to the Obligations of Smith and Merger Sub
The obligations of Smith and Merger Sub to consummate the Merger are
subject to the satisfaction of the following further conditions:
Representations and Warranties; Covenants and Agreements. The (i)
representations and warranties of Wilson contained in the Merger Agreement
and in any document delivered in connection therewith shall, as of the
Effective Time, be true and correct in all material respects, except for
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representations and warranties that speak as of a specified date, which
need only be true and correct in all material respects as of the specified
date, and (ii) covenants and agreements of Wilson contained in the Merger
Agreement to be performed on or before the Effective Time in accordance
with the Merger Agreement shall have been duly performed in all material
respects; and Smith shall have received a certificate(s), dated the day of
the Effective Time and validly executed by or on behalf of Wilson, to the
effect that the conditions set forth in clauses (i) and (ii) above have
been so satisfied;
Tax Opinion. Smith shall have received an opinion of Gardere Wynne
Sewell & Riggs, L.L.P., in form and substance reasonably satisfactory to
Smith, on the basis of certain facts, representations, and assumptions set
forth in such opinion, dated the Effective Time, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
qualifying under the provisions of Section 368(a) of the Code;
Registration Statement. The Registration Statement shall have been
declared effective and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the Commission; and
Waivers and Consents. Smith shall have received the written
confirmation of the Weir Group Investments Limited ("Weir") that it waives
any rights it may have to purchase the interest of HE in Weir-Houston
Engineers Ltd. ("Weir-HE") as a result of the Merger Agreement or the
transactions contemplated therein; provided that no such written
confirmation shall be required if it can be demonstrated to the reasonable
satisfaction of Smith that no such rights exist in favor of Weir as a
result of the Merger Agreement or the transactions contemplated therein. As
of the date of this Proxy Statement/Prospectus, Wilson has demonstrated to
Smith's satisfaction that no such rights do in fact exist in favor of Weir
as a result of the transaction contemplated by the Merger Agreement. In
addition, all waivers and consents required for the consummation of the
Merger shall have been obtained pursuant to that certain Credit Agreement
dated as of July 31, 1997 among Wilson, Chase Bank of Texas, National
Association and certain other parties named therein.
Additional Conditions to the Obligations of Wilson
The obligations of Wilson to consummate the Merger are subject to the
satisfaction of the following further conditions:
Representations and Warranties; Covenants and Agreements. The (i)
representations and warranties of Smith contained in the Merger Agreement
and any document delivered in connection therewith shall, as of the
Effective Time, be true and correct in all material respects, except for
representations and warranties that speak as of a specified date, which
need only be true and correct in all material respects as of the specified
date, and (ii) covenants and agreements of Smith and Merger Sub contained
in the Merger Agreement to be performed on or before the Effective Time in
accordance with the Merger Agreement shall have been duly performed in all
material respects; and Wilson shall have received a certificate(s), dated
the day of the Effective Time and validly executed by or on behalf of
Smith, to the effect that the conditions set forth in clauses (i) and (ii)
above have been so satisfied;
Tax Opinion. Wilson shall have received an opinion of Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P., in form and substance reasonably
satisfactory to Wilson, on the basis of certain facts, representations, and
assumptions set forth in such opinion, dated the Effective Time, to the
effect that the Merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368(a) of the
Code; and
Registration Statement. The Registration Statement shall have been
declared effective and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the Commission.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Wilson and Smith, relating, among other things, to the following: (i) their
incorporation, existence, good standing, corporate power and similar corporate
matters; (ii) their capitalization; (iii) their authorization, execution,
delivery and performance and the enforceability of the Merger Agreement; (iv)
the absence of conflicts, violations and defaults under their articles or
certificate of incorporation and bylaws and certain other agreements and
documents; (v) the absence of certain material changes and events since
September 30, 1997; (vi) pending or threatened investigations or litigation;
(vii) tax matters; (viii) employee benefit matters; (ix) environmental matters;
(x) the qualification of the Merger as a reorganization within the meaning of
Section 368(a) of the Code and the availability of "pooling-of-interests"
accounting treatment; (xi) the accuracy of information supplied by each for
inclusion in this Proxy Statement/Prospectus and the Registration Statement;
(xii) compliance with laws, ordinances and regulations; and (xiii) brokerage
fees and commissions. Wilson made additional representations and warranties as
to: (i) the presentation of its financial statements in accordance with
generally accepted accounting principles; (ii) the availability and maintenance
of its books and records; (iii) intellectual property rights; (iv) title to
property; (v) material contracts and commitments; (vi) maintenance of insurance;
and (vii) voting requirements of the Wilson shareholders necessary to approve
the Merger Agreement and the Merger. Smith made additional representations and
warranties as to reports and other documents filed with the Commission and the
absence of severance or change in control payments.
All representations and warranties of Wilson and Smith expire at the
Effective Time.
CERTAIN COVENANTS
Conduct of Business of Wilson. The Merger Agreement provides that, prior to
the Effective Time, unless Smith otherwise agrees in writing, Wilson and its
subsidiaries will operate their businesses in the ordinary and usual course in
all material respects in accordance with past practices. Specifically, except as
contemplated by the Merger Agreement, neither Wilson nor any of its
subsidiaries, without the prior written consent of Smith, will:
- amend or otherwise change their respective organizational documents;
- issue, sell, or agree to issue, sell, pledge, dispose of or encumber (i)
any share of their capital stock or (ii) any securities convertible into,
or options with respect to, or warrants to purchase or rights to
subscribe for, any shares of their capital stock;
- except in the ordinary course of business and consistent with past
practices or as required by law or contractual obligations or other
policies, benefit proposals, understandings, or arrangements existing on
the date of the Merger Agreement, (i) increase in any manner the base
compensation of, or enter into any new bonus or incentive agreement or
arrangement with, any of their directors, officers, or other employees;
(ii) pay or agree to pay any pension, retirement allowance, or other
employee benefit to any such director, officer, or employee, whether past
or present; (iii) enter into any new employment, severance, consulting or
other compensation agreement with any existing director, officer, or
employee; or (iv) commit itself to any additional pension,
profit-sharing, deferred compensation, group insurance, severance pay,
retirement, or other employee benefit plan, fund, or similar arrangement
or (except as required by law) amend or commit itself to amend any of
such plans, funds, or similar arrangements in existence on the date of
the Merger Agreement;
- (i) sell, transfer, or otherwise dispose of any of their assets, except
in the ordinary course of business and consistent with past practices,
(ii) create or permit to exist any new material lien on their assets,
(iii) enter into any material joint venture, partnership, or other
similar arrangement or form any other new material arrangement for the
conduct of their businesses, (iv) purchase any material assets or
securities of any person, or (v) except in the ordinary course of
business and consistent with past practices, enter into any other
material agreement;
- pay, declare or set aside any dividend on, or make any distribution or
payment with respect to, or purchase or redeem any of its capital stock
or the capital stock of any subsidiary, or make any
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commitment for any such action, except for quarterly cash dividends not
in excess of historical amounts; and
- take any action that would make any representation and warranty of Wilson
under the Merger Agreement materially inaccurate in any respect at, or as
of the time prior to, the Effective Time.
Conduct of Business of Smith. The Merger Agreement provides that, prior to
the Effective Time, unless Wilson otherwise agrees in writing, Smith and its
subsidiaries will conduct their businesses in the ordinary and usual course in
all material respects in accordance with past practice. Specifically, except as
contemplated by the Merger Agreement, neither Smith nor any of its subsidiaries,
without the prior written consent of Wilson, will:
- make any change or amendment in their respective organizational
documents;
- issue, sell or agree to issue, sell, pledge, dispose of or encumber (i)
any shares of their capital stock or (ii) any securities convertible
into, or options with respect to, or warrants to purchase or rights to
subscribe for, any shares of their capital stock, except that Smith may
issue options with an exercise price per share of Smith Common Stock no
less than the fair market value of a share of Smith Common Stock on the
date of grant thereof (and shares upon exercise of such options) pursuant
to its employee stock option plans in effect on the date of the Merger
Agreement;
- except in the ordinary course of business and consistent with past
practices, (i) sell, transfer, or otherwise dispose of any of their
assets, (ii) create or permit to exist any new material lien on their
assets, (iii) enter into any material joint venture, partnership, or
other similar arrangement; or (iv) enter into any other material
agreement;
- pay, declare or set aside any dividend on, or make any distribution with
respect to, or purchase or redeem any of their capital stock, except for
quarterly cash dividends by Smith and stock repurchases by Smith for
stock based compensation plans, in each case not in excess of historical
amounts, and dividends by wholly owned subsidiaries; and
- take any action that would make any representation and warranty of Smith
under the Merger Agreement materially inaccurate in any respect at, or as
of any time prior to, the Effective Time.
NO SOLICITATION OF ACQUISITION PROPOSALS
The Merger Agreement provides that Wilson agrees that prior to the
Effective Time or the termination of the Merger Agreement, whichever first
occurs, neither it nor any of its subsidiaries shall, and each of them shall not
permit any of its officers, directors, employees, agents or representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its subsidiaries) to (i) directly or indirectly,
solicit or encourage any inquiry, proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
10% or more of the assets on a consolidated basis or 10% or more of any of the
capital stock of, Wilson (any such proposal or offer being hereinafter referred
to as an "Acquisition Proposal"), (ii) enter into any agreement with respect to
any Acquisition Proposal, (iii) participate in any discussions or negotiations
regarding, or furnish to any person any information with respect to, the making
of any proposal that constitutes, or may reasonably be expected to lead to, or
to endorse, any Acquisition Proposal, (iv) engage in any negotiations concerning
an Acquisition Proposal, or (v) directly or indirectly, enter into any agreement
to, or make any public announcement by or on behalf of Wilson of a plan or
intention to do any of the foregoing.
Notwithstanding the above, Wilson may, in response to an unsolicited
written Acquisition Proposal, furnish confidential or non-public information
concerning its business, properties or assets to a financially capable
corporation, partnership, person or other entity or group (a "Potential
Acquiror") and negotiate with such Potential Acquiror if (i) the Wilson Board in
good faith concludes that such Acquisition Proposal would result in a
transaction more favorable to Wilson's shareholders than the Merger and (ii)
based upon advice of its outside legal counsel, the Wilson Board determines in
good faith that the failure to provide such
28
<PAGE> 37
confidential or non-public information to such Potential Acquiror would
constitute a breach of its fiduciary duty to its shareholders (any such
Acquisition Proposal meeting the conditions and clauses (i) and (ii) being
referred to as a "Superior Proposal").
Under the Merger Agreement, Wilson is required to immediately notify Smith
after receipt of any Acquisition Proposal or any request for non-public
information relating to Wilson or its subsidiaries in connection with an
Acquisition Proposal. Such notice to Smith shall be made orally and in writing
and shall indicate in reasonable detail the identity of the offeror and the
terms and conditions of such proposal, inquiry or contact.
TERMINATION
The Merger Agreement may be terminated and the transactions contemplated
thereby may be abandoned at any time prior to the Closing Date:
- by mutual written consent executed by Wilson and Smith;
- by Smith if (i) since the date of the Merger Agreement there has been a
material adverse change in Wilson, or (ii) there is an inaccuracy or
breach of any representation, warranty or covenant of Wilson set forth in
the Merger Agreement which breach has not been cured within 30 days
following receipt by Wilson of notice of such breach and which breach
results in or can reasonably be anticipated to result in a material
adverse effect; provided, however, that Smith's right to terminate the
Merger Agreement in accordance with this provision is subject to the
notice requirement set forth in the Merger Agreement;
- by Wilson if (i) since the date of the Merger Agreement there has been a
material adverse change in Smith, or (ii) there is an inaccuracy or
breach of any representation, warranty or covenant of Smith set forth in
the Merger Agreement which breach has not been cured within 30 days
following receipt by Smith of notice of such breach and which breach
results in or can reasonably be anticipated to result in a material
adverse effect; provided, however, that Wilson's right to terminate the
Merger Agreement in accordance with this provision is subject to the
notice requirement set forth in the Merger Agreement.
- by Smith or Wilson if the Closing Date shall not have occurred, other
than through the failure of any such party to fulfill its obligations
hereunder, on or before the expiration of 120 days from the date of the
Merger Agreement or such later date agreed to in writing by Smith and
Wilson; provided, however, that such 120 day period shall automatically
be extended for a period of 60 days, if the delay in the Closing Date
relates to the Notification and Report Form filed pursuant to the HSR
Act;
- by Smith or Wilson if any court of competent jurisdiction in the United
States of America or other (federal or state) governmental authority
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Merger Agreement and such order, decree, ruling or
other action shall have been final and nonappealable;
- by Smith or Wilson if the Merger Agreement shall not have been approved
or adopted by the shareholders of Wilson after the matter shall have been
presented to them for a vote at a meeting of Wilson shareholders
(including any adjournment thereof); or
- by Smith or Wilson if Wilson receives a Superior Proposal after the
expiration of two business days following written notice to Smith by
Wilson of its intention to accept and pursue such Superior Proposal and
terminate the Merger Agreement.
EXPENSES AND TERMINATION FEE
Except as set forth below, Smith and Wilson will each pay their own costs
and expenses in connection with the transactions contemplated by the Merger.
The Merger Agreement provides that Wilson will pay Smith a termination fee
of $20 million (the "Fee") payable in cash by wire transfer, within five days
after receipt of notice from Wilson of its intention to accept
29
<PAGE> 38
and pursue a Superior Proposal and terminate the Merger Agreement. The Fee
payable under certain circumstances by Wilson to Smith is intended, among other
things, to compensate Smith for its costs, including lost opportunity costs, if
the Merger is not consummated as a result of certain actions or inactions by
Wilson. The Fee may have the effect of increasing the likelihood that the Merger
will be consummated in accordance with the terms of the Merger Agreement. The
Fee may also have the effect of discouraging persons who might now or prior to
the consummation of the Merger be interested in acquiring all of or a
significant interest in Wilson from considering or proposing such an acquisition
by increasing the costs of any such acquisition.
INDEMNIFICATION
The Merger Agreement provides all rights to indemnification existing in
favor of the present or former directors, officers, employees and agents of
Wilson or any of its subsidiaries, or present or former officers or directors of
Wilson or any of its subsidiaries serving or who served at Wilson's or any of
its subsidiaries' request as a director, officer, employee or agent of another
entity (together with such person's heirs, executors or administrators, an
"Indemnified Party" and collectively, the "Indemnified Parties") as provided in
Wilson's or any subsidiaries' organizational documents and the indemnification
agreement with such person as if effect as of the date of the Merger Agreement
with respect to matters occurring at or prior to the Effective Time shall
survive the Merger and shall continue in full force and effect and without
modification (other than modifications which would enlarge such indemnification
rights) for a period of not less than the statutes of limitation applicable to
such matters and the Surviving Corporation shall comply fully with such
obligations. Without limiting the foregoing, Wilson shall, and after the
Effective Time, the Surviving Corporation or Smith shall periodically advance
expenses as incurred with respect to the foregoing to the fullest extent
permitted under applicable law; provided, however, that the person to whom the
expenses are advanced provides an undertaking to repay such advance if it is
ultimately determined that such person is not entitled to indemnification.
The Merger Agreement further provides that after the Effective Time Smith
shall, to the fullest extent permitted under applicable law, indemnify and hold
harmless, each Indemnified Party against any costs or expenses (including
attorneys' fees), judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement in connection with any actual or threatened claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of, relating to, or in connection
with any action or omission occurring or alleged to occur prior to the Effective
Time (including, without limitation, acts or omissions in connection with such
persons serving as an officer, director or other fiduciary in any entity if such
service was at the request or for the benefit of Wilson) or arising out of or
pertaining to the transactions contemplated by the Merger Agreement.
In the event Smith or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger of (ii)
transfers all or substantially all of its properties and assets to any person,
then in each such case, proper provisions shall be made so that the successors
and assigns of Smith shall assume the indemnification obligations set forth
above.
AMENDMENT AND WAIVER
The Merger Agreement may be amended, modified, terminated, rescinded or
supplemented only by written agreement of Wilson, Smith and Merger Sub. Any
failure of a party to comply with any obligation, covenant, agreement or
condition in the Merger Agreement may be waived by the party affected thereby
only by a written instrument signed by the party granting such waiver. No
waiver, or failure to insist upon strict compliance, by any party of any
condition or any breach of any obligation, term, covenant, representation,
warranty or agreement contained in the Merger Agreement, in any one or more
instances, shall be construed to be a waiver of, or estoppel with respect to,
any other condition or any other breach of the same or any other obligation,
term, covenant, representation, warranty or agreement. Whenever the Merger
Agreement requires or permits consent by or on behalf of any party hereto, such
consent shall be given in writing in a manner consistent with the requirements
for a waiver.
30
<PAGE> 39
ADDITIONAL AGREEMENTS
Reasonable Best Efforts. Each party will use its reasonable best efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper, or advisable under applicable laws and regulations to
consummate the transactions contemplated by the Merger Agreement.
Certain Filings. Wilson and Smith will cooperate with one another (i) in
connection with the preparation of the Registration Statement of which this
Proxy Statement/Prospectus is a part, (ii) in determining whether any action by
or in respect of, or filing with, any governmental authority is required, or any
actions, consents, approvals, or waivers are required to be obtained from
parties to any material agreements, in connection with the consummation of the
transactions contemplated by the Merger Agreement, and (iii) in taking such
actions or making such filings, furnishing information required in connection
therewith or with the Registration Statement and seeking timely to obtain such
actions, consents, approvals, or waivers. Smith and Wilson will promptly furnish
to each other all information, and take such other actions, as may reasonably be
requested in connection with any action by any of them in connection with the
preparation and filing of the Registration Statement and Wilson's Proxy
Statement. Smith and Wilson will make such filings as may be required by the HSR
Act with respect to the consummation of the transactions contemplated by the
Merger Agreement and will use all reasonable efforts to obtain early termination
of any waiting period under the HSR Act.
Public Announcements. Smith and Wilson each agree to not issue any press
releases or otherwise make public statements with respect to the Merger
Agreement or the transactions contemplated thereby without the prior consent of
the other.
Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of Wilson or Merger Sub, any deeds, bills of
sale, assignments, or assurances and to take and do, in the name and on behalf
of Wilson or Merger Sub, any other actions and things to vest, perfect, or
confirm of record or otherwise in the Surviving Corporation any and all right,
title, and interest in, to, and under any of the rights, properties, or assets
of Wilson acquired or to be acquired by the Surviving Corporation as a result
of, or in connection with, the Merger.
Notices of Certain Events. Wilson and Smith will each give the other prompt
notice of (i) any notice or other communication from any person alleging that
the consent of such person is or may be required in connection with the
transactions contemplated by the Merger Agreement, (ii) any notice or other
communication from a governmental authority in connection with the transactions
contemplated by the Merger Agreement, (iii) any action, suit, claim,
investigation or proceeding that has commenced or is known to be threatened that
would have been required to have been disclosed under the terms of the Merger
Agreement or that relate the consummation of the transactions contemplated
thereby, and (iv) (a) any material adverse change in such party's condition
(financial or otherwise), (b) the discovery by such party that any
representation or warranty contained in the Merger Agreement is untrue or
inaccurate in any material respect, (c) the occurrence or failure to occur of
any event which occurrence or failure to occur would be likely to cause any of
the representations or warranties in the Merger Agreement to be untrue or
incorrect in any material respect at the Effective Time, except for
representation or warranties that speak as of a specified date, which need only
be true and correct as of the specified date, and (d) any material failure on
its part to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under the Merger Agreement; provided, however,
that the delivery of any notice pursuant to the Merger Agreement shall not limit
or otherwise affect the remedies available thereunder to the party receiving
such notice.
Tax-Free Reorganization. Prior to the Effective Time, each party shall use
its best efforts to cause the Merger to qualify as a reorganization under the
provisions of Section 368(a) and to be treated as a "pooling-of-interests"
transaction, and in each case will not take or fail to take any action
reasonably likely to cause the Merger not to so qualify or to be so treated.
Affiliates. Each person who is deemed an affiliate of Wilson under Rule 145
of the Securities Act shall execute an affiliate letter in the form of Exhibit D
to the Merger Agreement. Smith will use all reasonable
31
<PAGE> 40
efforts to deliver or cause to be delivered to Wilson from each person who is
deemed, in Smith's reasonable judgment, an affiliate of Smith under Rule 145 of
the Securities Act an affiliate letter in the form of Exhibit E to the Merger
Agreement.
Access to Information; Confidentiality. The Merger Agreement provides that
each of Wilson and Smith will give to the other party reasonable access to its
offices, properties, books, and records, furnish to the other party and its
representatives such financial and other data and information as such party and
its representatives may reasonably request and instruct its own employees and
representatives to cooperate with the other party in its investigations. Each
party shall keep such information confidential in accordance with the terms of
the confidentiality agreement between Wilson and Smith dated November 6, 1997.
Smith's Board of Directors. The Smith Board shall elect Wallace S. Wilson,
age 68, as a Class I director of Smith as of the Effective Time with a term
expiring in 1999. If, prior to the Effective Time, Mr. Wilson shall decline or
be unable to serve, Wilson shall designate another person to serve in Mr.
Wilson's stead.
Mr. Wilson is the Chairman of the Wilson Board and has been with Wilson for
over 45 years. Mr. Wilson graduated from Yale University with a degree in
economics and served as an Officer in the United States Air Force from 1951 to
1953 before joining Wilson Supply Company. Mr. Wilson is active in many of the
energy industry associations, including the Petroleum Equipment Suppliers
Association, the American Petroleum Institution and the National Association of
Wholesalers. Mr. Wilson also serves as a Director of the Texas Medical Center,
Inc. and is on the Board of Trustees for the Texas Children's Hospital
Foundation.
For the calendar year ended December 31, 1996, Mr. Wilson's compensation
from Wilson was $249,260, of which $174,000 was salary, $65,000 was bonus and
the remainder consisted of other fringe benefits.
Shareholder Tax Representations. Wilson and Smith shall use reasonable
efforts to obtain representations from such persons which counsel may reasonably
require in connection with their opinions as to the federal income tax
consequences of the Merger.
EMPLOYEE MATTERS
Following the Closing, Smith shall make or cause the Surviving Corporation
to make all payments due under any and all applicable bonus or other agreements
between Wilson and certain of its officers and/or employees, including, without
limitation, all long-term incentive bonus agreements and incentive bonus
agreements. From and after the Effective Time, Smith (i) shall provide the
employees of the Surviving Corporation with compensation and benefits on the
same basis as Smith provides compensation and benefits to similarly situated
employees of Smith and its affiliates, and shall credit each person who is an
employee of Wilson at the Effective Time with such employee's service that is
recognized as of the Effective Time under Wilson's benefit plans (including
industry service for vacation purposes) for all purposes under Smith's plans or
programs except for the accrual of benefits under a defined benefit plan, and
(ii) shall waive any exclusion or limitation with respect to pre-existing
conditions under Smith's group health plan and shall provide that any
out-of-pocket health expenses incurred by a Wilson employee or his or her
covered dependants prior to the Effective Time shall be taken into account under
Smith's group health plan for purposes of satisfying applicable deductible
coinsurance and maximum covered health benefit claims for services rendered on
and after the Effective Time.
REGISTRATION RIGHTS AGREEMENT
Wallace S. Wilson, William N. Mathis, the C. Payne Family Limited
Partnership, Isabel Brown Wilson, the Wilson Hospital Foundation and Ellen E.
Wilson, and certain trusts over which certain of the foregoing exercise voting
control (the "Holders"), propose to enter into a Registration Rights Agreement
substantially in the form of Exhibit B to the Merger Agreement included as part
of Appendix A to this Proxy Statement/ Prospectus. Under the Registration Rights
Agreement, one or more of the Holders may upon three occasions request Smith to
register for resale shares issued in the Merger that have not theretofore been
registered ("Registrable Securities") for resale under the Securities Act,
provided that any such request shall have an aggregate offering price to the
public of not less that $10 million. The Holders will also be entitled to
32
<PAGE> 41
participate in certain other incidental registrations filed by Smith, if their
inclusion would not adversely affect the offering made thereby. Smith will pay
all fees and expenses of each such registration other than underwriting fees,
discounts or selling commissions incurred in connection with the sale of the
Registrable Securities. The Registration Rights Agreement contains provisions
customarily found in agreements relating to comparable transactions, including
indemnification and contribution rights.
33
<PAGE> 42
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following Restated and Pro Forma Condensed Balance Sheet as of
September 30, 1997 and Restated and Pro Forma Condensed Statements of Operations
for each of the three years in the period ended December 31, 1996 and for the
nine months ended September 30, 1996 and 1997, have been prepared to give effect
to the Merger. On January 19, 1998, Smith entered into a definitive agreement to
acquire all of the equity interests of Wilson in exchange for 7,900,000 shares
of Smith Common Stock.
The Restated and Pro Forma Condensed Statements of Operations for all years
presented combine the results of operations for both of the companies' fiscal
years ended December 31. The Restated and Pro Forma Condensed Statements of
Operations are presented as if the transaction had occurred prior to the
earliest period presented, whereas the Restated and Pro Forma Condensed Balance
Sheet assumes the Merger occurred on September 30, 1997. The pro forma
information is based upon the historical financial statements, giving effect to
the Merger under the "pooling-of-interests" method of accounting and the
assumptions included in the accompanying Notes to Restated and Pro Forma
Condensed Financial Statements. The accompanying Restated and Pro Forma
Condensed Financial Statements include an adjustment to record a change in
accounting principle in the period required for public companies; however, no
adjustments have been included to conform the accounting policies of Wilson and
Smith as no material differences in the companies' policies have been
identified.
The Restated and Pro Forma Condensed Financial Statements do not include
estimated cost savings; therefore they may not be indicative of the results
which would have occurred or which may occur in the future. The pro forma
adjustments are based upon available information and upon certain assumptions
that Smith's management believes are reasonable under the circumstances. The
Restated and Pro Forma Condensed Financial Statements should be read in
conjunction with the financial statements of Smith and Wilson included or
incorporated by reference in this Proxy Statement/Prospectus.
34
<PAGE> 43
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SMITH WILSON AS
HISTORICAL HISTORICAL RESTATED
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................ $653,901 $369,503 $1,023,404
Costs and Expenses:
Cost of revenues...................................... 432,627 300,570 733,197
Selling, general and administrative................... 161,170 60,503 221,673
-------- -------- ----------
Total costs and expenses...................... 593,797 361,073 954,870
-------- -------- ----------
Income before interest and taxes........................ 60,104 8,430 68,534
Interest expense, net................................... 8,572 1,463 10,035
-------- -------- ----------
Income before taxes and minority interests.............. 51,532 6,967 58,499
Income tax provision.................................... 6,815 2,779 9,594
Minority interests...................................... 8,838 -- 8,838
-------- -------- ----------
Net income.............................................. $ 35,879 $ 4,188 $ 40,067
======== ======== ==========
Earnings per share...................................... $ 0.92 $ 0.85
======== ==========
Weighted average common and common equivalent shares
outstanding........................................... 39,065 7,900 46,965
</TABLE>
See accompanying Notes to Restated and Pro Forma Condensed Financial Statements.
35
<PAGE> 44
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SMITH WILSON AS PRO FORMA
HISTORICAL HISTORICAL RESTATED ADJUSTMENTS(2) PRO FORMA
---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $874,544 $395,934 $1,270,478 $ -- $1,270,478
Costs and Expenses:
Cost of revenues.................... 582,004 325,380 907,384 -- 907,384
Selling, general and
administrative................... 206,292 64,340 270,632 -- 270,632
-------- -------- ---------- -------- ----------
Total costs and expenses.... 788,296 389,720 1,178,016 -- 1,178,016
-------- -------- ---------- -------- ----------
Income before interest and taxes...... 86,248 6,214 92,462 -- 92,462
Interest expense, net................. 12,238 1,877 14,115 -- 14,115
-------- -------- ---------- -------- ----------
Income from continuing operations
before taxes, minority interests and
cumulative effect of change in
accounting principle................ 74,010 4,337 78,347 -- 78,347
Income tax provision.................. 12,609 841 13,450 -- 13,450
-------- -------- ---------- -------- ----------
Income from continuing operations
before minority interests and
cumulative effect of change in
accounting principle................ 61,401 3,496 64,897 -- 64,897
Minority interests.................... 15,809 -- 15,809 15,809
Cumulative effect of change in
accounting principle................ -- 3,264 3,264 (3,264) --
-------- -------- ---------- -------- ----------
Net income............................ $ 45,592 $ 232 $ 45,824 $ 3,264 $ 49,088
======== ======== ========== ======== ==========
Earnings per share.................... $ 1.16 $ 0.97 $ 1.04
======== ========== ==========
Weighted average common and common
equivalent shares outstanding....... 39,383 7,900 47,283 47,283
</TABLE>
See accompanying Notes to Restated and Pro Forma Condensed Financial Statements.
36
<PAGE> 45
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SMITH WILSON AS
HISTORICAL HISTORICAL RESTATED
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.............................................. $1,156,658 $495,248 $1,651,906
Costs and Expenses:
Cost of revenues.................................... 764,596 405,962 1,170,558
Selling, general and administrative................. 259,542 73,284 332,826
---------- -------- ----------
Total costs and expenses.................... 1,024,138 479,246 1,503,384
---------- -------- ----------
Income before interest and taxes...................... 132,520 16,002 148,522
Interest expense, net................................. 16,445 2,595 19,040
---------- -------- ----------
Income before taxes and minority interests............ 116,075 13,407 129,482
Income tax provision.................................. 26,798 4,554 31,352
Minority interests.................................... 24,833 -- 24,833
---------- -------- ----------
Net income............................................ $ 64,444 $ 8,853 $ 73,297
========== ======== ==========
Earnings per share.................................... $ 1.62 $ 1.53
========== ==========
Weighted average common and common equivalent shares
outstanding......................................... 39,880 7,900 47,780
</TABLE>
See accompanying Notes to Restated and Pro Forma Condensed Financial Statements.
37
<PAGE> 46
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SMITH WILSON AS
HISTORICAL HISTORICAL RESTATED
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................................. $819,749 $360,124 $1,179,873
Costs and Expenses:
Cost of revenues........................................ 545,119 295,316 840,435
Selling, general and administrative..................... 184,509 53,816 238,325
-------- -------- ----------
Total costs and expenses........................ 729,628 349,132 1,078,760
-------- -------- ----------
Income before interest and taxes.......................... 90,121 10,992 101,113
Interest expense, net..................................... 11,350 1,868 13,218
-------- -------- ----------
Income before taxes and minority interests................ 78,771 9,124 87,895
Income tax provision...................................... 17,423 3,102 20,525
Minority interests........................................ 16,815 -- 16,815
-------- -------- ----------
Net income................................................ $ 44,533 $ 6,022 $ 50,555
======== ======== ==========
Earnings per share........................................ $ 1.12 $ 1.06
======== ==========
Weighted average common and common equivalent shares
outstanding............................................. 39,823 7,900 47,723
</TABLE>
See accompanying Notes to Restated and Pro Forma Condensed Financial Statements.
38
<PAGE> 47
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SMITH WILSON AS
HISTORICAL HISTORICAL RESTATED
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................ $1,137,276 $442,800 $1,580,076
Costs and Expenses:
Cost of revenues...................................... 742,777 359,880 1,102,657
Selling, general and administrative................... 240,559 61,681 302,240
---------- -------- ----------
Total costs and expenses...................... 983,336 421,561 1,404,897
---------- -------- ----------
Income before interest and taxes........................ 153,940 21,239 175,179
Interest expense, net................................... 17,882 2,843 20,725
---------- -------- ----------
Income before taxes and minority interests.............. 136,058 18,396 154,454
Income tax provision.................................... 35,481 5,377 40,858
Minority interests...................................... 28,271 -- 28,271
---------- -------- ----------
Net income.............................................. $ 72,306 $ 13,019 $ 85,325
========== ======== ==========
Earnings per share...................................... $ 1.80 $ 1.78
========== ==========
Weighted average common and common equivalent shares
outstanding........................................... 40,158 7,900 48,058
</TABLE>
See accompanying Notes to Restated and Pro Forma Condensed Financial Statements.
39
<PAGE> 48
SMITH INTERNATIONAL, INC.
RESTATED AND PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SMITH WILSON AS PRO FORMA
HISTORICAL HISTORICAL RESTATED ADJUSTMENTS(3) PRO FORMA
---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents....... $ 19,956 $ 2,592 $ 22,548 $ -- $ 22,548
Receivables, net................ 389,620 93,350 482,970 -- 482,970
Inventories, net................ 325,033 91,451 416,484 -- 416,484
Other current assets............ 31,534 3,161 34,695 -- 34,695
---------- -------- ---------- -------- ----------
Total current assets.... 766,143 190,554 956,697 -- 956,697
Property and equipment, net....... 253,205 40,407 293,612 -- 293,612
Goodwill.......................... 187,952 -- 187,952 -- 187,952
Other long-term assets............ 46,753 12,683 59,436 -- 59,436
---------- -------- ---------- -------- ----------
Total assets...................... $1,254,053 $243,644 $1,497,697 $ -- $1,497,697
========== ======== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 77,248 $ 790 $ 78,038 $ -- $ 78,038
Accounts payable................ 103,625 63,230 166,855 -- 166,855
Other current liabilities....... 134,960 11,660 146,620 32,000(b) 178,620
---------- -------- ---------- -------- ----------
Total current
liabilities........... 315,833 75,680 391,513 32,000 423,513
Long-term debt.................... 277,517 64,302 341,819 -- 341,819
Minority interests................ 199,074 -- 199,074 -- 199,074
Other long-term liabilities....... 23,296 6,468 29,764 -- 29,764
Stockholders' equity:
Common stock.................... 40,306 9,789 50,095 (1,889)(a) 48,206
Additional paid-in capital...... 282,448 13,882 296,330 (723)(a) 295,607
Retained earnings............... 134,788 76,110 210,898 (32,000)(b) 178,898
Cumulative translation
adjustment................... (11,507) 25 (11,482) -- (11,482)
Treasury securities............. (7,702) (2,612) (10,314) 2,612(a) (7,702)
---------- -------- ---------- -------- ----------
Total stockholders'
equity................ 438,333 97,194 535,527 (32,000) 503,527
---------- -------- ---------- -------- ----------
Total liabilities and
stockholders' equity............ $1,254,053 $243,644 $1,497,697 $ -- $1,497,697
========== ======== ========== ======== ==========
</TABLE>
See accompanying Notes to Restated and Pro Forma Condensed Financial Statements.
40
<PAGE> 49
NOTES TO RESTATED AND PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE (1) BASIS OF PRESENTATION
The Restated and Pro Forma Condensed Statements of Operations exclude the
impact of non-recurring costs related to the acquisition which will be incurred
within the next 12 months. The Restated and Pro Forma Condensed Balance Sheet
includes $32.0 million of acquisition-related charges which are expected to be
incurred in connection with the Merger. These charges consist primarily of
severance, investment banking, legal and accounting costs, as well as amounts
expected to be incurred to consolidate the Wilson operations. The Restated and
Pro Forma Condensed Financial Statements do not include any cost savings
expected to occur as a result of the Merger.
NOTE (2) PRO FORMA ADJUSTMENTS TO THE CONDENSED STATEMENTS OF OPERATIONS
Wilson adopted Statement of Financial Accounting Standards No. 106 ("SFAS
106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions"
on January 1, 1995 in compliance with the reporting rules for non-public
companies. This adjustment reflects the impact of including the charge related
to SFAS 106 in 1993 in accordance with the requirements for public companies.
NOTE (3) PRO FORMA ADJUSTMENTS TO THE CONDENSED BALANCE SHEET
(a) Reflects issuance of 7,900,000 shares of Smith Common Stock in exchange
for the shares of Wilson under the "pooling-of-interests" method of accounting.
(b) Reflects accrual of acquisition-related charges associated with the
Merger.
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DESCRIPTION OF SMITH CAPITAL STOCK
The authorized capital stock of Smith consists of 60,000,000 shares of
Smith Common Stock and 5,000,000 shares of preferred stock, par value $1.00 per
share. The following description of the capital stock of Smith is subject to the
applicable provisions of the Smith Charter and Smith Bylaws, which are
incorporated by reference herein.
COMMON STOCK
Smith is authorized by the Smith Charter to issue 60,000,000 shares of
Smith Common Stock, of which 40,332,796 shares were issued and outstanding as of
March 6, 1998.
The holders of shares of Smith Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of holders of Smith Common
Stock. The Smith Common Stock does not have cumulative voting rights, which
means that the holders of a majority of the shares of Smith Common Stock
outstanding can elect all the directors if they choose to do so. In such event,
the holders of the remaining shares will not be able to elect any directors.
Each share of Smith Common Stock is entitled to participate equally in
dividends, as and when declared by the Smith Board, and in the distribution of
assets in the event of liquidation, subject in all cases to any prior rights of
outstanding shares of preferred stock. The shares of Smith Common Stock have no
preemptive or conversion rights, redemption provisions or sinking fund
provisions. The outstanding shares of Smith Common Stock are duly and validly
issued, fully paid and nonassessable.
