<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
BAKER HUGHES INCORPORATED
(Exact name of Registrant as specified in its charter)
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<C> <C> <C>
DELAWARE 3533 72-0207995
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
LAWRENCE O'DONNELL, III
VICE PRESIDENT AND GENERAL COUNSEL
BAKER HUGHES INCORPORATED
3900 ESSEX LANE 3900 ESSEX LANE
HOUSTON, TEXAS 77027-5177 HOUSTON, TEXAS 77027-4995
(713) 439-8600 (713) 439-8600
(Address, including zip code, and (Name, address, including zip code, and
telephone number, including area code, of telephone number, including area code,
Registrant's principal executive offices) of agent for service)
---------------------
Copies to:
J. DAVID KIRKLAND, JR. SCOTT N. WULFE
BAKER & BOTTS, L.L.P. VINSON & ELKINS L.L.P.
ONE SHELL PLAZA 1001 FANNIN
910 LOUISIANA 2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002-4995 HOUSTON, TEXAS 77002-6760
</TABLE>
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 the effective time of the merger of Drilex International Inc. with
a subsidiary of Baker Hughes Incorporated (the "Merger"), as described in the
Agreement and Plan of Merger, dated as of April 16, 1997 (the "Merger
Agreement"), attached as Appendix A to the Proxy Statement/Prospectus forming a
part of this Registration Statement.
---------------------
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. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
=======================================================================================================
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------
Common Stock, $1.00 par value........................ $110,000,000 $33,333.34
=======================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) A fee of $21,322.74 was previously paid pursuant to Rules 14a-6 and 0-11
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
in connection with the filing of the preliminary Proxy Statement/Prospectus
by Drilex International Inc. on May 1, 1997. Pursuant to Rule 0-11(a)(2)
under the Exchange Act, such fee is being credited against the registration
fee and, accordingly, an additional $12,010.60 is being paid in connection
with this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
DRILEX INTERNATIONAL INC.
BAKER HUGHES INCORPORATED
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to an Agreement and Plan of Merger,
dated as of April 16, 1997 (the "Merger Agreement"), among Baker Hughes
Incorporated, a Delaware corporation ("Baker Hughes"), Baker Hughes Merger,
Inc., a Delaware corporation and a direct wholly owned subsidiary of Baker
Hughes ("Merger Sub"), and Drilex International Inc., a Delaware corporation
("Drilex"). The Merger Agreement provides for the merger of Merger Sub with and
into Drilex (the "Merger"), as a result of which Drilex would become a direct
wholly owned subsidiary of Baker Hughes, and the outstanding shares of common
stock, par value $0.01 per share, of Drilex ("Drilex Common Stock") would be
converted into the right to receive shares of common stock, par value $1.00 per
share, of Baker Hughes ("Baker Hughes Common Stock") valued at $15.00 per share,
subject to increase to $16.00 per share if Drilex meets certain financial tests
during a specified period prior to the Merger. See "The Merger."
Baker Hughes has filed a registration statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering shares of
Baker Hughes Common Stock with a value of up to approximately $110 million. This
Proxy Statement/Prospectus constitutes the Prospectus filed as a part of the
registration statement and is being furnished to stockholders of Drilex in
connection with the solicitation of proxies by the Board of Directors of Drilex
for use at the Special Meeting of the Stockholders of Drilex (the "Special
Meeting"), or any adjournment or postponement thereof, scheduled to be held on
July 14, 1997.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Drilex on or about June , 1997.
---------------------
THE SECURITIES 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 June , 1997.
<PAGE> 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS REGARDING
BAKER HUGHES BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS THE EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER, UPON REQUEST FROM LINDA J. SMITH, BAKER HUGHES
INCORPORATED, 3900 ESSEX LANE, HOUSTON, TEXAS 77027-5177, TELEPHONE NUMBER (713)
439-8600. TO ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY JULY 7, 1997.
Baker Hughes hereby undertakes to provide, without charge, to each person,
including any beneficial owner of Drilex 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 referred to below
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 person
indicated in the immediately preceding paragraph.
The following documents, which have been filed previously by Baker Hughes
(File No. 1-9397) with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), are hereby incorporated herein by reference:
- Baker Hughes' Annual Report on Form 10-K for the fiscal year ended
September 30, 1996;
- Baker Hughes' Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1996 and March 31, 1997; and
- Baker Hughes' Current Report on Form 8-K dated March 5, 1997.
All documents and reports filed by Baker Hughes 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 termination of the offering of the
securities registered hereunder 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.
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.
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 Baker Hughes or Drilex
since the date hereof.
2
<PAGE> 4
AVAILABLE INFORMATION
Baker Hughes and Drilex are subject to the informational requirements of
the Exchange Act and, in accordance therewith, file reports, proxy statements
and other information with the SEC. Such reports and other information may be
inspected and copied at the public reference facilities that the SEC maintains
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549,
and at the following Regional Offices of the SEC: 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 SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a Web site
that contains reports, proxy and information statements and other information
filed electronically by Baker Hughes and Drilex with the SEC that can be
accessed over the Internet at http://www.sec.gov. In addition, reports, proxy
statements and other information filed by Baker Hughes 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. Such material filed by Drilex can be inspected
at the offices of The Nasdaq Stock Market, Reports Section, 1735 K Street N.W.,
Washington, D.C. 20006.
Baker Hughes has filed with the SEC 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 Baker
Hughes Common Stock issuable in connection with the Merger. Baker Hughes has
provided the information contained herein with respect to Baker Hughes and its
subsidiaries, and Drilex has provided the information with respect to Drilex 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 SEC. 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.
3
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
AVAILABLE INFORMATION....................................... 3
SUMMARY..................................................... 6
The Companies............................................. 6
The Special Meeting....................................... 6
The Merger................................................ 7
Market Price and Dividend Information..................... 12
Baker Hughes Selected Historical Financial Information.... 13
Drilex Selected Historical Financial Information.......... 15
Comparative Per Share Data................................ 16
THE COMPANIES............................................... 17
THE SPECIAL MEETING......................................... 18
General................................................... 18
Matter to be Considered................................... 18
Record Date; Shares Entitled to Vote; Quorum.............. 18
Votes Required; Effect of Abstentions and Non-Votes....... 18
Voting and Revocation of Proxies.......................... 19
Solicitation of Proxies; Expenses......................... 19
THE MERGER.................................................. 20
General; Merger Consideration............................. 20
Stockholder Agreement..................................... 22
Procedures for Exchange of Certificates................... 22
Fractional Shares......................................... 23
Background of the Merger.................................. 23
Recommendation of the Drilex Board; Reasons for the
Merger................................................. 24
Opinion of Drilex's Financial Advisor..................... 26
Certain Federal Income Tax Consequences................... 30
Regulatory Approvals...................................... 31
Accounting Treatment...................................... 31
Drilex Employee Matters................................... 31
Treatment of Drilex Stock Options......................... 32
Interests of Certain Persons.............................. 33
Resales of Baker Hughes Common Stock...................... 33
NYSE Listing of Common Stock.............................. 34
No Dissenters' Rights..................................... 34
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.................. 35
Conditions to the Merger.................................. 35
Representations and Warranties............................ 36
Certain Covenants -- Conduct of Business of Drilex........ 37
Certain Covenants -- Conduct of Business of Baker
Hughes................................................. 38
No Solicitation of Acquisition Proposals.................. 39
Additional Agreements..................................... 40
Termination............................................... 41
Expenses and Termination Fee.............................. 42
Indemnification........................................... 43
Amendment and Waiver...................................... 43
</TABLE>
4
<PAGE> 6
DESCRIPTION OF CAPITAL STOCK................................ 45
Baker Hughes Common Stock................................. 45
Preferred Stock........................................... 45
Certain Anti-takeover Provisions.......................... 45
COMPARISON OF STOCKHOLDER RIGHTS............................ 48
Business Combinations..................................... 48
Amendments to Charter..................................... 48
No Stockholder Action by Written Consent.................. 48
Special Meetings of Stockholders.......................... 49
Classification of Board of Directors...................... 49
Removal of Directors...................................... 49
Cumulative Voting......................................... 49
No Preemptive Rights...................................... 50
Advance Notice Bylaws..................................... 50
INFORMATION REGARDING DRILEX................................ 51
Business of Drilex........................................ 51
Properties................................................ 58
Legal Proceedings......................................... 58
Market for Drilex Common Stock and Related Stockholder
Matters................................................ 59
Selected Financial Data................................... 60
Selected Quarterly Financial Data......................... 62
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 63
LEGAL MATTERS............................................... 70
EXPERTS..................................................... 70
INDEX TO FINANCIAL STATEMENTS............................... F-1
<TABLE>
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APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Stockholder Agreement
APPENDIX C -- Opinion of Merrill Lynch & Co.
</TABLE>
5
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus and does not purport to be complete. This
Summary is qualified in its entirety by the more detailed information included
elsewhere or incorporated by reference in this Proxy Statement/Prospectus.
Stockholders are urged to carefully read this Proxy Statement/Prospectus and the
Appendices hereto in their entirety.
THE COMPANIES
BAKER HUGHES............... Baker Hughes is a leading provider of products and
services for the worldwide petroleum and continuous
process industries. Through its six oilfield
divisions, Baker Hughes provides products and
services for the drilling, completion and
production of oil and gas wells. Its process
equipment operations manufacture and market
specialty equipment for a variety of process
applications. Baker Hughes is a Delaware
corporation formed in connection with the
combination of Baker International Corporation and
Hughes Tool Company in April 1987. Merger Sub is a
direct wholly owned subsidiary of Baker Hughes
organized in April 1997 for purposes of the Merger.
The principal executive offices of Baker Hughes and
Merger Sub are located at 3900 Essex Lane, Houston,
Texas 77027-5177, and their telephone number at
that location is (713) 439-8600.
DRILEX..................... Drilex is a leading provider of products and
services used in directional, horizontal and other
precision drilling of oil and gas wells, oilfield
workover operations, environmental remediation
applications, and trenchless pipeline and cable
laying applications. Drilex's products and services
include comprehensive computerized well planning
and engineering services, supervision of drilling
operations and project management, a full range of
high performance downhole positive displacement
motor systems, guidance systems (such as
measurement-while-drilling (MWD) instrument systems
and steering tools), and other related downhole
tools. The principal executive offices of Drilex
are located at 15151 Sommermeyer, Houston, Texas
77041, and its telephone at that location is (713)
937-8888.
THE SPECIAL MEETING
THE SPECIAL MEETING........ The Special Meeting of Stockholders of Drilex will
be held on July 14, 1997 at 9:00 a.m., Houston
time, at the Hyatt Regency Houston, 1200 Louisiana
Street, Houston, Texas.
MATTER TO BE CONSIDERED AT
THE SPECIAL MEETING........ At the Special Meeting, stockholders will be asked
to approve and adopt the Merger Agreement and the
Merger. For additional information relating to the
Special Meeting, see "The Special Meeting."
VOTE REQUIRED.............. Approval of the Merger Agreement requires the
affirmative vote of the holders of a majority of
the outstanding shares of Drilex Common Stock.
No approval by the holders of outstanding shares of
Baker Hughes Common Stock is required to approve
the Merger Agreement.
RECORD DATE; SHARES
ENTITLED TO VOTE........... Only stockholders of record of Drilex Common Stock
at the close of business on June 5, 1997 (the
"Record Date") are entitled to notice of
6
<PAGE> 8
and to vote at the Special Meeting. On that date,
there were 6,663,356 shares of Drilex Common Stock
outstanding. Holders of Drilex Common Stock are
entitled to one vote for each share held.
SECURITY OWNERSHIP OF
SIGNIFICANT STOCKHOLDER
AND MANAGEMENT........... DRLX Partners, L.P. ("DRLX Partners") beneficially
owned approximately 61.8% of the outstanding shares
of Drilex Common Stock as of the Record Date and
has agreed to vote in favor of the proposal to
approve and adopt the Merger Agreement and the
transactions contemplated thereby. Accordingly, the
adoption of the Merger Agreement by the requisite
vote of the Drilex stockholders is expected to
occur irrespective of whether or the manner in
which other Drilex stockholders vote their shares.
DRLX also has granted to Baker Hughes an option to
purchase up to 1,665,839 shares of Drilex Common
Stock owned by DRLX Partners, or 25% of the
outstanding Drilex Common Stock, at a price of
$16.00 per share, subject to certain conditions.
See "The Merger -- Stockholder Agreement."
Directors and executive officers of Drilex and
their affiliates, who as of the Record Date
beneficially owned approximately 2% of the
outstanding Drilex Common Stock (in addition to the
shares owned by DRLX Partners), have indicated that
they intend to vote in favor of the proposal to
approve and adopt the Merger Agreement and the
transactions contemplated thereby.
THE MERGER
EFFECT OF THE MERGER....... In the Merger, Merger Sub will merge with and into
Drilex. Drilex will be the surviving corporation
and will become a direct wholly owned subsidiary of
Baker Hughes. See "The Merger -- General; Merger
Consideration."
TREATMENT OF DRILEX COMMON
STOCK.................... In the Merger, each share of Drilex Common Stock
will be converted into the right to receive $15.00
in value of Baker Hughes Common Stock, subject to
increase to $16.00 per share if Drilex meets
certain financial tests during a specified period
prior to the closing of the Merger (the "Drilex
Value"). ALTHOUGH THE DRILEX VALUE COULD BE $16.00,
DRILEX STOCKHOLDERS SHOULD VOTE FOR THE MERGER
AGREEMENT ONLY IF THEY ARE WILLING TO ACCEPT A
DRILEX VALUE OF $15.00. For a discussion of certain
information relating to Drilex's financial results
for April and May 1997 in this connection, see "The
Merger -- General; Merger Consideration."
The market value for Baker Hughes Common Stock will
be based on the average closing prices of Baker
Hughes Common Stock on the New York Stock Exchange,
Inc. ("NYSE") during the ten consecutive trading
days ending immediately prior to the second trading
day prior to the closing date of the Merger (the
"Closing Date"). The number of shares of Baker
Hughes Common Stock to be received for each share
of Drilex Common Stock is referred to as the
"Exchange Ratio." See "The Merger -- General;
Merger Consideration."
7
<PAGE> 9
The table below illustrates the number of shares of
Baker Hughes Common Stock issuable for each share
of Drilex Common Stock at various average closing
prices of Baker Hughes Common Stock, based on a
Drilex Value of $15.00:
<TABLE>
<CAPTION>
BAKER HUGHES SHARES OF BAKER HUGHES
AVERAGE CLOSING PRICE COMMON STOCK
--------------------- ----------------------
<S> <C> <C>
$44.00 ......................... .3409
42.00 ......................... .3571
40.00 ......................... .3750
38.00* ........................ .3947
36.00 ......................... .4167
34.00 ......................... .4412
--------------
</TABLE>
* The average closing price for the ten consecutive
trading days ending immediately prior to June 11,
1997 was $38.30.
On April 16, 1997, the business day preceding
public announcement of the Merger Agreement, the
closing price of the Drilex Common Stock on the
Nasdaq National Market ("Nasdaq") was $13 3/8. The
shares of Baker Hughes Common Stock to be issued in
the Merger to stockholders of Drilex would
represent approximately 2% of the Baker Hughes
Common Stock to be outstanding after the Merger
(based on the current market price for the Baker
Hughes Common Stock.)
RECOMMENDATION OF THE
DRILEX BOARD OF
DIRECTORS................ The Board of Directors of Drilex (the "Drilex
Board") believes that the terms of the Merger are
fair to and in the best interests of Drilex and its
stockholders and has unanimously approved the
Merger Agreement and the transactions contemplated
thereby. THE BOARD OF DIRECTORS OF DRILEX
UNANIMOUSLY RECOMMENDS THAT DRILEX STOCKHOLDERS
APPROVE AND ADOPT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY. See "The
Merger -- Recommendation of the Drilex Board of
Directors; Reasons for the Merger."
DRILEX'S REASONS FOR THE
MERGER................... Drilex's Board of Directors believes the Merger
will, among other things, enable Drilex's
stockholders to receive a premium for their Drilex
Common Stock based on recent market prices and to
receive, on a tax deferred basis, a more liquid
security. See "The Merger -- Recommendation of the
Drilex Board of Directors; Reasons for the Merger."
OPINION OF DRILEX'S
FINANCIAL ADVISOR.......... Merrill Lynch & Co. ("Merrill Lynch") has delivered
its written opinion dated April 16, 1997 to the
Board of Directors of Drilex that, as of the date
of such opinion and based upon and subject to the
factors and assumptions, qualifications and
limitations set forth therein, the consideration to
be received in the Merger is fair, from a financial
point of view, to the holders of Drilex Common
Stock.
The Merrill Lynch opinion was provided to the
Drilex Board of Directors for its information and
is directed only to the fairness from a financial
point of view of the consideration to be received
by the holders of Drilex Common Stock, does not
address the merits of the underlying decision by
Drilex to engage in the Merger and does not
constitute a recommen-
8
<PAGE> 10
dation as to how any such stockholder should vote
on the Merger. For information on the assumptions
made, matters considered and the qualifications and
limitations on the review by Merrill Lynch, see
"The Merger -- Opinion of Drilex's Financial
Advisor." Stockholders are urged to read in their
entirety the opinion of Merrill Lynch, attached as
Appendix C to this Proxy Statement/Prospectus.
EFFECTIVE TIME OF THE
MERGER..................... Unless another date is agreed to by the parties,
the closing of the Merger (the "Closing") will
occur no later than the second business day after
the conditions to the Merger contained in the
Merger Agreement have been satisfied or waived. If
the Drilex Value has not been determined, the
Closing will be delayed until the business day
after the Drilex Value has been determined. The
Merger will become effective at or promptly after
the Closing. See "Certain Provisions of the Merger
Agreement -- Conditions to the Merger."
CONDITIONS TO THE MERGER... The obligations of Baker Hughes and Drilex to
consummate the Merger are subject to certain
conditions, including:
- the approval of holders of a majority of the
outstanding shares of Drilex Common Stock;
- the favorable opinion of counsel to Drilex that
the Merger will qualify as a tax-free
reorganization, which has previously been
delivered to Drilex, not having been withdrawn
(see "-- Certain Federal Income Tax Consequences"
below); and
- other conditions customary for transactions of
this nature.
See "Certain Provisions of the Merger
Agreement -- Conditions to the Merger."
REGULATORY MATTERS......... No material federal or state regulatory approvals
are required in order to consummate the Merger.
Consummation of the Merger was 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 June
4, 1997. See "The Merger -- Regulatory Approvals."
AMENDMENT AND WAIVER....... The parties may amend the Merger Agreement at any
time before or after approval of the Merger by the
stockholders of Drilex. Following such stockholder
approval, no amendment may be made that by law
requires the further approval of stockholders of
Drilex without obtaining the required approval.
Any party to the Merger Agreement may, to the
extent legally allowed, extend the time for
performance of any of the obligations of the other
parties, waive any inaccuracies in any
representations and warranties of the other parties
or waive compliance with any of the agreements or
conditions contained in the Merger Agreement for
the benefit of such party.
TERMINATION................ The Merger Agreement may be terminated at any time
prior to the Merger by mutual consent of Baker
Hughes and Drilex. It may also be terminated by the
parties in certain events, including if the Merger
has not been consummated by September 16, 1997 or
if there is a Material Adverse Change (as defined)
with respect to the other party, except for
9
<PAGE> 11
general economic changes or changes that may affect
the industries of the other party generally. Baker
Hughes may also terminate the Merger Agreement if
Drilex's Revenue or EBITDA (each as defined) fall
below specified levels, or if Drilex advises Baker
Hughes that Drilex expects Revenue or EBITDA to
fall below the specified levels.
Drilex may also terminate the Merger Agreement,
subject to certain conditions, if Drilex receives
an unsolicited acquisition proposal that is
financially superior to the Merger and reasonably
capable of being financed, and Drilex's Board of
Directors concludes that terminating the Merger
Agreement is necessary to satisfy its fiduciary
duties under applicable law. Baker Hughes may
terminate the Merger Agreement if the Drilex Board
has recommended to the Drilex stockholders an
alternative acquisition proposal or has withdrawn
its recommendation of the Merger. Upon termination
of the Merger Agreement under the circumstances
described above in this paragraph, Drilex will be
required to pay Baker Hughes a fee of $4 million.
Baker Hughes has agreed to pay Drilex a termination
fee of $4 million if the Merger Agreement is
terminated as a result of certain injunctions or
other actions or delays relating to antitrust laws.
See "Certain Provisions of the Merger
Agreement -- Termination" and "-- Expenses and
Termination Fee."
NO DISSENTERS' RIGHTS...... Under Delaware law, Drilex's stockholders will not
be entitled to any appraisal or dissenters' rights
in connection with the Merger.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............. Drilex has received an opinion of its counsel that
the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended. Accordingly, for
federal income tax purposes, no gain or loss will
be recognized by Baker Hughes, Drilex, or Merger
Sub as a result of the Merger.
A holder of Drilex Common Stock generally will not
recognize any gain or loss for federal income tax
purposes by reason of the conversion of Drilex
Common Stock into Baker Hughes Common Stock, except
for cash received in lieu of fractional shares. See
"The Merger -- Certain Federal Income Tax
Consequences."
It is a condition to Drilex's obligation to
consummate the Merger that the tax opinion it has
received described above shall not have been
withdrawn or modified in any material respect.
Although the Board of Directors of Drilex has the
right under the Merger Agreement to waive this
condition, it will not waive the condition unless
Drilex supplements this Proxy Statement/Prospectus
to so advise the Drilex stockholders and resolicits
the vote of the Drilex stockholders.
ACCOUNTING TREATMENT....... The Merger is intended to qualify as a pooling of
interests for accounting and financial reporting
purposes. See "The Merger -- Accounting Treatment."
INTERESTS OF CERTAIN
PERSONS IN THE MERGER...... In considering the recommendation of the Board of
Directors of Drilex with respect to the Merger,
stockholders should be aware that certain members
of Drilex's management and the Drilex Board have
certain interests in the Merger (including bonus
and severance arrangements in
10
<PAGE> 12
amounts aggregating up to approximately $1.2
million) that are in addition to the interests of
the stockholders of Drilex generally. The Drilex
Board was aware of these interests and considered
them in connection with the consideration of the
Merger, the Merger Agreement and the transactions
contemplated thereby. See "The Merger -- Drilex
Employee Matters" and "-- Interests of Certain
Persons."
COMPARISON OF STOCKHOLDER
RIGHTS................... As a result of the Merger, holders of Drilex Common
Stock will become stockholders of Baker Hughes and
will have certain different rights as stockholders
of Baker Hughes than they had as stockholders of
Drilex. See "Comparison of Stockholder Rights."
FORWARD-LOOKING
STATEMENTS................. This Proxy Statement/Prospectus includes
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E
of the Exchange Act. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may," "predict" and
similar expressions are intended to identify
forward-looking statements. No assurance can be
given that actual results may not differ materially
from those in the forward-looking statements herein
for reasons including the effect of competition,
the level of petroleum industry exploration and
production expenditures, world economic conditions,
prices of and the demand for crude oil and natural
gas, drilling activity, weather, the legislative
environment in the United States and other
countries, OPEC policy, conflict in the Middle East
and other major petroleum producing regions and the
condition of the capital and equity markets.
11
<PAGE> 13
MARKET PRICE AND DIVIDEND INFORMATION
Baker Hughes Common Stock is traded on the NYSE, the Pacific Stock Exchange
and the Swiss Stock Exchange under the symbol "BHI." Drilex Common Stock is
traded on Nasdaq under the symbol "DRLX." The following tables set forth the
high and low sales prices of Baker Hughes Common Stock and Drilex Common Stock
for the quarters indicated, as reported in The Wall Street Journal's NYSE
Composite Transactions Reports and on Nasdaq, respectively. Drilex completed its
initial public offering in July 1996. Certain dividend information for Baker
Hughes Common Stock is also provided below. No cash dividends were declared or
paid on Drilex Common Stock during any of the periods presented.
BAKER HUGHES COMMON STOCK
<TABLE>
<CAPTION>
MARKET PRICE DIVIDEND
---------------------- DECLARED
FISCAL YEAR ENDED SEPTEMBER 30, HIGH LOW PER SHARE
------------------------------- ---- --- ---------
<S> <C> <C> <C>
1995
First Quarter.............................................. $20 7/8 $17 $.115
Second Quarter............................................. 20 3/4 16 3/4 .115
Third Quarter.............................................. 23 3/4 19 7/8 .115
Fourth Quarter............................................. 23 3/8 20 .115
1996
First Quarter.............................................. $24 7/8 $18 3/8 $.115
Second Quarter............................................. 29 3/4 22 3/4 .115
Third Quarter.............................................. 34 1/4 28 .115
Fourth Quarter............................................. 35 5/8 28 7/8 .115
1997
First Quarter.............................................. $38 7/8 $29 1/2 $.115
Second Quarter............................................. 41 1/4 34 1/8 .115
Third Quarter (through June 10)............................ 40 1/8 32 5/8 .115
</TABLE>
DRILEX COMMON STOCK
<TABLE>
<CAPTION>
MARKET PRICE
--------------------
FISCAL YEAR ENDED DECEMBER 31, HIGH LOW
------------------------------ ---- ---
<S> <C> <C>
1996
Third Quarter (commencing July 3)........................... $17 $12 1/2
Fourth Quarter.............................................. 18 10 3/4
1997
First Quarter............................................... $14 1/2 $12 1/4
Second Quarter (through June 10)............................ 15 1/4 11 1/4
</TABLE>
The following table sets forth the closing price per share of Baker Hughes
Common Stock on the NYSE and Drilex Common Stock on Nasdaq and the equivalent
per share price (as explained below) of Drilex Common Stock on April 16, 1997,
the business day preceding public announcement of the Merger Agreement, and on
June 10, 1997:
<TABLE>
<CAPTION>
BAKER HUGHES DRILEX DRILEX EQUIVALENT
MARKET PRICE PER SHARE AT: COMMON STOCK COMMON STOCK PER SHARE PRICE
-------------------------- ------------ ------------ -----------------
<S> <C> <C> <C>
April 16, 1997.......................... $35 7/8 $13 3/8 $15 or $16
June 10, 1997........................... $38 $14 11/16 $15 or $16
</TABLE>
The equivalent per share price of a share of Drilex Common Stock represents
an estimation of the consideration to be received by Drilex stockholders in the
Merger, assuming that the Effective Time had occurred on the respective date set
forth in the table above. See "The Merger -- General; Merger Consideration."
Stockholders are advised to obtain current market quotations for Baker
Hughes Common Stock and Drilex Common Stock. No assurance can be given as to the
market price of Baker Hughes Common Stock or Drilex Common Stock at or, in the
case of Baker Hughes Common Stock, after consummation of the Merger.
12
<PAGE> 14
BAKER HUGHES SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected financial information has been derived from the
historical consolidated financial statements of Baker Hughes. Selected unaudited
financial data for the six months ended March 31, 1997 and 1996 include all
adjustments (consisting only of normally recurring adjustments) that Baker
Hughes considers necessary for a fair presentation of consolidated operating
results and financial position for such 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 Baker
Hughes consolidated financial statements, related notes and other financial
information incorporated by reference in this Proxy Statement/ Prospectus.
BAKER HUGHES INCORPORATED
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31, FISCAL YEAR ENDED SEPTEMBER 30,
------------------- ------------------------------------------------------------
1997(1) 1996 1996(2)(3) 1995(4) 1994(3)(5)(6) 1993(3) 1992(3)
-------- -------- ---------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Revenues.............................. $1,641.8 $1,439.5 $3,027.7 $2,637.5 $2,504.8 $2,701.7 $2,538.5
Operating income...................... 198.6 154.9 306.7 255.9 185.9 158.9 94.0
Income before income taxes,
extraordinary loss and accounting
changes............................. 176.2 126.4 298.9 205.1 226.1 100.1 32.0
Income before extraordinary loss and
accounting changes.................. 108.3 74.0 176.4 120.0 131.1 58.9 5.0
Net income............................ 96.3 74.0 176.4 105.4 42.7 58.9 5.0
Per share of common stock:
Income before extraordinary loss and
accounting changes.................. $ .75 $ .52 $ 1.23 $ .67 $ .85 $ .34 $ .00
Net income............................ .67 .52 1.23 .57 .22 .34 .00
Dividends............................. .23 .23 .46 .46 .46 .46 .46
Financial position:
Cash and cash equivalents............. $ 7.2 $ 15.9 $ 7.7 $ 6.8 $ 69.2 $ 7.0 $ 6.7
Working capital....................... 1,193.3 1,125.1 1,081.1 984.7 855.4 921.0 715.5
Total assets.......................... 3,411.7 3,271.6 3,297.4 3,166.6 3,000.0 3,143.3 3,212.9
Long-term debt........................ 695.2 847.6 673.6 798.4 638.0 935.8 812.5
Stockholders' equity.................. 1,757.9 1,569.4 1,689.2 1,513.6 1,638.5 1,610.6 1,645.5
</TABLE>
- ---------------
(1) Baker Hughes adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective October 1, 1996, and
recognized a charge to income of $12.1 million ($.08 per share), net of a
tax benefit of $6.0 million, as the cumulative effect of a change in
accounting in the first quarter of 1997.
(2) In 1996, Baker Hughes sold 6.3 million shares of Varco International, Inc.
("Varco") common stock, representing its entire investment in Varco, and
recognized a pretax gain of $44.3 million.
(3) In 1996, 1994, 1993 and 1992, Baker Hughes recorded unusual charges -- net
of $39.6 million, $31.8 million, $42.0 million and $79.2 million,
respectively. The 1996 charge consisted of restructurings at Baker Hughes
INTEQ, Baker Oil Tools and Baker Hughes Process Equipment Company, the
write-off of patents and the impairment of a joint venture. The 1994
charge -- net consisted of restructurings and reorganizations of certain
divisions, primarily Baker Hughes INTEQ and the discontinuance of a
measurement-while-drilling (MWD) product line. Offsetting these charges was
a cash recovery from certain insurance carriers in the 1993 litigation
regarding Parker & Parsley. The 1993 charge consisted primarily of
litigation settlements. The 1992 charge -- net consisted primarily of
restructurings in the Oilfield Operations and litigation claims offset by
the gain on the disposition of Baker Hughes Tubular Services.
13
<PAGE> 15
(4) Baker Hughes adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective October 1, 1994 and recognized a charge to income of
$14.6 million ($0.10 per share), net of a tax benefit of $7.9 million, as
the cumulative effect of a change in accounting in the first quarter of
1995.
(5) Baker Hughes adopted SFAS No. 109, "Accounting for Income Taxes," effective
October 1, 1993, and recognized a credit to income of $25.5 million ($0.18
per share) as the cumulative effect of a change in accounting in the first
quarter of 1994. An additional benefit of $21.9 million was allocated to
capital in excess of par value. Baker Hughes also adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions,"
effective October 1, 1993, and recognized a charge to income of $69.6
million ($0.50 per share), net of a tax benefit of $37.5 million, as the
cumulative effect of a change in accounting in the first quarter of 1994.
(6) In 1994, Baker Hughes repurchased or defeased all of its outstanding 6%
discount debentures for $205.5 million and generated an extraordinary loss
of $44.3 million ($0.31 per share), net of a tax benefit of $23.9 million.
In 1994, Baker Hughes sold the EnviroTech Pumpsystems group of companies and
recognized a pretax gain of $101.0 million.
14
<PAGE> 16
DRILEX SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected financial information presented as of and for the
periods ended December 31, 1996, 1995 and 1994, March 30, 1994 and December 31,
1993 is derived from the audited consolidated financial statements of Drilex and
its predecessor company, Drilex Systems, Inc. ("DSI"). The information presented
as of and for the year ended December 31, 1992 is derived from the unaudited
consolidated financial statements of DSI. The unaudited information as of and
for the three months ended March 31, 1997 and 1996 and the year ended December
31, 1992 includes all adjustments that Drilex considers necessary for a fair
presentation of the financial position and results of operations for those
periods. Results for the interim periods are not necessarily indicative of
results for the full year. The following information should be read in
conjunction with "Information Regarding Drilex -- Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the Consolidated
Financial Statements of Drilex, including the Notes thereto, included elsewhere
in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
DRILEX PREDECESSOR COMPANY(3)
----------------------------------------------------- --------------------------
THREE MONTHS MARCH 30,
ENDED YEAR ENDED 1994 JANUARY 1, YEAR ENDED
MARCH 31, DECEMBER 31, (INCEPTION) TO 1994 TO DECEMBER 31,
------------- -------------------- DECEMBER 31, MARCH 30, -------------
1997 1996 1996(1) 1995(1)(2) 1994(2) 1994 1993 1992
----- ----- ------- ---------- -------------- ---------- ----- -----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Revenues.............................. $17.0 $19.5 $76.1 $57.5 $25.2 $ 6.4 $25.9 $24.3
Operating income (loss)............... .3 1.6 6.9 5.0 3.7 .2 .4 (3.5)
Income before income taxes and
minority interests................. 0.0 .8 4.9 3.0 3.2 (.3) (1.5) (5.2)
Net income (loss)..................... 0.0 .5 3.0 1.8 2.0 (.3) (1.7) (5.2)
Per share of common stock:
Net income............................ $ .00 $ .12 $ .53 $ .40 $ .57
Financial position:
Working capital....................... $25.5 $13.7 $21.0 $13.4 $ 9.5 $10.5 $10.7 $10.6
Total assets.......................... 90.2 78.5 86.8 77.8 36.3 25.0 26.2 26.8
Long-term debt, less current
maturities......................... 19.3 32.9 11.9 32.5 7.6 -- -- --
Stockholders' equity(3)(4)............ 56.4 24.3 57.7 23.7 19.6 22.8 23.0 24.5
</TABLE>
- ---------------
(1) Effective April 1, 1995, Drilex changed its estimated useful life for
certain drilling motor components from five to seven years. This change was
made to better reflect the estimated period during which these assets will
remain in service. The effect of this change was an increase in net income
of $248,000, or $.06 per share, for the year ended December 31, 1995, and
$378,000, or $.07 per share, for the year ended December 31, 1996.
(2) Results for the year are not comparable to prior periods as a result of
acquisitions.
(3) The predecessor company, DSI, was a wholly owned subsidiary of MascoTech
prior to its acquisition by Drilex on March 30, 1994. As a wholly owned
subsidiary of MascoTech, DSI was allocated interest and other expenses by
its parent, and had no long-term indebtedness since its financing
requirements were met through advances from MascoTech. For purposes of this
presentation, such advances from MascoTech are reflected in stockholders'
equity. Earnings per share are not presented for periods during which DSI
was wholly owned by MascoTech.
(4) No cash dividends were declared or paid on Drilex Common Stock during any of
the periods presented.
15
<PAGE> 17
COMPARATIVE PER SHARE DATA
The following tables present comparative per share information for Baker
Hughes and Drilex on a historical basis, for Baker Hughes on a pro forma basis
and for Drilex on an equivalent pro forma basis assuming that the Merger had
been consummated and accounted for as a pooling of interests. The fiscal year
ends of Baker Hughes and Drilex are September 30 and December 31, respectively.
In applying the pooling of interests method of accounting, the historical
results of operations of Baker Hughes and Drilex for fiscal years prior to the
Merger will not be combined because the retained earnings and results of
operations of Drilex are not material to the consolidated financial statements
of Baker Hughes. The results of operations of the combined companies will
include income of Baker Hughes and Drilex for the entire fiscal year in which
the Merger occurs. As such, the Baker Hughes -- Pro Forma (unaudited)
information for the six months ended March 31, 1997 includes such combined
information for Baker Hughes and Drilex for such period, while the Baker
Hughes -- Pro Forma (unaudited) information for each of the three years in the
period ended September 30, 1996 reflects the historical results of only Baker
Hughes. The tables should be read in conjunction with (i) the consolidated
financial statements of Baker Hughes incorporated by reference in this Proxy
Statement/Prospectus and (ii) the Consolidated Financial Statements of Drilex,
including the Notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
SIX MONTHS ENDED ------------------------
MARCH 31, 1997 1996 1995 1994
---------------- ------ ------ ------
<S> <C> <C> <C> <C>
BAKER HUGHES -- HISTORICAL
Book value per common share............................ $12.07 $11.69 $10.64 $11.63
Cash dividends per common share........................ .23 .46 .46 .46
Income before extraordinary loss and accounting changes
per common share..................................... .75 1.23 .67 .85
BAKER HUGHES -- PRO FORMA (UNAUDITED)
Book value per common share............................ 12.23 11.69 10.64 11.63
Cash dividends per common share........................ .23 .46 .46 .46
Income before extraordinary loss and accounting changes
per common share..................................... .74 1.23 .67 .85
DRILEX -- EQUIVALENT PRO FORMA AT DRILEX VALUE OF $15(1) (UNAUDITED)
Book value per common share............................ 4.79 4.58 4.17 4.55
Cash dividends per common share........................ .09 .18 .18 .18
Income per common share................................ .29 .48 .26 .33
DRILEX -- EQUIVALENT PRO FORMA AT DRILEX VALUE OF $16(2) (UNAUDITED)
Book value per common share............................ 5.11 4.88 4.45 4.86
Cash dividends per common share........................ .10 .19 .19 .19
Income per common share................................ .31 .51 .28 .36
</TABLE>
- ---------------
(1) These equivalent pro forma per share amounts were calculated by multiplying
the Baker Hughes pro forma per share amounts by .3916. The .3916 represents
the number of shares of Baker Hughes Common Stock that a holder of Drilex
Common Stock would receive for each Drilex share assuming a 10 trading-day
average price of Baker Hughes Common Stock of $38.30 (based on the 10
trading days immediately prior to and including June 10, 1997) and a Drilex
Value of $15.
(2) These equivalent pro forma per share amounts were calculated by multiplying
the Baker Hughes pro forma per share amounts by .4178. The .4178 represents
the number of shares of Baker Hughes Common Stock that a holder of Drilex
Common Stock would receive for each Drilex share assuming a 10 trading-day
average price of Baker Hughes Common Stock of $38.30 (based on the 10
trading days immediately prior to and including June 10, 1997) and a Drilex
Value of $16.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -----------------------
MARCH 31, 1997 1996 1995 1994
------------------ ----- ----- -----
<S> <C> <C> <C> <C>
DRILEX -- HISTORICAL
Book value per common share...................... $8.46 $8.53 $5.41 $4.79
Cash dividends per common share.................. -- -- -- --
Income per common share.......................... .00 .53 .40 .57
</TABLE>
16
<PAGE> 18
THE COMPANIES
BAKER HUGHES INCORPORATED
Baker Hughes is a leading provider of products and services for the
worldwide petroleum and continuous process industries. Through its six oilfield
divisions, Baker Hughes provides products and services for the drilling,
completion, production, and maintenance of oil and gas wells. Its process
equipment operations manufacture and market specialty equipment for a variety of
process applications. Baker Hughes is a Delaware corporation formed in
connection with the combination of Baker International Corporation and Hughes
Tool Company in April 1987.
OILFIELD PRODUCTS AND SERVICES. Baker Hughes manufactures and markets a
broad range of rolling cutter and diamond drilling bits, ranging upward from
3 3/4 inches in diameter, which are designed for drilling specific types of rock
formations. Baker Hughes also produces and markets drilling fluids (muds) for
oil and gas well drilling, as well as chemical additives and specialty chemicals
(used in petroleum production, refining, waste water treatment, mineral
handling, and cooling and boiler water processes), and provides technical
services in connection with their formulation and use. Drilling fluids, which
are usually barite and bentonite combined with other chemicals in a water,
chemical or oil base, are used to clean the bottom of a hole by removing
cuttings, to cool the bit and drill string, to control formation preserves, and
to seal porous well formations. Baker Hughes provides directional and horizontal
drilling services, downhole motors, coring services, subsurface surveying and
measurement-while-drilling services to the oil and gas industry. Baker Hughes
also provides a broad range of completion and production tools, equipment and
services, such as packers (used to seal the space between the production tubing
and casing to maintain separation between production zones, and to protect from
reservoir pressures and corrosive formation fluids), liner hangers (to suspend
and set strings of casing pipe), electric submersible pumps and related control
equipment and cable (for artificial lift), fishing tool services (to locate,
dislodge and retrieve objects from the well bore), control systems for surface
and subsurface safety valves, gravel picking (to prevent sand from entering the
well bore) and tubing conveyed perforating (to provide paths for oil and gas to
enter the well bore).
PROCESS EQUIPMENT PRODUCTS AND SERVICES. Baker Hughes provides a broad
range of solid/liquid separation equipment and systems to concentrate product or
separate and remove waste material in the mineral, industrial, pulp and paper
and municipal industries. Baker Hughes' product lines include vacuum filters
(drum, disc and horizontal belt), filter presses, belt presses, granular media
filters, thickeners, clarifiers, flotation cells, aeration equipment,
centrifuges, coalescers, deaeration towers, and electrochlorination cells.
MERGER SUB. Merger Sub is a direct wholly owned subsidiary of Baker Hughes
organized in April 1997 for purposes of the Merger.
DRILEX INTERNATIONAL INC.
Drilex provides products and services used in directional, horizontal and
other precision drilling of oil and gas wells, oilfield workover operations,
environmental remediation applications, and trenchless pipeline and cable laying
applications. Drilex's products and services include comprehensive computerized
well planning and engineering services, supervision of drilling operations and
project management, a full range of high performance downhole positive
displacement motor systems, guidance systems (such as measurement-while-drilling
instrument systems and steering tools), and other related downhole tools.
Drilex's business is built upon its premier line of downhole positive
displacement motors. Drilex was one of the pioneers in the development of
downhole drilling motors in the early 1980s and now designs and manufactures
high-performance, multi-lobed positive displacement drilling motors. Drilex
currently operates both onshore and offshore and concentrates its activities in
the United States, Venezuela, the European Continental Shelf, Canada and the Far
East.
Drilex provides comprehensive precision drilling services for oil and gas
drilling and workover applications. During 1996, oilfield applications accounted
for approximately 84% of Drilex's revenues. Drilex has applied its technical
drilling capabilities for use in shallow well horizontal drilling for
environmental remediation applications and trenchless pipeline and cable
installations.
17
<PAGE> 19
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to stockholders of
Drilex in connection with the solicitation of proxies on behalf of the Board of
Directors of Drilex for use at the Special Meeting to be held on July 14, 1997
at the time and place specified in the accompanying Notice of Special Meeting of
Stockholders, and at any adjournment or postponement thereof.
MATTER TO BE CONSIDERED
At the Special Meeting, including any adjournment or postponement thereof,
stockholders of Drilex will consider and vote upon a proposal to approve and
adopt the Merger Agreement and the transactions contemplated thereby.
THE BOARD OF DIRECTORS OF DRILEX HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT ALL DRILEX STOCKHOLDERS VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Board of Directors of Drilex has fixed the close of business on June 5,
1997 as the Record Date for the determination of the Drilex stockholders
entitled to receive notice of and to vote at the Special Meeting. As of the
Record Date, 6,663,356 shares of Drilex Common Stock were outstanding and held
by approximately 21 holders of record. Each outstanding share of Drilex Common
Stock is entitled to one vote on the matter to be considered at the Special
Meeting. The presence, either in person or by proxy, of the holders of a
majority of the issued and outstanding shares of Drilex 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; EFFECT OF ABSTENTIONS AND NON-VOTES
Under Delaware law, the affirmative vote of the holders of at least a
majority of the outstanding shares of Drilex Common Stock entitled to vote on
the matter is required to approve and adopt the Merger Agreement.
The inspectors of election will treat shares of Drilex Common Stock
represented by properly signed and returned proxies that reflect abstentions as
shares that are present, entitled to vote and voting for purposes of determining
the presence of a quorum at the Special Meeting and for purposes of determining
the outcome of any question submitted to the stockholders for a vote. The
inspectors of election will treat "broker non-votes" (i.e., shares held by
brokers that are represented at a meeting but with respect to which the broker
does not have discretionary authority to vote) as shares that are present and
entitled to vote for purposes of establishing a quorum. For purposes of
determining the outcome of any question as to which the broker has physically
indicated on the proxy that it does not have discretionary authority to vote,
these shares will be treated as not present and not entitled to vote with
respect to that question, even though those shares are considered entitled to
vote for quorum purposes. Accordingly abstentions and broker non-votes will have
the same effect as votes against the approval and adoption of the Merger
Agreement.
As of the Record Date, (i) DRLX Partners held approximately 61.8% of the
outstanding shares of Drilex Common Stock and (ii) directors and executive
officers of Drilex and their affiliates beneficially owned in the aggregate an
additional 1.4% of the outstanding shares of Drilex Common Stock. The directors
and officers of Drilex have indicated that they intend to vote all of their
shares of Drilex Common Stock for the approval and adoption of the Merger
Agreement and the transactions contemplated thereby. DRLX Partners has agreed to
vote in favor of the proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby. Accordingly, the adoption of the Merger
Agreement by the requisite vote of the Drilex stockholders is expected to occur
irrespective of whether or the manner in which other Drilex stockholders vote
their shares. DRLX Partners also has granted to Baker Hughes an option to
purchase up to 1,665,839 shares of Drilex
18
<PAGE> 20
Common Stock owned by DRLX Partners, or approximately 25% of the outstanding
Drilex Common Stock, at a price of $16.00 per share, subject to certain
conditions. See "The Merger -- Stockholder Agreement."
VOTING AND REVOCATION OF PROXIES
Shares of Drilex Common Stock represented by properly executed proxies
received at or prior to the Special Meeting, and which have not been revoked,
will be voted at the Special Meeting, or any adjournment or postponement
thereof, in accordance with the instructions of such proxies. If a proxy is
properly executed and returned by a stockholder of Drilex without indicating any
voting instructions, the shares of Drilex Common Stock represented by such proxy
will be voted at the Drilex Special Meeting FOR the approval and adoption of the
Merger Agreement and the transactions contemplated thereby.
A stockholder executing and returning a proxy has the power to revoke it at
any time before it is exercised either by executing and delivering a later-dated
proxy to the Secretary of Drilex, or by delivering a duly executed written
revocation of such proxy to the Secretary of Drilex.
SOLICITATION OF PROXIES; EXPENSES
In connection with the Special Meeting, proxies are being solicited by and
on behalf of the Board of Directors of Drilex. Drilex will bear the cost of the
solicitation of proxies from its stockholders. In addition to the solicitation
of proxies by use of mail, the directors, officers and regular employees of
Drilex may solicit proxies from stockholders personally or by telephone,
telegraph or facsimile transmissions. Such directors, officers and employees
will not be additionally compensated for such solicitation but may be reimbursed
for out-of-pocket expenses incurred in connection therewith. Arrangements will
also be made with brokerage houses, banks, fiduciaries and other custodians for
the forwarding of solicitation material to the beneficial owners of stock held
of record by such persons, and Drilex will reimburse such persons for their
reasonable out-of-pocket expenses in connection therewith.
IF THE MERGER AGREEMENT IS APPROVED AND ADOPTED AND THE MERGER IS
CONSUMMATED, HOLDERS OF DRILEX COMMON STOCK WILL BE SENT INSTRUCTIONS REGARDING
THE SURRENDER OF THEIR CERTIFICATES REPRESENTING SHARES OF DRILEX COMMON STOCK.
HOLDERS OF DRILEX COMMON STOCK SHOULD NOT SEND THEIR STOCK CERTIFICATES UNTIL
THEY RECEIVE THESE INSTRUCTIONS.
19
<PAGE> 21
THE MERGER
Baker Hughes, Drilex and Merger Sub have entered into the Merger Agreement,
which provides that, subject to the satisfaction of certain conditions (see
"Certain Provisions of the Merger Agreement -- Conditions to the Merger"), the
Merger will be effected. THE DESCRIPTION OF THE MERGER AGREEMENT CONTAINED IN
THIS PROXY STATEMENT/PROSPECTUS IS SUBJECT TO THE MORE COMPLETE INFORMATION
CONTAINED IN THE MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO
THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED IN ITS ENTIRETY HEREIN BY
REFERENCE.
GENERAL; MERGER CONSIDERATION
The Merger Agreement provides for the merger of Merger Sub with and into
Drilex. Drilex will be the surviving corporation and will become a direct wholly
owned subsidiary of Baker Hughes.
In the Merger, each outstanding share of Drilex Common Stock will be
converted into a fraction of a share (rounded to four decimal places) of Baker
Hughes Common Stock equal to the Drilex Value (either $15 or $16, as described
below) divided by the Baker Hughes Average Closing Price. This fraction of a
share is referred to as the "Exchange Ratio."
The Baker Hughes Average Closing Price means the average of the closing
prices of Baker Hughes Common Stock on the NYSE for the ten consecutive trading
days ending immediately prior to the second trading day prior to the Closing
Date, subject to certain adjustment for stock splits, dividends and other
events.
The Drilex Value will be $15, unless Drilex meets certain financial tests
based on monthly average performance over the two or three-month period from
April 1, 1997 to the end of a specified month prior to the Closing Date.
Specifically, the Drilex Value will be $16 if Monthly Revenue for the Test
Period exceeds $6 million and Monthly EBITDA for the Test Period exceeds $1
million (as each of these terms is defined in the Merger Agreement).
For these purposes, "Revenue" means net revenues of Drilex, and "EBITDA"
means net income plus interest expense, provision for income taxes, and
depreciation and amortization of Drilex. Each measure will be determined on a
consolidated basis in accordance with generally accepted accounting principles
("GAAP") applied on a basis consistent with that used in preparing Drilex's
historical financial statements and will be finally determined pursuant to the
procedures described below. "Monthly" information will be the average monthly
results over a two or three-month period (the "Test Period") from April 1, 1997
to (i) May 31, 1997, if the Closing occurs prior to July 15, 1997 and (ii) June
30, 1997, otherwise. For determining the Test Period, any delay in the Closing
caused by the procedures described below will be ignored.
The following table sets forth Monthly Revenue and Monthly EBITDA amounts
for the periods indicated. These amounts are examples only and are not
necessarily indicative of the final Monthly Revenue and Monthly EBITDA amounts
that will be determined in accordance with the Merger Agreement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, 1997 APRIL 30, 1997
-------------- --------------
<S> <C> <C>
Monthly Revenue.......................................... $5,528,400 $5,907,000
Monthly EBITDA........................................... 657,000 808,000
</TABLE>
As soon as available after the end of April, May and June 1997 (but in any
event by the 20th day of the next month), Drilex will prepare, with the input
and participation of Baker Hughes, and will furnish to Baker Hughes consolidated
financial statements of Drilex for that month and for the period from April 1,
1997 to the end of such month (the "Monthly Statements"). The Monthly Statements
will be certified by the Chief Financial Officer and the Chief Executive Officer
of Drilex as having been prepared in accordance with the requirements of the
Merger Agreement.
Drilex will provide Baker Hughes with access to preliminary copies and
drafts of the Monthly Statements and copies of all work papers and other
relevant documents to permit Baker Hughes to verify the accuracy of
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<PAGE> 22
the Monthly Statements. Baker Hughes will have a period of ten days after
delivery of the Monthly Statements to review them and make objections to Drilex.
If Baker Hughes objects within the ten-day period, then Drilex and Baker Hughes
will attempt to resolve the matter or matters in dispute. If Baker Hughes does
not object within the ten-day period, then the Monthly Statements will be final.
If any disputes cannot be resolved by Drilex and Baker Hughes within five
business days, then the specific matters in dispute will be submitted to
Deloitte & Touche LLP or another independent accounting firm approved by Drilex
and Baker Hughes. The accounting firm will then decide the disputed matters.
For purposes of determining Monthly Revenue and EBITDA, amounts
attributable to original equipment manufacturer (OEM) sales (accounted
consistently with Drilex's past practice) (but not ordinary sales under existing
contracts) destined to ultimate purchasers outside the United States, the United
Kingdom, Canada, Argentina and Venezuela will be excluded to the extent of
transactions generating revenues in excess of $500,000 in the aggregate during
the Test Period. In all calculations of Revenue and EBITDA, the effects of any
investment banking, legal and other advisory fees and expenses, certain
employment costs and other expenses primarily attributable to, or resulting
from, the Merger Agreement and the transactions contemplated thereby will be
excluded, and the effects of any adjustment or change in accruals or reserves
shall also be excluded except to the extent made pursuant to GAAP consistent
with past practices resulting from events occurring after March 31, 1997.
