<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1996
REGISTRATION STATEMENT 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1389 76-0252850
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
INCORPORATION)
2835 HOLMES ROAD
HOUSTON, TEXAS 77051
(713) 799-5100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES F. MARONEY, III, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
2835 HOLMES ROAD
HOUSTON, TEXAS 77051
(713) 799-5100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
----------------
Copies to:
PATRICK T. SEAVER, ESQ. SCOTT N. WULFE, ESQ.
LATHAM & WATKINS VINSON & ELKINS L.L.P.
650 TOWN CENTER DRIVE, SUITE 2000 1001 FANNIN STREET, SUITE 2300
COSTA MESA, CALIFORNIA 92626 HOUSTON, TEXAS 77002-6760
(714) 540-1235 (713) 758-2222
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... 16,709,105 -- $43,886,132.80 $6,359.91
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(f) under the Securities Act of 1933,
as amended. The fee was computed in accordance with Rule 457(f)(2) based
upon the historical book value per ordinary share, par value $.10 per
share, of D.O.S. Ltd. ($1.22 as of December 31, 1995) and was reduced by
$8,773.23 which was previously paid to the Securities and Exchange
Commission pursuant to Rule 0-11 of the Securities and Exchange Act of
1934, as amended.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
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 [_]
----------------
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, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND
PROSPECTUS PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM LOCATION OF CAPTION IN JOINT PROXY
NO. FORM S-4 CAPTION STATEMENT/PROSPECTUS
---- ---------------- ----------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover Facing Page of Registration Statement,
Page of Prospectus............... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Inside Front Cover Page; Available
Prospectus....................... Information; Incorporation of Certain
Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other Summary; Summary Financial
Information...................... Information; Risk Factors; The Annual
Meeting; The Merger; Comparative Per
Share Data; Drexel
4. Terms of the Transaction......... Summary; The Merger; The Merger
Agreement; Comparative Rights of
Stockholders
5. Pro Forma Financial Information.. Summary Financial Information;
Unaudited Pro Forma Condensed Combined
Financial Statements
6. Material Contracts with the
Company Being Acquired........... The Merger
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to Be
Underwriters..................... Not Applicable
8. Interests of Named Experts and
Counsel.......................... The Merger; Legal Matters; Experts
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................. Not Applicable
10. Information With Respect to S-3 Incorporation of Certain Documents by
Registrants...................... Reference
11. Incorporation of Certain Incorporation of Certain Documents by
Information by Reference......... Reference
12. Information With Respect to S-2
or S-3 Registrants............... Not Applicable
13. Incorporation of Certain
Information by Reference......... Not Applicable
14. Information With Respect to
Registrants Other Than S-2 or S-3
Registrants...................... Not Applicable
15. Information With Respect to S-3
Companies........................ Not Applicable
16. Information With Respect to S-2
or S-3 Companies................. Not Applicable
17. Information With Respect to
Companies Other Than S-2 or S-3
Companies........................ Drexel
18. Information if Proxies, Consents
or Authorizations are to be Notice of Annual Meeting; Outside
Solicited........................ Front Cover Page; Summary; The Annual
Meeting; The Merger; Security
Ownership of Certain Beneficial Owners
and Management of Drexel; Security
Ownership of Certain Beneficial Owners
and Management of Tuboscope; Proposal
to Elect Tuboscope Directors
19. Information if Proxies, Consents,
or Authorizations are not to be
Solicited, or in an Exchange
Offer............................ Not Applicable
</TABLE>
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
2835 HOLMES ROAD
HOUSTON, TEXAS 77051
March 25, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Tuboscope Vetco International Corporation, a Delaware
corporation ("Tuboscope"), to be held on April 24, 1996, at 10:00 a.m., local
time, at The Ritz Carlton Hotel, 1919 Briar Oaks Lane, Houston, Texas.
At the Annual Meeting, you will be asked to consider and vote upon a group of
related proposals (the "Merger Proposals") which provide for (i) the merger
(the "Merger") of Grow Acquisition Limited, a Bermuda corporation and wholly
owned subsidiary of Tuboscope, with and into D.O.S. Ltd., a Bermuda
corporation, (ii) the sale (the "SCF Sale") by Tuboscope to SCF-III, L.P., a
Delaware limited partnership, of shares of Tuboscope Common Stock and warrants
to purchase shares of Tuboscope Common Stock and (iii) the amendment of
Tuboscope's Certificate of Incorporation to increase the number of authorized
shares of Tuboscope Common Stock. In addition, you will be asked to vote upon
two other proposals (the "Additional Proposals") relating to the election of
members of the Board of Directors of Tuboscope and approval of the 1996 Equity
Participation Plan of Tuboscope Vetco International Corporation (the "1996
Equity Participation Plan").
THE APPROVAL OF EACH OF THE MERGER PROPOSALS IS CONDITIONED UPON APPROVAL OF
ALL OF THE MERGER PROPOSALS BY THE STOCKHOLDERS OF TUBOSCOPE. ACCORDINGLY, A
VOTE AGAINST ANY ONE OR MORE OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT
AS A VOTE AGAINST ALL OF THE MERGER PROPOSALS.
The Merger Proposals and the Additional Proposals are more fully described in
the accompanying Proxy Statement/Prospectus and Appendices, including
discussions therein concerning Tuboscope's reasons for the Merger and the SCF
Sale and factors which should be considered in connection with your vote on the
Merger and the SCF Sale. Please review this information carefully.
AFTER CAREFUL CONSIDERATION, THE TUBOSCOPE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER PROPOSALS AND THE 1996 EQUITY PARTICIPATION PLAN. THE BOARD
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE MERGER PROPOSALS AND THE 1996
EQUITY PARTICIPATION PLAN. IN ADDITION, THE BOARD RECOMMENDS A VOTE FOR THE
ELECTION OF EACH NOMINEE TO THE BOARD OF DIRECTORS NAMED IN THE ACCOMPANYING
PROXY STATEMENT/PROSPECTUS.
We hope you will attend the Annual Meeting. However, whether or not you plan
to attend the Annual Meeting, please complete, sign and date the accompanying
proxy card and promptly return it in the enclosed prepaid envelope. If you are
present at the meeting you may, if you wish, withdraw your proxy and vote in
person.
Sincerely,
James F. Maroney, III
Vice President, Secretary and
General Counsel
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
2835 HOLMES ROAD
HOUSTON, TEXAS 77051
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 24, 1996
----------------
To the Stockholders of
Tuboscope Vetco International Corporation:
Notice is Hereby Given that the Annual Meeting of Stockholders (the "Annual
Meeting") of Tuboscope Vetco International Corporation, a Delaware corporation
("Tuboscope"), will be held at The Ritz Carlton Hotel, 1919 Briar Oaks Lane,
Houston, Texas at 10:00 a.m., local time, on April 24, 1996, to consider and
act upon:
1. Three related proposals (the "Merger Proposals"), more fully described
in the accompanying Proxy Statement/Prospectus and Appendices thereto,
which provide for the following:
Proposal One: Approval and adoption of the Agreement and Plan of
Merger dated as of January 3, 1996 (the "Merger Agreement"), between
Tuboscope, Grow Acquisition Limited, a Bermuda corporation and wholly
owned subsidiary of Tuboscope ("Sub"), and D.O.S. Ltd., a Bermuda
corporation ("Drexel"), providing for the merger (the "Merger") of Sub
with and into Drexel. Under the Merger Agreement, each outstanding
ordinary share, par value $0.10 per share, of Drexel will be converted
into .4645 share of common stock, par value $0.01 per share, of
Tuboscope ("Tuboscope Common Stock") or an aggregate of approximately
16,700,000 shares of Tuboscope Common Stock as of the date of the Proxy
Statement/Prospectus. Approval and adoption of the Merger Agreement
will also constitute approval of the transactions contemplated thereby,
including the assumption by Tuboscope of the rights and obligations of
Drexel under Drexel's stock option plans.
Proposal Two: Approval of the sale by Tuboscope to SCF-III, L.P., a
Delaware limited partnership and an affiliate of a stockholder of
Drexel ("SCF"), of 4,200,000 shares of Tuboscope Common Stock and
warrants to purchase, subject to adjustment under certain
circumstances, an aggregate of 2,533,000 shares of Tuboscope Common
Stock at an exercise price of $10 per share expiring on December 31,
2000, for an aggregate purchase price of $31,000,000, pursuant to a
Subscription Agreement dated as of January 3, 1996 between Tuboscope
and SCF.
Proposal Three: Approval of an amendment to Tuboscope's Certificate
of Incorporation to increase the number of authorized shares of
Tuboscope Common Stock from 35,000,000 to 60,000,000.