PREFERRED STOCK
Smith is authorized by the Smith Charter to issue 5,000,000 shares of
preferred stock, $1.00 par value per share (the "Smith Preferred Stock"), of
which no shares were issued and outstanding as of March 6, 1998. The Smith Board
has the authority to issue, without any further action by the stockholders
(except as may be required by applicable law or stock exchange regulations), the
preferred stock in one or more series, to establish from time to time the number
of shares to be included in each series, and to fix the designations, powers,
preferences and rights of the shares of each series and the qualifications,
limitations and restrictions thereof.
In connection with Smith's Stockholder Rights Plan (the "Smith Rights
Plan"), the Smith Board has authorized the issuance of up to 420,000 shares of
Series A Junior Participating Preferred Stock (the "Smith Junior Participating
Preferred Stock"). Upon issuance, each share of Smith Junior Participating
Preferred Stock is entitled to quarterly cash dividends equal to the greater of
$1 or 100 times (subject to antidilution adjustments for stock dividends and
stock splits) the aggregate value of all dividends or other distributions
declared on a share of Smith Common Stock (other than distributions of Smith
Common Stock) since the last quarterly dividend payment date. The Smith Junior
Participating Preferred Stock may be redeemed, in whole or in part, at the
option of the Smith Board at a cash price per share equal to 100 (subject to
antidilution adjustments) multiplied by the average closing sale price of Smith
Common Stock for the 10 trading days immediately preceding the date of such
redemption.
Each share of Smith Junior Participating Preferred Stock is entitled to 100
votes (subject to antidilution adjustments) on all matters submitted to a vote
of the stockholders of Smith, voting together as one class with Smith Common
Stock. In addition, if at any time dividends in an amount equal to six quarterly
dividend payments shall have accrued and be unpaid on the Smith Participating
Preferred Stock and until dividends have been declared and paid or set apart for
payment: (i) the holders of the Smith Junior Participating Preferred Stock shall
have the right to elect two members to the Smith Board and (ii) the holders of
record of 10% or more of the outstanding Smith Junior Participating Preferred
Stock may call a special meeting of the holders of the Smith Junior
Participating Preferred Stock, as well as the holders of any other stock
entitled to vote with the Smith Junior Participating Preferred Stock, for the
election of the directors to be elected by the holders of Smith Junior
Participating Preferred Stock. Except as required by applicable law, holders of
Smith Junior Participating Preferred Stock have no other special voting rights.
Whenever dividends or distributions
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on the Smith Junior Participating Preferred Stock are in arrears, Smith is
prohibited from declaring or paying dividends or distributions on, and Smith and
any subsidiary are prohibited from redeeming or acquiring for value, any stock
ranking junior as to dividends or upon liquidation. During any such arrearage,
Smith may declare or pay dividends on stock ranking on a parity with the Smith
Junior Participating Preferred Stock as to dividends or upon liquidation only if
declared or paid ratably with the Smith Junior Participating Preferred Stock.
During any such arrearage, Smith and any subsidiary are prohibited from
redeeming or acquiring for value any such parity stock or any Smith Junior
Participating Preferred Stock, except pursuant to an exchange of parity stock
for stock ranking junior to the Smith Junior Participating Preferred Stock or
pursuant to a purchase offer to the Smith Junior Participating Preferred Stock
and holders of parity stock on terms the Smith Board determines to be fair and
equitable.
The outstanding shares of the Smith Junior Participating Preferred Stock
may be redeemed, in whole or in part, at the option of the Smith Board at a cash
price per share equal to 100 (subject to antidilution adjustments) multiplied by
the average closing sale price of Smith Common Stock for the 10 trading days
immediately preceding the date of such redemption. Notice of any such redemption
shall be given by mailing to the holders of the Smith Junior Participating
Preferred Stock a notice of such redemption no later than the 30th day and no
earlier than the 60th day before the date fixed for redemption.
The Smith Junior Participating Preferred Stock ranks junior to all other
series of Smith's preferred stock and senior to Smith Common Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Upon any liquidation, dissolution or winding up of Smith, the Smith Junior
Participating Preferred Stock is entitled to a liquidation preference of $100
per share plus any accrued but unpaid dividends, subject to the prior rights of
any series of preferred stock ranking in liquidation senior to the Smith Junior
Participating Preferred Stock. In the event of any shortfall in the assets
available for distribution, any such liquidating distribution shall be made
ratably to the Smith Junior Participating Preferred Stock and any other series
of preferred stock ranking on a parity in proportion to their relative
liquidation preferences. Following such payment, no additional liquidating
distributions may be made on the Smith Junior Participating Preferred Stock
until each share of Smith Common Stock shall have received a distribution equal
to the Smith Junior Participating Preferred Stock liquidation preference divided
by 100 (subject to antidilution adjustments). Thereafter, any remaining assets
shall be distributed to each share of Smith Junior Participating Preferred Stock
and each share of Smith Common Stock in the ratio of 100 to 1 (subject to
antidilution adjustments).
STOCKHOLDER RIGHTS PLAN; CERTAIN OTHER ANTI-TAKEOVER PROVISIONS
As more fully described below, the Smith Rights Plan and certain provisions
of the Smith Charter may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider to be in such stockholder's best interest.
On June 19, 1990, the Smith Board adopted the Smith Rights Plan. The Smith
Rights Plan provides for a dividend distribution of one preferred stock purchase
right ("Right") for each outstanding share of Smith Common Stock, to
stockholders of record at the close of business on June 29, 1990. Each right
entitles the holder to purchase from the Company at any time following the
Distribution Date (as defined below) and prior to the occurrence of a Triggering
Event (as defined below) one-hundredth of a share of the Smith Junior
Participating Preferred Stock at an exercise price of $50 (subject to
adjustment). The Rights are exercisable on the date (the "Distribution Date") of
the earlier of (i) ten business days after the date on which there is a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") (a) has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding shares of Smith Common
Stock, or (b) if beneficially owning 20% or more of the outstanding shares of
Smith Common Stock on June 19, 1990, has acquired, or obtained the right to
acquire, beneficial ownership of 1% or more of the outstanding shares of Smith
Common Stock, or (ii) ten business days after the date on which a person
commences a tender offer or exchange offer that would result in a person or
group beneficially owning 20% or more of the outstanding shares of Smith Common
Stock.
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If any person or group becomes an Acquiring Person, except pursuant to a
tender offer or an exchange offer for all outstanding shares of Smith Common
Stock at a price and on terms determined by at least a majority of the
independent directors to be at a price which is fair to the stockholders and
otherwise in the best interests of Smith and its stockholders (a "Qualifying
Offer"), then each Right will thereafter entitle the holder to receive, upon
exercise, a number of shares of Smith Common Stock (or, in certain
circumstances, cash, property or other securities of Smith) having a value equal
to two times the exercise price of the Right, except that any Rights
beneficially owned by the Acquiring Person shall be null and void. Additionally,
at any time after the date a person becomes an Acquiring Person, Smith is
acquired in a merger or other business combination transaction (other than a
Qualifying Offer) in which Smith is not the surviving corporation, or 50% or
more of the assets or earning power of Smith is sold or transferred (each, a
"Triggering Event"), each Right (other than Rights previously voided) will
entitle its holder to purchase, at the Right's then current exercise price,
shares of common stock of such acquiring person having a value of twice the
Right's exercise price.
Until the Distribution Date, the Rights will be evidenced by the Smith
Common Stock certificates and the surrender or transfer of any certificates for
Smith Common Stock will also constitute the Rights associated with such Smith
Common Stock. The Rights are not exercisable until the Distribution Date and
will expire on June 19, 2000, unless earlier redeemed by Smith. The exercise
price and the number of shares of Smith Junior Participating Preferred Stock or
other securities issuable upon exercise of the Rights are subject to adjustment
from time to time to prevent dilution. Smith will generally be entitled to
redeem the Rights at $.01 per Right at any time until the tenth business day
(subject to extension) after a person becomes an Acquiring Person.
Additionally, Smith is subject to Section 203 of the DGCL, which prohibits
certain corporations from engaging in a "business combination" (as hereinafter
defined) with an "interested stockholder" (defined generally to mean a person
who, together with his affiliates owns, or if the person is an affiliate of the
corporation did own within the last three years, 15% or more of the outstanding
voting stock of the corporation) for a period of three years after the time of
the transaction in which the person became an interested stockholder, unless (i)
prior to the time of the business combination, the Smith Board approved the
business combination or the transaction in which the stockholder became an
interested stockholder, (ii) as a result of the business combination, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, or (iii) on or subsequent to
the date of the business combination, the Smith Board and the holders of at
least 66 2/3% of the outstanding voting stock not owned by the interested
stockholder approve the business combination. The DGCL defines a "business
combination" generally as: (a) a merger or consolidation with the interested
stockholder or with any other corporation if the merger or consolidation is
caused by the interested stockholder, (b) a sale or other disposition to or with
an interested stockholder of assets with an aggregate market value greater than
or equal to 10% or more of either the aggregate market value of all assets of
the corporation or the aggregate market value of all of the outstanding stock of
the corporation; (c) with certain exceptions, any transaction resulting in the
issuance or transfer by the corporation or any majority-owned subsidiary of any
stock of the corporation or such subsidiary to the interested stockholder; (d)
any transaction involving the corporation or a majority-owned subsidiary that
has the effect of increasing the proportionate share of the stock of the
corporation or any such subsidiary owned by the interested stockholder; or (e)
any receipt of the interested stockholder of the benefit of any loans or other
financial benefits provided by the corporation or any majority-owned subsidiary.
Section 203 applies only to Delaware corporations that have securities traded on
a national securities exchange, authorized for quotation on the National Market
System of the Nasdaq Stock Market, Inc. (the "Nasdaq/NMS") or held of record by
more than 2,000 stockholders.
The Smith Charter contains a provision similar to Section 203 of the DGCL,
except that it requires a higher percentage of all stockholders voting as a
class to approve a business combination, it prohibits business combinations with
interested stockholders for only two years, and it contains what is generally
referred to as a "fair price provision." The Smith Charter requires the
affirmative vote of the holders of at least 75% of the outstanding shares of
capital stock entitled to vote on matters submitted to stockholders generally
("voting stock"), voting together as a single class, to approve a "business
combination" involving Smith or a subsidiary and any "interested stockholder" or
affiliate of an interested stockholder, unless either (i) such business
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combination does not involve the payment of consideration to the holders of
Smith Capital Stock and is approved by a majority of disinterested directors, or
(ii) such business combination is approved by a majority of disinterested
directors, the stockholders receive a "fair price" for their Smith securities,
and certain other procedural requirements are met. The Smith Charter provides
that this provision may not be repealed or amended in any respect except by the
affirmative vote of the holders of not less than 75% of the outstanding shares
of capital stock entitled to vote generally in the election of Smith directors.
For purposes of the Smith Charter, a "business combination" is defined generally
as any merger or consolidation of Smith with any interested stockholder or any
company affiliated with an interested stockholder, any sale or other disposition
or any loan, advance or guarantee, agreement to purchase, agreement to pay,
extension of credit or other arrangement for the benefit of an interested
stockholder involving any assets, securities or commitments of Smith having an
aggregate fair market value of $2,500,000 or more or constitutes 5% of the book
value of the total assets or 5% of the stockholders' equity, the adoption of any
plan or proposal for the liquidation or dissolution of Smith or for any
amendment to Smith's Bylaws, or any reclassification or recapitalization that
has the effect of increasing the proportionate share of any class or series of
capital stock (or any security convertible into capital stock) that is
beneficially by an interested stockholder; and an "interested stockholder" is
defined generally as any person (other than Smith or any subsidiary of Smith)
who has announced or publicly disclosed a plan or intention to become the
beneficial owner of 20% or more of the outstanding voting stock of Smith or is
an affiliate of Smith and at any time within the two years prior to the date in
questions was the beneficial owner of 20% or more of the outstanding voting
stock of Smith.
The Smith Charter contains certain other provisions that may delay, defer
or prevent a tender offer or takeover attempt. The Smith Charter provides that
the Smith Board is divided into three classes that are elected for staggered
three-year terms, and that stockholders of Smith may only remove a director for
cause. The Smith Charter further provides that the stockholders of Smith may not
take any action by written consent.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Smith Common Stock is First Chicago
Trust Company of New York.
COMPARISON OF STOCKHOLDER RIGHTS
The rights of shareholders of Wilson are currently governed by the TBCA,
the Wilson Articles and the Wilson Bylaws. Upon consummation of the Merger,
shareholders of Wilson who receive Smith Common Stock will become stockholders
of Smith and their rights will be governed by the DGCL, the Smith Charter and
the Smith Bylaws, which differ in certain respects from the TBCA, the Wilson
Articles and the Wilson Bylaws. The following is a summary of certain
differences between the rights of Wilson shareholders and those of Smith
stockholders.
The following summary does not purport to be a complete description of the
rights of shareholders of Wilson or the rights of stockholders of Smith or a
comprehensive comparison of such rights, and is qualified in its entirety by
reference to the TBCA and the DGCL, to the Wilson Articles and Wilson Bylaws,
and to the Smith Charter and Smith Bylaws. For more information on reviewing or
obtaining a copy of the charter documents or bylaws of either company, see
"AVAILABLE INFORMATION."
VOTING RIGHTS
All holders of Wilson Common Stock have the right to one vote per share
with respect to all matters submitted to a vote of Wilson shareholders.
Holders of Smith Common Stock are entitled to one vote per share on all
matters upon which stockholders are entitled to vote.
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AMENDMENTS TO CHARTER AND BYLAWS
As more fully described below, amendments to the Wilson Articles generally
require the approval of holders of a higher percentage of outstanding shares
than do amendments to the Smith Charter, while amendments to the Smith Bylaws
require the approval of holders of a higher percentage of outstanding shares
than do amendments to the Wilson Bylaws.
Under the TBCA, an amendment to the Wilson Articles generally would require
the approval of the holders of two-thirds of the shares entitled to vote
thereon, or, if any class is entitled to vote separately thereon, the approval
of the holders of two-thirds of the shares of such class entitled to vote
thereon and two-thirds of the total shares entitled to vote thereon.
Under the TBCA and the Wilson Articles, the Wilson Board may alter, amend
or repeal the Wilson Bylaws without shareholder approval, although bylaws made
by the Wilson Board, and the power conferred upon the Wilson Board to amend such
bylaws, may be altered or repealed by the shareholders. The Wilson Bylaws
provide that the Wilson Bylaws may be altered, amended, or repealed by the
affirmative vote of the holders of a majority of the outstanding stock at any
annual meeting, or at any special meeting if notice of the proposed amendment is
contained in the notice of said special meeting, or by the affirmative vote of a
majority of the Wilson Board at any regular or special meeting, provided such
action is described in a notice of such meeting.
Under the DGCL, amendments to a Delaware corporation's certificate of
incorporation must be approved by a resolution of the board of directors
declaring the advisability of the amendment, and by the affirmative vote of a
majority of the outstanding shares entitled to vote. If an amendment would
increase or decrease the number of authorized shares of such class, increase or
decrease the par value of the shares of such class or alter or change the
powers, preferences or other special rights of a class of outstanding shares so
as to affect the class adversely, then a majority of shares of that class also
must approve the amendment. The DGCL also permits a corporation to make
provision in its certificate of incorporation requiring a greater proportion of
voting power to approve a specified amendment. In that regard, the Smith Charter
provides that certain provisions may not be amended without the affirmative vote
of 75% of the outstanding shares entitled to vote.
The Smith Charter provides that the Smith Bylaws may be amended or repealed
or new bylaws adopted upon the approval of the Smith Board or by the holders of
at least 75% of the voting power of all of the then outstanding shares of
capital stock entitled to vote generally in the election of directors, voting as
a single class. The Smith Bylaws provide that they may be amended only in
accordance with the Smith Charter.
BOARD OF DIRECTORS
The TBCA provides that the board of directors of a Texas corporation shall
consist of one or more members as fixed by the articles of incorporation or
bylaws. The Wilson Bylaws provide that the Wilson Board shall consist of nine
directors, subject to change by amendment to the Wilson Bylaws, provided that
the Wilson Board shall consist of at least three members. Members of the Wilson
Board are elected at each annual meeting of shareholders for terms expiring at
the succeeding annual meeting. Wilson does not have a classified board of
directors.
The DGCL provides that the board of directors of a Delaware corporation
shall consist of one or more directors as fixed by the certificate of
incorporation or bylaws. The Smith Charter provides that the number of directors
shall be not less than six and not more than fifteen and shall be fixed from
time to time by resolution duly adopted by the Smith Board. The Smith Charter
provides that the directors of Smith will be divided into three classes serving
staggered three-year terms such that approximately one-third of the Smith Board
is elected each year. Notwithstanding the foregoing, if at any time dividends in
an amount equal to six quarterly dividend payments shall have accrued and be
unpaid on the Smith Junior Participating Preferred Stock, and until dividends
have been declared and paid or set apart for payment, the holders of the Smith
Junior Participating Preferred Stock shall have the right to elect two members
to the Smith Board.
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QUORUM REQUIRED FOR DIRECTORS MEETING
The TBCA and the DGCL provide that a majority of the total number of
directors shall constitute a quorum for the transaction of business, unless the
charter or bylaws require a greater number. Both of the Wilson Bylaws and the
Smith Bylaws provide that a majority of the number of directors then in office
shall constitute a quorum for the transaction of business at directors'
meetings.
REMOVAL OF DIRECTORS
Under the TBCA, a corporation's bylaws or articles of incorporation may
provide that at any meeting of shareholders called expressly for that purpose,
one or more directors may be removed, with or without cause (subject to certain
exceptions for a corporation having a classified board of directors), by a vote
of the holders of a specified portion, but not less than a majority, of the
shares then entitled to vote in an election of directors. The Wilson Bylaws
provide that any director may be removed from office, with or without cause, by
a majority vote of the shareholders at any meeting at which a quorum is present.
The DGCL provides that unless otherwise provided in the certificate of
incorporation or bylaws, a director or the entire board of directors of a
Delaware corporation may be removed, with or without cause, by the affirmative
vote of the holders of a majority of the outstanding shares then entitled to
vote at an election of directors. The Smith Charter provides that, subject to
the rights of the holders of any series of preferred stock, any or all of the
directors may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of a majority of all of the then outstanding
shares of capital stock entitled to vote generally in the election of directors,
voting as a single class.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Under the TBCA and the Wilson Bylaws, any vacancy occurring on the Wilson
Board shall be filled by the affirmative vote of the remaining members of the
Wilson Board then in office, even though less than a quorum, provided that any
director so elected shall hold office only for the remainder of the term of the
director whose departure caused the vacancy. Under the TBCA and the Wilson
Bylaws, a directorship created by reason of an increase in the number of
directors may be filled by the Wilson Board for a term of office continuing only
until the next election of directors (whether at an annual or special
shareholders meeting). The TBCA provides that the Wilson Board shall not fill
more than two such directorships during the period between two successive annual
meetings of shareholders.
The DGCL provides that unless otherwise provided in the certificate of
incorporation or bylaws, vacancies and newly created directorships may be filled
by a majority vote of the directors then in office, even if the number of
directors then in office is less than a quorum. The Smith Bylaws provide that,
subject to the rights of holders of any series of Smith Preferred Stock, any
vacancy on the Smith Board resulting from any increase in the number of
directors and any other vacancy occurring in the Smith Board may be filled by
the Smith Board acting by a majority of the directors then in office, although
less than a quorum, for a term that shall coincide with the term of the class to
which such director was elected. The Smith Bylaws provide further that no
decrease in the number of authorized directors constituting the entire Smith
Board shall shorten the term of any incumbent director.
STOCKHOLDER PROPOSALS
The Wilson Bylaws provide that any business may be transacted at an annual
meeting, while only such business stated or indicated in a notice of a special
meeting may be transacted at such meetings.
The Smith Bylaws provide that business may be brought before a meeting of
the stockholders of Smith only (i) pursuant to Smith's notice of meeting, (ii)
by or at the direction of the Smith Board, or (iii) by a stockholder who, among
other things, was a stockholder of record at the time of the giving of notice,
is entitled to vote with respect thereto and gives timely notice. To be timely,
a stockholder's notice must be received by Smith's Secretary at least 60 days
prior to the anniversary date of the immediate preceding annual meeting or not
later than 10 days after notice of public disclosure of the date of the annual
meeting was given or made to
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the stockholders, whichever is earlier. The stockholders' notice must set forth
(a) a brief description of the business desired to be brought before the annual
meeting, the reasons for conducting such business at the annual meeting and, in
the event that such business includes a proposal to amend either the Smith
Charter or the Smith Bylaws, the language of the proposed amendment, (b) the
name and address of the stockholder proposing such business, (c) a
representation that the stockholder is a holder of record of stock of Smith
entitled to vote at such meeting and intends to appear in person or by proxy at
the meeting to propose such business, and (d) any material interest of the
stockholder in such business.
SPECIAL MEETINGS OF STOCKHOLDERS
As more fully described below, special meetings of shareholders of Wilson
may only be called by the board of directors, the chairman of the board, the
president, or by shareholders holding at least 10% of shares entitled to vote,
while special meetings of the stockholders of Smith are permitted to be called
under the Smith Charter and Smith Bylaws only by the board of directors, the
chairman of the board, the chief executive officer, the president or the
secretary or by any two other officers of Smith.
Under the TBCA and the Wilson Bylaws, special meetings of the shareholders
may be called at any time by the board of directors, the chairman of the board,
the president, or holders of at least 10% of the shares entitled to vote at the
meeting. The Wilson Bylaws further provide that business transacted at any
special meeting shall be confined to the purposes stated in the notice of the
meeting.
Under the Wilson Bylaws, written or printed notice stating the place, day,
and hour of each meeting of shareholders, and in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than 10 nor more than 50 days before the date of the meeting, either personally
or by mail, to each shareholder of record entitled to vote at such meeting.
The DGCL provides that special meetings of stockholders may be called by
the board of directors or by such person or persons as may be authorized by the
certificate of incorporation or bylaws. The Smith Charter and Smith Bylaws
provide that special meetings of stockholders may be called by the board of
directors, the chairman of the board, the chief executive officer, the president
or the secretary, or by any two other officers of Smith. The Smith Bylaws
further provide that business transacted at any special meeting shall be
confined to the purposes stated in the notice of such special meeting.
Additionally, if at any time dividends in an amount equal to six quarterly
dividend payments shall have accrued and be unpaid on the Smith Participating
Preferred Stock, and until dividends have been declared and paid or set apart
for payment, holders of record of 10% or more of the outstanding Smith Junior
Participating Preferred Stock may call a special meeting of the holders of the
Smith Junior Participating Preferred Stock, as well as the holders of any other
stock entitled to vote with the Smith Junior Participating Preferred Stock, for
the election of the directors to be elected by the holders of Smith Junior
Participating Preferred Stock.
The DGCL and the Smith Bylaws provide that written notice of every meeting
of stockholders stating the place, date, time and, in case of a special meeting,
the purposes thereof, shall be given at least 10 but not more than 60 days prior
to such meeting to each stockholder of record entitled to vote thereat.
ACTION BY WRITTEN CONSENT
As more fully described below, any action required to be taken at any
annual or special meeting of Wilson's shareholders may be taken without a
meeting if a consent in writing setting forth the action taken is signed by all
shareholders, whereas no action may be taken by the stockholders of Smith by
written consent.
The TBCA provides that any action required to be taken at an annual or
special meeting of shareholders may be taken without a meeting if all
shareholders entitled to vote with respect to the action consent in writing to
such action or, if the corporation's articles of incorporation so provide, if a
consent in writing shall be signed by the holders of shares having not less than
the minimum number of votes necessary to take such action at a meeting of
shareholders. The Wilson Articles provide that action may be taken only by the
unanimous written consent of its shareholders.
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The DGCL provides that, unless otherwise provided in the Smith Charter or
the Smith Bylaws, any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken, without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. The Smith Charter and the Smith Bylaws provide that any
action required to be taken by the stockholders may not be taken by a written
consent.
VOTE REQUIRED FOR MERGER
As more fully described below, the affirmative vote of two-thirds of the
outstanding shares entitled to vote thereon is generally required in order to
effect a merger of Wilson, whereas the affirmative vote of a majority of the
outstanding stock entitled to vote thereon is generally required in order to
effect a merger of Smith.
Unless the board of directors requires a greater vote, the TBCA generally
requires the affirmative vote of the holders of at least two-thirds of the
shares entitled to vote to approve a merger, or if any class of shares is
entitled to vote as a class on the approval of a merger, the affirmative vote of
the holders of at least two-thirds of the shares in each such class and the
affirmative vote of the holders of at least two-thirds of the shares otherwise
entitled to vote. Similar voting requirements apply for share exchanges or
conversions. The TBCA does not require a vote by the shareholders of the
surviving corporation if after the merger (i) the articles of incorporation of
the surviving corporation will not differ from its articles of incorporation
before the merger; (ii) each shareholder of the surviving corporation whose
shares were outstanding immediately prior to the effective date of the merger
will hold the same number of shares, with identical designations, preferences,
limitations and relative rights immediately after the merger; (iii) the voting
power of the number of voting shares outstanding immediately after the merger,
plus the voting power of the number of voting shares issuable as a result of the
merger, will not exceed by more than 20% the voting power of the total number of
voting shares of the surviving corporation before the merger; (iv) the number of
participating shares outstanding immediately after the merger, plus the number
of participating shares issuable as a result of the merger, will not exceed by
more than 20% the total number of participating shares of the surviving
corporation outstanding immediately before the merger; and (v) the board of
directors of the surviving corporation adopts a resolution approving the plan of
merger. The Wilson Articles do not contain any provisions relating to
shareholder approval of mergers.
The DGCL requires approval of the board of directors and the affirmative
vote of a majority of the outstanding stock entitled to vote thereon in order to
effect a merger. Unless required by its certificate of incorporation, no
stockholder vote is required of a corporation surviving a merger if (i) such
corporation's certificate of incorporation is not amended by the merger; (ii)
each share of stock of such corporation will be an identical share of the
surviving corporation after the merger; and (iii) either no shares are to be
issued by the surviving corporation or the number of shares to be issued in the
merger does not exceed 20% of such corporation's outstanding common stock
immediately prior to the effective date of the merger. The Smith Charter does
not contain any provisions relating to stockholder approval of mergers.
VOTE REQUIRED FOR SALE OF ASSETS
As more fully described below, the affirmative vote of two-thirds of the
outstanding shares entitled to vote thereon is generally required in order to
approve the sale, lease or exchange of all or substantially all of Wilson's
assets, while the affirmative vote of a majority of the outstanding stock
entitled to vote thereon is generally required in order to approve the sale,
lease or exchange of all or substantially all of Smith's assets.
The TBCA generally requires the affirmative vote of the holders of at least
two-thirds of the shares entitled to vote to approve the sale, lease, exchange
or other disposition of all or substantially all the corporation's assets if
other than in the usual and regular course of business, or if any class of
shares is entitled to vote as a class on the approval of a sale, lease, exchange
or other disposition of all or substantially all the corporation's assets, the
vote required for approval of such transaction is the affirmative vote of the
holders of at least two-thirds of the shares in each such class and the
affirmative vote of the holders of at least two-thirds
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<PAGE> 58
of the shares otherwise entitled to vote. The TBCA does not require shareholder
approval of a sale of assets in the usual and regular course of business unless
otherwise specified in the articles of incorporation. Under the TBCA, a sale of
assets shall be deemed to be in the usual and regular course of business if the
corporation shall, directly or indirectly, either continue to engage in one or
more businesses or apply a portion of the consideration received in connection
with the transaction to the conduct of a business in which it engages following
the transaction. The Wilson Articles do not contain any provisions relating to
shareholder approval of such dispositions.
The DGCL requires approval of the board of directors and the affirmative
vote of a majority of the outstanding stock entitled to vote thereon in order to
approve the sale, lease or exchange of all or substantially all of the
corporation's assets, including its goodwill and its corporate franchise. The
Smith Charter does not contain any provisions relating to stockholder approval
of such dispositions.
BUSINESS COMBINATIONS
As more fully described below, the TBCA and the DGCL, contain provisions
applicable to Wilson and Smith, respectively, that, subject to certain
exceptions, prohibit certain business combinations with interested shareholders.
Additionally, the Smith Charter contains a provisions similar to the DGCL
business combination law. These provisions may have the effect of delaying,
deferring or preventing a change in control or acquisition of Wilson or Smith by
means of a tender offer, a proxy contest or otherwise.
Wilson is subject to Part Thirteen of the TBCA, known as the "Texas
Business Combination Law," which became effective September 1, 1997. In general,
the Texas Business Combination Law provides that an "issuing public corporation"
shall not, directly or indirectly, enter into or engage in a "business
combination" with an "affiliated shareholder" (or its affiliates or associates)
during the three-year period immediately following the date on which the
affiliated shareholder first became an affiliated shareholder, unless (a) before
the date such person became an affiliated shareholder, the board of directors of
the issuing public corporation approved the business combination or the
acquisition of shares that caused the affiliated shareholder to become an
affiliated shareholder, or (b) not less than six months after the date such
person became an affiliated shareholder, the business combination was approved
by the affirmative vote of holders of at least two-thirds of the issuing public
corporation's outstanding voting shares not beneficially owned by the affiliated
shareholder or its affiliates at a meeting of shareholders and not by written
consent. For the purposes of the foregoing, an "affiliated shareholder" is
defined generally as a person that is or was within the proceeding three-year
period the beneficial owner of 20% or more of a corporation's outstanding voting
shares; a "business combination" is defined generally to include (i) mergers,
share exchanges or conversions involving an affiliated shareholder, (ii)
dispositions of assets involving a value equal to 10% or more of the market
value of the assets or of the outstanding common stock or representing 10% or
more of the earning power or net income of the corporation, (iii) certain
issuances or transfers of securities by the corporation to an affiliated
shareholder other than on a pro rata basis, (iv) certain plans or agreements
relating to a liquidation or dissolution of the corporation involving an
affiliated shareholder, (v) certain reclassifications, recapitalizations,
distributions or other transactions that would have the effect of increasing an
affiliated shareholder's percentage ownership of the corporation, or (vi) the
receipt of tax, guarantee, loan or other financial benefits by an affiliated
shareholder other than proportionately as a shareholder of the corporation; and
an "issuing public corporation" in generally defined as a Texas corporation that
has 100 or more shareholders, a class of its voting shares registered under the
Exchange Act, or a class of its voting shares qualified for trading in a
national market system.
As previously discussed, Smith is subject to Section 203 of the DGCL,
which, subject to certain exceptions, prohibits a corporation which has
securities traded on a national securities exchange, authorized for quotation on
the Nasdaq/NMS or held of record by more than 2,000 stockholders from engaging
in certain business combinations, including a merger, sale of a threshold
percentage of the corporation's assets, loan or issuance of stock, with an
interested stockholders, or an interested stockholder's affiliates or
associates, for a three-year period beginning on the date the interested
stockholder acquires 15% or more of the outstanding voting stock of the
corporation. Furthermore, the Smith Charter contains a provision similar to
Section 203 of the DGCL, except that it requires a higher percentage of all
stockholders voting as a class to approve a
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<PAGE> 59
business combination, it prohibits business combinations with interested
stockholders for only two years, and it contains what is generally referred to
as a "fair price provision." See "Description of Smith Capital Stock -- Certain
Anti-takeover Defenses."
STOCKHOLDER RIGHTS PLAN
The Smith Rights Plan adopted by the Smith Board may have the effect of
delaying, deferring or preventing a change in control or acquisition of Smith.
The Rights distributed under the Smith Rights Plan provide holders with right to
purchase one-hundredth of a share of the Smith Junior Participating Preferred
Stock at an exercise price of $50 (subject to adjustment) if any person or group
becomes an Acquiring Person or any person commences a tender or exchange offer
that would result in such person becoming an Acquiring Person. If a person or
group becomes an Acquiring Person, the Rights further provide holders (other
than the Acquiring Person) with the right to purchase a number of shares of
Smith Common Stock having a value equal to two times the exercise price of the
Right. Additionally, if at any time after the date a person becomes an Acquiring
Person, Smith is acquired in a merger or other business combination transaction
in which Smith is not the surviving corporation (other than a Qualifying Offer),
or 50% or more of the assets or earning power of Smith is sold or transferred,
each Right (other than Rights previously voided) will entitle its holder to
purchase shares of common stock of such acquiring person having a value of twice
the Right's exercise price.
Wilson has not adopted a shareholders rights plan.
PREEMPTIVE RIGHTS; CUMULATIVE VOTING
Neither the shareholders of Wilson nor the stockholders of Smith have any
preemptive rights to acquire unissued shares of capital stock or any rights to
cumulative voting with respect to the election of directors.
SUPERMAJORITY VOTING PROVISIONS
As previously discussed, the TBCA requires the approval of holders of at
least two-thirds of the outstanding shares of capital stock of a corporation
entitled to vote to amend its articles of incorporation, enter into a merger or
to sell all or substantially all of its assets. Neither the Wilson Bylaws nor
the Wilson Articles contain any additional supermajority voting requirements.
As previously discussed, the DGCL requires the affirmative vote of the
holders of not less than two-thirds of outstanding voting stock of a corporation
to approve certain business combinations. The Smith Charter further requires an
affirmative vote of the holders of not less than 75% of the total voting power
of all outstanding shares of capital stock of Smith in order to (i) approve
certain business combinations, (ii) amend certain provisions of the Smith
Charter, and (iii) repeal, alter, amend or rescind the Smith Bylaws.
DISSENTERS' RIGHTS
As more fully described below, both the TBCA and the DGCL contain
provisions that, subject to certain limitations and exceptions, permit
stockholders to demand dissenters' rights in connection with mergers and certain
other transactions. However, the dissenters' rights provisions of the DGCL do
not apply to holders of Smith Common Stock.
Under Article 5.11 of the TBCA, a shareholder generally has the right to
dissent from any merger to which the corporation is a party, from any sale of
all or substantially all assets of the corporation, or from any plan of exchange
and to receive fair value for his or her shares. However, dissenters' rights are
not available with respect to a plan of merger in which there is a single
surviving corporation, or with respect to any plan of exchange, if (i) the
shares held by the shareholder are part of a class or series, shares of which
are listed on a national securities exchange or the Nasdaq Stock Market,
designated on the Nasdaq/NMS or held of record by not less than 2,000 holders on
the record date fixed to determine the shareholders entitled to vote on the plan
of merger or the plan of exchange, (ii) the shareholder is not required by the
terms of the plan of merger or plan of exchange to accept for the shareholder's
shares any consideration that is different than the consideration (other than
cash in lieu of fractional shares) to be provided to any other holder of shares
of the
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<PAGE> 60
same class or series held by such shareholder, and (iii) the shareholder is not
required by the terms of the plan of merger or plan of exchange to accept for
his or her shares any consideration other than (a) shares of a corporation that,
immediately after the effective time of the merger or exchange, will be part of
a class or series of shares that are (1) listed, or authorized for listing upon
official notice of issuance, on a national securities exchange, (2) approved for
quotation on the Nasdaq/NMS, or (3) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
Section 262 of the DGCL provides stockholders with appraisal rights for
certain mergers and consolidations. Appraisal rights are not available to
holders of (i) shares listed on a national securities exchange, quoted on
Nasdaq/NMS or held of record by more than 2,000 stockholders or (ii) shares of
the surviving corporation of the merger, if the merger did not require the
approval of the stockholders of such corporation, unless in either case, the
holders of such stock are required pursuant to the merger to accept anything
other than (A) shares of stock of the surviving corporation, (B) shares of stock
of another corporation which are also listed on a national securities exchange,
Nasdaq/NMS or held by more than 2,000 holders, (C) cash in lieu of fractional
shares of such stock. Because shares of Smith Common Stock are listed on a
national securities exchange, the provisions of Section 262 of the DGCL do not
apply to holders of shares of Smith Common Stock.
LIMITATIONS ON DIRECTOR LIABILITY
As more fully described below, the Smith Charter contains provisions that,
subject to certain exceptions and limitations, limit the liability of officers
and directors to the corporation and its stockholders, while the Wilson Articles
do not contain such provisions.
Under the DGCL and the Smith Charter, directors shall not be personally
liable to Smith or any stockholder for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to Smith 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
intentional or negligent payment of unlawful dividends or stock redemptions; or
(iv) for any transaction from which the director derived an improper personal
benefit. The Smith Charter further provides that if the DGCL is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors of Smith, then the liability of the directors of Smith
shall be eliminated or limited to the fullest extent permitted by the DGCL. In
addition, the Smith Charter provides that any repeal or modification of the
foregoing provisions of the Smith Charter shall be prospective only and shall
not adversely affect any limitation on the personal liability of a director of
Smith existing at the time of such repeal or modification.
INDEMNIFICATION
Under Article 2.02-1 of the TBCA and the Wilson Bylaws, each current and
former director and officer of Wilson, or each person who served at request as a
director or officer of a subsidiary of Wilson, shall be indemnified by Wilson
for liabilities imposed upon him, expenses reasonably incurred by him in
connection with any claim made against him, or any action, suit or proceeding to
which he may be a party by reason of being or having been a director or officer,
and for any reasonable settlement of any such claim, action, suit or proceeding.