On May 20, 1997, Drilex delivered to Baker Hughes financial information
reporting Monthly Revenue and Monthly EBITDA for April 1997 of $6,734,200 and
$1,081,509, respectively, and Baker Hughes did not dispute these results. Baker
Hughes and Drilex have agreed that the Closing will occur on July 14, 1997 if
all conditions to the Merger Agreement have been satisfied immediately following
the Special Meeting. If the Closing occurs on July 14, 1997, the Drilex Value
will be based upon Monthly Revenue and Monthly EBITDA for the two-month period
ended May 31, 1997. Based upon preliminary information available to Drilex,
Drilex currently expects Monthly Revenue and Monthly EBITDA for such two-month
period to exceed $6,000,000 and $1,000,000, respectively, which would result in
a Drilex Value of $16. However, there can be no assurance that the Closing will
occur on July 14, 1997 or that the final Monthly Revenue and Monthly EBITDA
amounts determined in accordance with the Merger Agreement will exceed
$6,000,000 and $1,000,000, respectively. If the Closing does not occur on July
14, 1997, the Drilex Value will be based upon Monthly Revenue and Monthly EBITDA
for the three-month period ending June 30, 1997. Drilex currently is unable to
predict the Monthly Revenue and Monthly EBITDA for such period. Although the
Drilex Value could be $16, Drilex stockholders should vote for the Merger
Agreement only if they are willing to accept a Drilex Value of $15.
Notwithstanding the provisions described above, the Drilex Value will be
$15 if Drilex exercises its rights under Section 7.1(c)(vi) of the Merger
Agreement (enabling Drilex to reduce, with Baker Hughes' concurrence, the levels
of Revenue and EBITDA that permit Baker Hughes to terminate the Merger
Agreement). See "Certain Provisions of the Merger Agreement -- Termination."
Unless another date is agreed to by the parties, the Closing will occur on
a date no later than the second business day after the conditions to the Merger
contained in the Merger Agreement have been satisfied or waived, provided that
the Closing shall be delayed if the Drilex Value has not been determined until
the business day after the Drilex Value has been determined. On the Closing
Date, the parties shall cause a Certificate of Merger to be filed with the
Delaware Secretary of State and the time of such filing will be the "Effective
Time" unless otherwise provided in the Certificate of Merger.
Pursuant to the Merger Agreement, the certificate of incorporation of
Drilex will be the certificate of incorporation of the surviving corporation of
the Merger (the "Surviving Corporation"). The Bylaws of Drilex will be the
Bylaws of the Surviving Corporation. The directors of Merger Sub and the
officers of Drilex immediately prior to the Effective Time will be the initial
directors and officers, respectively, of the Surviving Corporation.
Based upon the capitalization of Baker Hughes and Drilex as of March 31,
1997, and assuming a Baker Hughes Average Closing Price of $38.30 per share,
stockholders of Drilex immediately prior to the Merger would hold approximately
2% of the outstanding Baker Hughes Common Stock immediately after the Merger.
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<PAGE> 23
STOCKHOLDER AGREEMENT
DRLX Partners is the controlling stockholder of Drilex by virtue of its
ownership of 4,119,207 shares of Drilex Common Stock, representing approximately
61.8% of the outstanding Drilex Common Stock. In order to induce Baker Hughes to
enter into the Merger Agreement with Drilex, DRLX Partners concurrently entered
into a Stockholder Agreement with Baker Hughes (the "Stockholder Agreement"). In
the Stockholder Agreement, DRLX Partners agreed to vote its 4,119,207 shares of
Drilex Common Stock in favor of the approval of the Merger Agreement and the
Merger. In addition, DRLX Partners granted Baker Hughes an option (the "Option")
to purchase, upon the occurrence of certain "Triggering Events," up to 1,665,839
shares of Drilex Common Stock owned by DRLX Partners at a cash exercise price of
$16 per share. The shares subject to the Option represent 25% of the outstanding
Drilex Common Stock.
The Option is not exercisable unless a Triggering Event occurs. These
Triggering Events generally involve the termination of the Merger Agreement in
the context of a third party's making a competing "Acquisition Proposal" or the
withdrawal or modification of the recommendation of Drilex's Board of Directors
with respect to the Merger. The Option will expire 45 days after the termination
of the Merger Agreement, except that if an Acquisition Proposal is pending on
the 45th day, the expiration date will be extended (but in no event beyond
October 31, 1997) until shortly after the consummation, withdrawal or
termination of all pending Acquisition Proposals.
In addition, DRLX Partners has agreed that it will not, and will not
authorize or permit any of its officers, directors, employees, partners, agents,
affiliates or other representatives (collectively, "Stockholder
Representatives") to, directly or indirectly, solicit or encourage any
prospective acquiror or the invitation or submission of any inquiries, proposals
or offers or any other efforts or attempts that constitute, or may reasonably be
expected to lead to, an Acquisition Proposal. DRLX Partners has agreed that,
while the Merger Agreement remains in effect, it will promptly notify Baker
Hughes of its receipt of any requests for information or of any Acquisition
Proposal. DRLX Partners will advise Baker Hughes of the identity of the person
or group engaging in such discussions or negotiations, requesting such
information or making such Acquisition Proposal, and of the material terms and
conditions of any Acquisition Proposal.
As used in the Merger Agreement and the Stockholder Agreement, "Acquisition
Proposal" means any proposal or offer, other than a proposal or offer by Baker
Hughes or any of its affiliates, for, or that could be reasonably expected to
lead to, a tender or exchange offer, a merger, consolidation or other business
combination involving Drilex or any of its Significant Subsidiaries (as defined
in the Merger Agreement) or any proposal to acquire in any manner a substantial
equity interest in, or any substantial portion of the assets of, Drilex or any
of its Significant Subsidiaries.
The detailed provisions described above are contained in the Stockholder
Agreement, which is included in full as Appendix B to this Proxy
Statement/Prospectus and incorporated herein by reference. The preceding summary
description of certain provisions of the Stockholder Agreement is subject to the
more complete information set forth in the Stockholder Agreement.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
As of the Effective Time, Baker Hughes will deposit, in trust with the
Exchange Agent for the Merger, shares of Baker Hughes Common Stock and cash in
lieu of fractional shares to be issued or paid pursuant to the Merger Agreement.
As soon as reasonably practicable after the Effective Time, the Exchange Agent
will send a letter of transmittal to each stockholder of Drilex. The letter of
transmittal will contain instructions with respect to the surrender of
certificates ("Certificates") representing shares of Drilex Common Stock to be
exchanged in the Merger.
STOCKHOLDERS OF DRILEX SHOULD NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD.
Upon the surrender of each Certificate by Drilex stockholders and a letter
of transmittal, the Exchange Agent will issue a certificate representing the
whole number of shares of Baker Hughes Common Stock and a
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<PAGE> 24
check representing the amount of any cash in lieu of fractional shares and
unpaid dividends and distributions which such holder is entitled to receive
under the Merger Agreement.
No dividends or other distributions declared or made after the Effective
Time with respect to shares of Baker Hughes Common Stock will be paid to a
holder of any unsurrendered Certificate with respect to the shares of Baker
Hughes Common Stock the holder is entitled to receive, and no cash payment in
lieu of fractional shares will be paid to any holder, until the surrender of
such Certificate in accordance with the Merger Agreement.
After the Effective Time, there shall be no transfers of Drilex Common
Stock on the stock transfer books of the Surviving Corporation. If, after the
effective time of the Merger, Certificates formerly representing shares of
Drilex Common Stock are presented to the Surviving Corporation or the Exchange
Agent, they will be canceled and (subject to applicable abandoned property,
escheat and similar laws) exchanged for the number of shares of Baker Hughes
Common Stock and any cash a holder is entitled to receive under the Merger
Agreement.
Following the first anniversary of the Effective Time, the Exchange Agent
shall deliver to Baker Hughes, upon demand, all cash and shares of Baker Hughes
Common Stock, and thereafter Baker Hughes will act as the Exchange Agent.
Thereafter, each holder of a Certificate may surrender such Certificate to Baker
Hughes and (subject to applicable abandoned property, escheat and similar laws)
receive in exchange therefor the number of shares of Baker Hughes Common Stock
and any cash such holder is entitled to receive under the Merger Agreement.
Neither Baker Hughes nor Drilex shall be liable to any holder of shares of
Drilex Common Stock for any amount of property in respect of such shares (or
dividends or distributions with respect thereto) delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
FRACTIONAL SHARES
No fractional shares of Baker Hughes Common Stock will be issued to any
stockholder of Drilex upon consummation of the Merger. For each fractional share
that would otherwise be issued, Baker Hughes will pay an amount in cash (without
interest) equal to such fractional share multiplied by the Baker Hughes Average
Closing Price.
BACKGROUND OF THE MERGER
In February 1997, Eric L. Mattson, Senior Vice President and Chief
Financial Officer of Baker Hughes, raised with L. E. Simmons, Chairman of the
Board of Drilex, the possibility of a business combination involving Baker
Hughes and Drilex. Prior to such discussion, Drilex had not been seeking to
enter into a merger or similar transaction that would involve a change in
control of Drilex. Additional meetings between representatives of Baker Hughes
and Drilex were held in February and early March 1997 to discuss further the
possibility of such a transaction.
In early March 1997, the Baker Hughes and Drilex representatives agreed
that the parties should enter into a confidentiality agreement pursuant to which
Baker Hughes would be provided information regarding Drilex to assist it in its
analysis for continued discussions. At a previously scheduled meeting of the
Board of Directors of Drilex (the "Drilex Board") held on March 12, 1997, Mr.
Simmons discussed with the Drilex Board the preliminary discussions with Baker
Hughes. The Drilex Board authorized its representatives to continue to pursue a
potential business combination with Baker Hughes. Drilex also engaged Merrill
Lynch, which had acted as the lead underwriter in Drilex's initial public
offering in 1996, to provide Drilex with financial advisory services with
respect to various matters relating to the discussions with Baker Hughes and to
review the fairness from a financial point of view to Drilex's stockholders of
any business combination proposal presented to the Drilex Board.
Discussions ensued between representatives of Baker Hughes and Drilex after
the March 12 Drilex Board meeting concerning the structure and other terms of a
possible business combination. On March 24, 1997,
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<PAGE> 25
Drilex's outside counsel delivered an initial draft of the Merger Agreement to
outside counsel for Baker Hughes.
On April 3, 1997, the Drilex Board met to, among other things, receive a
status update on the continuing discussions with Baker Hughes and a presentation
by Merrill Lynch on certain information relating to Baker Hughes and the
proposed business combination. The Drilex Board also received a preliminary
report on Drilex's first quarter financial performance, which was weaker than
previously expected.
From April 3 to April 16, Drilex representatives conferred with Baker
Hughes representatives and negotiated the detailed terms, provisions and
conditions of the Merger Agreement, and representatives of Drilex and DRLX
Partners conferred with Baker Hughes representatives and negotiated the detailed
terms, provisions and conditions of the Stockholder Agreement. Among the most
highly negotiated provisions were the terms of the Exchange Ratio and the
termination provisions and fees included in the Merger Agreement and the number
of shares that would be subject to the Option contained in the Stockholder
Agreement. The terms of the Exchange Ratio and Baker Hughes' right to terminate
the Merger Agreement if certain financial thresholds are not met reflected a
compromise that was intended to partially address Baker Hughes' concern that
Drilex's financial results would not improve during Drilex's second quarter in
the manner anticipated by Drilex.
At a special meeting held on April 16, 1997, the Drilex Board received
detailed reports of the negotiations with Baker Hughes and the terms and
provisions of the Merger Agreement and the Stockholder Agreement. After
receiving presentations from Drilex's financial and legal advisors, the Drilex
Board received the oral opinion of Merrill Lynch (which opinion was subsequently
confirmed by delivery of a written opinion dated April 16, 1997) to the effect
that, as of April 16, 1997, and based upon and subject to certain factors,
assumption, qualifications and limitations stated in such opinion, the
consideration to be received in the Merger is fair from a financial point of
view of the holders of Drilex Common Stock. The Drilex Board then determined
that the terms of the Merger Agreement and the transactions contemplated thereby
were fair to, and in the best interests of, Drilex and its stockholders, and
accordingly, the Drilex Board approved, by a unanimous vote of all directors
present (with one director absent), the Merger Agreement and the Stockholder
Agreement and resolved to recommend that the Drilex stockholders vote for the
approval and adoption of the Merger Agreement at the Special Meeting. Following
the Drilex Board special meeting, the Drilex Board executed a unanimous written
consent approving the Merger Agreement and the Stockholder Agreement and
recommending that the Drilex stockholders vote for the approval and adoption of
the Merger Agreement at the Special Meeting. See "-- Recommendation of the
Boards of Directors; Reasons for the Merger."
Later that day, after the Drilex Board's special meeting, the Merger
Agreement and the Stockholder Agreement were executed. Before the commencement
of trading on April 17, 1997, Baker Hughes and Drilex each issued a press
release announcing the execution of the Merger Agreement.
RECOMMENDATION OF THE DRILEX BOARD; REASONS FOR THE MERGER
The Drilex Board believes that the terms of the Merger are fair to and in
the best interests of Drilex and its stockholders and has unanimously approved
the Merger Agreement and unanimously recommends its approval and adoption by
Drilex's stockholders.
In reaching its conclusion, the Drilex Board considered, among other
factors:
- Information concerning the financial performance and condition, business
operations and prospects of each of Drilex and Baker Hughes.
- Current industry, economic and market conditions, which have encouraged
business combinations and other strategic alliances in the oil and gas
service industry.
- Recent market prices of the Drilex Common Stock and the Baker Hughes
Common Stock, including an analysis showing that since Drilex's initial
public offering in July 1996, the Drilex Common Stock had underperformed
in comparison to the market performance of the Baker Hughes Common Stock,
a
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<PAGE> 26
composite of common stocks of smaller companies believed to be comparable
to Drilex and a composite of common stocks of large oil and gas service
companies believed to be comparable to Baker Hughes.
- The structure of the transactions and terms of the Merger Agreement and
the Stockholder Agreement.
- The financial analyses and opinion of Merrill Lynch described below,
including Merrill Lynch's conclusion that the consideration to be received
in the Merger is fair, from a financial point of view, to the holders of
Drilex Common Stock. The Merrill Lynch opinion, dated April 16, 1997, is
based upon and subject to the factors and assumptions, qualifications and
limitations set forth therein.
- The fact that the Merger would provide holders of Drilex Common Stock
with the opportunity to receive a premium over recent market prices for
the Drilex Common Stock. Although the premium over market prices one day
and one week prior to announcement of the Merger (11.1% and 7.1%,
respectively, assuming a $15 Drilex Value) was significantly less than the
average premium paid in other recent comparable mergers, the Board also
considered that (i) the average premium paid four weeks prior to
announcement of the Merger (42.9% assuming a $15 Drilex Value) was
comparable to the average premium paid in other recent comparable mergers,
(ii) the premium paid would be higher if the Drilex Value is $16 and (iii)
there was significant risk that the market price of Drilex Common Stock
would react unfavorably to the announcement of the 1997 first quarter
financial results in the absence of a prior or concurrent announcement of
the Merger Agreement.
- Consolidation benefits that would be available to the combined entity
after the Merger that could allow Baker Hughes to conclude it was
justifiable to pay greater consideration for the Drilex Common Stock than
it would in the absence of such benefits.
- The Drilex Board's assessment of Drilex's strategic alternatives to the
Merger, including remaining an independent company, conducting
acquisitions, and merging with a party other than Baker Hughes. In
particular, the Drilex Board considered that (i) since its initial public
offering, Drilex's results of operations had been generally disappointing
notwithstanding Drilex's focus on financial results and a generally
favorable industry environment, (ii) in light of Drilex's recent financial
results, uncertainty existed whether Drilex as an independent company
would be able to produce substantially improved financial results on a
consistent basis, (iii) Drilex had encountered unexpected difficulties in
connection with its integration of assets acquired from Cobb Directional
Drilling Company, Inc. and that Drilex might encounter similar or other
difficulties if it were to pursue a more aggressive acquisition strategy,
and (iv) Baker Hughes' current position in Drilex's line of business, the
consolidation benefits available to Baker Hughes from the Merger and Baker
Hughes' acquisition strategy made Baker Hughes a favorable merger
candidate. In addition, although the Drilex Board noted that less than one
full year had elapsed since Drilex's initial public offering, the Drilex
Board did not believe that the proximity in time to the initial public
offering should cause the Company not to pursue a merger the Drilex Board
believed to be in the best interests of the Drilex stockholders.
- The expectation that the Merger will afford Drilex's stockholders the
opportunity to receive Baker Hughes Common Stock in a transaction that is
nontaxable for federal income tax purposes.
- The greater liquidity provided by Baker Hughes Common Stock in contrast
to that provided by Drilex Common Stock.
- Opportunities for Drilex's employees in the Baker Hughes organization
after the Merger.
- The ability of the Drilex Board pursuant to the Merger Agreement to
entertain superior unsolicited alternative proposals for a business
combination transaction, negotiate and give information to third parties
and, subject to the payment of a $4 million break-up fee to Baker Hughes
and certain other conditions, terminate the Merger Agreement if the Drilex
Board determines that any such action is necessary in order for the Drilex
Board to act in a manner consistent with its fiduciary obligations under
applicable law.
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In determining the Merger was fair to and in the best interest of Drilex's
stockholders, the Drilex Board considered the factors above as a whole and did
not assign specific or relative weights to such factors. The Drilex Board
believes that the Merger is an opportunity for Drilex's stockholders to
participate in a combined enterprise that has significantly greater business and
financial resources than Drilex would have absent the Merger and to receive, on
a tax-deferred basis, a premium for their Drilex Common Stock based on recent
market prices.
OPINION OF DRILEX'S FINANCIAL ADVISOR
Drilex retained Merrill Lynch to act as its exclusive financial advisor in
connection with a possible business combination. On April 16, 1997, Merrill
Lynch rendered to the Drilex Board its written opinion (the "Merrill Lynch
Opinion") that, as of such date and based upon and subject to the factors,
assumptions, qualifications and limitations set forth therein, the consideration
to be received in the Merger by the holders of Drilex Common Stock (the
"Consideration") was fair to the holders of Drilex Common Stock (other than
Baker Hughes and its affiliates) from a financial point of view.
THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY MERRILL LYNCH, IS ATTACHED AS APPENDIX C HERETO AND IS
INCORPORATED HEREIN BY REFERENCE. THE MERRILL LYNCH OPINION WAS PROVIDED TO THE
DRILEX BOARD FOR ITS INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS FROM A
FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO THE HOLDERS OF DRILEX COMMON
STOCK (OTHER THAN BAKER HUGHES AND ITS AFFILIATES), DOES NOT ADDRESS THE MERITS
OF THE UNDERLYING DECISION BY DRILEX TO ENGAGE IN THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY DRILEX STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE ON THE MERGER OR ANY TRANSACTION RELATED THERETO.
The Consideration was determined through negotiations between Baker Hughes
and Drilex and was approved by the Drilex Board.
The description set forth below is a summary of the material analyses
performed by Merrill Lynch and presented to the Board of Directors of Drilex.
Although all analyses and factors considered by Merrill Lynch that were material
and presented to the Board of Directors of Drilex are set forth herein, the
summary set forth below is not a complete description of the analyses underlying
the Merrill Lynch Opinion or the presentation made by Merrill Lynch to the
Drilex Board. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Merrill Lynch did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, Drilex or Baker Hughes. Any estimates contained in the analyses performed
by Merrill Lynch are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the value of businesses or securities
do not purport to be appraisals or to reflect the prices at which such
businesses or securities might actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. In addition, as
described above, the Merrill Lynch Opinion and Merrill Lynch's presentation to
the Drilex Board were among several factors taken into consideration by the
Drilex Board in making its determination to approve and adopt the Merger
Agreement. Consequently, the Merrill Lynch analyses described below should not
be viewed as determinative of the decision of the Drilex Board or Drilex's
management with respect to the fairness of the Consideration.
In arriving at its opinion, Merrill Lynch, among other things, reviewed
certain publicly available business and financial information relating to each
of Drilex and Baker Hughes, as well as the Merger Agreement and
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the Stockholder Agreement. Merrill Lynch also reviewed certain other
information, including financial forecasts, for Drilex and Baker Hughes, in each
case provided to it by Drilex and Baker Hughes, and met with members of senior
management and representatives of each of Drilex and Baker Hughes to discuss the
businesses and prospects of Drilex and Baker Hughes, before and after giving
effect to the Merger.
Merrill Lynch also considered certain stock market data for Drilex and
Baker Hughes and certain financial results for Drilex and Baker Hughes and
compared that data with similar data for other publicly held companies that
Merrill Lynch deemed to be comparable to Drilex and Baker Hughes. In addition,
Merrill Lynch considered the financial terms of certain other business
combination transactions which Merrill Lynch deemed relevant. Merrill Lynch
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as it deemed necessary,
including its assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch relied on the accuracy and
completeness of all information supplied or otherwise made available to Merrill
Lynch by Drilex, Baker Hughes or their respective representatives, discussed
with or reviewed by or for Merrill Lynch, or publicly available, and further
relied on the assurances of management of Drilex and Baker Hughes that they were
not aware of any facts that would make such information inaccurate or
misleading. Merrill Lynch has not assumed any responsibility for independently
verifying such information, has not undertaken an independent evaluation or
appraisal of the assets or liabilities of Drilex or Baker Hughes or been
furnished with such an evaluation or appraisal and has not conducted a physical
inspection of the properties or facilities of Drilex or Baker Hughes. With
respect to the financial forecast information furnished to or discussed with
Merrill Lynch by Drilex, Baker Hughes or their representatives, Merrill Lynch
assumed that it was reasonably prepared and reflected the best currently
available estimates and judgments of Drilex's and Baker Hughes's managements as
to the expected future financial performance of Drilex or Baker Hughes, as the
case may be, before and after giving effect to the Merger. Merrill Lynch
expressed no opinion as to such financial forecast information or the
assumptions on which they were based. In addition, Merrill Lynch assumed that
the Merger will qualify as a tax-free reorganization for U.S. Federal income tax
purposes. For purposes of rendering its opinion, Merrill Lynch assumed, in all
respects material to its analysis, that the representations and warranties of
each party to the Merger Agreement and the Stockholder Agreement and all related
documents and instruments contained therein are true and correct, that each
party to such documents will perform all of the covenants and agreements
required to be performed by such party under such documents and that all
conditions to the consummation of the Merger will be satisfied without waiver
thereof. Merrill Lynch also assumed that all material governmental, regulatory
or other consents and approvals will be obtained in connection with the Merger
and that in the course of obtaining any necessary governmental, regulatory or
other consents and approvals, or any amendments, modifications or waivers to any
documents to which either of Drilex or Baker Hughes are party, no restrictions
will be imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits to Drilex of the Merger.
The Merrill Lynch Opinion is necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
such opinion. Merrill Lynch was not authorized by Drilex or the Drilex Board to
solicit, nor did it solicit or take into account any prospect of, third-party
indications of interest for the acquisition of all or any part of Drilex. In
addition, Merrill Lynch was not asked to consider, and the Merrill Lynch Opinion
does not in any manner address, the price at which shares of Baker Hughes Common
Stock will actually trade following consummation of the Merger. Unless otherwise
noted, the multiples and premiums set forth below assume that the Drilex Value
is $15.00 per share.
Comparable Transaction Analysis. Merrill Lynch reviewed certain publicly
available information regarding selected business combination transactions in
the oilfield services industry between April 1995 and March 1997 (the
"Comparable Transactions") and compared certain financial information and
multiples from the Comparable Transactions to corresponding financial
information and multiples for Drilex. The Comparable Transactions and the dates
the transactions were announced are as follows: Tidewater Inc.'s proposed
acquisition of Ocean Group Plc (March 1997); Camco International, Inc.'s
proposed acquisition of Production Operators Corp. (February 1997); Baker
Hughes' proposed acquisition of Petrolite Corporation (February 1997); Parker
Drilling Company's acquisition of the Mallard Division of Energy Ventures
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(November 1996); Halliburton Company's acquisition of Landmark Graphics
Corporation (October 1996); BJ Services Company's acquisition of Nowsco Well
Service Ltd. (June 1996); Tuboscope Vetco International Corporation's
acquisition of Drexel Oilfield Services (April 1996); Tidewater Inc.'s
acquisition of Hornbeck Offshore Services, Inc.'s (March 1996); Seacor Holdings,
Inc.'s acquisition of John E. Graham & Sons (September 1995); Weatherford
International Incorporated's acquisition of Enterra Corporation (June 1995); and
BJ Services Company's acquisition of The Western Company of North America (April
1995). Merrill Lynch's analysis indicated transaction value as a multiple of
latest twelve month's ("LTM") earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the Comparable Transactions ranging from 6.8x to
37.6x with a mean of 14.0x. Merrill Lynch's analysis also indicated equity value
as a multiple of LTM net income for the Comparable Transactions ranging from
11.7x to 39.5x with a mean of 32.5x.
Based on the foregoing Comparable Transactions multiples, Merrill Lynch
determined that the appropriate LTM EBITDA and net income multiple ranges to be
applied to Drilex's LTM EBITDA and net income were 8.0x to 11.0x and 25.0x to
35.0x, respectively. Applying these multiple ranges to Drilex's LTM EBITDA and
net income, Merrill Lynch calculated equity values of $81.5 million to $119.3
million and $52.5 million to $73.5 million, respectively (compared to an
aggregate equity value in the Merger of $101.7 million).
No transaction utilized in the comparable transaction analysis was
identical to the Merger. Accordingly, due to the inherent differences between
the Merger and the Comparable Transactions, an analysis of the results of this
comparison is not purely mathematical; rather, it involves complex
considerations and judgments concerning differences in historical and projected
financial and operating characteristics of the comparable acquired companies and
other factors that could affect the acquisition value of such companies and
Drilex.
Comparable Company Trading Analysis. Using publicly available information,
Merrill Lynch examined the trading multiples for a group of publicly traded
companies that Merrill Lynch deemed to be comparable to Drilex (utilizing a base
case and a downside case of Drilex financial performance). This group of
selected comparable companies (the "Comparable Companies") consisted of Dailey
Petroleum Services Corp., Dawson Geophysical Company, Dreco Energy Services,
Ltd., 3-D Geophysical, Inc. and Tuboscope Vetco International Corporation.
Merrill Lynch calculated adjusted market value as market value of the common
stock plus total debt, preferred stock and minority interests, less cash and
cash equivalents ("Adjusted Market Value"). The analysis indicated (i) Adjusted
Market Value as a multiple of 1997 estimated EBITDA for the Comparable Companies
ranged from 1.4x to 7.7x with a mean of 5.2x (6.2x excluding Dailey), (ii)
Adjusted Market Value as a multiple of 1998 estimated EBITDA for the Comparable
Companies ranged from 1.3x to 6.7x with a mean of 4.4x (5.2x excluding Dailey)
and (iii) Adjusted Market Value as a multiple of 1997 and 1998 estimated EBITDA
for Baker Hughes of 8.4x and 7.5x, respectively. Merrill Lynch also calculated
the market value of common stock as a multiple of estimated 1997 and 1998 net
income for the Comparable Companies using estimates of net income obtained from
IBES, a data service which monitors and publishes a compilation of earnings
estimates produced by selected research analysts on companies of interest to
investors, for Baker Hughes and for Drilex (utilizing a base case and a downside
case of Drilex financial performance). The analysis indicated (x) market value
as a multiple of 1997 estimated net income for the Comparable Companies ranging
from 9.2x to 17.4x with a mean of 12.2x (12.9x excluding Dailey), (y) market
value as a multiple of 1998 estimated net income for the Comparable Companies
ranging from 6.9x to 13.1x with a mean of 9.3x (9.9x excluding Dailey), and (z)
market value as a multiple of 1997 and 1998 estimated net income for Baker
Hughes of 19.8x and 16.2x, respectively.
Based on the foregoing analysis of trading multiples of the Comparable
Companies, Merrill Lynch determined that the appropriate multiple ranges of (i)
1997 and 1998 estimated EBITDA to be applied to Drilex's 1997 and 1998 estimated
EBITDA were 5.0x to 7.0x and 4.5x to 6.5x, respectively, and (ii) 1997 and 1998
estimated net income to be applied to Drilex's 1997 and 1998 estimated net
income were 11.0x to 15.0x and 10.0x to 12.0x, respectively. Applying these
multiple ranges to Drilex's (i) 1997 and 1998 estimated base case EBITDA,
Merrill Lynch calculated aggregate equity values of $67.7 million to $102.5
million and $64.4 million to $101.6 million, respectively, and (ii) 1997 and
1998 estimated base case net income, Merrill Lynch calculated aggregate equity
values of $53.9 million to $73.5 million and $59.0 million to $70.8 million,
respectively. Applying these same multiple ranges to Drilex's (i) 1997 and 1998
estimated downsided case
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EBITDA, Merrill Lynch calculated aggregate equity values of $53.7 million to
$82.9 million and $49.1 million to $79.5 million, respectively, and (ii) 1997
and 1998 estimated downside case net income, Merrill Lynch calculated aggregate
equity values of $35.2 million to $48.0 million and $38.0 million to $45.6
million, respectively. These values compare to an aggregate equity value in the
Merger of $101.7 million.
Discounted Cash Flow Analysis. Using a discounted cash flow methodology,
Merrill Lynch calculated ranges of implied firm values for Drilex utilizing the
base case and the downside case financial projections developed in conjunction
with Drilex. Merrill Lynch utilized multiples of 2001 EBITDA ranging from 5.0x
to 7.0x as the terminal value of the enterprise and discount rates ranging from
12.0% to 16.0%. The discount rates were based on an analysis of the weighted
average cost of capital for Drilex. The base case discounted cash flow analysis
indicated a range of implied equity values for Drilex from $72.2 million to
$94.2 million. The downside case discounted cash flow analysis indicated a range
of implied equity values for Drilex from $53.0 million to $71.1 million. These
values compare to an aggregate equity value in the Merger of $101.7 million.
Based on the results of the foregoing analyses, Merrill Lynch calculated a
relevant market value range for Drilex of between $75.6 million and $91.5
million ($11.00 and $13.50 per share).
Common Stock Trading History. Merrill Lynch examined the history of trading
prices and volume for the Drilex Common Stock. Additionally, Merrill Lynch
reviewed the history of trading prices and the relative price performance of the
Drilex Common Stock, the Baker Hughes Common Stock, a composite of the common
stocks of the Comparable Companies and a composite of the common stocks of Baker
Hughes, Halliburton, Dresser, Schlumberger and Western Atlas.
Merger Premium Analysis. Merrill Lynch examined the premiums paid for
target company shares in certain mergers and acquisitions over the
pre-announcement stock prices of such target companies and calculated the
premium implied by the Merger.
Merrill Lynch examined premiums paid over pre-announcement stock prices one
day, one week and four weeks prior to announcement (i) in all public company
merger transactions having equity values between $100 million and $300 million
for the periods 1995 to present and 1996 to present; and (ii) in eleven selected
oilfield services merger transactions. In aggregate, such analyses indicated a
range of merger premiums of between 25% and 45% to be indicative, compared to
premiums implied by the Merger of 11.1%, 7.1% and 42.9% over pre-announcement
stock prices one day, one week and four weeks prior to announcement,
respectively.
Pursuant to a letter agreement between Drilex and Merrill Lynch, Drilex
agreed to pay Merrill Lynch a fee in an amount equal to 1.0% of the aggregate
purchase price paid in the Merger or certain other business combinations
involving Drilex, payable upon the closing of the Merger or such other business
combination. Upon the closing of the Merger, Merrill Lynch's fee described above
will be approximately $1.2 million. Drilex also agreed to reimburse Merrill
Lynch for its reasonable out-of-pocket expenses, including certain reasonable
fees and disbursements of its legal counsel. Additionally, Drilex agreed to
indemnify Merrill Lynch and certain related persons for certain liabilities
related to or arising out of its engagement, including liabilities under the
federal securities laws.
Drilex retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking and
advisory firm. Merrill Lynch, as part of its investment banking business, is
continuously 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 valuations for corporate and other purposes. Merrill Lynch is currently
engaged by Baker Hughes as financial advisor in connection with Baker Hughes'
pending merger with Petrolite Corporation and has, in the past, provided
financial advisory and financing services to Drilex and Baker Hughes and has
received fees for the rendering of such services. Merrill Lynch also acted as
managing underwriter for Drilex's initial public offering completed in July
1996. Merrill Lynch indicates in the Merrill Lynch Opinion that it has no reason
to believe that it will not continue to provide such services to Baker Hughes in
the future. In the ordinary course of its business, Merrill Lynch and its
affiliates may actively trade
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the equity securities of Drilex and the debt and equity securities of Baker
Hughes (and anticipate trading after the Merger in the securities of Baker
Hughes) for their own account and for the accounts of customers and accordingly,
may at any time hold a long or short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the Merger to the holders Drilex Common Stock and is based upon current
provisions of the Internal Revenue Code of 1986, as amended ("Code"), existing
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. No attempt has been made to comment on all
federal income tax consequences of the Merger that may be relevant to particular
holders, including holders that are subject to special tax rules such as dealers
in securities, foreign persons, insurance companies and tax exempt entities.
Holders of Drilex 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 consequences under state, local and foreign tax
laws.
No ruling from the Internal Revenue Service ("IRS") has been or will be
requested in connection with the Merger. Drilex has received from its counsel,
Vinson & Elkins L.L.P., an opinion to the effect that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. It is a condition to the obligation of Drilex to
consummate the Merger that such opinion shall not have been withdrawn or
modified in any material respect. Although the Board of Directors of Drilex has
the right under the Merger Agreement to waive this condition that the opinion of
Vinson & Elkins L.L.P. shall not have been withdrawn or modified in any material
respect, it will not waive the condition unless Drilex supplements this Proxy
Statement/Prospectus to so advise the Drilex stockholders and resolicits the
vote of the Drilex stockholders.
The opinion referred to above is subject to certain assumptions and based
on certain representations of Baker Hughes, and Drilex. Stockholders of Drilex
should be aware that such opinions are not binding on the IRS and no assurance
can be given that the IRS will not adopt a contrary position.
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 Baker Hughes, Merger Sub or
Drilex in connection with the Merger;
(b) no gain or loss will be recognized by a holder of Drilex Common
Stock who exchanges all of the holder's shares of Drilex Common Stock
solely for shares of Baker Hughes Common Stock in the Merger;
(c) the aggregate basis of the shares of Baker Hughes Common Stock to
be received by a Drilex stockholder in the Merger (including any fractional
share deemed received) will be the same as the aggregate basis of the
shares of Drilex Common Stock surrendered in exchange therefor;
(d) the holding period of the shares of Baker Hughes Common Stock to
be received by a Drilex stockholder in the Merger will include the holding
period of the shares of Drilex Common Stock surrendered in exchange
therefor, provided that such shares of Drilex Common Stock are held as
capital assets at the Effective Time; and
(e) a stockholder of Drilex receiving cash in lieu of a fractional
share will recognize gain or loss upon such payment equal to the
difference, if any, between such stockholder's basis in the fractional
share (as described in paragraph (c) above) and the amount of cash
received. Such gain or loss will be a capital gain or loss if the Drilex
Common Stock is held as a capital asset at the Effective Time.
EACH HOLDER OF DRILEX 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.
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REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division"), and specified waiting period requirements have been satisfied. Each
of Baker Hughes and Drilex has filed a premerger notification and report forms
with the FTC and the Antitrust Division, and the waiting period under the HSR
Act was terminated on June 4, 1997.
At any time before or after the Effective Time, the Justice Department, the
FTC, a State or a private person or entity could seek under the antitrust laws,
among other things, to enjoin the Merger or to cause Baker Hughes to divest
itself, in whole or in part, of Drilex or of other businesses conducted by Baker
Hughes. There can be no assurance that a challenge to the Merger will not be
made or that, if such a challenge is made, Baker Hughes will prevail. The
obligations of Baker Hughes and Drilex to consummate the Merger are subject to
the condition that there be no order or injunction of a court of competent
jurisdiction that prohibits the consummation of the Merger, and the obligations
of Baker Hughes are subject to the condition that no order or injunction that
imposes specified limitations on Baker Hughes or Drilex be in effect, and no
suit by a governmental authority seeking any order or injunction described in
this sentence be pending. See "Certain Provisions of the Merger
Agreement -- Conditions to the Merger," "-- Termination" and "-- Expenses and
Termination Fees."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
historical cost basis of the assets and liabilities of Baker Hughes and Drilex
will be carried forward to the operations of the combined companies at recorded
amounts and results of operations of the combined companies will include income
of Baker Hughes and Drilex for the entire fiscal year in which the combination
occurs. The historical results of operations of the separate companies for
fiscal years prior to the Merger will not be combined because the retained
earnings and results of operations of Drilex are not material to the
consolidated financial statements of Baker Hughes.
Baker Hughes and Drilex each expects to receive a letter from their
respective independent accountants stating that, based upon certain material
facts and certain representations and warranties described in such letters,
there were no significant matters that came to their attention that would
preclude the combined companies from accounting for the Merger as a pooling of
interests. Certain events, including certain transactions with respect to Baker
Hughes Common Stock or Drilex Common Stock by affiliates of Baker Hughes or
Drilex, respectively, may prevent the Merger from qualifying as a pooling of
interests for accounting and financial reporting purposes. For information
concerning certain restrictions to be imposed on the transferability of Baker
Hughes Common Stock to be received by affiliates in order, among other things,
to ensure the availability of pooling of interests accounting treatment, see
" -- Resales of Baker Hughes Common Stock."
DRILEX EMPLOYEE MATTERS
Pursuant to the Merger Agreement, Baker Hughes has agreed to cause Drilex
(the surviving corporation in the Merger) to pay approximately 180 designated
employees of Drilex (including all executive officers) a bonus of either 50% or
100% of one month's salary (based on the employee's position) if (i) the
employee remains employed by Drilex or its affiliates 45 days after the Closing
Date or (ii) the employee's employment is involuntarily terminated by Drilex or
its affiliates prior to 45 days after the Closing Date for any reason other than
cause (as defined). Baker Hughes has also agreed to cause Drilex to pay the
quarterly growth incentive bonuses that are earned or deemed by Drilex to have
been earned by employees for the second calendar quarter of 1997 under the
quarterly bonus program established in March 1997, if such bonus obligations
have not been satisfied prior to the Effective Time. All amounts paid or accrued
with respect to the quarterly growth incentive bonuses shall not be excluded
from the calculations under the Merger Agreement with respect to the Drilex
Value. Baker Hughes has also agreed to cause Drilex to pay pro rata bonuses that
are earned or deemed by Drilex to have been earned for the period through the
Effective Time pursuant to the quarterly cash
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bonuses under the Executive Management Plan and the Profit Center Management
Plan (the "Management Plans") for approximately 20 designated employees
(including all executive officers). After termination of the Management Plans
after the Merger, Baker Hughes will cause Drilex to provide participants with
aggregate compensation reasonably comparable to that available to similarly
situated employees of Baker Hughes.
Baker Hughes has agreed to cause Drilex to honor employment agreements with
John Forrest and Denny Kerr. Mr. Forrest's agreement, entered into in connection
with the Merger Agreement, provides for Mr. Forrest's employment for six months
after the Effective Time at his current annual salary of $215,000 and a
severance payment upon termination by either party equal to 18 months salary
(one half of which is payable at termination, with the balance paid over 18
months). Under the agreement, Mr. Forrest has agreed to certain non-competition
provisions for the 18-month period after termination of employment. Mr. Forrest
also has a right of first offer should Baker Hughes dispose of Drilex's
trenchless business within six months after the Effective Time. Drilex will also
pay Mr. Forrest a bonus equal to 25% of his base salary if the Merger is
consummated and the Drilex Value is $16. Mr. Kerr's agreement provides, in
exchange for his agreement not to solicit Drilex employees for one year after
departure and to continue employment, Drilex will pay Mr. Kerr (i) if the
consummation of a substantial transaction (such as the Merger) does not occur
prior to October 31, 1997, two years' salary if he resigns on or before December
31, 1997 and (ii) if Mr. Kerr remains employed by Drilex until two years after
the Effective Time (or is terminated other than for cause), a bonus of one
years' salary. In the event of a termination of employment after the Effective
Time, certain restrictions on Mr. Kerr's activities will apply.
Baker Hughes has agreed to cause Drilex to pay three executive officers
(Bruce Broussard, Todd Caspary and Lee Hardin) severance benefits if the officer
is involuntarily terminated by Drilex or its affiliates during the six-month
period commencing on the Closing Date, for any reason other than cause. These
severance benefits will include (a) a cash payment equal to the quarterly cash
bonus that reasonably would have been earned for the calendar quarter during
which the Closing Date occurs, unless paid prior to termination of employment,
and (b) one year's base salary, payable in accordance with normal payroll
practices, but reduced to 50% of base salary commencing in the month after the
officer obtains other full-time employment. In addition, the officer will be
entitled to continuation of health insurance coverage at no cost until one year
after termination of employment or, if earlier, until the officer is covered
under another employer's group health plan.
Baker Hughes and Drilex have agreed that the Drilex Employee Benefit Plans
and Drilex Pension Plans (as defined) in effect at the date of the Merger
Agreement will remain in effect until otherwise determined. To the extent Drilex
Employee Benefit Plans and Drilex Pension Plans are not continued, Baker Hughes
will provide for a period of one year after the Effective Time aggregate
compensation (including benefits) that is not less favorable, in the aggregate,
to employees as that applicable to similarly situated employees of Baker Hughes.
Service with Drilex and its subsidiaries shall, to the extent permitted by law,
(i) constitute service for all purposes under the Baker Hughes Employee Benefit
Plans (as defined), provided that such service does not result in a duplication
of benefits paid or payable under the Baker Hughes Employee Benefit Plans, and
(ii) constitute service for participation and vesting purposes under the Baker
Hughes Pension Plans (as defined). Baker Hughes has agreed not to make, prior to
the Effective Time, any representations or promises to employees of Drilex
concerning compensation payable after the Closing Date without the prior consent
of Drilex.
TREATMENT OF DRILEX STOCK OPTIONS
The Merger Agreement provides that at the Effective Time, each outstanding
option to purchase Drilex Common Stock that has been granted pursuant to the
Drilex Stock Option Plan ("Drilex Stock Option") shall be treated as described
below. The portion, if any, of each Drilex Stock Option that is exercisable as
of the Effective Time in accordance with the terms thereof shall be assumed by
Baker Hughes. As so assumed, such option shall be deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under such
Drilex Stock Option, a number of shares of Baker Hughes Common Stock equal to
the number of shares of Drilex Common Stock purchasable pursuant to such
exercisable portion of such Drilex Stock Option multiplied by the Exchange
Ratio, at a price per share equal to the per-share exercise price for
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the shares of Drilex Common Stock purchasable pursuant to such Drilex Stock
Option divided by the Exchange Ratio, with a cash adjustment for fractional
shares. After the Effective Time, each assumed option shall otherwise be
exercisable upon the same terms and conditions as were applicable to the related
Drilex Stock Option immediately prior to the Effective Time. Drilex shall take
all reasonable action as may be required such that the portion, if any, of each
Drilex Stock Option that is not exercisable as of the Effective Time (an
"Unexercisable Option") shall be canceled in exchange for the number of shares
of Baker Hughes Common Stock, decreased to the nearest whole share, having an
aggregate market value at the Effective Time (based on the Baker Hughes Average
Closing Price) equal to the number of shares of Drilex Common Stock subject to
such Unexercisable Option multiplied by the excess, if any, of the Drilex Value
over the per-share exercise price thereof. To the extent the terms of an
Unexercisable Option allow for withholding to satisfy tax obligations, such
rights shall apply to the Baker Hughes Common Stock so issuable.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Board of Directors of Drilex with
respect to the Merger, stockholders should be aware that certain members of
Drilex's management and the Drilex Board have certain interests in the Merger
(including bonus and severance arrangements) that are in addition to the
interests of the stockholders of Drilex generally. The Drilex Board was aware of
these interests and considered them in connection with the consideration of the
Merger, the Merger Agreement and the transactions contemplated thereby.
Arrangements with Certain Directors and Officers. See " -- Drilex Employee
Matters" for information concerning employment agreements, severance benefits
and other employee benefit matters (which aggregate up to approximately $1.2
million) and "-- Treatment of Drilex Stock Options" for information concerning
the treatment of the options previously granted employees of Drilex. See
"Certain Provisions of the Merger Agreement -- Indemnification" for information
concerning indemnification of directors and executive officers.
Other Arrangements Involving L.E. Simmons. L. E. Simmons is the Chairman of
the Board of Drilex. Mr. Simmons is also the president, a director and the sole
shareholder of the general partner of SCF Partners, L.P., which is the general
partner of DRLX Partners, Drilex's largest stockholder. David C. Baldwin, a
director of Drilex, is also an officer of the general partner of SCF Partners,
L.P. Mr. Simmons and Mr. Baldwin are also limited partners of DRLX Partners. As
of June 5, 1997, DRLX Partners owned 4,119,207 shares of DRLX Common Stock. Mr.
Simmons has an indirect pecuniary interest in approximately 230,000 of these
shares of Drilex Common Stock, while Mr. Baldwin has such an interest in
approximately 2,600 of these shares of Drilex Common Stock (in each case
assuming DRLX Partners were to distribute Drilex Common Stock to its partners
with a value of $15 or $16 per share). The partnership agreement for DRLX
Partners provides for an increase in the sharing ratio attributable to SCF
Partners, L.P.'s general partner interest after payout of the partnership.
Certain Insurance. Pursuant to the Merger Agreement, Baker Hughes has
agreed to cause to be maintained officers' and directors' liability insurance
covering officers, directors and certain employees who are currently covered
under existing officers' and directors' liability insurance policies maintained
by Drilex, for a period of six years from the Effective Time, on terms
substantially no less advantageous to them than such existing insurance, subject
to limitations regarding the premium for such coverage.
RESALES OF BAKER HUGHES COMMON STOCK
The issuance of Baker Hughes Common Stock to stockholders of Drilex in the
Merger has been registered under the Securities Act. All shares of Baker Hughes
Common Stock received by stockholders of Drilex upon consummation of the Merger
will be freely transferable by those holders who are not deemed to be
"affiliates" (as defined under the Securities Act but generally including
executive officers, directors and ten percent or more stockholders) of Drilex.
Pursuant to the Merger Agreement, Drilex has agreed to cause to be prepared
and delivered to Baker Hughes a list identifying all persons who, at the time of
the Special Meeting, may be deemed to be "affiliates"
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of Drilex (the "Affiliates"). Drilex will use its best efforts to cause each
person who is identified as an Affiliate in such list to deliver to Baker Hughes
at or prior to the Effective Time a written agreement that such Affiliate will
not sell, pledge, transfer or otherwise dispose of any shares of Baker Hughes
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. Drilex will also use its best efforts to cause each person who
is identified as an Affiliate in such list to sign, on or prior to the thirtieth
day prior to the Effective Time, a written agreement, in the form to be approved
by Baker Hughes and Drilex, that, with certain exceptions, such party will not
sell or in any other way reduce such party's risk relative to any shares of
Baker Hughes Common Stock to be received in the Merger until such time as
financial results covering at least 30 days of post-merger operations have been
published.
NYSE LISTING OF COMMON STOCK
It is a condition to the Merger that the shares of Baker Hughes Common
Stock to be issued pursuant to the Merger be authorized for listing on the NYSE,
subject to official notice of issuance. Baker Hughes' Common Stock is traded on
the NYSE, the Pacific Stock Exchange and the Swiss Stock Exchange under the
symbol "BHI."
NO DISSENTERS' RIGHTS
Under Delaware law, Drilex stockholders will not be entitled to any
appraisal or dissenters' rights in connection with the Merger.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The detailed terms of and conditions to 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.
CONDITIONS TO THE MERGER
Conditions to Obligation of Each Party to Effect the Merger
The respective obligation of each party to effect the Merger is subject to
the satisfaction or waiver (if applicable) prior to the Closing of the following
conditions:
Drilex Stockholder Approval. The Merger Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the holders of a majority
of the outstanding shares of Drilex Common Stock entitled to vote thereon.
NYSE Listing. The shares of Baker Hughes Common Stock issuable to Drilex
stockholders pursuant to the Merger Agreement and such other shares of Baker
Hughes Common Stock required to be reserved for issuance in connection with the
Merger shall have been authorized for listing on the NYSE upon official notice
of issuance.
Other Approvals. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated and all filings
required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time from any governmental entity in connection with the execution and
delivery of the Merger Agreement and the consummation of the transactions
contemplated thereby by Drilex, Baker Hughes and Merger Sub shall have been made
or obtained (as the case may be), except where the failure to obtain such
consents, approvals, permits, and authorizations would not be reasonably likely
to result in a Material Adverse Effect (as defined in the Merger Agreement) on
Baker Hughes or Drilex (assuming the Merger has taken place) or to materially
adversely affect the consummation of the Merger, and no such consent, approval,
permit or authorization shall impose terms or conditions that would have, or
would be reasonably likely to have, a Material Adverse Effect on Baker Hughes or
Drilex (assuming the Merger has taken place). Unless otherwise agreed to by
Baker Hughes, no such consent, approval, permit or authorization shall then be
subject to appeal.
Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceeding seeking a stop order.
No Injunctions or Restraints. No temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition ("Injunction") preventing
the consummation of the Merger shall be in effect; provided, however, that prior
to invoking this condition, each party shall have complied fully with its
obligations contained in Section 5.6 of the Merger Agreement with respect to
providing information and obtaining such consents and approvals from
governmental entities or courts in connection with the Merger.
Additional Conditions to Obligations of Baker Hughes and Merger Sub
The obligations of Baker Hughes and Merger Sub to effect the Merger are
subject to the satisfaction of the following conditions, any or all of which may
be waived in whole or in part by Baker Hughes and Merger Sub:
Representations and Warranties. Each of the representations and warranties
of Drilex set forth in the Merger Agreement shall be true and correct in all
material respects as of the date of the Merger Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date, except where the
failure to be so true and correct (without giving effect to the individual
materiality qualifications and thresholds otherwise contained in the
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Merger Agreement) could not reasonably be expected to have a Material Adverse
Effect on Drilex or as otherwise contemplated by the Merger Agreement.
Performance of Obligations of Drilex. Drilex shall have performed in all
material respects all obligations required to be performed by it under the
Merger Agreement at or prior to the Closing Date.
Letters from Drilex Affiliates. Baker Hughes shall have received signed
copies of the agreements referred to under "The Merger -- Resales of Baker
Hughes Common Stock" from all parties deemed to be Affiliates of Drilex.
Absence of Certain Actions. No Injunction shall be in effect (i) imposing
any limitation upon the ability of Baker Hughes or any of its subsidiaries
effectively to control the business or operations of Baker Hughes, Drilex or any
of their respective subsidiaries or (ii) prohibiting or imposing any limitation
upon Baker Hughes' or Drilex's or any of their subsidiaries' ownership or
operation of all or any portion of the business or assets or properties of Baker
Hughes or Drilex or any of their respective subsidiaries or compelling Baker
Hughes or Drilex or any of their respective subsidiaries to divest or hold
separate all or any portion of the business or assets or properties of Baker
Hughes or Drilex or any of their respective subsidiaries, or imposing any other
limitation upon any of them in the conduct of their businesses, and no suit or
proceeding by a governmental authority seeking such an Injunction or an
Injunction preventing or making illegal the consummation of the Merger shall be
pending.
Additional Conditions to Obligation of Drilex
The obligation of Drilex to effect the Merger is subject to the
satisfaction of the following conditions, any or all of which may be waived in
whole or in part by Drilex:
Representations and Warranties. Each of the representations and warranties
of Baker Hughes and Merger Sub set forth in the Merger Agreement shall be true
and correct in all material respects as of the date of the Merger Agreement and
(except to the extent such representations and warranties speak as of an earlier
date) as of the Closing Date as though made on and as of the Closing Date,
except where the failure to be so true and correct (without giving effect to the
individual materiality qualifications and thresholds otherwise contained in the
Merger Agreement) could not reasonably be expected to have a Material Adverse
Effect on Baker Hughes or as otherwise contemplated by the Merger Agreement.
Performance of Obligations of Baker Hughes and Merger Sub. Baker Hughes and
Merger Sub shall have performed in all material respects all obligations
required to be performed by them under the Merger Agreement at or prior to the
Closing Date.