THE APPROVAL OF EACH OF THE MERGER PROPOSALS IS CONDITIONED UPON THE APPROVAL
OF ALL OF THE MERGER PROPOSALS. ACCORDINGLY, A VOTE AGAINST ANY ONE OR MORE OF
THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE AGAINST ALL OF THE
MERGER PROPOSALS.
<PAGE>
2. Two additional proposals (the "Additional Proposals"), more fully
described in the accompanying Proxy Statement/Prospectus and Appendices
thereto, which provide for the following:
Proposal Four: The election of the members of the Tuboscope Board of
Directors.
Proposal Five: Approval of Tuboscope's 1996 Equity Participation Plan
of Tuboscope Vetco International Corporation.
THE APPROVAL OF THE ADDITIONAL PROPOSALS IS NOT CONDITIONED ON THE
APPROVAL OF ANY OTHER ADDITIONAL PROPOSAL OR THE MERGER PROPOSALS.
3. Such other business as may properly come before the Annual Meeting or
any adjournment or postponement thereof.
The Board of Directors of Tuboscope has fixed the close of business on March
15, 1996 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting or any
adjournment or postponement thereof. Only stockholders of record at the close
of business on the Record Date are entitled to notice of and to vote at the
Annual Meeting and any adjournments or postponements thereof. A list of such
stockholders will be available for inspection at the offices of Tuboscope
located at 2835 Holmes Road, Houston, Texas 77051, at least ten days prior to
the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please execute, date
and return promptly the enclosed form of proxy. A return envelope is enclosed
for your convenience and requires no postage for mailing in the United States.
By Order of the Board of Directors,
James F. Maroney, III
Vice President, Secretary and
General Counsel
March 25, 1996
YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL
IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
2
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 24, 1996
----------------
PROXY STATEMENT/PROSPECTUS
----------------
This Proxy Statement/Prospectus is being furnished to the stockholders of
Tuboscope Vetco International Corporation, a Delaware corporation ("Tuboscope"
or the "Company"), in connection with the solicitation of proxies by the Board
of Directors to be used at the Annual Meeting of Stockholders of the Company
(the "Annual Meeting") to be held on April 24, 1996, at 10:00 a.m., local
time, at The Ritz Carlton Hotel, 1919 Briar Oaks Lane, Houston, Texas.
At the Annual Meeting, the stockholders of Tuboscope will be asked to
consider and vote upon the following three related proposals (the "Merger
Proposals"): (i) approval and adoption of the Agreement and Plan of Merger
dated as of January 3, 1996 (the "Merger Agreement"), between Tuboscope, Grow
Acquisition Limited, a Bermuda corporation and wholly owned subsidiary of
Tuboscope ("Sub"), and D.O.S. Ltd., a Bermuda corporation ("Drexel"),
providing for the merger (the "Merger") of Sub with and into Drexel, (ii)
approval of the sale (the "SCF Sale") by Tuboscope to SCF-III, L.P., a
Delaware limited partnership and an affiliate of a stockholder of Drexel
("SCF"), of 4,200,000 shares (the "SCF Shares") of common stock, par value
$.01 per share, of Tuboscope ("Tuboscope Common Stock") and warrants (the "SCF
Warrants") to purchase, subject to adjustment under certain circumstances, an
aggregate of 2,533,000 shares of Tuboscope Common Stock at an exercise price
of $10 per share expiring on December 31, 2000, for an aggregate purchase
price of $31,000,000, pursuant to a Subscription Agreement (the "Subscription
Agreement") dated as of January 3, 1996 between Tuboscope and SCF, and (iii)
approval of an amendment to Tuboscope's Certificate of Incorporation to
increase the number of authorized shares of Tuboscope Common Stock from
35,000,000 to 60,000,000. Under the Merger Agreement, each outstanding
ordinary share, par value $0.10 per share, of Drexel ("Drexel Common Stock")
will be converted into .4645 share of Tuboscope Common Stock or an aggregate
of approximately 16,700,000 shares of Tuboscope Common Stock as of the date of
this Proxy Statement/Prospectus. Approval and adoption of the Merger Agreement
will also constitute approval of the assumption by Tuboscope of the rights and
obligations of Drexel under Drexel's stock option plans. Copies of the Merger
Agreement and Subscription Agreement are attached as Appendices A and B,
respectively, to this Proxy Statement/Prospectus. THE APPROVAL OF EACH OF THE
MERGER PROPOSALS IS CONDITIONED UPON THE APPROVAL OF ALL OF THE MERGER
PROPOSALS BY THE STOCKHOLDERS OF TUBOSCOPE. ACCORDINGLY, A VOTE AGAINST ANY
ONE OR MORE OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST ALL OF THE MERGER PROPOSALS.
(Cover continued on next page)
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED IN EVALUATING THE SECURITIES OFFERED HEREBY.
----------------
THE SECURITIES ISSUABLE PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS 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 ACCU-
RACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed or delivered to the stockholders of Tuboscope on or about March
25, 1996.
----------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS MARCH 22, 1996.
<PAGE>
(Cover continued from previous page)
In addition, at the Annual Meeting the stockholders of Tuboscope will
consider and vote upon the following additional proposals (the "Additional
Proposals"): (i) the election of the members of the Tuboscope Board of
Directors and (ii) approval of the 1996 Equity Participation Plan of Tuboscope
Vetco International Corporation (the "1996 Equity Participation Plan").
In connection with the Merger and SCF Sale, Tuboscope and Baker Hughes
Incorporated ("BHI") have entered into an Exchange Agreement dated as of
January 3, 1996 (the "Exchange Agreement"), whereby Tuboscope has agreed to
issue to BHI 1,500,000 shares (the "BHI Shares") of Tuboscope Common Stock and
warrants (the "BHI Warrants") to purchase, subject to adjustment under certain
circumstances, an aggregate of 1,250,000 shares of Tuboscope Common Stock at an
exercise price of $10 per share expiring on December 31, 2000, in exchange (the
"BHI Exchange") for all of the 100,000 shares of Redeemable Series A
Convertible Preferred Stock, par value $.01 per share, of Tuboscope (the
"Tuboscope Series A Preferred Stock") held by BHI. The BHI Exchange is
contingent upon, among other items, the consummation of the Merger.
The Merger, SCF Sale and BHI Exchange, and the transactions contemplated
thereby (including the amendment to Tuboscope's Certificate of Incorporation),
are collectively referred to in this Proxy Statement/Prospectus as the "Merger
Transactions."
The Tuboscope Common Stock is quoted on the Nasdaq Stock Market ("Nasdaq")
under the symbol "TUBO." On March 18, 1996, the last reported sale price for a
share of Tuboscope Common Stock on Nasdaq was $10 1/8.
----------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on Form
S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Tuboscope Common Stock to be issued pursuant to the
Merger Agreement. As permitted by the rules and regulations of the Commission,
this Prospectus, which constitutes a part of the Registration Statement, does
not contain all information set forth in the Registration Statement. For
further information, please refer to the Registration Statement, including the
exhibits thereto. Statements contained in this Proxy Statement/Prospectus
relating to the contents of any contract or other document referred to herein
are not necessarily complete, and 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 by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as reports, proxy statements
and other information filed by the Company can be inspected and copied at the
Commission's Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the public reference facilities
maintained by the Commission at its regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained from the Commission at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Additionally, material filed by Tuboscope can be
inspected at the offices of Nasdaq, Reports Section, 1735 K Street N.W.,
Washington, D.C. 20006.
Drexel is not subject to the informational requirements of the Exchange Act.
ii
<PAGE>
All information concerning Tuboscope contained in this Proxy
Statement/Prospectus has been furnished by Tuboscope and all information
concerning Drexel contained in this Proxy Statement/Prospectus has been
furnished by Drexel. No person is authorized to make any representation with
respect to the matters described in this Proxy Statement/Prospectus other than
those contained herein and, if given or made, such information or
representation must not be relied upon as having been authorized by Tuboscope,
Drexel or any other person. This Proxy Statement/Prospectus does not constitute
an offer to sell, or a solicitation of any offer to purchase, any securities,
or make a solicitation of a proxy, in any jurisdiction in which, or to or from
any person to or from whom, it is unlawful to make such an offer or
solicitation. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities hereunder shall under any circumstances be deemed to
imply that there has been no change in the assets, properties or affairs of
Tuboscope or Drexel since the date hereof or that the information set forth
herein is correct as of any time subsequent to the date hereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Tuboscope are
incorporated by reference in this Proxy Statement/Prospectus:
1.Tuboscope's Current Report on Form 8-K filed on January 16, 1996;
2. Tuboscope's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995; and
3. Tuboscope's Registration Statement on Form 8-A filed on February 22,
1990, as amended on March 2, 1990.