The Wilson Bylaws provide that no director or officer shall be indemnified with
respect to matters as to which he was adjudged in such action, suit or
proceeding to be liable for negligence or misconduct in performance of his
duties, or with respect to any matters which shall be settled by the payment of
sums which counsel selected by the Wilson Board shall not deem reasonable
payment made primarily with a view to avoiding expenses of litigation, or with
respect to matters for which such indemnification would be against public
policy. The TBCA further provides that a corporation may undertake any
indemnification of a director or officer only if it is determined that such
person (i) conducted himself in good faith, (ii) reasonably believed that, in
the case of conduct in his official capacity as a director, that his conduct was
in the corporation's best interests, and in all other cases, that his conduct
was at least not opposed to the corporation's bests interests, and (iii) in the
case of any criminal proceeding, had no reasonable cause to believe his conduct
was unlawful, and that a corporation must indemnify a director against
reasonable expenses incurred by him in connection with a proceeding in which he
is a named defendant because he is or was a director if he has been wholly
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<PAGE> 61
successful in the defense of the proceeding. The TBCA provides that Texas
corporations may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of such corporation for any
liability asserted against him, whether or not the corporation would have the
power to indemnify him against liability under the TBCA.
Under Section 145 of the DGCL and the Smith Charter and Smith Bylaws, Smith
shall indemnify any person made a party or threatened to be made a party to any
type of proceeding (other than an action by or in the right of the corporation)
because he or she is or was an officer, director or employee of Smith, or was
serving at the request of Smith as a director, officer, employee or agent of
another corporation or entity, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such
proceeding: (i) if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation; or (ii) in the case of a criminal proceeding, such person had no
reasonable cause to believe that his or her conduct was unlawful. Smith shall
indemnify any person made a party or threatened to be made a party to any
threatened, pending or completed action or suit brought by or in the right of
the corporation because such person was an officer, director 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 or other entity,
against expenses actually and reasonably incurred in connection with such action
or suit if such person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation,
except that there may not be such indemnification if the person is found liable
to the corporation unless, in such a case, the court determines the person is
fairly and reasonably entitled thereto. Additionally, the DGCL provides that a
corporation must indemnify a director or officer against expenses (including
attorneys' fees) actually and reasonably incurred if such person successfully
defends himself or herself in a proceeding to which such person was a party
because he or she was a director or officer of the corporation. The DGCL and the
Smith Charter further provide that Smith may purchase and maintain insurance on
behalf of any director, officer, employee or agent of Smith against any
liability asserted against such person and incurred by such person in any such
capacity, whether or not Smith would have the power to indemnify such person
against such liability.
DIVIDENDS
Under the TBCA, the board of directors of a corporation may authorize and
the corporation may make distributions; provided, that a distribution may not be
made if (i) after giving effect to the distribution, the corporation would be
insolvent or (ii) the distribution exceeds the surplus of the corporation.
Notwithstanding the limitations on distributions set forth in clauses (i) and
(ii) above, a corporation may make a distribution involving a purchase or
redemption of any of its own shares if the purchase or redemption is made by the
corporation to: (i) eliminate fractional shares, (ii) collect or compromise
indebtedness owed by or to the corporation, (iii) pay dissenting shareholders
entitled to payment for their shares under the TBCA or (iv) effect the purchase
or redemption of redeemable shares in accordance with the TBCA.
Under the DGCL, a corporation may, subject to restrictions in its
certificate of incorporation, pay dividends out of surplus or out of net profits
for the fiscal year in which the dividend is declared and/or for the preceding
fiscal year. Dividends out of net profits may not be paid when the capital of
the corporation amounts to less than the aggregate amount of capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets.
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MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
Smith Common Stock is traded on the NYSE and the Pacific Stock Exchange
under the symbol "SII." The following table sets forth the high and low sales
prices of Smith Common Stock for the calendar quarters indicated, as reported in
The Wall Street Journal's NYSE Composite Transactions Reports.
SMITH COMMON STOCK
<TABLE>
<CAPTION>
MARKET PRICE
----------------------
YEAR ENDED DECEMBER 31, HIGH LOW
----------------------- ---- ---
<S> <C> <C>
1998
First Quarter (through March 9, 1998)....................... $62 $46 1/4
1997
First Quarter............................................... 49 1/2 38 1/2
Second Quarter.............................................. 61 3/4 42 5/8
Third Quarter............................................... 81 60 3/4
Fourth Quarter.............................................. 87 7/8 53 5/8
1996
First Quarter............................................... 25 1/2 19 7/8
Second Quarter.............................................. 33 3/8 24 3/8
Third Quarter............................................... 36 5/8 29 3/8
Fourth Quarter.............................................. 48 35 1/4
</TABLE>
On January 16, 1998, the last trading day prior to the public announcement
of the Merger, the closing sale price of Smith Common Stock as reported by the
NYSE was $52 7/8 per share. On March 9, 1998, the closing sale price per share
of Smith Common Stock was $54 9/16.
Smith has not paid dividends on the Smith Common Stock since the first
quarter of 1986 and does not currently intend to pay any cash dividends in the
foreseeable future. The determination of the amount of future cash dividends to
be declared and paid on Smith Common Stock, if any, will depend upon Smith's
financial condition, earnings and cash flow from operations, the level of its
capital expenditures, its future business prospects and other factors that the
Smith Board deems relevant. In addition, Smith's debt agreements contain
covenants restricting the payment of cash dividends to Smith's common
stockholders based on net earnings and operating cash flow formulas as defined.
Following the Merger, shares of Smith Common Stock will continue to be
traded on the NYSE and the Pacific Stock Exchange under the symbol "SII."
Shareholders are advised to obtain current market quotations for Smith
Common Stock. No assurance can be given as to the market price of Smith Common
Stock at or after consummation of the Merger.
There is no active trading market for Wilson Common Stock. For information
concerning dividends paid by Wilson, see "Information Concerning
Wilson -- Market for Wilson Common Stock."
INFORMATION CONCERNING WILSON
BUSINESS OF WILSON
General
Founded in 1921, Wilson is a diversified supplier, servicer and
manufacturer serving the international petroleum and petrochemical industries.
Wilson also serves the MRO and engineering and construction markets in the
United States. Wilson's operations are conducted through its principal operating
division, Wilson Supply Company, and Wilson's wholly owned subsidiary, Houston
Engineers, Inc. Wilson Supply operates an extensive network of supply branches,
service centers and sales offices through which it markets pipe, valves,
fittings and other capital and expendable maintenance products throughout the
world, predomi-
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nantly in the Western Hemisphere. HE is a worldwide supplier of downhole tools
specializing in the design, development and manufacture of drilling and fishing
tools.
Wilson Supply Division
General. Wilson Supply, the flagship of Wilson, is one of the oldest and
largest independently-owned oilfield supply companies in the world operating a
network of 68 supply branches and service points and 11 sales offices throughout
the United States, and a worldwide network of sales representatives. The
majority of Wilson Supply's operations are focused on the domestic distribution
of general oil and gas supplies and equipment, handling more than 30,000
individual line items from more than 350 manufacturers. The remainder of its
operations are primarily divided between its tubular products (including casing,
tubing and drill pipe and line pipe), international product offerings
(maintained by skilled professionals fluent in Arabic, French, German, Italian
and Spanish and employee sales representatives in 30 countries around the world)
and automated valve products (including valve, actuator and control packages).
Wilson Supply's diverse customer base includes refining and chemical companies,
pipeline companies, engineering and construction companies, mining companies,
utilities and pulp and paper mills in the downstream sector, in addition to
major integrated oil companies, independent exploration and production
companies, drilling contractors and other oilfield service companies in the
upstream sector.
Wilson Supply International (U.K.) Limited. WSI, a wholly owned subsidiary
of Wilson, primarily serves Wilson's distribution customers in the North Sea
Region, Europe and the Middle East from its headquarters in Otford, England and
maintains supply branches at Great Yarmouth and Birmingham, England and Aberdeen
and Glasgow, Scotland. In addition to its access to the computer-controlled
inventory of Wilson, WSI also supplies offshore coatings and surface
preparations and coatings application equipment.
Business Strategy. Wilson Supply's business strategy is to enhance its
leadership position and earnings performance in each of the diverse markets it
serves. Wilson intends to accomplish this strategy by: (i) capitalizing on its
traditional strength in the upstream market segment; (ii) expanding its presence
in the downstream market segment; (iii) leveraging its alliance relationships
with the expanded application of electronic commerce, integrated supply
initiatives and strategic outsourcing opportunities; (iv) expanding its customer
base in the "oil country tubular goods" market segment; (v) continuing the
expansion of its product offerings through growth of its Automated Valve
Products business unit; (vi) maintaining its position as a leading supplier of
integrated export services and contract procurement services for its broad base
of international customers; and (vii) increasing its focus on quality
improvement.
Houston Engineers, Inc.
General. HE is a worldwide supplier of downhole tools to the petroleum
industry specializing in the design, development and manufacture of drilling and
fishing tools. The HYDRA-JAR(R) tool, the Drilling Accelerator(R) tool and the
Reversing tool are three products that HE manufactures and rents, both
domestically and internationally. HE has 11 domestic service locations, one
domestic manufacturing plant, two international joint ventures, two overseas
subsidiaries and 47 overseas sales and service representatives.
Business Strategy. HE's business strategy is to use its personnel, skills
and technology to grow by providing differentiated, quality products and
services which meet the needs of its customers. HE intends to accomplish this
strategy by: (i) emphasis on global distribution of its products; (ii) continued
commitment to research and development efforts for the development and marketing
of innovative products; (iii) continued development and improvement of its
existing products; (iv) focusing on superior customer service; (v) commitment to
quality improvement; and (vi) continued international expansion through joint
ventures, subsidiaries and service representatives.
Competition
The oilfield equipment supply industry is highly competitive. Generally,
competition involves numerous factors including price, experience, customer
service, equipment availability and suitability, efficiency, reputation and
customer relations. Wilson markets its products and services to exploration and
production
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companies as well as to companies with operations in the refining, chemical and
pipeline segments of the petroleum industry and as a result is considered to be
both an "upstream" and "downstream" competitor. Fluctuations in the demand for
Wilson's products and services from customers with operations in these segments
tend to offset each other and helps to provide Wilson with a diversified revenue
base. Wilson's management estimates that Wilson Supply was one of the top tier
providers in 1996 of line pipe, valves, fittings and flanges to downstream
customers, one of the top three providers of such items and rig supplies to
upstream customers and believes it is the only full line service provider for
the entire hydrocarbon production/ consumption cycle. Wilson also believes that
HE is the worldwide leader in drilling jars and Accelerator(R) tools, second in
fishing jar and Accelerator(R) tool rentals in the U.S. and third in
international sales of fishing equipment.
Wilson's Dependence on Oil and Gas Industry. Wilson's business and
operations are dependent on conditions in the oil and gas (including
petrochemical) industry. There can be no assurance that current levels of
expenditures in the oil and gas industry will be maintained or that demand for
Wilson's products and services will reflect the level of such expenditures. In
recent years, oil and gas prices have been volatile and have reacted to actual
and perceived changes in demand and supply of oil and natural gas. In this
regard, there have been recent declines in the prevailing prices of oil and
natural gas as well as uncertainties as to the effect of the recent economic
downturn in Asia on world demand for oil. A significant or prolonged decline in
future oil and gas prices likely would result in reduced expenditures in the oil
and gas industry and a decline in the demand for Wilson's products. Such reduced
activity could have a material adverse effect on Wilson's financial condition
and results of operations.
Customers
Wilson maintains a widely diverse customer base in both the upstream and
downstream market sectors. During the year ended December 31, 1996, Wilson's top
25 customers accounted for approximately 36% of Wilson's total consolidated
revenues with no single customer accounting for more than 5% of Wilson's total
consolidated revenues. Wilson Supply has also developed relationships with
certain "alliance customers" whereby Wilson Supply acts as a preferred supplier
to such customers of a variety of products and services, some of which were
historically provided by the customer rather than its suppliers.
Employees
As of September 30, 1997, Wilson had approximately 1,128 employees. Wilson
has consistently focused on maintaining a stable, productive workforce. In
general, Wilson's management feels that its workforce mirrors the stability of
its senior management, many of whom have been with Wilson for 15 years or more.
None of Wilson's employees are members of labor unions.
LEGAL PROCEEDINGS
In the normal course of its business, Wilson from time to time is involved
in routine litigation. Wilson's management is not aware of any pending or
threatened legal proceedings which, upon resolution, would have a material
adverse effect upon Wilson's financial condition, results of operations or cash
flows.
MARKET FOR WILSON COMMON STOCK
This is no active public trading market for Wilson Common Stock. As of
March 9, 1998, Wilson Common Stock was held by 185 holders of record. The number
of record holders does not bear any relationship to the number of beneficial
owners of Wilson Common Stock.
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The following table sets forth the amount of quarterly cash dividends paid
by Wilson to holders of Wilson Common Stock.
WILSON COMMON STOCK
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, DIVIDENDS
------------------------------ ---------
<S> <C>
1998
First Quarter............................................... $0.25
1997
First Quarter............................................... 0.25
Second Quarter.............................................. 0.25
Third Quarter............................................... 0.25
Fourth Quarter.............................................. 0.25
1996
First Quarter............................................... 0.25
Second Quarter.............................................. 0.25
Third Quarter............................................... 0.25
Fourth Quarter.............................................. 0.25
</TABLE>
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SELECTED FINANCIAL DATA
The following selected financial information for each of the five years in
the period ended December 31, 1996 has been derived from the audited
consolidated financial statements of Wilson. The selected financial data for the
nine months ended September 30, 1996 and 1997 have been derived from the
unaudited consolidated financial statements of Wilson and include all
adjustments (consisting only of normal recurring adjustments) that Wilson
management considers necessary for a fair presentation of the interim periods.
Results for the interim periods are not necessarily indicative of results for
the full year. The financial information set forth below should be read in
conjunction with the historical consolidated financial statements of Wilson, the
related notes and other financial information set forth in this Proxy
Statement/Prospectus.
WILSON INDUSTRIES, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $285,327 $370,954 $369,503 $395,934 $495,248 $360,124 $442,800
Gross profit.................... 50,767 70,180 68,933 70,554 89,286 64,808 82,920
Income (loss) before interest
and taxes..................... (802) 9,670 8,430 6,214 16,002 10,992 21,239
Income (loss) from continuing
operations.................... (623) 5,889 4,188 3,496 8,853 6,022 13,019
Net income (loss)............... $ (354)(1) $ 5,889 $ 4,188 $ 232(2) $ 8,853 $ 6,022 $ 13,019
Income (loss) per share from
continuing operations......... $ (1.61) $ 15.33 $ 10.95 $ 9.15 $ 23.31 $ 15.80 $ 34.69
Dividends declared and paid..... 348 230 383 382 380 295 282
OTHER DATA:
Depreciation and amortization... $ 6,092 $ 5,797 $ 6,539 $ 7,847 $ 9,347 $ 5,940 $ 7,445
Capital expenditures, net(3).... 7,017 4,911 9,790 8,675 13,295 7,926 21,848
BALANCE SHEET DATA:
Current assets.................. $ 94,939 $118,753 $126,775 $147,980 $176,845 $146,207 $190,554
Total assets.................... 118,889 140,798 154,056 178,293 212,680 177,972 243,644
Current liabilities............. 40,428 52,118 52,307 67,705 88,263 59,036 75,680
Long-term debt.................. 10,100 14,900 22,700 26,900 32,197 32,251 64,302
Stockholders' equity............ 67,943 72,114 76,652 75,885 85,657 81,096 97,118
</TABLE>
- ------------------
(1) Net loss for 1992 includes an extraordinary tax credit of $269.
(2) Net income for 1995 includes a $3,264 charge (net of tax benefit of $1,681)
for the cumulative effect of change in accounting for postretirement
benefits.
(3) Capital expenditures are presented net of any proceeds arising from sales of
fixed asset equipment replaced.
58
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to assist readers in understanding
Wilson's financial performance during the periods presented and significant
trends which may impact Wilson's future performance. It should be read in
conjunction with the consolidated financial statements of Wilson, and the notes
thereto, and "Information Concerning Wilson -- Selected Financial Data."
Net Sales by Business Unit
The following table presents net sales information by business unit for the
periods shown (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------ ---------------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wilson Supply and
WSI................ $339,747 92% $355,961 90% $450,026 91% $327,739 91% $397,725 90%
HE................... 29,756 8 39,973 10 45,222 9 32,385 9 45,075 10
-------- --- -------- --- -------- --- -------- --- -------- ---
Total................ $369,503 100% $395,934 100% $495,248 100% $360,124 100% $442,800 100%
======== === ======== === ======== === ======== === ======== ===
</TABLE>
Wilson Supply Company and Wilson Supply International (U.K.) Limited. Net
sales for the nine months ended September 30, 1997 increased $70.0 million, or
21%, from the same period in 1996. The increase resulted primarily from strong
activity in the oil and gas markets and an overall increase in business with
Wilson Supply's major alliance customers. Net sales for fiscal 1996 increased
$94.1 million, or 26%, over fiscal 1995. The increase is directly related to
improved rig count which was driven by increased demand and stability of the
price for oil and gas. During fiscal 1995 several of Wilson Supply's major
customers consolidated their supplier base and as a result net sales for fiscal
1995 increased $16.2 million, or 5%, over fiscal 1994.
Houston Engineers, Inc. Net sales for the nine months ended September 30,
1997 increased $12.7 million, or 39%, from the nine months ended September 30,
1996. The increase in net sales over the same period in 1996 resulted from the
expansion of HE's fleet of rental tools to meet the demands of international
drilling and exploration markets. Net sales for fiscal 1996 increased $5.2
million or 13% from fiscal 1995. The increase in net sales over fiscal 1995 was
the result of an improved worldwide rig count. Net sales for fiscal 1995
increased $10.2 million, or 34%, over 1994. The increase was due to HE's
purchase of the Wilson Downhole Services division from its parent, Wilson, and
an increased presence in the international marketplace.
Nine Months 1997 Versus Nine Months 1996
For the periods indicated, the following table summarizes the results of
Wilson and presents these results as a percentage of net sales (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales................................................. $360,124 100% $442,800 100%
-------- --- -------- ---
Gross profit.............................................. 64,808 18 82,920 19
Operating expenses........................................ 56,295 15 64,861 15
-------- --- -------- ---
Operating income.......................................... 8,513 3 18,059 4
Equity in earnings of joint ventures...................... 1,559 -- 1,715 --
Other income, net......................................... 920 -- 1,465 --
-------- --- -------- ---
Income before interest and taxes.......................... 10,992 3 21,239 4
Interest expense, net..................................... 1,868 -- 2,843 --
Income tax provision...................................... 3,102 1 5,377 1
-------- --- -------- ---
Net income................................................ $ 6,022 2% $ 13,019 3%
======== === ======== ===
</TABLE>
59
<PAGE> 68
Net sales in 1997 increased $82.7 million, or 23%, from the same period in
1996 as Wilson experienced growth across all business units. The improvement for
1997 is primarily attributable to growth in the distribution business unit's
sales of tubular products in the United States and an expansion of HE's rental
tool fleet.
Gross profit in 1997 increased $18.1 million, or 28%, from the same period
in 1996. The increase in gross margin from 18% for 1996 to 19% in 1997,
primarily resulted from improved product pricing related to an improvement in
market conditions.
Operating expenses, consisting of selling, general and administrative
expenses, in 1997 increased $8.6 million or 15% from the same period in 1996 due
to increased variable selling costs associated with the higher level of net
sales.
Equity in earnings of joint ventures, representing Wilson's 50% interest in
Weir-HE and a 30% interest in a joint operating agreement between HE and Nirvana
Oilfield Supplies Limited, S.A. ("NOS"), increased $0.2 million on increased
profitability of these interests.
Other income, net is composed primarily of royalties and other
miscellaneous items.
Interest expense, net, increased $1.0 million over the prior year's same
nine month period related to an increased level of borrowing to fund the
business' expansion.
The effective tax rate for the nine months ended September 30, 1997
approximated 29.2% which is lower than the prior period's effective tax rate and
the United States statutory rate. The effective tax rate differed from both the
prior period's and the statutory rate due to (i) the establishment of a foreign
sales corporation, a portion of the income from which is exempt from federal
income tax, (ii) an increase in the tax rate provided from 34% to 35%, resulting
in a tax benefit caused by an increase in net deferred tax assets, and (iii) an
increase in the unremitted earnings of Weir-HE which are deemed permanently
reinvested for tax purposes.
60
<PAGE> 69
1996 Versus 1995 and 1995 Versus 1994
For the periods indicated, the following table summarizes Wilson's results
of operations and presents these results as a percentage of net sales (dollars
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. $369,503 100% $395,934 100% $495,248 100%
-------- --- -------- --- -------- ---
Gross profit.......................... 68,933 19 70,554 18 89,286 18
Operating expenses.................... 62,213 17 66,646 17 76,947 15
-------- --- -------- --- -------- ---
Operating income...................... 6,720 2 3,908 1 12,339 3
Equity in earnings of joint
ventures............................ 769 -- 1,171 -- 2,172 --
Other income, net..................... 941 -- 1,135 -- 1,491 --
-------- --- -------- --- -------- ---
Income before interest, taxes and
cumulative expense of change in
accounting for postretirement
benefits............................ 8,430 2 6,214 1 16,002 3
Interest expense, net................. 1,463 -- 1,877 -- 2,595 --
Income tax provision.................. 2,779 1 841 -- 4,554 1
-------- --- -------- --- -------- ---
Income before cumulative expense of
change in accounting for
postretirement benefits............. 4,188 1 3,496 1 8,853 2
Cumulative expense of change in
accounting for postretirement
benefits, net of related income tax
benefit of $1,681 in 1995........... -- -- 3,264 1 -- --
-------- --- -------- --- -------- ---
Net income............................ $ 4,188 1% $ 232 --% $ 8,853 2%
======== === ======== === ======== ===
</TABLE>
1996 Versus 1995
Net sales for 1996 increased $99.3 million, or 25% from 1995. The increase
was due primarily to the higher rig activity in the Gulf of Mexico and
continuing increased sales to alliance customers which became a significant
focus of the business during 1995. Drilling tool rental revenues and sales were
also impacted favorably by the higher level and increased complexity of drilling
activity.
Gross profit for 1996 increased $18.7 million, or 27%, from 1995. The
increase was due primarily to the higher net sales from increased drilling
activity and sales to alliance customers. In addition, the increase in gross
profit reflects higher gross margins in the drilling tool rental and sales
business.
Operating expenses, consisting of selling, general and administrative
expenses, increased $10.3 million in 1996 or 15% from the prior year; however,
as a percentage of net sales, operating expenses decreased from 17% in 1995 to
15% in 1996. The decrease in operating expenses as a percentage of net sales is
due to the increase in net sales without an increase in overhead expenses while
the increase in absolute expenses is due primarily to increased variable selling
costs related to the higher level of net sales.
Equity in earnings of joint ventures, representing Wilson's 50% interest in
Weir-HE and a 30% interest in a joint operating agreement between HE and NOS,
increased $1.0 million on increased profitability of these interests.
Other income, net is composed primarily of royalties and other
miscellaneous income items.
Interest expense, net, for 1996 increased $0.7 million over 1995 related to
an increased level of borrowing to fund the business' expansion.
61
<PAGE> 70
The effective tax rate for 1996 approximated 34% which is higher than the
prior year's effective tax rate of 19%. The 1995 effective tax rate is lower
than the United States statutory rate primarily due to the reversal of valuation
allowances previously recorded on Wilson's net deferred tax assets.
1995 Versus 1994
Net sales for 1995 increased $26.4 million, or 7%, from 1994. The increase
is primarily related to an increase in business from several of Wilson's major
alliance customers who consolidated their supplier base, as well as an increase
in drilling tool rentals and sales.
Gross profit increased $1.6 million, or 2%, from 1994. Gains in gross
profits from drilling tool rental and sales increases over 1994 were offset by
declines in gross profits from Wilson's distribution business as a result of
lower margins on increased sales to alliance customers.
Operating expenses, consisting of selling, general and administrative
expenses, increased $4.4 million, or 7%, from 1994 while remaining constant at
17% of net sales. The increase in absolute expenses is due primarily to
increased variable costs related to the higher level of net sales and
incremental expenses associated with expansion in the distribution business.
Equity in earnings of joint ventures, representing Wilson's 50% interest in
Weir-HE and a 30% interest in a joint operating agreement between HE and NOS,
increased $0.4 million on increased profitability of these interests.
Other income, net is composed primarily of royalties and other
miscellaneous income items.
Interest expense, net, for 1995 increased $0.4 million over 1994 related to
an increased level of borrowing to fund the business' revenue growth.
The effective tax rate for 1995 approximated 19% which is lower than the
United States statutory rate and lower than the 40% effective tax rate reported
for 1994. The 1995 effective tax rate is lower than the United States statutory
rate primarily due to the reversal of valuation allowances previously recorded
on Wilson's net deferred tax assets.
Liquidity and Capital Resources
While Wilson's net income for the nine months ended September 30, 1997
increased significantly from the same period in the prior year, Wilson's
operations utilized $10.0 million of cash in the first nine months of 1997,
which is a $6.6 million increase over the comparable period of 1996. The
increase in cash used in operations resulted from increased accounts receivable
and inventory levels associated with the growth in net sales. Cash flows from
operations were not sufficient to fund Wilson's capital expenditure requirements
resulting in increased borrowings of $26.2 million in the first nine months of
1997.
Wilson invested approximately $21.8 million in property, plant and
equipment during the first nine months of 1997. The major components of these
expenditures were $15.8 million for drilling tools and $3.0 million for computer
equipment. The drilling tool expenditures are associated with Wilson's net sales
growth and international expansion.
External sources of liquidity include borrowings available under Wilson's
credit facility. In 1997, Wilson entered into a new corporate credit facility
(the "Facility") which consists of a $40.0 million revolving credit facility and
a $3.0 million discretionary line for letters of credit for working capital and
general corporate purposes. At September 30, 1997, Wilson had approximately
$16.6 million of funds available for borrowing under the Facility.
Management believes that Wilson's existing cash resources, together with
cash flows from operations and available borrowings under the Facility, will be
sufficient to satisfy its working capital and capital expenditure requirements
for the foreseeable future.
Inflation has not had a material effect on Wilson's results in recent years
and the effect is expected to be minor in the foreseeable future.
62
<PAGE> 71
Other Matters
Recent Accounting Pronouncement. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
comprehensive income and its components. Had SFAS No. 130 been adopted as of
September 30, 1997, the primary adjustments required to reflect income on a
comprehensive basis would have related to the cumulative translation adjustment
and unamortized pension costs.
Year 2000. Wilson is currently in the process of identifying, evaluating
and implementing modifications to its business systems in order to achieve Year
2000 date conversion compliance without an effect on customers or business
operations. Wilson expects that all of its enterprise business systems will be
Year 2000 compliant by mid-1999, with the majority of the systems expected to be
in compliance by the end of 1998. Wilson has developed a detailed Year 2000
implementation plan and expects that most of the necessary changes in computer
instructional code will be made by purchasing and installing off-the-shelf
software applications. Wilson does not believe that the necessary changes for
the remaining systems will require any significant level of external resources,
or that the failure to implement the proposed changes for the remaining systems
would have a material effect on Wilson's financial position or results of
operations.
Wilson has not yet determined the status of Year 2000 compliance of its
suppliers and financial institutions. Management of Wilson believes that
non-compliance by Wilson's suppliers will not have a material effect. However,
the failure of its financial institutions to become Year 2000 compliant could
have a material effect on Wilson's financial position or results of operations.
63
<PAGE> 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF WILSON
The following table sets forth, as of March 9, 1998, the names and
addresses of each beneficial owner of more than 5% of the outstanding shares of
Wilson Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- ----------------------- ----------------
<S> <C> <C>
Wallace S. Wilson(1)(6)............................ 75,033 20.20%
P.O. Box 1492
Houston, Texas 77251
Wilson Industries, Inc. Stock Ownership Plan....... 36,730 9.89%
P.O. Box 1492
Houston, Texas 77251
William N. Mathis(2)(6)............................ 36,222 9.75%
P.O. Box 1492
Houston, Texas 77251
Carolyn W. Payne(3)................................ 34,309 9.23%
5526 Woodway
Houston, Texas 77056
Isabel Brown Wilson(4)(6).......................... 31,902 8.59%
230 Westcott #204
Houston, Texas 77007
Wilson Hospital Foundation......................... 20,400 5.49%
P.O. Box 1492
Houston, Texas 77251
Ellen E. Wilson(5)(6).............................. 18,984 5.11%
8311 Briar Drive
Dallas, Texas 75243
</TABLE>
- ---------------
(1) Includes 1,053 shares beneficially owned through the Wilson Industries, Inc.
Stock Ownership Plan and 709 shares over which Mr. Wilson exercises voting
control as trustee.
(2) Includes 1,000 shares over which Mr. Mathis exercises voting control as
trustee.
(3) Consists of 34,309 shares held by the C. Payne Family Limited Partnership of
which Ms. Payne is the managing general partner.
(4) Includes 3,965 shares over which Isabel Brown Wilson exercises voting
control as trustee.
(5) Includes 904 shares over which Ellen E. Wilson exercises voting control as
trustee.
(6) Isabel Brown Wilson is the wife of Wallace S. Wilson and the mother of
William N. Mathis. Ellen E. Wilson is the daughter of Wallace S. Wilson.
Each of the foregoing persons disclaims any beneficial ownership of shares
of Wilson Common Stock held by each of such other persons.
64
<PAGE> 73
SECURITY OWNERSHIP OF MANAGEMENT OF WILSON
The following table sets forth, as of March 9, 1998, the beneficial
ownership of Wilson Common Stock by the named executive officers of Wilson, each
current director of Wilson and all directors and executive officers together as
a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------ ----------------------- ----------------
<S> <C> <C>
Wallace S. Wilson(1)............................... 75,033 20.20%
William N. Mathis(2)............................... 36,222 9.75%
George W. Gist, Jr. (3)............................ 5,883 1.58%
E. Clifton Wilson, Jr.............................. 5,837 1.57%
Manuel E. Sanchez III(4)........................... 5,342 1.44%
Preston Moore, Jr.................................. 2,448 *
Dwight E. Beach, Jr.(5)............................ 1,742 *
Humberto G. Kuhn(6)................................ 610 *
John H. Duncan..................................... 500 *
George A. Peterkin, Jr............................. 500 *
Robert H. Smith.................................... 500 *
Michael R. Chaddick(7)............................. 478 *
John R. Carter(8).................................. 273 *
Directors and Officers as a Group (27 persons)..... 140,454 37.80%
</TABLE>
- ---------------
* Less than 1%
(1) Includes 1,053 shares beneficially owned through the Wilson Industries, Inc.
Stock Ownership Plan and 709 shares over which Mr. Wilson exercises voting
control as trustee.
(2) Includes 1,000 shares over which Mr. Mathis exercises voting control as
trustee. Mr. Mathis is the son of Isabel Brown Wilson, the wife of Wallace
S. Wilson
(3) Includes 242 shares beneficially owned through the Wilson Industries, Inc.
Stock Ownership Plan.
(4) Includes 5,000 shares held by Sanchez Interests, Ltd. of which Mr. Sanchez
is a general partner.
(5) Includes 474 shares beneficially owned through the Wilson Industries, Inc.
Stock Ownership Plan.
(6) Includes 410 shares beneficially owned through the Wilson Industries, Inc.
Stock Ownership Plan.
(7) Includes 268 shares beneficially owned through the Wilson Industries, Inc.
Stock Ownership Plan.
(8) Owned beneficially through the Wilson Industries, Inc. Stock Ownership Plan.
The persons listed above will receive the same Merger Consideration as the
other Wilson shareholders for each share of Wilson Common Stock held at the
Effective Time.
TRANSACTIONS WITH CERTAIN PERSONS
Wilson leases certain business facilities from Gulf States Investment
Corporation of which Wallace S. Wilson, Ellen E. Wilson, William N. Mathis and
Travis Mathis, the son of Isabel Brown Wilson, are shareholders. For the year
ended December 31, 1996, such lease payments aggregated approximately $150,000.
In order to assure that Wilson would have the continued dedication and
availability of certain of its employees in the event of a change of control
transaction with an unrelated or unaffiliated third party, and to induce such
employees to remain in the employ of Wilson after such a change of control
transaction, Wilson entered into various retention agreements ("Retention
Agreements") with certain of its employees. The Retention Agreements provide for
cash payments to the employee which, in the case of certain employees, are
conditioned upon the consummation of a change of control transaction, subject to
the terms of the Retention Agreements. The Retention Agreements provide for
payments over periods ranging from 60 days to two years following the Effective
Time, but would accelerate in certain instances, including an employee being
65
<PAGE> 74
terminated without cause or upon permanent disability or death. Each Retention
Agreement contains restrictions on the employee's use of confidential
information of Wilson and certain of such Retention Agreements contain
non-competition and non-solicitation covenants of the employee. The aggregate
amount which may be payable pursuant to all such Retention Agreements is
approximately $8.0 million.
LEGAL MATTERS
The validity of the shares of Smith Common Stock to be issued in connection
with the Merger will be passed upon by Gardere Wynne Sewell & Riggs, L.L.P., 333
Clay Avenue, Suite 800, Houston, Texas 77002. Certain tax consequences of the
Merger will be passed upon for Smith by Gardere Wynne Sewell & Riggs, L.L.P. and
for Wilson by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., 3400 Chase Tower,
600 Travis, Houston, Texas 77002.
EXPERTS
The consolidated financial statements and schedule included in the Smith
Annual Report on Form 10-K for the year ended December 31, 1996, incorporated
herein by reference, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The consolidated financial statements of Wilson as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996,
included herein, have been audited by Arthur Andersen LLP, independent public
accountants as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
66
<PAGE> 75
WILSON INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994,
1995 and 1996............................................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.......................... F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1994, 1995 and 1996.................... F-7
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997........................................ F-18
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1996 and 1997......................... F-19
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1997......................... F-20
Notes to Consolidated Financial Statements for the Nine
Months Ended September 30, 1996 and 1997.................. F-21
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Wilson Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Wilson
Industries, Inc. (a Texas corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, 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 financial position of Wilson Industries, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for postretirement
benefits other than pensions.