Tax Opinion. Drilex shall have received an opinion, reasonably satisfactory
to Drilex, a copy of which shall be furnished to Baker Hughes, of Vinson &
Elkins L.L.P., counsel to Drilex, to the effect that, if the Merger is
consummated in accordance with the terms of the Merger Agreement, the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, which opinion shall not have been
withdrawn or modified in any material respect. In rendering such opinion, such
counsel may receive and rely upon representations of fact of Baker Hughes and
Drilex substantially similar to ones referred to in the Merger Agreement. Drilex
has received such an opinion dated on or about the date of this Proxy
Statement/Prospectus. See "The Merger -- Certain Federal Income Tax
Consequences."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
each of Baker Hughes, Merger Sub and Drilex relating to, among other things, (i)
each of their and certain of their respective subsidiaries' organization and
similar corporate matters, (ii) each of their capital structures, (iii)
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and related matters, and the absence of conflicts, violations of or
defaults under the Restated Certificates of Incorporation, as amended or
By-Laws, as amended, of each of Baker Hughes and Drilex, or any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, license, joint venture or other
ownership arrangement, judgment, order, decree, statute, law, ordinance, rule or
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regulation applicable to Baker Hughes or Drilex or any of their respective
subsidiaries or any of their respective properties or assets, (iv) the documents
and reports filed by each of them with the SEC and the accuracy of the
information contained therein, (v) the accuracy of the information provided by
each of them with respect to the Registration Statement and this Proxy
Statement/Prospectus, (vi) the absence of certain events, changes or effects,
(vii) the absence of undisclosed material liabilities, (viii) the absence of
certain defaults or violations, (ix) compliance with certain laws, (x)
litigation, (xi) taxes, (xii) retirement and other employee plans and matters
relating to the Employee Retirement Income Security Act of 1974, as amended,
(xiii) employee representation by labor unions or employee involvement in any
other organizational activity, (xiv) authority to use patents, trademarks and
other intellectual property, (xv) compliance with environmental laws, (xvi) the
stockholder vote required to approve the Merger Agreement, (xvi) certain
accounting matters, (xvii) beneficial ownership of the other party's common
stock, (xviii) maintenance of insurance, (xix) broker's or similar fees, and
(xx) certain tax matters. The Merger Agreement also contains representations and
warranties by Drilex relating to Merrill Lynch's fairness opinion, and
representations and warranties by Baker Hughes and Merger Sub regarding the
interim operations of Merger Sub.
CERTAIN COVENANTS -- CONDUCT OF BUSINESS OF DRILEX
During the period from the date of the Merger Agreement and continuing
until the Effective Time, Drilex has agreed as to itself and its subsidiaries
that (except as expressly contemplated or permitted by the Merger Agreement, or
to the extent that Baker Hughes has otherwise consented in writing):
Ordinary Course. Each of Drilex and its subsidiaries will carry on its
businesses in the ordinary course in substantially the same manner as heretofore
conducted and will use all reasonable efforts to preserve intact its present
business organizations, keep available the services of its current officers and
employees, and endeavor to preserve its relationships with customers, suppliers
and others having business dealings with it to the end that its goodwill and
ongoing business will not be impaired in any material respect at the Effective
Time.
Dividends; Changes in Stock. Except as specifically disclosed to Baker
Hughes, Drilex will not and it will not permit any of its subsidiaries to: (i)
declare or pay any dividends on or make other distributions in respect of any of
its capital stock, except for the declaration and payment of dividends from a
subsidiary of Drilex to Drilex or another subsidiary of Drilex and except for
cash dividends or distributions paid on or with respect to the capital stock of
a subsidiary of Drilex; (ii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of Drilex capital stock; or
(iii) repurchase, redeem or otherwise acquire, or permit any of its subsidiaries
to purchase, redeem or otherwise acquire, any shares of its capital stock,
except as required by the terms of its securities outstanding on the date of the
Merger Agreement or as contemplated by any existing employee benefit plan.
Issuance of Securities. Drilex will not and it will not permit any of its
subsidiaries to issue, deliver or sell, or authorize or propose to issue,
deliver or sell, any shares of its capital stock of any class, any Voting Debt
(as defined in the Merger Agreement) or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, Voting Debt or
convertible securities, other than: (i) the issuance of Drilex Common Stock upon
the exercise of stock options granted under the Drilex Stock Option Plan that
are outstanding on the date of the Merger Agreement, or in satisfaction of stock
grants or stock based awards made prior to the date of the Merger Agreement
pursuant to the Drilex Stock Option Plan or upon exercise of the Drilex Warrants
(as defined in the Merger Agreement); and (ii) issuances by a wholly owned
subsidiary of its capital stock to its parent.
Governing Documents. Except as contemplated by the Merger Agreement, Drilex
will not amend or propose to amend its Restated Certificate of Incorporation or
By-Laws.
No Acquisitions. Drilex will not, and it will not permit any of its
subsidiaries to acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof.
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No Dispositions. Other than: (i) dispositions in the ordinary course of
business consistent with past practice that are not material, individually or in
the aggregate, to Drilex and its subsidiaries taken as a whole and (ii) product
sales in the ordinary course of business consistent with past practice, Drilex
will not, and it will not permit any of its subsidiaries to, sell, lease,
encumber or otherwise dispose of, or agree to sell, lease (whether such lease is
an operating or capital lease), encumber or otherwise dispose of, any of its
assets.
No Dissolution, Etc. Except as otherwise permitted or contemplated by the
Merger Agreement, Drilex will not authorize, recommend, propose or announce an
intention to adopt a plan of complete or partial liquidation or dissolution of
such party or any of its Significant Subsidiaries.
Certain Employee Matters. With the exception of certain employee matters
specifically disclosed to Baker Hughes, Drilex will not and it will not permit
any of its subsidiaries to: (i) grant any increases in the compensation of any
of its directors, officers or employees, except increases to employees who are
not officers or directors in the ordinary course of business and in accordance
with past practice; (ii) pay or agree to pay any pension, retirement allowance
or other employee benefit not required or contemplated by any of the existing
Drilex Employee Benefit Plans or Drilex Pension Plans (as each are defined in
the Merger Agreement) as in effect on the date of the Merger Agreement to any
director, officer or employee, whether past or present; (iii) enter into any
new, or amend any existing, employment or severance or termination agreement
with any director, officer or key employee; (iv) become obligated under any new
Drilex Employee Benefit Plan or Drilex Pension Plan, which was not in existence
or approved by the Drilex Board prior to or on the date of the Merger Agreement,
or amend any such plan or arrangement in existence on the date of the Merger
Agreement if such amendment would have the effect of materially enhancing any
benefits thereunder; or (v) terminate the employment of any executive of
employee of Drilex without cause.
Indebtedness; Leases; Capital Expenditures. With the exception of certain
previously disclosed matters, Drilex will not, nor will Drilex permit any of its
subsidiaries to, (i) incur any indebtedness for borrowed money (except for
working capital under Drilex's existing credit facilities, and refinancings of
existing debt that permit prepayment of such debt without penalty (other than
LIBOR breakage costs)) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire any debt securities of such
party or any of its subsidiaries or guarantee any debt securities of others,
(ii) except in the ordinary course of business, enter into any lease (whether
such lease is an operating or capital lease) or create any mortgages, liens,
security interests or other encumbrances on the property of Drilex or any of its
subsidiaries in connection with any indebtedness thereof, or (iii) commit to
aggregate capital expenditures in excess of $500,000 outside the capital budget,
as amended and approved by Drilex prior to the date of the Merger Agreement.
CERTAIN COVENANTS -- CONDUCT OF BUSINESS OF BAKER HUGHES
During the period from the date of the Merger Agreement and continuing
until the Effective Time, Baker Hughes has agreed as to itself and its
subsidiaries that (except as expressly contemplated or permitted by the Merger
Agreement, or to the extent that Drilex has otherwise consented in writing):
Governing Documents. Baker Hughes will not amend its Restated Certificate
of Incorporation or Bylaws in any manner that materially and adversely affects
the rights of holders of Baker Hughes Common Stock.
Baker Hughes Common Stock. During the period beginning five business days
prior to the commencement of the period of time used to determine the Baker
Hughes Average Closing Price and ending at the Effective Time (the "Cessation
Period"), Baker Hughes will not (and will cause its subsidiaries not to) issue
or sell any shares of Baker Hughes' capital stock or the capital stock of any of
its subsidiaries (or securities convertible into or exchangeable for capital
stock) for less than the fair market value thereof, except under employee
benefit plans or outstanding options, warrants or convertible securities
existing on the date of the Merger Agreement in accordance with their terms, and
will not issue to holders of Baker Hughes' capital stock any rights to purchase
any shares of Baker Hughes' capital stock for less than the fair market value
thereof if the ex-dividend date for such distribution would be during the
Cessation Period. Baker Hughes will not (and will cause its subsidiaries not to)
engage in any substantial repurchase at a material premium, recapitalization,
restructuring or reorganization with respect to shares of Baker Hughes Common
Stock. During the period beginning five business days prior to the mailing of
this Proxy Statement/Prospectus and ending at the
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Effective Time, Baker Hughes will not (and will cause its subsidiaries not to)
redeem, repurchase or otherwise acquire any shares of Baker Hughes Common Stock,
except pursuant to existing employee benefit plans.
Dividends. Baker Hughes will not declare, set aside or pay any dividend or
make any other distributions in respect of Baker Hughes Common Stock, or make
any commitment for any such action, except regular, quarterly cash dividends in
amounts consistent with past practice.
Other. Baker Hughes will not take any action, including agreeing to or
consummating any acquisition or business combination, that is likely to delay
materially or adversely affect the ability of any of the parties to obtain any
consent, authorization, order or approval of any governmental commission, board
or other regulatory body or the expiration of any applicable waiting period
required to consummate the transactions contemplated by the Merger Agreement;
and, subject to applicable law, Baker Hughes will use its commercial reasonable
efforts without the incurrence of unreasonable expense (consistent with the
other terms of the Merger Agreement) to assist Drilex, at Drilex's request, so
that Drilex may keep available the services of its current officers and
employees and preserve its relationships with customers, suppliers and others
having business dealings with Drilex to the end that Drilex's goodwill and
ongoing business will not be impaired in any material respect.
NO SOLICITATION OF ACQUISITION PROPOSALS
From and after the date of the Merger Agreement, Drilex will not, and will
not authorize or permit any of its officers, directors, employees, agents,
affiliates or other representatives or those of any of its subsidiaries
(collectively, "Drilex Representatives") to, directly or indirectly, solicit or
encourage (including by way of providing information) any prospective acquiror
or the invitation or submission of any inquiries, proposals or offers or any
other efforts or attempts that constitute, or may reasonably be expected to lead
to, an Acquisition Proposal (as defined herein) from any person or engage in any
discussions or negotiations with respect thereto or otherwise cooperate with or
assist or participate in or facilitate any such proposal; provided, however,
that (i) Drilex's Board of Directors may take and disclose to Drilex's
stockholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act and (ii) following receipt from a third party (without any
solicitation, initiation, encouragement, discussion or negotiation, directly or
indirectly, by or with Drilex or any Drilex Representatives) of a bona fide
Acquisition Proposal that is financially superior to the Merger and reasonably
capable of being financed (as determined in each case in good faith by Drilex's
Board of Directors after consultation with Drilex's financial advisors), (x)
Drilex may engage in discussions or negotiations with such third party and may
furnish such third party information concerning Drilex and its business,
properties and assets if such third party executes a confidentiality agreement
in reasonably customary form and (y) the Board of Directors of Drilex may
withdraw, modify or not make its recommendation to approve and adopt the Merger
Agreement or may terminate the Merger Agreement in accordance with the Merger
Agreement, but in each case referred to in the foregoing clauses (i) and (ii)
only to the extent that the Board of Directors of Drilex shall conclude in good
faith after consultation with Drilex's outside counsel that such action is
necessary in order for the Board of Directors of Drilex to act in a manner that
is consistent with its fiduciary obligations under applicable law
notwithstanding any concessions that may be offered by Baker Hughes. The "no
solicitation" provisions of the Stockholder Agreement (see "The
Merger -- Stockholder Agreement") do not prohibit any Stockholder Representative
who is also a Drilex Representative from taking actions permitted by the
foregoing provisions of the Merger Agreement. As used in the Merger Agreement,
"Acquisition Proposal" means any proposal or offer, other than a proposal or
offer by Baker Hughes or any of its affiliates, for, or that could be reasonably
expected to lead to, a tender or exchange offer, a merger, consolidation or
other business combination involving Drilex or any Significant Subsidiary of
Drilex or any proposal to acquire in any manner a substantial equity interest
in, or any substantial portion of the assets of, Drilex or any of its
Significant Subsidiaries.
Prior to taking any action referred to in the foregoing paragraph, if
Drilex intends to participate in any such discussions or negotiations or provide
any such information to any such third party, Drilex will give prior notice to
Baker Hughes of such action. Drilex will promptly notify Baker Hughes of any
such requests for such information or the receipt of any Acquisition Proposal,
including the identity of the person or group engaging
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in such discussions or negotiations, requesting such information or making such
Acquisition Proposal, and the material terms and conditions of any Acquisition
Proposal.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, Baker Hughes and Drilex have agreed that
(i) they will prepare and file with the SEC the Proxy Statement/Prospectus and
have it mailed to stockholders of Drilex at the earliest practicable date, Baker
Hughes will prepare and file with the SEC the Registration Statement, and each
will use its best efforts to have the Registration Statement declared effective,
(ii) they will use their best efforts to have timely delivered to the other
"comfort" letters from their respective independent public accountants, (iii)
they will each afford to the other access to their respective officers,
properties and other information as the other party may reasonably request, (iv)
Drilex will call a meeting of its stockholders to be held as promptly as
practicable, (v) they will comply with all legal requirements imposed on each
other with respect to the Merger and furnish information to the other in
connection with such legal requirements, (vi) Baker Hughes will take action
necessary to permit it to issue shares of Baker Hughes Common Stock pursuant to
the Merger and will use all reasonable efforts to have approved for listing on
the NYSE, subject to official notice of issuance, the shares of Baker Hughes
Common Stock to be issued in the Merger and shares of Baker Hughes Common Stock
issued or reserved for issuance under the Drilex Stock Option Plan and under the
Drilex Warrants, (vii) they each agree to certain employee matters (see "The
Merger -- Drilex Employee Matters"), (viii) Baker Hughes will assume certain
outstanding stock options to purchase Drilex Common Stock, which will become
options to purchase Baker Hughes Common Stock based on the Exchange Ratio (see
"The Merger -- Treatment of Drilex Stock Options") and file a registration
statement with respect to the Baker Hughes Common Stock subject to the options,
(ix) Baker Hughes will, subject to certain limits, maintain directors and
officers liability insurance for officers and directors of Drilex and its
subsidiaries, (x) Baker Hughes will take certain actions with respect to
Drilex's bank credit agreement, (xi) they will cooperate and use reasonable best
efforts to defend any claim arising from or in connection with the Merger, (xii)
Drilex will not take any reasonable action requested by Baker Hughes that would
affect the accounting treatment of the Merger as a "pooling of interests,"
(xiii) they will cooperate and consult with the other regarding press releases,
(xiv) they will confer and will advise each other of changes or events that may
have a Material Adverse Effect and (xv) they will not take any action that would
affect the qualification of the Merger as a reorganization described in Section
368(a) of the Code.
In addition, pursuant to Section 5.6 of the Merger Agreement, Baker Hughes
and Drilex have agreed to: (a) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect to
the Merger; (b) use their best efforts to cooperate with one another in (i)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits or authorizations are required to
be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States, the several states and foreign jurisdictions
in connection with the execution and delivery of the Merger Agreement and the
consummation of the Merger and the transactions contemplated thereby and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; (c) furnish the other with copies of all
correspondence, filings and communications (and memoranda setting forth the
substance thereof) between them and their affiliates and their respective
representatives, on the one hand, and any governmental or regulatory authority
or members or their respective staffs, on the other hand, with respect to the
Merger Agreement and the transactions contemplated by the Merger Agreement; (d)
furnish the other with such necessary information and reasonable assistance as
such other parties and their respective affiliates may reasonably request in
connection with their preparation of necessary filings, registrations or
submissions of information to any governmental or regulatory authorities,
including without limitation any filings necessary under the provisions of the
HSR Act; and (e) use their commercially reasonable efforts to take, or cause to
be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the Merger and
the transactions contemplated by the Merger Agreement including, without
limitation, the resolution of objections, if any, as may be asserted by any
governmental authority with respect to the Merger and the transactions
contemplated thereby under any antitrust or trade or regulatory laws or
regulations of any governmental authority; provided that Baker Hughes and Drilex
will not be required to take any action that could have any
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adverse effect on the business, operations, prospects, assets, condition
(financial or otherwise) or results of operations of Baker Hughes or Drilex
(including any subsidiaries thereof).
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after approval of the
matters presented in connection with the Merger by the stockholders of Drilex:
(a) by mutual written consent of Drilex and Baker Hughes, or by mutual
action of their respective Boards of Directors;
(b) by either Drilex or Baker Hughes if (i) the Merger shall not have
been consummated by September 16, 1997 (provided that the right to
terminate the Merger Agreement shall not be available to any party whose
failure to fulfill any covenant or agreement under the Merger Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date); (ii) any court of competent jurisdiction, or some other
governmental body or regulatory authority, shall have issued an order,
decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and nonappealable; or (iii)
any required approval of Drilex's stockholders shall not have been obtained
by reason of the failure to obtain the required vote upon a vote held at a
duly held meeting of stockholders or at any adjournment thereof;
(c) by Baker Hughes if (i) for any reason Drilex fails to call and
hold a stockholders meeting for the purpose of voting upon the Merger
Agreement and the Merger by September 1, 1997 (provided that this right to
terminate the Merger Agreement shall not be available to Baker Hughes if
Drilex would be entitled to terminate the Merger Agreement under certain
circumstances); (ii) Drilex shall have failed to comply in any material
respect with any of the covenants or agreements contained in the Merger
Agreement to be complied with or performed by Drilex at or prior to such
date of termination (provided such breach has not been cured within 30 days
following receipt by Drilex of notice of such breach and is existing at the
time of termination of the Merger Agreement); (iii) any representation or
warranty of Drilex contained in the Merger Agreement shall not be true in
all material respects when made (provided such breach has not been cured
within 30 days following receipt by Drilex of notice of such breach and is
existing at the time of termination of the Merger Agreement) or on and as
of the time of such termination as if made on and as of such time (except
to the extent it relates to a particular date), except where the failure to
be so true and correct (without giving effect to the individual materiality
qualifications and thresholds otherwise contained in the Merger Agreement)
could not reasonably be expected to have a Material Adverse Effect; (iv)
after the date of the Merger Agreement there has been any Material Adverse
Change with respect to Drilex, except for general economic changes or
changes that may affect the industries of Drilex or any of its subsidiaries
generally (provided that a decrease in Drilex's revenues or EBITDA shall
not, without any other facts that would constitute a Material Adverse
Change, be deemed a Material Adverse Change unless the next clause is
applicable); (v) either (x) Revenue for the period from April 1, 1997 to
the end of the most recent month for which the Monthly Statements have been
finally determined (other than April 1997) is less than $10.9 million (if
such month is May 1997) or $15.9 million (if such month is June 1997) or
(y) EBITDA for the period from April 1, 1997 to the end of such most recent
month is less than $1.2 million (if such month is May 1997) or $1.8 million
(if such month is June 1997); or (vi) Drilex gives Baker Hughes written
notice stating that in Drilex's good faith belief, Drilex expects the
provisions of clause (v) to be applicable and stating good faith expected
amounts for Revenue and EBITDA for the periods from April 1, 1997 to May
31, 1997 and to June 30, 1997, in which case Baker Hughes may terminate the
Merger Agreement by giving written notice to Drilex within seven days of
receipt of such notice from Drilex; provided, however, that if Baker Hughes
does not so terminate the Merger Agreement, then the referenced amounts in
clause (v) that enable Baker Hughes to terminate shall be deemed amended to
such lower amounts and the Drilex Value shall be $15 without regard to
Monthly Revenue and Monthly EBITDA;
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(d) by Drilex if (i) Baker Hughes or Merger Sub shall have failed to
comply in any material respect with any of the covenants or agreements
contained in the Merger Agreement to be complied with or performed by it at
or prior to such date of termination (provided such breach has not been
cured within 30 days following receipt by Baker Hughes of notice of such
breach and is existing at the time of termination of the Merger Agreement);
(ii) any representation or warranty of Baker Hughes or Merger Sub contained
in the Merger Agreement shall not be true in all material respects when
made (provided such breach has not been cured within 30 days following
receipt by Baker Hughes of notice of such breach and is existing at the
time of termination of the Merger Agreement) or on and as of the time of
such termination as if made on and as of such time (except to the extent it
relates to a particular date), except where the failure to be so true and
correct (without giving effect to the individual materiality thresholds
otherwise contained in the Merger Agreement) could not reasonably be
expected to have a Material Adverse Effect; or (iii) after the date of the
Merger Agreement there has been any Material Adverse Change with respect to
Baker Hughes, except for general economic changes or changes that may
affect the industries of Baker Hughes or any of its subsidiaries generally;
(e) by Baker Hughes if (i) the Board of Directors of Drilex shall have
withdrawn or modified, in any manner which is adverse to Baker Hughes, its
recommendation or approval of the Merger or the Merger Agreement and the
transactions contemplated thereby or shall have resolved to do so, or (ii)
the Board of Directors of Drilex shall have recommended to the stockholders
of Drilex any Acquisition Proposal or any transaction described in the
definition of Acquisition Proposal, or shall have resolved to do so;
(f) by Drilex if Drilex shall exercise the right of termination
referred to under "-- No Solicitation of Acquisition Proposals"; provided
that Drilex may not effect such termination unless and until (i) Baker
Hughes receives at least three business days' prior written notice from
Drilex of its intention to effect such termination pursuant to this
provision; (ii) during such period, Drilex shall, and shall cause its
respective financial and legal advisors to, consider any adjustment in the
terms and conditions of the Merger Agreement that Baker Hughes may propose;
and (iii) Drilex pays Baker Hughes a termination fee of $4 million (see
"-- Expenses and Termination Fees") concurrently with such termination; or
(g) by Baker Hughes if any Governmental Entity (as defined in the
Merger Agreement) shall have issued any Injunction or taken any other
action permanently imposing, prohibiting or compelling any of the
limitations, prohibitions or compulsions set forth under "-- Additional
Conditions to Obligations of Baker Hughes and Merger Sub -- Absence of
Certain Actions" and such Injunction or other action shall have become
final and nonappealable.
For purposes of determining Revenue and EBITDA for purposes of the
termination provision described in clause (c)(v) above, amounts attributable to
OEM sales (accounted consistently with Drilex's past practice) (but not ordinary
sales under existing contracts) destined to ultimate purchasers outside the
United States, the United Kingdom, Canada, Argentina and Venezuela shall be
excluded to the extent of any single transaction (or group of related
transactions) generating revenues in excess of $300,000 per transaction (or
group of related transactions).
EXPENSES AND TERMINATION FEE
Each of Baker Hughes and Drilex is required to pay all costs and expenses
incurred by it in connection with the Merger Agreement and all the transactions
contemplated thereby, whether or not the Merger is consummated, except that the
filing fee for registering shares of Baker Hughes Common Stock pursuant to the
Registration Statement and with respect to the Proxy Statement/Prospectus will
be paid by Baker Hughes.
The Merger Agreement provides that Drilex will pay Baker Hughes a
termination fee of $4 million upon termination of the Merger Agreement pursuant
to the provisions of clauses (e) or (f) under "-- Termination" above.
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The Merger Agreement also provides that Baker Hughes will pay Drilex a
termination fee of $4 million if the Merger Agreement is terminated by Baker
Hughes or Drilex as a result of certain injunctions or other actions or delays
relating to antitrust laws and at such time Drilex shall not have failed to
perform or observe, in any material respect, any of its obligations under the
Merger Agreement.
INDEMNIFICATION
Drilex will, and from and after the Effective Time, Baker Hughes and the
Surviving Corporation will, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of the Merger Agreement or who
becomes prior to the Effective Time, an officer or director of Drilex or any of
its subsidiaries or an employee of Drilex or any of its subsidiaries who acts as
a fiduciary under any Drilex Employee Benefit Plans or Drilex Pension Plans (the
"Indemnified Parties") against all losses, claims, damages, costs, expenses
(including attorneys' fees), liabilities or judgments or amounts that are paid
in settlement with the approval of the indemnifying party (which approval shall
not be unreasonably withheld) of or in connection with any threatened or actual
claim, action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer, or such employee of Drilex or any subsidiary whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), including all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or pertaining to the
Merger Agreement or the transactions contemplated thereby, in each case to the
full extent permitted under applicable Delaware law (and Baker Hughes and the
Surviving Corporation, as the case may be, will pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by law). Without limiting the foregoing, in the event
any such claim, action, suit, proceeding or investigation is brought against any
of the Indemnified Parties (whether arising before or after the Effective Time),
(i) the Indemnified Parties may retain counsel satisfactory to them and Drilex
(or to them and Baker Hughes and the Surviving Corporation after the Effective
Time) and Drilex (or after the Effective Time, Baker Hughes and the Surviving
Corporation) will pay all fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received; and (ii) Drilex (or after
the Effective Time, Baker Hughes and the Surviving Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that none of Drilex, Baker Hughes or the Surviving Corporation will be
liable for any settlement effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification, upon learning of any such claim, action, suit, proceeding
or investigation, will notify Drilex (or after the Effective Time, Baker Hughes
and the Surviving Corporation), but the failure so to notify will not relieve a
party from any liability that it may have under the Merger Agreement except to
the extent such failure materially prejudices such party. The Indemnified
Parties as a group may retain only one law firm to represent them with respect
to each such 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. Drilex, Baker Hughes and Merger Sub agree that all
rights to indemnification, including provisions relating to advances of expenses
incurred in defense of any action or suit, existing in favor of the Indemnified
Parties (including in Drilex's Restated Certificate of Incorporation or By-Laws
or in the indemnification agreements with Drilex's directors made available to
Baker Hughes) with respect to matters occurring through the Effective Time, will
survive the Merger and will continue in full force and effect for a period of
six years from the Effective Time; provided, however, that all rights to
indemnification in respect of any Indemnified Liabilities asserted or made
within such period will continue until the disposition of such Indemnified
Liabilities.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto, by action taken
or authorized by their respective Boards of Directors, at any time before or
after approval of the matters presented in connection with the Merger by the
stockholders of Drilex, but, after any such approval, no amendment which by law
requires further approval by such stockholders shall be made without obtaining
such further approval.
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At any time prior to the Effective Time, each party may by action taken by
its Board of Directors, to the extent legally allowed: (i) extend the time for
the performance of any of the obligations or other acts of the other parties;
(ii) waive any inaccuracies in the representations and warranties made to such
party contained in the Merger Agreement or in any document delivered pursuant
thereto; and (iii) waive compliance with any of the agreements or conditions for
the benefit of such party contained in the Merger Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Baker Hughes consists of 400,000,000 shares
of Baker Hughes Common Stock and 15,000,000 shares of preferred stock, par value
$1.00 per share. The following description of the capital stock of Baker Hughes
is subject to the applicable provisions of Baker Hughes' Restated Certificate of
Incorporation and Bylaws, which are incorporated by reference herein.
BAKER HUGHES COMMON STOCK
Baker Hughes is authorized by its Restated Certificate of Incorporation to
issue 400,000,000 shares of Baker Hughes Common Stock, of which approximately
145,667,000 shares were issued and outstanding as of May 3, 1997.
The holders of shares of Baker Hughes Common Stock are entitled to one vote
for each share held on all matters submitted to a vote of holders of Baker
Hughes Common Stock. The Baker Hughes Common Stock does not have cumulative
voting rights, which means that the holders of a majority of the shares of Baker
Hughes 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 Baker Hughes Common Stock is entitled to participate equally
in dividends, as and when declared by the Board of Directors, 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 Baker
Hughes Common Stock have no preemptive or conversion rights, redemption
provisions or sinking fund provisions. The outstanding shares of Baker Hughes
Common Stock are duly and validly issued, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to Baker Hughes' Restated Certificate of Incorporation, Baker
Hughes is authorized to issue 15,000,000 shares of preferred stock, and Baker
Hughes' Board of Directors by resolution may establish one or more series of
preferred stock having such number of shares, designation, relative voting
rights, dividend rates, liquidation and other rights, preferences and
limitations as may be fixed by the Board of Directors without any further
stockholder approval. No shares of preferred stock were issued and outstanding
as of May 3, 1997.
CERTAIN ANTI-TAKEOVER PROVISIONS
The provisions of Baker Hughes' Restated Certificate of Incorporation
summarized in the succeeding paragraphs 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 in such stockholder's best interest, including those
attempts that might result in a premium over the market price for the shares of
Baker Hughes Common Stock held by stockholders.
The Board of Directors of Baker Hughes is divided into three classes that
are elected for staggered three-year terms. Stockholders may only remove a
director for cause.
Pursuant to Baker Hughes' Restated Certificate of Incorporation, Baker
Hughes' Board of Directors by resolution may establish one or more series of
Baker Hughes preferred stock having such number of shares, designation, relative
voting rights, dividend rates, liquidation and other rights, preferences and
limitations as may be fixed by the Board of Directors without any further
stockholder approval. Such rights, preferences, privileges and limitations as
may be established could have the effect of impeding or discouraging the
acquisition of control of Baker Hughes.
Baker Hughes' Restated Certificate of Incorporation contains a "fair price"
provision that requires the approval of holders of not less than 75% of the
outstanding shares of voting stock of Baker Hughes (including not less than
66 2/3% of the outstanding shares of voting stock not owned, directly or
indirectly, by persons who are Related Persons (as defined below)) as a
condition for mergers, consolidations and certain other business combinations
involving Baker Hughes and any Related Person; provided that the 66 2/3% voting
requirement is not applicable if the business combination is approved by the
holders of not less than 90% of the outstanding
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shares of voting stock of Baker Hughes. Related Persons include the holder of
10% or more of Baker Hughes' outstanding voting stock and any affiliate of such
person. The 75% voting requirement of the "fair price" provision is not
applicable to a business combination involving a holder of 10% or more of Baker
Hughes' outstanding voting stock if the acquisition by such holder of such stock
or the transaction is approved in advance of such person's becoming a holder of
10% of Baker Hughes' outstanding voting stock by not less than 75% of the
directors of Baker Hughes then holding office or the following conditions are
met: (i) the transaction is a merger or consolidation proposed to occur within
one year of time such holder acquired 10% of Baker Hughes' outstanding voting
stock and the price to be paid to holders of Baker Hughes Common Stock is at
least as high as the highest price paid by such holder in acquiring any of its
Baker Hughes Common Stock, (ii) the consideration to be paid in the transaction
is cash or the same form of consideration paid by such holder to acquire a
majority of its holdings of Baker Hughes Common Stock, (iii) between the date of
the acquisition by such holder of 10% of Baker Hughes' outstanding voting stock
and the transaction there has been no failure to declare and pay preferred stock
dividends and no reduction in common stock dividends (except as approved by a
majority of the unaffiliated directors), no further acquisition of voting stock
by such holder and no benefit, direct or indirect, received by such holder
through loans or other financial assistance from Baker Hughes or tax credits or
other tax advantages provided by Baker Hughes, and (iv) a proxy statement shall
have been mailed to stockholders of record at least 30 days prior to the
consummation of the transaction for the purpose of soliciting stockholder
approval of such transaction.
Baker Hughes' Restated Certificate of Incorporation further provides that
(i) stockholders may act only at an annual or special meeting of stockholders
and may not act by written consent; (ii) special meetings of stockholders can be
called only by the Board of Directors; (iii) a 75% vote of the outstanding
voting stock is required for the stockholders to amend Baker Hughes' By-laws;
and (iv) a 75% vote of the outstanding voting stock is required to amend the
Restated Certificate of Incorporation with respect to certain matters,
including, without limitation, the matters set forth in clauses (i) and (iii)
above and the 75% voting requirement required for certain business combinations
described in the preceding paragraph.
Baker Hughes' By-laws establish advance notice procedures with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of stockholders of Baker
Hughes. These procedures provide that the notice of proposed stockholder
nominations for the election of directors must be timely given in writing to the
Secretary of Baker Hughes prior to the meeting at which directors are to be
elected. The procedures also provide that at an annual meeting, and subject to
any other applicable requirements, only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Board of
Directors or by a stockholder who has given timely prior written notice to the
Secretary of Baker Hughes of such stockholder's intention to bring such business
before the meeting. In all cases, to be timely, notice must be received at the
principal executive offices of Baker Hughes not less than 30 days nor more than
60 days prior to the meeting (or if fewer than 40 days' notice or prior public
disclosure of the meeting date is given or made by Baker Hughes, not later than
the 10th day following the day on which the notice was mailed or such public
disclosure was made). The notice must contain certain information specified in
the By-laws.
Baker Hughes is a Delaware corporation and is subject to Section 203 of the
General Corporation Law of the State of Delaware ("DGCL"). The following summary
of Section 203 does not purport to be complete and is qualified in its entirety
by reference thereto. In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares
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held subject to the plan will be tendered in a tender or exchange offer); or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
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COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, holders of Drilex Common Stock will become
stockholders of Baker Hughes, and the rights of the former holders of Drilex
Common Stock will thereafter be governed by the Baker Hughes Restated
Certificate of Incorporation, the Baker Hughes By-laws and the DGCL. The rights
of the Drilex stockholders currently are governed by the Drilex Restated
Certificate of Incorporation, the Drilex By-laws and the DGCL. Because Baker
Hughes and Drilex are both Delaware corporations, the law governing the rights
of Drilex stockholders will not change. The following summary sets forth the
material differences between the Restated Certificates of Incorporation and
By-laws of the companies, which are incorporated by reference herein.
BUSINESS COMBINATIONS
Under Delaware law, approval by the affirmative vote of the holders of a
majority of the outstanding stock of a corporation entitled to vote generally is
required for a merger or consolidation or sale, lease or exchange of all or
substantially all of the corporation's assets. Unless the corporate charter
provides otherwise, no vote of the stockholders of a surviving corporation is
required to approve a merger if (i) the merger does not amend in any respect the
surviving corporation's charter, (ii) each share of the surviving corporation's
stock outstanding immediately prior to the merger is to remain outstanding
unchanged, and (iii) the number of shares of common stock of the surviving
corporation to be issued or delivered under the plan of merger (plus those
issuable upon conversion of any securities to be issued under the plan) does not
exceed 20% of the surviving corporation's common stock outstanding immediately
prior to the merger. Additionally, when certain conditions are met, no vote of
stockholders is required for the merger of a Delaware corporation into a
corporation that holds at least 90% of the outstanding shares of each class of
the corporation.
The Baker Hughes Restated Certificate of Incorporation provides that the
affirmative vote of 75% of the outstanding shares of voting stock, including the
affirmative vote of at least 66 2/3% of stock not owned by a Related Person, is
required for the approval of a business combination between Baker Hughes and a
Related Person. The Drilex Restated Certificate of Incorporation requires the
affirmative vote of the holders of (x) not less than 80% of all shares entitled
to vote in the election of directors and (y) not less than 66 2/3% of such
shares not beneficially owned by any Drilex Related Person to approve any
merger, consolidation, sale of assets with a value of $10 million or more or
certain other transactions involving any beneficial owner of 10% or more of the
aggregate voting power of all outstanding voting stock of Drilex (a "Drilex
Related Person"), unless (a) a majority of the Continuing Directors (as defined)
of Drilex approve such transaction or (b) certain "fair price" and procedural
protections are satisfied.
AMENDMENTS TO CHARTER
Section 242 of the DGCL provides that an amendment to a corporation's
certificate of incorporation must be adopted by a resolution of the board of
directors declaring the advisability of the amendment and approved by the
affirmative vote of the holders of at least a majority of the outstanding stock
entitled to vote thereon, and a majority of the outstanding stock of each class
entitled to vote thereon, unless the certificate of incorporation requires a
greater percentage. The Baker Hughes Restated Certificate of Incorporation
requires the affirmative vote of not less than 75% of the total voting power of
stockholders entitled to vote in the election of directors and, in certain
circumstances, the affirmative vote of 66 2/3% of such total voting power
excluding shares owned by a Related Person to approve certain amendments to the
Baker Hughes Restated Certificate of Incorporation. The Drilex Restated
Certificate of Incorporation requires the affirmative vote of the holders of (x)
not less than 80% of all shares entitled to vote in the election of directors
and (y) not less than 66 2/3% of such shares not beneficially owned by any
Drilex Related Person to amend or repeal certain provisions of the Drilex
Restated Certificate of Incorporation.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
Under Section 228 of the DGCL, stockholders may, unless otherwise provided
in the certificate of incorporation, act without a meeting, without prior notice
and without a vote, by written consent of holders of
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outstanding stock having not less than the minimum number of votes necessary to
take such action at a meeting at which all shares entitled to vote were present
and voted. The Certificates of Incorporation of Baker Hughes and Drilex provide
that stockholders may not act by written consent.
SPECIAL MEETINGS OF STOCKHOLDERS
The Baker Hughes Restated Certificate of Incorporation and By-laws provide
that special meetings of the stockholders may be called at any time by the Baker
Hughes Board of Directors, or by a duly designated committee of the Baker Hughes
Board of Directors authorized to call such a meeting. Special meetings of the
stockholders of Baker Hughes may not be called by any other person. The Drilex
By-laws provide that special meetings of the stockholders of Drilex may be
called at any time by the Chairman of the Board, the President or the Board of
Directors of Drilex.
CLASSIFICATION OF BOARD OF DIRECTORS
The Baker Hughes Restated Certificate of Incorporation provides that the
number of directors shall be fixed from time to time by the Baker Hughes By-laws
or an amendment thereto duly adopted by the Board of Directors or by the
stockholders. The Baker Hughes By-laws provide that the Baker Hughes Board of
Directors shall consist of a minimum of 12 and a maximum of 16 directors. The
Baker Hughes Restated Certificate of Incorporation and By-laws provide that the
directors of Baker Hughes will be divided into three classes serving staggered
three-year terms such that approximately one-third of the Baker Hughes Board of
Directors is elected each year. The Drilex Restated Certificate of Incorporation
provides that the number of directors shall be fixed from time to time by a
majority of the directors then in office, but shall be not less than three nor
more than 12. The Drilex Restated Certificate of Incorporation and By-laws
provide that the directors of Drilex will be divided into three classes serving
staggered three-year terms.
REMOVAL OF DIRECTORS
Under Section 141 of the DGCL, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares entitled to vote at an election of directors, except (i) in the case
of a corporation having a classified board, stockholders may effect such removal
only for cause, unless the certificate of incorporation otherwise provides, and
(ii) in the case of a corporation having cumulative voting, if less than the
entire board is to be removed, no director may be removed without cause if the
votes cast against such director's removal would be sufficient to elect such
director if then cumulatively voted at an election of the entire board of
directors or, if the board is classified, at an election of the class of
directors of which he is a part. The Baker Hughes Restated Certificate of
Incorporation provides that no director may be removed during his term except
for cause. The Baker Hughes By-laws provide that any director may be removed for
cause by the holders of a majority of the shares of Baker Hughes Common Stock
entitled to vote in the election of directors and that stockholders may not
remove any director without cause. The Drilex Restated Certificate of
Incorporation provides that no director may be removed except for cause (as
defined therein or as may be provided by law), and then only by the affirmative
vote of the holders of at least a majority of the voting power of all shares
generally entitled to vote for directors.
CUMULATIVE VOTING
Under Section 214 of the DGCL, the certificate of incorporation of a
corporation may provide for cumulative voting in the election of directors.
Neither the Baker Hughes Restated Certificate of Incorporation nor the Drilex
Restated Certificate of Incorporation provides for cumulative voting. Baker
Hughes Restated Certificate of Incorporation provides that no article imposing
cumulative voting in the election of directors may be added to the Baker Hughes
Certificates of Incorporation unless such action is approved by the affirmative
vote of the holders of not less than 75% of the shares of stock entitled to vote
in the election of directors.
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NO PREEMPTIVE RIGHTS
The DGCL does not provide for any required preemptive rights of
stockholders. The Baker Hughes Restated Certificate of Incorporation and By-laws
do not mention preemptive rights. The Drilex Restated Certificate of
Incorporation states that no Drilex stockholder shall have preemptive or
preferential rights to acquire or subscribe for any shares or securities.
ADVANCE NOTICE BYLAWS
Drilex's By-laws establish advance notice procedures with regard to the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of stockholders of
Drilex. Baker Hughes' By-laws contain similar provisions. See "Description of
Capital Stock -- Certain Anti-takeover Provisions."
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INFORMATION REGARDING DRILEX
BUSINESS OF DRILEX
Drilex provides products and services used in directional, horizontal and
other precision drilling of oil and gas wells, oilfield workover operations,
environmental remediation applications, and trenchless pipeline and cable laying
applications. Drilex's products and services include comprehensive computerized
well planning and engineering services, supervision of drilling operations and
project management, a full range of high performance downhole positive
displacement motor systems, guidance systems (such as MWD instrument systems and
steering tools), and other related downhole tools. Drilex was one of the
pioneers in the development of downhole drilling motors in the early 1980s and
now designs and manufactures high-performance, multi-lobed positive displacement
drilling motors. Drilex employs its drilling motors in its own service
operations and also provides motors for sale or rent under the internationally
recognized "Drilex" brand name to oil and gas exploration and development
companies and oilfield service contractors. Drilex currently operates from 19
locations around the world and has approximately 380 employees. In addition,
Drilex has a number of agencies around the world which are all authorized by
Drilex for sales and service. Oilfield applications accounted for approximately
84% of Drilex's revenues in 1996.
Drilex's predecessor, Drilex Systems, Inc., was formed in Scotland in 1981
and was subsequently acquired by MascoTech, Inc. ("MascoTech") in 1984. In March
1994, DRLX Partners and John Forrest (a founder of DSI and the current President
and Chief Executive Officer of Drilex) purchased DSI from MascoTech following
MascoTech's decision to exit the oilfield services business (the "DSI
Acquisition"). On September 30, 1994, Drilex acquired substantially all of the
fixed assets of Cobb Directional Drilling Company, Inc. and its affiliate,
Posi-Trak Mud Motors, Inc. (the "Cobb Acquisition"), an independent directional
drilling contractor and provider of drilling motors for the U.S. Gulf of Mexico
region. On May 5, 1995, Drilex acquired the stock of Sharewell, Inc. (the
"Sharewell Acquisition"), a provider of guidance services and equipment for
trenchless drilling and a supplier of guidance and survey instruments to the
oilfield precision drilling industry. On September 30, 1995, Drilex acquired
substantially all of the net assets of ENSCO Technology Company (the "ENSCO
Technology Acquisition"), a wholly owned subsidiary of ENSCO International
Incorporated. ENSCO Technology Company was an independent provider of precision
drilling services, with special emphasis on horizontal drilling. Drilex
completed the initial public offering of Drilex Common Stock (the "Drilex IPO")
in July 1996. During the third and fourth quarters of 1996, Drilex substantially
completed the consolidation of facilities and operations in Texas, Louisiana and
the United Kingdom. During 1996, Drilex also substantially completed the
combination of its guidance instrumentation support services into a single
Houston facility.
Unless the context otherwise requires, references herein to "Drilex" refer
to Drilex International Inc. and its consolidated subsidiaries viewed as a
single entity and include its predecessors. Drilex's principal executive offices
are located at 15151 Sommermeyer, Houston, Texas 77041, and its telephone number
at that location is (713) 937-8888.
BUSINESS STRATEGY
Drilex's business strategy is built upon Drilex's premier line of downhole
positive displacement drilling motors and emphasizes (i) providing the highest
quality oilfield precision drilling and related customer support services in key
geographic regions, (ii) maximizing delivery of its core products, either
through sales, rentals or alliance arrangements, into other geographic regions
where Drilex does not focus its service efforts, and (iii) capitalizing on its
technical strengths by developing opportunities to deliver its core products and
services for emerging oilfield and nonoilfield applications where Drilex's
technical expertise can provide significant advantages.
Drilex emphasizes delivering responsive, reliable and high quality oilfield
precision drilling services in key geographic regions. Drilex currently operates
both onshore and offshore and concentrates its activities in the United States,
Venezuela, the European Continental Shelf, Canada and the Far East. Each of
these regions is characterized by substantial oilfield development activity (as
opposed to new exploration activity) and a
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relatively high number of technically challenging situations that require high
quality precision drilling operations. Drilex concentrates its service
activities in its key geographic regions in order to develop and capitalize on
Drilex's local knowledge and to take advantage of the regional experience and
expertise of its drilling supervisors and other technical field personnel, as
well as to achieve scale operating efficiencies. Furthermore, the high level of
activity conducted by Drilex in specific geographic areas permits a focused
application engineering effort, which allows Drilex to refine its products and
services to meet the needs of its customers on a more effective basis.
Drilex also utilizes other distribution channels to maximize delivery of
its products to areas outside of its key geographic regions. Since its
inception, Drilex has successfully marketed its drilling motors on a sale and
rental basis to oil and gas exploration and development companies and other
oilfield service contractors. Drilex intends to continue strengthening its
existing distribution channels and to expand its product distribution in regions
where Drilex is not a significant service competitor. In particular, if the
Merger is not consummated, Drilex will continue to seek to establish alliance
arrangements with several large oilfield service companies, which would permit
these companies to include Drilex motors in their comprehensive offerings of
oilfield products and services in certain regions. These alliances do not, in
general, constitute long-term purchase commitments by the other party.
Drilex has built upon its technical drilling capabilities by developing
opportunities in emerging applications where Drilex's expertise can provide
competitive advantages. In particular, Drilex believes that the development and
rapid growth in the use of coiled tubing for oilfield workover, redrilling and
recompletion operations has provided a significant opportunity for growth in the
use of precision drilling technology for slim-hole applications. Drilex has also
been successful in developing opportunities for precision drilling in the
environmental remediation and trenchless services markets, which Drilex believes
offer significant opportunities for growth.
PRODUCTS AND SERVICES
OILFIELD PRECISION DRILLING APPLICATIONS
Precision Drilling Services. Drilex provides comprehensive precision
drilling services for oil and gas drilling and workover applications, including
computerized well planning, on-site drilling supervision, maintenance and
support, and post-well analysis. In many oilfield applications, precision
drilling techniques offer significant economic advantages over conventional
vertical drilling techniques, such as reduced drilling time and expense,
increased well production and enhanced reservoir recovery. The high torque,
speed and performance offered by current-generation downhole drilling motors
permit the use of precision drilling techniques as a practical alternative to
conventional drilling even for vertically drilled wells. Customers for oilfield
precision drilling services are primarily major and large independent oil and
gas companies. Because of the complexity involved in precision drilling, these
customers typically rely on specialized precision drilling service contractors
to manage the entire process of drilling the horizontal or directional portion
of a well. Precision drilling services require high performance drilling motors,
sophisticated guidance systems and analytical tools, and an experienced staff of
wellsite and technical support personnel. Drilex's drilling motors operate in
conjunction with various guidance systems (including MWD instrument systems and
steering tools) provided by Drilex or other oilfield service companies. While
Drilex has its own line of steering instruments, which it assembles from
sub-assemblies obtained from various third parties, Drilex currently obtains all
its MWD instrument systems from two third-party manufacturers. See
"-- Dependence on Certain Third-Party Suppliers."
Drilex has applied its technical drilling expertise to the development of
services for slim-hole production service, workover applications, coiled tubing
systems and "extended-reach" drilling. Production services typically involve
running small-diameter (3 1/2 inches or less) drilling motors on either coiled
tubing or workover strings for remedial work in existing wells, for cleaning,
deepening and recompleting a well or drilling a sidetrack well. Workover
applications involving Drilex's services frequently entail re-entering a well
and replacing its existing completion with horizontal drain holes to increase
the well's product performance and extend the life of the well. Other workover
services provided by Drilex include drilling out cement and
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<PAGE> 54
removing fill, scale or heavy wax; cleaning production tubing and casing;
milling casings, packers, junk and plugs; fishing; and well deepening. Coiled
tubing systems require specialized services, which utilize small diameter
drilling motors to develop mechanical power downhole. With the power generated
by the downhole drilling motor, coiled tubing systems can be used for a variety
of drilling operations, including conventional open-hole drilling, coring,
under-reaming, well deepening, medium-radius drilling, horizontal drilling,
setting whipstocks and milling. Extended-reach development projects typically
involve the drilling of numerous wells from a single, stationary drilling
location. This technology can provide substantial reductions in capital
requirements for development drilling.
Precision Drilling Products. Drilex was one of the pioneers in the
development of downhole drilling motors in the early 1980s and now designs and
manufactures high-performance, multi-lobed positive displacement drilling
motors. Drilex was the first manufacturer to produce a high-torque downhole
motor designed to drive a rock bit at its optimal (relatively low) speed,
thereby increasing the life of the bit and reducing the risk of the bit breaking
apart in the wellbore. Through its manufacturing operations, Drilex is able to
maintain close control over the performance and quality characteristics of the
drilling motors used in its service operations. Drilex's drilling motors have
the ability to generate power from a wide range of drilling fluids (both
oil-based and water-based fluids and compressed air) and to operate at both high
and low speeds.
Downhole positive displacement drilling motors consist of four basic
elements: the power section, the transmission section, the output shaft assembly
and the motor casing. Drilex's positive displacement motors utilize a
multi-lobed power section consisting of a rotor/stator combination that is
attached directly to the drillstring and is driven by drilling fluid pumped down
the drillstring to turn the drill bit. The power section operates without
lubrication (other than from the drilling fluid itself) and is designed to
withstand the highly abrasive drilling fluids being passed through it. The
stator and rotor comprising the power section act together as a system of
gears -- one inside the other. The outer gear (the stator) consists of a molded
elastomer with at least three gears (or lobes), and is enclosed by a metal tube.
Positioned inside the stator is an internal gear called the rotor, which is made
of steel and has one fewer lobe than the stator. The difference between the
rotor/stator lobe configuration creates a spiral series of gaps, which, during
drilling operations, are filled with drilling fluid. Under pressure, the fluid
within this spiral acts as a wedge. Hydraulic force applied to the top of the
wedge applies a force on the rotor. Due to the helical shape of the rotor, this
application of fluid force onto the rotor causes rotation.
The rotation from the power section is applied to the transmission section,
which is a drive shaft that converts the complex eccentric rotary motion from
inside the power section to transmit high downward thrusts and torque to the
output shaft assembly at varying rotational speeds. The transmission section can
be configured in a variety of forms to meet differing drilling objectives. The
output shaft assembly provides the drive to the drill bit. The complex,
multi-stack ball track bearing design mounted on this element must be able to
tolerate the maximum bit thrust as well as high levels of vibration and the
reactive force of the weight on the bit, which operates in an upward direction.
The motor casing is a precision-manufactured shell that encases the other
elements of the motor. While the motor casings are thin-walled, they are
designed to maximize the structural integrity of the motor.
Drilex has designed its drilling motors to optimize flexibility, power and
reliability. Drilex motors have demonstrated high performance capabilities and
reliability even in arctic locations and in severe downhole environments, both
onshore and offshore, where the motors encounter extremely high temperatures,
hard rock, sour gas, high sand content formations, highly abrasive muds and
environmentally sensitive fluids. Drilex's motors are used for a wide variety of
wellbore drilling applications, including initial spudding of wells, vertical
drilling, directional drilling, horizontal drilling, tangent drilling,
under-reaming, casing cutting, coring, conductor drill down and fishing. In
addition, Drilex's motors are used in a variety of production services, workover
applications and coiled tubing operations.
Drilex maintains an inventory of drilling motors in sizes ranging from
1 1/6 to 9 1/2 inches in outside diameter, which are capable of drilling holes
in sizes ranging from 6 inches to 36 inches in diameter, depending on the
application. Drilex's wide range of drilling motors permits the selection of the
precise
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<PAGE> 55
combination of size, torque, speed and bearing configuration to meet the
anticipated drilling conditions for a specified project.
Drilex uses its motors as a service tool, a rental tool and a direct sale
product, although rentals and sales have become a less significant part of
Drilex's business in recent years. Motor rental involves renting the equipment
directly to oil and gas companies or oilfield service contractors for use in the
drilling of vertical, horizontal and directional wells.
Drilex's drilling motors operate in conjunction with various guidance
systems (including MWD instrument systems and steering tool systems) provided by
Drilex or other oilfield service companies. Drilex's drilling motors are also
sometimes operated together with logging-while-drilling equipment, which Drilex
does not provide. While Drilex has its own line of steering instruments, which
it assembles from sub-assemblies obtained from various third parties, it obtains
its MWD instrument systems from third-party manufacturers. Drilex's MWD
instrument systems and steering tools are modular and readily transportable.
ENVIRONMENTAL REMEDIATION AND TRENCHLESS APPLICATIONS
Drilex has applied its technical drilling capabilities for use in shallow
well horizontal drilling for environmental remediation applications and
trenchless pipeline and cable installations.
In its environmental remediation operations, Drilex focuses on groundwater
remediation activities. Drilex uses its drilling systems to drill horizontal
wellbores beneath contaminated sites, so that extraction and remediation of the
contamination can take place at a much improved rate. Horizontal drilling
provides total cost and performance advantages to conventional vertical drilling
of sampling and treatment wells, primarily because horizontal drilling requires
fewer wells and surface installation facilities and allows contaminants beneath
fixed structures to be reached.