All documents filed by Tuboscope with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior
to the date of the Annual Meeting shall be deemed to be incorporated by
reference herein and shall be part hereof from the date of filing of such
documents. Any statement contained in a document 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
in this Proxy Statement/Prospectus or in any other subsequently filed document
which is deemed to be incorporated by reference modifies or supersedes such
statement. Any such statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS RELATING
TO TUBOSCOPE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS
RELATING TO TUBOSCOPE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE WITHOUT
CHARGE BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS
DAY OF RECEIPT OF SUCH REQUEST TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER,
TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON REQUEST FROM
TUBOSCOPE VETCO INTERNATIONAL CORPORATION, ATTENTION: CORPORATE SECRETARY, 2835
HOLMES ROAD, HOUSTON, TEXAS 77051. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
REQUESTS SHOULD BE RECEIVED BY APRIL 10, 1996.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... iii
SUMMARY................................................................... 1
SELECTED FINANCIAL INFORMATION............................................ 7
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA............. 9
COMPARATIVE PER SHARE DATA................................................ 10
PRICE RANGE OF TUBOSCOPE COMMON STOCK..................................... 11
RISK FACTORS.............................................................. 12
No Assurance of Continued Growth of Drexel's Operating Profit;
Integration of SOFS's Operations....................................... 12
Changes in the Ownership of Tuboscope Resulting From the Merger
Transactions........................................................... 12
Certain Changes in Executive Management................................. 12
No Assurance of Achieving Anticipated Consolidated Savings.............. 13
Possible Repurchase Obligation Regarding TVI's Subordinated Notes....... 13
Limitations of the Fairness Opinion of Tuboscope's Financial Advisor.... 13
Cyclical Nature of Oilfield Services Industry........................... 14
Risk of Significant Foreign Operations.................................. 14
Interests of Certain Persons in the Merger Transactions, Possible
Conflicts of Interest.................................................. 14
THE ANNUAL MEETING........................................................ 15
General................................................................. 15
Matters to be Considered at the Annual Meeting.......................... 15
Record Date............................................................. 15
Proxies................................................................. 16
Quorum.................................................................. 16
Vote Required........................................................... 16
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 18
THE MERGER TRANSACTIONS................................................... 24
Background of the Merger Transactions................................... 24
Tuboscope's Reasons for the Merger Transactions......................... 26
Drexel's Reasons for the Merger......................................... 27
Opinion of Tuboscope's Financial Advisor................................ 28
Interests of Certain Persons in the Merger.............................. 32
Voting Agreements....................................................... 35
Registration Rights..................................................... 36
Regulatory Approvals.................................................... 37
Accounting Treatment.................................................... 37
Restrictions on Sales of Stock.......................................... 37
THE MERGER AGREEMENT...................................................... 38
Merger Consideration.................................................... 38
Conversion of Shares; Fractional Shares................................. 38
Escrowed Shares......................................................... 39
Appraisal Rights........................................................ 39
Treatment of Drexel Options............................................. 39
Liquidation of Drexel................................................... 40
Conditions to the Merger................................................ 40
Representations and Warranties.......................................... 42
Certain Covenants; Conduct of Business.................................. 42
Additional Agreements................................................... 43
</TABLE>
iv
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses and Termination Fee............................................ 43
Indemnification......................................................... 44
Amendment, Waiver and Termination....................................... 44
THE SUBSCRIPTION AGREEMENT................................................ 45
Sale of SCF Shares and SCF Warrants..................................... 45
Conditions to the SCF Sale.............................................. 45
Termination; Termination Fee............................................ 45
Certain Antidilutive Adjustments to the SCF Warrants.................... 46
THE EXCHANGE AGREEMENT.................................................... 46
Exchange of BHI Shares and BHI Warrants................................. 46
Conditions to the BHI Exchange.......................................... 46
Termination............................................................. 46
Modification of Registration Rights; Effect of Existing Stockholder
Agreement.............................................................. 47
Certain Antidilutive Adjustments to the BHI Warrants.................... 47
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES..................... 47
Opinions................................................................ 48
General Tax Consequences................................................ 48
Cash in Lieu of Fractional Shares....................................... 48
Escrowed Shares......................................................... 48
Filing Requirements..................................................... 49
Proposed Regulations.................................................... 49
Dissenting Stockholders................................................. 49
Proposed Legislation.................................................... 49
MANAGEMENT AND OPERATIONS AFTER THE MERGER................................ 50
Directors After the Merger.............................................. 50
Executive Officers After the Merger..................................... 50
Executive Compensation of Executive Officers After the Merger........... 52
DREXEL.................................................................... 54
Recent Developments..................................................... 54
Strategy................................................................ 54
Solids Control Equipment................................................ 55
Coiled Tubing Equipment................................................. 55
Marketing, Distribution and Customers................................... 56
Backlog................................................................. 56
Competition............................................................. 57
Facilities.............................................................. 57
Employees............................................................... 58
Insurance and Litigation................................................ 58
Environmental Regulation................................................ 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF DREXEL..................................................... 59
Results of Operations................................................... 59
Nine Months Ended December 31, 1995 Compared to Nine Months Ended
December 31, 1994...................................................... 59
Fiscal Year Ended March 31, 1995 Compared to Fiscal Year Ended March 31,
1994................................................................... 60
Fiscal Year Ended March 31, 1994 Compared to Fiscal Year Ended March 31,
1993................................................................... 61
Financial Condition and Liquidity....................................... 62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DREXEL.. 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
TUBOSCOPE................................................................ 67
</TABLE>
v
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF TUBOSCOPE CAPITAL STOCK....................................................... 69
Redeemable Series A Convertible Preferred Stock............................................ 69
Tuboscope Common Stock..................................................................... 70
Delaware General Corporation Law........................................................... 71
COMPARATIVE RIGHTS OF STOCKHOLDERS........................................................... 71
General.................................................................................... 71
Bermuda and Delaware Corporate Law......................................................... 71
Charter and Bylaw Provisions............................................................... 75
PROPOSAL TO AMEND TUBOSCOPE'S CERTIFICATE OF INCORPORATION................................... 77
PROPOSAL TO ELECT TUBOSCOPE DIRECTORS........................................................ 78
General.................................................................................... 78
Information Concerning Nominees to the Tuboscope Board of Directors........................ 78
Vote....................................................................................... 79
Board of Directors Meetings and Committees................................................. 79
Director Compensation and Automatic-Grant Stock Option Plan................................ 80
Tuboscope Executive Officers............................................................... 80
Executive Compensation..................................................................... 81
Executive Committee Report on Compensation................................................. 84
Compensation Committee Interlocks and Insider Participation................................ 87
Performance Graph.......................................................................... 88
Certain Stockholder Agreements............................................................. 89
Certain Transactions....................................................................... 90
Compliance With Securities Laws............................................................ 90
PROPOSAL TO APPROVE THE 1996 EQUITY PARTICIPATION PLAN....................................... 91
Description of the 1996 Equity Participation Plan.......................................... 91
Federal Income Tax Consequences............................................................ 95
Reasons for Adoption of the 1996 Equity Participation Plan................................. 97
Required Vote for Approval and Recommendation of the Board of Directors.................... 97
LEGAL MATTERS................................................................................ 97
EXPERTS...................................................................................... 98
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING................................................ 98
OTHER MATTERS................................................................................ 98
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................... F-1
APPENDIX A --Agreement and Plan of Merger...................................................... A-1
APPENDIX B --Subscription Agreement............................................................ B-1
APPENDIX C --Form of Escrow Agreement.......................................................... C-1
APPENDIX D --Fairness Opinion of CS First Boston............................................... D-1
APPENDIX E --Certificate of Amendment to Restated Certificate of
Incorporation of Tuboscope Vetco International Corporation........................ E-1
--1996 Equity Participation Plan of Tuboscope Vetco
APPENDIX F International Corporation........................................................... F-1
</TABLE>
vi
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained elsewhere in this
Proxy Statement/Prospectus and Appendices hereto. Stockholders are urged to
read this Proxy Statement/Prospectus and its Appendices before voting on the
matters discussed herein.
As used herein, the term "Tuboscope" refers to Tuboscope Vetco International
Corporation, including, unless the context otherwise requires, its
subsidiaries, and the term "Drexel" refers to D.O.S. Ltd., including, unless
the context otherwise requires, its subsidiaries.
TUBOSCOPE
Tuboscope is the largest provider of oilfield-related inspection and coating
services in the world. These services include the inspection and coating of oil
country tubular goods (drill pipe, line pipe, casing and tubing) and the in-
place inspection of oil and gas pipelines. Tuboscope's customers include most
of the world's largest oil and gas companies and the major U.S. manufacturers
of oil country tubular goods.