ARTHUR ANDERSEN LLP
Houston, Texas
April 4, 1997
F-2
<PAGE> 77
WILSON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,742 $ 9,778
Accounts and notes receivable, less allowance for doubtful
accounts
of $1,676 in 1995 and $2,690 in 1996................... 64,721 78,966
Income tax receivable..................................... 1,170 --
Inventories............................................... 73,245 85,188
Prepaid expenses.......................................... 853 1,010
Deferred income taxes..................................... 1,249 1,903
-------- --------
Total current assets.............................. 147,980 176,845
INVESTMENTS:
Investments in joint ventures............................. 4,157 5,480
Other investments, at lower of cost or market............. 137 135
-------- --------
Total investments................................. 4,294 5,615
PROPERTY, PLANT AND EQUIPMENT............................... 72,271 81,663
Less -- Accumulated depreciation.......................... (50,447) (55,758)
-------- --------
Net property, plant and equipment................. 21,824 25,905
DEFERRED INCOME TAXES....................................... 1,191 1,378
OTHER ASSETS................................................ 3,004 2,937
-------- --------
Total assets...................................... $178,293 $212,680
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,200 $ 6,500
Short-term debt........................................... 2,500 --
Current maturities of capital lease obligations........... 188 203
Accounts payable.......................................... 59,528 73,247
Accrued expenses.......................................... 4,289 7,515
Income tax payable........................................ -- 798
-------- --------
Total current liabilities......................... 67,705 88,263
LONG-TERM DEBT, net of current maturities................... 26,500 32,000
CAPITAL LEASE OBLIGATIONS, net of current maturities........ 400 197
OTHER LONG-TERM LIABILITIES................................. 7,803 6,563
-------- --------
Total liabilities................................. 102,408 127,023
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $25 per share; shares authorized,
2,000,000 in 1995 and 1996; shares issued, 391,540 in
1995 and 1996.......................................... 9,789 9,789
Additional paid-in capital................................ 13,882 13,882
Retained earnings......................................... 54,900 63,373
Cumulative translation adjustment......................... (803) 109
Unamortized pension costs................................. (1,058) (76)
-------- --------
76,710 87,077
Less -- Treasury stock, at cost, 9,784 shares in 1995 and
15,293 shares in 1996.................................. (825) (1,420)
-------- --------
Total stockholders' equity........................ 75,885 85,657
-------- --------
Total liabilities and stockholders' equity........ $178,293 $212,680
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 78
WILSON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES.................................................. $369,503 $395,934 $495,248
COST OF GOODS SOLD......................................... 300,570 325,380 405,962
-------- -------- --------
Gross profit..................................... 68,933 70,554 89,286
OPERATING EXPENSES......................................... 62,213 66,646 76,947
-------- -------- --------
Operating income................................. 6,720 3,908 12,339
EQUITY IN EARNINGS OF JOINT VENTURES....................... 769 1,171 2,172
OTHER INCOME, net.......................................... 941 1,135 1,491
-------- -------- --------
INCOME BEFORE INTEREST, TAXES AND CUMULATIVE EXPENSE OF
CHANGE IN ACCOUNTING FOR POSTRETIREMENT BENEFITS......... 8,430 6,214 16,002
INTEREST EXPENSE, net...................................... 1,463 1,877 2,595
INCOME TAX PROVISION....................................... 2,779 841 4,554
-------- -------- --------
INCOME BEFORE CUMULATIVE EXPENSE OF CHANGE IN ACCOUNTING
FOR POSTRETIREMENT BENEFITS.............................. 4,188 3,496 8,853
CUMULATIVE EXPENSE OF CHANGE IN ACCOUNTING FOR
POSTRETIREMENT BENEFITS, net of related income tax
benefit of $1,681 in 1995................................ -- 3,264 --
-------- -------- --------
Net income....................................... $ 4,188 $ 232 $ 8,853
======== ======== ========
EARNINGS PER SHARE:
Income before cumulative expense of change in accounting
for postretirement benefits........................... $ 10.95 $ 9.15 $ 23.31
Cumulative expense of change in accounting for
postretirement benefits............................... -- (8.54) --
-------- -------- --------
Net income....................................... $ 10.95 $ 0.61 $ 23.31
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 79
WILSON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE UNAMORTIZED
COMMON PAID-IN RETAINED TRANSLATION PENSION TREASURY
STOCK CAPITAL EARNINGS ADJUSTMENT COSTS STOCK TOTAL
------ ---------- -------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993..... $9,789 $14,071 $51,245 $(1,108) $(1,163) $ (690) $72,144
Sale of treasury stock, 5,203
shares....................... -- (189) -- -- -- 449 260
Purchase of treasury stock,
5,622 shares................. -- -- -- -- -- (496) (496)
Cash dividends, $1.00 per
share........................ -- -- (383) -- -- -- (383)
1994 net income................ -- -- 4,188 -- -- -- 4,188
Translation adjustment......... -- -- -- 369 -- -- 369
Change in unamortized pension
costs........................ -- -- -- -- 570 -- 570
------ ------- ------- ------- ------- ------- -------
BALANCE, December 31, 1994..... 9,789 13,882 55,050 (739) (593) (737) 76,652
Purchase of treasury stock,
940 shares................... -- -- -- -- -- (88) (88)
Cash dividends, $1.00 per
share........................ -- -- (382) -- -- -- (382)
1995 net income................ -- -- 232 -- -- -- 232
Translation adjustment......... -- -- -- (64) -- -- (64)
Change in unamortized pension
costs........................ -- -- -- -- (465) -- (465)
------ ------- ------- ------- ------- ------- -------
BALANCE, December 31, 1995..... 9,789 13,882 54,900 (803) (1,058) (825) 75,885
Purchase of treasury stock,
5,509 shares................. -- -- -- -- -- (595) (595)
Cash dividends, $1.00 per
share........................ -- -- (380) -- -- -- (380)
1996 net income................ -- -- 8,853 -- -- -- 8,853
Translation adjustment......... -- -- -- 912 -- -- 912
Change in unamortized pension
costs........................ -- -- -- -- 982 -- 982
------ ------- ------- ------- ------- ------- -------
BALANCE, December 31, 1996..... $9,789 $13,882 $63,373 $ 109 $ (76) $(1,420) $85,657
====== ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 80
WILSON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,188 $ 232 $ 8,853
Adjustments to reconcile net income to net cash provided
by
operating activities --
Depreciation........................................... 6,539 7,847 9,347
Deferred income tax benefit............................ -- (732) (836)
Provision for doubtful accounts receivable............. 759 462 1,474
Cumulative expense of change in accounting for
postretirement benefits, net of tax.................. -- 3,264 --
Undistributed earnings of joint ventures............... (336) (476) (846)
Gain on sale of equipment.............................. (120) (124) (130)
Change in operating assets and liabilities --
(Increase) decrease in accounts receivable........... 26 (4,569) (15,484)
(Increase) decrease in income tax receivable......... -- (1,170) 1,170
Increase in inventories.............................. (6,554) (16,115) (11,837)
Increase in prepaid expenses and other assets........ (181) (99) (197)
Increase (decrease) in accounts payable and accrued
expenses.......................................... (191) 13,163 17,525
-------- -------- --------
Net cash provided by operating activities......... 4,130 1,683 9,039
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (10,081) (9,018) (13,617)
Proceeds from the sale of equipment....................... 291 343 322
-------- -------- --------
Net cash used in investing activities............. (9,790) (8,675) (13,295)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... -- 2,500 --
Proceeds from long-term borrowings........................ 9,551 5,521 9,871
Principal payments on long-term debt and capital leases... (1,639) (1,975) (1,759)
Cash dividends............................................ (383) (382) (380)
Purchase of treasury stock, net........................... (236) (88) (595)
-------- -------- --------
Net cash provided by financing activities......... 7,293 5,576 7,137
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 108 (16) 155
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,741 (1,432) 3,036
CASH AND CASH EQUIVALENTS, beginning of year................ 6,433 8,174 6,742
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 8,174 $ 6,742 $ 9,778
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 81
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Wilson Industries, Inc., and subsidiaries (the Company) markets pipe,
valves, fittings and drilling and fishing tools primarily in the Western
Hemisphere and also in Europe, Africa, the Middle East and Asia-Pacific Region.
The Company is a diversified supplier, servicer and manufacturing concern. The
Company predominantly serves a diversified group of customers in the oil and gas
industry, including drilling, production and petrochemical companies.
Principles of Consolidation
The consolidated financial statements include the accounts of Wilson
Industries, Inc., and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments in joint ventures are accounted for using the equity method. Profits
on product sales to joint ventures are deferred, to the extent of the Company's
applicable ownership, until realized by the joint ventures.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The accounts of foreign subsidiaries are translated using the exchange rate
prevailing at year-end for assets and liabilities and the appropriate historical
rates for capital accounts. Revenues and expenses are translated at average
exchange rates during the year. Unrealized gains and losses arising from the
translation of foreign currency financial statements are reported as a separate
component of stockholders' equity.
Inventories
Inventories are valued at the lower of cost or market. Cost of certain
domestic supplies inventory is determined by the last-in, first-out (LIFO)
method. Cost of the remaining inventories is generally determined on either the
first-in, first-out (FIFO) method or the average cost method. The cost of
products manufactured includes raw materials, direct labor and operating
overhead expenses.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized, and repair and maintenance costs are expensed.
Depreciation is generally computed using accelerated methods, utilized for
income tax purposes, over the estimated useful lives of the assets.
Statements of Cash Flows
The Company considers cash equivalents to include all highly liquid
investments with maturities of three months or less when purchased.
F-7
<PAGE> 82
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest paid in 1994, 1995 and 1996 was $1,472, $2,315 and $2,714,
respectively. Income tax paid in 1994, 1995 and 1996 was $3,715, $2,753 and
$3,468, respectively.
Concentrations of Credit Risk
The Company's revenues are derived predominantly from sales to customers in
the oil, including petrochemical, and gas industry. This industry concentration
has the potential to impact the Company's exposure to credit risk, either
positively or negatively, because customers may be similarly affected by changes
in economic or other conditions. The creditworthiness of this customer base is
strong, and the Company has not experienced significant credit losses on
receivables.
Revenue Recognition
The Company's net sales are composed of product sales and rental, service
and other revenues. The Company recognizes product sales revenues upon delivery
to the customer. Rental, service and other revenues are recorded when such
services are performed.
Earnings Per Share Computations
Earnings per share computations are based upon the weighted average number
of common shares outstanding during each year, which was approximately 382,569,
382,134 and 379,842 in 1994, 1995 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The
statement requires dual presentation of basic and diluted earnings per share, is
effective for financial statements for both interim and fiscal periods ending
after December 15, 1997, and requires restatement of all prior periods. The
Company will adopt this statement effective December 31, 1997. If SFAS No. 128
had been adopted as of December 31, 1996, there would have been no effect on
reported earnings per share.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The book
values of cash and cash equivalents, trade receivables and trade payables are
considered to be representative of their fair values. None of the Company's debt
instruments have readily ascertainable market values; however, in management's
opinion, the carrying values are considered to approximate their respective fair
values. See Note 9 for the terms and carrying values of the Company's debt
instruments.
Change in Accounting Principle
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires that the expected cost of retirees' postretirement benefits be charged
to expense during the years that the employees render service rather than the
Company's past practice of recognizing these costs on a cash basis. The January
1, 1995, noncash cumulative charge for the adoption of this statement of $3,264
(net of the related income tax benefit of $1,681) is included in the statement
of operations for the year ended December 31, 1995. This charge represents the
discounted present value of the accumulated benefits attributed to employees'
service rendered prior to January 1, 1995.
F-8
<PAGE> 83
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES:
Inventory components at December 31, 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Products purchased for resale --
Domestic supplies......................................... $37,289 $37,979
Pipe...................................................... 22,523 30,753
International supplies.................................... 1,022 2,896
------- -------
60,834 71,628
------- -------
Manufactured products --
Raw materials............................................. 285 670
Work in progress.......................................... 2,673 4,533
Finished goods............................................ 9,453 8,357
------- -------
12,411 13,560
------- -------
$73,245 $85,188
======= =======
</TABLE>
The carrying value of certain domestic inventories determined by the LIFO
method was $36,726 and $38,005 at December 31, 1995 and 1996, respectively. If
such LIFO inventories had been valued at replacement costs, they would have been
$3,492 and $4,361 higher at those respective dates.
3. PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment at December 31, 1995 and
1996, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1995 1996 LIFE
------- ------- ----------
<S> <C> <C> <C>
Land and improvements................................ $ 1,914 $ 1,914 --
Machinery and equipment.............................. 46,288 54,310 3-15 years
Buildings and warehouses............................. 10,518 10,601 5-33 years
Transportation equipment............................. 5,908 6,517 3-5 years
Fixtures, office equipment and other................. 7,643 8,321 3-30 years
------- -------
72,271 81,663
Less -- Accumulated depreciation..................... 50,447 55,758
------- -------
Net property, plant and equipment.......... $21,824 $25,905
======= =======
</TABLE>
4. INVESTMENTS IN JOINT VENTURES:
The Company's investments in joint ventures consist of a 50 percent
interest in Weir-Houston Engineers Limited (Wier), a United Kingdom corporation,
held by Houston Engineers, Inc. (HE), a wholly owned subsidiary of the Company,
and a 30 percent interest in a joint operating agreement between HE and Nirvana
F-9
<PAGE> 84
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Oilfield Supplies Limited, S.A. (NOS), a Panamanian corporation. The components
of the Company's investments in joint ventures at December 31, 1995 and 1996,
were as follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Investment.................................................. $ 704 $ 704
Cumulative equity in earnings, net of dividends............. 3,828 4,674
Cumulative translation adjustment........................... (375) 102
------ ------
$4,157 $5,480
====== ======
</TABLE>
The Company made sales to Weir totaling approximately $1,169, $2,482 and
$2,094 in 1994, 1995 and 1996, respectively. Accounts receivable from Weir were
approximately $118 and $48 at December 31, 1995 and 1996, respectively. The
Company received royalties, management fees and consultation fees from Weir and
Weir Pump, the joint venture partner, totaling approximately $583, $725 and $990
in 1994, 1995 and 1996, respectively. The Company made sales to NOS of
approximately $101, $803 and $899 in 1994, 1995 and 1996, respectively, and
accounts receivable from NOS at December 31, 1995 and 1996, were approximately
$316 and $266, respectively.
The following tables set forth the significant components of the joint
ventures' assets, liabilities and results of operations:
CONDENSED SUMMARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current assets.............................................. $ 8,936 $10,182
Non-current assets.......................................... 7,292 8,542
------- -------
Total assets...................................... $16,228 $18,724
======= =======
Current liabilities......................................... $ 5,321 $ 4,582
Long-term liabilities....................................... 702 883
Stockholders' equity........................................ 10,205 13,259
------- -------
Total liabilities and stockholders' equity........ $16,228 $18,724
======= =======
</TABLE>
CONDENSED SUMMARY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $10,019 $12,862 $16,355
Gross profit................................................ 3,948 5,839 7,857
Net income.................................................. 1,377 2,570 4,122
</TABLE>
5. EMPLOYEE BENEFIT PLANS:
Pension Plan
The Company has a defined benefit pension plan. Effective January 31, 1987,
the Company amended the plan to freeze all future benefit accruals and prohibit
the addition of any new participants. At that time, the plan covered
substantially all of the Company's full-time domestic employees that were 21
years of age or older with at least one year of service. Pension benefits are
based primarily on years of service and the employee's compensation level. As a
result of these changes, members of the plan will not receive any increases in
benefits after January 31, 1987, although benefits earned prior to that date are
not affected by the amendment. The Company makes annual contributions to the
plan that comply with the minimum funding provisions of the Employee Retirement
Income Security Act.
F-10
<PAGE> 85
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension costs for 1994, 1995 and 1996 included the following components:
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- -------
<S> <C> <C> <C>
Interest cost on projected benefit obligation............ $ 415 $ 463 $ 456
Return on plan assets.................................... (150) (1,121) (1,177)
Net gain (loss) deferred................................. (93) 868 865
Amortization of prior service cost, net obligation and
unrecognized loss...................................... 248 236 256
----- ------- -------
Net periodic pension cost...................... $ 420 $ 446 $ 400
===== ======= =======
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheets at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Actuarial present value of --
Accumulated benefit obligation, including vested benefits
of $6,508 and $6,387, respectively..................... $ 6,508 $ 6,387
======= =======
Projected benefit obligation................................ 6,508 6,387
Plan assets at fair market value............................ (3,978) (5,235)
------- -------
Projected benefit obligation in excess of plan assets....... 2,530 1,152
Unrecognized net loss....................................... (1,058) (76)
Unrecognized prior service cost............................. (5) (4)
Unrecognized net obligation at January 1, 1987, being
recognized over 15 years.................................. (1,163) (969)
Additional minimum liability................................ 2,226 1,049
------- -------
Pension liability included primarily in other long-term
liabilities............................................... $ 2,530 $ 1,152
======= =======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.95 percent and 7.46 percent at December 31,
1995 and 1996, respectively. The expected long-term rate of return on plan
assets was 9 percent. Plan assets are invested primarily in marketable equity
securities.
The Company has a plan covering the employees of its wholly owned
subsidiary in the United Kingdom. This plan is currently fully funded. The
expense under this plan was approximately $61, $67 and $62 in 1994, 1995 and
1996, respectively.
Savings Plan
The Company has a 401(k) savings plan allowing employees to make certain
tax-advantaged contributions. The plan is maintained for all eligible domestic
employees and provides for annual Company contributions in amounts determined by
the board of directors, but not to exceed 6 percent of the aggregate of each
participant's compensation during the year. The Company recorded matching
contributions of $274, $354 and $603 in 1994, 1995 and 1996, respectively.
Employee Stock Ownership Plan
The Company also maintains an employee stock ownership plan (ESOP) to
provide additional retirement benefits for all eligible employees. Effective
January 1, 1991, the Company amended the plan to discontinue all future
contributions and prohibit the addition of any new participants.
F-11
<PAGE> 86
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. POSTRETIREMENT BENEFITS:
As discussed in Note 1, the Company adopted SFAS No. 106 effective January
1, 1995. Major medical insurance is available to eligible retirees and their
dependents with cost-sharing premiums that are determined by the Company. This
component of the postretirement benefit gives rise to a liability for the
Company.
The following tables set forth the amounts included in the accompanying
consolidated financial statements as of and for the years ended December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Net periodic postretirement benefit cost includes the
following components --
Service cost benefits earned during the period............ $ 102 $ 136
Interest cost on accumulated postretirement benefit
obligation............................................. 414 445
Amortization of unrealized loss........................... 137 56
------- ------
653 637
Initial transition obligation recognized as cumulative
expense of change in accounting for postretirement
benefits.................................................. 4,945 --
------- ------
Total postretirement benefit cost recognized in the
accompanying consolidated statements of operations........ $ 5,598 $ 637
======= ======
Accumulated postretirement benefit obligation --
Retirees.................................................. $ 2,335 $2,512
Fully eligible active participants........................ 1,665 1,584
Other active participants................................. 2,358 2,324
------- ------
Total accumulated postretirement benefit obligation......... 6,358 6,420
Unrecognized net loss from assumption changes............... (1,148) (905)
------- ------
Accrued postretirement benefit cost included in other
long-term liabilities..................................... $ 5,210 $5,515
======= ======
Assumed weighted average discount rate...................... 6.95% 7.46%
======= ======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9 percent decreasing to 5.2 percent over
25 years. If health care cost trend rate assumptions were increased by 1
percent, the accumulated postretirement benefit obligation as of December 31,
1995 and 1996, and the net periodic postretirement benefit cost for 1995 and
1996 would be increased by 15 percent.
7. STOCK PLANS:
During the current year, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires, among other things, that
compensation cost for stock-based compensation plans be recorded at the grant
date based on fair value of the equity instruments. The Company has the option
of recognizing the compensation cost over the vesting period as an expense in
the statement of operations or making pro forma disclosures in the notes to the
financial statements. The Company has elected the pro forma disclosure option
under SFAS No. 123. During 1995, the Company granted options to purchase 3,000
shares of common stock to nonemployee directors under the Wilson Industries,
Inc. 1995 Outside Directors Stock Option Plan. All options are outstanding, are
fully vested and are exercisable at an actual and weighted average exercise
price of $97. No options were granted in 1996. Options to purchase 5,000 shares
of common stock remain reserved for grant under the plan. The difference between
actual and pro forma net income and earnings per share was not significant for
the years ended December 31, 1995 and 1996.
F-12
<PAGE> 87
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITAL LEASE OBLIGATIONS:
During 1995, the Company entered into a capital lease for computer
equipment to be used in its operations. Total assets recorded under the capital
lease were $608 as of December 31, 1995. As of December 31, 1996, the remaining
annual maturities under this lease (excluding amounts representing interest) are
$203 in 1997 and $197 in 1998.
9. LONG-TERM DEBT:
Long-term debt at December 31, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
$9,300 term note payable to a bank at an interest rate of
10.55 percent, payable in monthly installments of $100,
with the remaining balance due May 31, 1997............... $ 7,700 $ 6,500
$10,000 working capital lines of credit at an average
interest rate of 6.8 percent in 1996, due May 31, 1998.... 5,000 10,000
$25,000 revolving lines of credit at an average interest
rate of 7.3 percent in 1996, due May 31, 1998............. 15,000 22,000
------- -------
27,700 38,500
Less -- Current portion..................................... 1,200 6,500
------- -------
$26,500 $32,000
======= =======
</TABLE>
During 1996, the Company amended the loan agreements for its revolving
lines of credit and its working capital lines of credit to extend the maturity
dates of these loans to May 31, 1998, to increase the revolving lines of credit
from $15,000 to $25,000 and to increase the working capital lines of credit from
$5,000 to $10,000. The loan agreements are secured by the Company's accounts
receivable and inventories. The Company also has a separate $3,000
letter-of-credit facility. The revolving lines of credit provide for commitment
fees equal to one fourth of 1 percent on all available borrowings under these
facilities. The Company had outstanding letters of credit of $1,589 at December
31, 1996.
The loan agreements contain various covenants including financial ratios
and minimum consolidated tangible net worth requirements which must be
maintained by the Company. The agreements also limit the amount the Company may
pay as cash dividends and use to purchase the Company's stock.
As of December 31, 1996, annual maturities of outstanding long-term debt
for the next two years are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 6,500
1998.............................................. 32,000
-------
Total long-term debt.................... $38,500
=======
</TABLE>
10. STOCKHOLDERS' EQUITY:
During 1996, the Company made a tender offer to stockholders to purchase up
to 50 shares of common stock from each stockholder of record at a purchase price
of $108.00 per share. The tender offer was dated September 1, 1996, and expired
September 16, 1996. Common stock repurchased from stockholders under this tender
offer totaled 4,559 shares. In addition the Company repurchased, in connection
with the terms of the ESOP, 950 shares from former employees.
F-13
<PAGE> 88
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. OPERATING LEASES:
The Company is obligated under various noncancelable operating leases. Rent
expense under all operating leases for the years ended December 31, 1994, 1995
and 1996, was $1,936, $1,995 and $2,407, respectively. Future minimum payments
under the noncancelable operating leases with initial or remaining terms of one
year or more are as follows.
<TABLE>
<S> <C>
Year ending December 31 --
1997.............................................. $ 949
1998.............................................. 582
1999.............................................. 296
2000.............................................. 179
2001.............................................. 121
Thereafter........................................ 1,100
------
Total minimum payments.................... $3,227
======
</TABLE>
12. INCOME TAXES:
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The geographical sources of income before income taxes for each of the
three years in the period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Income before taxes and cumulative effect of change in
accounting for postretirement benefits --
U.S................................................... $6,148 $3,052 $ 9,871
Foreign............................................... 819 1,285 3,536
------ ------ -------
$6,967 $4,337 $13,407
====== ====== =======
</TABLE>
Foreign income includes equity in earnings of joint ventures of $769,
$1,171 and $2,172 for the years ended December 31, 1994, 1995 and 1996,
respectively.
A summary of the income tax provisions (benefits) included in the
consolidated statements of operations is as follows (excluding the $1,681 tax
benefit recorded in 1995 as a component of the cumulative effect of change in
accounting for postretirement benefits, see Note 1):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current --
U.S.................................................... $2,768 $1,525 $4,922
Foreign................................................ 25 48 468
------ ------ ------
2,793 1,573 5,390
Deferred --
U.S.................................................... -- (718) (813)
Foreign................................................ (14) (14) (23)
------ ------ ------
(14) (732) (836)
------ ------ ------
$2,779 $ 841 $4,554
====== ====== ======
</TABLE>
F-14
<PAGE> 89
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision (benefit) computed by applying the federal
statutory rate to income before income tax provision is reconciled to actual as
follows (excluding the $1,681 tax benefit recorded as a component of the
cumulative effect of change in accounting for postretirement benefits, see Note
1):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Tax provision at statutory rate.......................... $2,369 $1,475 $4,558
Foreign tax credits...................................... (240) (26) (208)
Unremitted earnings of Weir.............................. (100) (243) (295)
Change in valuation allowance............................ 490 (577) --
Nondeductible entertainment expenses..................... 305 287 340
Other permanent items.................................... (45) (75) 159
------ ------ ------
$2,779 $ 841 $4,554
====== ====== ======
</TABLE>
Prior to 1995, the Company had substantially reserved its net deferred tax
assets due to the uncertainty regarding their realization. The Company now
believes that, based upon its recent consistent history of profitable operations
and taxable income, it is more likely than not that a significant portion of its
net deferred tax assets will be realized on future tax returns, primarily from
the generation of future taxable income. Accordingly, the Company recognized net
deferred tax assets of $2,440 in 1995 and $3,281 in 1996. The Company's deferred
tax liabilities and assets are primarily composed of differences in book and tax
bases for receivables, inventory, fixed assets and accrued expenses and are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities attributed to the excess of net
book basis over remaining tax basis (principally
depreciation):
U.S.................................................... $ 287 $ 282
Foreign................................................ -- --
------- -------
Total deferred tax liabilities.............................. 287 282
------- -------
Deferred tax assets attributed to reserves and accruals not
deductible until paid:
U.S.................................................... 4,760 5,573
Foreign................................................ 47 70
------- -------
4,807 5,643
Valuation allowance......................................... (2,080) (2,080)
------- -------
Total deferred tax assets................................... 2,727 3,563
------- -------
Net deferred tax assets..................................... $ 2,440 $ 3,281
======= =======
</TABLE>
The net deferred tax assets are set forth in the consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Net current assets.......................................... $1,249 $1,903
Net long-term assets........................................ 1,191 1,378
------ ------
Net deferred tax assets........................... $2,440 $3,281
====== ======
</TABLE>
Provision has not been made for United States income taxes on unremitted
earnings of the Company's wholly owned foreign subsidiaries and Weir, totaling
$9,321, because management considers the undistributed earnings of its foreign
subsidiaries to be permanently invested and taxes on Weir's undistributed
earnings will be substantially offset by foreign tax credits when repatriated.
F-15
<PAGE> 90
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS:
The Company operates primarily in one industry segment, the petroleum
services segment. No single customer represented in excess of 10 percent of
total revenues during any of the years presented.
The following table presents financial information about non-U.S. and U.S.
operations and export sales:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues --
United States --
Domestic...................................... $323,202 $345,241 $431,118
Export........................................ 36,919 40,898 47,414
Other............................................ 9,382 9,795 16,716
-------- -------- --------
$369,503 $395,934 $495,248
======== ======== ========
Income before interest, taxes and cumulative change
in accounting for postretirement benefits --
United States.................................... $ 16,994 $ 15,524 $ 24,457
Other............................................ 50 114 1,364
-------- -------- --------
$ 17,044 $ 15,638 $ 25,821
======== ======== ========
Identifiable assets --
United States.................................... $149,019 $173,469 $198,882
Other............................................ 5,037 4,824 13,798
-------- -------- --------
$154,056 $178,293 $212,680
======== ======== ========
</TABLE>
General corporate expenses have been excluded from income before interest
and taxes in the table above. Results of operations as reported in the
accompanying consolidated financial statements include general corporate
expenses of $9,383, $10,595 and $11,991 in 1994, 1995 and 1996, respectively. In
addition, equity in earnings of joint ventures of $769, $1,171 and $2,172 in
1994, 1995 and 1996, respectively, has been excluded from income before interest
and taxes in the table above.
Transfers between geographic areas, which are eliminated upon
consolidation, are excluded from the above presentation. These transfers are
recorded by the Company and its subsidiaries based on their various intercompany
pricing agreements. U.S. sales to affiliates amounted to $115, $15 and $5,094 in
1994, 1995 and 1996, respectively. Non-U.S. sales to affiliates were not
material in 1994, 1995 and 1996.
F-16
<PAGE> 91
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is a party to a number of legal actions arising in the ordinary
course of its business. In management's opinion, the Company has adequate legal
defenses and/or insurance coverage with respect to each of these actions and
does not believe that their resolution will materially affect the Company's
operations or financial position.
Insurance
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company is exposed to deductible limits on various
of its insurance policies, which range from $250 to $500. In addition, the
Company maintains a medical and health benefits program for its employees
whereby the Company is exposed to a maximum self-insurance deductible of $125
per claim. The Company has not incurred significant claims or losses on any of
its insurance policies and, in management's opinion, the Company has established
reserves which are adequate to cover future losses under these policies.
15. EVENTS SUBSEQUENT TO THE DATE OF AUDITORS' REPORT (UNAUDITED):
Senior Secured Notes and Credit Facility
In July 1997, the Company entered into a new corporate credit facility (the
Facility) and issued $50,000 in senior secured notes (the Senior Notes). The
proceeds from the Senior Notes were utilized to refund all of the Company's
existing indebtedness of $38,500, with the remainder to be utilized for capital
expenditures, working capital requirements and general corporate purposes. The
Senior Notes bear interest at 7.7 percent and are due in annual installments
beginning July 31, 2001, with the final installment due July 31, 2007. The
Facility consists of a three-year revolving credit facility in the amount of
$40,000 with a $3,000 facility available for letters of credit. As of December
31, 1997, there was $15,300 of borrowings outstanding under the Facility. The
Facility bears interest at a variable rate (LIBOR plus 1 percent to LIBOR plus
1 1/2 percent) based on the results of certain financial ratios. The Senior
Notes and the Facility are secured by substantially all of the Company's
accounts receivable and inventories. The Senior Notes and the Facility contain
various covenants including financial ratios and minimum consolidated tangible
net worth requirements which must be maintained by the Company. The agreements
also limit the amount the Company may pay as cash dividends and use to purchase
the Company's stock. In addition, the Facility contains covenants that restrict
the Company's ability to be a party to a merger and the Senior Notes have an
optional call feature in the event of a merger. As discussed below, the Company
has signed a definitive agreement to be acquired by Smith International, Inc.
(Smith). In the event this transaction is consummated, the Company may be
required to repay all or a portion of the Facility and Senior Notes unless
releases from the merger restrictions are obtained.
Merger with Smith International, Inc.
On January 20, 1998, the Company announced the signing of a definitive
agreement to be acquired by Smith, in a transaction expected to be accounted for
as a pooling of interests. Smith is a publicly-traded company engaged in the
manufacture and sale of premium products and services to customers in the oil
and gas industry. Under the terms of the merger agreement, Company stockholders
will receive an aggregate of 7,900,000 shares of Smith common stock in exchange
for all of the outstanding common stock of the Company.
The transaction is subject to, among other conditions, approval by the
stockholders of the Company and various U.S. governmental entities. There are no
assurances as to whether this transaction will be ultimately consummated.
F-17
<PAGE> 92
WILSON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,778 $ 2,592
Accounts and notes receivable, less allowance for doubtful
accounts of $2,690 in 1996 and $3,100 in 1997.......... 78,966 93,350
Inventories............................................... 85,188 91,451
Prepaid expenses.......................................... 1,010 1,255
Deferred income taxes..................................... 1,903 1,906
-------- --------
Total current assets.............................. 176,845 190,554
-------- --------
INVESTMENTS:
Investments in joint ventures............................. 5,480 6,587
Other investments, at lower of cost or market............. 135 137
-------- --------
Total investments................................. 5,615 6,724
-------- --------
PROPERTY, PLANT AND EQUIPMENT............................... 81,663 100,566
Less -- Accumulated depreciation.......................... (55,758) (60,159)
-------- --------
Net property, plant and equipment................. 25,905 40,407
DEFERRED INCOME TAXES....................................... 1,378 1,536
OTHER ASSETS................................................ 2,937 4,423
-------- --------
Total assets...................................... $212,680 $243,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 6,500 $ --
Short-term debt........................................... -- 148
Current maturities of capital lease obligations........... 203 642
Accounts payable.......................................... 73,247 63,230
Accrued expenses.......................................... 7,515 11,622
Income tax payable........................................ 798 38
-------- --------
Total current liabilities......................... 88,263 75,680
LONG-TERM DEBT, net of current maturities................... 32,000 62,800
CAPITAL LEASE OBLIGATIONS, net of current maturities........ 197 1,502
OTHER LONG-TERM LIABILITIES................................. 6,563 6,544
-------- --------
Total liabilities................................. 127,023 146,526
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $25 per share;
shares authorized, 2,000,000 in 1996 and 1997;
shares issued, 391,540 in 1996 and 1997................ 9,789 9,789
Additional paid-in capital................................ 13,882 13,882
Retained earnings......................................... 63,373 76,110
Cumulative translation adjustment......................... 109 25
Unamortized pension costs................................. (76) (76)
-------- --------
87,077 99,730
Less -- Treasury stock, at cost, 15,293 shares in 1996 and
23,007 shares in 1997.................................. (1,420) (2,612)
-------- --------
Total stockholders' equity........................ 85,657 97,118
-------- --------
Total liabilities and stockholders' equity........ $212,680 $243,644
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 93
WILSON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
NET SALES................................................... $360,124 $442,800
COST OF GOODS SOLD.......................................... 295,316 359,880
-------- --------
Gross profit.............................................. 64,808 82,920
OPERATING EXPENSES.......................................... 56,295 64,861
-------- --------
Operating income.......................................... 8,513 18,059
EQUITY IN EARNINGS OF JOINT VENTURES........................ 1,559 1,715
OTHER INCOME, net........................................... 920 1,465
-------- --------
INCOME BEFORE INTEREST AND TAXES............................ 10,992 21,239
INTEREST EXPENSE, net....................................... 1,868 2,843
INCOME TAX PROVISION........................................ 3,102 5,377
-------- --------
Net income................................................ $ 6,022 $ 13,019
======== ========
Earnings per share........................................ $ 15.80 $ 34.69
======== ========
Weighted average common shares outstanding................ 381,053 375,271
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 94
WILSON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,022 $ 13,019
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation........................................... 5,940 7,445
Deferred income tax benefit............................ (10) (161)
Provision for doubtful accounts receivable............. 827 1,096
Undistributed earnings of joint ventures............... (1,498) (1,109)
Gain on sale of equipment.............................. (135) (100)
Change in operating assets and liabilities --
Increase in accounts receivable...................... (7,462) (15,480)
(Increase) decrease in inventories................... 3,702 (6,263)
(Increase) decrease in prepaid expenses and other
assets.............................................. 2,175 (1,892)
Decrease in accounts payable and accrued expenses.... (12,974) (6,528)
-------- --------
Net cash used in operations....................... (3,413) (9,973)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (8,137) (22,108)
Proceeds from the sale of equipment....................... 211 260
-------- --------
Net cash used in investing activities............. (7,926) (21,848)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings........................ 9,868 83,572
Principal payments on long-term debt and capital leases... (1,247) (57,379)
Cash dividends............................................ (295) (282)
Purchase of treasury stock, net........................... (587) (1,192)
-------- --------
Net cash provided by financing activities......... 7,739 24,719
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 70 (84)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (3,530) (7,186)
CASH AND CASH EQUIVALENTS, beginning of period.............. 6,742 9,778
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,212 $ 2,592
======== ========
Cash interest paid.......................................... $ 1,998 $ 2,123
Cash income taxes paid...................................... $ 1,530 $ 4,959
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 95
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited consolidated financial statements of Wilson
Industries, Inc. and subsidiaries (the Company) have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the audited financial statements and accompanying notes
for the period ended December 31, 1996, included herein.
The unaudited consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the interim periods. All significant
intercompany balances and transactions have been eliminated in the accompanying
financial statements. Results for the interim periods are not necessarily
indicative of results for the year.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. NEW ACCOUNTING PRONOUNCEMENT:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting comprehensive income and its components. Had
SFAS No. 130 been adopted as of September 30, 1997, the primary adjustments
required to reflect income on a comprehensive basis would have related to the
cumulative translation adjustment and unamortized pension costs.
3. INVENTORIES:
Inventory components at December 31, 1996 and September 30, 1997 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Products purchased for resale --
Domestic supplies...................................... $37,979 $35,260
Pipe................................................... 30,753 34,371
International supplies................................. 2,896 1,167
------- -------
71,628 70,798
------- -------
Manufactured products --
Raw materials.......................................... 670 776
Work in progress....................................... 4,533 6,583
Finished goods......................................... 8,357 13,294
------- -------
13,560 20,653
------- -------
$85,188 $91,451
======= =======
</TABLE>
The carrying value of certain domestic inventories determined by the LIFO
method was $38,005 and $36,566 at December 31, 1996 and September 30, 1997,
respectively. If such LIFO inventories had been valued at replacement cost, they
would have been $4,361 and $5,105 higher at those respective dates.
F-21
<PAGE> 96
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment at December 31, 1996 and
September 30, 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Land and improvements..................................... $ 1,914 $ 1,914
Machinery and equipment................................... 54,310 68,990
Buildings and warehouses.................................. 10,601 10,807
Transportation equipment.................................. 6,517 7,364
Fixtures, office equipment and other...................... 8,321 11,491
-------- --------
81,663 100,566
Less -- Accumulated depreciation.......................... (55,758) (60,159)
-------- --------
Net property, plant and equipment.................... $ 25,905 $ 40,407
======== ========
</TABLE>
5. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and September 30, 1997, consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------------- --------------------
<S> <C> <C>
Long-term Senior Notes due in semi-annual installments
beginning July 31, 2001 with interest due semi-annually
at a rate of 7.70 percent beginning January 31, 1998.... $ -- $50,000
Revolving credit facility due July 31, 2000 at an average
interest rate of 6.63 percent........................... -- 12,800
Other notes payable due May 1, 1998 at an interest rate of
7.46 percent............................................ -- 148
Term note of $9,300 payable to a bank at an interest rate
of 10.55 percent, repaid July 31, 1997.................. 6,500 --
Working capital lines of credit of $10,000 at an average
interest rate of 6.8 percent in 1996, repaid July 31,
1997.................................................... 10,000 --
Revolving lines of credit of $25,000 at an average
interest rate of 7.3 percent in 1996, repaid July 31,
1997.................................................... 22,000 --
------- -------
38,500 62,948
Less -- Current portion................................... 6,500 148
------- -------
$32,000 $62,800
======= =======
</TABLE>
On July 31, 1997, the Company refinanced its term note, working capital
lines of credit and revolving lines of credit with $50,000 of long-term notes
and a $40,000 revolving credit facility. The long-term Senior Notes are fully
amortized through seven equal installments, beginning at the end of year four of
the agreement.
6. SUBSEQUENT EVENT:
Merger With Smith International, Inc.
On January 20, 1998, the Company announced the signing of a definitive
agreement to be acquired by Smith International, Inc. (Smith), in a transaction
expected to be accounted for as a pooling of interests. Smith is a publicly
traded company engaged in the manufacture and sale of premium products and
services to
F-22
<PAGE> 97
WILSON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers in the oil and gas industry. Under the terms of the merger agreement,
Company stockholders will receive an aggregate of 7,900,000 shares of Smith
common stock in exchange for all of the outstanding common stock of the Company.
The transaction is subject to, among other conditions, approval by the
stockholders of the Company and various U.S. governmental entities. There are no
assurances as to whether this transaction will be ultimately consummated.
F-23
<PAGE> 98
APPENDIX A
================================================================================
MERGER AGREEMENT
BY AND AMONG
WILSON INDUSTRIES, INC.,
SMITH INTERNATIONAL, INC.
AND
SII ACQUISITION CORP.
DATED AS OF JANUARY 19, 1998
================================================================================
<PAGE> 99
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER..........................................................................
SECTION 1.1. The Merger..................................................
SECTION 1.2. Closing.....................................................
SECTION 1.3. Effective Time..............................................
SECTION 1.4. Effects of the Merger.......................................