Drilex attempts to provide its environmental remediation services in a
manner so as to minimize its handling of materials that may be classified as
hazardous substances or wastes. In addition, Drilex generally obtains indemnity
agreements from its environmental remediation services customers requiring such
customers to indemnify Drilex against any liability that may arise from Drilex's
handling of such materials in the course of performing a contract for these
services. There is no assurance, however, that such contractual indemnity will,
in all instances, be effective or sufficient to protect Drilex from liability
for claims arising from its handling of hazardous materials in connection with
its environmental services operations.
Through its Sharewell subsidiary, Drilex also provides precision drilling
services and equipment for trenchless pipeline and cable laying applications,
which primarily involve horizontal boring underneath city streets and structures
to enable the "trenchless" delivery of conduits in densely built areas, as well
as subsurface crossings of rivers, streams and other bodies of water. Sharewell
is a leading provider of guidance systems to the trenchless drilling industry
worldwide. Applications for trenchless services include subsurface installations
of fiber optics lines, cable systems and utility pipelines and wiring.
Drilex provides complete horizontal drilling services for environmental
remediation and trenchless services using two specialized mobile slant drilling
rigs that it designed and built. The rigs utilize a closed-loop circulation
system that captures, cleans and recirculates the drilling fluid, eliminating
the need for earthen mud pits at the well site. The rigs are compact, requiring
an area as small as 50 feet x 100 feet for four trailer-mounted rig components.
Surface rotary power and downhole motors may be used to advance the drillstring.
This equipment provides Drilex with the capability to drill a six-inch diameter
hole approximately 30 feet below surface and hit a two-feet in diameter target
point 1,500 feet away. During 1996, Drilex completed two significant
environmental remediation projects. Drilex's environmental remediation and
trenchless services operations accounted for approximately 16% of Drilex's
revenues in 1996.
CUSTOMERS
Drilex's customers for oilfield precision drilling services and products
are primarily major and large independent oil and gas companies, conventional
drilling contractors and certain other oilfield service contractors. Customers
for Drilex's environmental remediation services include environmental service
contrac-
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<PAGE> 56
tors, engineering consulting firms, petrochemical companies, hydrocarbon
transportation companies and military and other governmental organizations.
Customers for trenchless services include telephone and other utilities, as well
as general contractors.
For the year ended December 31, 1996, two customers each accounted for
approximately 10% of Drilex's revenues. While Drilex is not dependent on any one
customer, the loss of one of its significant customers could, at least on a
short-term basis, have an adverse effect on Drilex's results of operations.
MARKETING AND SALES
Drilex markets and sells its services and products directly through its
sales force and operating managers, utilizing Drilex's 12 domestic and 7
international locations. In addition, in certain foreign countries where Drilex
does not maintain offices, Drilex utilizes sales representatives and local
agents to enhance its marketing and sales efforts. Drilex also places print
advertising in trade and technical publications targeted to Drilex's customer
base and publishes technical papers, which it presents at technical conferences
and seminars. Drilex is a qualified supplier or an approved vendor to many oil
and gas production companies. Drilex's jobs are generally on a per-well basis,
which Drilex believes is representative of current industry practices. Drilex
does not have a significant number of long-term service contracts.
Drilex's marketing and sales resources are generally focused in the United
States, Venezuela, the European Continental Shelf, Canada and the Far East.
Controlled purchasing from external manufacturing vendors, combined with
the focused scope of Drilex's in-house manufacturing function results in a
relatively short manufacturing lead time for production of Drilex's drilling
motors; therefore, backlog is generally not significant to Drilex.
RELIANCE ON THE OIL AND GAS INDUSTRY
Drilex's business is substantially dependent upon the condition of the oil
and gas industry and the industry's willingness to spend capital on drilling
operations. The level of expenditures on such activities is generally dependent
on the prevailing view of future hydrocarbon product prices, which are affected
by the numerous factors affecting the supply and demand for oil and gas,
including worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, political requirements of national
governments, coordination by the Organization of Petroleum Exporting Countries
("OPEC"), the cost of producing oil and gas and technological advances. Oil and
gas prices and drilling activity have been characterized by significant
volatility in recent years.
RELIANCE ON NEW PRODUCT DEVELOPMENT AND POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The market for Drilex's products and services is characterized by changing
technology. As a result, Drilex's success is dependent upon its ability to
develop new products and services on a cost-effective basis and to introduce
them into the marketplace in a timely manner. Drilex intends to continue
committing financial resources and effort to the development of new products and
services.
PATENTS AND OTHER INTELLECTUAL PROPERTY
Drilex currently holds 17 U.S. patents and has one U.S. patent application
pending (and 32 foreign patents covering many of the same inventions), most of
which relate to Drilex's positive displacement drilling motors. Although in the
aggregate these patents are important to Drilex, Drilex generally depends on
technological capabilities, manufacturing quality control and the application of
know-how rather than patents in the conduct of its business. Drilex does benefit
from service and product name brand recognition, principally through its Drilex
trademark, and considers such trademark to be important. In general, Drilex will
seek to protect its intellectual property rights in all jurisdictions where
Drilex believes the cost of such protection is warranted. There can be no
assurance that the steps taken by Drilex to protect its proprietary rights will
be adequate to prevent misappropriation of its intellectual property rights or
independent development by others
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<PAGE> 57
of competitive products or services. In addition, the laws of certain foreign
countries may not protect such rights to the same extent as to the laws of the
United States.
DEPENDENCE ON CERTAIN THIRD-PARTY SUPPLIERS
Drilex's two independent suppliers for MWD instrument systems are
essentially the only sources for such equipment available to Drilex. Drilex's
reliance on these limited sources subjects it to the risks of, among other
things, delays in the receipt of desired quantities of MWD equipment (as a
result of manufacturing delays or other reasons) and increases in prices for
such equipment. Drilex also relies on single suppliers for the stator molding
and the thrust bearings used in the manufacture of its downhole positive
displacement motors. While Drilex does not anticipate any difficulties in
continuing to obtain product from these single suppliers, Drilex believes that
adequate alternative sources are available should the need arise. Such
alternative sources may, however, involve increased costs to Drilex and shipment
delays.
COMPETITION
The industry in which Drilex operates is highly competitive. Drilex's
ability to compete successfully depends on elements both within and outside of
its control, including successful and timely development of new products and
services, performance and quality, customer service, pricing, industry trends,
and general economic trends. Several of Drilex's competitors are divisions or
subsidiaries of companies that are substantially larger and have greater
financial and other resources than Drilex.
Competition in the oilfield services market is primarily on the basis of
service quality, experience of personnel and equipment reliability, although
price competition is also a significant factor. Drilex believes that, in
selecting from among qualified contractors for a particular precision drilling
service contract, customers also consider, among other things, bidding
responsiveness, the availability and technical capabilities of equipment and
personnel, and the flexibility of equipment to work within the technical
constraints imposed by other aspects of the drilling project (such as drill bit
sizes and types, hydraulics limitations, and differing drilling fluids and
borehole sizes).
OPERATIONAL HAZARDS AND INSURANCE
Drilex's operations are subject to many hazards inherent in the drilling
and workover of oil and gas wells (including explosions, blow-outs, reservoir
damage, loss of well control, cratering and fires), the occurrence of which
could result in the suspension of drilling operations, damage to or destruction
of equipment and injury or death to field personnel. Damage to the environment
could also result from operations that may involve Drilex or its products.
Drilex maintains insurance coverage in such amounts and against such risks as it
believes to be in accordance with normal industry practice, and there can be no
assurance that such insurance will be adequate to cover all losses or
liabilities that may be incurred by Drilex in its operations.
INTERNATIONAL OPERATIONS
Drilex maintains facilities in five countries and, from time to time,
conducts operations in numerous other countries. Drilex's non-U.S. operations
accounted for approximately 28% of Drilex's revenues during the year ended
December 31, 1996 (and Drilex's operations in Venezuela accounted for
approximately 43% of these foreign-sourced revenues). Certain information
concerning Drilex's operations by geographic areas is set forth in Note 15 to
the Consolidated Financial Statements of Drilex International Inc. included
elsewhere herein.
Drilex's business outside the United States is subject to various risks of
international operations that are beyond its control, such as instability of
foreign economies and governments, currency fluctuations, overlap of different
tax structures, risks of expropriation, and changes in laws and policies
affecting trade and investment. Drilex attempts to limit its exposure to foreign
currency fluctuations by limiting the amount by which its foreign contracts are
denominated in a currency other than U.S. dollars to an amount generally equal
to expenses expected to be incurred in such foreign currency. Drilex has not
historically engaged in and does not currently intend to engage in any
significant hedging or currency trading transactions designed to compensate for
adverse currency fluctuations.
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SEASONALITY
Drilex's business is somewhat seasonal, since domestic oil and gas drilling
activities are generally lower in the first and second quarters. In addition,
adverse weather conditions can curtail operations in certain regions during
different parts of the year.
EMPLOYEES
As of December 31, 1996, Drilex had approximately 380 employees. Drilex's
success depends, in part, on its ability to attract, retain and motivate highly
qualified technical, marketing, engineering and management personnel. Drilex is
not a party to any collective bargaining agreements and has not experienced any
strikes or work stoppages, and management believes that Drilex's employee
relations are good.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of Drilex's operations are affected by political developments
and are subject to both domestic and foreign governmental regulations, including
those relating to oilfield operations, worker safety and the protection of the
environment. In addition, Drilex depends on the demand for its services from the
oil and gas industry and, therefore, is generally affected by changing taxes,
price controls and other laws and regulations relating to the oil and gas
industry.
Drilex's operations are affected by numerous foreign, federal, state and
local environmental laws and regulations. The technical requirements of these
laws and regulations are becoming increasingly expensive, complex and stringent.
These laws may provide for "strict liability" for damages to natural resources
or threats to public health and safety, rendering a party liable for the
environmental damage without regard to negligence or fault on the part of such
party. Sanctions for noncompliance may include revocation of permits, corrective
action orders, administrative or civil penalties, and criminal prosecution.
Certain environmental laws provide for joint and several strict liability for
remediation of spills and releases of hazardous substances. In addition,
companies may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances, as well as damage to
natural resources. Such laws and regulations may also expose Drilex to liability
for the conduct of or conditions caused by others, or for acts of Drilex that
were in compliance with all applicable laws at the time such acts were
performed. Compliance with environmental laws and regulations may require Drilex
to obtain permits or other authorizations for certain activities and to comply
with various standards or procedural requirements. Drilex believes that its
facilities are in substantial compliance with current regulatory standards.
Capital expenditures for property, plant and equipment for environmental
control facilities during 1996 were not material. Based on Drilex's experience
to date, it does not currently anticipate any material adverse effect on its
business or consolidated financial position as a result of future compliance
with existing environmental laws and regulations controlling the discharge of
materials into the environment.
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PROPERTIES
Drilex's manufacturing and principal sales and service operations are
conducted using the following facilities:
<TABLE>
<CAPTION>
FLOOR SPACE
LOCATION OWNED/LEASED (SQUARE FEET) DESCRIPTION
-------- ------------ ------------- -----------
<S> <C> <C> <C>
UNITED STATES:
Anchorage, Alaska Leased 685 Sales and Service
Bakersfield, California Leased 7,500 Sales and Service
Casper, Wyoming Leased 9,500 Sales and Service
Denver, Colorado Leased 200 Sales
Fort Worth, Texas Leased 200 Sales
Houston, Texas Leased 53,750 Executive Offices, Manufacturing,
Engineering, Sales and Service
Houston, Texas Leased 41,366 Sales and Service
Lafayette, Louisiana Owned 20,000 Sales and Service
New Orleans, Louisiana Leased 1,055 Sales
Oklahoma City, Oklahoma Leased 10,500 Sales and Service
Prudhoe Bay, Alaska Leased 500 Repair and Maintenance
Youngsville, Louisiana Owned 10,516 Sales and Service
INTERNATIONAL:
Aberdeen, Scotland Leased 17,523 Sales and Service
Anaco, Venezuela Leased 10,500 Sales and Service
Calgary, Alberta Leased 100 Sales
Ciudad Ojeda, Venezuela Leased 16,666 Sales and Service
Edmonton, Alberta Leased 6,896 Sales and Service
Maturin, Venezuela Leased 2,000 Sales
North Freemantle, West Australia Leased 500 Sales and Service
</TABLE>
LEGAL PROCEEDINGS
Drilex is involved from time to time in routine litigation incidental to
its business. Drilex is not currently involved in any legal proceedings that
Drilex believes will have a material adverse effect on its financial condition
or results of operations.
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MARKET FOR DRILEX COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since July 3, 1996, the Drilex Common Stock has been traded on the Nasdaq
Stock Market under the symbol "DRLX." As of June 5, 1997, there were 6,663,356
shares of Drilex Common Stock outstanding, held by approximately 21 stockholders
of record. The number of record holders does not bear any relationship to the
number of beneficial owners of the Drilex Common Stock.
The following table sets forth the range of high and low sale prices for
the Drilex Common Stock on the Nasdaq Stock Market for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Year Ended December 31, 1996:
Third Quarter (commencing July 3)..... $17 $ 12 1/2
Fourth Quarter........................ 18 10 3/4
Year Ended December 31, 1997:
First Quarter......................... $14 1/2 $ 12 1/4
Second Quarter (through June 10)...... 15 1/4 11 1/4
</TABLE>
Drilex has not paid dividends on the Drilex Common Stock since its
inception. If the Merger is not consummated, Drilex does not anticipate paying
dividends on the Drilex Common Stock in the foreseeable future. Drilex expects
that it will retain funds generated by Drilex's operations for the development
and growth of its business. Drilex's future dividend policy will be determined
by its Board of Directors on the basis of various factors, including, among
other things, Drilex's financial condition, cash flows from operations, the
level of its capital expenditures, its future business prospects, the
requirements of Delaware law, and any restrictions imposed by Drilex's current
or future credit facilities and promissory notes. Provisions contained in
Drilex's bank credit facility (the "Drilex Credit Facility") currently prohibit
the payment of dividends on the Drilex Common Stock. See "Information Regarding
Drilex -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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SELECTED FINANCIAL DATA
The following table sets forth selected historical financial and other data
for Drilex. The information presented as of and for the periods ended December
31, 1996, 1995 and 1994, March 30, 1994 and December 31, 1993 is derived from
the audited consolidated financial statements of Drilex and its predecessor
company, DSI. The information presented as of and for the year ended December
31, 1992 is derived from the unaudited consolidated financial statements of DSI.
The information as of and for the three months ended March 31, 1997 and 1996 is
derived from unaudited consolidated financial statements of Drilex, which
include all adjustments that Drilex considers necessary for a fair presentation
of the financial position and results of operations for those periods. Operating
results for the three months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1997. The following information should be read in conjunction with "Information
Regarding Drilex -- Management's Discussion and Analysis of Financial Conditions
and Results of Operation" and the Consolidated Financial Statements of Drilex,
including the Notes thereto, included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
DRILEX PREDECESSOR COMPANY(3)
-------------------------------------------------------- ------------------------------
MARCH 30,
THREE MONTHS YEAR ENDED 1994 JANUARY 1, YEAR ENDED
ENDED MARCH 31, DECEMBER 31, (INCEPTION) TO 1994 TO DECEMBER 31,
------------------ ------------------ DECEMBER 31, MARCH 30, -----------------
1997 1996 1996 1995(1) 1994(2) 1994 1993 1992
------- -------- ------- ------- -------------- ---------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues.............. $17,033 $ 19,457 $76,147 $57,526 $25,209 $ 6,357 $25,871 $24,349
Costs of sales and
operations.............. 10,780 12,018 45,696 34,606 12,924 3,364 14,093 14,326
Selling, general and
administrative
expenses................ 3,992 4,243 16,945 13,448 6,711 2,029 8,286 10,573
Depreciation and
amortization............ 1,939 1,580 6,575(4) 4,492(4) 1,855 775 3,107 2,942
------- -------- ------- ------- ------- ------- ------- -------
Operating income (loss)... 322 1,616 6,931 4,980 3,719 189 385 (3,492)
Interest expense.......... (317) (811) (2,079) (1,935) (478) (481) (1,893) (1,667)
------- -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
minority interests...... 5 805 4,852 3,045 3,241 (292) (1,508) (5,159)
Provision for income
taxes................... (2) (290) (1,727) (1,097) (1,166) (3) (152) (84)
Minority interests........ -- 11 (83) (164) (66) -- -- --
------- -------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ 3 $ 526 $ 3,042 $ 1,784 $ 2,009 $ (295) $(1,660) $(5,243)
======= ======== ======= ======= ======= ======= ======= =======
Net income per common and
common equivalent
share................... $ .00 $ .12 $ .53 $ .40 $ .57
======= ======== ======= ======= =======
Weighted average common
and equivalent shares
outstanding............. 6,828 4,552 5,712 4,411 3,507
======= ======== ======= ======= =======
OTHER DATA:
Capital expenditures...... $ 3,204 $ 1,816 $ 9,876 $ 5,408 $ 707 $ 195 $ 252 $ 1,364
EBITDA(5)................. 2,261 3,196 13,506 9,472 5,574 964 3,492 (550)
Summary cash flow
information:
Net cash provided by
(used for) operating
activities............ (3,089) 1,249 812 (185) 877 663 277 (3,752)
Net cash used for
investing
activities............ (2,599) (1,124) (6,036) (19,360) (22,893) (195) (252) (1,364)
Net cash provided by
financing
activities(3)......... 4,542 444 6,957 19,415 22,965 28 503 5,379
BALANCE SHEET DATA:
Working capital........... $25,468 $ 13,653 $21,026 $13,365 $ 9,511 $10,533 $10,717 $10,581
Total assets.............. 90,207 78,455 86,770 77,754 36,292 24,965 26,196 26,793
Long-term debt, less
current maturities...... 19,311 32,945 11,883 32,467 7,633 -- -- --
Total stockholders'
equity(3)(6)............ 56,382 24,266 57,680 23,682 19,557 22,794 22,990 24,459
</TABLE>
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- ---------------
(1) Results for the year are not comparable to prior periods due to the ENSCO
Technology and Sharewell Acquisitions.
(2) Results for the period are not comparable to prior years due to the Cobb
Acquisition.
(3) The predecessor company, DSI, was a wholly owned subsidiary of MascoTech
prior to its acquisition by Drilex on March 30, 1994. As a wholly owned
subsidiary of MascoTech, DSI was allocated interest and other expenses by
its parent, and had no long-term indebtedness since its financing
requirements were met through advances from MascoTech. For purposes of this
presentation, such advances from MascoTech are reflected in stockholders'
equity. Earnings per share are not presented for periods during which DSI
was wholly owned by MascoTech.
(4) Effective April 1, 1995, Drilex changed its estimated useful life for
certain drilling motor components from five to seven years. This change was
made to better reflect the estimated period during which these assets will
remain in service. The effect of this change was an increase in net income
of $248,000, or $.06 per share, for the year ended December 31, 1995, and
$378,000, or $.07 per share, for the year ended December 31, 1996.
(5) For purposes of the table, EBITDA means operating income (loss) plus
depreciation and amortization and is a supplemental financial measurement
used by Drilex in the evaluation of its business. EBITDA is not intended to
represent cash flow, an alternative to net income or any other measure of
performance in accordance with generally accepted accounting principles.
EBITDA as presented above may not be comparable to similarly titled measures
of other companies. In addition, the funds depicted by EBITDA may not be
available for management's discretionary use as a result of required debt
service and other commitments or uncertainties. Reference is made to the
Consolidated Statement of Cash Flows contained in the Consolidated Financial
Statements of Drilex included elsewhere herein for a complete presentation
of cash flows from operating, investing and financing activities prepared in
accordance with generally accepted accounting principles.
(6) No cash dividends were declared or paid on the Drilex Common Stock during
any of the periods presented.
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<PAGE> 63
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth summary unaudited quarterly financial
information for the years ended December 31, 1996 and 1995. Drilex believes that
this information has been prepared on the same basis as its audited Consolidated
Financial Statements and that all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the selected quarterly information when read in conjunction with
the Consolidated Financial Statements of Drilex, including the Notes thereto,
included elsewhere in this Proxy Statement/Prospectus. Drilex's business is
somewhat seasonal, since domestic oil and gas drilling activities are generally
lower in the first and second quarters. Adverse weather conditions can curtail
operations in certain regions during different parts of the year. Accordingly,
Drilex's results of operations for any one quarter are not necessarily
indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996:
Net revenues.......................... $19,457 $18,593 $20,075 $18,022
Operating income...................... 1,616 823 2,419 2,073
Net income............................ 526 93 1,279 1,144
Net income per common and common
equivalent share................... .12 .02 .19 .17
1995:
Net revenues.......................... $10,527 $12,343 $14,493 $20,163
Operating income...................... 660 1,023 1,411 1,886
Net income............................ 205 361 574 644
Net income per common and common
equivalent share................... .05 .08 .13 .14
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Drilex, including the Notes thereto, and
"Information Regarding Drilex -- Selected Financial Data" appearing elsewhere
herein.
The following discussion is intended to assist in understanding Drilex's
financial condition and results of operations as of and for each year in the
three-year period ended December 31, 1996 and as of and for the three months
ended March 31, 1997 and 1996. The statements in this discussion regarding the
industry outlook, Drilex's expectations regarding growth in the precision
drilling segment, Drilex's expectations regarding the future performance of its
businesses, and other statements which are not historical facts in this
discussion are forward-looking statements. The words "anticipate," "believe,"
"expect," "plan," "intend," "estimate," "project," "will," "could," "may,"
"predict" and similar expressions are also intended to identify forward-looking
statements. Such statements are subject to numerous risks and uncertainties,
including but not limited to the effect of competition, the level of petroleum
industry exploration and production expenditures, world economic conditions,
prices of and the demand for crude oil and natural gas, drilling activity,
weather, the legislative environment in the United States and other countries,
OPEC policy, conflict in the Middle East and other major petroleum producing
regions, the condition of the capital and equity markets, unanticipated
technological changes and other factors detailed herein and in Drilex's SEC
filings. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
OVERVIEW
Drilex's business is substantially dependent upon the condition of the oil
and gas industry and the willingness of oil and gas companies to spend capital
on drilling and workover operations, which is generally dependent on the
prevailing view of future hydrocarbon product prices. This is particularly the
case in the United States, where Drilex generates approximately 72% of its
revenues. Expectations relative to such future prices are affected by numerous
factors affecting the supply and demand for oil and natural gas, including
worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, political requirements of national
governments, coordination by OPEC, the cost of producing oil and gas, and
technological advances. Oil and gas prices and exploration and development
activity have been characterized by significant volatility in recent years.
Although overall oil and gas drilling activity as measured by the rotary
rig count has declined significantly over the past 15 years, rapid increases in
precision drilling technology, enhanced geological prospecting technologies
(such as 3-D seismic technologies and CAEX techniques), and the demands of
exploration and development companies for more precise and less costly drilling
systems have driven growth in the precision drilling segment of the oilfield
drilling market. Based on industry sources, the number of oil and gas wells
drilled in the United States using precision drilling technology and the
proportion of oil and gas wells drilled in the United States employing precision
drilling technology have each increased significantly over the past five years.
Drilex anticipates continued growth in demand for precision drilling
services and expects the number of oilfield jobs employing precision drilling
techniques to grow at a higher rate than the number of jobs in the overall
drilling market. Moreover, with respect to jobs employing precision drilling
techniques, Drilex expects continued increases in the average number of feet per
well drilled using a downhole drilling motor. Drilex believes the growth in the
number of precision drilling jobs and the increase in the utilization of
precision drilling technology per job will be driven by the requirements of
exploration and production companies for more precision and cost efficiency in
their drilling operations, as well as the greater acceptance of precision
drilling technology in the drilling industry, which has resulted from
technological advancements, product improvements (which have extended equipment
lives and increased penetration rates), and the expansion of downhole drilling
motor technology to a wide variety of slim-hole applications. Drilex also
believes that, over time, the demand for hydrocarbon products will grow and that
exploration and development activity will increase. Drilex expects this increase
in activity to be primarily driven by lower oil and gas company cost
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<PAGE> 65
structures, technological advances and the interest of foreign countries in
maintaining or expanding their production.
Drilex International Inc. was organized by DRLX Partners and John Forrest
(a founder of DSI and the current President and Chief Executive Officer of
Drilex) to acquire DSI (also referred to herein as the "Predecessor") from
MascoTech on March 30, 1994. Drilex's predecessor was originally formed in 1981.
Since the DSI Acquisition, Drilex has grown substantially through the
expansion of its product and service offerings and acquisitions of complementary
businesses. The Cobb and ENSCO Technology Acquisitions (completed on September
30, 1994 and 1995, respectively) expanded Drilex's presence in certain of its
key geographic regions for oilfield precision drilling services and provided
Drilex with significant opportunities to expand its distribution of
Drilex-manufactured motors by employing them in the newly acquired operations.
In addition, the ENSCO Technology Acquisition significantly expanded Drilex's
MWD capabilities, providing Drilex additional opportunities to deploy its
products and services. The Sharewell Acquisition (completed on May 5, 1995) also
provided the opportunity to expand Drilex's product distribution and
significantly increased Drilex's service capabilities in environmental
remediation and trenchless services. During the third and fourth quarters of
1996, Drilex substantially completed the consolidation of facilities and
operations in Texas, Louisiana and the United Kingdom. During 1996, Drilex also
combined its guidance instrumentation support services into a single Houston
facility which is expected to reduce costs, enhance guidance instrument
performance and improve service delivery.
In July 1996, Drilex completed its initial public offering. The net
proceeds to Drilex from the Drilex IPO of $28.3 million were used to repay debt
incurred primarily in connection with the Cobb, Sharewell and ENSCO Technology
Acquisitions.
Results of Operations
Drilex International Inc. began operations on March 30, 1994, the effective
date of the DSI Acquisition. As a result, for purposes of the following
discussion, the amounts from the consolidated statement of income of Drilex
International Inc. from March 30, 1994 through December 31, 1994 have been
combined with the statement of income for the Predecessor for the three months
ended March 31, 1994 (adjusted to a pro forma basis as if the DSI Acquisition
had occurred as of January 1, 1994). The following discussion presents an
analysis of such combined results for 1994 compared to the results of operations
of Drilex International Inc. for each of 1995 and 1996.
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<PAGE> 66
Drilex's business is somewhat seasonal, since domestic oil and gas drilling
activities are generally lower in the first and second quarters. Adverse weather
conditions can curtail operations in certain regions during different parts of
the year. Accordingly, Drilex's results of operations for any one quarter are
not necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF NET OF NET OF NET OF NET OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............. $17,033 100.0% $19,457 100.0% $76,147 100.0% $57,526 100.0% $31,566 100.0%
Operating expenses:
Costs of sales and
operations........... 10,780 63.3 12,018 61.8 45,696 60.0 34,606 60.1 16,288 51.6
Selling, general and
administrative
expenses............. 3,992 23.4 4,243 21.8 16,945 22.3 13,448 23.4 8,605 27.2
Depreciation and
amortization......... 1,939 11.4 1,580 8.1 6,575 8.6 4,492 7.8 2,324 7.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income......... 322 1.9 1,616 8.3 6,931 9.1 4,980 8.7 4,349 13.8
Interest expense......... (317) (1.9) (811) (4.2) (2,079) (2.7) (1,935) (3.4) (567) (1.8)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income before income
taxes and minority
interests.............. 5 0 805 4.1 4,852 6.4 3,045 5.3 3,782 12.0
Provision for income
taxes.................. (2) 0 (290) (1.5) (1,727) (2.3) (1,097) (1.9) (1,362) (4.3)
Minority interests....... -- 0 11 0.1 (83) (0.1) (164) (0.3) (66) (0.2)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net income............... $ 3 0% $ 526 2.7% $ 3,042 4.0% $ 1,784 3.1% $ 2,354 7.5%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Comparison of Three Months Ended March 31, 1997 and 1996
Consolidated revenues for the three months ended March 31, 1997 were $17.0
million, a decrease of 12% from revenues of $19.5 million for the corresponding
period in the prior year. The $2.5 million decrease was primarily attributable
to delays in the start of drilling projects in Texas and Venezuela and to lower
activity from the Louisiana operations in the first quarter of 1997. The Texas
delays were due to changes in drilling projects in the deep Austin Chalk that
cause longer intervals for drilling the vertical section of the wellbore prior
to Drilex's performing the directional drilling services. The lower Venezuela
revenues were attributable to the delay of rig availability until early April.
These lower revenue levels were partially offset by a sales and service contract
to the Far East which is expected to provide for ongoing service revenues.
Costs of sales and operations decreased from $12.0 million in the first
quarter of 1996 to $10.8 million in the first quarter of the current year. This
decrease is almost entirely attributable to the lower revenues described above.
As a percentage of revenues, costs of sales and operations increased from 61.8%
in the first quarter of 1996 to 63.3% in the first quarter of the current year.
The increase in costs of sales and operations as a percentage of revenues is
primarily attributable to the effect of the combination of fixed period expenses
and lower revenues.
Selling, general and administrative expenses decreased from $4.2 million in
the first quarter of 1996 to $4.0 million in the first quarter of 1997. The
dollar reduction in selling, general and administrative expenses was not
sufficient to compensate for the lower than expected revenue levels.
Depreciation and amortization increased from $1.6 million in the first
quarter of 1996 to $1.9 million in the first quarter of 1997. This increase was
primarily associated with the increase in the depreciable cost of MWD equipment
related to the purchase and deployment of additional MWD equipment to areas that
were previously renting third-party MWD units.
Interest expense decreased from $0.8 million in the first quarter of 1996
to $0.3 million in the first quarter of 1997. Beginning in the third quarter of
1996, interest expense has been substantially reduced as a result of retiring
approximately $32.2 million in debt in connection with the Drilex IPO. This
reduction was partially
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<PAGE> 67
offset by an increase in the amount outstanding under the Drilex Credit Facility
due to the purchase of additional MWD units and to the cash payment in
connection with a stock repurchase and promissory note repayment agreement and
general release (the "Cobb Buy-Out Agreement"), which was effected on February
10, 1997, with Mr. Archie Cobb and certain of his affiliates from whom the
Company previously acquired assets in the Cobb Acquisition. See "-- Liquidity
and Capital Resources."
During the first quarter of 1997, the Company completed the combination of
its guidance instrumentation support services into a single Houston facility.
This centralization of personnel, controls and procedures is expected to reduce
costs, enhance guidance instrument performance and improve service delivery.
Comparison of 1996 and 1995
Consolidated revenues for 1996 were $76.1 million, an increase of 32% from
revenues of $57.5 million for the prior year. Of the $18.6 million increase,
$11.8 million was attributable to a full year's activity for the operations
acquired in the ENSCO Technology Acquisition as compared to the inclusion of
only three months of such operations in 1995 (following the September 1995
effective date of the ENSCO Acquisition) and $2.4 million was attributable to a
full year's activity for the operations acquired in the Sharewell Acquisition as
compared to the inclusion of eight months of such operations in 1995 (following
the May 1995 effective date of the Sharewell Acquisition). The remaining
increases in revenues resulted from higher drilling service revenues due
primarily to an increase in revenues from operations in Latin America, a $2
million product sale and associated service work in the Far East in the third
quarter and increased revenues associated with Drilex's United States land
operations. These increases in revenue were partially offset by decreased
revenues from Drilex's European Continental Shelf and environmental remediation
operations. The 1996 revenues were less than expected during the third and
fourth quarters due to MWD equipment performance failures in the Austin Chalk,
MWD delivery delays in Venezuela, the consolidation of operations in Louisiana
and lower than anticipated equipment sales in the Far East.
Cost of sales and operations increased from $34.6 million in 1995 to $45.7
million in 1996. As a percent of revenues, cost of sales and operations
decreased slightly from 60.1% in 1995 to 60.0% in 1996. The margins for
operations acquired in the ENSCO Technology and Sharewell Acquisitions have
historically been less than Drilex's pre-existing oilfield drilling services
(excluding such acquisitions) due to the sale and use of third-party equipment
by such acquired operations. Lower margins associated with such operations in
1996 were partially offset by higher margins associated with Far East sales in
the third quarter of 1996. Of the $11.1 million increase in cost of sales and
operations, $9.2 million was due to the full year effect of the ENSCO Technology
and Sharewell Acquisitions. The remaining increase of $1.9 million primarily
reflects increased expenses related to higher drilling services revenues and
higher engineering expenses relating to replacement of third-party drilling
motors used by the operations acquired in the ENSCO and Sharewell Acquisitions.
In 1995 there was a nonrecurring $0.6 million charge resulting from a trenchless
business unit operational dispute.
Selling, general and administrative expenses increased from $13.4 million
in 1995 to $16.9 million in 1996. As a percent of revenues, selling, general and
administrative expenses decreased from 23.4% in 1995 to 22.3% in 1996. Of the
$3.5 million increase, $3.2 million was due to the full year effect of the ENSCO
Technology and Sharewell Acquisitions. The remaining $0.3 million increase is
attributable to increased expenses associated with becoming a publicly held
company.
Depreciation and amortization increased from $4.5 million in 1995 to $6.6
million in 1996. Of the $2.1 million increase, $1.3 million was due to the full
year effect of the Sharewell and ENSCO Technology Acquisitions. The remainder of
the increase is attributable to increased depreciation resulting from the
capital expenditures in 1996.
Interest expense increased from $1.9 million in 1995 to $2.1 million in
1996, primarily due to the effect of notes issued in connection with the ENSCO
Technology Acquisition and the full year effect of notes issued in connection
with the Sharewell Acquisition. Increases in interest expense were partially
offset by the retirement of debt, including the notes issued in connection with
the ENSCO Technology Acquisition, in connection with the Drilex IPO in July
1996.
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Comparison of 1995 and 1994
Consolidated revenues for 1995 were $57.5 million, an increase of 82% from
revenues of $31.6 million for the prior year. Of the $25.9 million increase,
$7.9 million was attributable to the Sharewell Acquisition, $5.3 million was
attributable to the ENSCO Technology Acquisition, and $5.2 million resulted from
the effect of a full year's activity for the operations acquired in the Cobb
Acquisition, as compared to the inclusion of only three months of such
operations in 1994 (following the September 1994 effective date of the Cobb
Acquisition). The remaining increase in revenues resulted from an increase in
Drilex's drilling services revenues, due primarily to increased operations in
Texas, Europe (including the North Sea) and Eastern Venezuela. The increase in
activity in Texas was a result of increased drilling activity by several major
customers. Increased revenues attributable to Europe were due to greater small
motor activity, including motor sales to the Commonwealth of Independent States,
and expanded market penetration. Revenues in Eastern Venezuela more than doubled
to $6.2 million from 1994 levels, as drilling activity significantly expanded in
this area.
Costs of sales and operations increased from $16.3 million in 1994 to $34.6
million in 1995. As a percent of revenues, costs of sales and operations
increased from 51.6% in 1994 to 60.1% in 1995. Of the $18.3 million increase,
$12.0 million was due to the ENSCO Technology and Sharewell Acquisitions and the
effect of a full year's activity for the operations acquired in the Cobb
Acquisition. Margins for the operations acquired in the Cobb Acquisition
decreased in 1995 due to increased field expenses, a greater proportion of
lower-margin onshore activity than higher-margin offshore activity compared to
the prior year, and increased costs associated with third-party motor rentals.
Sharewell's margins were adversely affected in 1995 due to a greater proportion
of lower-margin sales of third-party equipment compared to higher-margin service
billings, as compared to the prior year. The margins for the operations acquired
in the ENSCO Technology Acquisition were lower than Drilex's other drilling
operations due to low utilization of MWD equipment and the expenses associated
with rentals of third-party motors.
Costs of sales and operations related to Drilex's pre-existing oilfield
drilling services (excluding the Sharewell and ENSCO Technology Acquisitions)
were adversely impacted in 1995 by increased engineering and manufacturing costs
of approximately $0.6 million. These increases resulted from costs incurred in
1995 for development of newly designed small-diameter motors, a new concept
power section for Drilex's primary line of drilling motors, and equipment for
slim-hole reentry drilling and workover applications. Drilex began operations in
Western Venezuela in 1995 and incurred $0.3 million in startup expenses for
staffing personnel, freight and duties on imported equipment and facilities.
Operations in this location generated only minimal revenues in 1995. In 1995,
Drilex's trenchless business unit absorbed a $0.6 million charge related to an
operational dispute, which was settled in full in May 1996.
Selling, general and administrative expenses increased from $8.6 million in
1994 to $13.4 million in 1995. As a percentage of revenues, selling, general and
administrative expenses decreased from 27.2% in 1994 to 23.4% in 1995. Of the
$4.8 million increase, $3.1 million was due to the ENSCO Technology, Sharewell
and Cobb Acquisitions. Corporate overhead increased $0.8 million due to
additional advertising, marketing and personnel costs associated with the
support of these three acquisitions, in particular the ENSCO Technology
Acquisition because of its size and complexity.
Depreciation and amortization increased from $2.3 million in 1994 to $4.5
million in 1995. This increase was primarily due to the ENSCO Technology,
Sharewell and Cobb Acquisitions, partially offset by a $0.4 million decrease
resulting from an increase in the estimated useful lives for certain drilling
equipment effective April 1, 1995.
Interest expense increased from $0.6 million in 1994 to $1.9 million in
1995 due to an increase in debt to $38.4 million at December 31, 1995.
Substantially all of this increase in debt was due to the ENSCO Technology,
Sharewell and Cobb Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Drilex IPO, Drilex generally funded its activities (other than
its acquisitions) through cash generated from operations and short-term
borrowings. The cash portion of the purchase price for each of the Cobb,
Sharewell and ENSCO Technology Acquisitions was funded through borrowings under
Drilex's then-
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<PAGE> 69
current bank credit facility and, in the case of the Cobb and ENSCO Technology
Acquisitions, from the issuance of capital stock.
In July 1996, Drilex sold 2,000,000 shares of Drilex Common Stock in the
Drilex IPO and received net proceeds of $28.3 million. Drilex used approximately
$24.7 million of the net proceeds of the Drilex IPO to repay all of the $14.8
million in borrowings under the term loan portion and $9.9 million of the
borrowings under the revolving loan portion of its then-current bank credit
facility. Drilex used approximately $3.6 million of the proceeds from the Drilex
IPO to repay a promissory note issued to ENSCO Technology in connection with the
ENSCO Technology Acquisition.
At March 31, 1997, Drilex had working capital of $25.5 million, compared to
working capital of $21.0 million at December 31, 1996, $13.4 million at December
31, 1995 and $9.5 million at December 31, 1994. The increase of $4.5 million
from December 31, 1996 primarily reflects increases in accounts receivable and
inventory and decreases in current maturities of long-term debt. Drilex's
current maturities of debt were lower due to the repayment of debt pursuant to
the Cobb Buy-Out Agreement. The increase of $7.6 million from 1995 to 1996
primarily reflects increases in cash and inventory (due to higher production in
response to increased slim-hole opportunities and the replacement of third-party
motors with Drilex motors in the operations acquired in the ENSCO Technology
Acquisition) and decreases in current maturities of long-term debt due to the
repayment of debt from the proceeds of the Drilex IPO.
Capital expenditures for the first three months of 1997 were $3.2 million
as compared to $1.8 million for the first quarter of 1996. The 1997 expenditures
included $2.7 million for acquisitions of new MWD/guidance equipment. Capital
expenditures for 1996 were $9.9 million, as compared to $5.4 million for the
prior year. The 1996 expenditures included $7.3 million for MWD/guidance
equipment (including $3.7 million to replace equipment lost-in-hole, which
amount was primarily paid by customers) and $1.0 million for machinery and
equipment. Drilex expects to spend approximately $5.2 million for capital
expenditures during the remaining nine months of 1997. Such expenditures are
expected to relate primarily to acquisitions of MWD systems.
During the remainder of 1997, Drilex expects to fund its working capital,
anticipated capital expenditures and debt maturity requirements primarily
through cash provided by operating activities and, if the Merger is not
consummated, borrowings under the Drilex Credit Facility. Drilex carries
substantial inventory and accounts receivable, and will require increased
working capital as its revenues grow. Drilex believes that cash flow from
operations and the Drilex Credit Facility will be adequate to support its normal
working capital and capital expenditures for at least the remainder of 1997.
However, if the Merger is not consummated and 1997 capital expenditures exceed
expected levels or if cash flow from operations for the year is less than
anticipated, Drilex may need to seek an increase in its borrowing limit under
the Drilex Credit Facility.
In September 1996 Drilex entered into the Drilex Credit Facility by
amending and restating its prior credit facility. The Drilex Credit Facility
consists of an unsecured revolving line of credit which is scheduled to mature
on September 30, 1999. The Drilex Credit Facility provides for borrowings of up
to $15.0 million at December 31, 1996 (which limit was increased to $20.0
million in February 1997), of which up to $3.0 million may be used for letters
of credit. As of March 31, 1997, borrowings under the Drilex Credit Facility
were $16.7 million and $3.1 million was available for borrowings. Increased
borrowings during the quarter ended March 31, 1997 of $7.6 million were
primarily used for capital expenditures ($3.2 million, including $2.7 million
for the purchase of MWD equipment), the Cobb Buy-Out Agreement ($2.7 million)
and net inventory increases ($0.9 million). The Drilex Credit Facility bears
interest at a rate per annum, at Drilex's election, equal to (i) a Eurodollar or
Eurosterling interbank offered rate plus 3/4% or (ii) the bank's prime rate.
With respect to the former, the interest rate margin may be increased by 3/8%
(non-cumulatively) based on a quarterly financial test. The Drilex Credit
Facility requires Drilex to maintain certain financial covenants (including a
minimum tangible net worth, a minimum fixed charge coverage ratio and maximum
debt to capitalization ratios) and limits additional borrowings of Drilex (other
than under the Drilex Credit Facility) to no more than $5.0 million. The Drilex
Credit Facility also places restrictions on Drilex's ability to, among other
things, pay dividends, enter into unrelated lines of business, undertake
transactions with affiliates and
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<PAGE> 70
make investments. For an additional description of the Drilex Credit Facility's
terms, see Note 6 to the Consolidated Financial Statements of Drilex included
elsewhere herein.
In February 1997, pursuant to the closing of the Cobb Buy-Out Agreement,
Drilex repaid certain notes issued in connection with the Cobb Acquisition and
Drilex's March 23, 1995 purchase of a minority interest in a subsidiary of
Drilex from an affiliate of Mr. Cobb. Also pursuant to the Cobb Buy-Out
Agreement, Drilex repurchased the 96,523 shares of Drilex Common Stock held by
Mr. Cobb and entered into an amendment to the non-competition provisions of Mr.
Cobb's employment agreement in connection with Mr. Cobb's termination of
employment. The Cobb Buy-Out Agreement resulted in a net payment by Drilex of
approximately $2.7 million.
The consummation of the Merger is expected to have a material effect on
Drilex's financial position and operations. Accordingly, if the acquisition is
consummated, actual outcomes may vary materially from those indicated in the
foregoing discussion of Drilex's results of operations and liquidity and capital
resources. If the Merger is not consummated, Drilex intends to continue pursuing
attractive acquisition opportunities. The timing, size or success of any
acquisition effort and the associated potential capital commitments are
unpredictable. Drilex expects to fund future acquisitions primarily through a
combination of working capital, cash flow from operations and bank borrowings,
including the unborrowed portion of the Drilex Credit Facility, as well as
issuances of additional equity.
Due to the relatively low levels of inflation experienced in 1994, 1995 and
1996, inflation did not have a significant effect on Drilex's results in such
years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective for fiscal years beginning after December 15,
1995. The adoption of SFAS 121 in 1996 did not result in a charge to earnings.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. In adopting SFAS 123 in 1996, Drilex has
elected to continue the use of the "intrinsic value based method" of accounting
for its employee stock option plan. This method does not result in the
recognition of compensation expense when employee stock options are granted if
the exercise price of the options equals or exceeds the fair market value of the
stock at the date of grant. See Note 10 to the Consolidated Financial Statements
of Drilex included elsewhere herein.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 revises the methodology to be used in
computing earnings per share such that the computation required for primary and
fully diluted earnings per share are to be replaced with "basic" and "diluted"
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed in the same manner as fully diluted
earnings per share, except that, among other changes, the average share price
for the period is used in all cases when applying the treasury stock method to
potentially dilutive outstanding options. Drilex will adopt SFAS No. 128
effective December 31, 1997, and, as required, will restate earnings per share
for all periods presented. Drilex anticipates that the amounts to be reported
for basic and diluted earnings per share for the three months ended March 31,
1997 and 1996 will not differ significantly from the amounts reported under the
current accounting standards.
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<PAGE> 71
LEGAL MATTERS
Certain legal matters in connection with the Merger and the shares of Baker
Hughes Common Stock issued in connection with the Merger are being passed on for
Baker Hughes by Baker & Botts, L.L.P., Houston, Texas. Baker & Botts, L.L.P. has
represented Drilex in various capacities since 1994, including matters in
connection with the Cobb, Sharewell and ENSCO Technology Acquisitions and the
Drilex IPO, and continues to represent Drilex on several matters (including
employee benefit matters relating to the Merger). Vinson & Elkins L.L.P. is
acting as special counsel for Drilex in connection with certain legal matters,
including certain United States federal income tax matters, relating to the
Merger. Vinson & Elkins L.L.P. represents Baker Hughes on certain matters
(including employee benefit matters relating to the Merger).
EXPERTS
The consolidated financial statements incorporated by reference in the
Baker Hughes Annual Report on Form 10-K for the year ended September 30, 1996,
incorporated herein by reference, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report included in such Baker Hughes
Form 10-K, and have been incorporated by reference herein in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of Drilex as of December 31, 1996 and
1995 and for the years ended December 31, 1996 and 1995 and the period from
March 30, 1994 (inception) to December 31, 1994, included herein, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
70
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheet as of March 31, 1997
(unaudited) and as of December 31, 1996 and 1995....... F-3
Consolidated Statement of Income for the Three Months
Ended March 31, 1997 and 1996 (unaudited) and for the
Years Ended December 31, 1996 and 1995 and for the
Period from March 30, 1994 (inception) to December 31,
1994................................................... F-4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (unaudited) and for the
Years Ended December 31, 1996 and 1995 and for the
Period from March 30, 1994 (inception) to December 31,
1994................................................... F-5
Consolidated Statement of Stockholders' Equity for the
Three Months ended March 31, 1997 (unaudited) and for
the Years Ended December 31, 1996 and 1995 and for the
Period from March 30, 1994 (inception) to December 31,
1994................................................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Drilex International Inc.:
We have audited the accompanying consolidated balance sheets of Drilex
International Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, cash flows, and
stockholders' equity for the years ended December 31, 1996 and 1995 and the
period from March 30, 1994 (inception) to December 31, 1994. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Drilex International Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended and for the period from
March 30, 1994 (inception) to December 31, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 1997
F-2
<PAGE> 74
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,406 $ 2,552 $ 819
Receivables:
Trade, net of allowance for doubtful accounts of $968,
$814 and $933 at March 31, 1997 and December 31, 1996
and 1995, respectively............................... 21,899 20,015 20,994
Other.................................................. 843 1,031 694
Inventories............................................... 11,689 10,733 8,259
Prepaid expenses and other current assets................. 1,452 1,208 1,217
------- ------- -------
Total current assets.............................. 37,289 35,539 31,983
Property and equipment, net................................. 36,183 33,909 27,557
Goodwill, net of accumulated amortization of $608, $519 and
$170 at March 31, 1997 and December 31, 1996 and 1995,
respectively.............................................. 13,712 13,801 14,151
Other assets, net of accumulated amortization of $1,571,
$1,397 and $686 at March 31, 1997 and December 31, 1996
and 1995 respectively..................................... 3,023 3,521 4,063
------- ------- -------
$90,207 $86,770 $77,754
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,903 $ 8,614 $ 8,706
Accrued compensation and related benefits................. 1,075 1,112 1,550
Accrued taxes, other than on income....................... 318 475 1,064
Accrued income taxes...................................... 240 356 476
Other accrued liabilities................................. 1,399 1,485 936
Long-term debt, current maturities........................ 886 2,471 5,886
------- ------- -------
Total current liabilities......................... 11,821 14,513 18,618
Long-term debt, less current maturities..................... 19,311 11,883 32,467
Other noncurrent liabilities................................ 1,805 1,806 2,182
------- ------- -------
Total liabilities................................. 32,937 28,202 53,267
------- ------- -------
Commitments and contingencies (Note 13)
Minority interests.......................................... 888 888 805
Stockholders' equity:
Preferred stock, $01 par value; 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $01 par value; 25,000,000 shares authorized;
shares issued: March 31, 1997 -- 6,663,356; December
31, 1996 -- 6,759,879; and December 31,
1995 -- 4,381,205...................................... 67 68 44
Additional paid-in capital................................ 49,477 50,777 19,845
Retained earnings......................................... 6,838 6,835 3,793
------- ------- -------
Total stockholders' equity........................ 56,382 57,680 23,682
------- ------- -------
$90,207 $86,770 $77,754
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 75
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS YEAR ENDED MARCH 30, 1994
ENDED MARCH 31, DECEMBER 31, (INCEPTION) TO
----------------- ----------------- DECEMBER 31,
1997 1996 1996 1995 1994
------- ------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Rental and service......................... $13,160 $17,039 $63,601 $43,766 $21,850
Equipment sales............................ 3,873 2,418 12,546 13,760 3,359
------- ------- ------- ------- -------
17,033 19,457 76,147 57,526 25,209
------- ------- ------- ------- -------
Operating expenses:
Costs of sales and operations (exclusive of
depreciation and amortization):
Rental and service...................... 8,978 10,836 40,087 27,956 11,714
Equipment sales......................... 1,802 1,182 5,609 6,650 1,210
Selling, general and administrative
expenses................................ 3,992 4,243 16,945 13,448 6,711
Depreciation and amortization.............. 1,939 1,580 6,575 4,492 1,855
------- ------- ------- ------- -------
16,711 17,841 69,216 52,546 21,490
------- ------- ------- ------- -------
Operating income............................. 322 1,616 6,931 4,980 3,719
Interest expense............................. (317) (811) (2,079) (1,935) (478)
------- ------- ------- ------- -------
Income before income taxes and minority
interests.................................. 5 805 4,852 3,045 3,241
Provision for income taxes................... (2) (290) (1,727) (1,097) (1,166)
Minority interests........................... -- 11 (83) (164) (66)
------- ------- ------- ------- -------
Net income................................... $ 3 $ 526 $ 3,042 $ 1,784 $ 2,009
======= ======= ======= ======= =======
Net income per common and common equivalent
share...................................... $ .00 $ .12 $ .53 $ .40 $ .57
======= ======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding......................... 6,828 4,552 5,712 4,411 3,507
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 76
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS YEAR ENDED MARCH 30, 1994
ENDED MARCH 31, DECEMBER 31, (INCEPTION) TO
------------------ -------------------- DECEMBER 31,
1997 1996 1996 1995 1994
------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 3 $ 526 $ 3,042 $ 1,784 $ 2,009
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization........................ 1,939 1,580 6,575 4,492 1,855
Net (gains) losses on disposition of property and
equipment.......................................... 147 193 (1,002) 1,033 883
Minority interests................................... -- (11) 83 164 66
Changes in assets and liabilities, excluding the
effects of acquisitions:
Increase in inventories............................ (2,190) (1,080) (7,584) (5,918) (2,393)
Decrease (increase) in receivables................. (1,696) (508) 554 (5,209) (3,667)
Decrease (increase) in prepaid expenses and other
assets........................................... (185) (151) 210 (560) (576)
(Decrease) increase in accounts payable............ (711) 521 (92) 4,568 1,628
(Decrease) increase in accrued and other
liabilities...................................... (396) (837) (974) (539) 1,072
------- ------- -------- -------- --------
Net cash provided by (used for) operating
activities....................................... (3,089) 1,249 812 (185) 877
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property and equipment.... 292 692 3,840 1,263 29
Capital expenditures................................... (3,204) (1,816) (9,876) (5,408) (707)
Acquisition of ENSCO Technology Company net assets, net
of cash acquired..................................... -- -- -- (11,488) --
Acquisition of Sharewell, Inc., net of cash acquired... -- -- -- (3,727) --
Acquisition of Drilex Systems, Inc., net of cash
acquired............................................. -- -- -- -- (18,625)
Acquisition of Cobb net assets......................... -- -- -- -- (3,590)
Net proceeds from reduction of non-compete agreement in
connection with the Cobb Buy-Out Agreement........... 313 -- -- -- --
------- ------- -------- -------- --------
Net cash used for investing activities........... (2,599) (1,124) (6,036) (19,360) (22,893)
------- ------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............... -- -- -- 17,450 2,250
Payments under revolving credit agreements............. -- -- (15,700) (14,300) --
Borrowings under revolving credit agreements........... 7,650 1,550 15,500 19,000 4,500
Proceeds from issuance of common stock................. -- -- 28,456 3,117 16,215
Principal payments on long-term debt................... (1,805) (1,106) (21,299) (4,826) --
Purchases of common stock.............................. (1,303) -- -- (1,026) --
------- ------- -------- -------- --------
Net cash provided by financing activities........ 4,542 444 6,957 19,415 22,965
------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (1,146) 569 1,733 (130) 949
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 2,552 819 819 949 --
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 1,406 $ 1,388 $ 2,552 $ 819 $ 949
======= ======= ======== ======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfers of drilling equipment parts from inventories
to property and equipment............................ $ 1,235 $ 1,222 $ 5,110 $ 2,926 $ 1,965
Conversion of ENSCO Promissory Note.................... -- -- 2,500 -- --
Amounts recorded in connection with acquisitions:
Fair value of net assets acquired, including
goodwill........................................... -- -- -- 26,257 26,881
Issuances of long-term debt.......................... -- -- -- 10,792 1,333
Issuance of long-term debt to reacquire equity
interest in subsidiary............................. -- -- -- 2,154 --
Issuances of common stock and warrants............... -- -- -- 250 1,333
Issuance of equity interest in subsidiary............ -- -- -- -- 2,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 314 $ 800 $ 2,146 $ 1,689 $ 274
Income taxes paid...................................... 109 312 1,097 842 613
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 77
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES ($.01 PAR) CAPITAL EARNINGS TOTAL
--------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, March 30, 1994 (inception)..... -- $-- $ -- $ -- $ --
Issuances of common stock............. 4,080,818 41 17,507 -- 17,548
Net income............................ -- -- -- 2,009 2,009
--------- --- ------- ------ -------
Balance, December 31, 1994.............. 4,080,818 41 17,507 2,009 19,557
Issuances of common stock and
warrants........................... 451,220 5 3,362 -- 3,367
Purchases of common stock............. (150,833) (2) (1,024) -- (1,026)
Net income............................ -- -- -- 1,784 1,784
--------- --- ------- ------ -------
Balance, December 31, 1995.............. 4,381,205 44 19,845 3,793 23,682
Common stock issued in initial public
offering........................... 2,361,962 24 30,816 -- 30,840
Exercised stock options, net of tax
benefit............................ 16,712 -- 116 -- 116
Net income............................ -- -- -- 3,042 3,042
--------- --- ------- ------ -------
Balance, December 31, 1996.............. 6,759,879 68 50,777 6,835 57,680
Purchases of common stock
(unaudited)........................ (96,523) (1) (1,300) -- (1,301)
Net income (unaudited)................ -- -- -- 3 3
--------- --- ------- ------ -------
Balance, March 31, 1997 (unaudited)..... 6,663,356 $67 $49,477 $6,838 $56,382
========= === ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 78
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Drilex International Inc. was organized on March 10, 1994 by DRLX Partners,
L.P. ("DRLX Partners") and Mr. John Forrest to acquire the common stock of
Drilex Systems, Inc. ("DSI") from MascoTech, Inc. See Note 2. Mr. Forrest is a
founder of DSI and the President and Chief Executive Officer of Drilex
International Inc. The initial capital contributions of $11,200,000 were made on
March 30, 1994.