Tuboscope was incorporated in 1988 as a Delaware corporation. Tuboscope is a
holding company which owns all of the outstanding capital stock of Tuboscope
Vetco International Inc. ("TVI"), CTI Inspection Services Inc. and Tuboscope
Vetco Capital Corporation. Tuboscope's principal executive offices are located
at 2835 Holmes Road, Houston, Texas, 77501, and its telephone number is (713)
799-5100.
DREXEL
Drexel is the world's leading provider of solids control equipment and
services to the oil and natural gas industry and coiled tubing units and
related pressure control equipment to oilfield service companies. Drexel's
oilfield products enjoy strong brand name recognition and its customers include
the world's largest oilfield companies and operators. In November 1995, Drexel
acquired SWECO(R) Oilfield Services (a division of Environmental Procedures,
Inc.) and related companies (collectively, "SOFS"), which was the second
largest oilfield solids control equipment supplier in the world.
Drexel was incorporated in 1975 as a Bermuda corporation. Drexel's principal
executive offices are located at 6829 Flintlock, Houston, Texas 77240, and its
telephone number is (713) 466-8035.
THE ANNUAL MEETING
The Annual Meeting will be held on April 24, 1996 at 10:00 a.m., local time,
at The Ritz Carlton Hotel, 1919 Briar Oaks Lane, Houston, Texas.
At the Annual Meeting, including any adjournment thereof, the stockholders of
Tuboscope will be asked to consider and vote upon the following three related
Merger Proposals: (i) approval and adoption of the Merger Agreement and the
transactions contemplated thereby, (ii) approval of the SCF Sale and (iii)
approval of an amendment to Tuboscope's Certificate of Incorporation to
increase the number of authorized shares of Tuboscope Common Stock from
35,000,000 to 60,000,000. Approval and adoption of the Merger Agreement will
also constitute approval of the assumption by Tuboscope of the rights and
obligations of Drexel under Drexel's stock option plans. THE APPROVAL OF EACH
OF THE MERGER PROPOSALS IS CONDITIONED UPON THE APPROVAL OF ALL OF THE MERGER
PROPOSALS BY THE STOCKHOLDERS OF TUBOSCOPE. ACCORDINGLY, A VOTE AGAINST ANY ONE
OR MORE OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE AGAINST ALL
OF THE MERGER PROPOSALS.
1
<PAGE>
In addition, at the Annual Meeting, the stockholders of Tuboscope will
consider and vote upon the following two Additional Proposals: (i) election of
members of the Tuboscope Board of Directors and (ii) approval of the 1996
Equity Participation Plan. THE APPROVAL OF ANY OF THE ADDITIONAL PROPOSALS IS
NOT CONDITIONED UPON THE APPROVAL OF ANY OTHER ADDITIONAL PROPOSAL OR THE
MERGER PROPOSALS.
The close of business on March 15, 1996 has been fixed as the record date
(the "Record Date") for the determination of the stockholders of Tuboscope
entitled to notice of and to vote at the Annual Meeting. Holders of Tuboscope
Common Stock are entitled to one vote for each share of Tuboscope Common Stock
held by them. The holders of a majority of the outstanding shares of Tuboscope
Common Stock, present either in person or by properly executed proxies, will
constitute a quorum at the Annual Meeting. See "The Annual Meeting--Record
Date," "--Proxies," "--Quorum" and "--Vote Required."
The affirmative vote of holders of a majority of the outstanding shares of
Tuboscope Common Stock is required to approve and adopt each of the Merger
Proposals. The affirmative vote of a majority of the outstanding shares of
Tuboscope Common Stock present at the Annual Meeting, either in person or by
properly executed proxies, and entitled to vote is required to approve the 1996
Equity Participation Plan. The favorable vote of a plurality of the shares of
Tuboscope Common Stock present at the Annual Meeting, either in person or by
properly executed proxies, and entitled to vote is required to elect members of
the Tuboscope Board of Directors. See "The Annual Meeting--Vote Required." As
of the Record Date, 18,560,075 shares of Tuboscope Common Stock were issued and
outstanding, of which 21.0% were beneficially owned by directors, executive
officers and affiliates of Tuboscope (excluding 777,619 shares which may be
acquired upon exercise of options which are exercisable within 60 days of the
Record Date). BHI and Brentwood Associates IV, L.P. ("Brentwood") have entered
into a voting agreement with Drexel pursuant to which each such stockholder
agreed to vote an aggregate of 2,991,111 shares of Tuboscope Common Stock,
representing 16.1% of the outstanding Tuboscope Common Stock, in favor of the
Merger Proposals. See "The Merger Transactions--Voting Agreements" and
"Security Ownership of Certain Beneficial Owners and Management of Tuboscope."
THE MERGER TRANSACTIONS
The Merger
Conversion of Securities. Upon consummation of the transactions contemplated
by the Merger Agreement, Sub will be merged with and into Drexel, and each
share of Drexel Common Stock outstanding immediately prior to the consummation
of the Merger will be converted into (i) .4372 share of Tuboscope Common Stock
which will be immediately available for distribution to Drexel stockholders and
(ii) an additional .0273 share of Tuboscope Common Stock which will be placed
in escrow (an "Escrowed Share") pursuant to an Escrow Agreement (the "Escrow
Agreement"), the form of which is attached hereto as Appendix C. Tuboscope has
the right, until the fifteenth business day after the delivery of the Drexel
audited financial statements for the fiscal year ended March 31, 1996, to make
claims against the Escrowed Shares for any damages suffered as a result of any
breach by Drexel of any representation or warranty of Drexel contained in the
Merger Agreement if such damages would result in a material adverse effect on
Drexel, and then only to the extent such damages exceed $1,000,000 in the
aggregate. No certificates or scrip representing fractional shares of Tuboscope
Common Stock will be issued in the Merger, but cash will be paid to
stockholders in lieu thereof. See "The Merger Agreement--Conversion of Shares;
Fractional Shares" and "--Escrowed Shares."
Liquidation of Drexel. As soon as practicable after the Effective Time (as
defined below), Tuboscope shall cause Drexel to be liquidated into Tuboscope
(the "Liquidation") so that the Merger and the Liquidation
2
<PAGE>
will be collectively treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). See "The Merger Agreement--Liquidation
of Drexel" and "Certain United States Federal Income Tax Consequences."
Effective Time of the Merger. The Merger will be effective upon the filing of
a certificate of amalgamation (the "Certificate of Merger"), prepared and
executed in accordance with the Companies Act 1981 of Bermuda, as amended (the
"Bermuda Act"), with the Bermuda Registrar of Companies. The date and time of
such filing (the "Effective Time") is currently expected to occur on or shortly
after April 24, 1996, subject to approval by the stockholders of Tuboscope and
Drexel of the Merger Proposals and satisfaction or waiver of the conditions
precedent to the Merger set forth in the Merger Agreement. See "The Merger
Agreement--Conditions to the Merger."
Conditions to the Merger; Termination. The obligations of Tuboscope and
Drexel to consummate the Merger are subject to the satisfaction of certain
conditions, including, among others, (i) obtaining requisite Tuboscope and
Drexel stockholder approvals and requisite regulatory approvals (including the
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act")), (ii) the
effectiveness of the Registration Statement and the receipt by Tuboscope of all
necessary approvals under applicable state securities laws, (iii) the
authorization for trading on Nasdaq of the shares of Tuboscope Common Stock
registered hereby, (iv) the absence of any injunction prohibiting consummation
of the Merger, (v) the receipt of certain legal opinions with respect to the
tax consequences of the Merger and the Liquidation, (vi) the receipt of
consents from Tuboscope's and Drexel's banks and (vii) the compliance by SCF
with its obligations under the Subscription Agreement. See "The Merger
Agreement--Conditions to the Merger."
The Merger Agreement is subject to termination by either Tuboscope or Drexel
if the Merger is not consummated on or before June 30, 1996. In addition, the
Merger Agreement may be terminated under certain circumstances by either
Tuboscope or Drexel, including circumstances under which Drexel may be entitled
to receive a termination fee. See "The Merger Agreement--Amendment, Waiver and
Termination" and "--Expenses and Termination Fee."
Treatment of Stock Options. At the Effective Time, all options to purchase
shares of Drexel Common Stock (individually, a "Drexel Option") outstanding
under Drexel's 1993 Stock Option Plan and stock option agreements of certain
former stockholders of Drexel subsidiaries (the "Drexel Stock Option Plans")
granted on or prior to the Effective Time, whether or not currently
exercisable, will remain outstanding and will be assumed by Tuboscope.