SECTION 1.5. Articles of Incorporation; Bylaws...........................
SECTION 1.6. Directors and Officers......................................
SECTION 1.7. Conversion of Securities; Exchange; Fractional Shares.......
SECTION 1.8. Dissenting Shares...........................................
SECTION 1.9. Adjustments to Prevent Dilution.............................
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................
SECTION 2.1. Organization and Qualification..............................
SECTION 2.2. The Company's Capitalization................................
SECTION 2.3. Authority Relative to the Agreement.........................
SECTION 2.4. Consents and Approvals; No Violation........................
SECTION 2.5. Financial Statements........................................
SECTION 2.6. Books and Records...........................................
SECTION 2.7. No Undisclosed Liabilities..................................
SECTION 2.8. No Material Adverse Changes.................................
SECTION 2.9. Litigation..................................................
SECTION 2.10. Tax Matters.................................................
SECTION 2.11. Employee Benefit Plans......................................
SECTION 2.12. Employment Matters..........................................
SECTION 2.13. Intellectual Property.......................................
SECTION 2.14. Environmental Matters.......................................
SECTION 2.15. Title to Properties; Encumbrances...........................
SECTION 2.16. Permits and Licenses........................................
SECTION 2.17. Material Contracts and Commitments..........................
SECTION 2.18. Tax and Pooling Matters.....................................
SECTION 2.19. Insurance...................................................
SECTION 2.20. Registration Statement and Proxy Statement..................
SECTION 2.21. Compliance with Laws........................................
SECTION 2.22. No Brokers..................................................
SECTION 2.23. Parent Stock Ownership......................................
SECTION 2.24. Voting Requirements.........................................
SECTION 2.25. Disclaimer of Additional and Implied Warranties.............
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.............................
SECTION 3.1. Organization and Qualification..............................
SECTION 3.2. Capitalization of Parent....................................
SECTION 3.3. Authority Relative to the Agreement.........................
SECTION 3.4. Consents and Approvals; No Violation........................
SECTION 3.5. SEC Filings.................................................
SECTION 3.6. No Undisclosed Liabilities..................................
SECTION 3.7. No Material Adverse Changes.................................
SECTION 3.8. Litigation..................................................
SECTION 3.9. Tax Matters.................................................
</TABLE>
A-i
<PAGE> 100
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 3.10. Employee Benefit Plans......................................
SECTION 3.11. Employment Matters..........................................
SECTION 3.12. Environmental Matters.......................................
SECTION 3.13. Permits and Licenses........................................
SECTION 3.14. Tax and Pooling Matters.....................................
SECTION 3.15. Registration Statement and Proxy Statement..................
SECTION 3.16. Compliance with Laws........................................
SECTION 3.17. Severance and Change of Control Payments....................
SECTION 3.18. No Brokers..................................................
SECTION 3.19. Disclaimer of Additional and Implied Warranties.............
ARTICLE IV
COVENANTS OF THE COMPANY............................................................
SECTION 4.1. Acquisition Proposals.......................................
SECTION 4.2. Conduct of the Business.....................................
SECTION 4.3. Company Stockholder Approval................................
ARTICLE V
COVENANTS OF PARENT.................................................................
SECTION 5.1. Conduct of Business.........................................
SECTION 5.2. Obligations of Merger Sub...................................
SECTION 5.3. Registration Statement......................................
SECTION 5.4. Stock Exchange Listing......................................
SECTION 5.5. Employee Benefits...........................................
SECTION 5.6. Registration Rights Agreement...............................
SECTION 5.7. Post-Merger Combined Financial Statements...................
SECTION 5.8. Indemnification of Company Directors, Officers and
Employees...................................................
ARTICLE VI
ADDITIONAL AGREEMENTS...............................................................
SECTION 6.1. Reasonable Best Efforts.....................................
SECTION 6.2. Certain Filings.............................................
SECTION 6.3. Public Announcements........................................
SECTION 6.4. Further Assurances..........................................
SECTION 6.5. Notices of Certain Events...................................
SECTION 6.6. Tax-Free Reorganization and Pooling.........................
SECTION 6.7. Affiliates..................................................
SECTION 6.8. Access to Information: Confidentiality......................
SECTION 6.9. Parents Board of Directors..................................
SECTION 6.10. Shareholder Tax Representations.............................
ARTICLE VII
CONDITIONS TO THE MERGER............................................................
SECTION 7.1. Conditions to the Obligations of Each Party.................
SECTION 7.2. Conditions to the Obligations of Parent and Merger Sub......
SECTION 7.3. Conditions to the Obligations of the Company................
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER......................................................
SECTION 8.1. Termination.................................................
SECTION 8.2. Effect of Termination.......................................
</TABLE>
A-ii
<PAGE> 101
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE IX
MISCELLANEOUS.......................................................................
SECTION 9.1. Non-survival of Representations and Warranties..............
SECTION 9.2. Expenses....................................................
SECTION 9.3. Entire Agreement; Assignment................................
SECTION 9.4. Amendment and Modification..................................
SECTION 9.5. Waiver; Consents............................................
SECTION 9.6. Severability................................................
SECTION 9.7. Notices.....................................................
SECTION 9.8. Governing Law...............................................
SECTION 9.9. Jurisdiction and Venue......................................
SECTION 9.10. Descriptive Headings........................................
SECTION 9.11. Parties in Interest; No Third Party Beneficiary.............
SECTION 9.12. Counterparts................................................
SECTION 9.13. Incorporation by Reference..................................
SECTION 9.14. Schedules...................................................
</TABLE>
EXHIBITS
Exhibit A -- Definitions
Exhibit B -- Registration Rights Agreement
Exhibit C -- Affiliates of the Company
Exhibit D -- Company Affiliate Letter
Exhibit E -- Parent Affiliate Letter
Exhibit F -- Company Designees to Parent Board of Directors
Exhibit G -- Environmental Laws
A-iii
<PAGE> 102
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Agreement"), made as of the 19th day of
January, 1998, is entered into by and among Smith International, Inc., a
Delaware corporation ("Parent"), SII Acquisition Corp., a Texas corporation and
wholly-owned subsidiary of Parent ("Merger Sub"), and Wilson Industries, Inc., a
Texas corporation, (the "Company").
RECITALS
WHEREAS, subject to and in accordance with the terms and conditions of this
Agreement, Parent, Merger Sub and the Company desire that Merger Sub merge with
and into the Company (the "Merger"), so that the issued and outstanding shares
of common stock, par value $25.00 per share, of the Company (the "Company Common
Stock") not owned by the Company will in the aggregate be converted into the
right to receive 7,900,000 shares of common stock, par value $1.00 per share, of
Parent ("Parent Common Stock"), as provided herein; and
WHEREAS, Parent and the Company intend the Merger to qualify as a tax-free
reorganization under the provision at Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations thereunder; and
WHEREAS, Parent and the Company intend the Merger to be recorded as a
"pooling of interests" for financial accounting purposes; and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger; and
WHEREAS, certain terms used herein are defined in Exhibit A attached
hereto;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I.
THE MERGER
Section 1.1. The Merger. Subject to and in accordance with the terms and
conditions of this Agreement and in accordance with the Texas Business
Corporation Act (the "TBCA"), at the Effective Time (as defined in Section 1.3)
Merger Sub shall be merged with and into the Company. As a result of the Merger,
the separate corporate existence of the Merger Sub shall cease and the Company
shall continue as the surviving corporation (sometimes referred to herein as the
"Surviving Corporation") and shall succeed to and assume all of the rights and
obligations of the Company and Merger Sub in accordance with the TBCA.
Section 1.2. Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., 3400 Chase Tower, 600
Travis, Houston, Texas 77002, as soon as practicable (and in no event more than
three (3) business days) after the satisfaction or waiver of the conditions set
forth in Article VII or at such other time and place and on such other date as
Parent and the Company shall agree; provided, that the closing conditions set
forth in Article VII shall have been satisfied or waived at or prior to such
time. The date on which the Closing actually occurs is herein referred to as the
"Closing Date."
Section 1.3. Effective Time. On the Closing Date, or as soon as practicable
thereafter, the Company and Merger Sub will cause Articles of Merger (the
"Articles of Merger") to be filed with the Secretary of State of the State of
Texas as provided in Article 5.04 of the TBCA. The Merger will become effective
upon the issuance of a Certificate of Merger by the Secretary of State of the
State of Texas or at such other time specified in the Articles of Merger as the
effective time (the "Effective Time").
Section 1.4. Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the TBCA.
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Section 1.5. Articles of Incorporation; Bylaws. The articles of
incorporation (the "Articles") and bylaws (the "Bylaws") of the Company, as in
effect immediately prior to the Effective Time, shall be the articles of
incorporation and bylaws of the Surviving Corporation and thereafter shall
continue to be its articles of incorporation and bylaws until amended as
provided therein and under the TBCA.
Section 1.6. Directors and Officers. The initial directors and officers of
the Surviving Corporation shall be designated in Schedule 1.6, and such
directors and officers shall hold office in accordance with the Articles and
Bylaws of the Surviving Corporation until their respective successors are duly
elected or appointed and qualified.
Section 1.7. Conversion of Securities; Exchange; Fractional Shares.Subject
to the terms and conditions of this Agreement, at the Effective Time, by virtue
of the Merger and without any action on the part of the Company, Merger Sub or
the shareholders of the Company, the shares of capital stock of each of the
Company and Merger Sub shall be converted or canceled as follows:
(a) Each share of the Company Common Stock issued and outstanding
immediately prior to the Effective Time, other than any shares of the Company
Common Stock to be canceled pursuant to Section 1.7(b) and Dissenting Shares (as
defined in Section 1.8), shall be converted into the right to receive 21.2633
shares (the "Exchange Ratio") of Parent Common Stock (the "Merger
Consideration"); provided that no fractional shares of Parent Common Stock shall
be issued, and, in lieu thereof, a cash payment shall be made in accordance with
the procedure set forth in Section 1.7(g) hereof.
(b) Each share of the Company Common Stock held in the treasury of the
Company immediately prior to the Effective Time shall be canceled and
extinguished at the Effective Time without any conversion thereof and no payment
shall be made with respect thereto.
(c) Each share of common stock, par value $1.00 per share, of Merger Sub
issued and outstanding immediately prior to the Effective Time shall at the
Effective Time be converted into one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation.
(d) At the Effective Time, each holder of an outstanding certificate that
prior thereto represented shares of the Company Common Stock shall be entitled
to receive, upon surrender to the paying agent for the Merger of such
certificate or certificates for cancellation and subject to any required
withholding of taxes, a certificate or certificates representing the number of
whole shares of Parent Common Stock (of such denominations and registered in
such names as such holder may request) into which the shares of the Company
Common Stock so surrendered shall have been converted. Each holder of shares of
the Company Common Stock who would otherwise be entitled to a fraction of a
share of Parent Common Stock shall, upon surrender to the Surviving Corporation
of the certificates representing shares of the Company Common Stock held by such
holder, be paid an amount in cash in accordance with the provisions of Section
1.7(g). Until so surrendered, each outstanding certificate that prior to the
Effective Time represented shares of the Company Common Stock shall be deemed
from and after the Effective Time to evidence the right to receive that number
of full shares of Parent Common Stock into which such shares of the Company
Common Stock shall have been converted pursuant to this Section 1.7, and any
cash in lieu of fractional shares of Parent Common Stock, subject to any of
required withholding of taxes. No interest shall be paid on the cash payable
upon surrender of the certificate or certificates evidencing shares of the
Company Common Stock. Unless and until any such outstanding certificates
representing shares of the Company Common Stock shall be surrendered, no
dividends or other distributions declared and payable to the holders of Parent
Common Stock on or after the Effective Time shall be paid to the holders of such
outstanding certificates which prior to the Effective Time represented shares of
the Company Common Stock; provided, however, that, upon surrender and exchange
of such outstanding certificates, there shall be paid to the record holders of
the certificates issued and exchanged therefor the amount, without interest
thereon, of dividends and other distributions, if any, that theretofore were
declared and became payable since the Effective Time with respect to the number
of full shares of Parent Common Stock issued to such holders.
(e) The shares of Parent Common Stock into which the shares of the Company
Common Stock shall have been converted pursuant to this Section 1.7, and any
cash in lieu of fractional shares of Parent Common
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Stock, shall be issued in full satisfaction of all rights pertaining to such
converted shares of the Company Common Stock.
(f) If any certificate for shares of Parent Common Stock is to be issued in
a name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange shall have paid
to Parent or the Surviving Corporation any transfer or other taxes required by
reason of the issuance of a certificate for shares of Parent Common Stock in any
name other than that of the registered holder of the certificate surrendered, or
established to the satisfaction of Parent or its transfer agent that such tax
has been paid or is not payable.
(g) No fraction of a share of Parent Common Stock shall be issued, but in
lieu thereof each holder of shares of the Company Common Stock who would
otherwise be entitled to a fraction of a share of Parent Common Stock shall,
upon surrender to the Surviving Corporation of the certificate or certificates
representing the shares of the Company Common Stock held by such holder, be paid
an amount in cash equal to the value of such fraction of a share of Parent
Common Stock based upon the closing price of one share of Parent Common Stock on
the New York Stock Exchange (the "NYSE") on the last trading day prior to the
Effective Time. No interest shall be paid on such amount. All shares of the
Company Common Stock held by a record holder shall be aggregated for purposes of
computing the number of shares of Parent Common Stock to be issued pursuant to
this Section 1.7.
(h) At the Closing, Parent shall provide each holder of certificates of
Company Common Stock ("Certificates"), which prior to the Effective Time
represented shares of the Company Common Stock, a letter of transmittal to
return to the paying agent for the Merger: (i) notifying the paying agent of the
effectiveness of the Merger; (ii) providing instructions for effecting the
surrender and exchange of the Certificates for the Merger Consideration; (iii)
specifying that delivery shall be affected, and risk of loss of the Certificates
shall pass, only upon delivery of the Certificates to the paying agent; and (iv)
including such other provisions as the Company and Parent may mutually agree.
(i) Neither Parent, the Surviving Corporation, nor any other person shall
be liable to any former holder of shares of the Company Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(j) In the event any certificate formerly representing shares of the
Company Common Stock shall have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming such certificate to be lost,
stolen or destroyed and, if required by Parent or the Surviving Corporation, the
posting by such person of a bond in customary amount as indemnity against any
claim that may be made against Parent or the Surviving Corporation with respect
to such certificate, the Surviving Corporation shall deliver in exchange for
such lost, stolen or destroyed certificate the cash and shares of Parent Common
Stock that would be deliverable pursuant to this Article I upon due surrender of
the shares of the Company Common Stock represented by such lost, stolen or
destroyed certificate.
Section 1.8. Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time that are held by a shareholder who did
not vote in favor of the Merger and who complies with all of the relevant
provisions of Section 5.12 of the TBCA (the "Dissenting Shares") shall not be
converted into the right to receive the Merger Consideration unless and until
the shareholder shall have failed to perfect or shall have effectively withdrawn
or lost such shareholder's rights to appraisal under the TBCA; and any such
shareholder shall have only such rights in respect of the Dissenting Shares
owned by such shareholder as are provided in Sections 5.11 and 5.12 of the TBCA.
If any such shareholder shall have failed to perfect or shall have effectively
withdrawn or lost such rights, such shareholder's Dissenting Shares shall
thereupon be deemed to have been converted into and to have become exchangeable,
as of the Effective Time, for the right to receive the Merger Consideration
without any interest thereon, pursuant to the terms of Section 1.7.
Section 1.9. Adjustments to Prevent Dilution. In the event that the Company
changes the number of shares of the Company Common Stock or securities
convertible or exchangeable into or exercisable for shares
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of the Company Common Stock, or Parent changes the number of shares of Parent
Common Stock or securities convertible or exchangeable into or exercisable for
shares of Parent Common Stock, issued and outstanding prior to the Effective
Time as a result of a reclassification, stock split (including a reverse split
or combination), stock dividend or distribution, recapitalization, subdivision,
or other similar transaction, the Merger Consideration shall be correspondingly
adjusted.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company makes the representations and warranties set forth in this
Article II to Parent. The Company has delivered to Parent the Schedules to this
Agreement referred to in this Article II on the date hereof and such Schedules
have been reviewed and accepted by Parent. The Company shall, from time to time
through the Closing Date, advise Parent as to any change, amendment or
supplement to the Schedules which is necessary to reflect material changes in
the subject matter thereof occurring through the Closing Date. Parent must
notify the Company within five (5) business days after receipt of any material
change, amendment or supplement to the Schedules of its election to terminate
this Agreement in accordance with Section 8.1. If Parent fails to notify the
Company as required, it shall be deemed to have waived its right to terminate
this Agreement based on such change, amendment or supplement to the Schedules.
Section 2.1. Organization and Qualification.
(a) The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Texas. The Company has all
requisite corporate power and authority to carry on its business as it is now
being conducted, and to own, lease and operate its properties and assets, and to
perform all its obligations under the agreements and instruments to which it is
a party or by which it is bound. The Company is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each state or
other jurisdiction in which the properties and assets owned, leased or operated
by it or the nature of the business conducted by it make such qualification
necessary, except in such jurisdictions where the failure to be duly qualified
or in good standing does not and would not result in a Material Adverse Effect.
Each such jurisdiction in which the Company is so qualified is listed on
Schedule 2.1(a).
(b) Schedule 2.1(b) contains a list of all Subsidiaries, indicating in each
case the name, type of entity, jurisdiction of organization and other
jurisdictions in which it is authorized to do business, its authorized capital
stock or share capital and the number of issued and outstanding shares of
capital stock or share capital. Each Subsidiary which is a corporation is duly
incorporated, validly existing and in good standing under the laws of the state
or jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as it is now being conducted, to own, lease
and operate its properties and assets, and to perform all its obligations under
the agreements and instruments to which it is a party or by which it is bound.
Each Subsidiary which is not a corporation is duly organized and validly
existing under all applicable laws and has all necessary power and authority to
own or lease and operate its properties and assets, and to perform all its
obligations under the agreements and instruments to which it is a party or by
which it is bound. Each Subsidiary is duly qualified to do business as a foreign
entity and is in good standing under the laws of each state or other
jurisdiction in which the properties and assets owned, leased or operated by it
or the nature of the business conducted by it make such qualification necessary,
except in such jurisdictions where the failure to be duly qualified or in good
standing does not and would not result in a Material Adverse Effect.
(c) True, correct and complete copies of the Organizational Documents of
the Company and each Subsidiary, with all amendments thereto through the date of
this Agreement, have been delivered by the Company to Parent.
Section 2.2. The Company's Capitalization. The authorized and outstanding
capital stock of the Company is set forth on Schedule 2.2. Except as set forth
on Schedule 2.2, there are no outstanding subscriptions, options, phantom stock,
convertible securities, rights, warrants, calls, irrevocable proxies or other
agreements or commitments of any kind directly or indirectly obligating the
Company to issue any
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security of or equity interest in the Company, or irrevocable proxies or any
agreements restricting the transfer of or otherwise relating to any security or
equity interest in the Company. All of the outstanding shares of capital stock
of the Company and all outstanding shares of capital stock of each Subsidiary
have been duly authorized, validly issued and are fully paid and non-assessable,
and are free of preemptive rights. Except as set forth on Schedule 2.2, all
dividends declared prior to the date hereof have been paid.
Section 2.3. Authority Relative to the Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby, subject to the approval of the Board of Directors and shareholders of
the Company ("Company Approvals") which, with respect to the approval of the
shareholders, will require a meeting of the shareholders of the Company pursuant
to Section 5.03 of TBCA ("Company Shareholders' Meeting"). No corporate actions
or proceedings on the part of the Company are necessary to authorize the
execution and delivery of this Agreement, the performance of the obligations
hereunder or the consummation of the transactions contemplated hereby, except
for the Company Approvals. This Agreement has been duly and validly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, subject to
the effect of bankruptcy, insolvency, reorganization, moratorium, or other
similar laws relating to creditors' rights generally and general equitable
principles.
Section 2.4. Consents and Approvals; No Violation. Except for filings as
may be required by the HSR Act or as otherwise set forth on Schedule 2.4, no
filing or registration with, no notice to, or consent or approval of any third
party, including but not limited to, any Governmental Authority, creditor or
other Person in a contractual relationship with the Company or any Subsidiary,
is necessary in connection with the execution and delivery of this Agreement by
the Company, the performance of its obligations hereunder, or the consummation
of the transactions contemplated hereby. Except as set forth on Schedule 2.4,
the execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby, or the compliance by the Company with any of
the provisions hereof will not, as of the Closing Date, (i) conflict with or
violate any provision of any Organizational Document of the Company or any
Subsidiary; (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, contract, agreement, commitment, bond,
mortgage, indenture, license, lease, pledge agreement or other instrument or
obligation to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary or any of their respective properties or assets may be
bound, except as would not have a Material Adverse Effect; (iii) violate or
conflict with any provision of any Governmental Authorization or Legal
Requirement binding upon the Company or any Subsidiary except as would not have
a Material Adverse Effect; or (iv) result in, or require, the creation or
imposition of, any Encumbrance upon or with respect to any of the properties or
assets now owned or used by the Company or any Subsidiary, except as would not
have a Material Adverse Effect.
Section 2.5. Financial Statements. The Company has provided Parent with a
true and complete copy of (i) the audited Consolidated Balance Sheets of the
Company for the fiscal years ended December 31, 1994, 1995 and 1996 and the
related Consolidated Statements of Income, Changes in Stockholder's Equity, and
Cash Flows, for the years then ended and (ii) the unaudited Consolidated Balance
Sheet of the Company as of September 30, 1997 (the "Balance Sheet Date") and the
related Consolidated Statement of Income, Changes in Stockholder's Equity and
Cash Flows as of and for the nine months then ended (all of the foregoing
Consolidated Balance Sheets and Consolidated Statements of Income, Changes in
Stockholder's Equity and Cash Flows of the Company are collectively referred to
as the "Company Financial Statements"). The Company Financial Statements present
fairly, in all material respects, the financial condition, results of operations
and cash flows of the Company and its Subsidiaries as at the respective dates
thereof and for the periods therein referred to, all in accordance with GAAP,
subject in the case of interim financial statements, to normal recurring
year-end adjustments and the absence of notes. Since December 31, 1996, there
have been no material changes in accounting principles applicable to, or methods
of accounting utilized by, the Company, except as specifically described in the
Company Financial Statements.
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Section 2.6. Books and Records. The books of account, minute books, stock
records books and other records of the Company and its Subsidiaries, all of
which have been made available to Parent, are complete and correct in all
material respects and have been maintained in accordance with sound business
practices and Legal Requirements. The minute books of the Company and its
Subsidiaries contain accurate and complete records of all meetings held of and
corporate action taken by the shareholders and boards of directors of the
Company and the Subsidiaries, and no meeting of such shareholders or any such
board of directors has been held for which minutes have not been prepared and
are not contained in such minute books.
Section 2.7. No Undisclosed Liabilities. Except as set forth on Schedule
2.7 or as reflected, reserved against or otherwise disclosed in the Company
Financial Statements, there are no debts, liabilities or obligations (whether
accrued, absolute, contingent or otherwise) pertaining to acts or omissions
arising on or prior to the Balance Sheet Date which were not recorded in the
accounting records of the Company and reflected in the Company Financial
Statements that would have, individually or in the aggregate, a Material Adverse
Effect.
Section 2.8. No Material Adverse Changes. Except as set forth on Schedule
2.8, since the Balance Sheet Date the Company has not (i) issued or sold any of
its capital stock or corporate debt obligations (other than checks, drafts,
bills and notes issued in the ordinary course of its business consistent with
past practice); (ii) sold or granted any option, warrant or other right to
purchase any of its capital stock; (iii) declared or set aside or paid any
dividend or made any other distribution in respect of its capital stock, or,
directly or indirectly, purchased, redeemed or otherwise acquired any shares of
such stock; (iv) made any payments or distributions pursuant to any tax sharing
agreements or arrangements; (v) acquired, transferred or disposed of, or agreed
to acquire, transfer or dispose of, any assets except in the ordinary course of
business consistent with past practice; (vi) subjected any assets to any liens,
other than liens for taxes not yet due and payable; (vii) suffered any damage,
destruction or casualty loss in excess of $500,000, whether or not covered by
insurance; (viii) guaranteed or assumed responsibility for any indebtedness or
the performance of any other obligations other than those of the Company or its
Subsidiaries; (ix) increased or established any bonus, insurance, severance,
deferred compensation, pension, retirement, profit-sharing, stock option, stock
purchase or other employee benefit plan, except in the ordinary course of
business consistent with past practice; or (x) operated the business of the
Company or its Subsidiaries other than in, or entered into any material
transactions or arrangements (including those effected for tax purposes) outside
the ordinary course of business consistent with past practice.
Section 2.9. Litigation. Except as set forth on Schedule 2.9, there are no
Proceedings pending or, to the knowledge of the Company, threatened against the
Company or any Subsidiary or involving any of the properties or assets of the
Company or any Subsidiary that would have, individually or in the aggregate, a
Material Adverse Effect.
Section 2.10. Tax Matters. Except as set forth on Schedule 2.10, the
Company and its Subsidiaries have timely filed (or there has been filed on their
behalf) with the appropriate Governmental Authorities all income (including
foreign) and franchise tax returns, statements, reports and forms that each of
them was required to file on or before the date hereof. All such income and
franchise tax returns were correct and complete in all material respects, and,
to the knowledge of the Company, all such tax returns properly reflected the
respective liabilities of the Company and its Subsidiaries for taxes for the
periods covered thereby. All taxes shown as due on the heretofore described tax
returns have been timely paid. Neither the Company nor any Subsidiary is
currently the beneficiary of any extension of time within which to file any
income or franchise tax return. Except as set forth in Schedule 2.10, neither
the Company nor any Subsidiary has received any notice of deficiency or
assessment or proposed deficiency or assessment in connection with any tax
return, and there are not any pending tax examinations of, or claims served
against, the Company or any Subsidiary. There is no material dispute or claim
concerning any income or franchise tax liability of the Company or any
Subsidiary either claimed or raised by any authority in writing. The Company has
made available to the Parent true and correct copies of all federal and state
income and franchise tax returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company or any Subsidiary for
all open tax years. Neither the Company nor any Subsidiary has extended, or
waived the application of, any statute of limitations of any jurisdiction
regarding the assessment or collection of any income or franchise taxes. Neither
the Company nor
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any Subsidiary has filed a consent under Section 341(f) of the Code concerning
collapsible corporations. Neither the Company nor any Subsidiary has been a
United States real property holding corporation within the meaning of Code
sec. 897(c)(2) during the applicable period specified in Code
sec. 897(c)(1)(A)(ii). Neither the Company nor any Subsidiary is party to any
tax allocation or sharing agreement. Neither the Company nor any Subsidiary (i)
has been a member of an affiliated group filing a consolidated federal income
tax return (other than a group the common parent of which was the Company) or
(ii) has any liability for the taxes of any person under Reg. sec. 1.1502-6 (or
any similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise. There are no security interests or liens
on any assets of the Company or any Subsidiary that arose or may reasonably be
expected to arise in connection with any failure by the Company or any
Subsidiary to pay any tax (other than any lien for current taxes not yet due and
payable) related to operations of the Company or any Subsidiary through the
Closing Date. The Company and its Subsidiaries have withheld and paid all taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or other third
party. The unpaid income taxes and other taxes of the Company and its
Subsidiaries (i) did not, as of the most recent fiscal month end, exceed by any
material amount the reserve for tax liability (other than any reserve for
deferred taxes established to reflect timing differences between book and tax
income) set forth on the face of the most recent balance sheet (other than in
any notes thereto) and (ii) will not exceed by any material amount that reserve
as adjusted for operations and transactions through the Closing Date in
accordance with the past custom and practice of the Company in filing its income
tax and other tax returns.
Section 2.11. Employee Benefit Plans. (a) Schedule 2.11 contains a list of
all "employee pension benefit plans" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes
referred to herein as the "Company Pension Plans"), "employee welfare benefit
plans" (as defined in Section 3(1) of ERISA, hereinafter a "Company Welfare
Plan"), stock option, stock purchase, incentive, deferred compensation plans or
arrangements, vacation, change in control, stay-on bonus plans or arrangements,
and other material employee compensation and fringe benefit plans or agreements,
maintained, contributed to, or called the "Company Benefit Plans"). The Company
has made available to Parent true, complete, and correct copies of (i) each
Company Benefit Plan and any subsequently adopted amendments thereto (on, in the
case of unwritten Company Benefit Plan, descriptions thereof), (ii) the most
recent annual report on Form 5500 filed with respect to each Company Benefit
Plan (if any such report was required), (iii) the most recent summary plan
description for each Company Benefit Plan for which such a summary plan
description is required (with all summaries of material modifications provided
after the most recent summary plan description was distributed), (iv) each trust
agreement and group annuity contract relating to any Company Benefit Plan and
(v) each favorable determination letter from the Internal Revenue Service with
respect to each Company Benefit Plan that is intended to be qualified under
Section 401(a) of the Code.
(b) All Company Benefit Plans are and have been administered in material
compliance with their terms and all applicable Legal Requirements, including,
without limitation, ERISA and the Code, except where the failure to so
administer the Company Benefit Plans or to comply with such laws would not have,
individually or in the aggregate, a Material Adverse Effect. There are no
pending or, to the Company's or the Subsidiary's knowledge, threatened
investigations by any Governmental Authority, termination proceedings, or other
claims (except claims for benefits payable in the normal operation of the
Company Benefit Plans), Proceedings against or involving any Company Benefit
Plan or asserting any rights or claims to benefits under any Company Benefit
Plan that would have, individually or in the aggregate, a Material Adverse
Effect.
(c) All material contributions to, and material payments from, the Company
Benefit Plans required to be made in accordance with the Company Benefit Plans
have been timely made or provided for.
(d) No Company Benefit Plan is a "multiemployer plan" within the meaning of
Section 4001(a)(3) of ERISA.
(e) (i) No "prohibited transaction" (under Section 4975 of the Code or
Section 406 of ERISA) has occurred with respect to any Company Benefit Plan;
(ii) there has been no breach of fiduciary duty with respect to any Company
Benefit Plan; (iii) the Seller has not incurred any direct or indirect liability
under
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Title IV of ERISA in connection with the termination of, or withdrawal from, any
of the Company Benefit Plans; and (iv) there does not exist with respect to any
of the Company Benefit Plans any accumulated funding deficiency within the
meaning of Section 412 of the Code or Section 302 of ERISA, other than, in each
case, those that would not have, individually or in the aggregate, a Material
Adverse Effect.
(f) Except as required by law or as disclosed in Schedule 2.11(f), the
Company does not maintain or contribute to any material plan or arrangement
which provides or has any material liability to provide life insurance or other
employee welfare benefits to any employee or former employee upon his or her
retirement or termination of employment, and the Company has not represented,
provided or contracted (whether in oral or written form) to any employee or
former employee that such benefits would be provided.
(g) Except as disclosed in Schedule 2.11(g), the execution of, and
performance of the transactions contemplated in, this Agreement will not (either
alone or upon the occurrence of any additional or subsequent events) constitute
an event under any Company Benefit Plan that will or may result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligations to fund
benefits with respect to any employee.
Section 2.12. Employment Matters. Except as disclosed on Schedule 2.12,
there are no agreements with labor unions or associations representing employees
of the Company or any Subsidiary. No material work stoppage against the Company
or any Subsidiary is pending or, to the knowledge of the Company, threatened.
Neither the Company nor any Subsidiary is involved in or, to the knowledge of
the Company, is threatened with any labor dispute or similar Proceeding relating
to labor matters involving the employees of the Company or any Subsidiary
(excluding routine workers' compensation claims) that would have, individually
or in the aggregate, a Material Adverse Effect. To the Company's knowledge,
there are no organizational efforts with respect to the formation of a
collective bargaining unit presently being undertaken or threatened involving
employees of the Company or any Subsidiary.
Section 2.13. Intellectual Property.
(a) The Company and/or each of its Subsidiaries owns, or is licensed or
otherwise possesses legal enforceable rights to use all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
technology, know-how, computer software programs or applications, and tangible
or intangible proprietary information or material that are used in the business
of the Company and its Subsidiaries as currently conducted, except as would not
have a Material Adverse Effect.
(b) Except as disclosed in Section 2.13(b) or as would not have a Material
Adverse Effect: (i) the Company is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its obligations
hereunder, in violation of any licenses, sublicenses and other agreements as to
which the Company is a party and pursuant to which the Company is authorized to
use any third-party patents, trademarks, service marks and copyrights
("Third-Party Intellectual Property Rights"); (ii) no claims with respect to the
patents, registered and material unregistered trademarks and service marks,
registered copyrights, trade names and any applications therefor owned by the
Company and its Subsidiaries (the "Company Intellectual Property Rights"), any
trade secret material to the Company, or Third-Party Intellectual Property
Rights to the extent arising out of any use, reproduction or distribution of
such Third-Party Intellectual Property Rights by or through the Company or any
of its Subsidiaries, are currently pending or, to the knowledge of the Company,
threatened by any person; or (iii) the Company does not know of any reasonable
grounds for any claims (1) to the effect that the manufacture, sale, licensing
or use of any products as now used, sold or licensed or proposed for use, sale
or license by the Company or any of its Subsidiaries, infringes on any
copyright, patent, trademark, service mark or trade secret; (2) against the use
by the Company or any of its Subsidiaries, of any trademarks, trade names, trade
secrets, copyrights, patents, technology, know-how or computer software programs
and applications used in the business of the Company or any of its Subsidiaries
as currently conducted or as proposed to be conducted; (3) challenging the
ownership, validity or effectiveness of any of the Company Intellectual Property
Rights or other trade secret material to the Company; or (4) challenging the
license or legal enforceable right to use of the Third-Party Intellectual Rights
by the Company or any of its Subsidiaries.
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(c) To the Company's knowledge, all material patents, registered
trademarks, service marks and copyrights held by the Company are valid and
subsisting. To the Company's knowledge there is no material unauthorized use,
infringement or misappropriation of any of the Company Intellectual Property by
any third-party, including any employee or former employee of the Company or any
of its Subsidiaries.
Section 2.14. Environmental Matters. Except as disclosed on Schedule 2.14,
(i) other than violations that would not have a Material Adverse Effect, each
Company Business Facility has been operated in compliance with all applicable
Environmental Laws; (ii) there are no existing, pending or, to the Company's
knowledge, threatened Proceedings or clean-up obligations asserted by any
Governmental Authority or other third party relating to any Environmental Laws
with respect to any Company Business Facility, except that would not have a
Material Adverse Effect; (iii) all notices, permits, or similar authorizations,
if any, required to be obtained or filed under applicable Environmental Laws in
connection with the operation of the Company Business Facilities have been
obtained or filed, other than any such notices, permits, or similar
authorizations the failure of which to obtain or file would not have a Material
Adverse Effect; and (iv) there are not any past or present conditions or
circumstances at, or arising out of, any current or former business of the
Company or any Subsidiary of the Company, including, but not limited to, on-site
or off-site disposal or release of any substance, product or waste, which may
give rise to: (1) liabilities or obligations for any clean-up, remediation or
corrective action under any Environmental Law, or (2) claims for personal
injury, property damage or damage to natural resources, except in each case that
which would not have a Material Adverse Effect.
Section 2.15. Title to Properties; Encumbrances. The Company and its
Subsidiaries have good and valid title to all of the properties, assets, real
and personal, reflected as owned in the books and records of the Company and the
Company Financial Statements and all properties and assets purchased or
otherwise acquired by the Company or any Subsidiary since the Balance Sheet
Date, except for those properties and assets disposed of in the ordinary course
of business since the Balance Sheet Date. None of the properties or assets owned
by the Company or its Subsidiaries is subject to any lien, mortgage, pledge,
security interest or other encumbrance arising by, through or under the Company
or its Subsidiaries, except (i) liens, mortgages, pledges, security interests or
other encumbrances shown on the Company Financial Statements as securing
specified liabilities or obligations, with respect to which no default (or
circumstance which with notice or lapse of time or both would constitute a
default) exists, (ii) liens, mortgages, pledges, security interests or other
encumbrances incurred in connection with the purchase of property or assets
after the Balance Sheet Date, with respect to which no default (or circumstance
which with notice or lapse of time or both would constitute a default) exists,
(iii) liens, mortgages, pledges, security interests or other encumbrances
described in Schedule 2.15, (iv) liens for taxes, assessments or governmental
charges or levies which are not delinquent, and (v) liens, mortgages, pledges,
security interests or other encumbrances that do not materially interfere with
the Company's and Subsidiaries' use and enjoyment of the assets encumbered
thereby.
Section 2.16. Permits and Licenses. Except as set forth in Schedule 2.16,
the Company and each Subsidiary have all permits, licenses, certificates and
authorities (collectively, "Permits") from Governmental Authorities required to
conduct their businesses as they are now being conducted, and the consummation
of the transactions contemplated by this Agreement will not constitute a
violation of any such Permit which would result in a Material Adverse Effect.
Such Permits are in full force and effect unimpaired by any act or omission of
the Company or any Subsidiary, or their employees or agents, have not been
suspended or revoked, and the Company and each Subsidiary have complied with,
and will continue to comply with, their terms until Closing, except for any
failure to comply which would not result in a Material Adverse Effect.