The consolidated financial statements include the accounts of Drilex
International Inc. and its majority and wholly owned subsidiaries, collectively
referred to herein as the "Company". All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company provides directional, horizontal and other precision drilling
services and products. Such services and products are used primarily for oil and
gas drilling, environmental remediation and trenchless service applications.
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, the
disclosure of contingent assets and liabilities as of 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.
The consolidated financial statements as of and for the three months ended
March 31, 1997 and for the three months ended March 31, 1996 are unaudited;
however, they include all adjustments (consisting only of normal recurring
adjustments) that, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at March 31, 1997, and the
consolidated results of operations and cash flows for the three months ended
March 31, 1997 and 1996. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the entire year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory costs represent invoice
or production cost. Production costs include materials, labor and manufacturing
overhead. The largest portion of the Company's inventories is consumed in
connection with rental and service activities, and the remainder is utilized for
equipment sales. Certain drilling equipment parts are transferred from
inventories to property and equipment when placed in service.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed utilizing the straight-line method at rates based upon
the estimated useful lives of the various classes of assets. Additions and
improvements are capitalized, while maintenance and repairs are expensed. Upon
the sale or retirement of an asset, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized.
Effective January 1, 1996, the Company implemented Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of
F-7
<PAGE> 79
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company's adoption of SFAS 121 did not result in a charge to
earnings.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price for acquired
businesses over the allocated value of the related net assets (see Note 2).
Goodwill is amortized on a straight-line basis over a forty year life. The
carrying value of goodwill and other intangible assets is reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the acquired assets may not be recoverable. If the sum of the
estimated future cash flows (undiscounted) expected to result from the use and
eventual disposition of an asset is less than the carrying amount of the asset,
an impairment loss is recognized. Measurement of an impairment loss is based on
the fair value of the asset.
Included in other assets are noncompete agreements, a technology licensing
agreement, organization costs and patents. These intangible assets are amortized
on a straight-line basis over their estimated useful lives.
Revenue Recognition
Rental and service revenues are recognized as the services are performed,
generally on an hourly or daily rate basis, under short-term contracts. Revenues
from equipment sales are recognized when products are shipped to customers.
Income Taxes
The Company accounts for income taxes using an asset and liability
approach, which requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Deferred income
tax assets and liabilities are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates.
Foreign Currency Translation
The Company uses the United States dollar as the functional currency for
its foreign operations. Foreign currency transaction gains and losses are
recognized in consolidated income as incurred. Gains or losses resulting from
balance sheet translation of foreign operations are included in consolidated
income.
Per Share Information
Per share information is based on the weighted average number of common
shares outstanding during each period and, if dilutive, the weighted average
number of common equivalent shares resulting from the assumed conversion of
outstanding stock options and warrants. Shares issued by the Company during the
one-year period prior to the filing of its Registration Statement have been
included in the computation of weighted average shares from the Company's date
of inception (using the treasury stock method and the initial public offering
price). The fully diluted computation assumes the conversion of the Convertible
Promissory Note as of the date of its issuance (see Note 6) and the resulting
decrease in interest expense for the applicable period. On July 9, 1996, the
Convertible Promissory Note was converted in connection with the Company's
initial public offering (the "IPO") and the resulting shares were included in
the primary per share computation for the remainder of the year. The difference
between earnings per common share on a primary and fully diluted basis is not
significant.
F-8
<PAGE> 80
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Based Compensation
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123") was issued. SFAS 123
establishes alternative methods of accounting and disclosure for employee
stock-based compensation arrangements. In adopting SFAS 123 in 1996, the Company
has elected to continue the use of the "intrinsic value based method" of
accounting for its employee stock option plan (see Note 10). This method does
not result in the recognition of compensation expense when employee stock
options are granted if the exercise price of the options equals or exceeds the
fair market value of the stock at the date of grant. The Company has disclosed
the proforma income and earnings per share amounts that would have been reported
under the "fair value" based recognition provisions of SFAS 123 in Note 10.
2. ACQUISITIONS
On March 31, 1994, the Company acquired all of the common stock of DSI for
cash of $20,000,000 in a transaction accounted for as a purchase. During the
remainder of 1994 and during 1995, the Company consummated three additional
business acquisitions which were also accounted for using the purchase method.
Results of operations and cash flows of the acquired businesses are included in
the consolidated financial statements for the periods subsequent to the
respective dates of acquisition.
ENSCO Technology Company and subsidiary ("ENSCO Technology")
On September 30, 1995, the Company acquired substantially all of the
assets, net of outstanding liabilities and minority interests, of ENSCO
Technology. ENSCO Technology provides precision drilling and
measurement-while-drilling services to customers primarily in Texas and Canada.
The total purchase price of $17,851,000 consisted of $11,790,000 in cash and
notes payable to ENSCO Technology totaling $6,061,000. The Company recognized
goodwill of $8,586,000 in connection with this acquisition.
Sharewell, Inc. and subsidiaries ("Sharewell")
On May 5, 1995, the Company acquired all of the common stock of Sharewell
(formerly Shareco, Inc.), which provides directional drilling guidance systems
and services in both domestic and international locations. The total purchase
price of $9,167,000 consisted of $4,186,000 in cash, notes payable to
Sharewell's former stockholders totaling $4,731,000 and warrants to purchase
180,981 shares of the Company's common stock valued at $250,000. The Company
recognized goodwill of $4,332,000 in connection with this acquisition.
Cobb Directional Drilling Company, Inc. and Posi-Trak Mud Motors, Inc.
(collectively, "Cobb")
On September 30, 1994, the Company acquired substantially all of the fixed
assets of Cobb (the "Cobb acquisition"), which provides precision drilling
services to customers primarily in Louisiana and the Gulf of Mexico. The Company
used a newly-formed subsidiary, Cobb Directional Drilling Company LLC ("Cobb
LLC"), to acquire the Cobb assets. The total purchase price of $8,256,000
consisted of $3,590,000 in cash, a note payable to Posi-Trak Mud Motors, Inc.
for $1,333,000, a one-third equity interest in Cobb LLC valued at $2,000,000 and
241,307 shares of the Company's common stock valued at $1,333,000. The Company
recognized goodwill of $1,403,000 in connection with this acquisition.
On March 23, 1995, the Company repurchased 144,784 of the shares of its
common stock for $1,000,000 in cash (the estimated fair value of such common
stock on that date). This repurchase, after retirement of the resulting treasury
shares, was recorded as a reduction of common stock and additional paid-in
capital on the Company's consolidated balance sheet. On the same date, the
Company reacquired the one-third equity interest in Cobb LLC in exchange for two
notes payable to Cobb Directional Drilling Company, Inc. totaling $2,154,000
(the estimated fair value of such equity interest on that date). This
reacquisition was recorded as a
F-9
<PAGE> 81
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduction of minority interests on the Company's consolidated balance sheet. The
minority stockholder's share of Cobb LLC's earnings for the period from October
1, 1994 through March 23, 1995 is presented as minority interests in the
Company's consolidated income statement.
Pro forma results of operations (unaudited)
The following unaudited pro forma summary presents consolidated results of
operations for the Company as if (a) the Cobb acquisition had been consummated
on March 30, 1994 and (b) the Sharewell and ENSCO Technology acquisitions had
been consummated as of the beginning of the respective periods. Appropriate
adjustments have been reflected for depreciation and amortization, interest
expense, income taxes and minority interests. Net income for the period ended
December 31, 1994 includes an after-tax gain of $429,000, or $.10 per share,
resulting from ENSCO Technology's sale of stock of a foreign subsidiary. The pro
forma information does not necessarily reflect the actual results that would
have been achieved, nor is it necessarily indicative of future consolidated
results for the Company.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------- ---------------
(IN THOUSANDS OF DOLLARS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues............................................. $73,557 $48,719
Net income............................................. 1,929 2,905
Net income per common and common equivalent share...... .42 .67
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1997 1996 1995
----------- ------- ------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Drilling equipment parts............................... $10,922 $ 9,879 $7,573
Work in process........................................ 767 854 686
------- ------- ------
$11,689 $10,733 $8,259
======= ======= ======
</TABLE>
4. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------
USEFUL LIVES 1996 1995
------------ ------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Land................................................ $ 52 $ 52
Buildings and improvements.......................... 5-40 years 1,382 985
Machinery and equipment............................. 3-15 years 8,110 7,122
Rental tools........................................ 3-7 years 29,927 19,901
Furniture and fixtures.............................. 3-10 years 3,244 2,385
Construction in progress............................ 33 1,844
------- -------
42,748 32,289
Less: accumulated depreciation...................... (8,839) (4,732)
------- -------
$33,909 $27,557
======= =======
</TABLE>
F-10
<PAGE> 82
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the years ended December 31, 1996 and 1995 and for
the period ended December 31, 1994 was $5,467,000, $3,668,000 and $1,703,000,
respectively. Effective April 1, 1995, the Company changed its estimated useful
life for certain drilling motor components from five to seven years. This change
was made to better reflect the estimated period during which these assets will
remain in service. The effect of this change was an increase in net income of
$378,000, or $.07 per share, for the year ended December 31, 1996 and $248,000,
or $.06 per share, for the year ended December 31, 1995.
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -----------------
USEFUL LIVES 1996 1995
------------ ------- ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Noncompete agreements............................... 5-10 years $ 2,100 $2,100
Technology licensing agreement...................... 13 1/3 years 1,465 1,465
Organization costs.................................. 5 years 1,058 1,052
Patents............................................. 17 years 142 122
Other............................................... 153 10
------- ------
4,918 4,749
Less: accumulated amortization...................... (1,397) (686)
------- ------
$ 3,521 $4,063
======= ======
</TABLE>
In conjunction with the acquisition of DSI, the Company obtained a
licensing agreement that provides it with a non-exclusive right to use a
patented technology for the remaining life of the patent. As consideration for
the license, the Company is obligated to sell or lease certain drilling systems
equipment to the licensor at a discount. The period of this obligation extends
through December 31, 1997. A liability for this obligation is included on the
Company's consolidated balance sheet in the amount of $1,138,000 and $1,238,000
at December 31, 1996 and 1995, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Bank Credit Agreement:
Revolving Credit Facility............................. $16,650 $ 9,000 $ 9,200
Term Note............................................. -- -- 16,578
Promissory Note payable to Posi-Trak Mud Motors, Inc.... -- 1,333 1,333
Promissory Note payable to Cobb Directional Drilling
Company, Inc.......................................... -- 417 750
Promissory Notes payable to former stockholders of
Sharewell............................................. 3,547 3,604 4,431
Promissory Note payable to ENSCO Technology............. -- -- 3,561
Convertible Promissory Note payable to ENSCO
Technology............................................ -- -- 2,500
------- ------- -------
20,197 14,354 38,353
Less: current maturities................................ (886) (2,471) (5,886)
------- ------- -------
$19,311 $11,883 $32,467
======= ======= =======
</TABLE>
F-11
<PAGE> 83
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bank Credit Agreement
On September 16, 1996, the Company entered into an unsecured credit
agreement with a bank (the "Bank Credit Agreement") which replaced previous
credit agreements entered into by the Company and its subsidiaries and provided
for borrowings of up to $15,000,000, of which up to $3,000,000 could be used for
letters of credit. The Bank Credit Agreement, as amended on February 10, 1997,
consists of a revolving line of credit (the "Revolving Credit Facility") which
matures on September 30, 1999 and provides for borrowings of up to $20,000,000
of which up to $3,000,000 may be used for letters of credit. As of March 31,
1997, $3,130,000 was available for borrowings of which $2,780,000 was available
for letters of credit. Letters of credit outstanding amounted to $220,000 at
March 31, 1997.
Borrowings under the Bank Credit Agreement bear interest at a rate per
annum, at the Company's election, equal to (i) a Eurodollar and Eurosterling
interbank offered rate plus 3/4% or (ii) the bank's prime rate (8.3% and 6.4%,
respectively, at December 31, 1996). In the case of the former, the interest
rate margins may be increased by 3/8% (non-cumulatively) based on a financial
test, determined quarterly. The Bank Credit Agreement requires the Company to
maintain certain financial covenants and places restrictions on the Company's
ability to, among other things, incur debt and liens, pay dividends, enter into
unrelated lines of business and make investments.
Promissory Note payable to Posi-Trak Mud Motors, Inc.
This note matures on September 30, 1997, bears interest at a rate of 7% per
annum and is secured by a pledge of the Company's equity interest in Cobb LLC
(see Note 16).
Promissory Note payable to Cobb Directional Drilling Company, Inc.
This note matures on March 23, 1998, bears interest at a rate of 7 1/2% per
annum, calls for quarterly principal payments of $83,000 and is secured by a
pledge of a one-third equity interest in Cobb LLC. A related promissory note for
$1,154,000 was repaid on July 1, 1995 (see Note 16).
Promissory Notes payable to former stockholders of Sharewell
These unsecured notes mature on April 30, 2000 and bear interest at a rate
of 8% per annum. Six of the notes call for quarterly principal payments
aggregating $139,000. The remaining note calls for annual principal payments of
$250,000 and a final payment of $913,000 at maturity, and requires that the
Company maintain a minimum consolidated net worth.
Maturities
Scheduled maturities of long-term debt outstanding at December 31, 1996 are
as follows: years ending December 31, 1997 -- $2,471,000; 1998 -- $887,000;
1999 -- $9,804,000; 2000 -- $1,192,000.
F-12
<PAGE> 84
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
for these instruments. The estimated fair value of long-term debt is determined
based on the current rates offered for similar borrowings. The estimated fair
values of the Company's financial instruments, along with the carrying amounts
of the related assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 2,552 $ 2,552 $ 819 $ 819
Long-term debt............................. (14,354) (14,251) (38,353) (38,594)
Interest rate swap agreement............... -- -- -- (332)
</TABLE>
The Company's interest rate swap agreement was terminated on July 9, 1996
in conjunction with the IPO and subsequent prepayment of the Term Note (see Note
10). The net settlement amount (a $57,000 credit) resulting from this agreement
was recognized as an adjustment to interest expense. The Company does not hold
or issue derivative financial instruments for trading purposes.
8. INCOME TAXES
The domestic and foreign components of income before income taxes and
minority interests are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ---------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Domestic....................................... $ 563 $ 951 $2,217
Foreign........................................ 4,289 2,094 1,024
------ ------ ------
$4,852 $3,045 $3,241
====== ====== ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ---------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal...................................... $ 110 $ 301 $ 682
State........................................ 162 41 23
Foreign...................................... 744 670 170
------ ------ ------
1,016 1,012 875
------ ------ ------
Deferred:
Federal...................................... 711 85 291
------ ------ ------
$1,727 $1,097 $1,166
====== ====== ======
</TABLE>
F-13
<PAGE> 85
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
income taxes and minority interests is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30, 1994
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ---------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Provision for income taxes at statutory rate... $1,650 $1,035 $1,102
Nondeductible goodwill amortization............ 36 24 --
Other.......................................... 41 38 64
------ ------ ------
$1,727 $1,097 $1,166
====== ====== ======
</TABLE>
The components of the net deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Deferred income tax liabilities:
Property and equipment.................................... $ 916 $626 $194
Basis difference in foreign subsidiaries, net of foreign
tax credits............................................ 598 72 151
Other..................................................... 291 236 3
------ ---- ----
Total deferred income tax liabilities............. 1,805 934 348
------ ---- ----
Deferred income tax assets:
Receivables allowance..................................... 277 65 52
Other..................................................... -- 52 5
------ ---- ----
Total deferred income tax assets.................. 277 117 57
------ ---- ----
Net deferred income tax liabilities......................... $1,528 $817 $291
====== ==== ====
</TABLE>
Provision has been made for the U.S. income tax effect of the anticipated
repatriation of earnings of foreign subsidiaries.
No valuation allowances are required for the deferred income tax assets.
The net current deferred income tax assets are included in prepaid expenses and
other current assets, and the net non-current deferred income tax liabilities
are included in other noncurrent liabilities, on the consolidated balance sheet.
9. MINORITY INTERESTS
Minority interests at December 31, 1996 and 1995 represent minority
stockholders' interests in certain foreign subsidiaries of acquired companies
(see Note 17).
10. STOCKHOLDERS' EQUITY
Authorized Shares
On May 16, 1996, the Company filed an amendment to its certificate of
incorporation to, among other things, (i) increase the number of authorized
common shares to 25,000,000 and to effect a stock split involving the issuance
of approximately 1.81 shares of common stock in exchange for each share of
common stock then outstanding; (ii) retire all treasury shares of common stock
purchased since the Company's inception; and (iii) authorize 10,000,000 shares
of $.01 par value preferred stock. The effect of the stock split
F-14
<PAGE> 86
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the retirement of treasury shares has been presented retroactively to the
date of inception in the Company's consolidated financial statements.
Initial Public Offering
On July 2, 1996, the Company entered into an underwriting agreement
providing for the issuance of 2,361,962 shares of common stock in the IPO. Of
the total number of shares issued, 2,000,000 were sold by the Company, and
361,962 were sold by ENSCO Technology, which had converted its Convertible
Promissory Note. Net proceeds to the Company from the IPO, after issuance costs,
were $28,340,000 and were used to (i) retire the $3,561,000 of outstanding
principal and $12,000 accrued interest under the Promissory Note payable to
ENSCO Technology; and (ii) make principal repayments of $14,833,000 for all term
loan borrowings and $9,934,000 for a portion of the revolving line of credit
borrowings outstanding under its Bank Credit Agreement (see Note 6).
Stock options
In 1996, the Company amended and restated the Drilex Holdings Corp. 1994
Stock Option Plan (the "1994 Stock Option Plan"). Up to 440,000 shares of the
Company's common stock are reserved for awards or for payment of rights granted
to certain employees and to non-employee directors of the Company and its
subsidiaries. These options are exercisable ratably over periods of three to
four years beginning one year from the date of grant. All stock options are
granted at the fair market value of the Common Stock at the date of grant. Stock
options granted to non-employee directors generally expire ten years after the
date of grant or three months after the date of retirement from the Board of
Directors, if earlier. Stock options granted to employees prior to the IPO
generally expire seven years after the date of grant. Stock options granted to
employees after the IPO generally expire five years after the date of grant. All
stock options granted to employees may expire earlier, at the discretion of the
Compensation Committee, if employment is terminated.
The following table summarizes the stock option activity related to the
Company's plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE WEIGHTED AVERAGE
SHARES EXERCISE PRICE PER SHARE CONTRACTUAL LIFE
------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1994: Granted.......................... 62,911 $ 5.53 $ 5.53
------- -------
Outstanding at December 31....... 62,911 5.53 5.53 7.12 years
1995: Granted.......................... 25,044 $ 5.53-11.05 $10.52
Forfeited/Cancelled.............. (12,099) 5.53 5.53
------- -------
Outstanding at December 31....... 75,856 5.53-11.05 7.18 7.19 years
1996: Granted.......................... 161,850 $11.94-16.00 $15.88
Exercised........................ (16,712) 5.53 5.53
Forfeited/Cancelled.............. (24,806) 5.53-16.00 15.66
------- -------
Outstanding at December 31....... 196,188 5.53-16.00 13.43 6.34 years
</TABLE>
The following table provides information for the exercisable stock options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE EXERCISE PRICE
SHARES PRICE PER SHARE
------ ----------- ----------------
<S> <C> <C> <C>
December 31, 1995............................. 12,905 $ 5.53 $5.53
December 31, 1996............................. 15,561 $5.53-11.05 $7.54
</TABLE>
F-15
<PAGE> 87
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In adopting SFAS 123 in 1996, the Company has elected to continue the use
of the "intrinsic value based method" of accounting for its employee stock
option plan. This method does not result in the recognition of compensation
expense when employee stock options are granted if the exercise price of the
options equals or exceeds the fair market value of the stock at the date of
grant. The following table discloses the pro forma income and earnings per share
amounts that would have been reported as prescribed by SFAS 123:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income:
As reported............................................... $3,042 $1,784
Proforma.................................................. $2,963 $1,770
Earnings per share:
As reported............................................... $ 0.53 $ 0.40
Proforma.................................................. $ 0.52 $ 0.40
</TABLE>
The weighted average fair values of options granted during 1996 and 1995
were $5.17 and $4.56 per share, respectively. The fair value of each stock
option granted during 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR OF GRANT
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Risk free interest rate..................................... 6.29% 6.47%
Expected life of options.................................... 3.5 years 2.5 years
Expected volatility of the Company's stock price............ 64% 0%
Expected dividend yield of the Company's stock.............. 0% 0%
</TABLE>
Warrants
On May 5, 1995, in connection with the Sharewell acquisition (see Note 2),
the Company issued warrants to purchase an aggregate of 180,981 shares of its
common stock at an exercise price of $5.53 per share. The warrants are
exercisable, in whole or in part, at any time until May 5, 2000. None of the
warrants had been exercised as of December 31, 1996.
Shares reserved for issuance
At December 31, 1996, the Company had the following shares of common stock
reserved for future issuance:
<TABLE>
<S> <C>
1994 Stock Option Plan...................................... 423,288
Warrants.................................................... 180,981
-------
604,269
=======
</TABLE>
Restrictions on payment of dividends
As of December 31, 1996, the Company is precluded from paying dividends on
its common stock by the provisions of various debt agreements (see Note 6).
F-16
<PAGE> 88
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTY TRANSACTIONS
The Company purchases equipment and services from parties related to Cobb's
former stockholder. Charges for such purchases amounted to $767,000, $629,000
and $178,000 for the periods ended December 31, 1996, 1995 and 1994,
respectively.
In connection with the ENSCO Technology acquisition (see Note 2), the
Company was charged a $150,000 fee for investment banking and consulting
services by an affiliate of DRLX Partners. This fee, included in other accrued
liabilities on the Company's consolidated balance sheet as of December 31, 1995,
was paid in 1996.
Included in other receivables at December 31, 1996 and 1995 are advances to
employees of the Company amounting to $395,000 and $334,000, respectively.
12. EMPLOYEE BENEFIT PLAN
On April 1, 1994, the Company adopted a defined contribution savings plan
covering substantially all of its employees. Employees may elect to contribute
up to 15% of their eligible compensation to the plan. For those participants who
have elected to make voluntary contributions to the plan, the Company's
contributions consist of a 50% matching amount for participant contributions,
not to exceed 4% of the eligible compensation of participants. The cost to the
Company of this plan was $273,000, $207,000 and $87,000 for the periods ended
December 31, 1996, 1995 and 1994, respectively.
13. COMMITMENTS AND CONTINGENCIES
Commitments
Minimum rental commitments under operating leases at December 31, 1996 are
as follows: years ending December 31, 1997 -- $1,202,000; 1998 -- $691,000;
1999 -- $602,000; 2000 -- $370,000; 2001 -- $165,000; thereafter -- $1,146,000.
Rental expense for operating leases was $1,287,000, $993,000 and $565,000 for
the periods ended December 31, 1996, 1995 and 1994, respectively.
The Company has a licensing agreement that provides it with a non-exclusive
right to purchase and use certain measurement-while-drilling systems equipment.
Most of this equipment was obtained in connection with the ENSCO Technology
acquisition (see Note 2). As consideration for this license, the Company is
obligated to make annual royalty payments of $360,000 to the supplier of the
equipment. The Company is entitled to receive discounts on the royalty payments
for the ENSCO Technology equipment amounting to $46,000 per year for the first
three years of the agreement and $260,000 per year for the fourth and fifth
years of the agreement. The terms of this licensing agreement are to be reviewed
and renegotiated in September 2000.
In November 1996, the Company committed to be a participating lender for an
unaffiliated entity's senior secured oil and gas exploration and development
loan facility ("Facility"). The Company's maximum commitment of $500,000 is
secured by certain domestic oil and gas properties of the borrower and it will
receive an overriding royalty interest in each property for which funding under
the Facility is provided. Interest is earned on advances made under this
Facility at an annual rate of 12% and is receivable quarterly. Principal
payments are to be received quarterly beginning in 1999 based on a stated
percentage of net production revenues of properties covered under the Facility.
At December 31, 1996, the Company had a receivable of $150,000 with respect to
the Facility included in Other Assets.
Contingencies
The Company is involved in various claims, lawsuits and proceedings arising
in the ordinary course of business. While there are uncertainties inherent in
the ultimate outcome of such matters and it is impossible
F-17
<PAGE> 89
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to presently determine the ultimate costs that may be incurred, management
believes the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position or results of operations.
14. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and trade
receivables. The Company mitigates its risk with respect to cash and cash
equivalents by maintaining such deposits at high credit quality financial
institutions and monitoring the credit ratings of those institutions.
The Company derives a significant portion of its revenues from sales and
services to customers in the energy industry. In addition, the Company has
concentrations of operations in certain geographic areas (primarily Texas, the
Louisiana Gulf Coast, Venezuela and the North Sea). At December 31, 1996, two
customers each accounted for approximately 10% of the Company's revenues. At
December 31, 1995, one customer accounted for approximately 11% of the Company's
revenues. At December 31, 1996, there were no individual customers which had
accounts receivable balances greater than 10% of total trade receivables. At
December 31, 1995, outstanding receivables from two significant customers
accounted for approximately 13% and 11% of total trade receivables,
respectively. The Company mitigates its concentrations of credit risk with
respect to trade receivables by actively monitoring the creditworthiness of its
customers.
15. GEOGRAPHIC INFORMATION
Summarized information by geographic area is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 30,1994
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1994
------------ ------------ --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
Domestic.......................................... $54,732 $42,557 $18,460
Latin America..................................... 9,237 6,635 2,544
Europe............................................ 4,848 5,378 2,023
Other foreign..................................... 7,330 2,956 2,182
------- ------- -------
Total..................................... $76,147 $57,526 $25,209
======= ======= =======
Operating income (loss):
Domestic.......................................... $ 4,886 $ 3,180 $ 3,287
Latin America..................................... 803 355 522
Europe............................................ 396 1,292 42
Other foreign..................................... 846 153 (132)
------- ------- -------
Total..................................... $ 6,931 $ 4,980 $ 3,719
======= ======= =======
Identifiable assets:
Domestic.......................................... $64,747 $59,492 $28,836
Latin America..................................... 10,680 7,170 2,560
Europe............................................ 4,657 4,633 2,518
Other foreign..................................... 6,686 6,459 2,378
------- ------- -------
Total..................................... $86,770 $77,754 $36,292
======= ======= =======
</TABLE>
Sales and transfers among geographic areas are not significant. Included in
results of operations are aggregate foreign currency transaction gains (losses)
of $(87,000), $(43,000) and $30,000 for the periods
F-18
<PAGE> 90
DRILEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1996, 1995 and 1994, respectively. Export sales were less
than 10% of total net revenues for the periods ended December 31, 1996, 1995 and
1994.
16. COBB BUY-OUT AGREEMENT
On January 31, 1997, the Company entered into a stock repurchase and
promissory note repayment agreement and general release with the previous owner
of Cobb (the "Cobb Buy-Out Agreement"), which was effected on February 10, 1997.
The agreement provides for, among other things, the repurchase of Company stock,
early payment of outstanding notes payable, the termination of Mr. Cobb's
employment as of January 31, 1997, and the amendment of the non-compete
provision in the related employment agreement. Company stock repurchased was
96,523 shares at the January 31, 1997 market closing price of $13.50 per share
(a total of $1,303,000). The notes payable repaid were to Posi-Trak Mud Motors,
Inc. and Cobb Directional Drilling Company, Inc. having principal balances
outstanding of $1,333,000 and $417,000, respectively, together with accrued
interest of approximately $11,000. The employment agreement was amended to
provide for a reduction in the duration of the post-termination non-compete from
five years to two years in exchange for payment from Mr. Cobb to the Company of
$313,665 and the sale to Mr. Cobb of certain ancillary assets for an aggregate
purchase price of $23,695. The total net cash payment made by the Company under
the Cobb Buy-Out Agreement was $2,726,000 and was funded through its Revolving
Credit Facility.
17. SUBSEQUENT EVENTS (UNAUDITED)
On April 11, 1997, the Company purchased the 30% minority interest in its
Canadian subsidiary, Drilex Systems Canada, Inc., for approximately $1.4
million.
On April 17, 1997, the Company announced that it had entered into a
definitive agreement to be acquired by Baker Hughes Incorporated. The agreement
is subject to satisfaction of customary conditions including clearance by
appropriate government agencies. The acquisition is expected to close before
September 30, 1997.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary quarterly financial information for the years ended December 31,
1996 and 1995, and the period from March 30, 1994 (inception) to December 31,
1994 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
1996:
Net revenues........................ $19,457 $18,593 $20,075 $18,022
Operating income.................... 1,616 823 2,419 2,073
Net income.......................... 526 .93 1,279 1,144
Net income per common and common
equivalent share.................. .12 .02 .19 .17
1995:
Net revenues........................ $10,527 $12,343 $14,493 $20,163
Operating income.................... 660 1,023 1,411 1,886
Net income.......................... 205 361 574 644
Net income per common and common
equivalent share.................. .05 .08 .13 .14
1994:
Net revenues........................ $ 6,689 $ 7,770 $10,750
Operating income.................... 846 1,101 1,772
Net income.......................... 426 631 952
Net income per common and common
equivalent share.................. .18 .17 .22
</TABLE>
F-19
<PAGE> 91
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
BAKER HUGHES INCORPORATED, BAKER HUGHES MERGER, INC.
AND
DRILEX INTERNATIONAL INC.
DATED AS OF APRIL 16, 1997
<PAGE> 92
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
THE MERGER
1.1 The Merger; Effective Time of the Merger.................... A-1
1.2 Closing..................................................... A-1
1.3 Effects of the Merger....................................... A-1
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock..................................... A-2
2.2 Exchange of Certificates.................................... A-4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Drilex.................... A-6
3.2 Representations and Warranties of Baker Hughes and Sub...... A-15
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS OF DRILEX
4.1 Conduct of Business by Drilex Pending the Merger............ A-22
4.2 No Solicitation............................................. A-23
4.3 Conduct of Business by Baker Hughes Pending the Merger...... A-24
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Proxy Statement.................. A-25
5.2 Letter of Drilex's Accountants.............................. A-25
5.3 Letter of Baker Hughes's Accountants........................ A-25
5.4 Access to Information....................................... A-26
5.5 Drilex Stockholders Meeting................................. A-26
5.6 Filings; Other Action....................................... A-26
5.7 Agreements of Others........................................ A-26
5.8 Authorization for Shares and Stock Exchange Listing......... A-27
5.9 Employee Matters............................................ A-27
5.10 Stock Options............................................... A-27
5.11 Indemnification; Directors' and Officers' Insurance......... A-28
5.12 Drilex Credit Agreement..................................... A-29
5.13 Agreement to Defend......................................... A-29
5.14 Public Announcements........................................ A-29
5.15 Other Actions............................................... A-29
5.16 Advice of Changes; SEC Filings.............................. A-29
5.17 Reorganization.............................................. A-29
5.18 Accounting Matters.......................................... A-30
</TABLE>
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-30
6.2 Conditions of Obligations of Baker Hughes and Sub........... A-30
6.3 Conditions of Obligations of Drilex......................... A-31
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination................................................. A-32
7.2 Effect of Termination....................................... A-33
7.3 Amendment................................................... A-34
7.4 Extension; Waiver........................................... A-34
ARTICLE VIII
GENERAL PROVISIONS
8.1 Payment of Expenses......................................... A-34
8.2 Nonsurvival of Representations, Warranties and Agreements... A-34
8.3 Notices..................................................... A-35
8.4 Interpretation.............................................. A-35
8.5 Counterparts................................................ A-35
8.6 Entire Agreement; No Third Party Beneficiaries.............. A-36
8.7 Governing Law............................................... A-36
8.8 No Remedy in Certain Circumstances.......................... A-36
8.9 Assignment.................................................. A-36
8.10 Schedules................................................... A-36
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GLOSSARY OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Proposal........................................ 4.2(e)
Affiliates.................................................. 5.7
Agreement................................................... Preamble
Antitrust Laws.............................................. 7.2(c)
Average Closing Price....................................... 2.1(d)
Baker Hughes................................................ Preamble
Baker Hughes Common Stock................................... 2.1(c)
Baker Hughes Employee Benefit Plans......................... 3.2(l)(iii)
Baker Hughes Equity Plans................................... 3.2(b)
Baker Hughes ERISA Affiliate................................ 3.2(l)(i)
Baker Hughes Intangible Property............................ 3.2(n)
Baker Hughes Litigation..................................... 3.2(j)
Baker Hughes Order.......................................... 3.2(j)
Baker Hughes Pension Plans.................................. 3.2(l)(i)
Baker Hughes Permits........................................ 3.2(i)
Baker Hughes Preferred Stock................................ 3.2(b)
Baker Hughes SEC Documents.................................. 3.2(d)
Bank Credit Facility........................................ 5.12
CERCLA...................................................... 3.1(o)(A)
Certificate of Merger....................................... 1.1
Certificates................................................ 2.2(b)
Closing..................................................... 1.1
Closing Date................................................ 1.2
Code........................................................ Recitals
Confidentiality Agreement................................... 5.4
Constituent Corporations.................................... 1.3(a)
DGCL........................................................ 1.1
Drilex...................................................... Preamble
Drilex Common Stock......................................... 2.1
Drilex Employee Benefit Plans............................... 3.1(l)(iv)
Drilex ERISA Affiliate...................................... 3.1(l)(i)
Drilex Intangible Property.................................. 3.1(n)
Drilex Litigation........................................... 3.1(j)
Drilex Order................................................ 3.1(j)
Drilex Pension Plans........................................ 3.1(l)(i)
Drilex Permits.............................................. 3.1(i)
Drilex Preferred Stock...................................... 3.1(b)
Drilex Representatives...................................... 4.2(a)
Drilex SEC Documents........................................ 3.1(d)
Drilex Stock Option......................................... 5.10(a)
Drilex Stock Plan........................................... 3.1(b)
Drilex Value................................................ 2.1(e)(vii)
Drilex Warrants............................................. 3.1(b)
EBITDA...................................................... 2.1(e)(ii)
Effective Time.............................................. 1.1
Environmental Law........................................... 3.1(o)(A)
ERISA....................................................... 3.1(l)(i)
Exchange Act................................................ 3.1(c)(iii)
Exchange Agent.............................................. 2.2(a)
Exchange Fund............................................... 2.2(a)
Exchange Ratio.............................................. 2.1(c)
</TABLE>
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<PAGE> 95
GAAP........................................................ 3.1(d)
Governmental Entity......................................... 3.1(c)(iii)
Hazardous Materials......................................... 3.1(o)(B)
HSR Act..................................................... 3.1(c)(iii)
Indemnified Liabilities..................................... 5.11(a)
Indemnified Parties......................................... 5.11(a)
Injunction.................................................. 6.1(e)
IRS......................................................... 3.1(k)(ii)
Material Adverse Change..................................... 3.1(a)
Material Adverse Effect..................................... 3.1(a)
Merger...................................................... Recitals
Monthly..................................................... 2.1(e)(iv)
Monthly Statements.......................................... 2.1(e)(v)
NYSE........................................................ 2.1(d)
OSHA........................................................ 3.1(o)(A)
PBGC........................................................ 3.1(l)(iii)
Pricing Period.............................................. 2.1(d)
Proxy Statement............................................. 3.1(c)(iii)
Release..................................................... 3.1(o)(C)
Remedial Action............................................. 3.1(o)(D)
Returns..................................................... 3.1(k)(i)
Revenue..................................................... 2.1(e)(i)
S-4......................................................... 3.1(e)
SEC......................................................... 3.1(a)
Securities Act.............................................. 3.1(d)
Significant Subsidiary...................................... 3.1(a)
Stockholder Agreement....................................... Recitals
Surviving Corporation....................................... 1.3(a)
Sub......................................................... Preamble
Subsidiary.................................................. 2.1(b)
Taxes....................................................... 3.1(k)
Test Period................................................. 2.1(e)(iii)
Unexercisable Option........................................ 5.10(c)
Voting Debt................................................. 3.1(b)
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SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<S> <C>
3.1(a) -- Significant Subsidiaries; Jurisdiction of Incorporation
3.1(b) -- Capital Structure
3.1(c) -- Authority; No Violations; Consents and Approvals
3.1(d) -- SEC Documents
3.1(f) -- Absence of Certain Changes or Events
3.1(g) -- No Undisclosed Material Liabilities
3.1(h) -- No Default
3.1(i) -- Compliance with Applicable Laws
3.1(j) -- Litigation
3.1(k)(i),(ii),(iii),(vi) -- Taxes
3.1(l)(ii),(v) -- Pension and Benefit Plans; ERISA
3.1(m)(i),(ii) -- Labor Matters
3.1(n) -- Intangible Property
3.1(o) -- Environmental Matters
3.1(t) -- Brokers
3.1(u) -- Tax Matters
4.1(a) -- Ordinary Course
4.1(b) -- Dividends; Changes in Stock
4.1(c) -- Issuance of Securities
4.1(e) -- No Acquisitions
4.1(f) -- No Dispositions
4.1(h) -- Certain Employee Matters
4.1(i) -- Indebtedness; Leases; Capital Expenditures
5.9 -- Employee Matters
3.2(b) -- Capital Structure
3.2(f) -- Absence of Certain Changes or Events
3.2(g) -- No Undisclosed Material Liabilities
3.2(h) -- No Default
3.2(i) -- Compliance with Applicable Laws
3.2(j) -- Litigation
3.2(k)(i),(ii),(iii) -- Taxes
3.2(m) -- Labor Matters
3.2(n) -- Intangible Property
3.2(o) -- Environmental Matters
3.2(u) -- Tax Matters
</TABLE>
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<PAGE> 97
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 16, 1997 (this
"Agreement"), among Baker Hughes Incorporated, a Delaware corporation ("Baker
Hughes"), Baker Hughes Merger, Inc., a Delaware corporation and a direct wholly
owned subsidiary of Baker Hughes ("Sub"), and Drilex International Inc., a
Delaware corporation ("Drilex").
WHEREAS, the Boards of Directors of Baker Hughes, Sub and Drilex each have
determined that it is in the best interests of their respective stockholders for
Sub to merge with and into Drilex (the "Merger") upon the terms and subject to
the conditions of this Agreement;
WHEREAS, concurrently with the execution and delivery hereof, DRLX
Partners, L.P., the owner of approximately 61.8% of the outstanding Drilex
Common Stock (as hereinafter defined), is entering into a Stockholder Agreement
(the "Stockholder Agreement") with Baker Hughes providing for, among other
things, the voting of the shares of Drilex Common Stock owned by DRLX Partners,
L.P. and the grant to Baker Hughes of an option to purchase a portion of such
shares of Drilex Common Stock;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests; and
WHEREAS, Baker Hughes, Sub and Drilex desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger; Effective Time of the Merger. Upon the terms and subject
to the conditions of this Agreement and in accordance with the Delaware General
Corporation Law (the "DGCL"), Sub shall be merged with and into Drilex at the
Effective Time (as hereinafter defined). The Merger shall become effective
immediately when a certificate of merger (the "Certificate of Merger"), prepared
and executed in accordance with the relevant provisions of the DGCL, is filed
with the Secretary of State of the State of Delaware or, if agreed to by the
parties, at such time thereafter as is provided in the Certificate of Merger
(the "Effective Time"). The filing of the Certificate of Merger shall be made as
soon as practicable on or after the closing of the Merger (the "Closing").
1.2 Closing. The Closing shall take place at 10:00 a.m. on a date to be
specified by the parties, which shall be no later than the second business day
after satisfaction (or waiver in accordance with this Agreement) of the latest
to occur of the conditions set forth in Article VI (the "Closing Date"), at the
offices of Baker & Botts, L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas
77002, provided that the Closing Date shall be delayed if the Drilex Value has
not been determined until the business day after the Drilex Value has been
determined, unless another date or place is agreed to in writing by the parties.
1.3 Effects of the Merger. (a) At the Effective Time: (i) Sub shall be
merged with and into Drilex, the separate existence of Sub shall cease and
Drilex shall continue as the surviving corporation (Sub and Drilex are sometimes
referred to herein as the "Constituent Corporations" and Drilex is sometimes
referred to herein as the "Surviving Corporation"); (ii) the Restated
Certificate of Incorporation of Drilex as in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation; and (iii) the Bylaws of Drilex as in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation.
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(b) The directors of Sub at the Effective Time shall, from and after the
Effective Time, be the initial directors of the Surviving Corporation, and the
officers of Drilex at the Effective Time shall, from and after the Effective
Time, be the initial officers of the Surviving Corporation, and such directors
and officers shall serve until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Restated Certificate of
Incorporation and Bylaws.
(c) At and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises of a public as well as
of a private nature, and be subject to all the restrictions, disabilities and
duties of each of the Constituent Corporations; and all and singular rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well as for stock subscriptions
and all other things in action or belonging to each of the Constituent
Corporations, shall be vested in the Surviving Corporation; and all property,
rights, privileges, powers and franchises, and all and every other interest
shall be thereafter as effectually the property of the Surviving Corporation as
they were of the Constituent Corporations; and the title to any real estate
vested by deed or otherwise, in either of the Constituent Corporations, shall
not revert or be in any way impaired; but all rights of creditors and all liens
upon any property of either of the Constituent Corporations shall be preserved
unimpaired; and all debts, liabilities and duties of the Constituent
Corporations shall thenceforth attach to the Surviving Corporation, and may be
enforced against it to the same extent as if said debts and liabilities had been
incurred by it.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of common
stock, par value $0.01 per share, of Drilex ("Drilex Common Stock") or capital
stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
common stock of Sub shall be converted into and become 10,000 fully paid
and nonassessable shares of common stock, par value $0.01 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Stock and Baker Hughes-Owned Stock. Each
share of Drilex Common Stock and all other shares of capital stock of
Drilex that are owned by Drilex as treasury stock and any shares of Drilex
Common Stock and all other shares of capital stock of Drilex owned by Baker
Hughes, Sub or any other wholly owned Subsidiary (as hereinafter defined)
of Baker Hughes or Drilex shall be canceled and retired and shall cease to
exist and no stock of Baker Hughes or other consideration shall be
delivered or deliverable in exchange therefor. As used in this Agreement,
the word "Subsidiary" means, with respect to any party, any corporation or
other organization, whether incorporated or unincorporated, of which: (i)
such party or any other Subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which are
held by such party or any Subsidiary of such party that do not have a
majority of the voting interest in such partnership); or (ii) at least a
majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corporation or
other organization is, directly or indirectly, owned or controlled by such
party or by any one or more of its Subsidiaries, or by such party and any
one or more of its Subsidiaries.
(c) Exchange Ratio for Drilex Common Stock. Subject to the provisions
of Section 2.2(e) hereof, each share of Drilex Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares to
be canceled in accordance with Section 2.1(b)) shall be converted into a
fraction of a duly authorized, validly issued, fully paid and nonassessable
share of common stock, par value $1.00 per share, of Baker Hughes ("Baker
Hughes Common Stock"), calculated by dividing (i) the Drilex Value by (ii)
the Average Closing Price, rounded to four decimal places (such fraction
being referred to herein as the "Exchange Ratio"). All such shares of
Drilex Common Stock, when so converted, shall no longer
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be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Baker Hughes Common Stock and cash in lieu
of fractional shares of Baker Hughes Common Stock as contemplated by
Section 2.2(e), to be issued or paid in consideration therefor upon the
surrender of such certificate in accordance with Section 2.2, without
interest.
(d) Average Closing Price. "Average Closing Price" shall mean the
average of the per share closing prices of Baker Hughes Common Stock as
reported on the consolidated transaction reporting system for securities
traded on the New York Stock Exchange, Inc. ("NYSE") for the ten
consecutive trading days ending immediately prior to the second trading day
prior to the Closing Date (the "Pricing Period"), appropriately adjusted
for any stock splits, reverse stock splits, stock dividends,
recapitalizations or similar transactions; provided, however, that if any
ex-dividend trading with respect to any regular quarterly cash dividend on
Baker Hughes Common Stock occurs on or after the first day of the Pricing
Period and prior to the Closing Date, then for purposes of calculating the
Average Closing Price (x) if the related record date occurs prior to the
Effective Time, the closing price of Baker Hughes Common Stock for each day
prior to the related ex-dividend date included in the Pricing Period shall
be reduced by the amount per share of such dividend and (y) if the related
record date occurs at or after the Effective Time, the closing price of
Baker Hughes Common Stock for each day on or after such ex-dividend date
included in the Pricing Period shall be increased by the amount per share
of such dividend.
(e) Drilex Value. For purposes of this Agreement:
(i) "Revenue" with respect to a period means the net revenues of
Drilex for such period, determined on a consolidated basis in accordance
with GAAP (as defined herein) applied on a basis consistent with that
used in preparing the financial statements of Drilex referred to in
Section 3.1(d), as finally determined pursuant to the procedures set
forth in this Section 2.1.
(ii) "EBITDA" with respect to a period means the net income plus
interest expense, provision for income taxes, and depreciation and
amortization of Drilex for such period, determined on a consolidated
basis in accordance with GAAP applied on a basis consistent with that
used in preparing the financial statements of Drilex referred to in
Section 3.1(d), as finally determined pursuant to the procedures set
forth in this Section 2.1.
(iii) "Test Period" means the period from April 1, 1997 to (i)
April 30, 1997, if the Closing occurs prior to June 15, 1997 (or if the
Closing would have occurred prior to such date except for delay caused
by the procedures of Section 2.1(e)(vi)), (ii) May 31, 1997, if the
Closing occurs prior to July 15, 1997 (or if the Closing would have
occurred prior to such date except for delay caused by the procedures of
Section 2.1(e)(vi)) and (iii) June 30, 1997, otherwise.
(iv) "Monthly," when used with respect to Revenue or EBITDA, means
the total amount of Revenue or EBITDA, as the case may be, for the Test
Period divided by the number of months in the Test Period.
(v) As soon as available after the end of each of April, May and
June 1997 but in any event by the 20th day of the next month, Drilex
shall prepare, with the input and participation of Baker Hughes, and
shall furnish to Baker Hughes financial statements (a balance sheet and
income statement) of Drilex for such month and for the period from April
1, 1997 to the end of such month, prepared on a consolidated basis in
accordance with GAAP applied on a basis consistent with that used in
preparing the financial statements of Drilex referred to in Section
3.1(d) (the "Monthly Statements"). Drilex shall provide Baker Hughes
with access to preliminary copies and drafts of the Monthly Statements.
Such Monthly Statements shall include a calculation of Revenue and
EBITDA (calculated separately for purposes of Section 2.1(e)(vii) and
Section 7.1(c)(v)) for such month and for the Test Period, and shall be
certified by the Chief Financial Officer and the Chief Executive Officer
of Drilex as having been prepared in accordance with the requirements of
this Agreement.
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<PAGE> 100
(vi) Drilex shall provide Baker Hughes with access to copies of all
work papers and other relevant documents to permit Baker Hughes to
verify the accuracy of the Monthly Statements. Baker Hughes shall have a
period of ten calendar days after delivery of the Monthly Statements for
April 1997, May 1997 and June 1997 to review them and make any
objections it may have in writing to Drilex. If written objections to
such Monthly Statements are delivered to Drilex by Baker Hughes within
such period, then Drilex and Baker Hughes shall attempt to resolve the
matter or matters in dispute. If no written objections are made by
Drilex within such period, then such Monthly Statements shall be final
and binding on the parties hereto. If disputes with respect to such
Monthly Statements cannot be resolved by Drilex and Baker Hughes within
five business days after the delivery of the objections to such Monthly
Statements, then the specific matters in dispute shall be submitted to
Deloitte & Touche LLP or such other independent accounting firm as may
be approved by Drilex and Baker Hughes, which firm shall decide such
matters. Such independent accounting firm will send to Drilex and Baker
Hughes its determination on the specified matters in dispute within five
business days of such submission, which determination shall be final and
binding on the parties hereto. The fees and expenses of such independent
accounting firm shall be borne by one-half by Drilex and one-half by
Baker Hughes.
(vii) The "Drilex Value" shall be $15.00, unless Monthly Revenue
exceeds $6,000,000 and Monthly EBITDA exceeds $1,000,000, each as
finally determined in accordance with this Section 2.1, in which case
the Drilex Value shall be $16.00 (subject to the provisions of Sections
6.2(e) and 7.1(c)(vi)).
(viii) For purposes of determining Revenue and EBITDA for any
period, (1) amounts attributable to OEM sales (accounted consistently
with Drilex's past practice) (but not ordinary sales under existing
contracts) destined to ultimate purchasers outside the United States,
the United Kingdom, Canada, Argentina and Venezuela shall be excluded
(x) with respect to the calculations for purposes of Section
2.1(e)(vii), to the extent of transactions generating revenues in excess
of $500,000 in the aggregate during such period, and (y) with respect to
the calculations for purposes of Section 7.1(c)(v), to the extent of any
single transaction (or group of related transactions) generating
revenues in excess of $300,000 per transaction (or group of related
transactions); (2) the effects of any investment banking, legal and
other advisory fees and expenses, employment costs arising from the
agreements referred to in Schedule 5.9 or other expenses primarily
attributable to, or resulting from, this Agreement and the transactions
contemplated hereby shall be excluded; and (3) the effects of any
adjustment or change in accruals or reserves except to the extent made
pursuant to GAAP consistent with past practices resulting from events
occurring after March 31, 1997 shall be excluded.
(f) Treatment of Stock Options. Each outstanding Drilex Stock Option
(as defined in Section 5.10) shall be treated as provided in Section 5.10.
(g) Drilex Warrants. Baker Hughes shall agree to be bound by the
conversion provisions of the Drilex Warrants (as defined in Section
3.1(b)), such that the Drilex Warrants shall be exercisable for Baker
Hughes Common Stock based on the Exchange Ratio in accordance with the
terms of Drilex Warrants.