Thereafter, such options will be exercisable upon the same terms and conditions
as under the applicable Drexel Stock Option Plan and the applicable option
agreement issued thereunder, except that the number of shares of Tuboscope
Common Stock subject to, and the per share exercise price of, each Drexel
Option will be determined in accordance with the provisions of the Merger
Agreement. See "The Merger Agreement--Treatment of Drexel Options."
Certain U.S. Federal Income Tax Consequences. The Merger and the Liquidation
are intended to qualify as a reorganization within the meaning of Section
368(a) of the Code. Based upon the advice of Baker & Botts, L.L.P., Tuboscope
believes that no gain or loss will be recognized by Tuboscope or Tuboscope
stockholders for U.S. federal income tax purposes as a result of the Merger and
the Liquidation. Based upon the advice of Vinson & Elkins L.L.P., Drexel
believes that no gain or loss will be recognized by Drexel stockholders for
U.S. federal income tax purposes on the exchange of Drexel Common Stock for
Tuboscope Common Stock (except with respect to cash, if any, received in lieu
of a fractional interest in Tuboscope Common Stock). See "The Merger
Agreement--Conditions to the Merger" and "Certain United States Federal Income
Tax Consequences."
3
<PAGE>
Dissenters' Rights. Under the General Corporation Law of the State of
Delaware (the "DGCL"), holders of Tuboscope Common Stock are not entitled to
dissenters' rights in connection with the Merger.
Resales of Tuboscope Common Stock. The shares of Tuboscope Common Stock to be
issued pursuant to the Merger have been registered under the Securities Act,
and therefore may be resold without restriction by persons who are not deemed
to be "affiliates" (as such term is defined under the Securities Act) of either
Tuboscope or Drexel. See "The Merger Transactions--Restrictions on Sales of
Stock."
The SCF Sale
Sale of Securities. Concurrently with the closing of the Merger, Tuboscope
will sell to SCF 4,200,000 shares of Tuboscope Common Stock and warrants to
purchase, subject to adjustment under certain circumstances, an aggregate of
2,533,000 shares of Tuboscope Common Stock at an exercise price of $10 per
share expiring on December 31, 2000, for an aggregate purchase price of
$31,000,000. L. E. Simmons & Associates, Incorporated ("SCF G.P.") is the
general partner of the general partner of SCF. The sole stockholder of SCF G.P.
is Mr. L. E. Simmons. See "The Subscription Agreement--Sale of SCF Shares and
SCF Warrants" and "--Certain Antidilutive Adjustments to the SCF Warrants."
Conditions to Sale. The obligations of Tuboscope and SCF to effect the SCF
Sale are subject to the satisfaction of certain conditions, including, among
others, (i) the satisfaction by Tuboscope and Drexel of the conditions
precedent to the Merger and (ii) the making of all filings with, and the
receipt of all consents, approvals, permits and authorizations from, any
government entity except where the failure to obtain such consents, approvals,
permits and authorizations would not be likely to have a material adverse
effect. See "The Subscription Agreement--Conditions to the SCF Sale."
Termination; Termination Fee. The Subscription Agreement is subject to
termination by either SCF or Tuboscope if (i) the SCF Sale does not occur by
June 30, 1996 or (ii) the Merger Agreement is terminated. In addition, the
Subscription Agreement may be terminated by the mutual agreement of Tuboscope
and SCF. If the Merger Agreement is terminated, SCF may be entitled to receive
a termination fee from Drexel under certain circumstances. See "The
Subscription Agreement--Termination; Termination Fee."
The BHI Exchange
Exchange of Securities. Concurrently with the closing of the Merger and the
SCF Sale, Tuboscope will issue to BHI 1,500,000 shares of Tuboscope Common
Stock and warrants to purchase, subject to adjustment under certain
circumstances, an aggregate of 1,250,000 shares of Tuboscope Common Stock at an
exercise price of $10 per share expiring on December 31, 2000, in exchange for
all of the 100,000 shares of Tuboscope Series A Preferred Stock held by BHI.
BHI has agreed not to dispose of the shares of Tuboscope Common Stock it
receives pursuant to the BHI Exchange prior to December 31, 1997. See "The
Merger Transactions--Interests of Certain Persons in the Merger Transactions--
The BHI Exchange" and "The Exchange Agreement."
Conditions to Exchange. The obligations of Tuboscope and BHI to effect the
BHI Exchange are subject to the satisfaction of certain conditions, including
among others, (i) the satisfaction by Tuboscope and Drexel of the condition
precedents to the Merger and (ii) the making of all filings with, and the
receipt of all consents, approvals, permits and authorizations from, any
government entity except where the failure to obtain such consents, approvals,
permits and authorizations would not be likely to have a material adverse
effect. See "The Exchange Agreement--Conditions to the BHI Exchange."
Termination. The Exchange Agreement is subject to termination by either BHI
or Tuboscope if (i) the BHI Exchange does not occur by June 30, 1996 or (ii)
the Merger Agreement is terminated.
4
<PAGE>
Amendment to Tuboscope's Certificate of Incorporation
The Board of Directors of Tuboscope has approved an amendment to Tuboscope's
Certificate of Incorporation increasing the number of authorized shares of
Tuboscope Common Stock from 35,000,000 to 60,000,000. See "Description of
Tuboscope Capital Stock" and "Proposal to Amend Tuboscope's Certificate of
Incorporation."
Recommendations of the Board of Directors
The Board of Directors of Tuboscope has unanimously approved the Merger
Proposals and unanimously recommends a vote FOR approval and adoption of each
of the Merger Proposals by the stockholders of Tuboscope. See "The Merger
Transactions--Tuboscope's Reasons for the Merger Transactions." See also "Risk
Factors" for a discussion of factors which should be carefully considered by
the stockholders of Tuboscope in connection with evaluating and voting on the
Merger Proposals and the transactions contemplated thereby.
Opinion of Tuboscope's Financial Advisor
CS First Boston Corporation ("CS First Boston"), Tuboscope's financial
advisor, rendered to the Board of Directors of Tuboscope its written opinion,
to the effect that, as of the date of such opinion, the consideration to be
paid and received by Tuboscope in the Merger Transactions was fair to Tuboscope
from a financial point of view. See "The Merger Transactions--Opinion of
Tuboscope's Financial Advisor." CS First Boston subsequently confirmed its
opinion by delivery of a written opinion dated as of the date of this Proxy
Statement/Prospectus. The full text of the written opinion of CS First Boston,
which sets forth certain assumptions made, matters considered and limitations
on the review undertaken by CS First Boston, is attached as Appendix D hereto.
Tuboscope stockholders are urged to read the opinion carefully in its entirety.
Tuboscope Management After the Merger
Following the consummation of the Merger, Tuboscope's Board of Directors will
be comprised of Jerome R. Baier, John F. Lauletta, J.S. Dickson Leach, Eric L.
Mattson, Martin R. Reid, L. E. Simmons and an individual to be mutually agreed
upon by Tuboscope and Drexel. Messrs. Lauletta, Dickson Leach and Simmons are
currently affiliated with Drexel and Messrs. Baier, Mattson and Reid are
currently directors of Tuboscope. See "Management and Operations After the
Merger" and "Proposal to Elect Tuboscope's Directors."
Following the consummation of the Merger, L.E. Simmons, currently the
Chairman of the Board of Drexel, will be the Chairman of the Board of
Tuboscope, John F. Lauletta, currently the Chief Executive Officer of Drexel,
will be the President and Chief Executive Officer of Tuboscope, Joseph C.
Winkler, currently the Chief Financial Officer of Drexel, will be the Chief
Financial Officer of Tuboscope, Gerhard H. Hage will continue to be the Senior
Vice President-International Operations, Martin I. Greenberg will continue to
be the Vice President, Controller, Assistant Treasurer and Assistant Secretary,
Kenneth L. Nibling will continue to be the Vice President-Human Resources and
Administration and James F. Maroney will continue to be the Vice President,
Secretary and General Counsel. See "Management and Operations After the
Merger."
Interests of Certain Persons in the Merger Transactions
In considering the recommendations of the Board of Directors of Tuboscope
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders should be aware that certain members of the Board of Directors of
Tuboscope and the management of Tuboscope may have interests in the Merger that
are in addition to the interests of stockholders of Tuboscope generally
(including, without limitation, the eligibility for severance benefits). The
Tuboscope Board of Directors was aware of these interests and
5
<PAGE>
considered them, among other factors, in approving the Merger Transactions. See
"The Merger Transactions--Interests of Certain Persons in the Merger
Transactions," "The Merger Agreement--Certain Covenants; Conduct of Business,"
"The Merger Agreement--Treatment of Drexel Options" and "The Merger Agreement--
Indemnification."