Section 2.17. Material Contracts and Commitments. Except as set forth on
Schedule 2.17, the Company is not a party to or bound by any (i) employment,
consulting or severance contract, including any golden parachute arrangement
within the meaning of Section 280G of the Code; (ii) bonus, stock option,
incentive compensation plan, non-qualified stock purchase plan or other fringe
benefit plan or program; (iii) contract to purchase or sell or option granted to
a third party to purchase any real property, or lease of any real property; (iv)
lease with respect to or contract or option to purchase or sell any material
equipment otherwise than in the ordinary course of business; (v) contract or
commitment for capital expenditures requiring payments of $500,000 or more; (vi)
contract or commitment for the purchase of materials or supplies or for the
performance of services for its benefit which requires payments of $500,000 or
more per year and more than
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30 days notice of cancellation or a cancellation payment or penalty of $250,000
or more; (vii) joint venture or partnership agreement; (viii) agreement for
money borrowed or loaned; (ix) security agreement or guarantee with respect to
an obligation in excess of $500,000; (x) sales representation, distribution or
agency agreement which requires more than one (1) years notice of cancellation
or a cancellation payment or penalty of $250,000 or more; (xi) non-competition
agreement (excluding agreements with employees) for the benefit of or obligating
the Company; or (xii) material contract other than the foregoing, not made in
the ordinary course of business consistent with past practice (collectively, the
"Contracts"). To the knowledge of the Company, each such Contract is valid,
binding and enforceable by the Company in accordance with its terms, subject to
the effect of bankruptcy, insolvency, reorganization, moratorium, or other
similar laws relating to or affecting creditors' rights generally and general
equity principles. To the knowledge of the Company, neither the Company nor any
other party to such Contract is in breach or default in any material respect
under any Contract. True and complete copies of the Contracts have been made
available to the Parent for inspection and copying.
Section 2.18. Tax and Pooling Matters. To the Company's knowledge, neither
the Company nor any of its Affiliates has taken, has agreed or failed to take,
or intends to take any action or has any knowledge of any fact or circumstance
that would prevent the Merger from (a) qualifying as a reorganization within the
meaning of Section 368 of the Code (a "368 Reorganization") or (b) being treated
for financial accounting purposes as a "pooling of interests" (a "Pooling
Transaction") in accordance with GAAP and the rules, regulations and
interpretations of the Securities and Exchange Commission ("SEC") if consummated
in accordance with this Agreement. Without limiting the foregoing: (1) to the
Company's knowledge, (A) there is no plan or intention on the part of the
holders of the Company Common Stock to sell, exchange or otherwise dispose of a
number of shares of Parent Common Stock that would cause paragraph 2 of Section
7.02 of Rev. Proc. 77-37 (as amplified) not to be true as applied to the Merger,
and (B) the only Company stockholders beneficially owning more than 5% of the
outstanding Company Common Stock are as set forth in Schedule 2.18; (2) as of
the Effective Time and immediately following the Merger, the surviving company
of the Merger will hold "substantially all" of the Company's properties within
the meaning of Section 368(a)(2)(E) of the Code and Rev. Proc. 77-37 (as
amplified); and (3) there is no intercorporate indebtedness between the Company
and the Parent.
Section 2.19. Insurance. Schedule 2.19 sets forth a list of all insurance
policies issued in favor of the Company or its Subsidiaries which relate to the
business of the Company or its Subsidiaries, and all such policies are currently
in force and effect. True and complete copies of all such policies will be
delivered to Parent upon request. The Company maintains insurance coverage
reasonably adequate for the operation of its business.
Section 2.20. Registration Statement and Proxy Statement. None of the
information to be supplied by the Company for inclusion in (a) the Registration
Statement or (b) the proxy statement to be distributed in connection with the
Company Shareholders' Meeting (the "Company Proxy Statement") will, in the case
of the Company Proxy Statement or any amendments thereof or supplements thereto,
at the time of the mailing of the Company Proxy Statement and any amendments
thereof or supplements thereto, and at the time of the Company Shareholders'
Meeting, or, in the case of the Registration Statement, as amended or
supplemented, at the time it becomes effective and at the time of the Company
Shareholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. No representation is made by the Company with respect
to information supplied by the Parent or Merger Sub for inclusion therein.
Section 2.21. Compliance with Laws. The conduct of the business of the
Company and its Subsidiaries complies with all applicable Legal Requirements
(other than Environmental Laws which are governed solely by Section 2.14),
except for violations or failures to so comply, if any, that would not have,
individually or in the aggregate, a Material Adverse Effect.
Section 2.22. No Brokers. The Company has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Company or Parent to pay any finder's
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fees, brokerage or agent's commission or other payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby, except that the Company has retained Morgan Stanley & Co.
Incorporated as its financial advisor, the arrangements with which have been
disclosed in writing to the Parent prior to the date hereof.
Section 2.23. Parent Stock Ownership. Neither the Company nor any of its
Subsidiaries owns any shares of Parent Common Stock or other securities
convertible into or otherwise exercisable to acquire Parent Common Stock.
Section 2.24. Voting Requirements. The affirmative vote of the holders of
at least two-thirds of the outstanding shares of the Company Common Stock is the
only vote of the holders of any class or series of the capital stock of the
Company necessary to approve this Agreement and the Merger.
Section 2.25. Disclaimer of Additional and Implied Warranties. The Company
is making no representations or warranties, express or implied, of any nature
whatsoever except as specifically set forth in Article II of this Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub make the representations and warranties set forth in
this Article III jointly and severally to the Company. Parent has delivered to
the Company the Schedules to this Agreement referred to in this Article III on
the date hereof and such Schedules have been reviewed and accepted by the
Company. Parent shall, from time to time through the Closing Date, advise the
Company as to any change, amendment or supplement to the Schedules which is
necessary to reflect material changes in the subject matter thereof occurring
through the Closing Date. The Company must notify Parent within five (5)
business days after receipt of any material change, amendment or supplement to
the Schedules of its election to terminate this Agreement in accordance with
Section 8.1. If the Company fails to notify Parent as required, it shall be
deemed to have waived its right to terminate this Agreement based on such
change, amendment or supplement to the Schedules.
Section 3.1. Organization and Qualification. (a) Parent is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware. Parent has all requisite corporate power and authority to
carry on its business as it is now being conducted, and to own, lease and
operate its properties and assets, and to perform all its obligations under the
agreements and instruments to which it is a party or by which it is bound.
Parent is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which the
properties and assets owned, leased or operated by it or the nature of the
business conducted by it make such qualification necessary, except in such
jurisdictions where the failure to be duly qualified or in good standing does
not and would not result in a Material Adverse Effect. Each such jurisdiction in
which Parent is so qualified is listed on Schedule 3.1(a).
(b) Merger Sub is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Texas. Merger Sub has all requisite
corporate power and authority to carry on its business as it is now being
conducted, and to own, lease and operate its properties and assets, and to
perform all its obligations under the agreements and instruments to which it is
a party or by which it is bound.
Section 3.2. Capitalization of Parent. (a)The authorized and outstanding
capital stock of Parent is set forth on Schedule 3.2. Except as set forth on
Schedule 3.2, there are no outstanding subscriptions, options, phantom stock,
convertible securities, rights, warrants, calls, irrevocable proxies or other
agreements or commitments of any kind directly or indirectly obligating Parent
to issue any security of or equity interest in Parent, or irrevocable proxies or
any agreements restricting the transfer of or otherwise relating to any security
or equity interest in Parent. All of the outstanding shares of capital stock of
Parent have been duly authorized, validly issued and are fully paid and
non-assessable, and are free of preemptive rights. Except as set forth on
Schedule 3.2, all dividends declared prior to the date hereof have been paid.
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(b) The shares of Parent Common Stock to be issued as part of the Merger
Consideration have been duly authorized and, when issued and delivered in
accordance with the terms of the Agreement, will have been validly issued and
will be fully paid and nonassessable, and the issuance thereof is not subject to
any preemptive or other similar right.
Section 3.3. Authority Relative to the Agreement. Parent and Merger Sub
each have full power and authority to execute and deliver this Agreement, to
perform their respective obligations hereunder and to consummate the
transactions contemplated hereby. No corporate actions or proceedings on the
part of Merger Sub or Parent are necessary to authorize the execution and
delivery of this Agreement, the performance of the obligations hereunder or the
consummation of the transactions contemplated hereby, except for the approval of
the Parent's Board of Directors and the Board of Directors and the shareholders
of Merger Sub; with respect to the approval of the Board of Directors and the
shareholders of Merger Sub, such approval will be obtained on or before the
approval of the Parent's Board of Directors. This Agreement has been duly and
validly executed and delivered by Parent and Merger Sub, and this Agreement
constitutes the valid and binding obligation of Parent and Merger Sub,
enforceable against each in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and general equitable principles.
Section 3.4. Consents and Approvals; No Violation. Except for filings as
may be required by the HSR Act or as otherwise set forth in the Parent SEC
Reports (as hereinafter defined) or Schedule 3.4, no filing or registration
with, no notice to, or consent or approval of any third party, including, but
not limited to, any Governmental Authority, creditor or other Person in a
contractual relationship with the Parent or Merger Sub, is necessary in
connection with the execution and delivery of this Agreement by the Parent or
the Merger Sub, the performance of their obligations hereunder, or the
consummation of the transactions contemplated hereby. Except as set forth in the
Parent SEC Reports, the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, or the compliance by the
Parent and Merger Sub with any of the provisions hereof will not, as of the
Closing Date, (i) conflict with or violate any provision of any Organizational
Document of Parent or Merger Sub; (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, any
of the terms, conditions or provisions of any note, contract, agreement,
commitment, bond, mortgage, indenture, license, lease, pledge agreement or other
instrument or obligation to which Parent or any Subsidiary is a party or by
which the Parent or any Subsidiary or any of their respective properties or
assets may be bound, except as would not have a Material Adverse Effect; (iii)
violate or conflict with any provision of any Governmental Authorization or
Legal Requirement binding upon Parent or any Subsidiary, except as would not
have a Material Adverse Effect; or (iv) result in, or require, the creation or
imposition of, any Encumbrance upon or with respect to any of the properties now
owned or used by Parent or any Subsidiary, except as would not have a Material
Adverse Effect.
Section 3.5. SEC Filings. (a) Parent has filed all forms, reports and
documents required to be filed with the SEC since December 31, 1995, and has
heretofore delivered to the Company, in the form filed with the SEC, (i) its
Annual Reports on Form 10-K for the fiscal years ended December 31, 1994, 1995
and 1996, (ii) its Quarterly Reports on Form 10-Q filed after December 31, 1996,
(iii) all proxy statements (other than preliminary materials) relating to
Parent's meetings of shareholders (whether annual or special) held since
December 31, 1995, (iv) all other reports or registration statements (other than
Reports on Form 10-Q not referred to in clause (ii) above) filed by Parent with
the SEC since December 31, 1995, and (v) all amendments and supplements to all
such reports and registration statements filed by Parent with the SEC
(collectively, the "Parent SEC Reports"). The Parent SEC Reports (i) were
prepared in all material respects in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not at the
time they were filed (or amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of Parent's
Subsidiaries is required to file any forms, reports or other documents with the
SEC.
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(b) The consolidated financial statements (including, in each case, any
related notes thereto) contained in the Parent SEC Reports (the "Parent
Financial Statements") present fairly, in all material respects, the financial
condition, results of operations and cash flows of Parent and its Subsidiaries
as at the respective dates thereof and for the periods therein referred to, all
in accordance with GAAP, subject in the case of interim financial statements to
normal recurring year-end adjustments and the absence of notes. Since December
31, 1996, there have been no material changes in accounting principles
applicable to, or methods of accounting utilized by, Parent except as
specifically described in the Parent SEC Reports.
Section 3.6. No Undisclosed Liabilities. Except as set forth in the Parent
SEC Reports or as reflected, reserved against or otherwise disclosed in the
Parent Financial Statements, there are no debts, liabilities or obligations
(whether accrued, absolute, contingent or otherwise) pertaining to acts or
omissions arising on or prior to the Balance Sheet Date which were not recorded
in the accounting records of the Parent and reflected in the Parent Financial
Statements that would have, individually or in the aggregate, a Material Adverse
Effect.
Section 3.7. No Material Adverse Changes. Since December 31, 1996, the
Parent has not (i) issued or sold any of its capital stock or corporate debt
obligations (other than checks, drafts, bills and notes issued in the ordinary
course of its business consistent with past practice); (ii) sold or granted any
option, warrant or other right to purchase any of its capital stock; (iii)
declared or set aside or paid any dividend or made any other distribution in
respect of its capital stock, or, directly or indirectly, purchased, redeemed or
otherwise acquired any shares of such stock; (iv) made any payments or
distributions pursuant to any tax sharing agreements or arrangements; (v)
acquired, transferred or disposed of, or agreed to acquire, transfer or dispose
of, any assets except in the ordinary course of business consistent with past
practice; (vi) subjected any assets to any liens, other than liens for taxes not
yet due and payable; (vii) suffered any damage, destruction or casualty loss in
excess of $1,000,000, whether or not covered by insurance; (viii) guaranteed or
assumed responsibility for any indebtedness or the performance of any other
obligations other than those of the Parent or its Subsidiaries; (ix) increased
or established any bonus, insurance, severance, deferred compensation, pension,
retirement, profit-sharing, stock option, stock purchase or other employee
benefit plan, except in the ordinary course of business consistent with past
practice; or (x) operated the business of the Parent or its Subsidiaries other
than in, or entered into any material transactions or arrangements (including
those effected for tax purposes) outside the ordinary course of business
consistent with past practice.
Section 3.8. Litigation. Except as set forth in the Parent SEC Reports,
there are no Proceedings pending or, to the knowledge of the Parent, threatened
against the Parent or any Subsidiary or involving any of the properties or
assets of the Parent or any Subsidiary that would have, individually or in the
aggregate, a Material Adverse Effect.
Section 3.9. Tax Matters. Except as set forth in the Parent SEC Reports,
all income (including foreign) and franchise tax returns, statements, reports
and forms that are required to be filed on or before the date hereof by or with
respect to Parent or any Subsidiary (i) have been or will be duly and timely
filed with the appropriate Governmental Authorities, (ii) such tax returns are
true, complete and correct in all material respects, and (iii) all income and
franchise taxes, including interest and penalties, due and payable pursuant to
such tax returns have been paid or, except as set forth in the Parent SEC
Reports, adequately provided for in reserves established by Parent, except where
the failure to file, pay or provide for such taxes would not result in a
Material Adverse Effect. There is no material claim against Parent or any
Subsidiary with respect to any income or franchise taxes, and no material
assessment, deficiency or adjustment has been asserted or proposed with respect
to any income or franchise tax return of or with respect to Parent or any
Subsidiary that has not been adequately provided for in reserves established by
Parent and no requests for waivers of the time to assess any such taxes are
pending.
Section 3.10. Employee Benefit Plans. (a) Each Parent Employee Plan (as
hereinafter defined) has been funded and maintained in compliance with its terms
and with the requirements prescribed by any and all statutes, orders, rules, and
regulations (including, but not limited to ERISA and the Code) which are
applicable to such Parent Employee Plan, except where failure to so comply would
not have, individually or in the aggregate, a Material Adverse Effect. For
purposes of this Agreement, "Parent Employee Plan" shall
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mean each material "employee benefit plan" as defined in Section 3(3) of ERISA,
each employment, severance, or similar contract, plan, arrangement, or policy
and each plan or arrangement (written or oral), providing for compensation,
bonuses, profit-sharing, stock option, or other stock related rights or other
forms of incentive or deferred compensation, vacation benefits, insurance
coverage (including any self-insured arrangements), health or medical benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical, or life insurance benefits)
which is maintained, administered, or contributed to by Parent or any Affiliate
of Parent and covers any employee or former employee of Parent or any Affiliate
of Parent or under which Parent or any Affiliate of Parent has any liability.
(b) Each Parent Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code.
Section 3.11. Employment Matters. Except as set forth in the Parent SEC
Reports, there are no agreements with labor unions or associations representing
employees of Parent or any Subsidiary. No material work stoppage against Parent
or any Subsidiary is pending or, to the knowledge of the Parent, threatened.
Neither Parent nor any Subsidiary is involved in or, to the knowledge of Parent,
is threatened with any labor dispute or similar Proceeding relating to labor
matters involving the employees of Parent or any Subsidiary (excluding routine
workers' compensation claims) that would have, individually or in the aggregate,
a Material Adverse Effect. To Parent's knowledge, there are no organizational
efforts with respect to the formation of a collective bargaining unit presently
being undertaken or threatened involving employees of the Company or any
Subsidiary.
Section 3.12. Environmental Matters. Except as set forth in the Parent SEC
Reports, (i) other than violations that would not have a Material Adverse
Effect, each Parent Business Facility has been operated in compliance with all
applicable Environmental Laws; (ii) there are no existing, pending or, to the
Parent's knowledge, threatened Proceedings or clean-up obligations asserted by
any Governmental Authority or other third party relating to any Environmental
Laws with respect to any Parent Business Facility, except that would not have a
Material Adverse Effect; (iii) all notices, permits, or similar authorizations,
if any, required to be obtained or filed under applicable Environmental Laws in
connection with the operation of the Parent Business Facilities have been
obtained or filed, other than any such notices, permits, or similar
authorizations the failure of which to obtain or file would not have a Material
Adverse Effect; and (iv) there are not any past or present conditions or
circumstances at, or arising out of, any current or former business of the
Parent or any Subsidiary, including, but not limited to, on-site or off-site
disposal or release of any substance, product or waste, which may give rise to:
(1) liabilities or obligations for any clean-up, remediation or corrective
action under any Environmental Law, or (2) claims for personal injury, property
damage or damage to natural resources, except in each case that which would not
have a Material Adverse Effect.
Section 3.13. Permits and Licenses. Except as set forth in the Parent SEC
Reports, Parent and each Subsidiary have all Permits from Governmental
Authorities required to conduct their businesses as they are now being
conducted, and the consummation of the transactions contemplated by this
Agreement will not constitute a violation of any such Permit which would result
in a Material Adverse Effect. Such Permits are in full force and effect
unimpaired by any act or omission of the Company or any Subsidiary, or their
employees or agents, have not been suspended or revoked, and Parent and each
Subsidiary have complied with, and will continue to comply with, their terms
until Closing, except for any failure to comply which would not result in a
Material Adverse Effect.
Section 3.14. Tax and Pooling Matters. To the Parent's knowledge, neither
Parent nor any of its Affiliates has taken, has agreed or failed to take or
intends to take any action nor has any knowledge of any fact or circumstance to
prevent the Merger from (a) qualifying as a 368 Reorganization, or (b) being
treated for financial accounting purposes as a Pooling Transaction in accordance
with GAAP and the rules, regulations and interpretations of the SEC if
consummated in accordance with this Agreement. Without limiting the foregoing:
(1) to the Parent's knowledge, (A) there is no plan or intention on the part of
the holders of the
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Parent Common Stock to sell, exchange or otherwise dispose of a number of shares
of Parent Common Stock that would cause paragraph 2 of Section 7.02 of Rev.
Proc. 77-37 (as amplified) not to be true as applied to the Merger, and (B) the
only Parent stockholders beneficially owning more than 5% of the outstanding
Parent Common Stock are as set forth in Schedule 3.14; (2) as of the Effective
Time and immediately following the Merger, the surviving company of the Merger
will hold "substantially all" of the Company's properties within the meaning of
Section 368(a)(2)(E) of the Code and Rev. Proc. 77-37 (as amplified); and (3)
there is no intercorporate indebtedness between the Company and the Parent.
Section 3.15. Registration Statement and Proxy Statement. None of the
information to be supplied by Parent for inclusion in (a) the Registration
Statement or (b) the Company Proxy Statement will, in the case of the Company
Proxy Statement or any amendments thereof or supplements thereto, at the time of
the mailing of the Company Proxy Statement and any amendments thereof or
supplements thereto, and at the time of the Company Shareholders' Meeting, or,
in the case of the Registration Statement, as amended or supplemented, at the
time it becomes effective and at the time of the Company Shareholders' Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. No representation is made by Parent with respect to information
supplied by the Company for inclusion therein.
Section 3.16. Compliance with Laws. The conduct of the business of Parent
and its Subsidiaries complies with all applicable Legal Requirements (other than
Environmental Laws which are governed solely by Section 3.12), except for
violations or failures to so comply, if any, that would not have, individually
or in the aggregate, a Material Adverse Effect.
Section 3.17. Severance and Change of Control Payments. There are no
severance or change of control or similar payments or obligations that will be
owed by the Parent or any Subsidiary as a result of the Company entering into
this Agreement, the Merger or other transactions contemplated by this Agreement.
Section 3.18. No Brokers. The Parent has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Parent or the Company to pay any finder's fees, brokerage or
agent's commission or other payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
Section 3.19. Disclaimer of Additional and Implied Warranties. Parent and
Merger Sub are making no representations or warranties, express or implied, of
any nature whatsoever except as specifically set forth in Article III of this
Agreement.
ARTICLE IV.
COVENANTS OF THE COMPANY
Section 4.1. Acquisition Proposals. (a) The Company agrees that (A) prior
to the Effective Time or the termination of this Agreement, whichever first
occurs, neither it nor any of its Subsidiaries shall, and each of them shall not
permit any of its officers, directors, employees, agents or representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) to, directly or indirectly, solicit
or encourage any inquiry, proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of 10% or more
of the assets on a consolidated basis or 10% or more of any of the capital stock
of, the Company (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal"), (B) enter into any agreement with respect to any
Acquisition Proposal, (C) participate in any discussions or negotiations
regarding, or furnish to any person any information with respect to, the making
of any proposal that constitutes, or may reasonably be expected to lead to, or
to endorse, any Acquisition Proposal, (D) engage in any negotiations concerning
an Acquisition Proposal, or (E) directly or indirectly, enter into any agreement
to, or make any public announcement by or on behalf of the Company of a plan or
intention to do any of the foregoing.
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(b) The Company will immediately cease and cause to be terminated any
existing negotiations with any parties conducted heretofore with respect to any
of the activities described in Section 4.1(a).
(c) Notwithstanding the provisions set forth above in this Section 4.1, the
Company may, in response to an unsolicited written Acquisition Proposal, furnish
(subject to the execution of a confidentiality agreement substantially similar
to the confidentiality provisions of the Confidentiality Agreement executed by
Parent in connection herewith) confidential or non-public information concerning
its business, properties or assets to a financially capable corporation,
partnership, person or other entity or group (a "Potential Acquiror") and
negotiate with such Potential Acquiror if (i) the Board of Directors of the
Company in good faith concludes that such Acquisition Proposal (if consummated
pursuant to its terms) would result in a transaction more favorable to the
Company's stockholders than the Merger and (ii) based upon advice of its outside
legal counsel, its Board of Directors determines in good faith that the failure
to provide such confidential or non-public information to such Potential
Acquiror would constitute a breach of its fiduciary duty to its stockholders
(any such Acquisition Proposal meeting the conditions and clauses (i) and (ii)
being referred to as a "Superior Proposal"). The Company shall immediately
notify Parent after receipt of any Acquisition Proposal or any request for
non-public information relating to the Company or its Subsidiaries in connection
with an Acquisition Proposal. Such notice to Parent shall be made orally and in
writing and shall indicate in reasonable detail the identity of the offeror and
the terms and conditions of such proposal, inquiry or contact.
Section 4.2. Conduct of the Business. From the date hereof until the
Effective Time, except as provided for in, or contemplated by, this Agreement,
or, except as consented to or approved by Parent in writing, the Company
covenants and agrees that it will and will cause its Subsidiaries to:
(a) operate their businesses (including the making of capital expenditures)
in the ordinary and usual course in all material respects in accordance with
past practices;
(b) not make any change or amendment in their respective Organizational
Documents;
(c) not issue, sell, or agree to issue, sell, pledge, dispose of or
encumber (i) any share of its capital stock or (ii) any securities convertible
into, or options with respect to, or warrants to purchase or rights to subscribe
for, any shares of its capital stock;
(d) except in the ordinary course of business and consistent with past
practices or as required by law or contractual obligations or other policies,
benefit proposals, understandings, or arrangements existing on the date hereof,
not (i) increase in any manner the base compensation of, or enter into any new
bonus or incentive agreement or arrangement with, any of its directors,
officers, or other employees; (ii) pay or agree to pay any pension, retirement
allowance, or other employee benefit to any such director, officer, or employee,
whether past or present; (iii) enter into any new employment, severance,
consulting or other compensation agreement with any existing director, officer,
or employee; or (iv) commit itself to any additional pension, profit-sharing,
deferred compensation, group insurance, severance pay, retirement, or other
employee benefit plan, fund, or similar arrangement or (except as required by
law) amend or commit itself to amend any of such plans, funds, or similar
arrangements in existence on the date hereof;
(e) not (i) sell, transfer, or otherwise dispose of any of its assets,
except in the ordinary course of business and consistent with past practices,
(ii) create or permit to exist any new material lien on its assets, (iii) enter
into any material joint venture, partnership, or other similar arrangement or
form any other new material arrangement for the conduct of its business, (iv)
purchase any material assets or securities of any Person, or (v) except in the
ordinary course of business and consistent with past practices, enter into any
other material agreement;
(f) not pay, declare or set aside any dividend on, or make any distribution
or payment with respect to, or purchase or redeem any of its capital stock or
the capital stock of any Subsidiary, or make any commitment for any such action,
except for quarterly cash dividends not in excess of historical amounts; and
(g) not take any action that would make any representation and warranty of
the Company hereunder materially inaccurate in any respect at, or as of the time
prior to, the Effective Time.
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\Section 4.3. Company Stockholder Approval. The Company will take all action
necessary in accordance with applicable law and its articles of incorporation
and bylaws to convene a meeting of its stockholders as promptly as practicable
to consider and vote upon the approval of this Agreement and the transactions
contemplated hereby.
ARTICLE V.
COVENANTS OF PARENT
Section 5.1. Conduct of Business. From the date hereof until the Effective
Time, except as provided for in, or contemplated by, this Agreement, or, except
as consented to or approved by the Company in writing, Parent covenants and
agrees that it will and will cause each of its Subsidiaries to:
(a) operate their businesses (including the making of capital expenditures)
in the ordinary and usual course in all material respects in accordance with
past practices;
(b) not make any change or amendment in their respective Organizational
Documents;
(c) not issue, sell or agree to issue, sell, pledge, dispose of or encumber
(i) any shares of their capital stock or (ii) any securities convertible into,
or options with respect to, or warrants to purchase or rights to subscribe for,
any shares of their capital stock, except that Parent may issue options with an
exercise price per share of Parent Common Stock no less than the fair market
value of a share of Parent Common Stock on the date of grant thereof (and shares
upon exercise of such options) pursuant to its employee stock option plans in
effect on the date hereof;
(d) except in the ordinary course of business and consistent with past
practices, not (i) sell, transfer, or otherwise dispose of any of its assets,
(ii) create or permit to exist any new material lien on its assets, (iii) enter
into any material joint venture, partnership, or other similar arrangement; or
(iv) enter into any other material agreement;
(e) not pay, declare or set aside any dividend on, or make any distribution
with respect to, or purchase or redeem any of their capital stock, except for
quarterly cash dividends by Parent and stock repurchases by parent for stock
based compensation plans, in each case not in excess of historical amounts, and
dividends by wholly-owned subsidiaries; and
(f) not take any action that would make any representation and warranty of
Parent hereunder materially inaccurate in any respect at, or as of any time
prior to, the Effective Time.
Section 5.2. Obligations of Merger Sub. Parent will take all action
necessary to cause Merger Sub to authorize and approve the Merger and to perform
its obligations under this Agreement and to consummate the Merger on the terms
and conditions set forth in this Agreement.
Section 5.3. Registration Statement. Parent shall promptly prepare and file
with the SEC the Registration Statement and shall use its reasonable best
efforts to cause the Registration Statement to be declared effective by the SEC
as promptly as practicable. Parent shall promptly take any action required to be
taken under foreign or state securities or Blue Sky laws in connection with the
issuance of Parent Common Stock in the Merger.
Section 5.4. Stock Exchange Listing. Parent shall use its reasonable best
efforts to cause the shares of Parent Common Stock to be issued in connection
with the Merger to be listed on the NYSE, subject to official notice of
issuance.
Section 5.5. Employee Benefits. Following the Closing, Parent shall make or
cause the Surviving Corporation to make all payments due under any and all
applicable bonus or other agreements between the Company and certain of its
officers and/or employees, including, without limitation, all management
stability agreements, long-term incentive bonus agreements and incentive bonus
agreements. From and after the Effective Time, Parent (a) shall provide the
employees of the Surviving Corporation with compensation and benefits on the
same basis as Parent provides compensation and benefits to similarly situated
employees of Parent and its Affiliates, and shall credit each person who is an
employee of the Company at the Effective
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Time with such employee's service that is recognized as of the Effective Time
under the Company Benefit Plans (including industry service for vacation
purposes) for all purposes under Parent's plans or programs except for the
accrual of benefits under a defined benefit plan, and (b) shall waive any
exclusion or limitation with respect to pre-existing conditions under Parent's
group health plan and shall provide that any out-of-pocket health expenses
incurred by a Company employee or his or her covered dependants prior to the
Effective Time shall be taken into account under Parent's group health plan for
purposes of satisfying applicable deductible coinsurance and maximum covered
health benefit claims for services rendered on and after the Effective Time.
Section 5.6. Registration Rights Agreement. Parent will enter into a
Registration Rights Agreement at the Effective Time in the form attached hereto
as Exhibit B.
Section 5.7. Post-Merger Combined Financial Statements. Parent will issue,
in a manner satisfying the requirements of SEC Accounting Series Release No.
135, an earnings statement containing at least 30 days of post-Merger combined
financial results of Parent and the Company as soon as reasonably practicable
following the Effective Time but in no event shall Parent be required to issue a
release at any time other than its normal quarterly release date.
Section 5.8. Indemnification of Company Directors, Officers and Employees.
(a) Parent and Merger Sub agree that all rights to indemnification existing in
favor of the present or former directors, officers, employees and agents of the
Company (as such) or any of its Subsidiaries, or present or former officers or
directors of the Company or any of its Subsidiaries serving or who served at the
Company's or any of its Subsidiaries' request as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise (together with such person's heirs, executors
or administrators, an "Indemnified Party" and collectively, the "Indemnified
Parties"), as provided in the Company's or any Subsidiary's Organizational
Documents and the indemnification agreements with such present and former
directors, officers and employees as in effect as of the date hereof with
respect to matters occurring at or prior to the Effective Time shall survive the
Merger and shall continue in full force and effect and without modification
(other than modifications which would enlarge the indemnification rights) for a
period of not less than the statutes of limitations applicable to such matters
and the Surviving Corporation shall comply fully with its obligations hereunder
and thereunder. Without limiting the foregoing, the Company shall, and after the
Effective Time, the Surviving Corporation or Parent shall periodically advance
expenses as incurred with respect to the foregoing (including with respect to
any action to enforce rights to indemnification or the advancement of expenses)
to the fullest extent permitted under applicable law; provided, however, that
the person to whom the expenses are advanced provides an undertaking (without
delivering a bond or other security) to repay such advance if it is ultimately
determined that such person is not entitled to indemnification.
(b) Without limiting Section 5.8(a), after the Effective Time Parent shall,
to the fullest extent permitted under applicable law, indemnify and hold
harmless, each Indemnified Party against any costs or expenses (including
attorneys' fees), judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement in connection with any actual or threatened claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of, relating to, or in connection
with any action or omission occurring or alleged to occur prior to the Effective
Time (including, without limitation, acts or omissions in connection with such
persons serving as an officer, director or other fiduciary in any entity if such
service was at the request or for the benefit of the Company) or arising out of
or pertaining to the transactions contemplated by this Agreement. In the event
of any such actual or threatened claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Parent shall pay the reasonable fees and expenses of counsel selected by the
Indemnified Parties, which counsel shall be reasonably satisfactory to the
Parent, in due course after statements therefor are received and shall pay all
other reasonable expenses in advance of the final disposition of such action,
(ii) the Parent will cooperate and use all reasonable efforts to assist in the
vigorous defense of any such matter, and (iii) to the extent any determination
is required to be made with respect to whether an Indemnified Party's conduct
complies with the standards set forth under the TBCA and the Parent's charters
or by-laws such determination shall be made by independent legal counsel
acceptable to the Parent and the Indemnified Party; provided, however, that
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Parent shall not be liable for any settlement effected without its written
consent (which consent shall not be unreasonable withheld, except for a
settlement involving injunctive relief restricting the activities of Parent, in
which case consent may be withheld for any or no reason) and, provided, further,
that if Parent advances or pays any amount to any person under this paragraph
(b) and if it shall thereafter be finally determined by a court of competent
jurisdiction that such person was not entitled to be indemnified hereunder for
all or any portion of such amount, to the extent required by law, such person
shall repay such amount or such portion thereof, as the case may be, to Parent.
The Indemnified Parties as a group may not retain more than one law firm to
represent them with respect to each matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(c) In the event the Parent or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provisions shall be made so that the
successors and assigns of the Parent shall assume the obligations set forth in
this Section 5.8.
(d) This Section 5.8, which shall survive the consummation of the Merger at
the Effective Time and shall continue for the periods specified herein, is
intended to benefit the Company, the Surviving Corporation and Parent, and any
person or entity referenced in this Section 5.8 or indemnified hereunder, each
of whom may enforce the provisions of this Section 5.8 (whether or not parties
to this Agreement).
ARTICLE VI.
ADDITIONAL AGREEMENTS
Section 6.1. Reasonable Best Efforts. Subject to the terms and conditions
of this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement.
Section 6.2. Certain Filings. (a) The Company and Parent shall cooperate
with one another (i) in connection with the preparation of the Registration
Statement and the Company Proxy Statement, (ii) in determining whether any
action by or in respect of, or filing with, any Governmental Authority is
required, or any actions, consents, approvals, or waivers are required to be
obtained from parties to any material agreements, in connection with the
consummation of the transactions contemplated by this Agreement, and (iii) in
taking such actions or making such filings, finishing information required in
connection therewith or with the Registration Statement and seeking timely to
obtain such actions, consents, approvals, or waivers. Parent and the Company
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by any of
them in connection with the preparation and filing of the Registration Statement
and the Company Proxy Statement.
(b) If not previously filed by Parent and the Company, within ten business
days after the date hereof Parent and the Company will make such filings as may
be required by the HSR Act with respect to the consummation of the transactions
contemplated by this Agreement and will use all reasonable efforts to obtain
early termination of any waiting period under the HSR Act. Parent and the
Company will file or cause to be filed as promptly as practicable with the
United States Federal Trade Commission ("FTC") and the United States Department
of Justice ("Justice Department") any supplemental information which may be
requested pursuant to the HSR Act. All filings referred to in this Section
6.2(b) will comply in all material respects with the requirements of the
respective laws pursuant to which they are made.
(c) Without limiting the generality or effect of Section 6.2(b) and
notwithstanding any provision herein to the contrary, each of the parties will
(i) use reasonable efforts to comply as expeditiously as possible with all
lawful requests of Governmental Authorities for additional information and
documents pursuant to the HSR Act, (ii) not (A) extend any waiting period under
the HSR Act or (B) enter into any voluntary agreement with any Governmental
Authorities not to consummate the transactions contemplated by this Agreement,
except with the prior consent of the other, and (iii) cooperate with each other
and use reasonable efforts to
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obtain the requisite approval of the FTC and Justice Department, including,
without limitation, (A) the execution, delivery, and performance by the
appropriate entity of such divestiture agreements or other actions, as the case
may be, as may be necessary to secure the expiration or termination of the
applicable waiting periods under the HSR Act, (B) the removal, dissolution,
stay, or dismissal of any temporary restraining order, preliminary injunction or
other judicial or administrative order which prevents the consummation of the
transactions contemplated by this Agreement or requires as a condition thereto
that all or any part of the Company's business be held separate, or (C) the
pursuit of necessary litigation or administrative proceedings (including, if
necessary, participation in proceedings through the trial court level).
Section 6.3. Public Announcements. Without the prior consent of the other,
which consent shall not be unreasonably withheld, neither Parent nor the Company
will issue, or permit any agent or Affiliate to issue, any press releases or
otherwise make or permit any agent or Affiliate to make, public statements with
respect to this Agreement or the transactions contemplated by this Agreement.
Section 6.4. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger Sub, any
deeds, bills of sale, assignments, or assurances and to take and do, in the name
and on behalf of the Company or Merger Sub, any other actions and things to
vest, perfect, or confirm of record or otherwise in the Surviving Corporation
any and all right, title, and interest in, to, and under any of the rights,
properties, or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger.
Section 6.5. Notices of Certain Events. Each of the Company and Parent
shall promptly notify the other party hereto of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any Governmental Authority in
connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced or,
to its knowledge, threatened against, relating to, or involving or otherwise
affecting such party that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to this Agreement or that relate
to the consummation of the transactions contemplated by this Agreement; and
(d) (i) a material adverse change in such party's condition (financial or
otherwise), (ii) the discovery by such party that any representation or warranty
contained in this Agreement is untrue or inaccurate in any material respect,
(iii) the occurrence or failure to occur of any event which occurrence or
failure to occur would be likely to cause any of the representations or
warranties in this Agreement to be untrue or incorrect in any material respect
at the Effective Time, except for representations and warranties that speak as
of a specified date, which need only be true and correct as of the specified
date, and (iv) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.5(d) shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 6.6. Tax-Free Reorganization and Pooling. Prior to the Effective
Time, each party shall use its best efforts to cause the Merger to qualify as a
368 Reorganization and to be treated as a Pooling Transaction, and in each case
will not take or fail to take any action reasonably likely to cause the Merger
not to so qualify or to be so treated.