2.2 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Baker Hughes shall deposit,
or cause to be deposited, with Baker Hughes's transfer agent for Baker Hughes
Common Stock or such other bank or trust company designated by Baker Hughes and
reasonably acceptable to Drilex (the "Exchange Agent"), for the benefit of the
holders of shares of Drilex Common Stock, for exchange in accordance with this
Article II, through the Exchange Agent, certificates representing the shares of
Baker Hughes Common Stock (such shares of Baker Hughes Common Stock, together
with any dividends or distributions with respect thereto, being hereinafter
referred to as the "Exchange Fund") issuable pursuant to Section 2.1 in exchange
for outstanding shares of Drilex Common Stock, together with cash in lieu of
fractional shares as provided herein. The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the Baker Hughes Common Stock contemplated to
be
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issued pursuant to Section 2.1 out of the Exchange Fund. The Exchange Fund shall
not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which, immediately prior to the Effective Time,
represented outstanding shares of Drilex Common Stock (the "Certificates"),
which holder's shares of Drilex Common Stock were converted into the right to
receive shares of Baker Hughes Common Stock pursuant to Section 2.1: (i) a
letter of transmittal (which shall specify that delivery shall be effected and
risk of loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Baker Hughes may reasonably specify); and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Baker Hughes Common Stock. Upon surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Baker Hughes, together with such letter of
transmittal, duly executed, and any other required documents, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Baker Hughes Common Stock which such
holder has the right to receive pursuant to the provisions of this Article II
and cash in lieu of fractional shares of Baker Hughes Common Stock as
contemplated by Section 2.2(e), and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Drilex Common
Stock which is not registered in the transfer records of Drilex, a certificate
representing the appropriate number of shares of Baker Hughes Common Stock may
be issued to a transferee if the Certificate representing such Drilex Common
Stock is presented to the Exchange Agent accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.2, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of Baker Hughes Common Stock and cash in lieu of any
fractional shares of Baker Hughes Common Stock as contemplated by this Section
2.2. The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the Baker Hughes Common Stock held by it from time to
time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect thereto for the account of
persons entitled thereto.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Baker Hughes Common Stock declared or made after
the Effective Time with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the right to receive
shares of Baker Hughes Common Stock represented thereby and no cash payment in
lieu of fractional shares shall be paid to any such holder pursuant to Section
2.2(e) until the holder of such Certificate shall surrender such Certificate.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the holder thereof, without interest: (i) at
the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Baker Hughes Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such whole shares of Baker Hughes Common Stock; and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Baker Hughes Common
Stock.
(d) No Further Ownership Rights in Drilex Common Stock. All shares of Baker
Hughes Common Stock issued upon the surrender for exchange of shares of Drilex
Common Stock in accordance with the terms hereof (including any cash paid
pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Drilex Common
Stock, subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time that may have been declared or made by Drilex on such shares of
Drilex Common Stock in accordance with the terms of this Agreement or prior to
the date hereof and which remain unpaid at the Effective Time, and after the
Effective Time there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Drilex Common Stock
that were outstanding
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immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article II.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of Baker Hughes Common Stock shall be issued upon the surrender for
exchange of Certificates pursuant to this Article II, and, except as provided in
this Section 2.2(e), no dividend or other distribution, stock split or interest
shall relate to any such fractional security, and such fractional interests
shall not entitle the owner thereof to vote or to any rights of a security
holder of Baker Hughes. In lieu of any fractional security, each holder of
shares of Drilex Common Stock who would otherwise have been entitled to a
fraction of a share of Baker Hughes Common Stock upon surrender of Certificates
for exchange pursuant to this Article II will be paid an amount in cash (without
interest) equal to the Average Closing Price multiplied by the fractional
interest the holder would otherwise be entitled to receive.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and any
cash in lieu of fractional shares of Baker Hughes Common Stock made available to
the Exchange Agent that remain undistributed to the former stockholders of
Drilex for one year after the Effective Time shall be delivered to Baker Hughes,
upon demand, and any stockholders of Drilex who have not theretofore complied
with this Article II shall thereafter look only to Baker Hughes for payment of
their claim for Baker Hughes Common Stock, any cash in lieu of fractional shares
of Baker Hughes Common Stock and any dividends or distributions with respect to
Baker Hughes Common Stock.
(g) No Liability. Neither Baker Hughes nor Drilex shall be liable to any
holder of shares of Drilex Common Stock or Baker Hughes Common Stock, as the
case may be, for such shares (or dividends or distributions with respect
thereto) or cash in lieu of fractional shares of Baker Hughes Common Stock
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Drilex. Drilex represents and
warrants to Baker Hughes and Sub as follows:
(a) Organization, Standing and Power. Each of Drilex and its
Subsidiaries is a corporation, limited liability company or partnership
duly organized, validly existing and in good standing under the laws of its
state or jurisdiction of incorporation or organization, has all requisite
power and authority to own, lease and operate its properties and to carry
on its business as now being conducted, and is duly qualified and in good
standing to do business in each jurisdiction in which the business it is
conducting, or the operation, ownership or leasing of its properties, makes
such qualification necessary, other than in such jurisdictions where the
failure so to qualify would not have a Material Adverse Effect (as defined
below) on Drilex. Drilex has heretofore delivered to Baker Hughes complete
and correct copies of its Restated Certificate of Incorporation and Bylaws.
All Significant Subsidiaries of Drilex and their respective jurisdictions
of incorporation or organization are identified on Schedule 3.1(a). As used
in this Agreement: (i) a "Significant Subsidiary" means any Subsidiary of
Drilex or Baker Hughes, as the case may be, that would constitute a
Significant Subsidiary of such party within the meaning of Rule 1-02 of
Regulation S-X of the Securities and Exchange Commission (the "SEC"); and
(ii) a "Material Adverse Effect" or "Material Adverse Change" shall mean,
in respect of Drilex or Baker Hughes, as the case may be, any effect or
change that is or, as far as can be reasonably determined, is reasonably
likely to be, materially adverse to the business, operations, assets,
condition (financial or otherwise) or results of operation of such party
and its Subsidiaries taken as a whole.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of Drilex consists of 25,000,000 shares of Drilex Common Stock and
10,000,000 shares of preferred stock, par value $0.01 per share ("Drilex
Preferred Stock"). At the close of business on April 1, 1997: (i) 6,663,356
shares of Drilex Common Stock and no shares of Drilex Preferred Stock were
issued and outstanding, 184,187 shares of Drilex Common Stock were reserved
for issuance pursuant to outstanding options under
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Drilex's Stock Option Plan (the "Drilex Stock Plan") and 180,981 shares of
Drilex Common Stock were reserved for issuance pursuant to outstanding
warrants to purchase Drilex Common Stock at an exercise price of $5.53 per
share, subject to adjustment (the "Drilex Warrants"), (ii) 96,523 shares of
Drilex Common Stock were held by Drilex in its treasury; and (iii) no
bonds, debentures, notes or other indebtedness having the right to vote (or
convertible into securities having the right to vote) on any matters on
which Drilex stockholders may vote ("Voting Debt") were issued or
outstanding. Except as set forth on Schedule 3.1(b), all outstanding shares
of Drilex Common Stock are validly issued, fully paid and nonassessable and
are not subject to preemptive rights. Except as set forth on Schedule
3.1(b), all outstanding shares of capital stock of the Subsidiaries of
Drilex are owned by Drilex, or a direct or indirect wholly owned Subsidiary
of Drilex, free and clear of all liens, charges, encumbrances, claims and
options of any nature. Except as set forth in this Section 3.1(b) or on
Schedule 3.1(b) and except for changes since April 1, 1997 resulting from
the exercise of employee stock options granted pursuant to, or from
issuances or purchases under, the Drilex Stock Plan, the exercise of the
Drilex Warrants or as contemplated by this Agreement, there are
outstanding: (i) no shares of capital stock, Voting Debt or other voting
securities of Drilex; (ii) no securities of Drilex or any Subsidiary of
Drilex convertible into or exchangeable for shares of capital stock, Voting
Debt or other voting securities of Drilex or any Subsidiary of Drilex; and
(iii) no options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which Drilex or any Subsidiary of Drilex is a
party or by which it is bound in any case obligating Drilex or any
Subsidiary of Drilex to issue, deliver, sell, purchase, redeem or acquire,
or cause to be issued, delivered, sold, purchased, redeemed or acquired,
additional shares of capital stock or any Voting Debt or other voting
securities of Drilex or of any Subsidiary of Drilex, or obligating Drilex
or any Subsidiary of Drilex to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. Except as set forth on
Schedule 3.1(b), there are not as of the date hereof and there will not be
at the Effective Time any stockholder agreements, voting trusts or other
agreements or understandings to which Drilex is a party or by which it is
bound relating to the voting of any shares of the capital stock of Drilex
that will limit in any way the solicitation of proxies by or on behalf of
Drilex from, or the casting of votes by, the stockholders of Drilex with
respect to the Merger. Except as set forth on Schedule 3.1(b), there are no
restrictions on Drilex to vote the stock of any of its Subsidiaries.
(c) Authority; No Violations; Consents and Approvals.
(i) The Board of Directors of Drilex has, by vote of the directors
with no negative vote, (i) approved the Merger and the Merger Agreement and
declared the Merger and the Merger Agreement to be in the best interests of
the stockholders of Drilex and (ii) approved for all purposes (including,
without limitation, purposes of Section 203 of the DGCL) the transactions
contemplated by the Stockholder Agreement (including, without limitation,
the grant and exercise of the option contained therein). The directors have
advised Drilex and Baker Hughes that they currently intend to vote or cause
to be voted all of the shares beneficially owned by them and their
affiliates in favor of approval of the Merger and the Merger Agreement.
Drilex has all requisite corporate power and authority to enter into this
Agreement and, subject, with respect to consummation of the Merger, to
approval of this Agreement and the Merger by the stockholders of Drilex in
accordance with the DGCL, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Drilex, subject, with respect to
consummation of the Merger, to approval of this Agreement and the Merger by
the stockholders of Drilex in accordance with the DGCL. This Agreement has
been duly executed and delivered by Drilex and, subject, with respect to
consummation of the Merger, to approval of this Agreement and the Merger by
the stockholders of Drilex in accordance with the DGCL, and assuming this
Agreement constitutes the valid and binding obligation of Baker Hughes and
Sub, constitutes a valid and binding obligation of Drilex enforceable in
accordance with its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general principles of equity.
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(ii) Except as set forth on Schedule 3.1(c), the execution and
delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof
will not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss
of a material benefit under, or give rise to a right of purchase under,
result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Drilex or any of its
Subsidiaries under, or otherwise result in a detriment to Drilex or any of
its Subsidiaries under, any provision of (i) the Restated Certificate of
Incorporation or Bylaws of Drilex or any provision of the comparable
charter or organizational documents of any of its Subsidiaries, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable
to Drilex or any of its Subsidiaries, (iii) any joint venture or other
ownership arrangement or (iv) assuming the consents, approvals,
authorizations or permits and filings or notifications referred to in
Section 3.1(c)(iii) are duly and timely obtained or made and the approval
of the Merger and this Agreement by the stockholders of Drilex has been
obtained, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Drilex or any of its Subsidiaries or any of their
respective properties or assets, other than, in the case of clause (ii),
(iii) or (iv), any such conflicts, violations, defaults, rights, liens,
security interests, charges, encumbrances or detriments that, individually
or in the aggregate, would not have a Material Adverse Effect on Drilex,
materially impair the ability of Drilex to perform its obligations
hereunder or prevent the consummation of any of the transactions
contemplated hereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any court,
governmental, regulatory or administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (a
"Governmental Entity"), is required by or with respect to Drilex or any of
its Subsidiaries in connection with the execution and delivery of this
Agreement by Drilex or the consummation by Drilex of the transactions
contemplated hereby, as to which the failure to obtain or make would have a
Material Adverse Effect, except for: (A) the filing of a premerger
notification report by Drilex under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the expiration or
termination of the applicable waiting period with respect thereto; (B) the
appropriate filings or notifications as may be required by comparable
Canadian or European laws; (C) the filing with the SEC of (x) a proxy
statement in preliminary and definitive form relating to the meeting of
Drilex's stockholders to be held in connection with the Merger (the "Proxy
Statement") and (y) such reports under Section 13(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such other
compliance with the Exchange Act and the rules and regulations thereunder,
as may be required in connection with this Agreement and the transactions
contemplated hereby; (D) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware; (E) such filings and approvals
as may be required by any applicable state securities, "blue sky" or
takeover laws, or environmental laws; and (F) such filings and approvals as
may be required by any foreign premerger notification, securities,
corporate or other law, rule or regulation.
(d) SEC Documents. Drilex has made available to Baker Hughes a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Drilex with the SEC since May 9, 1996
and prior to the date of this Agreement (the "Drilex SEC Documents") which
are all the documents that Drilex was required to file with the SEC since
such date. As of their respective dates, the Drilex SEC Documents complied
in all material respects with the requirements of the Securities Act of
1933, as amended (the "Securities Act"), or the Exchange Act, as the case
may be, and the rules and regulations of the SEC thereunder applicable to
such Drilex SEC Documents, and none of the Drilex SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements of Drilex included in the Drilex SEC Documents
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted
by Rule 10-01 of Regulation S-X
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of the SEC) and fairly present in accordance with applicable requirements
of GAAP (subject, in the case of the unaudited statements, to normal,
recurring adjustments, none of which are material) the consolidated
financial position of Drilex and its consolidated Subsidiaries as of their
respective dates and the consolidated results of operations and the
consolidated cash flows of Drilex and its consolidated Subsidiaries for the
periods presented therein. Except as disclosed in the Drilex SEC Documents
or in Schedule 3.1(d), there are no agreements, arrangements or
understandings between Drilex and any party who is at the date of this
Agreement or was at any time prior to the date hereof but after December
31, 1996 an Affiliate of Drilex that are required to be disclosed in the
Drilex SEC Documents.
(e) Information Supplied. None of the information supplied or to be
supplied by Drilex for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Baker Hughes
in connection with the issuance of shares of Baker Hughes Common Stock in
the Merger (the "S-4") will, at the time the S-4 becomes effective under
the Securities Act or at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
none of the information supplied or to be supplied by Drilex and included
or incorporated by reference in the Proxy Statement will, at the date
mailed to stockholders of Drilex or at the time of the meeting of such
stockholders to be held in connection with the Merger or at the Effective
Time, 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. If at any time prior to the Effective Time any event
with respect to Drilex or any of its Subsidiaries, or with respect to other
information supplied by Drilex for inclusion in the Proxy Statement or S-4,
shall occur which is required to be described in an amendment of, or a
supplement to, the Proxy Statement or the S-4, such event shall be so
described, and such amendment or supplement shall be promptly filed with
the SEC and, as required by law, disseminated to the stockholders of
Drilex. The Proxy Statement, insofar as it relates to Drilex or its
Subsidiaries or other information supplied by Drilex for inclusion therein,
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
(f) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in, the Drilex SEC Documents
or on Schedule 3.1(f), or except as contemplated by this Agreement, since
December 31, 1996, there has not been: (i) any declaration, setting aside
or payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of Drilex's capital stock; (ii) any amendment
of any material term of any outstanding equity security of Drilex or any
Subsidiary; (iii) any repurchase, redemption or other acquisition by Drilex
or any Subsidiary of any outstanding shares of capital stock or other
equity securities of, or other ownership interests in, Drilex or any
Subsidiary, except as contemplated by Drilex Benefit Plans; (iv) any
material change in any method of accounting or accounting practice or any
tax method, practice or election by Drilex or any Subsidiary; or (v) any
other transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary
course of business) that has had a Material Adverse Effect on Drilex,
except for general economic changes and changes that may affect the
industries of Drilex or any of its Subsidiaries generally.
(g) No Undisclosed Material Liabilities. Except as disclosed in the
Drilex SEC Documents or on Schedule 3.1(g), as of the date hereof, there
are no liabilities of Drilex or any of its Subsidiaries of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, that are reasonably likely to have a Material Adverse Effect
on Drilex, other than: (i) liabilities adequately provided for on the
balance sheet of Drilex dated as of December 31, 1996 (including the notes
thereto) contained in Drilex's Annual Report on Form 10-K for the year
ended December 31, 1996; and (ii) liabilities under this Agreement.
(h) No Default. Neither Drilex nor any of its Subsidiaries is in
default or violation (and no event has occurred which, with notice or the
lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) their respective charter and by-laws,
(ii) except as disclosed in Schedule 3.1(h), any note, bond, mortgage,
indenture, license, agreement or other instrument or
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obligation to which Drilex or any of its Subsidiaries is now a party or by
which Drilex or any of its Subsidiaries or any of their respective
properties or assets may be bound or (iii) any order, writ, injunction,
decree, statute, rule or regulation applicable to Drilex or any of its
Subsidiaries, except in the case of (ii) and (iii) for defaults or
violations which in the aggregate would not have a Material Adverse Effect
on Drilex.
(i) Compliance with Applicable Laws. Drilex and its Subsidiaries hold
all permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses (the "Drilex Permits"), except where the
failure so to hold would not have a Material Adverse Effect on Drilex.
Drilex and its Subsidiaries are in compliance with the terms of the Drilex
Permits, except where the failure so to comply would not have a Material
Adverse Effect on Drilex. Except as disclosed in the Drilex SEC Documents
or as set forth on Schedule 3.1(i), 3.1(j), 3.1(k), 3.1(l), 3.1(m) or
3.1(o), the businesses of Drilex and its Subsidiaries are not being
conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which would not have a
Material Adverse Effect on Drilex. Except as set forth on Schedule 3.1(i),
as of the date of this Agreement, no investigation or review by any
Governmental Entity with respect to Drilex or any of its Subsidiaries is
pending or, to the best knowledge of Drilex as of the date hereof,
threatened, other than those the outcome of which would not have a Material
Adverse Effect on Drilex. Schedule 3.1(i) sets forth each such failure to
hold or comply with the terms of Drilex Permits, each such violation of
law, ordinance or regulation of any governmental entity and each such
pending or threatened investigation or review by any governmental entity
existing on the date hereof that involves amounts in excess of $100,000.
(j) Litigation. Except as disclosed in the Drilex SEC Documents or on
Schedule 3.1(j) hereto, there is no suit, action or proceeding pending, or,
to the best knowledge of Drilex, threatened against or affecting Drilex or
any Subsidiary of Drilex ("Drilex Litigation"), and Drilex and its
Subsidiaries have no knowledge of any facts that are likely to give rise to
any Drilex Litigation, that (in any case) is reasonably likely to have a
Material Adverse Effect on Drilex, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against Drilex or any Subsidiary of Drilex ("Drilex Order")
that is reasonably likely to have a Material Adverse Effect on Drilex or
its ability to consummate the transactions contemplated by this Agreement.
In addition, the aggregate reasonable estimate of uninsured exposures or
losses under all claims and judgments pending, or to the best knowledge of
Drilex as of the date hereof, threatened, pursuant to all Drilex Litigation
and Drilex Orders, existing on the date hereof, excluding individual,
unrelated claims or judgments of less than $100,000 each, does not exceed
$5,000,000.
(k) Taxes.
(i) Except as set forth on Schedule 3.1(k)(i), each of Drilex, each of
its Subsidiaries and any affiliated, consolidated, combined, unitary or
similar group of which any such corporation is or was a member has (A) duly
filed on a timely basis (taking into account any extensions) all federal
and all material state, local, foreign and other returns, declarations,
reports, estimates, information returns and statements ("Returns") required
to be filed or sent by or with respect to it in respect of any Taxes (as
hereinafter defined), (B) duly paid or deposited on a timely basis all
Taxes that are due and payable (except for audit adjustments not material
in the aggregate or to the extent that liability therefor is reserved for
in Drilex's most recent audited financial statements) for which Drilex or
any of its Subsidiaries may be liable, (C) established reserves that are
adequate for the payment of all Taxes not yet due and payable with respect
to the results of operations of Drilex and its Subsidiaries through the
date hereof, and (D) complied in all material respects with all applicable
laws, rules and regulations relating to the reporting, payment and
withholding of Taxes and has in all material respects timely withheld from
employee wages and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over.
(ii) Schedule 3.1(k)(ii) sets forth (A) the last taxable period
through which the federal income Tax Returns of Drilex and any of its
Subsidiaries have been examined by the Internal Revenue Service
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("IRS") or otherwise closed and (B) any affiliated, consolidated, combined,
unitary or similar group or Return in which Drilex or any of its
Subsidiaries is or has been a member or is or has joined in the filing.
Except to the extent being contested in good faith, all material
deficiencies asserted as a result of such examinations and any examination
by any applicable taxing authority have been paid, fully settled or
adequately provided for in Drilex's most recent audited financial
statements. Except as adequately provided for in the Drilex SEC Documents,
no material audits or other administrative proceedings or court proceedings
are presently pending with regard to any Taxes for which Drilex or any of
its Subsidiaries would be liable, and no material deficiency for any Taxes
has been proposed, asserted or assessed pursuant to such examination
against Drilex or any of its Subsidiaries by any authority with respect to
any period other than as set forth in Schedule 3.1(k)(ii).
(iii) Except as disclosed on Schedule 3.1(k)(iii), neither Drilex nor
any of its Subsidiaries has executed or entered into (or prior to the close
of business on the Closing Date will execute or enter into) with the IRS or
any taxing authority (i) any agreement or other document extending or
having the effect of extending the period for assessments or collection of
any income or franchise Taxes for which Drilex or any of its Subsidiaries
would be liable or (ii) a closing agreement pursuant to Section 7121 of the
Code, or any predecessor provision thereof or any similar provision of
state, local, foreign or other income tax law that relates to the assets or
operations of Drilex or any of its Subsidiaries.
(iv) Neither Drilex nor any of its Subsidiaries is a party to an
agreement that provides for the payment of any amount that would constitute
an "excess parachute payment" within the meaning of Section 280G of the
Code.
(v) Neither Drilex nor any of its Subsidiaries has made an election
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by Drilex or any of its
Subsidiaries.
(vi) Except as set forth in Drilex SEC Documents or as disclosed on
Schedule 3.1(k)(vi), neither Drilex nor any of its Subsidiaries is a party
to, is bound by or has any obligation under any tax sharing or allocation
agreement or similar agreement or arrangement.
For purposes of this Agreement, "Taxes" shall mean all federal, state,
county, local, foreign or other taxes, charges, fees, levies, imposts,
duties, licenses or other assessments, together with any interest,
penalties, additions to tax or additional amounts imposed by any taxing
authority.
(l) Pension and Benefit Plans; ERISA.
(i) All "employee pension plans," as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
maintained by Drilex or any of its Subsidiaries or any trade or business
(whether or not incorporated) which is under common control, or which is
treated as a single employer, with Drilex under Section 414(b), (c), (m) or
(o) of the Code ("Drilex ERISA Affiliate") or to which Drilex or any of its
Subsidiaries or any Drilex ERISA Affiliate contributed or is obligated to
contribute thereunder (the "Drilex Pension Plans") intended to qualify
under Section 401 of the Code so qualify and the trusts maintained pursuant
thereto are exempt from federal income taxation under Section 501 of the
Code, and, to the best knowledge of Drilex as of the date hereof, nothing
has occurred with respect to the operation of the Drilex Pension Plans that
could reasonably be expected to cause the loss of such qualification or
exemption or the imposition of any liability, penalty, or tax under ERISA
or the Code that is reasonably likely to have a Material Adverse Effect on
Drilex.
(ii) Except as disclosed in Schedule 3.1(l)(ii), there has been no
"reportable event" as that term is defined in Section 4043 of ERISA and the
regulations thereunder with respect to the Drilex Pension Plans subject to
Title IV of ERISA that would require the giving of notice or any event
requiring disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA.
(iii) As to the Drilex Pension Plans and as to the "employee pension
benefit plans" maintained or contributed to by Drilex, its Subsidiaries or
by any Drilex ERISA Affiliate within six years prior to the Effective Time
subject to Title IV of ERISA, there has been no event or condition which
presents a
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material risk of termination, no notice of intent to terminate has been
given under Section 4041 of ERISA and no proceeding has been instituted
under Section 4042 of ERISA to terminate, such that would result in a
material liability to Drilex, its Subsidiaries, or Drilex ERISA Affiliates;
no material liability to the Pension Benefit Guaranty Corporation ("PBGC")
has been incurred; no material accumulated funding deficiency, whether or
not waived, within the meaning of Section 302 of ERISA or Section 412 of
the Code has been incurred; and the assets of each Drilex Pension Plan
equal or exceed the actuarial present value of the benefit liabilities,
within the meaning of Section 4041 of ERISA, under such Drilex Pension
Plan, based upon reasonable actuarial assumptions and the asset valuation
principles established by the PBGC.
(iv) There is no violation of ERISA with respect to the filing of
applicable reports, documents, and notices regarding all the "employee
benefit plans," as defined in Section 3(3) of the ERISA and all other
material employee compensation and benefit arrangements or payroll
practices, including, without limitation, severance pay, sick leave,
vacation pay, salary continuation for disability, consulting or other
compensation agreements, retirement, deferred compensation, bonus,
long-term incentive, stock option, stock purchase, hospitalization, medical
insurance, life insurance and scholarship programs maintained by Drilex or
any of its Subsidiaries or to which Drilex or any of its Subsidiaries
contributed or is obligated to contribute thereunder (all such plans, other
than the Drilex Pension Plans, being hereinafter referred to as the "Drilex
Employee Benefit Plans"), or Drilex Pension Plans with the Secretary of
Labor and the Secretary of the Treasury or the furnishing of such documents
to the participants or beneficiaries of the Drilex Employee Benefit Plans
or Drilex Pension Plans, which violation is reasonably likely to have a
Material Adverse Effect on Drilex.
(v) Except as disclosed on Schedule 3.1(l)(v), the Drilex Employee
Benefit Plans and Drilex Pension Plans have been maintained, in all
material respects, in accordance with their terms and with all provisions
of ERISA (including rules and regulations thereunder) and other applicable
Federal and state law, all contributions to the Drilex Employee Benefit
Plans and Drilex Pension Plans have been timely made pursuant to their
terms, there is no material liability for breaches of fiduciary duty in
connection with the Drilex Employee Benefit Plans and Drilex Pension Plans,
there have been no material defaults, violations, actions, suits or claims
pending (except ordinary claims for benefits), or to the knowledge of
Drilex, threatened respecting the Drilex Employee Benefit Plans and Drilex
Pension Plans, and neither Drilex nor any of its Subsidiaries has engaged
in a material "prohibited transaction" within the meaning of Section 4975
of the Code or Section 406 of ERISA with respect to the Drilex Employee
Benefit Plans and Drilex Pension Plans.
(vi) Except as disclosed or referenced on Schedule 5.9, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment becoming
due to any employee or group of employees of Drilex or any of its
Subsidiaries; (ii) increase any benefits otherwise payable under any Drilex
Employee Benefit Plan or Drilex Pension Plan or the profit sharing plan of
Drilex or (iii) result in the acceleration of the time of payment or
vesting of any such benefits. Except as disclosed or referenced on Schedule
5.9 or in the Drilex SEC Documents, there are no severance agreements or
employment agreements between Drilex or any of its Subsidiaries and any
employee of Drilex or such Subsidiary.
True and correct copies of all such severance agreements and
employment agreements have been provided to Baker Hughes. Except as set
forth or otherwise referenced on Schedule 5.9, neither Drilex nor any of
its Subsidiaries has any consulting agreement or arrangement with any
person involving compensation in excess of $50,000, except as are
terminable upon one month's notice or less.
(vii) No stock or other security issued by Drilex or any of its
subsidiaries forms or has formed a material part of the assets of any
funded Drilex Employee Benefit Plan or Drilex Pension Plan.
(viii) Neither Drilex nor any of its Subsidiaries nor any Drilex ERISA
Affiliate contributes to, or has an obligation to contribute to, and has
not within six years prior to the Effective Time contributed to, or had an
obligation to contribute to, a multiemployer plan within the meaning of
Section 3(37) of ERISA.
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(m) Labor Matters.
(i) Except as set forth in Schedule 3.1(m)(i) hereto, as of the date
of this Agreement, (1) no employees of Drilex or any of its Subsidiaries
are represented by any labor organization; (2) no labor organization or
group of employees of Drilex or any of its Subsidiaries has made a pending
demand for recognition or certification, and there are no representation or
certification proceedings or petitions seeking a representation proceeding
presently pending or threatened in writing to be brought or filed with the
National Labor Relations Board or any other labor relations tribunal or
authority; and (3) to the knowledge of Drilex, there are no organizing
activities involving Drilex or any of its Subsidiaries pending with any
labor organization or group of employees of Drilex or any of its
Subsidiaries.
(ii) Except as set forth on Schedule 3.1(m)(ii) hereto, Drilex and
each of its Subsidiaries is in compliance with all laws and orders relating
to the employment of labor, including all such laws and orders relating to
wages, hours, collective bargaining, discrimination, civil rights, safety
and health, workers' compensation and the collection and payment of
withholding and/or Social Security Taxes and similar Taxes, except where
the failure to comply would not have a Material Adverse Effect on Drilex.
(n) Intangible Property. Drilex and its Subsidiaries possess or have
adequate rights to use all material trademarks, trade names, patents,
service marks, brand marks, brand names, computer programs, databases,
industrial designs and copyrights necessary for the operation of the
businesses of each of Drilex and its Subsidiaries (collectively, the
"Drilex Intangible Property"), except where the failure to possess or have
adequate rights to use such properties would not reasonably be expected to
have a Material Adverse Effect on Drilex. Except as set forth on Schedule
3.1(n), all of the Drilex Intangible Property is owned by Drilex or its
Subsidiaries free and clear of any and all liens, claims or encumbrances,
except those that are not reasonably likely to have a Material Adverse
Effect on Drilex, and neither Drilex nor any such Subsidiary has forfeited
or otherwise relinquished any Drilex Intangible Property which forfeiture
would result in a Material Adverse Effect. To the knowledge of Drilex, the
use of the Drilex Intangible Property by Drilex or its Subsidiaries does
not, in any material respect, conflict with, infringe upon, violate or
interfere with or constitute an appropriation of any right, title, interest
or goodwill, including, without limitation, any intellectual property
right, trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person and there have been no claims made
and neither Drilex nor any of its Subsidiaries has received any notice of
any claim or otherwise knows that any of the Drilex Intangible Property is
invalid or conflicts with the asserted rights of any other person or has
not been used or enforced or has been failed to be used or enforced in a
manner that would result in the abandonment, cancellation or
unenforceability of any of the Drilex Intangible Property, except for any
such conflict, infringement, violation, interference, claim, invalidity,
abandonment, cancellation or unenforceability that would not reasonably be
expected to have a Material Adverse Effect.
(o) Environmental Matters.
For purposes of this Agreement:
(A) "Environmental Law" means any applicable law regulating or
prohibiting Releases into any part of the natural environment, or
pertaining to the protection of natural resources, the environment and
public and employee health and safety including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") (42 U.S.C. Section 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the
Clean Water Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (33
U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. Section 7401 et seq.), the Federal Insecticide, Fungicide, and
Rodenticide Act (7 U.S.C. Section 136 et seq.), and the Occupational
Safety and Health Act (29 U.S.C. Section 651 et seq.) ("OSHA") and the
regulations promulgated pursuant thereto, and any such applicable state
or local statutes, and the regulations promulgated pursuant thereto, as
such laws have been and may be amended or supplemented through the
Closing Date.
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(B) "Hazardous Material" means any substance, material or waste
which is regulated pursuant to any Environmental Law by any public or
governmental authority in the jurisdictions in which the applicable
party or its Subsidiaries conducts business, or the United States,
including, without limitation, any material or substance which is
defined as a "hazardous waste," "hazardous material," "hazardous
substance," "extremely hazardous waste" or "restricted hazardous waste,"
"contaminant," "toxic waste" or "toxic substance" under any provision of
Environmental Law;
(C) "Release" means any release, spill, effluent, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration into the indoor or outdoor environment, or into or
out of any property owned, operated or leased by the applicable party or
its Subsidiaries; and
(D) "Remedial Action" means all actions, including, without
limitation, any capital expenditures, required by a governmental entity
or required under any Environmental Law, or voluntarily undertaken to
(I) clean up, remove, treat, or in any other way ameliorate or address
any Hazardous Materials or other substance in the indoor or outdoor
environment; (II) prevent the Release or threat of Release, or minimize
the further Release of any Hazardous Material so it does not endanger or
threaten to endanger the public health or welfare of the indoor or
outdoor environment; (III) perform pre-remedial studies and
investigations or post-remedial monitoring and care pertaining or
relating to a Release; or (IV) bring the applicable party into
compliance with any Environmental Law.
(i) Except as disclosed on Schedule 3.1(o), the operations of
Drilex and its Subsidiaries have been and, as of the Closing Date, will
be, in compliance with all Environmental Laws, except where the failure
to so comply would not reasonably be expected to have a Material Adverse
Effect on Drilex;
(ii) Except as disclosed on Schedule 3.1(o), Drilex and its
Subsidiaries have obtained and will, as of the Closing Date, maintain
all permits required under applicable Environmental Laws for the
continued operations of their respective businesses, except such permits
the lack of which would not reasonably be expected to lead to a Material
Adverse Effect on Drilex;
(iii) Except as disclosed on Schedule 3.1(o), as of the date hereof
Drilex and its Subsidiaries are not subject to any material
(individually or in the aggregate) outstanding written orders or
material contracts with any Governmental Entity or other person
respecting (A) Environmental Laws, (B) Remedial Action or (C) any
Release or threatened Release of a Hazardous Material;
(iv) Except as disclosed on Schedule 3.1(o), Drilex and its
Subsidiaries have not received any written communication alleging, with
respect to any such party, the violation of or liability under any
Environmental Law, which violation or liability would reasonably be
expected to have a Material Adverse Effect on Drilex;
(v) Except as disclosed on Schedule 3.1(o), neither Drilex nor any
of its Subsidiaries has any contingent liability in connection with the
Release of any Hazardous Material into the indoor or outdoor environment
(whether on-site or off-site) that would reasonably be expected to lead
to a Material Adverse Effect on Drilex;
(vi) Except as disclosed on Schedule 3.1(o), the operations of
Drilex or its Subsidiaries involving the generation, transportation,
treatment, storage or disposal of hazardous waste, as defined and
regulated under 40 C.F.R. Parts 260-270 (in effect as of the date of
this Agreement) or any state equivalent, are in compliance with
applicable Environmental Laws, except where the failure to so comply
would not reasonably be expected to have a Material Adverse Effect on
Drilex; and
(vii) Except as disclosed on Schedule 3.1(o), to the knowledge of
Drilex as of the date hereof, there is not now on or in any property of
Drilex or its Subsidiaries any of the following: (A) any underground
storage tanks or surface impoundments, (B) any asbestos-containing
materials, or (C) any polychlorinated biphenyls, any of which ((A), (B),
or (C) preceding) could reasonably be expected to have a Material
Adverse Effect on Drilex.
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(p) Opinion of Financial Advisor. Drilex has received the opinion of
Merrill Lynch & Co to the effect that, as of the date hereof, the
consideration to be received by the holders of Drilex Common Stock pursuant
to this Agreement is fair from a financial point of view to such holders.
(q) Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of Drilex Common Stock is the only vote of the
holders of any class or series of Drilex capital stock necessary to approve
this Agreement and the transactions contemplated hereby.
(r) Beneficial Ownership of Baker Hughes Common Stock. As of the date
hereof, assuming the accuracy of the representation set forth in Section
3.2(b), neither Drilex nor its Subsidiaries "beneficially owns" (as defined
in Rule 13d-3 under the Exchange Act) in the aggregate one percent (1%) or
more of the outstanding Baker Hughes Common Stock.
(s) Insurance. Drilex has delivered to Baker Hughes an insurance
schedule of Drilex's and each of its Subsidiaries' directors' and officers'
liability insurance, primary and excess casualty insurance policies,
providing coverage for bodily injury and property damage to third parties,
including products liability and completed operations coverage, and
worker's compensation, in effect as of the date hereof. Drilex maintains
insurance coverage reasonably adequate for the operation of the business of
Drilex and each of its Subsidiaries (taking into account the cost and
availability of such insurance), and the transactions contemplated hereby
will not materially adversely affect such coverage.
(t) Brokers. Except as disclosed on Schedules 3.1(t) or 5.9 hereof, no
broker, investment banker, or other person is entitled to any broker's,
finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Drilex.
(u) Tax Matters. As of the date hereof, to the knowledge of Drilex,
the representations set forth in the numbered paragraphs of the form of
Certificate of Drilex included as Schedule 3.1(u) are true and correct in
all material respects, assuming for purposes of this representation and
warranty that the Merger referred to in such form had been consummated on
the date hereof.
(v) Accounting Matters. Drilex has previously (i) requested its
outside accountants to disclose to Baker Hughes any actions taken by Drilex
or any of its affiliates, and (ii) accurately answered all questions posed
by Baker Hughes, that in either such case are relevant to the determination
of the treatment of the business combination to be effected by the Merger
as a pooling of interests for accounting purposes.
3.2 Representations and Warranties of Baker Hughes and Sub. Baker Hughes
and Sub jointly and severally represent and warrant to Drilex as follows:
(a) Organization, Standing and Power. Each of Baker Hughes, Sub and
Baker Hughes's Significant Subsidiaries is a corporation, limited liability
company or partnership duly organized, validly existing and in good
standing under the laws of its state or jurisdiction of incorporation or
organization, has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted,
and is duly qualified and in good standing to do business in each
jurisdiction in which the business it is conducting, or the operation,
ownership or leasing of its properties, makes such qualification necessary,
other than in such jurisdictions where the failure so to qualify would not
have a Material Adverse Effect on Baker Hughes. Baker Hughes and Sub have
heretofore delivered to Drilex complete and correct copies of their
respective Certificates of Incorporation and Bylaws.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of Baker Hughes consists of 400,000,000 shares of Baker Hughes Common
Stock and 15,000,000 shares of preferred stock, par value $1.00 per share,
of Baker Hughes (the "Baker Hughes Preferred Stock"). At the close of
business on March 31, 1997 (i) 145,642,230 shares of Baker Hughes Common
Stock were issued and outstanding; (ii) 8,300,000 shares of Baker Hughes
Common Stock were held by Baker Hughes in its treasury or by its wholly
owned Subsidiaries, which are treated for purposes of clause (i) and
financial reporting purposes as having been effectively retired; (iii) no
shares of Baker Hughes Preferred Stock are issued
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and outstanding; and (iv) no Voting Debt was outstanding. All outstanding
shares of Baker Hughes capital stock are, and the shares of Baker Hughes
Common Stock when issued in accordance with this Agreement, and upon
exercise of the Drilex Stock Options (as defined in Section 5.10) and the
Drilex Warrants to be assumed pursuant to the Merger, will be, validly
issued, fully paid and nonassessable and not subject to preemptive rights.
Except as set forth on Schedule 3.2(b), all outstanding shares of capital
stock of the Significant Subsidiaries of Baker Hughes are owned by Baker
Hughes or a direct or indirect wholly owned Subsidiary of Baker Hughes,
free and clear of all liens, charges, encumbrances, claims and options of
any nature. Except as set forth in this Section 3.2(b) or on Schedule
3.2(b) or as described in the Baker Hughes SEC Documents and except for
changes since March 31, 1997 resulting from the exercise of employee stock
options or convertible debentures granted pursuant to, or from issuances or
purchases under, plans described in the Baker Hughes SEC Documents (as
defined herein) (collectively, the "Baker Hughes Equity Plans"), or as
contemplated by this Agreement, there are outstanding: (i) no shares of
capital stock, Voting Debt or other voting securities of Baker Hughes; (ii)
no securities of Baker Hughes or any Subsidiary of Baker Hughes convertible
into or exchangeable for shares of capital stock, Voting Debt or other
voting securities of Baker Hughes or any Subsidiary of Baker Hughes; and
(iii) no options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which Baker Hughes or any Subsidiary of Baker
Hughes is a party or by which it is bound in any case obligating Baker
Hughes or any Subsidiary of Baker Hughes to issue, deliver, sell, purchase,
redeem or acquire, or cause to be issued, delivered, sold, purchased,
redeemed or acquired, additional shares of capital stock or any Voting Debt
or other voting securities of Baker Hughes or of any Subsidiary of Baker
Hughes or obligating Baker Hughes or any Subsidiary of Baker Hughes to
grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. There are not as of the date hereof and there will
not be at the Effective Time any stockholder agreements, voting trusts or
other agreements or understandings to which Baker Hughes is a party or by
which it is bound relating to the voting of any shares of the capital stock
of Baker Hughes. As of the date hereof, the authorized capital stock of Sub
consists of 1,000 shares of common stock, par value $0.01 per share, 1,000
shares of which are validly issued, fully paid and nonassessable and are
owned by Baker Hughes and the balance of which are not issued or
outstanding.
(c) Authority; No Violations, Consents and Approvals.
(i) Each of Baker Hughes and Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
including but not limited to the issuance of the Baker Hughes Common Stock
pursuant to the Merger, have been duly authorized by all necessary
corporate action on the part of Baker Hughes and Sub. This Agreement has
been duly executed and delivered by Baker Hughes and Sub and, assuming this
Agreement constitutes the valid and binding obligation of Drilex,
constitutes a valid and binding obligation of each of Baker Hughes and Sub
enforceable in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity.
(ii) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with
the provisions hereof will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or give rise to a
right of purchase under, result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of
Baker Hughes or any of its Subsidiaries under, or otherwise result in a
detriment to Baker Hughes or any of its Subsidiaries under, any provision
of (i) the Certificate of Incorporation or Bylaws of Baker Hughes or any
provision of the comparable charter or organizational documents of any of
its Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to Baker Hughes or any of its Subsidiaries,
(iii) any joint venture or other ownership arrangement or (iv) assuming the
consents, approvals, authorizations or permits and filings or notifica-
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tions referred to in Section 3.2(c)(iii) are duly and timely obtained or
made, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Baker Hughes or any of its Subsidiaries or any of
their respective properties or assets, other than, in the case of clause
(ii), (iii) or (iv), any such conflicts, violations, defaults, rights,
liens, security interests, charges, encumbrances or detriments that,
individually or in the aggregate, would not have a Material Adverse Effect
on Baker Hughes, materially impair the ability of Baker Hughes to perform
its obligations hereunder or thereunder or prevent the consummation of any
of the transactions contemplated hereby or thereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any Governmental
Entity is required by or with respect to Baker Hughes or any of its
Subsidiaries in connection with the execution and delivery of this
Agreement by Baker Hughes and Sub or the consummation by Baker Hughes and
Sub of the transactions contemplated hereby, as to which the failure to
obtain or make would have a Material Adverse Effect on Baker Hughes, except
for: (A) the filing of a premerger notification report by Baker Hughes
under the HSR Act and the expiration or termination of the applicable
waiting period with respect thereto; (B) the filing with the SEC of the
Proxy Statement, the S-4, such reports under Section 13(a) of the Exchange
Act and such other compliance with the Securities Act and the Exchange Act
and the rules and regulations thereunder as may be required in connection
with this Agreement and the transactions contemplated hereby, and the
obtaining from the SEC of such orders as may be so required; (C) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware; (D) filings with, and approval of, the NYSE; (E) such filings and
approvals as may be required by any applicable state securities, "blue sky"
or takeover laws or environmental laws; and (F) such filings and approvals
as may be required by any foreign premerger notification, securities,
corporate or other law, rule or regulation.
(d) SEC Documents. Baker Hughes has made available to Drilex a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Baker Hughes with the SEC since
September 30, 1996 and prior to the date of this Agreement (the "Baker
Hughes SEC Documents"), which are all the documents (other than preliminary
material) that Baker Hughes was required to file with the SEC since such
date. As of their respective dates, the Baker Hughes SEC Documents complied
in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Baker Hughes SEC Documents, and none of the
Baker Hughes SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The financial statements of
Baker Hughes included in the Baker Hughes SEC Documents complied as to form
in all material respects with the published rules and regulations of the
SEC with respect thereto, were prepared in accordance with GAAP applied on
a consistent basis during the periods involved (except as may be indicated
in the notes thereto or, in the case of the unaudited statements, as
permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present in
accordance with applicable requirements of GAAP (subject, in the case of
the unaudited statements, to normal, recurring adjustments, none of which
will be material) the consolidated financial position of Baker Hughes and
its consolidated Subsidiaries as of their respective dates and the
consolidated results of operations and the consolidated cash flows of Baker
Hughes and its consolidated Subsidiaries for the periods presented therein.
(e) Information Supplied. None of the information supplied or to be
supplied by Baker Hughes or Sub for inclusion or incorporation by reference
in the S-4 will, at the time the S-4 becomes effective under the Securities
Act or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and none of the
information supplied or to be supplied by Baker Hughes or Baker Hughes Sub
and included or incorporated by reference in the Proxy Statement will, at
the date mailed to stockholders of Drilex or at the time of the meeting of
such stockholders to be held in connection with the Merger or at the
Effective Time, 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
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the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event with respect to Baker Hughes or any
of its Subsidiaries, or with respect to other information supplied by Baker
Hughes or Sub for inclusion in the Proxy Statement or S-4, shall occur
which is required to be described in an amendment of, or a supplement to,
the Proxy Statement or the S-4, such event shall be so described, and such
amendment or supplement shall be promptly filed with the SEC. The Proxy
Statement, insofar as it relates to Baker Hughes, Sub or other Subsidiaries
of Baker Hughes or other information supplied by Baker Hughes or Sub for
inclusion therein, will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
(f) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in, the Baker Hughes SEC
Documents or on Schedule 3.2(f), or except as contemplated by this
Agreement, since September 30, 1996, there has not been: (i) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of Baker Hughes's
capital stock, except for regular quarterly cash dividends not in excess of
$.115 per share on Baker Hughes Common Stock (or a pro rata amount for any
dividend less than a full quarter) with usual record and payment dates for
such dividends; (ii) any amendment of any material term of any outstanding
equity security of Baker Hughes or any Significant Subsidiary; (iii) any
repurchase, redemption or other acquisition by Baker Hughes or any
Subsidiary of any outstanding shares of capital stock or other equity
securities of, or other ownership interests in, Baker Hughes or any
Subsidiary, except as contemplated by Baker Hughes Benefit Plans; (iv) any
material change in any method of accounting or accounting practice or any
tax method, practice or election by Baker Hughes or any Subsidiary; or (v)
any other transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary
course of business) that has had a Material Adverse Effect on Baker Hughes,
except for general economic changes and changes that may affect the
industries of Baker Hughes or any of its Subsidiaries generally.
(g) No Undisclosed Material Liabilities. Except as disclosed in the
Baker Hughes SEC Documents or on Schedule 3.2(g), as of the date hereof,
there are no liabilities of Baker Hughes or any of its Subsidiaries of any
kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, that are reasonably likely to have a Material
Adverse Effect on Baker Hughes, other than: (i) liabilities adequately
provided for on the balance sheet of Baker Hughes dated as of December 31,
1996 (including the notes thereto) contained in Baker Hughes's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996; and (ii)
liabilities under this Agreement.
(h) No Default. Neither Baker Hughes nor any of its Subsidiaries is in
default or violation (and no event has occurred which, with notice or the
lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) their respective charter and by-laws,
(ii) except as disclosed in Schedule 3.2(h), any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which
Baker Hughes or any of its Subsidiaries is now a party or by which Baker
Hughes or any of its Subsidiaries or any of their respective properties or
assets may be bound (except for the requirement under certain of such
instruments to file supplemental indentures as a result of the transactions
contemplated hereby) or (iii) any order, writ, injunction, decree, statute,
rule or regulation applicable to Baker Hughes or any of its Subsidiaries,
except in the case of (ii) and (iii) for defaults or violations which in
the aggregate would not have a Material Adverse Effect on Baker Hughes.
(i) Compliance with Applicable Laws. Baker Hughes and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses (the "Baker Hughes Permits"), except where the
failure so to hold would not have a Material Adverse Effect on Baker
Hughes. Baker Hughes and its Subsidiaries are in compliance with the terms
of the Baker Hughes Permits, except where the failure so to comply would
not have a Material Adverse Effect on Baker Hughes. Except as disclosed in
the Baker Hughes SEC Documents or as set forth in Schedules 3.2(i), 3.2(j),
3.2(k), 3.2(m) or 3.2(o), the businesses of Baker Hughes and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for possible violations which
would not have a Material Adverse Effect on Baker Hughes. Except as set
forth on Schedule 3.2(i), as of the date of this
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Agreement, no investigation or review by any Governmental Entity with
respect to Baker Hughes or any of its Subsidiaries is pending or, to the
best knowledge of Baker Hughes as of the date hereof, threatened, other
than those the outcome of which would not have a Material Adverse Effect on
Baker Hughes.
(j) Litigation. Except as disclosed in the Baker Hughes SEC Documents
or on Schedule 3.2(j) hereto, there is no suit, action or proceeding
pending, or, to the best knowledge of Baker Hughes, threatened against or
affecting Baker Hughes or any Subsidiary of Baker Hughes ("Baker Hughes
Litigation"), and Baker Hughes and its Subsidiaries have no knowledge of
any facts that are likely to give rise to any Baker Hughes Litigation, that
(in any case) is reasonably likely to have a Material Adverse Effect on
Baker Hughes, nor is there any judgment, decree, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against Baker Hughes
or any Subsidiary of Baker Hughes ("Baker Hughes Order") that is reasonably
likely to have a Material Adverse Effect on Baker Hughes or its ability to
consummate the transactions contemplated by this Agreement. In addition,
the aggregate reasonable estimate of uninsured exposures or losses under
all claims and judgments pending, or to the best knowledge of Baker Hughes,
threatened, pursuant to all Baker Hughes Litigation and Baker Hughes
Orders, existing on the date hereof, excluding individual, unrelated claims
or judgments of less than $1,500,000 each, does not exceed $70,000,000.
(k) Taxes.
(i) Except as set forth on Schedule 3.2(k)(i), each of Baker Hughes,
each of its Subsidiaries and any affiliated, consolidated, combined,
unitary or similar group of which any such corporation is or was a member
has (A) duly filed on a timely basis (taking into account any extensions)
all federal and all material state, local, foreign and other Returns,
required to be filed or sent by or with respect to it in respect of any
Taxes, (B) duly paid or deposited on a timely basis all Taxes that are due
and payable (except for audit adjustments not material in the aggregate or
to the extent that liability therefor is reserved for in Baker Hughes's
most recent audited financial statements) for which Baker Hughes or any of
its Subsidiaries may be liable, (C) established reserves that are adequate
for the payment of all Taxes not yet due and payable with respect to the
results of operations of Baker Hughes and its Subsidiaries through the date
hereof, and (D) complied in all material respects with all applicable laws,
rules and regulations relating to the reporting, payment and withholding of
Taxes and has in all material respects timely withheld from employee wages
and paid over to the proper governmental authorities all amounts required
to be so withheld and paid over.
(ii) Schedule 3.2(k)(ii) sets forth the last taxable period through
which the federal income Tax Returns of Baker Hughes and any of its
Subsidiaries have been examined by the IRS or otherwise closed. Except to
the extent being contested in good faith, all deficiencies asserted as a
result of such examinations and any examination by any applicable taxing
authority have been paid, fully settled or adequately provided for in Baker
Hughes's most recent audited financial statements. Except as adequately
provided for in the Baker Hughes SEC Documents, no material audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes for which Baker Hughes or any of its Subsidiaries would
be liable, and no material deficiency for any Taxes has been proposed,
asserted or assessed pursuant to such examination against Baker Hughes or
any of its Subsidiaries by any taxing authority with respect to any period
other than as set forth in Schedule 3.2(k)(ii).
(iii) Except as disclosed on Schedule 3.2(k)(iii), neither Baker
Hughes nor any of its Subsidiaries has executed or entered into (or prior
to the close of business on the Closing Date will execute or enter into)
with the IRS or any taxing authority (i) any agreement or other document
extending or having the effect of extending the period for assessments or
collection of any income or franchise Taxes for which Baker Hughes or any
of its Subsidiaries would be liable or (ii) a closing agreement pursuant to
Section 7121 of the Code, or any predecessor provision thereof or any
similar provision of state, local, foreign or other income tax law that
relates to the assets or operations of Baker Hughes or any of its
Subsidiaries.
(iv) Neither Baker Hughes nor any of its Subsidiaries has made an
election under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f)
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asset (as such term is defined in Section 341(f)(4) of the Code) owned by
Baker Hughes or any of its Subsidiaries.
(l) Pension and Benefit Plans; ERISA.