Regulatory Matters
In connection with the Merger and SCF Sale, Tuboscope, Drexel, DOS Partners
and SCF each filed pre-merger notification forms with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") under the HSR Act. Early termination of the waiting
period under the HSR Act has been granted with respect to these filings. In
addition, in connection with the BHI Exchange, Tuboscope and BHI each filed
pre-merger notification forms with the FTC and Antitrust Division under the HSR
Act. The required waiting period with respect to these filings will expire on
April 13, 1996, unless terminated at an earlier date or unless a request for
additional information is received. No other material federal or state
regulatory approvals must be obtained in order to consummate the Merger. See
"The Merger Transactions--Regulatory Approvals."
PROPOSAL TO ELECT TUBOSCOPE DIRECTORS
The following individuals, each of whom is currently a director of Tuboscope,
have been nominated for election to the Tuboscope Board of Directors: Martin R.
Reid, William V. Larkin, Jerome R. Baier, Martin G. Hubbard, Eric L. Mattson,
Timothy M. Pennington III, Patrick T. Seaver, James J. Shelton and Frederick J.
Warren. If the Merger Proposals are approved and the Merger is consummated,
Messrs. Larkin, Hubbard, Pennington, Seaver, Shelton and Warren, after their
election and upon consummation of the Merger, will resign as members of
Tuboscope's Board of Directors, and pursuant to the Merger Agreement, Messrs.
Simmons, Lauletta, Dickson Leach and an individual to be mutually agreed upon
by Tuboscope and Drexel will be appointed to Tuboscope's Board of Directors,
and the authorized number of directors will be reduced to seven. See
"Management and Operations After the Merger" and "Proposal to Elect Tuboscope
Directors."
PROPOSAL TO APPROVE THE 1996 EQUITY PARTICIPATION PLAN
The Tuboscope Board of Directors has approved the adoption of the 1996 Equity
Participation Plan. Approval of the 1996 Equity Participation Plan by the
requisite vote of Tuboscope stockholders is not a condition to, and is not
required for, consummation of the Merger Transactions. See "Proposal to Approve
the 1996 Equity Participation Plan."
6
<PAGE>
SELECTED FINANCIAL INFORMATION
TUBOSCOPE
The following selected financial information is derived from the historical
consolidated financial statements of Tuboscope. The financial information set
forth below should be read in conjunction with Tuboscope's consolidated
financial statements, related notes and other financial information
incorporated by reference in this Proxy Statement/Prospectus.
TUBOSCOPE VETCO INTERNATIONAL CORPORATION (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue.................... $151,769 $164,996 $183,340 $192,175 $190,015
Operating profit (loss).... 18,669 15,741 2,445 27,048 27,460
Interest expense........... 11,255 11,676 10,595 12,190 12,328
Income (loss) before income
taxes and extraordinary
item...................... 7,330 4,549 (10,807) 14,289 15,205
Net income (loss)(1)(2).... $4,546 $3,522 $(12,859) $7,524 $8,819
======== ======== ======== ======== ========
Net income (loss)
applicable to common
stock..................... $4,422 $2,822 $(13,559) $6,824 $8,119
======== ======== ======== ======== ========
Net income (loss) per
common share.............. $0.35 $0.15 $(0.74) $0.37 $0.44
======== ======== ======== ======== ========
Other Data:
Depreciation and
amortization.............. $ 9,235 $13,221 $14,218 $14,380 $15,037
Capital expenditures....... 7,546 5,296 14,640 7,549 7,645
EBITDA(3).................. 31,090 30,852 27,262 40,859 42,570
Cash flows provided by
(used for):
Operating activities..... 18,507 3,363 2,488 16,389 21,581
Investing activities..... (62,399) (12,894) (15,960) (12,368) (1,084)
Financing activities..... 72,607 (17,605) 10,769 1,916 (19,875)
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............ $ 49,795 $ 28,202 $ 5,279 $ 35,926 $ 44,623
Total assets............... 326,969 299,734 310,108 317,027 306,679
Long-term debt (including
current portion).......... 129,388 109,771 126,416 130,356 111,617
Redeemable Series A
Convertible Preferred
Stock..................... 10,124 10,175 10,175 10,175 10,175
Common stockholders'
equity.................... 115,223 119,849 105,256 113,424 121,441
</TABLE>
- --------
(1) During 1991, 1992, and 1993, Tuboscope recorded the impact of restructuring
plans designed to increase overall profitability of Tuboscope.
Restructuring costs of $3.3 million, $1.4 million and $13.3 million were
incurred in 1991, 1992 and 1993, respectively, and included severance costs
related to reduction of Tuboscope's personnel, costs associated with the
consolidation or closure of certain facilities, and costs associated with
the retirement of the former chief executive officer.
(2) Tuboscope recognized extraordinary losses, net of taxes of $4.5 million and
$764,000 in 1993 and 1994, respectively, related to the early retirement
and refinancing of Tuboscope's subordinated and senior debt.
(3) "EBITDA" means earnings before interest, taxes, depreciation, amortization,
restructuring charges and extraordinary items and should not be considered
as an alternative to net income or any other generally accepted accounting
principles measure of performance as an indicator of Tuboscope's operating
performance or as a measure of liquidity. As used herein, EBITDA is
consistent with the definition used in the Company's credit agreement for
covenant purposes. The Company believes EBITDA is a widely accepted
financial indicator of a company's ability to service debt.
7
<PAGE>
DREXEL
The following financial information is derived from the historical
consolidated financial statements of Drexel. Selected unaudited financial data
for the nine months ended December 31, 1994 and 1995 include all adjustments
(consisting only of normally recurring accruals) that Drexel considers
necessary for a fair presentation of consolidated operating results for such
interim periods. Results for the interim periods are not necessarily indicative
of results for the full year. In November 1995, Drexel acquired SOFS. SOFS
financial information is included in the financial information for the nine
months ended December 31, 1995 commencing on the effective date of the
acquisition. The financial information set forth below should be read in
conjunction with Drexel's consolidated financial statements, related notes and
other financial information included elsewhere in this Proxy
Statement/Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Drexel."
D.O.S. LTD. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
----------------------------------------- --------------------
1991 1992 1993 1994 1995 1994 1995
------- ------- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue............... $53,031 $75,471 $66,411 $67,370 $80,173 $ 59,113 $ 67,657
Operating profit
(loss)............... 2,636 2,267 1,703 (3,113) 4,690 2,795 6,572
Interest expense...... 1,369 1,424 432 234 230 174 435
Income (loss) before
income taxes and
extraordinary item
and cumulative effect
of accounting
change(1)(2)......... 1,715 1,048 28 (5,115) 4,317 2,560 6,339
Net income
(loss)(1)(2)(3)...... $ 1,532 $ 646 $ (25) $(4,964) $ 5,843 $ 1,665 $ 4,133
======= ======= ======= ======= ======= ======== ========= ===
Net income (loss) per
common share......... $ 0.08 $ 0.03 $ 0.00 $ (0.16) $ 0.18 $ 0.05 $ 0.13
======= ======= ======= ======= ======= ======== =========
Other Data:
Depreciation and
amortization......... $2,101 $2,497 $3,011 $2,603 $3,014 $2,213 $2,580
Capital expenditures.. 7,128 3,222 2,323 3,923 2,995 1,940 4,564
EBITDA(4)............. 5,185 4,969 3,471 (322) 7,561 4,947 9,354
<CAPTION>
AS OF MARCH 31, AS OF
----------------------------------------- DEC. 31,
1991 1992 1993 1994 1995 1995
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....... $ 5,392 $13,811 $21,969 $17,203 $22,698 $ 28,821
Total assets.......... 44,551 44,234 49,808 46,532 48,906 108,488
Long-term debt
(including current
portion)(5).......... 6,542 15,122 2,206 1,723 1,634 35,151
Common stockholders'
equity(6)(7)......... 4,333 13,894 33,743 29,271 35,780 45,853
</TABLE>
- --------
(1) During fiscal 1993, Drexel recorded a loss of $1.3 million on a
discontinued joint venture.
(2) During fiscal 1994, Drexel recorded a goodwill write-off of $2.0 million.
(3) Effective April 1, 1993, Drexel adopted SFAS No. 109, "Accounting for
Income Taxes," on a prospective basis resulting in a valuation allowance
equal to certain tax assets in fiscal 1994. The cumulative effect of this
charge was $397,000.
(4) "EBITDA" means earnings before interest, taxes, depreciation, amortization,
goodwill write-off and extraordinary items and should not be considered as
an alternative to net income or any other generally accepted accounting
principles measure of performance as an indicator of Drexel's operating
performance or as a measure of liquidity.