Section 6.7. Affiliates. (a) The Persons named on Exhibit C are, to the
Company's knowledge, the only Persons who may be deemed affiliates of the
Company under Rule 145 of the 1933 Act. Each Person named on Exhibit C has
executed a written agreement substantially in the form of Exhibit D.
(b) At least 30 days prior to the Effective Time, Parent shall deliver to
the Company a list of names and addresses of those Persons who were, in Parent's
reasonable judgment, at the record date for the Parent Stockholders' Meeting,
affiliates (each such person, a "Parent Affiliate") of Parent within the meaning
of
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Rule 145 of the 1933 Act. Parent shall use all reasonable efforts to deliver or
cause to be delivered to the Company, prior to the Effective Time, from each of
the Parent Affiliates identified in the foregoing list, a written agreement
substantially in the form of Exhibit E.
Section 6.8. Access to Information: Confidentiality. (a) From the date
hereof until the Effective Time, the Company and Parent will give to the other
party, its counsel, financial advisors, auditors, and other authorized
representatives reasonable access to the offices, properties, books, and records
of such party, furnish to the other party and its representatives such financial
and other data and information as such party and its representatives may
reasonably request and instruct its own employees and representatives to
cooperate with the other party in its investigations; provided, however, that
any such access may be denied which, in the reasonable judgment of the party
asserting such denial, could operate to cause the waiver of any attorney-
client, work product, or other privilege or result in the violation of an
obligation or agreement of confidentiality. Any investigation pursuant to this
Section 6.8 shall be conducted in such manner as not to interfere unreasonably
with the conduct of the business of the Company and Parent, as the case may be.
No investigation pursuant to this Section 6.8 shall affect any representation or
warranty made by any party hereunder.
(b) All information obtained by Parent or the Company pursuant to this
Section 6.8 shall be kept confidential in accordance with, and shall otherwise
be subject to the terms of the Confidentiality Agreement dated November 6, 1997,
between Parent and the Company (the "Confidentiality Agreement").
Section 6.9. Parents Board of Directors. The Board of Directors of the
Parent shall elect one (1) person designated by the Company as a director of
Parent as of the Effective Time. The Company's designee is set forth on Exhibit
F. If, prior to the Effective Time, such designee shall decline or be unable to
serve, the Company shall designate another person to serve in such person's
stead.
Section 6.10. Shareholder Tax Representations. The Company and Parent shall
use reasonable efforts to obtain from such persons representations which counsel
may reasonably require in connection with their opinions pursuant to Sections
7.2(b) and 7.3(b) of this Agreement.
ARTICLE VII.
CONDITIONS TO THE MERGER
Section 7.1. Conditions to the Obligations of Each Party. The obligations
of the Company, Parent and Merger Sub to consummate the Merger are subject to
the satisfaction of the following conditions:
(a) this Agreement shall have been approved and adopted by the respective
Boards of Directors of the Company and the Parent;
(b) this Agreement shall have been approved and adopted by the shareholders
of the Company in accordance with the applicable provisions of the TBCA;
(c) any applicable waiting period under the HSR Act relating to the Merger
shall have expired or been terminated;
(d) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger;
(e) the shares of Parent Common Stock to be issued in the Merger shall have
been approved for listing on the NYSE, subject to official notice of issuance;
(f) Arthur Andersen L.L.P., certified public accountants for Parent, shall
have delivered a letter dated the day of the Effective Time, addressed to
Parent, in form and substance reasonably satisfactory to Parent, to the effect
that the Merger will qualify as a Pooling Transaction if consummated in
accordance with this Agreement; and
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(g) Arthur Andersen L.L.P., certified public accountants for the Company,
shall have delivered a letter dated the day of the Effective Time, addressed to
the Company, in form and substance reasonably satisfactory to the Company, to
the effect that the Company has met the requirements of a Pooling Transaction.
Section 7.2. Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) The (i) representations and warranties of the Company contained in
Article II and in any document delivered in connection herewith shall, as of the
Effective Time, be true and correct in all material respects, except for
representations and warranties that speak as of a specified date, which need
only be true and correct in all material respects as of the specified date, and
(ii) covenants and agreements of the Company contained in this Agreement to be
performed on or before the Effective Time in accordance with this Agreement
shall have been duly performed in all material respects; and Parent shall have
received at the Effective Time a certificate(s), dated the day of the Effective
Time and validly executed by or on behalf of the Company, to the effect that the
conditions set forth in clauses (i) and (ii) above have been so satisfied;
(b) Parent shall have received an opinion of Gardere, Wynne, Sewell & Riggs
in form and substance reasonably satisfactory to Parent, on the basis of certain
facts, representations, and assumptions set forth in such opinion, dated the
Effective Time, to the effect that the Merger will be treated for federal income
tax purposes as a reorganization qualifying under the provisions of Section
368(a) of the Code. In rendering such opinion, such counsel may require and rely
upon (and may incorporate by reference) representations and covenants, including
those contained in certificates of officers and/or directors of Parent, the
Company and Merger Sub and others. Parent shall have received executed copies of
the certificates of officers and directors of the Company, Parent, Merger Sub
and others that may reasonably be required by counsel in connection with the tax
opinions referred to in this Section 7.2(b);
(c) The Registration Statement shall have been declared effective and no
stop order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the SEC; and
(d) Parent shall have received the written confirmation of the Weir Group
(Overseas Holdings) Ltd. ("Weir") that it waives any rights it may have to
purchase the interest of Houston Engineers, Inc. in Weir-Houston Engineers Ltd.
as a result of this Agreement or the transactions contemplated herein; provided
that no such written confirmation shall be required if it can be demonstrated to
the reasonable satisfaction of Parent that no such rights exist in favor of Weir
as a result of this Agreement or the transactions contemplated herein.
(e) All waivers and consents required for the consummation of the Merger
shall have been obtained pursuant to that certain Credit Agreement dated as of
July 31, 1997 among the Company, Texas Commerce Bank National Association and
certain other parties named therein.
Section 7.3. Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are subject to the satisfaction of the
following further conditions:
(a) The (i) representations and warranties of Parent contained in Article
III and any document delivered in connection herewith shall, as of the Effective
Time, be true and correct in all material respects, except for representations
and warranties that speak as of a specified date, which need only be true and
correct in all material respects as of the specified date, and (ii) covenants
and agreements of Parent and Merger Sub contained in this Agreement to be
performed on or before the Effective Time in accordance with this Agreement
shall have been duly performed in all material respects; and Parent shall have
received at the Effective Time a certificate(s), dated the day of the Effective
Time and validly executed by or on behalf of Parent, to the effect that the
conditions set forth in clauses (i) and (ii) above have been so satisfied;
(b) The Company shall have received an opinion of Liddell, Sapp, Zivley,
Hill & LaBoon, L.L.P., in form and substance reasonably satisfactory to the
Company, on the basis of certain facts, representations, and assumptions set
forth in such opinion, dated the Effective Time, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization qualifying
under the provisions of Section 368(a) of the
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Code. In rendering such opinion, such counsel may require and rely upon (any may
incorporate by reference) representations and covenants, including those
contained in certificates of officers and/or directors of Parent, the Company
and Merger Sub and others. The Company shall have received executed copies of
the certificates of officers and directors of the Company, Parent, Merger Sub
and others that may reasonably be required by counsel in connection with the tax
opinions referred to in this Section 7.3(b); and
(c) The Registration Statement shall have been declared effective and no
stop order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the SEC.
ARTICLE VIII.
TERMINATION; AMENDMENT; WAIVER
Section 8.1. Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date:
(a) by mutual written consent executed by the Company and Parent;
(b) by Parent if (i) since the date of this Agreement there has been a
Material Adverse Change in the Company, or (ii) there is an inaccuracy or breach
of any representation, warranty or covenant of the Company set forth in this
Agreement which breach has not been cured within thirty (30) days following
receipt by the Company of notice of such breach and which breach results in or
can reasonably be anticipated to result in a Material Adverse Effect; provided,
however, that Parent's right to terminate this Agreement in accordance with this
Section 8.1(b) is subject to the notice requirement set forth in Article II with
respect to the matters set out in Article II.
(c) by the Company if (i) since the date of this Agreement there has been a
Material Adverse Change in Parent, or (ii) there is an inaccuracy or breach of
any representation, warranty or covenant of Parent set forth in this Agreement
which breach has not been cured within thirty (30) days following receipt by
Parent of notice of such breach and which breach results in or can reasonably be
anticipated to result in a Material Adverse Effect; provided, however, that the
Company's right to terminate this Agreement in accordance with this Section
8.1(c) is subject to the notice requirement set forth in Article III with
respect to the matters set out in Article III.
(d) by Parent or the Company if the Closing Date shall not have occurred,
other than through the failure of any such party to fulfill its obligations
hereunder, on or before the expiration of 120 days from the date of this
Agreement or such later date agreed to in writing by Parent and the Company;
provided, however, that such 120 day period shall automatically be extended for
a period of 60 days, if the delay in the Closing Date relates to the
Notification and Report Form filed pursuant to the HSR Act;
(e) by Parent or the Company if any court of competent jurisdiction in the
United States of America or other (federal or state) Governmental Authority
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have been
final and nonappealable;
(f) by Parent or the Company if this Agreement shall not have been approved
or adopted by the shareholders of the Company after the matter shall have been
presented to them for a vote at the Company Shareholders' Meeting (including any
adjournment thereof);
(g) by Parent or the Company if the Company receives a Superior Proposal
and the expiration of two (2) business days following written notice to the
Parent by the Company of its intention to accept and pursue such Superior
Proposal and terminate this Agreement pursuant to this provision; or
(h) by Parent or the Company in accordance with Section 9.14.
Section 8.2. Effect of Termination. (a) In the event of the termination and
abandonment of this Agreement pursuant to Sections 8.1(a) - (h) hereof, this
Agreement shall thereafter become void and have
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no effect, without any liability on the part of any party or its directors,
other than the provisions of Sections 6.8(b), 9.2, 9.8 and 9.9. Nothing
contained in this Section 8.2(a) shall relieve any party from liability for any
breach or violation of this Agreement.
(b) If this Agreement is terminated by Parent or the Company pursuant to
Section 8.1(g), then the Company shall pay Parent a fee of $20,000,000 in cash
by wire transfer, within five (5) days after receipt of the notice of
termination, to an account designated by Parent.
ARTICLE IX.
MISCELLANEOUS
Section 9.1. Non-survival of Representations and Warranties. All
representations and warranties in this Agreement shall not survive the Merger,
and after effectiveness of the Merger neither the Company, Parent, Merger Sub or
their respective officers or directors shall have any further obligation with
respect thereto. All covenants and agreements shall survive the Merger until
performance of such covenants and agreements in accordance with their terms.
Section 9.2. Expenses. All costs and expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by the party
incurring such costs and expenses.
Section 9.3. Entire Agreement; Assignment. This Agreement (a) constitutes
the entire agreement among the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, among the parties or any of them with respect to the subject matter
hereof, and (b) shall not be assigned by operation of law or otherwise.
Section 9.4. Amendment and Modification. This Agreement may be amended,
modified, terminated, rescinded or supplemented only by written agreement of the
parties hereto.
Section 9.5. Waiver; Consents. Any failure of a party to comply with any
obligation, covenant, agreement or condition herein may be waived by the party
affected thereby only by a written instrument signed by the party granting such
waiver. No waiver, or failure to insist upon strict compliance, by any party of
any condition or any breach of any obligation, term, covenant, representation,
warranty or agreement contained in this Agreement, in any one or more instances,
shall be construed to be a waiver of, or estoppel with respect to, any other
condition or any other breach of the same or any other obligation, term,
covenant, representation, warranty or agreement. Whenever this Agreement
requires or permits consent by or on behalf of any party hereto, such consent
shall be given in writing in a manner consistent with the requirements for a
waiver.
Section 9.6. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
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Section 9.7. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by cable, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt requested), to the
respective parties as follows:
if to Parent:
Mr. Neal S. Sutton
Senior Vice President -- Administration
General Counsel and Secretary
Smith International, Inc.
16740 Hardy Street
Houston, Texas 77032
Telecopy No. (281) 233-5996
with a copy to:
Mr. Eric Blumrosen
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay, Suite 800
Houston, Texas 77002
Telecopy No. (713) 308-5555
if to the Company:
Mr. Wallace S. Wilson
Wilson Industries, Inc.
1301 Conti
Houston, Texas 77002
Telecopy No. (713) 237-3741
with a copy to:
Mr. Marcus A. Watts
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
3400 Chase Tower
600 Travis
Houston, Texas 77002
Telecopy No. (713) 223-3717
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 9.8. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
Section 9.9. Jurisdiction and Venue. Any process against Parent or the
Company in, or in connection with, any suit, action or proceeding arising out of
or relating to this Agreement or any of the transactions contemplated by this
Agreement may be served personally or by certified mail at the address set forth
in Section 9.7 with the same effect as though served on it or him personally.
Parent and the Company hereby irrevocably submit in any suit, action or
proceeding arising out of or relating to this Agreement or any of the
transactions contemplated by this Agreement to the exclusive jurisdiction and
venue of the United States District Court for the Southern District of Texas or
any court of the State of Texas located in Harris County and irrevocably waive
any and all objections to jurisdiction and review or venue that they may have
under the laws of Texas or the United States.
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Section 9.10. Descriptive Headings. The descriptive headings are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
Section 9.11. Parties in Interest; No Third Party Beneficiary. Except as
set forth in Section 5.5 and Section 5.8, this Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 9.12. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 9.13. Incorporation by Reference. Any and all schedules, exhibits,
annexes, statements, reports, certificates or other documents or instruments
referred to herein or attached hereto are incorporated herein by reference
hereto as though fully set forth at the point referred to in the Agreement.
Section 9.14. Schedules. The parties hereto acknowledge that as of the date
hereof the Company has not delivered and the Parent has not accepted the
Schedules to this Agreement. The Company agrees to deliver the Schedules hereto
to Parent on or before January 22, 1998. The Parent agrees to review the
Schedules and notify the Company in writing of any objection thereto on or
before January 27, 1998. The Parent shall be entitled to object to any
disclosure in the Schedules which is material and adverse, and which has not
previously been made available in writing for the Parent's review. If no written
objection to the Schedules is delivered by Parent to the Company on or before
January 27, 1998, the Schedules shall be considered delivered by the Company and
accepted by Parent for all purposes under this Agreement. If Parent delivers a
written objection to the Company on or before January 27, 1998, the parties
shall work together in good faith to resolve such objection. If such objection
is not resolved on or before January 29, 1998, then either party may terminate
this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
SMITH INTERNATIONAL, INC.
By: /s/ DOUGLAS ROCK
----------------------------------
Name: Douglas Rock
Title: Chairman and President
SII ACQUISITION CORP.
By: /s/ NEAL SUTTON
----------------------------------
Name: Neal Sutton
Title: Vice President
WILSON INDUSTRIES, INC.
By: /s/ WALLACE S. WILSON
----------------------------------
Wallace S. Wilson
Chairman of the Board, President
and
Chief Executive Officer
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EXHIBIT A
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
meanings specified or referred to below whether or not capitalized when used in
this Agreement.
"Affiliate" means, with respect to a specified Person, (a) any Entity of
which such Person is an executive officer, director, partner, trustee or other
fiduciary or is directly or indirectly the Beneficial Owner of 10% or more of
any class of equity security thereof or other financial interest therein; (b) if
such Person is an individual, any relative or spouse of such individual, or any
relative of such spouse (such relative being related to the individual in
question within the second degree) and any Entity of which any such relative,
spouse, or relative of spouse is an executive officer, director, partner,
trustee or other fiduciary or is directly or indirectly the Beneficial Owner of
10% or more of any class of equity security thereof or other financial interest
therein; (c) if such Person is an Entity, any director, executive officer,
partner, trustee or other fiduciary or any direct or indirect Beneficial Owner
of 10% or more of any class of equity security of, or other financial interest
in, such Entity; (d) any Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with the
Person specified, or (e) with respect to the Company, any Shareholder. For
purposes of this definition, "executive officer" means the president, any vice
president in charge of a principal business unit, division or function such as
sales, administration, research and development, or finance, and any other
officer, employee or other Person who performs a policy making function or has
the same duties as those of a president or vice president. For purposes of this
definition, "control" (including "controlling", "controlled by" and "under
common control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 of the
General Rules and Regulations promulgated under the Securities Exchange Act of
1934 as in effect as of the date of this Agreement.
"Company Business Facility" means any land, building, structure,
installation, equipment, pipe or pipeline (including any pipe into a sewer or
publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch,
landfill, storage container, motor vehicle, rolling stock, vessel or aircraft
owned, leased, operated or controlled by the Company and/or any Subsidiary.
"Entity" means any corporation (including any non-profit corporation),
general partnership, limited partnership, joint venture, joint stock
association, estate, trust, cooperative, foundation, union, syndicate, league,
consortium, coalition, committee, society, firm, company or other enterprise,
association, organization or entity of any nature.
"Environmental Laws" means any and all laws, rules, regulations,
ordinances, or orders in effect as of the date hereof of any federal, state or
local executive, legislative, judicial, regulatory or administrative agency,
board or authority that relate to pollution, contamination, preservation,
protection, or clean-up of the air, surface water, ground water, soil or
wetlands, including, but not limited to, those described in Exhibit G.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"GAAP" means generally accepted United States accounting principles,
consistently applied. As applied to the Company, GAAP means those accounting
principles and practices (a) which are recognized as such by the Financial
Accounting Standards Board, (b) which are applied for all periods after the date
hereof in a manner consistent with the manner in which such principles and
practices were applied to the most recent audited financial statements of the
Company furnished to the Parent, or furnished by the Parent to the Company (as
applicable), and (c) which are consistently applied for all periods after the
date hereof so as to reflect properly the financial condition, and results of
operations and cash flows.
"Governmental Authority" means any governmental authority, including, but
not limited to, any foreign governmental authority, the United States of
America, any State of the United States, any local authority and any political
subdivision of any of the foregoing, any multi-national organization or body,
any agency,
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department, commission, board, bureau, court or other authority thereof, or any
quasi-governmental or private body exercising, or purporting to exercise, any
executive, legislative, judicial, administrative, police, regulatory or taxing
authority or power of any nature.
"Governmental Authorization" means any permit (including, but not limited
to, any Environmental Permit), license, franchise, approval, certificate,
consent, ratification, permission, confirmation, endorsement, waiver,
certification, registration, qualification or other authorization issued,
granted, given or otherwise made available by or under the authority of any
Governmental Authority or pursuant to any Legal Requirement.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Knowledge" or "known"; unless otherwise specifically defined in the text
of the Agreement with respect to one or more Sections, the Company shall be
deemed to have "knowledge" of or to have "known" a particular fact or other
matter if any director or executive officer of the Company has current, actual
knowledge of such fact or other matter.
"Legal Requirement" shall mean any law (including, but not limited to,
Environmental Laws), statute, ordinance, decree, requirement, order, treaty,
proclamation, convention, rule or regulation (or interpretation of any of the
foregoing) of, and the terms of any Governmental Authorization issued by, any
Governmental Authority which exists on the date of this Agreement and/or exists
up to and including the Closing Date.
"Material Adverse Effect" shall mean any material adverse change in the
business, condition (financial or otherwise), assets or liabilities of the
Company and its Subsidiaries taken as a whole (or when the reference is to
Parent, to Parent, taken as a whole), after taking into account insurance
recoveries in respect thereof.
"Organizational Documents" means, with respect to a corporation, the
certificate of incorporation, articles of incorporation and bylaws of such
corporation; with respect to a general partnership, the partnership agreement
establishing such partnership; with respect to a joint venture, the joint
venture agreement establishing such joint venture; with respect to a limited
partnership, the limited partnership agreement and the certificate of limited
partnership of such limited partnership; with respect to a trust, the instrument
establishing such trust; and with respect to any other Entity, any charter
document or other document executed, adopted, approved, ratified or filed in
connection with the formation, creation, constitution or organization of such
Entity, in each case including any and all amendments or modifications thereof.
"Parent Business Facility" means any land, building, structure,
installation, equipment, pipe or pipeline (including any pipe into a sewer or
publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch,
landfill, storage container, motor vehicle, rolling stock, vessel or aircraft
owned, leased, operated or controlled by the Parent and/or any Subsidiary.
"Person" means any individual, Entity or Governmental Authority.
"Proceeding" means any action, suit, litigation, arbitration, lawsuit,
claim, proceeding (including any civil, criminal, administrative, investigative
or appellate proceeding and any informal proceeding), review, prosecution,
contest, hearing, inquiry, inquest, audit, examination, investigation,
challenge, controversy or dispute commenced, brought, conducted or heard by or
before, or otherwise involving, any Governmental Authority or any arbitrator.
"Registration Statement" means the Registration Statement on Form S-4 to be
filed under the Securities Act with the SEC by Parent in connection with the
Merger for the purpose of registering the shares of Parent Common Stock to be
issued in the Merger.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, joint venture, joint stock association, business trust or other
Entity of which such Person or another Subsidiary of such Person directly or
indirectly owns more than 20% of the outstanding capital stock or other equity
interest.
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EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of
, 1998, by and among Smith International, Inc., a Delaware
corporation ("Parent"), and the parties set forth on the signature page hereto
(each a "Stockholder"). Capitalized terms not otherwise defined herein shall
have the meaning set forth in the Merger Agreement dated the date hereof (the
"Merger Agreement") by and among Wilson Industries Inc., a Texas corporation
(the "Company"), Parent, and SII Acquisition Corp., a Texas corporation and
wholly-owned subsidiary of Parent ("Merger Sub").
RECITALS
WHEREAS, the Merger Agreement sets forth the general terms as conditions
pursuant to which Merger Sub will be merged with and into the Company, with the
Company continuing as the surviving corporation; and
WHEREAS, pursuant to the Merger Agreement, the Parent has agreed to provide
the Stockholders with certain registration rights as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
DEFINITIONS
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Person" shall mean an individual, partnership, corporation, limited
liability company, trust, unincorporated organization or other entity, or a
government or agency or political subdivision thereto.
"Registrable Securities" shall mean (a) any of the Securities, and (b) any
securities issued or issuable with respect to any of the Securities by way of
stock dividend or stock split, a dividend or other distribution, in connection
with a combination of shares, recapitalization, reclassification, merger,
consolidation or other reorganization or otherwise. Any Registrable Security
will cease to be a Registrable Security when (i) a registration statement
covering such Registrable Security has been declared effective by the SEC and
the Registrable Security has been disposed of pursuant to such effective
registration statement, or (ii) the Registrable Security is sold under
circumstances in which all of the applicable conditions of Rule 144 (or any
similar provisions then in force) under the Securities Act are met.
"Registration Statement" shall mean the Registration Statement of the
Parent that covers any of the Registrable Securities pursuant to the provisions
of this Agreement, including the prospectus included therein, all amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibit and all material incorporated by reference in such Registration
Statement.
"SEC" shall mean the Securities and Exchange Commission or any successor
entity.
"Securities" shall mean any of the common stock, par value $1.00 per share,
of Parent held by the Stockholders as of the date hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Underwritten Offering" shall mean a registration in which securities of
the Parent are sold to an underwriter for re-offering to the public.
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1. Demand Registration Rights.
(a) Subject to the terms and conditions of this Agreement, one or more
Stockholders may request the Parent, by written notice (a "Demand Notice"), to
register or sell under the Securities Act (a "Demand Registration") all or any
portion of any Registrable Securities ("Demand Securities") held by such
Stockholders (the "Requesting Stockholders") on terms and conditions comparable
to those normally applicable to offerings of equity securities in reasonably
similar circumstances, including, without limitation, a continuous or "shelf"
registration statement, it being specifically agreed that (i) the Parent shall
not be required to effect more than three (3) Demand Registrations under this
Section 1, and (ii) any such request for a Demand Registration shall have an
aggregate offering price to the public of not less than $10,000,000. A
registration pursuant to this Section 1 shall not be deemed to have been
effected (and it shall not count as one of the three Demand Registrations)
unless the Registration Statement relating thereto has become effective under
the Securities Act; provided, however, that if, after the Registration Statement
has become effective, the offering pursuant to registration is interfered with
by any stop order, injunction or other order or requirement of the SEC or other
governmental agency or court, such registration will not be deemed to have been
effected (and it shall not count as one of the three Demand Registrations).
Unless the Requesting Stockholders shall consent in writing, no party (other
than the Parent or other Stockholder) shall be permitted to offer securities
under any such Demand Registration.
(b) If the Requesting Stockholders so elect, the offering of Registrable
Securities pursuant to a Demand Registration shall be in the form of an
Underwritten Offering. If the managing underwriter or underwriters of such
offering advise the Parent and the Requesting Stockholders that in their view
the number of Registrable Securities requested to be included in such offering
is sufficiently large so as to materially and adversely affect the success of
such offering, the Parent will include in such registration the aggregate number
of Registrable Securities which in the view of such managing underwriter or
underwriters can be sold without any such material adverse effect; provided,
however, that no Demand Securities may be excluded before all securities
proposed to be sold by the Parent and any other Person have been excluded. If
any Demand Securities are excluded, such registration shall not count as one of
the three Demand Registrations. If any Demand Securities are required to be
excluded pursuant to this Section 1, the number of Demand Securities of each
Requesting Stockholder to be included in such registration shall be reduced pro
rata (according to the total number of Demand Securities beneficially owned by
each such holder), to the extent necessary to reduce the total number of Demand
Securities to be included in the offering to the number recommended by such
managing underwriter or underwriters.
(c) Promptly following receipt of any notice under this Section 1, the
Parent shall use its reasonable best efforts to register under the Securities
Act the Shares specified in the Requesting Stockholders' notice; provided,
however, that the Parent shall not be required to maintain the effectiveness of
any Registration Statement pursuant to this Agreement for a period in excess of
the completion of the distribution as described in Section 3 hereof, exclusive
of any period of time during which the right of the Requesting Stockholders to
make sales thereunder or the effectiveness of such Registration Statement is
suspended by the Parent as provided in this Section 1. Notwithstanding anything
to the contrary contained herein, the Parent shall not be obligated to prepare
and file any Registration Statement pursuant to this Section 1, or prepare or
file any amendment or supplement thereto, and may suspend the Requesting
Stockholders' right to make sales of Registrable Securities pursuant to an
effective Registration Statement, at any time when the Parent, in the good faith
judgment of its Board of Directors, reasonably believes that the filing thereof
at the time requested, or the offering of securities pursuant thereto, would
materially and adversely affect a pending or proposed public offering of the
Parent's securities, or an acquisition, merger, recapitalization, consolidation,
reorganization or similar transaction or negotiations, discussions or pending
proposals with respect thereto. The filing of a Registration Statement, or any
amendment or supplement thereto, by the Parent cannot be deferred, and the
Requesting Stockholders' right to make sales pursuant to an effective
Registration Statement cannot be suspended, pursuant to the provisions of the
preceding sentence, for more than 90 days after the abandonment or consummation
of any of the foregoing offerings, proposals or transactions or, in any event,
for more than 120 days after the date of the Board's determination pursuant to
the preceding sentence of this Section 1(c).
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2. Piggyback Registration Rights.
(a) If the Parent at any time, but prior to the date that is ten (10) years
from the date hereof, proposes to file on its behalf and/or on behalf of any of
its stockholders a Registration Statement under the Securities Act (other than
in connection with a Demand Registration or a registration statement on Form S-4
or S-8 or any successor form) for any class that is the same or similar to the
Registrable Securities, it will give written notice to the Stockholders, at
least ten business days before the initial filing with the SEC of such
Registration Statement, and such notice shall (i) offer to include in such
filing such number of Registrable Securities as the Stockholders may request,
and (ii) describe such securities and specify the form and manner and other
relevant facts involved in such proposed registration (including, in that
limitation, whether or not such registration will be in connection with an
Underwritten Offering and, if so, the identity of the managing underwriter and
whether such Underwritten Offering will be pursuant to a "best efforts" or "firm
commitment" underwriting). If any Stockholder desires to have Registrable
Securities registered under this Section 2, such Stockholder (a "Piggyback
Stockholder," and together with the Requesting Stockholders, the "Selling
Stockholders") shall advise the Parent in writing within 5 business days after
the date of receipt of such offer from the Parent, setting forth the amount of
such Registrable Securities for which registration is requested. The Parent
shall thereupon include in such Registration Statement the number of Registrable
Securities for which registration is so requested, and shall use its best
efforts to effect registration under the Securities Act of such Registrable
Securities.
(b) Notwithstanding the foregoing, if in the reasonable opinion of the
managing underwriter (in the case of an underwritten public offering) the
success of the offering would be jeopardized by inclusion of the Registrable
Securities requested to be included, then the amount of securities to be offered
by the Parent and the Piggyback Stockholders shall be reduced pro rata to the
extent necessary to reduce the total amount of securities to be included in such
offering to the amount recommended by such managing underwriter; provided, that
if securities are being offered for the account of other Persons as well as the
Parent, then with respect to the Registrable Securities, the proportion by which
the number of Registrable Securities is reduced shall not exceed the proportion
by which the amount of such class of securities intended to be offered by such
other Persons is reduced.
3. Registration Procedures. (a) If and whenever the Parent is required by
the provisions of this Agreement hereof to use its reasonable best efforts to
effect the registration of any of the Registrable Securities under the
Securities Act, the Parent will, as expeditiously as possible:
(i) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use its reasonable best efforts
to cause such Registration Statement to become and remain effective for the
period of the distribution as contemplated thereby (determined pursuant to
Section 3(b) below), including, without limitation, the period necessary to
allow distribution in accordance with any request for a continuous or
"shelf" registration as contemplated by Section 1(a) hereof;
(ii) prepare and file with the SEC such amendments and supplements to
such Registration Statement and the prospectus used in connection therewith
as may be necessary to keep such Registration Statement effective for the
period specified in Section 3(b) below and as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities covered by such Registration Statement in
accordance with the Selling Stockholder's intended method of disposition
set forth in such Registration Statement for such period, including,
without limitation, the period necessary to allow distribution in
accordance with any requests for a continuous or "shelf" registration as
contemplated by Section 1(a) hereof;
(iii) furnish to the Selling Stockholder and to each underwriter such
number of copies of the Registration Statement and the prospectus included
therein (including each preliminary prospectus and each document
incorporated by reference therein to the extent then required by the rules
and regulations of the SEC) as such Person may reasonably request in order
to facilitate the public sale or other disposition of the Registrable
Securities covered by such Registration Statement;
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(iv) use its reasonable best efforts to register or qualify the
Registrable Securities covered by such Registration Statement under the
securities or blue sky laws of such jurisdictions as the Selling
Stockholder or, in the case of an Underwritten Offering, the managing
underwriter, shall reasonably request and to take all necessary action to
keep such registration or qualification effective as required by this
Section 3(b) as to a Registration Statement filed with the SEC; provided
that the Parent shall not be required to qualify to transact business as a
foreign corporation in any jurisdiction in which it would not otherwise be
required to be so qualified or to take any action which would subject it to
general service of process in any such jurisdiction to which it is not then
so subject;
(v) immediately notify in writing the Selling Stockholder and each
underwriter, at any time when a prospectus relating thereto is required to
be delivered under the Securities Act, of the happening of any event as a
result of which the prospectus contained in such Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances
then existing (in which case, the Parent shall promptly provide the Selling
Stockholder with revised or supplemental prospectuses and, if so requested
by the Parent in writing, the Selling Stockholder shall promptly take
action to cease making any offers of Registrable Securities until receipt
and distribution of such revised or supplemental prospectuses);
(vi) furnish at the request of the Selling Stockholder (i) on the date
that Registrable Securities are delivered to any underwriters for sale
pursuant to such Registration Statement, an opinion of counsel representing
the Parent dated as of such date for the purposes of such registration,
addressed to the underwriters and to the Selling Stockholder, stating that
such Registration Statement has become effective under the Securities Act
and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for
that purpose have been instituted or are pending or contemplated under the
Securities Act, (B) the Registration Statement, the related prospectus, and
each amendment or supplement thereof, comply as to form in all material
respects with the requirements of the Securities Act and the applicable
rules and regulations thereunder (except that such counsel need express no
opinion as to the financial statements or any other financial or
statistical data or any engineering report contained or incorporated
therein) and (C) to such other effects as may reasonably be requested by
counsel for the underwriters or by either the Selling Stockholder or its
counsel, and (ii) on the effective date of the Registration Statement, the
date the Registrable Securities are delivered to any underwriters for sale
pursuant to such Registration Statement and on the effective date of each
post-effective amendment to the Registration Statement, a "comfort" letter
dated such date from the regular independent accountants retained by the
Parent, addressed to the underwriters and to the Selling Stockholder,
stating that they are independent public accountants within the meaning of
the Securities Act and that the financial statements of the Parent included
or incorporated by reference in the Registration Statement or the
prospectus, or any amendment or supplement thereto, comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act and the published rules and regulations thereunder, and such
letter shall additionally cover such other financial matters (including
information as to the period ending no more than 5 business days prior to
the date of such letter) included in the Registration Statement in respect
of which such letter is being given as the underwriters or the Selling
Stockholder may reasonably request;
(vii) make every reasonable effort to obtain the withdrawal of any
stop order, injunction or other order suspending the effectiveness of the
Registration Statement at the earliest possible moment;
(viii) if reasonably requested by the managing underwriter or
underwriters or by the Selling Stockholders holding in the aggregate in
excess of 50% of the Registrable Securities covered by the Registration
Statement, the Parent will promptly incorporate in a prospectus supplement
or post-effective amendment such information as the managing underwriters
and such Selling Stockholders agree should be included therein relating to
the sale of the Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being sold
to such underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the Underwritten
Offering of the Registrable Securities to be sold in such offering; and
make all required
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filings of such prospectus supplement or post-effective amendment as soon
as notified of the matters to be incorporated in such prospectus supplement
or post-effective amendment;
(ix) make available for inspection during normal business hours to a
representative of the Selling Stockholder, any underwriter reasonably
acceptable to the Parent participating in any distribution pursuant to such
Registration Statement, and any attorney, accountant or other agent
retained by each representative of the Selling Stockholder or underwriter,
all financial and other records, pertinent corporate documents and
properties of the Parent and its subsidiaries, and cause the Parent's
officers, directors and employees to supply all information reasonably
requested by any such representative of the Selling Stockholder,
underwriter, attorney, accountant or agent in connection with such
Registration Statement;
(x) use its reasonable best efforts to keep effective and maintain any
registration, qualification, approval or listing obtained to cover the
Registrable Securities as may be necessary for the Selling Stockholder to
dispose of such Registrable Securities during the period of distribution
and shall from time to time amend or supplement any prospectus used in
connection therewith to the extent necessary in order to comply with
applicable law; provided that, notwithstanding anything to the contrary
contained herein, the Parent shall not be required to file or to keep
effective and maintain any such registration, qualification, approval or
listing for such period that would require it to cause an audit of the
Parent to be performed other than as is required by the rules and
regulations of the SEC with respect to reports required to be filed under
the Exchange Act;
(xi) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
(xii) in the case of any Demand Registration which is an Underwritten
Offering, participate in customary "roadshow" and similar marketing
presentations as reasonably requested by the underwriters; and
(xiii) take such other actions as reasonably may be requested by the
Selling Stockholders in order to effect the applicable registration.
(b) For purposes of Sections 3(a)(i) and 3(a)(ii) above and of Section 1(c)
hereof, the period of distribution of Shares in a firm commitment underwritten
public offering shall be deemed to extend until the earlier of (i) the sale of
all Shares covered thereby, (ii) 90 days after the initial effectiveness of the
Registration Statement pursuant to which such Shares are to be offered,
exclusive of any period of time during which the right of the Selling
Stockholder to make sales thereunder or the effectiveness of such Registration
Statement is suspended by the Parent as permitted by Section 1 hereof, and (iii)
the date the Board of Directors makes a determination as permitted under Section
1(c) hereof; provided, however, that the distribution shall be deemed to
recommence after the expiration of the time periods set forth in the last
sentence of Section 1(c) hereof.
(c) In connection with any registration hereunder, each Stockholder will
furnish promptly to the Parent in writing such information (together with such
supplements as may be necessary from time to time) with respect to itself and
the proposed distribution by it (which proposed distribution for a "shelf"
registration may include a plan to sell Shares from time to time in market
transactions) as shall be reasonably necessary in order to ensure compliance
with federal and applicable state securities laws.
(d) In connection with any registration hereunder covering an Underwritten
Offering (whether or not such Underwritten Offering shall cover all Registrable
Securities held by the Selling Stockholder), the Parent agrees to enter into a
written agreement with the managing underwriter or underwriters, and condition
the participation of any other stockholder in such registration on such
stockholder entering into such a written agreement, in such form and containing
such provisions as are customary in the securities business for such an
arrangement between major underwriters and companies of the Parent's size and
investment stature, including, but not limited to, indemnification and
contribution provisions from the Parent and its controlling persons for the
benefit of the underwriters, provided that such agreement shall not contain any
such provisions applicable to the Parent that are inconsistent with the
provisions hereof; and further provided, that the time
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and place of the closing under said agreement shall be as mutually agreed upon
among the Parent, the Selling Stockholder and such managing underwriter.