(i) All "employee pension plans," as defined in Section 3(2) of ERISA,
maintained by Baker Hughes or any of its Subsidiaries or any trade or
business (whether or not incorporated) which is under common control, or
which is treated as a single employer, with Baker Hughes under Section
414(b), (c), (m) or (o) of the Code ("Baker Hughes ERISA Affiliate") or to
which Baker Hughes or any of its Subsidiaries or any Baker Hughes ERISA
Affiliate contributed or is obligated to contribute thereunder (the "Baker
Hughes Pension Plans") intended to qualify under Section 401 of the Code so
qualify and the trusts maintained pursuant thereto are exempt from federal
income taxation under Section 501 of the Code, and, to the best knowledge
of Baker Hughes as of the date hereof, nothing has occurred with respect to
the operation of the Baker Hughes Pension Plans that could cause the loss
of such qualification or exemption or the imposition of any liability,
penalty, or tax under ERISA or the Code that is reasonably likely to have a
Material Adverse Effect on Baker Hughes.
(ii) There has been no "reportable event" as that term is defined in
Section 4043 of ERISA and the regulations thereunder with respect to the
Baker Hughes Pension Plans subject to Title IV of ERISA that would require
the giving of notice or any event requiring disclosure under Section
4041(c)(3)(C) or 4063(a) of ERISA.
(iii) There is no violation of ERISA with respect to the filing of
applicable reports, documents, and notices regarding the "employee benefit
plans," as defined in Section 3(3) of ERISA and all other material employee
compensation and benefit arrangements or payroll practices including,
without limitation, severance pay, sick leave, vacation pay, salary
continuation for disability, consulting or other compensation agreements,
retirement, deferred compensation, bonus, long-term incentive, stock
option, stock purchase, hospitalization, medical insurance, life insurance
and scholarship programs maintained by Baker Hughes or any of its
Subsidiaries or to which Baker Hughes or any of its Subsidiaries
contributed or is obligated to contribute thereunder (all such plans, other
than the Baker Hughes Pension Plans, being hereinafter referred to as the
"Baker Hughes Employee Benefit Plans") or Baker Hughes Pension Plans with
the Secretary of Labor and the Secretary of the Treasury or the furnishing
of such documents to the participants or beneficiaries of the Baker Hughes
Employee Benefit Plans or Baker Hughes Pension Plans, which violation is
reasonably likely to have a Material Adverse Effect on Baker Hughes.
(iv) The Baker Hughes Employee Benefit Plans and Baker Hughes Pension
Plans have been maintained, in all material respects, in accordance with
their terms and with all provisions of ERISA (including rules and
regulations thereunder) and other applicable Federal and state law, and
neither Baker Hughes nor any of its Subsidiaries has engaged in a material
"prohibited transaction" within the meaning of Section 4975 of the Code or
Section 406 of ERISA with respect to the Baker Hughes Employee Benefit
Plans and Baker Hughes Pension Plans.
(m) Labor Matters. Except as set forth on Schedule 3.2(m) hereto,
Baker Hughes and each of its Subsidiaries is in compliance with all laws
and orders relating to the employment of labor, including all such laws and
orders relating to wages, hours, collective bargaining, discrimination,
civil rights, safety and health workers' compensation and the collection
and payment of withholding and or Social Security Taxes and similar Taxes,
except where the failure to comply would not have a Material Adverse Effect
on Baker Hughes.
(n) Intangible Property. Baker Hughes and its Subsidiaries possess or
have adequate rights to use all material trademarks, trade names, patents,
service marks, brand marks, brand names, computer programs, databases,
industrial designs and copyrights necessary for the operation of the
businesses of each of Baker Hughes and its Subsidiaries (collectively, the
"Baker Hughes Intangible Property"), except where the failure to possess or
have adequate rights to use such properties would not reasonably be
expected to have a Material Adverse Effect on Baker Hughes. Except as set
forth on Schedule 3.2(n), all of the Baker Hughes Intangible Property is
owned by Baker Hughes or its Subsidiaries free and clear of
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any and all liens, claims or encumbrances, except those that are not
reasonably likely to have a Material Adverse Effect on Baker Hughes and
neither Baker Hughes nor any such Subsidiary has forfeited or otherwise
relinquished any Baker Hughes Intangible Property which forfeiture would
result in a Material Adverse Effect. To the knowledge of Baker Hughes, the
use of the Baker Hughes Intangible Property by Baker Hughes or its
Subsidiaries does not, in any material respect, conflict with, infringe
upon, violate or interfere with or constitute an appropriation of any
right, title, interest or goodwill, including, without limitation, any
intellectual property right, trademark, trade name, patent, service mark,
brand mark, brand name, computer program, database, industrial design,
copyright or any pending application therefor of any other person and there
have been no claims made and neither Baker Hughes nor any of its
Subsidiaries has received any notice of any claim or otherwise knows that
any of the Baker Hughes Intangible Property is invalid or conflicts with
the asserted rights of any other person or has not been used or enforced or
has been failed to be used or enforced in a manner that would result in the
abandonment, cancellation or unenforceability of any of the Baker Hughes
Intangible Property, except for any such conflict, infringement, violation,
interference, claim, invalidity, abandonment, cancellation or
unenforceability that would not reasonably be expected to have a Material
Adverse Effect.
(o) Environmental Matters.
(i) Except as disclosed on Schedule 3.2(o), the operations of Baker
Hughes and its Subsidiaries have been and, as of the Closing Date, will
be, in compliance with all Environmental Laws, except where the failure
to so comply would not reasonably be expected to have a Material Adverse
Effect on Baker Hughes;
(ii) Except as disclosed on Schedule 3.2(o), Baker Hughes and its
Subsidiaries have obtained and will, as of the Closing Date, maintain
all permits required under applicable Environmental Laws for the
continued operations of their respective businesses, except such permits
the lack of which would not reasonably be expected to lead to a Material
Adverse Effect on Baker Hughes;
(iii) Except as disclosed on Schedule 3.2(o), Baker Hughes and its
Subsidiaries are not subject to any outstanding written orders or
material contracts with any Governmental Entity or other person
respecting (A) Environmental Laws, (B) Remedial Action or (C) any
Release or threatened Release of a Hazardous Material, except such
orders or contracts the compliance with which would not reasonably be
expected to have a Material Adverse Effect;
(iv) Except as disclosed on Schedule 3.2(o), Baker Hughes and its
Subsidiaries have not received any written communication alleging, with
respect to any such party, the violation of or liability under any
Environmental Law, which violation or liability would reasonably be
expected to have a Material Adverse Effect on Baker Hughes;
(v) Except as disclosed on Schedule 3.2(o), neither Baker Hughes
nor any of its Subsidiaries has any contingent liability in connection
with the Release of any Hazardous Material into the indoor or outdoor
environment (whether on-site or off-site) that would reasonably be
expected to lead to a Material Adverse Effect on Baker Hughes;
(vi) Except as disclosed on Schedule 3.2(o), none of the operations
of Baker Hughes or its Subsidiaries involving the generation,
transportation, treatment, storage or disposal of hazardous waste, as
defined and regulated under 40 C.F.R. Parts 260-270 (in effect as of the
date of this Agreement) or any state equivalent are in compliance with
applicable Environmental Laws, except where the failure to so comply
would not reasonably be expected to have a Material Adverse Effect on
Baker Hughes; and
(vii) Except as disclosed on Schedule 3.2(o), to the knowledge of
Baker Hughes as of the date hereof, there is not now on or in any
property of Baker Hughes or its Subsidiaries any of the following: (A)
any underground storage tanks or surface impoundments, (B) any asbestos-
containing materials, or (C) any polychlorinated biphenyls, which ((A),
(B), or (C) preceding) could reasonably be expected to have a Material
Adverse Effect on Baker Hughes.
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(p) No Vote Required. No vote of the holders of any class or series of
Baker Hughes capital stock is necessary to approve the issuance of Baker
Hughes Common Stock pursuant to this Agreement and the transactions
contemplated hereby.
(q) Beneficial Ownership of Drilex Common Stock. As of the date
hereof, assuming the accuracy of the representation set forth in Section
3.1(b), neither Baker Hughes nor its Subsidiaries "beneficially owns" (as
defined in Rule 13d-3 under the Exchange Act) any of the outstanding Drilex
Common Stock.
(r) Brokers. No broker, investment banker or other person is entitled
to any broker's, finder's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Baker Hughes.
(s) Interim Operations of Sub. Sub was formed by Baker Hughes solely
for the purpose of engaging in the transactions contemplated hereby, has
engaged in no other business or activities, has incurred no other
obligations or liabilities, has no other assets and has conducted its
operations only as contemplated hereby. All of the outstanding capital
stock of Sub is owned directly by Baker Hughes.
(t) Tax Matters. As of the date hereof, to the knowledge of Baker
Hughes, the representations in the numbered paragraphs set forth in the
form of Certificate of Purchaser included as Schedule 3.2(t) are true and
correct in all material respects, assuming for purposes of this
representation and warranty that the Merger referred to in such form had
been consummated on the date hereof.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS OF DRILEX
4.1 Conduct of Business by Drilex Pending the Merger. During the period
from the date of this Agreement and continuing until the Effective Time, Drilex
agrees as to itself and its Subsidiaries that (except as expressly contemplated
or permitted by this Agreement, or to the extent that Baker Hughes shall
otherwise consent in writing):
(a) Ordinary Course. Except as provided on Schedule 4.1(a), each of
Drilex and its Subsidiaries shall carry on its businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and shall use all reasonable efforts to preserve intact its
present business organizations, keep available the services of its current
officers and employees, and endeavor to preserve its relationships with
customers, suppliers and others having business dealings with it to the end
that its goodwill and ongoing business shall not be impaired in any
material respect at the Effective Time.
(b) Dividends; Changes in Stock. Except as provided on Schedule
4.1(b), Drilex shall not and it shall not permit any of its Subsidiaries
to: (i) declare or pay any dividends on or make other distributions in
respect of any of its capital stock or partnership interests, except for
the declaration and payment of dividends from a Subsidiary of Drilex to
Drilex or another Subsidiary of Drilex and except for cash dividends or
distributions paid on or with respect to the capital stock or partnership
interests of a Subsidiary of Drilex; (ii) split, combine or reclassify any
of its capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
Drilex capital stock; or (iii) repurchase, redeem or otherwise acquire, or
permit any of its Subsidiaries to purchase, redeem or otherwise acquire,
any shares of its capital stock, except as required by the terms of its
securities outstanding on the date hereof or as contemplated by any
existing employee benefit plan.
(c) Issuance of Securities. Except as provided on Schedule 4.1(c),
Drilex shall not and it shall not permit any of its Subsidiaries to, issue,
deliver or sell, or authorize or propose to issue, deliver or sell, any
shares of its capital stock of any class, any Voting Debt or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, Voting Debt or convertible securities, other than: (i) the issuance
of Drilex Common Stock upon the exercise of stock options granted under the
Drilex Stock Plan that are outstanding on the date hereof, or in
satisfaction of stock grants or stock based awards made prior to the date
hereof pursuant to the Drilex Stock Plan or upon exercise of the Drilex
Warrants; and (ii) issuances by a wholly owned Subsidiary of its capital
stock to its parent.
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(d) Governing Documents. Except as contemplated hereby or in
connection herewith, Drilex shall not amend or propose to amend its
Restated Certificate of Incorporation or Bylaws.
(e) No Acquisitions. Other than acquisitions listed on Schedule
4.1(e), Drilex shall not and it shall not permit any of its Subsidiaries
to, acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division
thereof.
(f) No Dispositions. Other than: (i) dispositions or proposed
dispositions listed on Schedule 4.1(f), (ii) dispositions in the ordinary
course of business consistent with past practice that are not material,
individually or in the aggregate, to Drilex and its Subsidiaries taken as a
whole, and (iii) product sales in the ordinary course of business
consistent with past practice, Drilex shall not and it shall not permit any
of its Subsidiaries to sell, lease, encumber or otherwise dispose of, or
agree to sell, lease (whether such lease is an operating or capital lease),
encumber or otherwise dispose of, any of its assets.
(g) No Dissolution, Etc. Except as otherwise permitted or contemplated
by this Agreement, Drilex shall not authorize, recommend, propose or
announce an intention to adopt a plan of complete or partial liquidation or
dissolution of Drilex or any of its Significant Subsidiaries.
(h) Certain Employee Matters. Except as set forth on Schedule 4.1(h)
or pursuant to Section 5.9, Drilex shall not and it shall not permit any of
its Subsidiaries to: (i) grant any increases in the compensation of any of
its directors, officers or employees, except increases to employees who are
not officers or directors in the ordinary course of business and in
accordance with past practice; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required or contemplated
by any of the existing Drilex Employee Benefit Plans or Drilex Pension
Plans as in effect on the date hereof to any director, officer or employee,
whether past or present; (iii) enter into any new, or amend any existing,
employment or severance or termination agreement with any director, officer
or key employee; (iv) become obligated under any new Drilex Employee
Benefit Plan or Drilex Pension Plan, which was not in existence or approved
by the Board of Directors of Drilex prior to or on the date hereof, or
amend any such plan or arrangement in existence on the date hereof if such
amendment would have the effect of materially enhancing any benefits
thereunder; or (v) terminate the employment of any executive or employee of
Drilex without cause.
(i) Indebtedness; Leases; Capital Expenditures. Except as set forth on
Schedule 4.1(i), Drilex shall not, nor shall Drilex permit any of its
Subsidiaries to, (i) incur any indebtedness for borrowed money (except for
working capital under Drilex's existing credit facilities, and refinancings
of existing debt that permit prepayment of such debt without penalty (other
than LIBOR breakage costs)) or guarantee any such indebtedness or issue or
sell any debt securities or warrants or rights to acquire any debt
securities of such party or any of its Subsidiaries or guarantee any debt
securities of others, (ii) except in the ordinary course of business, enter
into any lease (whether such lease is an operating or capital lease) or
create any mortgages, liens, security interests or other encumbrances on
the property of Drilex or any of its Subsidiaries in connection with any
indebtedness thereof, or (iii) commit to aggregate capital expenditures in
excess of $500,000 outside the capital budget, as amended and approved by
Drilex prior to the date hereof and disclosed to Baker Hughes on Schedule
4.1(i).
4.2 No Solicitation.
(a) From and after the date hereof, Drilex will not, and will not authorize
or permit any of its officers, directors, employees, agents, affiliates or other
representatives or those of any of its Subsidiaries (collectively, "Drilex
Representatives") to, directly or indirectly, solicit or encourage (including by
way of providing information) any prospective acquiror or the invitation or
submission of any inquiries, proposals or offers or any other efforts or
attempts that constitute, or may reasonably be expected to lead to, an
Acquisition Proposal (as defined herein) from any person or engage in any
discussions or negotiations with respect thereto or otherwise cooperate with or
assist or participate in or facilitate any such proposal; provided, however,
that,
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notwithstanding any other provision of this Agreement, (i) Drilex's Board of
Directors may take and disclose to Drilex's stockholders a position contemplated
by Rule 14e-2(a) promulgated under the Exchange Act and (ii) following receipt
from a third party (without any solicitation, initiation, encouragement,
discussion or negotiation, directly or indirectly, by or with Drilex or any
Drilex Representatives) of a bona fide Acquisition Proposal that is financially
superior to the Merger and reasonably capable of being financed (as determined
in each case in good faith by Drilex's Board of Directors after consultation
with Drilex's financial advisors), (x) Drilex may engage in discussions or
negotiations with such third party and may furnish such third party information
concerning Drilex, and its business, properties and assets if such third party
executes a confidentiality agreement in reasonably customary form and (y) the
Board of Directors of Drilex may withdraw, modify or not make its recommendation
referred to in Section 5.5 or terminate this Agreement in accordance with
Section 7.1(f), but in each case referred to in the foregoing clauses (i) and
(ii) only to the extent that the Board of Directors of Drilex shall conclude in
good faith after consultation with Drilex's outside counsel that such action is
necessary in order for the Board of Directors of Drilex to act in a manner that
is consistent with its fiduciary obligations under applicable law
notwithstanding any concessions that may be offered by Baker Hughes.
(b) Drilex shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted heretofore by Drilex or any Drilex Representatives
with respect to any Acquisition Proposal existing on the date hereof.
(c) Prior to taking any action referred to in Section 4.2(a), if Drilex
intends to participate in any such discussions or negotiations or provide any
such information to any such third party, Drilex shall give prior notice to
Baker Hughes of such action. Drilex will promptly notify Baker Hughes of any
such requests for such information or the receipt of any Acquisition Proposal,
including the identity of the person or group engaging in such discussions or
negotiations, requesting such information or making such Acquisition Proposal,
and the material terms and conditions of any Acquisition Proposal.
(d) Nothing in this Section 4.2 shall permit Drilex to enter into any
agreement with respect to an Acquisition Proposal during the term of this
Agreement (it being agreed that during the term of this Agreement, Drilex shall
not enter into any agreement with any person that provides for, or in any way
facilitates, an Acquisition Proposal other than a confidentiality agreement in
the form referred to above).
(e) As used in this Agreement, "Acquisition Proposal" shall mean any
proposal or offer, other than a proposal or offer by Baker Hughes or any of its
affiliates, for, or that could be reasonably expected to lead to, a tender or
exchange offer, a merger, consolidation or other business combination involving
Drilex or any Significant Subsidiary of Drilex or any proposal to acquire in any
manner a substantial equity interest in, or any substantial portion of the
assets of, Drilex or any of its Significant Subsidiaries.
4.3 Conduct of Business by Baker Hughes Pending the Merger. During the
period from the date of this Agreement and continuing until the Effective Time,
Baker Hughes agrees as to itself and its Subsidiaries that (except as expressly
contemplated or permitted by this Agreement, or to the extent that Drilex shall
otherwise consent in writing):
(a) Governing Documents. Baker Hughes shall not amend its Restated
Certificate of Incorporation or Bylaws in any way that materially and
adversely affects the rights of holders of Baker Hughes Common Stock.
(b) Baker Hughes Common Stock. (i) During the period beginning five
business days prior to the Pricing Period and ending at the Effective Time,
Baker Hughes shall not (and shall cause its Subsidiaries not to) issue or
sell any shares of Baker Hughes's capital stock or the capital stock of any
of its Subsidiaries (or securities convertible into or exchangeable for
capital stock) for less than the fair market value thereof, except for
issuances pursuant to employee benefit plans or pursuant to outstanding
options, warrants or convertible securities in accordance with their terms,
in each case as in existence on the date hereof, and shall not issue to
holders of Baker Hughes's capital stock any rights to purchase any shares
of Baker Hughes's capital stock for less than the fair market value thereof
if the ex-dividend date for such distribution would be during the period
beginning five business days prior to the Pricing Period and
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ending at the Effective Time; (ii) Baker Hughes shall not (and shall cause
its Subsidiaries not to) engage in any substantial repurchase at a material
premium, recapitalization, restructuring or reorganization with respect to
the Baker Hughes Common Stock; and (iii) during the period beginning five
business days prior to the mailing of the Proxy Statement and ending at the
Effective Time, Baker Hughes shall not (and shall cause its Subsidiaries
not to) redeem, repurchase or otherwise acquire any shares of Baker Hughes
Common Stock (other than pursuant to existing employee benefit plans).
(c) Dividends. Baker Hughes shall not declare, set aside or pay any
dividend or make any other distribution or payment with respect to any
shares of Baker Hughes Common Stock, or make any commitment for any such
action, except regular quarterly cash dividends in amounts consistent with
past practice.
(d) Other Action. Baker Hughes shall not take any action, including
agreeing to or consummating any acquisition or business combination, that
is likely to delay materially or adversely affect the ability of any of the
parties hereto to obtain any consent, authorization, order or approval of
any governmental commission, board or other regulatory body or the
expiration of any applicable waiting period required to consummate the
transactions contemplated by this Agreement; and, subject to applicable
law, Baker Hughes agrees to use its commercial reasonable efforts without
the incurrence of unreasonable expense (consistent with the other terms of
this Agreement) to assist Drilex, at Drilex's request, so that Drilex may
keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having
business dealings with Drilex to the end that Drilex's goodwill and ongoing
business shall not be impaired in any material respect.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Proxy Statement. Baker Hughes and Drilex
shall promptly prepare and file with the SEC the Proxy Statement and Baker
Hughes shall prepare and file with the SEC the S-4, in which the Proxy Statement
will be included as a prospectus. Each of Baker Hughes and Drilex shall use its
best efforts to have the S-4 declared effective under the Securities Act as
promptly as practicable after such filing. Each of Drilex and Baker Hughes shall
use its best efforts to cause the Proxy Statement to be mailed to stockholders
of Drilex at the earliest practicable date. Baker Hughes shall use its best
efforts to obtain all necessary state securities laws or "blue sky" permits,
approvals and registrations in connection with the issuance of Baker Hughes
Common Stock in the Merger and upon the exercise of Drilex Stock Options (as
defined in Section 5.10) and Drilex shall furnish all information concerning
Drilex and the holders of Drilex Common Stock as may be reasonably requested in
connection with obtaining such permits, approvals and registrations.
5.2 Letter of Drilex's Accountants. Drilex shall use its best efforts to
cause to be delivered to Baker Hughes a letter of Deloitte & Touche LLP,
Drilex's independent public accountants, dated a date within two business days
before the date on which the S-4 shall become effective and addressed to Baker
Hughes and Drilex, in form and substance reasonably satisfactory to Baker Hughes
and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the S-4.
5.3 Letter of Baker Hughes's Accountants. Baker Hughes shall use its best
efforts to cause to be delivered to Drilex a letter of Deloitte & Touche LLP,
Baker Hughes's independent public accountants, dated a date within two business
days before the date on which the S-4 shall become effective and addressed to
Drilex and Baker Hughes, in form and substance reasonably satisfactory to Drilex
and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the S-4.
5.4 Access to Information. Upon reasonable notice, Drilex and Baker Hughes
shall each (and shall cause each of their respective Subsidiaries to) afford to
the officers, employees, accountants, counsel and other representatives of the
other, access, during normal business hours during the period prior to the
Effective
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Time, to all its properties, books, contracts, commitments and records
(including reasonable environmental testing) and, during such period, each of
Drilex and Baker Hughes shall (and shall cause each of their respective
Subsidiaries to) furnish promptly to the other (a) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to SEC requirements and (b) all other information
concerning its business, properties and personnel as such other party may
reasonably request. Each of Drilex and Baker Hughes agrees that it will not, and
will cause its respective representatives not to, use any information obtained
pursuant to this Section 5.4 for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement. The Confidentiality Agreement
between Baker Hughes and Drilex (the "Confidentiality Agreement") shall apply
with respect to information furnished thereunder or hereunder and any other
activities contemplated thereby.
5.5 Drilex Stockholders Meeting. Drilex shall call a meeting of its
stockholders to be held as promptly as practicable after the date hereof for the
purpose of voting upon this Agreement and the Merger. Subject only to the
proviso of the first sentence of Section 4.2, Drilex will, through its Board of
Directors, recommend to its stockholders approval of such matters and not
rescind such recommendation and shall use its best efforts to obtain approval
and adoption of this Agreement and the Merger by its stockholders. Drilex shall
use all reasonable efforts to hold such meeting as soon as practicable after the
date upon which the S-4 becomes effective.
5.6 Filings; Other Action. Subject to the terms and conditions herein
provided, Baker Hughes and Drilex shall: (a) promptly make their respective
filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; (b) use their best efforts to cooperate with one
another in (i) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of the Merger and the transactions contemplated hereby and
(ii) timely making all such filings and timely seeking all such consents,
approvals, permits or authorizations; (c) furnish the others with copies of all
correspondence, filings and communications (and memoranda setting forth the
substance thereof) between them and their affiliates and their respective
representatives, on the one hand, and any governmental or regulatory authority
or members or their respective staffs, on the other hand, with respect to this
Agreement and the transactions contemplated hereby; (d) furnish the others with
such necessary information and reasonable assistance as such other parties and
their respective affiliates may reasonably request in connection with their
preparation of necessary filings, registrations or submissions of information to
any governmental or regulatory authorities, including without limitation any
filings necessary under the provisions of the HSR Act; and (e) use their
commercially reasonable efforts to take, or cause to be taken, all other action
and do, or cause to be done, all other things necessary, proper or appropriate
to consummate and make effective the Merger and the transactions contemplated by
this Agreement including, without limitation, the resolution of objections, if
any, as may be asserted by any governmental authority with respect to the Merger
and the transactions contemplated hereby under any antitrust or trade or
regulatory laws or regulations of any governmental authority; provided that
Baker Hughes and Drilex shall not be required to take any action that could have
any adverse effect on the business, operations, prospects, assets, condition
(financial or otherwise) or results of operations of Baker Hughes or Drilex
(including any Subsidiaries thereof).
5.7 Agreements of Others. Prior to the Effective Time, Drilex shall cause
to be prepared and delivered to Baker Hughes a list identifying all persons who,
at the time of the Stockholder Meeting, may be deemed to be "affiliates" of
Drilex as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Affiliates"). Drilex shall use its best efforts to cause
each person who is identified as an Affiliate in such list to deliver to Baker
Hughes, at or prior to the Effective Time, a written agreement, in the form to
be approved by the parties hereto, that such Affiliate will not sell, pledge,
transfer or otherwise dispose of any shares of Baker Hughes Common Stock issued
to such Affiliate pursuant to the Merger, except pursuant to an effective
registration statement or in compliance with Rule 145 or an exemption from the
registration requirements of the Securities Act. Drilex shall use its best
efforts to cause each person who is identified as an Affiliate in such list to
sign on or prior to the thirtieth day prior to the Effective Time, a written
agreement, in
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the form to be approved by Baker Hughes and Drilex, that such party will not
sell or in any other way reduce such party's risk relative to any shares of
Baker Hughes Common Stock received in the Merger (within the meaning of Section
201.01 of the SEC's Financial Reporting Release No. 1), until such time as
financial results (including combined sales and net income) covering at least 30
days of post-merger operations have been published, except as permitted by Staff
Accounting Bulletin No. 76 (or any successor thereto) issued by the SEC.
5.8 Authorization for Shares and Stock Exchange Listing. Prior to the
Effective Time, Baker Hughes shall have taken all action necessary to permit it
to issue the number of shares of Baker Hughes Common Stock required to be issued
pursuant to Section 2.1. Baker Hughes shall use all reasonable efforts to cause
the shares of Baker Hughes Common Stock to be issued in the Merger and the
shares of Baker Hughes Common Stock to be reserved for issuance upon exercise of
Drilex Stock Options and Drilex Warrants and issuances under the Drilex Stock
Plan to be approved for listing on the NYSE, subject to official notice of
issuance, prior to the Closing Date.
5.9 Employee Matters. Baker Hughes and Drilex agree to the matters
described on Schedule 5.9. Baker Hughes and Drilex agree that all employees of
Drilex immediately prior to the Effective Time shall be employed by the
Surviving Corporation immediately after the Effective Time, it being understood
that Baker Hughes and the Surviving Corporation shall not have any obligations
to continue employing such employees for any length of time thereafter. Prior to
the Effective Time, Baker Hughes agrees to make no representations or promises,
oral or written, to employees of Drilex concerning compensation payable after
the Closing Date without the prior consent of Drilex. Baker Hughes and Drilex
further agree that the Drilex Employee Benefit Plans and Drilex Pension Plans in
effect at the date of this Agreement shall remain in effect until otherwise
determined by the Surviving Corporation or Baker Hughes. To the extent such
Drilex Employee Benefit Plans and Drilex Pension Plans are not continued, Baker
Hughes will provide for a period of one year after the Effective Time aggregate
compensation (including benefits) that is not less favorable, in the aggregate,
to such employees as that applicable to similarly situated employees of Baker
Hughes. Service with Drilex and its Subsidiaries shall, to the extent permitted
by law, (i) constitute service for all purposes under the Baker Hughes Employee
Benefit Plans, provided that such service does not result in a duplication of
benefits paid or payable under the Baker Hughes Employee Benefit Plans, and (ii)
constitute service for participation and vesting purposes under the Baker Hughes
Pension Plans.
5.10 Stock Options. (a) At the Effective Time, each outstanding option to
purchase Drilex Common Stock that has been granted pursuant to the Drilex Stock
Plan ("Drilex Stock Option") shall be treated as set forth in this Section 5.10.
Drilex shall not grant any stock appreciation rights or limited stock
appreciation rights and shall not permit cash payments to holders of Drilex
Stock Options in lieu of the treatment thereof as provided in this Section 5.10.
(b) The portion, if any, of each Drilex Stock Option that is exercisable as
of the Effective Time in accordance with the terms thereof shall be assumed by
Baker Hughes. As so assumed, such option shall be deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under such
Drilex Stock Option, a number of shares of Baker Hughes Common Stock equal to
the number of shares of Drilex Common Stock purchasable pursuant to such
exercisable portion of such Drilex Stock Option multiplied by the Exchange
Ratio, at a price per share equal to the per-share exercise price for the shares
of Drilex Common Stock purchasable pursuant to such Drilex Stock Option divided
by the Exchange Ratio; provided, however, that in the case of any option to
which Section 421 of the Code applies by reason of its qualification under any
of sections 422-424 of the Code, the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise of
such option shall be determined in order to comply with Section 424(a) of the
Code; and provided further, that the number of shares of Baker Hughes Common
Stock that may be purchased upon exercise of such Drilex Stock Option shall not
include any fractional share and, upon exercise of such Drilex Stock Option, a
cash payment shall be made for any fractional share based upon the closing price
of a share of Baker Hughes Common Stock on the NYSE on the last trading day of
the calendar month immediately preceding the date of exercise. After the
Effective Time, except as provided above in this Section 5.10(b), each assumed
option shall be exercisable upon the same
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terms and conditions as were applicable to the related Drilex Stock Option
immediately prior to the Effective Time.
(c) Drilex shall take all reasonable action as may be required such that
the portion, if any, of each Drilex Stock Option that is not exercisable as of
the Effective Time (an "Unexercisable Option") shall be canceled in exchange for
the number of shares of Baker Hughes Common Stock, decreased to the nearest
whole share, having an aggregate market value at the Effective Time (based on
the Average Closing Price) equal to the number of shares of Drilex Common Stock
subject to such Unexercisable Option multiplied by the excess, if any, of the
Drilex Value over the per-share exercise price thereof. To the extent the terms
of an Unexercisable Option allow for withholding to satisfy tax obligations,
such rights shall apply to the consideration provided for by this Section
5.10(c).
(d) Baker Hughes shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Baker Hughes Common Stock for delivery
upon exercise of the Drilex Stock Options assumed in accordance with this
Section 5.10. As soon as practicable after the Effective Time, Baker Hughes
shall file with the SEC a registration statement on Form S-8 (or any successor
form) or another appropriate form with respect to the shares of Baker Hughes
Common Stock subject to the Drilex Stock Options and shall use its best efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as Drilex Stock Options remain outstanding.
5.11 Indemnification; Directors' and Officers' Insurance. (a) Drilex
shall, and from and after the Effective Time, Baker Hughes and the Surviving
Corporation shall, indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, an officer or director of Drilex or any of its Subsidiaries or
an employee of Drilex or any of its Subsidiaries who acts as a fiduciary under
any Drilex Employee Benefit Plans or Drilex Pension Plans (the "Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
attorneys' fees), liabilities or judgments or amounts that are paid in
settlement with the approval of the indemnifying party (which approval shall not
be unreasonably withheld) of or in connection with any threatened or actual
claim, action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer, or such employee of Drilex or any Subsidiary whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), including all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or pertaining to
this Agreement or the transactions contemplated hereby, in each case to the full
extent permitted under applicable Delaware law (and Baker Hughes and the
Surviving Corporation, as the case may be, will pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by law). Without limiting the foregoing, in the event
any such claim, action, suit, proceeding or investigation is brought against any
Indemnified Parties (whether arising before or after the Effective Time), (i)
the Indemnified Parties may retain counsel satisfactory to them and Drilex (or
them and Baker Hughes and the Surviving Corporation after the Effective Time)
and Drilex (or after the Effective Time, Baker Hughes and the Surviving
Corporation) shall pay all fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received; and (ii) Drilex (or after
the Effective Time, Baker Hughes and the Surviving Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither Drilex, Baker Hughes nor the Surviving Corporation shall
be liable for any settlement effected without its written consent, which
consent, however, shall not be unreasonably withheld. Any Indemnified Party
wishing to claim indemnification under this Section 5.11, upon learning of any
such claim, action, suit, proceeding or investigation, shall notify Drilex (or
after the Effective Time, Baker Hughes and the Surviving Corporation), but the
failure so to notify shall not relieve a party from any liability that it may
have under this Section 5.11, except to the extent such failure materially
prejudices such party. The Indemnified Parties as a group may retain only one
law firm to represent them with respect to each such 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.
Drilex, Baker Hughes and Sub agree that all rights to indemnification, including
provisions relating to advances of expenses incurred in defense of any action or
suit,
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existing in favor of the Indemnified Parties (including in the Restated
Certificate of Incorporation or Bylaws or in the indemnification agreements
previously provided to Baker Hughes) with respect to matters occurring through
the Effective Time, shall survive the Merger and shall continue in full force
and effect for a period of six years from the Effective Time; provided, however,
that all rights to indemnification in respect of any Indemnified Liabilities
asserted or made within such period shall continue until the disposition of such
Indemnified Liabilities.
(b) For a period of six years after the Effective Time, Baker Hughes shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by Drilex and its Subsidiaries
(provided that Baker Hughes may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions that are no less
advantageous in any material respect to the Indemnified Parties) with respect to
matters arising before the Effective Time, provided that Baker Hughes shall not
be required to pay an annual premium for such insurance in excess of two times
the current annual premium disclosed by Drilex to Baker Hughes prior to the date
hereof, but in such case shall purchase as much coverage as possible for such
amount.
5.12 Drilex Credit Agreement. At or prior to the Closing, Baker Hughes
shall refinance (or arrange for the continuation of) or repay all Drilex's debt
under its bank credit facility with Texas Commerce Bank National Association and
the other lenders thereunder (the "Bank Credit Facility"). Baker Hughes
acknowledges that the Merger may constitute an "Event of Default" as a result of
a change of control under the Bank Credit Facility. Notwithstanding the
foregoing, Baker Hughes acknowledges that the receipt of the consent or waiver
of the lenders under the Bank Credit Facility shall not be a condition to Baker
Hughes's obligation to effect the Merger.
5.13 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, the parties hereto agree to cooperate and use their
reasonable efforts to defend against and respond thereto.
5.14 Public Announcements. Baker Hughes and Sub, on the one hand, and
Drilex, on the other hand, will consult with each other before issuing any press
release or otherwise making any public statements with respect to the
transactions contemplated by this Agreement, and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by applicable law or by obligations pursuant to any listing
agreement with any national securities exchange or transaction reporting system.
5.15 Other Actions. Except as contemplated by this Agreement, neither
Baker Hughes nor Drilex shall, and shall not permit any of its Subsidiaries to,
take or agree or commit to take any action that is reasonably likely to result
in any of its respective representations or warranties hereunder being untrue in
any material respect or in any of the conditions to the Merger set forth in
Article VI not being satisfied.
5.16 Advice of Changes; SEC Filings. Baker Hughes and Drilex shall confer
on a regular basis with each other, report on operational matters and promptly
advise each other orally and in writing of any change or event having, or which,
insofar as can reasonably be foreseen, could have, a Material Adverse Effect on
Baker Hughes or Drilex, as the case may be. Drilex and Baker Hughes shall
promptly provide each other (or their respective counsel) copies of all filings
made by such party with the SEC or any other state or federal Governmental
Entity in connection with this Agreement and the transactions contemplated
hereby.
5.17 Reorganization. It is the intention of Baker Hughes and Drilex that
the Merger will qualify as a reorganization described in Section 368(a) of the
Code (and any comparable provisions of applicable state law). Neither Baker
Hughes nor Drilex (nor any of their respective Subsidiaries) will take or omit
to take any action (whether before, on or after the Closing Date) that would
cause the Merger not to be so treated. The parties will characterize the Merger
as such a reorganization for purposes of all Returns and other filings.
5.18 Accounting Matters. During the period from the date of this Agreement
through the Effective Time, unless the parties shall otherwise agree in writing,
neither Drilex nor any Subsidiary of Drilex shall
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knowingly take or fail to take any reasonable action requested by Baker Hughes
which action or failure to act would jeopardize the treatment of Sub's
combination with Drilex as a pooling of interests for accounting purposes;
provided, however, that pooling shall not be a condition to Closing.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) Drilex Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the affirmative vote of the holders of a
majority of the outstanding shares of Drilex Common Stock entitled to vote
thereon.
(b) NYSE Listing. The shares of Baker Hughes Common Stock issuable to
Drilex stockholders pursuant to this Agreement and such other shares of
Baker Hughes Common Stock required to be reserved for issuance in
connection with the Merger shall have been authorized for listing on the
NYSE upon official notice of issuance.
(c) Other Approvals. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated and
all filings required to be made prior to the Effective Time with, and all
consents, approvals, permits and authorizations required to be obtained
prior to the Effective Time from any Governmental Entity in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Drilex, Baker Hughes and Sub shall have
been made or obtained (as the case may be), except where the failure to
obtain such consents, approvals, permits, and authorizations would not be
reasonably likely to result in a Material Adverse Effect on Baker Hughes or
Drilex (assuming the Merger has taken place) or to materially adversely
affect the consummation of the Merger, and no such consent, approval,
permit or authorization shall impose terms or conditions that would have,
or would be reasonably likely to have, a Material Adverse Effect on Baker
Hughes or Drilex (assuming the Merger has taken place). Unless otherwise
agreed to by Baker Hughes, no such consent, approval, permit or
authorization shall then be subject to appeal.
(d) S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a
stop order.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
have complied fully with its obligations under Section 5.6 hereof.
6.2 Conditions of Obligations of Baker Hughes and Sub. The obligations of
Baker Hughes and Sub to effect the Merger are subject to the satisfaction of the
following conditions, any or all of which may be waived in whole or in part by
Baker Hughes and Sub:
(a) Representations and Warranties. Each of the representations and
warranties of Drilex set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and (except to
the extent such representations and warranties speak as of an earlier date)
as of the Closing Date as though made on and as of the Closing Date, except
where the failure to be so true and correct (without giving effect to the
individual materiality qualifications and thresholds otherwise contained in
Section 3.1 hereof) could not reasonably be expected to have a Material
Adverse Effect on Drilex or as otherwise contemplated by this Agreement.
(b) Performance of Obligations of Drilex. Drilex shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date.
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(c) Letters from Drilex Affiliates. Baker Hughes shall have received
from each person named in the letter referred to in Section 5.7 an executed
copy of an agreement as provided in Section 5.7.
(d) Absence of Certain Action. No Injunction shall be in effect (i)
imposing any limitation upon the ability of Baker Hughes or any of its
Subsidiaries effectively to control the business or operations of Baker
Hughes, Drilex or any of their respective Subsidiaries or (ii) prohibiting
or imposing any limitation upon Baker Hughes's or Drilex's or any of their
Subsidiaries' ownership or operation of all or any portion of the business
or assets or properties of Baker Hughes or Drilex or any of their
respective Subsidiaries or compelling Baker Hughes or Drilex or any of
their respective Subsidiaries to divest or hold separate all or any portion
of the business or assets or properties of Baker Hughes or Drilex or any of
their respective Subsidiaries, or imposing any other limitation upon any of
them in the conduct of their businesses, and no suit or proceeding by a
governmental authority seeking such an Injunction or an Injunction
preventing or making illegal the consummation of any of the Mergers shall
be pending.
(e) Interim Results for April. If the Test Period is the period from
April 1, 1997 to April 30, 1997:
(i) Monthly Revenue shall be not less than $5,600,000 and Monthly
EBITDA shall be not less than $600,000, each as finally determined
pursuant to Section 2.1(e);
(ii) Drilex shall have delivered to Baker Hughes a certificate of
the Chief Financial Officer and the Chief Executive Officer of Drilex
(x) containing Drilex's good faith estimate of Revenue for the period
from May 1, 1997 through a date within five business days of the Closing
Date (and, if the Closing Date is after June 6, 1997, through May 31,
1997) and (y) stating that, in their good faith belief, Revenue and
EBITDA for the period from April 1, 1997 through May 31, 1997
(calculated for purposes of Section 7.1(c)(v)) will exceed the
thresholds applicable to Section 7.1(c)(v);
(iii) if the Drilex Value would otherwise be $16.00, either (1) the
certificate referred to in clause (ii) shall also state that, in the
signers' good faith belief, Revenue and EBITDA for the period from April
1, 1997 through May 31, 1997 (calculated for purposes of Section
2.1(e)(vii)) will exceed the thresholds applicable to Section
2.1(e)(vii) or (2) Drilex shall have advised Baker Hughes that the Board
of Directors of Drilex shall have elected not to delay the Closing Date
to determine the Monthly Statements for May 1997, in which case the
Drilex Value shall be $15.00 and the provisions of Section 2.1(e)(vii)
shall cease to apply; and
(iv) Baker Hughes shall not have notified Drilex within five
business days of its receipt of the certificate referred to in clauses
(ii) and (iii) that, in its good faith belief, it disagrees with any of
Drilex's good faith beliefs contained in such certificate.
If this condition is not satisfied or waived, then the Closing Date shall
not occur until such time as the Test Period includes May 1997.
6.3 Conditions of Obligations of Drilex. The obligation of Drilex to
effect the Merger is subject to the satisfaction of the following conditions,
any or all of which may be waived in whole or in part by Drilex:
(a) Representations and Warranties. Each of the representations and
warranties of Baker Hughes and Sub set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement
and (except to the extent such representations and warranties speak as of
an earlier date) as of the Closing Date as though made on and as of the
Closing Date, except where the failure to be so true and correct (without
giving effect to the individual materiality qualifications and thresholds
otherwise contained in Section 3.2 hereof) could not reasonably be expected
to have a Material Adverse Effect on Baker Hughes or as otherwise
contemplated by this Agreement.
(b) Performance of Obligations of Baker Hughes and Sub. Baker Hughes
and Sub shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the
Closing Date.
(c) Tax Opinion. Drilex shall have received an opinion, reasonably
satisfactory to Drilex, dated on or about the date that is two days prior
to the date the Proxy Statement is first mailed to stockholders of
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Drilex, a copy of which will be furnished to Baker Hughes, of Vinson &
Elkins L.L.P., counsel to Drilex, to the effect that, if the Merger is
consummated in accordance with the terms of this Agreement, the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, which opinion shall not have been
withdrawn or modified in any material respect. In rendering such opinion,
such counsel may receive and rely upon representations of fact
substantially similar to those referred to in the forms of certificates of
Drilex and Baker Hughes included in Schedules 3.1(u) and 3.2(t),
respectively.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of Drilex:
(a) by mutual written consent of Drilex and Baker Hughes, or by mutual
action of their respective Boards of Directors;
(b) by either Drilex or Baker Hughes if (i) the Merger shall not have
been consummated by September 16, 1997 (provided that the right to
terminate this Agreement under this clause (i) shall not be available to
any party whose failure to fulfill any covenant or agreement under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); (ii) any court of competent jurisdiction, or
some other governmental body or regulatory authority shall have issued an
order, decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and nonappealable; or (iii)
any required approval of the Drilex stockholders shall not have been
obtained by reason of the failure to obtain the required vote upon a vote
held at a duly held meeting of stockholders or at any adjournment thereof;
(c) by Baker Hughes if (i) for any reason Drilex fails to call and
hold a stockholders meeting for the purpose of voting upon this Agreement
and the Merger by September 1, 1997 (provided that the right to terminate
this Agreement under this Section 7.1(c) shall not be available to Baker
Hughes if Drilex would be entitled to terminate this Agreement under
Section 7.1(d) or if the S-4 did not become effective at least 45 days
prior to such date); (ii) Drilex shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by Drilex at or prior to such
date of termination (provided such breach has not been cured within 30 days
following receipt by Drilex of notice of such breach and is existing at the
time of termination of this Agreement); (iii) any representation or
warranty of Drilex contained in this Agreement shall not be true in all
material respects when made (provided such breach has not been cured within
30 days following receipt by Drilex of notice of such breach and is
existing at the time of termination of this Agreement) or on and as of the
time of such termination as if made on and as of such time (except to the
extent it relates to a particular date), except where the failure to be so
true and correct (without giving effect to the individual materiality
qualifications and thresholds otherwise contained in Section 3.1 hereof)
could not reasonably be expected to have a Material Adverse Effect; (iv)
after the date hereof there has been any Material Adverse Change with
respect to Drilex, except for general economic changes or changes that may
affect the industries of Drilex or any of its Subsidiaries generally
(provided that a decrease in Drilex's revenues or EBITDA shall not, without
any other facts that would constitute a Material Adverse Change, be deemed
a Material Adverse Change unless the next clause is applicable); (v) either
(x) Revenue for the period from April 1, 1997 to the end of the most recent
month for which the Monthly Statements have been finally determined
pursuant to Section 2.1 (other than April 1997) is less than $10,900,000
(if such month is May 1997) or $15,900,000 (if such month is June 1997) or
(y) EBITDA for the period from April 1, 1997 to the end of the most recent
month for which the Monthly Statements have been finally determined
pursuant to Section 2.1 (other than April 1997) is less than $1,200,000 (if
such month is May 1997) or $1,800,000 (if such month is
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June 1997); or (vi) Drilex gives Baker Hughes written notice (expressly
referencing this clause) stating that in Drilex's good faith belief, Drilex
expects the provisions of clause (v) to be applicable and stating good
faith expected amounts for Revenue and EBITDA for the periods from April 1,
1997 to May 31, 1997 and to June 30, 1997, in which case Baker Hughes may
terminate this Agreement by giving written notice to Drilex within seven
days of receipt of such notice from Drilex; provided, however, that if
Baker Hughes does not so terminate this Agreement, then the referenced
amounts in Section 7.1(c)(v) shall be deemed amended to such lower amounts,
the Drilex Value shall be $15.00 and the provisions of Section 2.1(e)(vii)
shall cease to apply;
(d) by Drilex if (i) Baker Hughes or Sub shall have failed to comply
in any material respect with any of the covenants or agreements contained
in this Agreement to be complied with or performed by it at or prior to
such date of termination (provided such breach has not been cured within 30
days following receipt by Baker Hughes of notice of such breach and is
existing at the time of termination of this Agreement); (ii) any
representation or warranty of Baker Hughes or Sub contained in this
Agreement shall not be true in all material respects when made (provided
such breach has not been cured within 30 days following receipt by Baker
Hughes of notice of such breach and is existing at the time of termination
of this Agreement) or on and as of the time of such termination as if made
on and as of such time (except to the extent it relates to a particular
date), except where the failure to be so true and correct (without giving
effect to the individual materiality qualifications and thresholds
otherwise contained in Section 3.2 hereof) could not reasonably be expected
to have a Material Adverse Effect; or (iii) after the date hereof there has
been any Material Adverse Change with respect to Baker Hughes, except for
general economic changes or changes that may affect the industries of Baker
Hughes or any of its Subsidiaries generally;
(e) by Baker Hughes if (i) the Board of Directors of Drilex shall have
withdrawn or modified, in any manner which is adverse to Baker Hughes, its
recommendation or approval of the Merger or this Agreement and the
transactions contemplated hereby or shall have resolved to do so, or (ii)
the Board of Directors of Drilex shall have recommended to the stockholders
of Drilex any Acquisition Proposal or any transaction described in the
definition of Acquisition Proposal, or shall have resolved to do so;
(f) by Drilex if Drilex shall exercise the right specified in clause
(ii) of Section 4.2(a); provided that Drilex may not effect such
termination pursuant to this Section 7.1(f) unless and until (i) Baker
Hughes receives at least three business days' prior written notice from
Drilex of its intention to effect such termination pursuant to this Section
7.1(f); (ii) during such period, Drilex shall, and shall cause its
respective financial and legal advisors to, consider any adjustment in the
terms and conditions of this Agreement that Baker Hughes may propose; and
(iii) Drilex pays the amounts required by Section 7.2 concurrently with
such termination; or
(g) by Baker Hughes if any Governmental Entity shall have issued any
Injunction or taken any other action permanently imposing, prohibiting or
compelling any of the limitations, prohibitions or compulsions set forth in
Section 6.2(d) and such Injunction or other action shall have become final
and nonappealable.
7.2 Effect of Termination.
(a) In the event of termination of this Agreement by any party hereto as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of any party hereto except (i)
with respect to this Section 7.2, the second and third sentences of Section 5.4,
and Section 8.1, (ii) to the extent that such termination results from the
willful breach (except as provided in Section 8.8) by a party hereto of any of
its representations or warranties or of any of its covenants or agreements
contained in this Agreement and (iii) from the date hereof until the Termination
Date (as defined in the Stockholder Agreement), Drilex shall not participate in
any transaction or take any action to approve any transaction that treats the
Option Shares (as defined in the Stockholder Agreement) less favorably than the
outstanding shares of Drilex Common Stock generally.
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(b) If Baker Hughes or Drilex terminates this Agreement pursuant to Section
7.1(e) or 7.1(f), Drilex shall, on the day of such termination, pay Baker Hughes
a fee of $4,000,000 in cash by wire transfer of immediately available funds to
an account designated by Baker Hughes.
(c) If this Agreement is terminated (A) by Baker Hughes or Drilex pursuant
to Section 7.1(b)(ii) or Section 7.1(g) as a result of an Injunction or other
action relating to any antitrust, trade, or regulatory laws or regulations of
any governmental, regulatory or administrative authority, agency or commission
(U.S. or foreign) ("Antitrust Laws") or (B) by Baker Hughes or Drilex pursuant
to Section 7.1(b)(i) at a time when the nonconsummation of the Mergers is a
result of the failure to satisfy the conditions set forth in Sections 6.1(c) or
(e) or Section 6.2(d) by reason, in any such case, of any Antitrust Law, and
Drilex shall not have failed to perform or observe in any material respect any
of its obligations under this Agreement (including, without limitation, Section
5.6), then Baker Hughes shall, on the day of such termination, pay to the
Company a fee of $4,000,000 in cash by wire transfer of immediately available
funds to an account designated by Drilex.
(d) In the event Baker Hughes receives any fee pursuant to Section 7.2(b),
Baker Hughes shall not assert or pursue in any manner, directly or indirectly,
any claim or cause of action against Drilex or any of its affiliates, officers
or directors based in whole or in part upon a breach of this Agreement by them
or their receipt, consideration, negotiation, recommendation, or approval of an
Acquisition Proposal or the exercise by Drilex of its right of termination under
Section 7.1(f).
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of Drilex, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Payment of Expenses. Each party hereto shall pay its own expenses
incident to preparing for entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby, whether or not the Merger
shall be consummated, except that the filing fees with respect to the Proxy
Statement and the S-4 shall be paid by Baker Hughes.
8.2 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective Time
and any liability for breach or violation thereof shall terminate absolutely and
be of no further force and effect at and as of the Effective Time, except for
the agreements contained in Sections 2.1, 2.2, 5.9 through 5.12 and 7.2 and
Article VIII, the agreements delivered pursuant to Section 5.7 and the
representations, covenants and agreements contained in Section 5.17. The
Confidentiality Agreement shall survive the execution and delivery of this
Agreement, and the provisions of the Confidentiality Agreement shall apply to
all information and material delivered hereunder.
8.3 Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid,
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and shall be deemed to be given, dated and received when so delivered
personally, telegraphed or telecopied or, if mailed, five business days after
the date of mailing to the following address or telecopy number, or to such
other address or addresses as such person may subsequently designate by notice
given hereunder:
(a) if to Baker Hughes or Sub, to:
Baker Hughes Incorporated
3900 Essex Lane
Houston, Texas 77027
Attention: Lawrence O'Donnell, III
Facsimile: 713-439-8472
with a copy to:
J. David Kirkland, Jr.
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
Facsimile: 713-229-1522
(b) if to Drilex, to:
Drilex International Inc.
15151 Sommermeyer
Houston, Texas 77041
Attention: John Forrest
Facsimile: 713-849-2390
with a copy to:
Scott N. Wulfe
Vinson & Elkins L.L.P.
1001 Fannin
2300 First City Tower
Houston, Texas 77002-6760
Facsimile: 713-758-2346
8.4 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the word "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation." The phrase
"made available" in this Agreement shall mean that the information referred to
has been made available if requested by the party to whom such information is to
be made available. Unless the context otherwise requires, "or" is disjunctive
but not necessarily exclusive, and words in the singular include the plural and
in the plural include the singular. Any representations and warranties that are
qualified by the phrase "to the best knowledge" of a party or phrases with
similar wording shall be interpreted to refer to the knowledge, after reasonable
investigation, of (i) in the case of Drilex, Messrs. Forrest, Broussard, Kerr,
Simmons and Baldwin and (ii) in the case of Baker Hughes, its executive
officers.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(together with the Confidentiality Agreement and any other documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties
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with respect to the subject matter hereto and (b) except as provided in Sections
5.7, 5.9, 5.11 and 5.17, is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
8.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
8.8 No Remedy in Certain Circumstances. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby, unless the foregoing inconsistent action or the failure to
take an action constitutes a material breach of this Agreement or makes the
Agreement impossible to perform in which case this Agreement shall terminate
pursuant to Article VII hereof. Except as otherwise contemplated by this
Agreement, to the extent that a party hereto took an action inconsistent
herewith or failed to take action consistent herewith or required hereby
pursuant to an order or judgment of a court or other competent authority, such
party shall not incur any liability or obligation unless such party breached its
obligations under Section 5.6 hereof or did not in good faith seek to resist or
object to the imposition or entering of such order or judgment.