(5) During the period ended December 31, 1995, long-term debt of approximately
$30.8 million was incurred in connection with the SOFS acquisition.
(6) Includes an equity infusion of approximately $20.0 million during fiscal
1993, the proceeds of which were used to pay down Drexel's bank debt.
(7) Includes an equity infusion of approximately $5.0 million from existing
Drexel stockholders and the issuance to former SOFS stockholders of
approximately $2.0 million of Drexel Common Stock in connection with the
SOFS acquisition during the period ended December 31, 1995.
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following summary unaudited pro forma condensed combined financial data
present summary (i) unaudited pro forma selected operating data for the year
ended December 31, 1995 after giving effect to the Merger Transactions and as
if the Merger Transactions were consummated on January 1, 1995 and (ii)
unaudited pro forma selected balance sheet data at December 31, 1995, giving
effect to the Merger Transactions as if the Merger Transactions were
consummated on that date, using the purchase method of accounting. The pro
forma condensed statement of income for the year ended December 31, 1995
combines the results of operations for Tuboscope's fiscal year ended December
31, 1995 with the results of operations for Drexel's twelve month period ended
December 31, 1995 and SOFS's 10.5 month period ended November 15, 1995, after
giving effect to pro forma adjustments.
The following summary unaudited pro forma condensed combined financial data
are provided for comparative purposes only and should be read in conjunction
with the unaudited pro forma condensed combined financial statements and notes
thereto and the separate audited consolidated financial statements and related
notes of Tuboscope (which are incorporated herein by reference) and Drexel
(which are included elsewhere in this Proxy Statement/Prospectus). The
following summary unaudited pro forma condensed combined financial data are
based on certain assumptions and do not purport to be indicative of the results
which actually would have occurred if the Merger Transactions had been
consummated on the dates indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DEC. 31, 1995(1)
----------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C>
Income Statement Data:
Revenue...................................................... $314,960
Operating profit............................................. 38,584
Interest expense............................................. 14,162
Income before income taxes................................... 24,466
Net income................................................... $16,433
========
Net income per common share.................................. $0.40
========
Other Data:
Depreciation and amortization................................ $22,009
EBITDA(2).................................................... 60,637
<CAPTION>
AS OF
DEC. 31,
1995
--------
<S> <C>
Balance Sheet Data:
Working capital.............................................. $ 73,269
Total assets................................................. 481,708
Long-term debt (including current portion)................... 131,958
Common stockholders' equity.................................. 257,445
</TABLE>
- --------
(1) Unaudited Pro Forma Condensed Combined Financial Statements do not include
consolidation savings which the Company expects to achieve from the Merger
of Tuboscope and Drexel and the acquisition of SOFS. See "Risk Factors--No
Assurance of Achieving Anticipated Consolidation Savings."
(2) "EBITDA" means earnings before interest, taxes, depreciation, amortization
and extraordinary items and should not be considered as an alternative to
net income or any other generally accepted accounting principles measure of
performance as an indicator of the combined entity's operating performance
or as a measure of liquidity. As used herein, EBITDA is consistent with the
definition used in the Company's credit agreement for covenant purposes.
The Company believes EBITDA is a widely accepted financial indicator of a
company's ability to service debt.
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical and pro forma per share data for
Tuboscope and historical and equivalent pro forma per share information for
Drexel after giving effect to the Merger Transactions using the purchase method
of accounting, assuming the Merger Transactions had been effective during all
periods presented. The pro forma data does not purport to be indicative of
future operations or the results that would have occurred had the Merger
Transactions been consummated at the beginning of the periods presented. The
information set forth below should be read in conjunction with the financial
statements and notes thereto of Tuboscope incorporated herein by reference, the
financial statements and notes thereto of Drexel included elsewhere in this
Proxy Statement/Prospectus and the unaudited pro forma condensed combined
financial statements included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
1995(1)
-----------
TUBOSCOPE
- ---------
<S> <C>
Income per share from continuing operations
Historical....................................................... $0.44
Pro forma(2)..................................................... 0.40
Book Value
Historical....................................................... 6.31
Pro forma(2)..................................................... 6.32
<CAPTION>
DREXEL
- ------
<S> <C>
Income per share from continuing operations
Historical(2).................................................... $0.26
Equivalent of 46.45% of pro forma net income per share of
Tuboscope Common Stock.......................................... 0.19
Book Value
Historical(2).................................................... 1.27
Equivalent of 46.45% of pro forma net book value per share of
Tuboscope Common Stock.......................................... 2.94
</TABLE>
- --------
(1) The information with respect to Tuboscope is for the fiscal year ended
December 31, 1995 and the information with respect to Drexel is for the
twelve-month period ended December 31, 1995.
(2) The historical results for Drexel include the results of SOFS from November
16, 1995, the effective date of the SOFS acquisition. The pro forma results
for Tuboscope include SOFS results for the fiscal year ended December 31,
1995.
10
<PAGE>
PRICE RANGE OF TUBOSCOPE COMMON STOCK
Tuboscope Common Stock is quoted on Nasdaq under the symbol "TUBO." The table
below sets forth, for the calendar quarters indicated, the high and low sale
prices per share quoted on Nasdaq for Tuboscope Common Stock. The information
with respect to Nasdaq quotations reflects interdealer prices, without retail
markup, markdown or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
TUBOSCOPE
COMMON STOCK
-----------------
HIGH LOW
------ ------
<S> <C> <C>
Calendar 1994:
First Quarter........................................... $ 7 1/2 $4
Second Quarter.......................................... 7 1/8 4 1/2
Third Quarter........................................... 8 6 1/8
Fourth Quarter.......................................... 7 1/8 5 5/8
Calendar 1995:
First Quarter........................................... $ 8 1/2 $6 1/2
Second Quarter.......................................... 7 1/2 6
Third Quarter........................................... 7 5 3/4
Fourth Quarter.......................................... 6 5/8 5 5/8
Calendar 1996:
First Quarter
(through March 18, 1996)............................... 10 $ 5 5/8
</TABLE> 1/4
- --------
The last reported sale price per share of Tuboscope Common Stock on January
3, 1996, the last trading day preceding public announcement of the Merger, was
$6 1/8. On March 18, 1996, the closing sale price per share of Tuboscope Common
Stock was $10 1/8.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR TUBOSCOPE COMMON
STOCK.
11
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the stockholders of
Tuboscope in connection with voting upon the Merger Proposals and the
transactions contemplated thereby.
NO ASSURANCE OF CONTINUED GROWTH OF DREXEL'S OPERATING PROFIT; INTEGRATION OF
SOFS'S OPERATIONS
Drexel's operating profit increased $7.8 million from an operating loss of
$3.1 million for the fiscal year ended March 31, 1994 to $4.7 million for the
fiscal year ended March 31, 1995, and increased $3.8 million from $2.8 million
for the nine months ended December 31, 1994 to $6.6 million for the nine months
ended December 31, 1995. Drexel's operating profit growth is the result of,
among other things, growth in its markets and actions taken by its new
management team to focus on the sale of higher gross margin equipment and
parts, the expansion of the rental and service portion of Drexel's business,
the implementation of cost control measures and the acquisition of SOFS. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Drexel." While Drexel's management believes that Drexel continues
to have good prospects for operating profit growth, no assurance can be given
that Drexel's operating profit will continue to grow or be maintained at
current levels.
On November 16, 1995, Drexel acquired all of the operations of SOFS, whose
revenues for its fiscal year ended May 31, 1995 were approximately $38.0
million. No assurance can be given that SOFS's operations can be successfully
integrated into Drexel's operations or that expected improvements in SOFS's
performance can be achieved.
CHANGES IN THE OWNERSHIP OF TUBOSCOPE RESULTING FROM THE MERGER TRANSACTIONS
After consummation of the Merger Transactions, existing Tuboscope
stockholders, including BHI, will own approximately 48.9% of the outstanding
Tuboscope Common Stock. BHI, which currently owns approximately 13.7% of
Tuboscope Common Stock, will own beneficially approximately 10.8% of Tuboscope
Common Stock (excluding the BHI Warrants) after the Merger Transactions,
including the BHI Exchange; Brentwood Associates IV, which currently owns
approximately 7.0% of the outstanding Tuboscope Common Stock, is expected to
distribute such stock to its partners on or prior to May 15, 1996.