4. Allocation of Expenses. Except as provided in the following sentence,
the Parent shall bear all expenses arising or incurred in connection with any of
the transactions contemplated by this Agreement, including, without limitation,
(a) all expenses and fees of transfer agents and registrars, (b) registration
fees, (c) listing fees, (d) printing expenses, (e) accounting fees and expenses,
(f) legal fees and expenses of the Parent and one special counsel selected by
the Selling Stockholders, (g) expenses of any special audits or comfort letters
incident to or required by any such registration or qualification, and (h)
expenses of complying with the securities or blue sky laws of any jurisdictions
in connection with such registration or qualification. Notwithstanding the
foregoing, the Parent shall not have any obligation to pay any underwriting
fees, discounts or selling commissions incurred in connection with the sale of
Registrable Securities pursuant to this Agreement.
5. Indemnification.
(a) In the event of a registration of any of the Registrable Securities
under the Securities Act pursuant to this Agreement, the Parent will indemnify
and hold harmless each Selling Stockholder and each underwriter of Registrable
Securities thereunder and each person who controls such Selling Stockholder or
underwriter within the meaning of the Securities Act and the Exchange Act
against any losses, claims, damages or liabilities (including reasonable
attorneys' fees), joint or several, to which such Selling Stockholder or
underwriter or controlling person may become subject under the Securities Act,
the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement under which such Registrable Securities were
registered under the Securities Act pursuant to this Agreement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or based upon 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, and will reimburse each Selling Stockholder,
each such underwriter and each such controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Parent will not be liable in any such case if and to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished in writing by the Selling
Stockholder, such underwriter or such controlling person specifically for use in
such Registration Statement or prospectus; provided, further, that the Parent
will not be liable hereunder to any underwriter or any person who controls an
underwriter within the meaning of the Securities Act and the Exchange Act for
any loss, claim, damage or liability that arises out of, or is based upon, any
untrue statement or alleged untrue statement or any omission or alleged omission
contained in any preliminary prospectus that was corrected by any subsequent
prospectus, and the underwriter was required to deliver but failed to deliver
such prospectus as required by the Securities Act.
(b) In the event of a registration of any of the Registrable Securities
under the Securities Act pursuant to this Agreement, the Selling Stockholder
will indemnify and hold harmless the Parent and each person who controls the
Parent within the meaning of the Securities Act and the Exchange Act, each
officer of the Parent who signs the Registration Statement, each director of the
Parent, each underwriter and each person who controls any underwriter within the
meaning of the Securities Act and the Exchange Act, against all losses, claims,
damages or liabilities (including reasonable attorneys' fees), joint or several,
to which the Parent or such officer or director or underwriter or controlling
person may become subject under the Securities Act, the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement
under which such Shares were registered under the Securities Act pursuant to
this Agreement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon 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,
and will reimburse the Parent and each such officer, director, underwriter and
controlling person for any legal or other
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<PAGE> 136
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that such Selling Stockholder will be liable hereunder in any such case if and
only to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission relating to the Selling Stockholders made in reliance upon and
in conformity with information pertaining to such Selling Stockholder, as such,
furnished in writing to the Parent by such Selling Stockholder specifically for
use in such Registration Statement or prospectus ("Selling Stockholder
Information"); provided, further, that no Selling Stockholder will be liable
hereunder to any underwriter or any person who controls an underwriter within
the meaning of the Securities Act and the Exchange Act for any loss, claim,
damage or liability that arises out of, or is based upon, any untrue statement
or alleged untrue statement or any omission or alleged omission in any Selling
Stockholder Information contained in any preliminary prospectus that was
corrected by any subsequent prospectus, and the underwriter was required to
deliver but failed to deliver such prospectus as required by the Securities Act;
and provided, further, that the liability of each Selling Stockholder hereunder
shall be limited to the proportion of any such loss, claim, damage, liability or
expense which is equal to the proportion that the public offering price of
Registrable Securities sold by such Selling Stockholder under such Registration
Statement bears to the total public offering price of all securities sold
thereunder, but not to exceed the amount of the proceeds received by such
Selling Stockholder from the sale of the Shares covered by such Registration
Statement.
(c) Any person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification, and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party will not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling person of such
indemnified party and will survive the transfer of securities. The Parent also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
6. Rule 144. The Parent hereby agrees that 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 SEC thereunder (or, if Parent is not
required to file such reports, it will, upon the request of any Stockholder,
make publicly available other information so long as necessary to permit sales
pursuant to Rule 144 under the Securities Act), and it will take such further
action as any Stockholder may reasonably request, all to the extent required
from time to time to enable each Stockholder 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 form time to time, or (b) any similar rule or regulation hereafter
adopted by the SEC.
7. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the successors and assigns of each of the parties. Except for
the indemnification and contribution rights under this Agreement (which are
intended to and shall create third party beneficiary rights), the provisions of
this Agreement are solely for the benefit of the parties and are not intended to
confer upon any Person except the parties any rights or remedies hereunder, and
there are no third party beneficiaries of this Agreement.
8. Governing Law; Jurisdiction and Venue. This Agreement shall be governed
by the laws of the State of Texas without regard to conflict of law principles
thereof.
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<PAGE> 137
9. Entire Agreement. This Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, among the
parties or any of them with respect to the subject matter hereof.
10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
11. Notice; Time Periods. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given on the day when
delivered personally or sent by telecopier (with receipt confirmed), and one day
after the date of mailing sent by reputable overnight delivery service (receipt
requested), in each case to the other parties at the following addresses and
telecopier numbers (or to such other address or telecopier number as shall be
communicated to the other parties by like notice):
If to the Parent, to:
Mr. Neal S. Sutton
Senior Vice President -- Administration
General Counsel and Secretary
Smith International, Inc.
16740 Hardy Street
Houston, Texas 77032
Telecopy No. (281) 233-5996
Copy to:
Mr. Eric Blumrosen
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay, Suite 800
Houston, Texas 77002
Telecopy No. (713) 308-5555
If to the Stockholders, to:
Mr. Wallace S. Wilson
Wilson Industries, Inc.
1301 Conti
Houston, Texas 77002
Telecopy No. (713) 237-3741
Copy to:
Liddell, Sapp, Zivley, Hill & LaBoon, LLP
3400 Texas Commerce Tower
600 Travis
Houston, Texas 77002
United States
Telephone: 713/226-1200
Telecopy No. 713/223-3717
Attn: Marcus A. Watts
12. Amendments and Waivers. The provisions of this Agreement may only be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may only be given, with the written consent of the Parent
and the holders of a majority of the Registrable Securities.
13. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance , is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
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<PAGE> 138
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARENT
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
[STOCKHOLDERS]*
- ---------------
* This Agreement will be signed by affiliates of the Company reasonably selected
by the Company.
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<PAGE> 139
EXHIBIT C
AFFILIATES OF THE COMPANY
Wallace S. Wilson
G.W. Gist, Jr.
D.E. Beach, Jr.
John H. Duncan
George A. Peterkin, Jr.
Robert H. Smith
Manuel A. Sanchez, III
E. Clifton Wilson, Jr.
Preston Moore, Jr.
William N. Mathis
Rupert W. Barefield
Robert E. Brown, Jr.
Humberto G. Kuhn
Gary M. Nelson
Michael R. Chaddick
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<PAGE> 140
EXHIBIT D
COMPANY AFFILIATE LETTER
, 1998
Wilson Industries, Inc.
1301 Conti
Houston, Texas 77002
[Parent]
Gentlemen:
The undersigned has been advised that as of the date of this letter the
undersigned may be deemed to be an "affiliate" of Wilson Industries, Inc., a
Texas corporation (the "Company"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended (the "Act"). Pursuant to the terms
of the Merger Agreement dated as of , 1998, (the "Merger
Agreement"), between the Company, [Parent], a corporation ("Parent"),
and a newly formed wholly owned subsidiary of Parent ("Merger Subsidiary"),
Merger Subsidiary will be merged with and into the Company with the Company to
be the surviving corporation in the merger (the "Merger").
As a result of the Merger, the undersigned will receive shares of Common
Stock, par value $ per share, of Parent (the "Parent Common Stock") in
exchange for shares of Common Stock, par value $ per share, of the
Company (the "Company Common Stock") owned by the undersigned.
The undersigned represents, warrants and covenants to Parent and the
Company that in the event the undersigned receives any Parent Common Stock as a
result of the Merger:
A. The undersigned shall not make any sale, transfer or other disposition of the
Parent Common Stock in violation of the Act or the Rules and Regulations.
B. The undersigned has carefully read this letter and the Agreement and
discussed the requirements of such documents and other applicable limitations
upon the undersigned's ability to sell, transfer or otherwise dispose of the
Parent Common Stock to the extent the undersigned felt necessary with the
undersigned's counsel or counsel for the Company.
C. The undersigned has been advised that the issuance of Parent Common Stock to
the undersigned pursuant to the Merger will be registered with the SEC under the
Act on a Registration Statement on Form S-4. However, the undersigned has also
been advised that, since at the time the Merger is submitted for a vote of the
stockholders of Company, the undersigned may be deemed to be an affiliate of the
Company, the undersigned may not sell, transfer or otherwise dispose of the
Parent Common Stock issued to the undersigned in the Merger unless (i) such
sale, transfer or other disposition has been registered under the Act, (ii) such
sale, transfer or other disposition is made in conformity with Rule 145
promulgated by the SEC under the Act, or (iii) in the opinion of counsel
reasonably acceptable to Parent, or pursuant to a "no action" letter obtained by
the undersigned from the staff of the SEC, such sale transfer or other
disposition is otherwise exempt from registration under the Act.
D. From and after the date that is 30 days prior to the Effective Time (as
defined in the Agreement) the undersigned shall not offer to sell, sell or
otherwise dispose of, or in any other way reduce the undersigned's risk relative
to, any shares of parent Common Stock or Company Common Stock (other than by way
of conversion into shares of Parent Common Stock pursuant to the Merger) in any
case until an earnings statement containing at least 30 days of post-Merger
combined financial results of Parent and the Company have been issued in a
manner satisfying the requirements of SEC Accounting Release No. 135.
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<PAGE> 141
E. The undersigned will not take or fail to take any action reasonably likely to
cause the Merger not to qualify as a 368 Reorganization (as defined in the
Merger Agreement) or to be treated as a Pooling Transaction (as defined in the
Merger Agreement).
F. The undersigned understands and agrees that this letter agreement shall apply
to all shares of the capital stock of Parent and the Company that are deemed to
be beneficially owned by the undersigned pursuant to applicable federal
securities laws.
G. The undersigned further understands and agrees that the representations,
warranties, covenants and agreements of the undersigned set forth herein are for
the benefit of Parent, Company and the Surviving Corporation (as defined in the
Merger Agreement) and will be relied upon by such entities and their respective
counsel and accountants.
Execution of this Letter should not be considered an admission on the part
of the undersigned that the undersigned is an "affiliate" of the Company as
described in the first paragraph of this letter or as a waiver of any rights the
undersigned may have to object to any claim that the undersigned is such an
affiliate on or after the date of this letter.
Very truly yours,
------------------------------------
Signature
------------------------------------
Print Name
Accepted this day of
, 1998
WILSON INDUSTRIES. INC.
By:
--------------------------------
Wallace S. Wilson
Chairman of the Board President
and
Chief Executive Officer
[PARENT]
By:
- ------------------------------------
Name:
- ------------------------------------
Title:
- ------------------------------------
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<PAGE> 142
EXHIBIT E
PARENT AFFILIATE LETTER
, 1998
Wilson Industries, Inc.
1301 Conti
Houston, Texas 77002
[Parent]
Gentlemen:
The undersigned has been advised that as of the date of this letter the
undersigned may be deemed to be an "affiliate" of [Parent], a
corporation ("Parent"), as the term "affiliate" is defined for purposes of
paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Merger Agreement dated as of , 1998, (the "Merger Agreement"),
between Parent, Wilson Industries, Inc., a Texas corporation (the "Company"),
and a newly formed wholly owned subsidiary of Parent ("Merger Subsidiary"),
Merger Subsidiary will be merged with and into the Company with the Company to
be the surviving corporation in the merger (the "Merger").
The undersigned represents, warrants and covenants to Parent and the
Company that:
H. From and after the date that is 30 days prior to the Effective Time (as
defined in the Agreement) the undersigned shall not offer to sell, sell or
otherwise dispose of, or in any other way reduce the undersigned's risk relative
to, any shares of Parent Common Stock in any case until an earnings statement
containing at least 30 days of post-Merger combined financial results of Parent
and the Company have been issued in a manner satisfying the requirements of SEC
Accounting Release No. 135.
I. The undersigned will not take or fail to take any action reasonably likely to
cause the Merger not to qualify as a 368 Reorganization (as defined in the
Merger Agreement) or to be treated as a Pooling Transaction (as defined in the
Merger Agreement).
J. The undersigned further understands and agrees that the representations,
warranties, covenants and agreements of the undersigned set forth herein are for
the benefit of Parent, Company and the Surviving Corporation (as defined in the
Merger Agreement) and will be relied upon by such entities and their respective
counsel and accountants.
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<PAGE> 143
Execution of this letter should not be considered an admission on the part
of the undersigned that the undersigned is an "affiliate" of Parent as described
in the first paragraph of this letter or as a waiver of any rights the
undersigned may have to object to any claim that the undersigned is such an
affiliate on or after the date of this letter.
Very truly yours,
------------------------------------
Signature
------------------------------------
Print Name
Accepted this day of , 1998
WILSON INDUSTRIES, INC.
By:
- ------------------------------------
Wallace S. Wilson
Chairman of the Board, President and
Chief Executive Officer
[PARENT]
By:
- ------------------------------------
Name:
- ------------------------------------
Title:
- ------------------------------------
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<PAGE> 144
EXHIBIT F
COMPANY DESIGNEE TO PARENT BOARD OF DIRECTORS
Wallace S. Wilson
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<PAGE> 145
EXHIBIT G
ENVIRONMENTAL LAWS
FEDERAL -- UNITED STATES OF AMERICA
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. sec.sec. 9601 et seq. as amended by the Superfund Amendments and
Reauthorization Act of 1986.
Toxic Substances Control Act, 15 U.S.C. sec. 2601 et seq.
Clean Water Act, 33 U.S.C. sec. 1251 et seq., as amended by the Oil Pollution
Act of 1990, Pub.L. No. 101-380, 104 Stat. 484 (1990).
Safe Drinking Water Act, 42 U.S.C. sec.sec. 300f -- 300j-26.
Clean Air Act, 42 U.S.C. sec. 7401 et seq., as amended by the Clean Air Act
Amendments of 1990, Pub.L. No. 101-549, 104 Stat. 2399 (1990).
Resource Conservation and Recovery Act of 1976, 42 U.S.C. sec.sec. 6901 et. seq.
The Oil Pollution Act of 1990, Pub.L. No. 101-380, 104 Stat. 484 (1990).
Hazardous Materials Transportation Act, 49 U.S.C. sec. 1801 et seq.
Williams-Steiger Occupational Safety and Health Act.
TEXAS
Texas Asbestos Health Protection Act
Texas Water Code
Texas Health and Safety Code
Texas Natural Resources Code
Statewide Rules for Oil , Gas and Geothermal
Operations (promulgated by the Railroad Commission of Texas)
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<PAGE> 146
APPENDIX B
January 21, 1998
Board of Directors
Wilson Industries, Inc.
1301 Conti
Houston, Texas 77002
Gentlemen:
We understand that Wilson Industries, Inc. (the "Company"), Smith
International, Inc. ("Parent") and SII Acquisition Corp., a wholly owned
subsidiary of Parent ("Merger Sub"), have entered into a Merger Agreement, dated
as of January 19, 1998 (the "Agreement"), which provides, among other things,
for the merger (the "Merger") of Merger Sub with and into the Company. Pursuant
to the Merger, each issued and outstanding share of common stock, par value
$25.00 per share, of the Company ("Company Common Stock"), other than shares
held in treasury or as to which dissenters' rights have been perfected, will be
converted into the right to receive 21.2633 shares (the "Exchange Ratio") of
common stock, par value $1.00 per share, of Parent ("Parent Common Stock"). The
terms and conditions of the Merger are more fully set forth in the Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of Company Common Stock pursuant to the
Agreement is fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Parent;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared by the
management of the Company;
(iii) analyzed certain financial projections prepared by the
management of the Company;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company and Parent with senior executives of the
Company and Parent;
(v) compared the financial performance of the Company and Parent with
that of certain other comparable publicly-traded companies;
(vi) reviewed the pro forma impact of the Merger on Parent's earnings
per share, cash flow, consolidated capitalization and financial ratios;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(viii) compared the financial performance of the Company and Parent
and the prices and trading activity of the Parent Common Stock with that of
certain other comparable publicly-traded companies and their securities;
(ix) participated in discussions and negotiations among
representatives of the Company and Parent and their financial and legal
advisors;
(x) reviewed the Agreement and certain related documents; and
(xi) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have
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<PAGE> 147
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of the Company and Parent. We have not made any independent valuation or
appraisal of the assets or liabilities of the Company or Parent, nor have we
been furnished with any such appraisals. In addition, we have assumed that the
Merger will be consummated on the terms set forth in the Agreement. Our opinion
is necessarily based on economic, market and other conditions as in effect on,
and the information made available to us as of, the date hereof. We have acted
as financial advisor to the Board of Directors of the Company in connection with
this transaction and will receive a fee for our services.
It is understood that this letter is for the information of the Board of
Directors of the Company only and may not be used for any other purpose without
our prior written consent.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of shares of Company
Common Stock pursuant to the Agreement is fair from a financial point of view to
such holders.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
By: /s/ DAVID B.D. LUMPKINS
----------------------------------
David B.D. Lumpkins
Managing Director
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APPENDIX C
ARTICLES 5.11 THROUGH 5.13 OF THE
TEXAS BUSINESS CORPORATION ACT
ART. 5.11 RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and
the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise
provided in the articles of incorporation) of all, or substantially all,
the property and assets, with or without good will, of a corporation if
special authorization of the shareholders is required by this Act and the
shareholders hold shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation
system) or designated as a national market security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc., or successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any
consideration that is different than the consideration (other than cash in
lieu of fractional shares that the shareholder would otherwise be entitled
to receive) to be provided to any other holder of shares of the same class
or series of shares held by such shareholder; and
(3) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any
consideration other than:
(a) shares of a domestic or foreign corporation that, immediately
after the effective time of the merger or exchange, will be part of a
class or series, shares of which are:
(i) listed, or authorized for listing upon official notice of
issuance, on a national securities exchange;
(ii) approved for quotation as a national market security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to be
received; or
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(c) any combination of the securities and cash described in
Subdivisions (a) and (b) of this subsection.
ART. 5.12 PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1)(a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a copy
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
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(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be
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treated as provided in the plan of merger and, in all other cases, may be held
and disposed of by the corporation as in the case of other treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation has the power, under specified circumstances, to
indemnify a director, officer, employee or agent of the corporation and certain
other persons serving at the request of the corporation in related capacities
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
an action or proceeding to which he or she is threatened to be made a party by
reason of such position, if such person shall 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, and, with respect to any criminal action, that they had no
reasonable cause to believe their conduct was unlawful. With respect to suits by
or in the right of the corporation, however, indemnification is generally
limited to attorneys' fees and other expenses and is not available if such
person is adjudged to be liable to the corporation unless the court determines
that indemnification is appropriate. Additionally, a corporation is required to
indemnify its directors and officers against expenses to the extent that such
directors or officers have been successful on the merits or otherwise in any
action, suit or proceeding or in defense of any claim, issue or matter therein.
Indemnification can be made by the corporation only upon a determination that
indemnification is proper in the circumstances because the party seeking
indemnification has met the applicable standard of conduct as set forth in the
General Corporation Law of the State of Delaware. A corporation also has the
power to purchase and maintain insurance on behalf of any person, whether or not
the corporation would have the power to indemnify such person against such
liability.
The Restated Certificate of Incorporation of Smith and the Restated Bylaws
of Smith extend indemnification rights to its directors, officers, employees and
agents to the fullest extent authorized by the General Corporation Law of the
State of Delaware. The Restated Certificate of Incorporation of Smith and the
Restated Bylaws of Smith also permit Smith to maintain insurance on behalf of
any person who is or was a director, officer, employee or agent to Smith against
any liability asserted against such person and incurred by such person is such
capacity, whether or not Smith would have the power or the obligation to
indemnify such person against such liability. Reference is made to the Restated
Certificate of Incorporation and the Restated Bylaws of Smith.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for a breach of fiduciary duty as a director,
provided that such provisions may not eliminate or limit the liability of a
director (i) for any breach of the 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 (relating to liability for unauthorized acquisitions or redemptions
of, or dividends on, capital stock) of the General Corporation Law of the State
of Delaware or (iv) for any transaction from which the director derived an
improper personal benefit. Smith's Restated Certificate of Incorporation
contains such a provision, and further provides that if the General Corporation
Law of the State of Delaware is amended to further eliminate or limit the
personal liability of directors, then the liability of the directors of Smith
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware.
The above discussion of Smith's Restated Certificate of Incorporation and
Restated Bylaws and of Sections 102(b)(7) and 145 of the General Corporation Law
of the State of Delaware is not intended to be exhaustive and is qualified in
its entirety by such Restated Certificate of Incorporation, Restated Bylaws and
statutes.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
2.1 -- Merger Agreement dated January 19, 1998 by and among
Wilson Industries, Inc., Smith International, Inc. and
SII Acquisition Corp. (included as Appendix A to the
Proxy Statement/Prospectus that constitutes part of this
Registration Statement).
3.1 -- Restated Certificate of Incorporation of the Registrant
as amended to date (incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993).
3.2 -- Bylaws of the Registrant as amended to date (incorporated
by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993).
4.1 -- Rights Agreement, dated as of June 19, 1990, between the
Registrant and First Chicago Trust Company of New York
(incorporated by reference to Exhibit 4.13 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991).
5.1* -- Opinion of Gardere Wynne Sewell & Riggs, L.L.P.,
regarding legality of securities.
8.1* -- Opinion of Gardere Wynne Sewell & Riggs, L.L.P.,
regarding certain tax matters.
8.2* -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding certain tax matters.
23.1 -- Consent of Gardere Wynne Sewell & Riggs, L.L.P. (included
in Exhibits 5.1 and 8.1).
23.2 -- Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
(included in Exhibit 8.2)
23.3* -- Consent of Arthur Andersen LLP with respect to the
financial statements of Smith International, Inc.
23.4* -- Consent of Arthur Andersen LLP with respect to the
financial statements of Wilson Industries, Inc.
24.1 -- Powers of Attorney (contained on page II-4).
99.1* -- Form of proxy card of Wilson Industries, Inc.
</TABLE>
- ---------------
* Filed herewith.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) of 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement 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.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(c) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
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<PAGE> 154
(d) 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 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 the 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.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 155
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on March 11, 1998.
SMITH INTERNATIONAL, INC.
By: /s/ DOUGLAS L. ROCK
----------------------------------
Douglas L. Rock,
Chief Executive Officer, President
and
Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas L. Rock, John J. Kennedy and Neal S.
Sutton, and each of them, each of whom may act without joinder of the other, his
or her true and lawful attorneys and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all pre- and post-effective amendments to
this Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, and each of them, or
the substitute or substitutes of any or all of them, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS L. ROCK Chief Executive Officer, March 11, 1998
- ----------------------------------------------------- President and Chief
Douglas L. Rock Operating Officer
(Principal Executive
Officer)
/s/ LOREN K CARROLL Executive Vice President and March 11, 1998
- ----------------------------------------------------- Director
Loren K Carroll
/s/ JOHN J. KENNEDY Senior Vice President and March 11, 1998
- ----------------------------------------------------- Chief
John J. Kennedy Financial Officer
(Principal
Financial and Accounting
Officer)
/s/ BENJAMIN F. BAILAR Director March 11, 1998
- -----------------------------------------------------
Benjamin F. Bailar
/s/ G. CLYDE BUCK Director March 11, 1998
- -----------------------------------------------------
G. Clyde Buck
/s/ JAMES R. GIBBS Director March 11, 1998
- -----------------------------------------------------
James R. Gibbs
</TABLE>
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<PAGE> 156
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JERRY W. NEELY Director March 11, 1998
- -----------------------------------------------------
Jerry W. Neely
/s/ H. MOAK ROLLINS Director March 11, 1998
- -----------------------------------------------------
H. Moak Rollins
</TABLE>
II-5
<PAGE> 157
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Merger Agreement dated January 19, 1998 by and among
Wilson Industries, Inc., Smith International, Inc. and
SII Acquisition Corp. (included as Appendix A to the
Proxy Statement/Prospectus that constitutes part of this
Registration Statement).
3.1 -- Restated Certificate of Incorporation of the Registrant
as amended to date (incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993).
3.2 -- Bylaws of the Registrant as amended to date (incorporated
by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993).
4.1 -- Rights Agreement, dated as of June 19, 1990, between the
Registrant and First Chicago Trust Company of New York
(incorporated by reference to Exhibit 4.13 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991).
5.1* -- Opinion of Gardere Wynne Sewell & Riggs, L.L.P.,
regarding legality of securities.
8.1* -- Opinion of Gardere Wynne Sewell & Riggs, L.L.P.,
regarding certain tax matters.
8.2* -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.,
regarding certain tax matters.
23.1 -- Consent of Gardere Wynne Sewell & Riggs, L.L.P. (included
in Exhibits 5.1 and 8.1).
23.2 -- Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
(included in Exhibit 8.2)
23.3* -- Consent of Arthur Andersen LLP with respect to the
financial statements of Smith International, Inc.
23.4* -- Consent of Arthur Andersen LLP with respect to the
financial statements of Wilson Industries, Inc.
24.1 -- Powers of Attorney (contained on page II-4).
99.1* -- Form of proxy card of Wilson Industries, Inc.
</TABLE>
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* Filed herewith.
<PAGE> 1
EXHIBIT 5.1
[Gardere Wynne Sewell & Riggs, L.L.P. Letterhead]
March 11, 1998
Smith International, Inc.
16740 Hardy Street
P. O. Box 60068
Houston, Texas 77205
Gentlemen:
As set forth in the Registration Statement (the "Registration Statement") on
Form S-4 to be filed by Smith International, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), relating to the
proposed issuance of 7,900,000 shares (the "Shares") of the Company's common
stock, par value $1.00 per share ("Common Stock"), certain legal matters in
connection with the Common Stock are being passed upon for the Company by us.
The Shares are to be issued pursuant to the terms and provisions of a Merger
Agreement dated as of January 19, 1998 among the Company, SII Acquisition
Corp., a Texas corporation and a wholly owned subsidiary of the Company, and
Wilson Industries, Inc., a Texas corporation. At your request, this opinion is
being furnished to you for filing as Exhibit 5.1 to the Registration Statement.
In our capacity as your counsel in the connection referred to above, we have
examined the Restated Certificate of Incorporation and Restated Bylaws of the
Company and 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.
We have assumed the authenticity and completeness of all records, certificates
and other instruments submitted to us as originals, the conformity to original
documents of all records, certificates and other instruments submitted to us as
copies, the authenticity and completeness of the originals of those records,
certificates and other instruments submitted to us as copies and the
correctness of all statements of fact contained in all records, certificates
and other instruments that we have examined.
<PAGE> 2
Smith International, Inc.
March 11, 1998
Page 2
Based on the foregoing, and having regard for such legal considerations as we
have deemed relevant, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware; and
2. Upon the issuance by the Company of the Shares upon consummation
of the Merger (as defined in the Merger Agreement) pursuant to the Merger
Agreement, such Shares will be duly authorized, validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to the federal laws of the United States of
America and the General Corporation Law of the State of Delaware, and we are
expressing no opinion as to the effect of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the references to our Firm under
the caption "Legal Matters" in the Proxy Statement/Prospectus included in the
Registration Statement.
Very truly yours,
GARDERE WYNNE SEWELL & RIGGS, L.L.P.
By: /s/ ERIC A. BLUMROSEN
--------------------------------
Eric A. Blumrosen, Partner
<PAGE> 1
EXHIBIT 8.1
[GARDERE, WYNNE, SEWELL & RIGGS LLP LETTERHEAD]
March __, 1998
Smith International, Inc.
16740 Hardy Street
P.O. Box 60068
Houston, Texas 77205
RE: MERGER AGREEMENT WITH WILSON INDUSTRIES, INC.
Gentlemen:
We have acted as counsel to Smith International, Inc., a Delaware corporation
("Parent"), in connection with (i) the Registration Statement on Form S-4 of
Parent, to which this opinion letter is filed as an exhibit (the "Registration
Statement"), which includes a Proxy Statement/Prospectus of Parent and Wilson
Industries, Inc., a Texas corporation (the "Company") ("Proxy
Statement/Prospectus"), and (ii) the merger of SII Acquisition Corp., a Texas
corporation and a wholly-owned subsidiary of Parent ("Sub"), with and into the
Company with the Company surviving, pursuant to the Merger Agreement, dated as
of January 19, 1998, among Parent, Sub and the Company (the "Agreement"). As a
result of the Merger, the shareholders of the Company will exchange their
shares of common stock of the Company ("Company Common Stock") solely for
shares of voting common stock of Parent ("Parent Common Stock") and cash in
lieu of fractional shares of Parent Common Stock. Unless otherwise defined
herein or the context hereof otherwise requires, each term used herein with its
initial letter capitalized has the meaning ascribed to such term in the
Agreement.
We have examined, are familiar with, and are relying upon (without any
independent investigation or review thereof) the truth and accuracy, at all
relevant times, of originals or copies, certified or otherwise authenticated to
our satisfaction, of such documents (including all exhibits and schedules
thereto) and records of Parent, Sub, the Company and its Subsidiaries, and such
statutes, regulations and instruments as we have deemed necessary or advisable
for the purposes of this opinion letter, including, without limitation, (i) the
Agreement, (ii) representations (the "Representations") made in connection with
the Merger by Parent, Sub and the Company and by various shareholders of the
Company and (iii) the Proxy Statement/Prospectus.
In connection with rendering our opinion, we have assumed the accuracy of the
Representations. We have also assumed the due authorization, execution and
delivery of the Agreement by the Company, Parent and Sub and that the Agreement
constitutes the legal, valid and binding
<PAGE> 2
March __, 1998
Page 2
obligation of the Company, Parent and Sub, enforceable against each party in
accordance with its terms. We have also assumed that the Merger will constitute
a merger under the applicable laws of Texas.
Based upon the foregoing and subject to the assumptions, exceptions,
qualifications and limitations set forth herein, we hereby confirm that, in our
opinion, the statements contained in paragraphs (a) - (e) in the Proxy
Statement/Prospectus under the heading "Certain Federal Income Tax Consequences"
to the extent they constitute matters of law or legal conclusions with respect
thereto, are accurate.
This opinion is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing regulations thereunder, published rulings and
court decisions, all of which are subject to change at any time, which change
may be retroactive. Except as stated above, we express no opinion with respect
to any other matter.
We hereby consent to the use of our name in the Proxy Statement/Prospectus
under the heading "Certain Federal Income Tax Consequences" and "Certain Terms
of the Merger -- Conditions to the Merger -- Additional Conditions to the
Obligations of Smith and Merger Sub -- Tax Opinion" and to the filing of this
opinion as an exhibit to the Registration Statement. By giving such consent,
we do not thereby admit that we are experts with respect to this letter, as
that term is used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
GARDERE & WYNNE, L.L.P.
By: Michael J. Donohue, Partner
<PAGE> 1
EXHIBIT 8.2
[LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P. LETTERHEAD]
March ___, 1998
Wilson Industries, Inc.
1301 Conti
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as counsel to Wilson Industries, Inc., a Texas
corporation ("Wilson Industries"), in connection with (i) the planned merger
(the "Merger ") into Wilson Industries of SII Acquisition Corp., a Texas
corporation ("Merger Sub") and a wholly-owned subsidiary of Smith
International, Inc., a Delaware corporation ("Smith International"), pursuant
to a Merger Agreement, dated as of January 19, 1998, by and among Smith
International, Merger Sub and Wilson Industries (the "Merger Agreement"),
pursuant to which the shareholders of Wilson Industries will receive solely
voting common stock of Smith International in exchange for their stock in
Wilson Industries, and (ii) the Registration Statement on Form S-4 of Smith
International, to which this opinion letter is filed as an exhibit (the
"Registration Statement"). All capitalized terms, unless otherwise specified,
have the meaning assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have reviewed and
relied upon (i) the Merger Agreement, (ii) the Proxy Statement/Prospectus
included in the Registration Statement (the "Proxy Statement/Prospectus") and
(iii) such other documents, records and instruments as we have deemed necessary
or appropriate in order to enable us to render our opinion. Our opinion is
based and conditioned upon certain statements and representations made by Smith
International, Merger Sub and Wilson Industries in connection with the Merger,
which we have neither investigated or verified. We have assumed that all such
statements and representations are true, correct, complete and not breached,
and that no actions that are or would be inconsistent with such statements and
representations have been or will be taken. We have also assumed that all
representations made "to the knowledge of" any person or entity will be true,
correct and complete as if made without such qualification.
In addition, we have assumed that (i) the Merger will be consummated
in accordance with the Merger Agreement (including satisfaction of all
covenants and conditions to the obligations of the parties without amendment or
waiver thereof), (ii) the Merger will qualify as a merger under the
<PAGE> 2
Wilson Industries, Inc.
March __, 1998
Page 2
applicable laws of the State of Texas and (iii) the Merger Agreement and all of
the documents and instruments referred to therein are valid and binding in
accordance with their terms. Any inaccuracy in, or breach of, any of the
aforementioned statements, representations and assumptions could adversely
affect our opinion.
Our opinion is based upon existing provisions of the Code, Treasury
Regulations promulgated or proposed thereunder, and interpretations thereof by
the Internal Revenue Service ("IRS") and the courts, all of which are subject
to change with prospective or retroactive effect, and our opinion could be
adversely affected or rendered obsolete by any such change.
Based upon and subject to the foregoing as well as the limitations set
forth below, it is our opinion that the statements contained in numbered
paragraphs (a) through (e) of the section of the Proxy Statement/Prospectus
entitled "THE MERGER -- Certain Federal Income Tax Consequences", insofar as
such statements constitute legal conclusions or summaries of legal matters, are
accurate.
Except as set forth above, we express no opinion as to the tax
consequences to any party, whether federal, state, local or foreign, of the
Merger or of any transactions related to the Merger or contemplated by the
Merger Agreement. Furthermore, our opinion is based on current federal income
tax law and administrative practice, and we do not undertake to advise you as
to any changes after the Effective Time of the Merger in federal income tax law
or administrative practice that may affect our opinion.
This opinion is for use in connection with the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the captions "THE
MERGER -- Certain Federal Income Tax Consequences" and "CERTAIN TERMS OF THE
MERGER -- Conditions to the Merger -- Additional Conditions to the Obligations
of Wilson -- Tax Opinion" in the Registration Statement and the Proxy
Statement/Prospectus which is a part thereof. In giving this consent, we do
not thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act and the rules and regulations
thereunder.
Very truly yours,
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our reports dated February 3,
1997, included in Smith International, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996, and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
March 10, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report dated April 4, 1997 on the consolidated financial statements of Wilson
Industries, Inc. as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996, and to all references to our Firm
included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
March 10, 1998
<PAGE> 1
EXHIBIT 99.1
PROXY WILSON INDUSTRIES, INC. PROXY
1301 Conti
Houston, Texas 77002
SPECIAL MEETING OF SHAREHOLDERS APRIL 27, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder(s) of Wilson Industries, Inc. (the "Company")
hereby appoint Wallace S. Wilson and George W. Gist, Jr., and each of them,
attorneys-in-fact and proxies of the undersigned, with full power of
substitution, to vote in respect of the undersigned's shares of the Company's
Common Stock at the Special Meeting of Shareholders of the Company to be held on
April 27, 1998, at 10:00 a.m., Houston time, at 1302 Conti, Houston, Texas and
at any adjournment(s) thereof, the number of shares the undersigned would be
entitled to cast if personally present.
The Board of Directors recommends a vote FOR Proposal 1 below.
1. Proposal to approve and adopt the Merger Agreement dated as of January
19, 1998 by and among the Company, Smith International, Inc. ("Smith") and SII
Acquisition Corp., a wholly owned subsidiary of Smith ("SII"), whereby SII will
be merged with and into the Company with the Company continuing as the
surviving corporation and a wholly owned subsidiary of Smith.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is indicated on this
proxy, this proxy will be voted FOR Proposal 1.
SIGNATURE(S) _______________________________________ DATE _______________, 1998
NO. OF SHARES OWNED: _______________________________
NOTE: Please sign your name as it appears on your stock certificate. Joint
owners should each sign. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. While on behalf of a
corporation, please indicate your title.
- --------------------------------------------------------------------------------
PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE PROXY CARD
USING THE ENCLOSED ENVELOPE.
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