8.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties, except that Sub may assign, in its sole discretion, any or all of its
rights, interests and obligations hereunder to any newly formed direct wholly
owned Subsidiary of Baker Hughes. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
8.10 Schedules. For purposes of this Agreement, Schedules shall mean the
Schedules contained in the Confidential Disclosure Schedule, dated the date
hereof, delivered in connection with this Agreement and initialed by the parties
hereto.
IN WITNESS WHEREOF, each party has caused this Agreement to be signed by
its respective officers thereunto duly authorized, all as of the date first
written above.
BAKER HUGHES INCORPORATED
By: /s/ ERIC L. MATTSON
----------------------------------
Eric L. Mattson
Senior Vice President and
Chief Financial Officer
BAKER HUGHES MERGER, INC.
By: /s/ ERIC L. MATTSON
----------------------------------
Eric L. Mattson
President
DRILEX INTERNATIONAL INC.
By: /s/ L. E. SIMMONS
----------------------------------
L. E. Simmons
Chairman of the Board
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APPENDIX B
STOCKHOLDER AGREEMENT
This Stockholder Agreement dated as of April 16, 1996 is between Baker
Hughes Incorporated, a Delaware corporation ("Baker Hughes") and DRLX Partners,
L.P., a Delaware limited partnership (the "Stockholder").
WHEREAS, Baker Hughes, Baker Hughes Merger, Inc., a Delaware corporation
and a wholly owned subsidiary of Baker Hughes ("Sub"), and Drilex International
Inc. ("Drilex"), a Delaware corporation, are entering into an Agreement and Plan
of Merger dated as of the date hereof (as amended from time to time pursuant
thereto, the "Merger Agreement");
WHEREAS, the Stockholder is the record and beneficial owner of 4,119,207
shares of Common Stock, par value $0.01 per share, of Drilex (the "Drilex Common
Stock") (such shares of Drilex Common Stock, together with any shares of capital
stock of the Drilex acquired by the Stockholder after the date hereof and during
the term of this Agreement, being collectively referred to herein as the
"Stockholder Shares");
WHEREAS, as a condition to the willingness of Baker Hughes to enter into
the Merger Agreement, and as an inducement to it to do so, the Stockholder has
agreed for the benefit of Baker Hughes as set forth in this Agreement; and
WHEREAS, the Board of Directors of Drilex has approved the Stockholder's
entering into this Agreement, the form of this Agreement and the transactions
contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Agreement, the parties
hereby agree as follows (terms defined in the Merger Agreement and used but not
defined herein having the meanings assigned to such terms in the Merger
Agreement):
ARTICLE I
THE OPTION
Section 1.01. Grant of the Option. The Stockholder hereby grants to Baker
Hughes an irrevocable option (the "Option") to purchase, on the terms and
subject to the conditions set forth herein, at a per share cash exercise price
of $16.00 (the "Exercise Price"), up to 1,665,839 Stockholder Shares, together
with (i) any additional shares of capital stock of the Drilex or any securities
or other property that the Stockholder is or becomes entitled to receive from
Drilex by reason of being a record holder of such number of Stockholder Shares,
(ii) any capital stock, securities or other property into which any such number
of Stockholder Shares shall have been or shall be converted or changed, whether
by amendment to the Certificate of Incorporation of the Company, merger,
consolidation, reorganization, capital change or otherwise, (iii) any additional
Drilex Common Stock acquired by the Stockholder as the result of the
Stockholder's exercising an option, warrant or other right to acquire shares of
capital stock from Drilex issued with respect to such number of Stockholder
Shares (all of the foregoing hereinafter collectively referred to as the
"Additional Stockholder Shares"), and (iv) any shares of capital stock,
securities or property referred to in clauses (i), (ii), and (iii) above that
are issued or issuable in respect of Additional Stockholder Shares (such
Stockholder Shares, the Additional Stockholder Shares and any shares, securities
or property referred to in clause (iv) above being collectively referred to
herein as the "Option Shares").
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Section 1.02. Exercise of the Option. (a) Subject to the conditions set
forth in Section 1.03, the Option may be exercised in whole at any time, and in
part from time to time, after the occurrence of a Triggering Event but prior to
the Termination Date.
(b) For purposes hereof, a "Triggering Event" means:
(i) the termination of the Merger Agreement pursuant to Section 7.1(e)
or Section 7.1(f), or pursuant to Sections 7.1(b) (i) or (iii) or 7.1(c)
(i) or (ii) after the public announcement of, or the disclosure to the
Board of Directors of Drilex of, an Acquisition Proposal; or
(ii) the occurrence of any event giving Baker Hughes the right to
terminate the Merger Agreement pursuant to Section 7.1(e) thereof.
For purposes hereof, the "Termination Date" means the first to occur of (1) the
Effective Time of the Merger and (2) the close of business on the date 45 days
after the termination of the Merger Agreement, provided such date shall be
extended (but in no event beyond October 31, 1997) if an Acquisition Proposal is
pending until the close of business on the third business day after the
Stockholder gives Baker Hughes notice of the consummation, withdrawal or
termination of the Acquisition Proposal if at such time no other Acquisition
Proposal is pending.
(c) In the event Baker Hughes wishes to exercise the Option, Baker Hughes
will send a written notice to the Stockholder specifying a place, date (not less
than two business days nor more than 10 calendar days after the date such notice
is given) and time for the closing of the purchase of such Option Shares (the
"Closing").
(d) The purchase price payable to the Stockholder with respect to any
exercise of the Option will be the product of (i) the Exercise Price and (ii)
the number of Option Shares to be purchased upon such exercise.
(e) In the event of any change in the number of issued and outstanding
shares of Drilex Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, conversion, exchange of shares or other change in
the corporate or capital structure of Drilex, the number and kind of shares
subject to the Option and the Exercise Price shall be adjusted appropriately.
If, on or after the date hereof, Drilex should declare or pay any cash or stock
dividend or other distribution or issue any rights with respect to the Drilex
Common Stock, payable or distributable to stockholders of record on a date prior
to the transfer to the name of Baker Hughes or its nominee on Ship's stock
transfer books of the Option Shares, and the Option is exercised, then (a) the
exercise price per Option Share will be reduced by the amount of any such cash
dividend or cash distribution, and (b) the whole of any such non-cash dividend,
distribution or right which would have been payable with respect to each Option
Share purchased by Baker Hughes if such shares were outstanding on the record
date for such distribution will be promptly remitted and transferred by the
Stockholder to Baker Hughes. Upon exercise of the Option, to the extent
consistent with law, pending such remittance, Baker Hughes will be entitled to
all rights and privileges as owner of any such non-cash dividend, distribution
or right with respect to each Option Share purchased.
Section 1.03. Closing. (a) At the Closing, the Stockholder will deliver to
Baker Hughes a certificate or certificates representing the Option Shares being
purchased, duly endorsed for transfer or accompanied by appropriate stock powers
duly executed in blank, and Baker Hughes will pay the purchase price in
immediately available funds by wire transfer to an account designated by the
Stockholder. Transfer taxes, if any, imposed as a result of the exercise of the
Option and the transfer of any Option Shares will be paid by the Stockholder.
(b) The obligations of Baker Hughes and the Stockholder to consummate the
purchase and sale of the Option Shares pursuant to this Article I will be
subject to the fulfillment of the following conditions:
(i) The expiration or termination of the waiting period applicable to
the consummation of such transactions under the HSR Act; and
(ii) Neither of the parties hereto shall be subject to any order of
injunction of a court of competent jurisdiction which prohibits the
consummation of such transactions.
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Each of the parties will promptly make, and will use all reasonable efforts to
cause each of their respective affiliates to make, all such filings and take all
such actions as may be reasonably required in order to permit the lawful
exercise of the Option, as promptly as possible. The date of any Closing may be
extended, if required, to the next business day following (1) the date that any
applicable waiting period under the HSR Act shall have expired or been earlier
terminated (but not beyond August 31, 1997 unless Drilex shall not have complied
with its obligations under the Merger Agreement with respect thereto), (2) the
date that all other necessary governmental approvals for the sale of the Option
Shares for which the Option shall have been exercised shall have been obtained,
and (3) the satisfaction of any other condition to the Closing; provided that
any delay pursuant to clauses (2) or (3) shall not exceed 10 business days.
Section 1.04. Registration Rights Agreement. If Baker Hughes purchases any
Option Shares, the Option Shares so purchased shall be "Registrable Securities"
and Baker Hughes shall become a "Holder" for purposes of the Restated
Registration Rights Agreement dated as of June 14, 1996 among Drilex and the
stockholders party thereto, and Baker Hughes shall be entitled to the benefits
of such Agreement notwithstanding any restrictions on transfer or assignment
contained in Section 11(j) thereof. This Agreement shall, to the extent
necessary, be deemed an amendment to such registration rights agreement to
effectuate the provisions of this Section.
ARTICLE II
COVENANTS OF THE STOCKHOLDER
Section 2.01. Agreement to Vote. At any meeting of the stockholders of
Drilex held prior to the earlier of (i) the Effective Time of the Merger and
(ii) the termination of the Merger Agreement (such earlier time being herein
referred to as the "Voting Termination Date"), however called, and at every
adjournment or postponement thereof prior to the Voting Termination Date, or in
connection with any written consent of the stockholders of Drilex given prior to
the Voting Termination Date, the Stockholder shall vote or cause to be voted the
Stockholder Shares in favor of the approval of the Merger and each of the other
transactions contemplated by the Merger Agreement and in favor of the approval
and adoption of the Merger Agreement, and any actions required in furtherance
hereof and thereof. The Stockholder shall not enter into any agreement or
understanding with any person prior to the Voting Termination Date, directly or
indirectly, to vote, grant any proxy or give instructions with respect to the
voting of the Stockholder Shares in any manner inconsistent with the preceding
sentence.
Section 2.02. Proxies and Voting Agreements. The Stockholder hereby revokes
any and all previous proxies granted with respect to matters set forth in
Section 2.01. Prior to the Voting Termination Date, the Stockholder shall not,
directly or indirectly, except as contemplated hereby, grant any proxies or
powers of attorney with respect to matters set forth in Section 2.01, deposit
any of the Stockholder Shares or enter into a voting agreement with respect to
any of the Stockholder Shares.
Section 2.03. No Solicitation.
(a) From and after the date hereof until the termination of the Merger
Agreement, the Stockholder will not, and will not authorize or permit any of its
officers, directors, employees, partners, agents, affiliates or other
representatives (collectively, "Stockholder Representatives") to, directly or
indirectly, solicit or encourage (including by way of providing information) any
prospective acquiror or the invitation or submission of any inquiries, proposals
or offers or any other efforts or attempts that constitute, or may reasonably be
expected to lead to, an Acquisition Proposal.
(b) The Stockholder shall immediately cease and cause to be terminated any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Stockholder or any
Stockholder Representatives with respect to any Acquisition Proposal existing on
the date hereof.
(c) Prior to the termination of the Merger Agreement, the Stockholder will
promptly notify Baker Hughes of any requests for information made to the
Stockholder or any Stockholder Representative or the
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receipt of any Acquisition Proposal made to the Stockholder or any Stockholder
Representative, including the identity of the person or group engaging in such
discussions or negotiations, requesting such information or making such
Acquisition Proposal, and the material terms and conditions of any Acquisition
Proposal.
(d) Prior to the termination of the Merger Agreement, the Stockholder shall
not enter into any agreement with any person that provides for, or in any way
facilitates, an Acquisition Proposal.
(e) The provisions of this Section 2.03 do not prohibit any Stockholder
Representative who is also a Drilex Representative from taking actions permitted
by Section 4.2 of the Merger Agreement.
Section 2.04. Transfer of Option Shares by the Stockholder. Prior to the
Termination Date, the Stockholder shall not (a) subject any of the Option Shares
to, or suffer to exist on any of the Option Shares, any lien, pledge, security
interest, charge or other encumbrance or restriction, other than pursuant to
this Agreement or the terms of the existing partnership agreement of the
Stockholder (the "Partnership Agreement"), or (b) sell, transfer, assign, convey
or otherwise dispose of any of the Option Shares (including any such action by
operation of law), other than a disposition by operation of law pursuant to the
Merger. Prior to the record date for the Drilex stockholder meeting to vote on
the Merger Agreement, the Stockholder will not sell, transfer, assign, convey or
otherwise dispose of any of the Stockholder Shares (including any such action of
operation of law).
Section 2.05. Other Actions. Prior to the Termination Date, the Stockholder
shall not take any action that would in any way restrict, limit, impede or
interfere with the performance of its obligations hereunder or the transactions
contemplated hereby or by the Merger Agreement.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND ADDITIONAL COVENANTS
OF THE STOCKHOLDER
The Stockholder represents, warrants and covenants to Baker Hughes that:
Section 3.01. Ownership. The Stockholder is as of the date hereof the
beneficial and record owner of the Stockholder Shares, the Stockholder has the
sole right to vote the Stockholder Shares and there are no restrictions on
rights of disposition or other lien, pledge, security interest, charge or other
encumbrance or restriction pertaining to the Stockholder Shares other than the
terms of the Partnership Agreement. Except as provided in the terms of the
Partnership Agreement, none of the Stockholder Shares is subject to any voting
trust or other agreement, arrangement or restriction with respect to the voting
of the Stockholder Shares, and no proxy, power of attorney or other
authorization has been granted with respect to any of the Stockholder Shares.
Upon delivery of any Option Shares upon exercise of the Option, Baker Hughes
will acquire good title to such shares, free and clear of all liens, pledges,
security interests, charges or other encumbrances or restrictions.
Section 3.02. Authority and Non-Contravention. The Stockholder is a limited
partnership duly formed and validly existing under the laws of the State of
Delaware. The Stockholder has the right, power and authority, and the
Stockholder has been duly authorized by all necessary action (including
consultation, approval or other action by or with any other person), to execute,
deliver and perform this Agreement and consummate the transactions contemplated
hereby. Such actions by the Stockholder (a) require no action by or in respect
of, or filing with, any Governmental Entity with respect to the Stockholder,
other than any required filings under Section 13 of the Exchange Act or under
the HSR Act, and (b) do not and will not contravene or constitute default under
any provision of applicable law or regulation or any agreement, judgment,
injunction, order, decree or other instrument binding on the Stockholder or
result in the imposition of any lien, pledge, security interest, charge or other
encumbrance or restriction on any of the Stockholder Shares (other than as
provided in this Agreement with respect to Stockholder Shares).
Section 3.03. Binding Effect. This Agreement has been duly executed and
delivered by the Stockholder and is the valid and binding agreement of the
Stockholder, enforceable against the Stockholder in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, moratorium or
other similar
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laws relating to creditors' rights generally and by equitable principles to
which the remedies of specific performance and injunctive and similar forms of
relief are subject.
Section 3.04. Total Shares. The Stockholder Shares are the only shares of
capital stock of Drilex owned beneficially or of record as of the date hereof by
the Stockholder, and the Stockholder does not have any option to purchase or
right to subscribe for or otherwise acquire any securities of Drilex and has no
other interest in or voting rights with respect to any other securities of
Drilex.
Section 3.05. Finder's Fees. No investment banker, broker or finder is
entitled to a commission or fee from Drilex, Baker Hughes or Sub in respect of
this Agreement based upon any arrangement or agreement made by or on behalf of
the Stockholder, except as otherwise provided in the Merger Agreement.
Section 3.06. Reasonable Efforts. Prior to the Termination Date, the
Stockholder shall use reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with Baker
Hughes in doing, all things necessary, proper or advisable to consummate and
make effective the Merger and the other transactions contemplated by the Merger
Agreement and this Agreement. Subject to Section 5.17 of the Merger Agreement,
Baker Hughes shall use reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
Stockholder in doing, all things necessary, proper or advisable to allow the
Stockholder to sell publicly shares of Baker Hughes Common Stock received in the
Merger without any unreasonable delay or restrictions.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF BAKER HUGHES
Baker Hughes represents, warrants and covenants to the Stockholder that:
Section 4.01. Corporate Power and Authority. Baker Hughes has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution, delivery and performance by Baker Hughes
of this Agreement and the consummation by Baker Hughes of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Baker Hughes.
Section 4.02. Binding Effect. This Agreement has been duly executed and
delivered by Baker Hughes and is a valid and binding agreement of Baker Hughes,
enforceable against Baker Hughes in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights generally and by equitable principles
to which the remedies of specific performance and injunctive and similar forms
of relief are subject.
ARTICLE V
MISCELLANEOUS
Section 5.01. Expenses. Each party hereto shall pay its own expenses
incident to preparing for entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby.
Section 5.02. Further Assurances. From time to time, at the request of the
other party, each party shall execute and deliver or cause to be executed and
delivered such additional documents and instruments and take all such further
action as may be necessary or desirable to consummate the transactions
contemplated by this Agreement.
Section 5.03. Specific Performance. The Stockholder agrees that Baker
Hughes would be irreparably damaged if for any reason the Stockholder fails to
perform any of the Stockholder's obligations under this Agreement, and that
Baker Hughes would not have an adequate remedy at law for money damages in such
event. Accordingly, Baker Hughes shall be entitled to seek specific performance
and injunctive and other equitable relief to enforce the performance of this
agreement by the Stockholder. This provision is without prejudice to any other
rights that Baker Hughes may have against the Stockholder for any failure to
perform its obligations under this Agreement.
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Section 5.04. Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed or
telecopied or sent by certified or registered mail, postage prepaid, and shall
be deemed to be given, dated and received when so delivered personally,
telegraphed or telecopied or, if mailed, five business days after the date of
mailing to the following address or telecopy number, or to such other address or
addresses as such person may subsequently designate by notice given hereunder:
(a) if to Baker Hughes or Sub, to:
Baker Hughes Incorporated
3900 Essex Lane
Houston, Texas 77027
Attention: Lawrence O'Donnell, III
Facsimile: 713-439-8472
with a copy to:
J. David Kirkland, Jr.
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
Facsimile: 713-229-1522
(b) if to Stockholder, to:
DRLX Partners, L.P.
c/o SCF Partners, L.P.
6600 Texas Commerce Tower
Houston, Texas 77002
Attention: L. E. Simmons
Facsimile: 713-227-7850
with a copy to:
Curtis W. Huff
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010
Facsimile: 713-651-5246
Section 5.06. Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the word "include," "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation." Unless the context otherwise requires, "or" is disjunctive but not
necessarily exclusive, and words in the singular include the plural and in the
plural include the singular. The term "person" is to be interpreted broadly to
include any corporation, partnership, trust, limited liability company,
government or other entity and any group (as used with respect to Section 13(d)
of the Exchange Act).
Section 5.07. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
Section 5.08. Entire Agreement; No Third Party Beneficiaries. This
Agreement (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties
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with respect to the subject matter hereto and (b) is not intended to confer upon
any person other than the parties hereto any rights or remedies hereunder.
Section 5.09. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
Section 5.10. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) except to the partners of the
Stockholder as permitted herein without the prior written consent of the other
party. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns. All costs and expenses incurred in connection with this
Agreement shall be paid by the party incurring such cost or expense.
Section 5.11. Amendments; Termination. This Agreement may not be modified,
amended, altered or supplemented, except upon the execution and delivery of a
written agreement executed by the parties hereto.
Section 5.12. Certain Events. (a) The Stockholder agrees that this
Agreement and the obligations hereunder shall attach to the Stockholder Shares
beneficially owned by such Stockholder and shall be binding upon any person to
which legal or beneficial ownership of such shares shall pass, whether by
operation of law or otherwise; provided that if the Stockholder distributes any
Stockholder Shares other than Option Shares to its limited partners, then
Section 2.01 only shall be binding on such limited partners and if a limited
partner publicly sells such shares, this Agreement shall cease to apply to such
shares.
(b) If any Stockholder Shares other than Option Shares are distributed to
the limited partners of the Stockholder prior to 30 days prior to the Effective
Time, no limited partner who beneficially owns shares of Drilex Common Stock
(excluding Option Shares retained by the Stockholder) representing less than 10%
of the outstanding Drilex Common Stock shall be treated as an Affiliate for
purposes of Section 5.7 of the Merger Agreement.
Section 5.13. Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid but if any provision or portion of any provision of this
agreement is held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision, and this Agreement will be reformed, construed and
enforced as if such invalid, illegal or unenforceable provision or portion of
any provision had never been contained herein. The parties shall endeavor in
good faith negotiations to replace any invalid, illegal or unenforceable
provision with a valid provision the effects of which come as close as possible
to those of such invalid, illegal or unenforceable provision.
Section 5.14. Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements, in addition to any other relief to which such party may be
entitled.
B-7
<PAGE> 140
IN WITNESS WHEREOF, Baker Hughes and the Stockholder have caused this
Agreement to be duly executed as of the day and year first above written.
DRLX PARTNERS, L.P.
By: SCF Partners, L.P., general
partner
By: L. E. Simmons & Associates,
Incorporated, general
partner
By /s/ L. E. SIMMONS
-----------------------------------
L. E. Simmons
President
BAKER HUGHES INCORPORATED
By /s/ ERIC L. MATTSON
-----------------------------------
Eric L. Mattson
Senior Vice President and
Chief Financial Officer
Consented to for purposes of Section
1.04:
DRILEX INTERNATIONAL INC.
By: /s/ L. E. SIMMONS
--------------------------------
L. E. Simmons
Chairman of the Board
B-8
<PAGE> 141
APPENDIX C
[MERRILL LYNCH LETTERHEAD]
April 16, 1997
Board of Directors
Drilex International Inc.
15151 Sommermeyer
Houston, Texas 77041
Gentlemen:
Drilex International Inc. (the "Company"), Baker Hughes Incorporated (the
"Acquiror") and Baker Hughes Merger, Inc., a newly formed, wholly owned
subsidiary of the Acquiror (the "Acquisition Sub"), propose to enter into an
Agreement and Plan of Merger (the "Agreement") pursuant to which the Acquisition
Sub will be merged with the Company in a transaction (the "Merger") in which
each outstanding share of the Company's common stock, par value $.01 per share
(the "Company Shares"), will be converted into the right to receive $15.00 in
value of the common stock of the Acquiror, par value $1.00 per share (the
"Acquiror Shares"), subject to the opportunity to receive $16.00 per share in
the event that the Company's revenues and EBITDA, as adjusted, equal or exceed
the thresholds set forth in the Agreement during the time periods specified in
the Agreement (the "Consideration"). We understand that DRLX Partners, L.P.,
owner of approximately 62% of the Company Shares will, concurrently with the
execution of the Agreement, enter into an agreement (the "Stockholder
Agreement") granting the Acquiror the option to purchase Company Shares
representing 25% of the outstanding Company Shares and obligating DRLX Partners,
L.P. to vote in favor of the Merger. The terms and conditions of the Merger are
more fully described in the Agreement.
You have asked us whether, in our opinion, the Consideration is fair from a
financial point of view to the holders of the Company Shares, other than the
Acquiror and its affiliates.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror which we deemed to be relevant;
2. Reviewed certain information, including financial forecasts, relating to
the business earnings, cash flow, assets, liabilities and prospects of
the Company and the Acquiror, furnished to us by the Company and the
Acquiror, respectively;
3. Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning their
respective businesses and prospects before and after giving effect to
the Merger;
4. Reviewed the market prices and valuation multiples for the Company
Shares and the Acquiror Shares and compared them with those of certain
publicly traded companies which we deemed to be relevant;
5. Reviewed the results of operations of the Company and the Acquiror and
compared them with those of certain companies which we deemed to be
relevant;
6. Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions which we deemed to be relevant;
7. Reviewed the potential pro forma impact of the Merger;
8. Reviewed the Agreement and the Stockholder Agreement; and
9. Reviewed such other financial studies and analyses and took into account
such other matters as we deemed necessary, including our assessment of
general economic, market and monetary conditions.
C-1
<PAGE> 142
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us or
publicly available or discussed with or reviewed by or for us and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or been furnished with any such
evaluation or appraisal. In addition, we have not conducted any physical
inspection of the properties or facilities of the Company or the Acquiror. With
respect to the financial forecast information furnished to or discussed with us
by the Company or the Acquiror, we have assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgment of the
Company's or the Acquiror's management as to the expected future financial
performance of the Company or the Acquiror, as the case may be.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on the date hereof.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or any
part of the Company.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We are currently engaged by the Acquiror as financial advisor in
connection with the Acquiror's pending merger with Petrolite Corporation and
have, in the past, provided financial advisory and financing services to the
Company and the Acquiror and have received fees for the rendering of such
services. We have no reason to believe that we will not continue to provide such
services to the Acquiror in the future. In addition, in the ordinary course of
business, we may actively trade the Company Shares and other securities of the
Company, as well as the Acquiror Shares and other securities of the Acquiror,
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the proposed Merger.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration is fair from a financial point of view
to the holders of the Company Shares, other than the Acquiror and its
affiliates.
Very truly yours,
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
By: /s/ WILLIAM C. MONTGOMERY
-----------------------------------
William C. Montgomery
Director
Investment Banking Group
C-2
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Baker Hughes' Restated Certificate of Incorporation contains a provision
that eliminates the personal liability of a director to Baker Hughes and its
stockholders for monetary damages for breach of his fiduciary duty as a director
to the extent currently allowed under the Delaware General Corporation Law. If a
director were to breach such duty in performing his duties as a director,
neither Baker Hughes nor its stockholders could recover monetary damages from
the director, and the only course of action available to Baker Hughes'
stockholders would be equitable remedies, such as an action to enjoin or rescind
a transaction involving a breach of fiduciary duty. To the extent certain claims
against directors are limited to equitable remedies, the provision in Baker
Hughes' Restated Certificate of Incorporation may reduce the likelihood of
derivative litigation and may discourage stockholders or management from
initiating litigation against directors for breach of their fiduciary duty.
Additionally, equitable remedies may not be effective in many situations. If a
stockholder's only remedy is to enjoin the completion of the Board of Directors'
action, this remedy would be ineffective if the stockholder does not become
aware of a transaction or event until after it has been completed. In such a
situation, it is possible that the stockholders and Baker Hughes would have no
effective remedy against the directors. Under Baker Hughes' Restated Certificate
of Incorporation, liability for monetary damages remains for (i) any breach of
the duty of loyalty to Baker Hughes or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) payment of an improper dividend or improper repurchase of Baker
Hughes' stock under Section 174 of the Delaware General Corporation Law, or (iv)
any transaction from which the director derived an improper personal benefit.
Baker Hughes' Restated Certificate of Incorporation further provides that in the
event the Delaware General Corporation Law is amended to allow the further
elimination or limitation of the liability of directors, then the liability of
Baker Hughes' directors shall be limited or eliminated to the fullest extent
permitted by the amended Delaware General Corporation Law.
Under Article III of Baker Hughes' By-laws as currently in effect and an
indemnification agreement with Baker Hughes' officers and directors (the
"Indemnification Agreement"), each person who is or was a director or officer of
Baker Hughes or a subsidiary of Baker Hughes, or who serves or served any other
enterprise or organization at the request of Baker Hughes or a subsidiary of
Baker Hughes, shall be indemnified by Baker Hughes to the full extent permitted
by the Delaware General Corporation Law.
Under such law, to the extent that such person is successful on the merits
in defense of a suit or proceeding brought against him by reason of the fact
that he is or was a director or officer of Baker Hughes, or serves or served any
other enterprise or organization at the request of Baker Hughes, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred in connection with such action.
Under such law, if unsuccessful in defense of a third-party civil suit or a
criminal suit, or if such suit is settled, such a person shall be indemnified
against both (i) expenses, including attorneys' fees, and (ii) judgments, fines
and amounts paid in settlement if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of Baker
Hughes, and, with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of Baker
Hughes, or if such a suit is settled, such a person shall be indemnified under
such law only against expenses (including attorneys' fees) actually and
reasonably incurred in the defense or settlement of such suit if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of Baker Hughes, except that if such person is adjudged to be
liable in such a suit for negligence or misconduct in the performance of his
duty to Baker Hughes, he cannot be made whole for expenses unless the court
determines that he is fairly and reasonably entitled to indemnity for such
expenses.
The Indemnification Agreement provides directors and officers with specific
contractual assurance that indemnification and advancement of expenses will be
available to them regardless of any amendments to or
II-1
<PAGE> 144
revocation of the indemnification provisions of Baker Hughes' By-laws. The
Indemnification Agreement provides for indemnification of directors and officers
against both stockholder derivative claims and third-party claims. Sections
145(a) and 145(b) of the Delaware General Corporation Law, which grant
corporations the power to indemnify directors and officers, specifically
authorize lesser indemnification in connection with derivative claims than in
connection with third-party claims. The distinction is that Section 145(a),
concerning third-party claims, authorizes expenses and judgments and amounts
paid in settlement (as is provided in the Indemnification Agreement), but
Section 145(b), concerning derivative suits, generally authorizes only
indemnification of expenses. However, Section 145(f) expressly provides that the
indemnification and advancement of expenses provided by or granted pursuant to
the subsections of Section 145 shall not be exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any agreement. No Delaware case directly answers the question whether
Delaware's public policy would support this aspect of the Indemnification
Agreement under the authority of Section 145(f), or would cause its invalidation
because it does not conform to the distinctions contained in Sections 145(a) and
145(b).
Pursuant to the Indemnification Agreement, Baker Hughes has agreed to
provide, at all times during the two-year period following a "change in control"
(as defined in the Indemnification Agreement) of Baker Hughes, irrevocable
letters of credit in an aggregate amount not less than $25,000,000 for the
benefit of the officers and directors of Baker Hughes to secure its obligations
under the Indemnification Agreement.
Delaware corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and officers. Baker Hughes
currently has in effect a directors' and officers' liability insurance policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger among Baker Hughes
Incorporated, Baker Hughes Merger, Inc., and Drilex
International Inc., dated as of April 16, 1997 (included as
Appendix A to the Proxy Statement/Prospectus that
constitutes a part of this Registration Statement).
4.1 Rights of Holders of Baker Hughes' Long-Term Debt. Hughes
Incorporated has no long-term debt instrument with regard to
which the securities authorized thereunder equal or exceed
10% of the total assets of Baker Hughes and its subsidiaries
on a consolidated basis. Baker Hughes agrees to furnish a
copy of its long-term debt instruments to the SEC upon
request.
4.2 Restated Certificate of Incorporation (filed as Exhibit 3.1
to Annual Report of Baker Hughes Incorporated on Form 10-K
for the year ended September 30, 1993 and incorporated
herein by reference).
4.3 By-Laws (filed as Exhibit 3.2 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
September 30, 1992 and incorporated herein by reference).
4.4 Certificate of Designation of Series L Preferred Stock of
Baker Hughes Incorporated (filed as Exhibit 4.4 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the
year ended September 30, 1996 and incorporated herein by
reference).
5.1* Opinion of Baker & Botts, L.L.P. with respect to legality of
securities.
8.1* Opinion of Vinson & Elkins L.L.P. with respect to certain
tax matters.
23.1* Consent of Deloitte & Touche LLP with respect to Baker
Hughes Incorporated.
23.2* Consent of Deloitte & Touche LLP with respect to Drilex
International Inc.
23.3 Consent of Baker & Botts, L.L.P (contained in Exhibit 5.1).
23.4 Consent of Vinson & Elkins L.L.P. (contained in Exhibit
8.1).
</TABLE>
II-2
<PAGE> 145
24.1 Powers of Attorney (See page II-4).
99.1* Form of Proxy Card of Drilex International Inc.
99.2* Chairman's Letter and Notice for the Special Meeting of
Stockholders of Drilex International Inc. to be held
on July 14, 1997.
* 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 reports pursuant to section 13(a) or section 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.
(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 for 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
Items 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.
II-3
<PAGE> 146
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Max L. Lukens, Eric L. Mattson and Lawrence
O'Donnell, III and each of them, each of whom may act without joinder of the
other, his or her true and lawful attorneys-in-fact 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.
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 June 11, 1997.
BAKER HUGHES INCORPORATED
By: /s/ LAWRENCE O'DONNELL,
III
----------------------------------
Lawrence O'Donnell, III
Vice President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <C>
/s/ MAX L. LUKENS President, Chief Executive Officer June 11, 1997
- ----------------------------------------------------- and Chairman of the Board (principal
Max L. Lukens executive officer)
/s/ ERIC L. MATTSON Senior Vice President and Chief June 11, 1997
- ----------------------------------------------------- Financial Officer (principal
Eric L. Mattson financial officer)
/s/ JAMES E. BRAUN Controller (principal accounting June 11, 1997
- ----------------------------------------------------- officer)
James E. Braun
/s/ LESTER M. ALBERTHAL, JR. Director June 11, 1997
- -----------------------------------------------------
Lester M. Alberthal, Jr.
/s/ VICTOR G. BEGHINI Director June 11, 1997
- -----------------------------------------------------
Victor G. Beghini
/s/ JACK S. BLANTON Director June 11, 1997
- -----------------------------------------------------
JACK S. BLANTON
/s/ EUNICE M. FILTER Director June 11, 1997
- -----------------------------------------------------
Eunice M. Filter
/s/ JOE B. FOSTER Director June 11, 1997
- -----------------------------------------------------
Joe B. Foster
</TABLE>
II-4
<PAGE> 147
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <C>
/s/ RICHARD D. KINDER Director June 11, 1997
- -----------------------------------------------------
Richard D. Kinder
/s/ JOHN F. MAHER Director June 11, 1997
- -----------------------------------------------------
John F. Maher
/s/ JAMES F. MCCALL Director June 11, 1997
- -----------------------------------------------------
James F. McCall
/s/ H. JOHN RILEY, JR. Director June 11, 1997
- -----------------------------------------------------
H. John Riley, Jr.
/s/ DONALD C. TRAUSCHT Director June 11, 1997
- -----------------------------------------------------
Donald C. Trauscht
</TABLE>
II-5
<PAGE> 148
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger among Baker Hughes
Incorporated, Baker Hughes Merger, Inc., and Drilex
International Inc., dated as of April 16, 1997 (included as
Appendix A to the Proxy Statement/Prospectus that
constitutes a part of this Registration Statement).
4.1 Rights of Holders of Baker Hughes' Long-Term Debt. Hughes
Incorporated has no long-term debt instrument with regard to
which the securities authorized thereunder equal or exceed
10% of the total assets of Baker Hughes and its subsidiaries
on a consolidated basis. Baker Hughes agrees to furnish a
copy of its long-term debt instruments to the SEC upon
request.
4.2 Restated Certificate of Incorporation (filed as Exhibit 3.1
to Annual Report of Baker Hughes Incorporated on Form 10-K
for the year ended September 30, 1993 and incorporated
herein by reference).
4.3 By-Laws (filed as Exhibit 3.2 to Annual Report of Baker
Hughes Incorporated on Form 10-K for the year ended
September 30, 1992 and incorporated herein by reference).
4.4 Certificate of Designation of Series L Preferred Stock of
Baker Hughes Incorporated (filed as Exhibit 4.4 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the
year ended September 30, 1996 and incorporated herein by
reference).
5.1* Opinion of Baker & Botts, L.L.P. with respect to legality of
securities.
8.1* Opinion of Vinson & Elkins L.L.P. with respect to certain
tax matters.
23.1* Consent of Deloitte & Touche LLP with respect to Baker
Hughes Incorporated.
23.2* Consent of Deloitte & Touche LLP with respect to Drilex
International Inc.
23.3 Consent of Baker & Botts, L.L.P (contained in Exhibit 5.1).
23.4 Consent of Vinson & Elkins L.L.P. (contained in Exhibit
8.1).
24.1 Powers of Attorney (See page II-4).
99.1* Form of proxy card of Drilex International Inc.
99.2* Chairman's Letter and Notice for the Special Meeting of
Stockholders of Drilex International Inc. to be held on July
14, 1997.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[Baker & Botts, L.L.P. Letterhead]
June 11, 1997
Baker Hughes Incorporated
3900 Essex Lane, Suite 1200
P. O. Box 4740
Houston, Texas 77210-4740
Gentlemen:
As set forth in the Registration Statement (the "Registration
Statement") on Form S-4 to be filed by Baker Hughes Incorporated, 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 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 of Common
Stock subject to the Registration Statement (the "Shares") are to be issued
pursuant to the terms and provisions of an Agreement and Plan of Merger dated
as of April 16, 1997 among the Company, Baker Hughes Merger, Inc. and Drilex
International Inc. Pursuant to Rule 457 under the Act, the Registration
Statement relates to shares of Common Stock with a proposed maximum offering
price of up to $110 million. 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 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.
Based on our examination as aforesaid, 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
<PAGE> 2
Baker Hughes Incorporated -2- June 11, 1997
2. When any necessary approval of the stockholders of the Company
has been obtained, 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.
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 Prospectus/Proxy Statement included in
the Registration Statement.
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE> 1
EXHIBIT 8.1
[VINSON & ELKINS LETTERHEAD]
June 11, 1997
Drilex International Inc.
1515 Sommermeyer
Houston, Texas 77041
Gentlemen:
You have requested our opinion with respect to certain federal income
tax consequences of the merger of Baker Hughes Merger, Inc. ("Merger Sub"), a
direct wholly owned subsidiary of Baker Hughes Incorporated ("Baker Hughes")
with and into Drilex International Inc. ("Drilex") as hereinafter described
(the "Merger"). Our opinion is based upon (i) the Agreement and Plan of Merger
dated April 16,1997 among Baker Hughes, Merger Sub and Drilex (the "Merger
Agreement")1/, (ii) the facts set forth in the Registration Statement (the
"Registration Statement") filed with the Securities and Exchange Commission
("SEC") in connection with the Merger and (iii) the representations set forth
in the Certificates of Drilex and Baker Hughes dated June 11, 1997 (the
"Certificates").
THE MERGER
The Merger Agreement provides for the merger of Merger Sub with and into
Drilex in accordance with the Delaware General Corporation Law. As a result of
the Merger, the separate corporate existence of Merger Sub shall cease and
Drilex shall continue as the Surviving Corporation and succeed to all of the
assets and obligations of Merger Sub. At the Effective Time, each outstanding
share of Drilex Common Stock (other than shares owned by Drilex as treasury
stock, all of which will be canceled) will be converted into the number of
shares of Baker Hughes Common Stock having a value equal to the Drilex Value.
No fraction of a share of Baker Hughes Common Stock shall be issued, but in
lieu thereof each holder of shares who would otherwise be entitled to a
fraction of a share of Baker Hughes Common Stock shall be paid an amount in
cash equal to such fractional share multiplied by the Baker Hughes Average
Closing Price. No dissenters' rights are provided to the holders of shares of
Drilex Common Stock. Each share of common stock of Merger
- --------------------
(1/) Capitalized terms used but not defined herein have the meanings ascribed
to them in the Merger Agreement.
<PAGE> 2
Drilex International Inc.
Page 2
June 11, 1997
Sub outstanding immediately prior to the Effective Time shall be converted into
one share of common stock of the Surviving Corporation.
The terms of the Merger Agreement were the result of arm's-length
negotiations between representatives of Drilex and Baker Hughes. The business
purposes for the Merger are set forth in the Proxy Statement/Prospectus.
STATEMENT OF AUTHORITIES
Section 368(a)(1)(A) of the Code defines a "reorganization" to include a
statutory merger or consolidation. Section 368(a)(2)(E) provides that a
transaction otherwise qualifying under section 368(a)(1)(A) shall not be
disqualified by reason of the fact that stock of a corporation (referred to as
the "controlling corporation") which before the merger was in control of the
merged corporation is used in the transaction, if (i) after the transaction,
the corporation surviving the merger holds substantially all of its properties
and of the properties of the merged corporation (other than stock of the
controlling corporation distributed in the transaction), and (ii) in the
transaction, former shareholders of the surviving corporation exchanged, for an
amount of voting stock of the controlling corporation, an amount of stock in
the surviving corporation which constitutes control of such corporation.
Section 368(b) of the Code provides that the term "a party to a
reorganization" includes both corporations, in the case of a reorganization
resulting from the acquisition by one corporation of stock or properties of
another, and that in the case of a reorganization qualifying under section
368(a)(1)(A) by reason of section 368(a)(2)(E), also includes the controlling
corporation referred to in section 368(a)(2)(E). Section 368(c) provides that
the term "control" means the ownership of stock possessing at least 80 percent
of the total combined voting power of all classes of stock entitled to vote and
at least 80 percent of the total number of shares of all other classes of stock
of the corporation.
Section 368(a)(2)(F) of the Code provides generally that if two or more
parties to a transaction described in section 368(a)(1) were investment
companies (as defined in section 368(a)(2)(F)(iii) and (iv)) immediately before
the transaction, then the transaction shall not be considered to be a
reorganization with respect to any such investment company (and its
shareholders). Section 368(a)(3) provides additional rules with respect to the
reorganization of a corporation in a title 11 or similar case.
Section 1032(a) of the Code provides that no gain or loss shall be
recognized to a corporation on the receipt of money or other property in
exchange for stock of such corporation.
Section 354(a)(1) of the Code provides that no gain or loss shall be
recognized if stock or securities in a corporation a party to a reorganization
are, in pursuance of the plan of
<PAGE> 3
Drilex International Inc.
Page 3
June 11, 1997
reorganization, exchanged solely for stock or securities in such corporation or
in another corporation a party to the reorganization.
Section 361(a) of the Code provides that no gain or loss shall be
recognized to a corporation if such corporation is a party to a reorganization
and exchanges property, in pursuance of the plan of reorganization, solely for
stock or securities in another corporation a party to the reorganization.
Section 361(c)(1) of the Code provides generally that no gain or loss
shall be recognized to a corporation a party to a reorganization on the
distribution to its shareholders of property in pursuance of the plan of
reorganization.
Treas. Reg. Section 1.368-1(b) provides that requisite to a
reorganization under the Code are a continuity of the business enterprise under
the modified corporate form and a continuity of interest therein on the part of
those persons who, directly or indirectly, were the owners of the enterprise
prior to the reorganization.
Treas. Reg. Section 1.368-1(d) provides that continuity of business
enterprise requires that the acquiring corporation either (i) continue the
historic business of the acquired corporation or (ii) use a significant portion
of the acquired corporation's historic business assets in a business, and that
the continuity of business enterprise requirement is satisfied if the acquiring
corporation continues the acquired corporation's historic business.
In Revenue Procedure 77-37, 1977-2 Cum. Bull. 568, the Internal Revenue
Service published operating rules used in considering requests for rulings
involving reorganizations. Section 3.02 of Revenue Procedure 77-37 provides
that the "continuity of interest" requirement of Treas. Reg. Section 1.368-
1(b) is satisfied if there is continuing interest through stock ownership in
the acquiring corporation (or a corporation in control thereof) on the part of
the former shareholders of the acquired corporation which is equal in value, as
of the effective date of the reorganization, to at least 50% of the value of
all of the formerly outstanding stock of the acquired corporation as of the
same date. Sales, redemptions, and other dispositions of stock occurring prior
or subsequent to the plan of reorganization will be considered in determining
whether there is a 50% continuing interest through stock ownership as of the
effective date of the reorganization. Revenue Procedure 77-37, by its terms,
does not define, as a matter of law, the lower limits of continuity of
interest. See, e.g., John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935);
Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); Miller v. Commissioner, 84
F.2d 415 (6th Cir. 1936); and United States v. Adkins-Phelps, Inc., 400 F.2d
737 (8th Cir. 1968).
In Revenue Procedure 86-42, 1986-2 Cum. Bull. 722, the Internal Revenue
Service set forth standard representations to be submitted as a prerequisite to
the issuance of rulings on the tax consequences of a reorganization described
in section 368(a)(1)(A) and section 368(a)(2)(E) of the Code, which to the
extent relevant are substantially the same as the representations set forth in
the Certificates. In Revenue Procedure 90-56, 1990-2 C.B. 639, the Internal
Revenue Service
<PAGE> 4
Drilex International Inc.
Page 4
June 11, 1997
stated that it will no longer issue advance rulings on whether a transaction
constitutes a corporate reorganization within the meaning of section
368(a)(1)(A) of the Code, but did not revoke Revenue Procedure 86-42.
CONCLUSIONS
Accordingly, based upon the facts summarized above and the
representations set forth in the Certificates, and conditioned upon our
understanding that the transactions contemplated by the Merger Agreement will
be carried out strictly in accordance with the terms of the Merger Agreement
and that there are no other agreements, arrangements, or understandings among
any of Baker Hughes, Merger Sub, Drilex or the stockholders of Drilex relating
to the Merger other than those described or referenced in the Merger Agreement
or the Registration Statement, it is our opinion that:
(i) the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of section 368(a) of the Code;
(ii) each of Baker Hughes, Merger Sub and Drilex will be a
party to the reorganization within the meaning of section 368(b) of the
Code;
(iii) no gain or loss will be recognized by a holder of Drilex
Common Stock on the exchange of Drilex Common Stock for Baker Hughes
Common Stock pursuant to the Merger (except to the extent of cash
received in lieu of fractional shares of Baker Hughes Common Stock);
(iv) the description of the material federal income tax
consequences of the Merger set forth under the heading "Certain Federal
Income Tax Consequences" in the Proxy Statement/Prospectus included in
the Registration Statement is accurate and complete in all material
respects.
We express no opinion as to any other federal income tax consequences of
the Merger or to the tax treatment of any conditions existing at the time of,
or effects resulting from, the Merger which are not specifically addressed in
the foregoing opinion.
<PAGE> 5
Drilex International Inc.
Page 5
June 11, 1997
We hereby consent to the filing of this opinion with the SEC as an
exhibit to the Registration Statement and to the reference to our Firm under
the heading "Certain Federal Income Tax Consequences" in the Proxy
Statement/Prospectus included in the Registration Statement.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Baker Hughes Incorporated on Form S-4 of our report dated November 13, 1996
incorporated by reference in the Annual Report on Form 10-K of Baker Hughes
Incorporated for the year ended September 30, 1996 and to the reference to us
under the heading "Experts" in the Proxy Statement/Prospectus of Drilex
International Inc. and Baker Hughes Incorporated, which is part of this
Registration Statement.
DELOITTE & TOUCHE LLP
Houston, Texas
June 11, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Baker Hughes
Incorporated on Form S-4 of our report dated February 11, 1997 on the
consolidated financial statements of Drilex International Inc. appearing in the
Proxy Statement/Prospectus for Drilex International Inc. and Baker Hughes
Incorporated, which is part of this Registration Statement, and to the reference
to us under the heading "Experts" in such Proxy Statement/Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
June 11, 1997
<PAGE> 1
EXHIBIT 99.1
DRILEX INTERNATIONAL INC.
PROXY FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JULY 14, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Drilex International Inc., a Delaware
Corporation (the "Company"), hereby acknowledges receipt of the Proxy
Statement/Prospectus dated June 12, 1997 and appoints John Forrest and G. Bruce
Broussard, and each of them, attorneys-in-fact and proxies with full power of
substitution, to vote all shares of the Company's Common Stock that the
undersigned would be entitled to vote if then and there personally present, at
a special meeting of stockholders of the Company to be held at the Hyatt
Regency Houston, 1200 Louisiana Street, on July 14, 1997 at 9:00 a.m., local
time, or at any adjournment or postponement thereof, revoking all previous
proxies, with all powers the undersigned would possess if present, to act upon
the following matters and upon such other business as may properly come before
the meeting or any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 2
Please mark [X]
your votes as
indicated in
this example
1. APPROVAL OF AGREEMENT AND PLAN OF MERGER: To approve the Agreement and Plan
of Merger, dated as of April 16, 1997 (the "Merger Agreement"), by and among
Baker Hughes Incorporated ("Baker Hughes"), Baker Hughes Merger, Inc. and
the Company, and the transactions contemplated thereby. As a result of the
merger, the Company will become a wholly owned subsidiary of Baker Hughes.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
"PLEASE MARK INSIDE BOXES"
PLEASE VOTE, DATE, SIGN
AND RETURN PROMPTLY IN
ENCLOSED ENVELOPE.
Signature(s)_________________________________________ Date _____________________
NOTE: Please sign this proxy exactly as your name appears on the books of the
Company. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more
than one name appears, a majority must sign. If a corporation, this signature
should be that of an authorized officer and should state his or her title.
<PAGE> 1
EXHIBIT 99.2
[DRILEX LETTERHEAD]
June , 1997
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of
Drilex International Inc. ("Drilex") at the Hyatt Regency Houston, 1200
Louisiana Street, Houston, Texas on Monday, July 14, 1997, at 9:00 a.m., Houston
time.
At the Special Meeting, you will be asked to approve and adopt an Agreement
and Plan of Merger (the "Merger Agreement") among Drilex, Baker Hughes
Incorporated ("Baker Hughes") and a wholly owned subsidiary of Baker Hughes,
pursuant to which the subsidiary would merge (the "Merger") with and into
Drilex. If the Merger becomes effective, each share of Drilex common stock will
be converted into the right to receive shares of Baker Hughes common stock. For
purposes of determining the exchange ratio for shares of Baker Hughes common
stock to be received by Drilex stockholders, each share of Drilex common stock
will be valued at $15.00 per share, subject to increase to $16.00 per share if
Drilex meets certain financial tests during a specified period prior to the
closing of the Merger. Although the value per Drilex share could be $16.00,
Drilex stockholders should vote for the Merger Agreement only if they are
willing to accept a transaction valued at $15.00 per Drilex share. The market
value for the Baker Hughes common stock will be based on the average closing
price of Baker Hughes common stock during the ten consecutive trading days
ending immediately prior to the second trading day prior to the closing date of
the Merger. The aggregate value of the Baker Hughes common stock issuable in the
Merger would be approximately $100 million based on a value per Drilex share of
$15.00 (and would be approximately $107 million if the value per Drilex share is
$16.00). The determination of the exchange ratio is described more fully in the
accompanying Proxy Statement/Prospectus.
Your Board of Directors believes that the proposed Merger is fair to, and
in the best interests of, Drilex and its stockholders and unanimously recommends
that you vote FOR adoption and approval of the Merger Agreement and the
transactions contemplated thereby. In addition, the Board of Directors has
received the opinion of Merrill Lynch & Co. that the consideration to be
received by holders of Drilex common stock in the Merger is fair to such
stockholders from a financial point of view. Approval and adoption of the Merger
Agreement requires the affirmative vote of the holders of a majority of the
outstanding shares of Drilex common stock.
You are urged to read carefully the accompanying Proxy Statement/Prospectus
and the Appendices in their entirety for a complete description of the Merger
and the Merger Agreement. Whether or not you plan to attend the Special Meeting,
please be sure to date, sign and return the proxy card in the enclosed
postage-paid envelope as promptly as possible so that your shares may be
represented at the Special Meeting and voted in accordance with your wishes.
Sincerely,
L. E. Simmons
Chairman of the Board
<PAGE> 2
DRILEX INTERNATIONAL INC.
15151 SOMMERMEYER
HOUSTON, TEXAS 77041
(713) 937-8888
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 14, 1997
TO THE STOCKHOLDERS OF DRILEX INTERNATIONAL INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Drilex
International Inc. ("Drilex") will be held at the Hyatt Regency Houston, 1200
Louisiana Street, Houston, Texas on Monday, July 14, 1997, at 9:00 a.m., Houston
time, to vote upon approval and adoption of an Agreement and Plan of Merger (the
"Merger Agreement"), which is described in and attached as Appendix A to the
accompanying Proxy Statement/Prospectus, and the transactions contemplated
thereby.
Pursuant to the Merger Agreement, (a) a wholly owned subsidiary of Baker
Hughes Incorporated ("Baker Hughes") will merge with and into Drilex, (b) Drilex
will become a wholly owned subsidiary of Baker Hughes and (c) each issued and
outstanding share of Drilex common stock would be converted into shares of Baker
Hughes common stock.
Only Drilex stockholders of record at the close of business on June 5, 1997
are entitled to notice of and to vote at the Special Meeting. A complete list of
stockholders entitled to vote at the Special Meeting will be available for
examination by any Drilex stockholder, for purposes relevant to the Special
Meeting, during normal business hours for a period of ten days prior to the
Special Meeting at the office of Drilex, 15151 Sommermeyer, Houston, Texas
77041.
We hope you will be represented at the meeting by signing, dating and
returning the enclosed proxy card in the accompanying envelope as promptly as
possible, whether or not you expect to be present in person. Your proxy may be
revoked at any time by the following procedures set forth in the accompanying
Proxy Statement/Prospectus.
By order of the Board of Directors
G. Bruce Broussard
Secretary
Houston, Texas
June , 1997