After consummation of the Merger Transactions, in addition to BHI, the
largest stockholders of Tuboscope are expected to be DOS Partners, L.P., a
Delaware limited partnership ("DOS Partners") (13.1%), SCF (10.3%, excluding
the SCF Warrants), Panmell (Holdings), Ltd., a Hong Kong corporation
("Panmell") (8.5%), Kadoorie McAuley International Ltd., a British Virgin
Islands corporation ("KMIL") (8.3%) and Actinium Holding Corporation, a Nauru
corporation ("Actinium") (7.9%). Mr. L.E. Simmons, the Chairman of the Board of
Drexel and upon consummation of the Merger Transactions the Chairman of the
Board of Tuboscope, will be deemed to beneficially own the shares held by DOS
Partners and SCF after consummation of the Merger Transactions. Mr. Y.L. Loh, a
director of Drexel, will be deemed to beneficially own the shares held by
Panmell after consummation of the Merger Transactions. The entities mentioned
above have indicated that they have no arrangement or understanding to act in
concert; however, if such entities did act in concert, they would be able, as a
practical matter, to control the future policies of the Company.
CERTAIN CHANGES IN EXECUTIVE MANAGEMENT
Following consummation of the Merger Transactions, Tuboscope's Board of
Directors will be comprised of Jerome R. Baier, John F. Lauletta, J.S. Dickson
Leach, Eric L. Mattson, Martin R. Reid, L. E. Simmons and an individual to be
mutually agreed upon by Tuboscope and Drexel. Messrs. Lauletta, Dickson Leach
and Simmons are currently affiliated with Drexel and Messrs. Baier, Mattson and
Reid are currently directors of Tuboscope. See "Management and Operations After
the Merger" and "Proposal to Elect Tuboscope's Directors." In addition,
following consummation of the Merger Transactions, L.E. Simmons, currently the
Chairman of the Board of Drexel, will be the Chairman of the Board of
Tuboscope, John F. Lauletta,
12
<PAGE>
currently the Chief Executive Officer of Drexel, will be the President and
Chief Executive Officer of Tuboscope, Joseph C. Winkler, currently the Chief
Financial Officer of Drexel, will be the Chief Financial Officer of Tuboscope,
Gerhard H. Hage will continue to be the Senior Vice President-International
Operations, Martin I. Greenberg will continue to be the Vice President,
Controller, Assistant Treasurer and Assistant Secretary, Kenneth L. Nibling
will continue to be the Vice President-Human Resources and Administration and
James F. Maroney will continue to be the Vice President, Secretary and General
Counsel. See "Management and Operations After the Merger." There can be no
assurance that the changes in executive management described above will not
have an adverse effect on the future operations of Tuboscope.
NO ASSURANCE OF ACHIEVING ANTICIPATED CONSOLIDATION SAVINGS
Tuboscope's management anticipates that consolidation cost savings of $4.0
million on an annualized basis will result from the Merger, primarily related
to the combination and elimination of duplicate overhead and operating
locations and the elimination of certain executive officer and overhead
functions. In addition, Tuboscope and Drexel management anticipate that
consolidation cost savings and operational efficiencies of approximately $2.6
million on an annualized basis will result from Drexel's acquisition of SOFS in
November 1995, primarily resulting from the combination and elimination of
duplicate operating locations, and efficiencies gained in purchasing and
manufacturing. If the consolidation savings are achieved, and assuming a
statutory tax rate of 35%, earnings per share would increase by $.10. However,
no assurance can be given that the expected cost savings from the combination
of Tuboscope, Drexel and SOFS will be achieved.
POSSIBLE REPURCHASE OBLIGATION REGARDING TVI'S SUBORDINATED NOTES
TVI currently has outstanding $75 million of its 10.75% Subordinated Notes
(the "Notes") due 2003. Pursuant to the indenture under which the Notes were
issued, if within 90 days after the public announcement of the Merger
Transactions or their consummation, the rating by either Moody's or Standard &
Poor's Corporation ("S&P") of the Notes is decreased by one or more gradations,
TVI will be required to offer to purchase all of the outstanding Notes at 101%
of their original principal amount. In 1993 when the Notes were originally
issued, S&P rated the Notes with a "B-" rating and Moody's rated the Notes with
a "B2" rating. Subsequent to the announcement of the Merger Transactions, S&P
announced that the Notes were placed on Credit Watch with positive
implications. Based on the reduced leverage of Tuboscope after the Merger
Transactions and preliminary conversations with S&P, Tuboscope management does
not believe that the Notes will incur a rating downgrade.
If Tuboscope were required to make an offer to repurchase the Notes and
Noteholders holding a significant amount of the outstanding principal amount of
the Notes accepted the offer, Tuboscope's liquidity would be significantly
impacted unless alternate financing were arranged. No assurance can be given
that sufficient funds will be available to make any required repurchases.
Tuboscope's Bank Credit Agreement prohibits the repurchase of indebtedness
subordinated to indebtedness under the Bank Credit Agreement, including the
Notes. Failure of Tuboscope to repurchase the Notes, if required, would create
an event of default under the Notes.
LIMITATIONS OF THE FAIRNESS OPINION OF TUBOSCOPE'S FINANCIAL ADVISOR
The fairness opinion rendered by CS First Boston to Tuboscope's Board of
Directors is qualified by, and is dependent on, a number of assumptions which
may not prove to be accurate. Included in these assumptions is a reliance by CS
First Boston on forecasted financial information prepared by Tuboscope and
Drexel without independent verification. Any estimates contained in such
forecasts are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than as set forth therein. Moreover, CS First Boston did not make or receive an
independent evaluation or appraisal of the assets or liabilities or of the
historical information it was provided pertaining to Tuboscope
13
<PAGE>
or Drexel. CS First Boston's fairness opinion is based upon market, economic
and other conditions as they existed on, and should be evaluated as of, the
date of such opinion. Future market, economic and other conditions may vary
from those assumed in the fairness opinion, and such variances may materially
impact the analysis employed, and the conclusions reached, in such opinion.
CYCLICAL NATURE OF OILFIELD SERVICES INDUSTRY
The oil and gas industry in which Tuboscope and Drexel participate
historically has experienced significant volatility. Demand for Tuboscope's and
Drexel's services and products depends primarily upon the number of oil and gas
wells being drilled, the depth and drilling conditions of such wells, the
volume of production, the number of well completions and the level of workover
activity. Drilling and workover activity can fluctuate significantly in a short
period of time, particularly in the United States and Canada.
The willingness of oil and gas operators to make capital expenditures for the
exploration and production of oil and natural gas will continue to be
influenced by numerous factors over which Tuboscope and Drexel have no control,
including the prevailing and expected market prices for oil and natural gas.
Such prices are impacted by, among other factors, the ability of the members of
the Organization of Petroleum Exporting Countries ("OPEC") to maintain price
stability through voluntary production limits, the level of production by non-
OPEC countries, worldwide demand for oil and gas, general economic and
political conditions, costs of exploration and production, availability of new
leases and concessions, and governmental regulations regarding, among other
things, environmental protection, taxation, price controls and product
allocations. No assurance can be given as to the level of future oil and gas
industry activity or demand for Tuboscope's and Drexel's services and products.
RISK OF SIGNIFICANT FOREIGN OPERATIONS
Tuboscope's and Drexel's foreign operations, which include significant
operations in Canada, Europe, the Far East, the Middle East and Latin America,
are subject to the risks normally associated with conducting business in
foreign countries, including uncertain political and economic environments,
which may limit or disrupt markets, restrict the movement of funds or result in
the deprivation of contract rights or the taking of property without fair
compensation. Government-owned petroleum companies located in some of the
countries in which Tuboscope and Drexel operate have adopted policies (or are
subject to governmental policies) giving preference to the purchase of goods
and services from companies that are majority-owned by local nationals. As a
result of such policies, Tuboscope and Drexel rely on joint ventures, license
arrangements and other business combinations with local nationals in these
countries. In addition, political considerations may disrupt the commercial
relationships between Tuboscope and Drexel and such government-owned petroleum
companies. Although neither Tuboscope nor Drexel has experienced any
significant problems in foreign countries arising from nationalistic policies,
political instability, economic instability or currency restrictions, there can
be no assurance that such a problem will not arise in the future.
In jurisdictions where management believes significant inflation or other
currency risks exist, Tuboscope and Drexel attempt to limit their exposure by
preparing their billings in U.S. dollars. In most of these jurisdictions there
are no material limitations on Tuboscope's or Drexel's ability to dividend or
loan cash from their operations into the United States once the billings are
paid.
To minimize its foreign currency translation exposure, Tuboscope and Drexel
also attempt to match foreign assets and liabilities and, in some instances,
Tuboscope enters into foreign currency hedging transactions. Neither Tuboscope
nor Drexel engages in speculative foreign currency financial transactions.
INTERESTS OF CERTAIN PERSONS IN THE MERGER TRANSACTIONS; POSSIBLE CONFLICTS OF
INTEREST
Certain directors and officers of Tuboscope and Drexel have interests in
connection with the Merger Transactions that are in addition to those of the
stockholders of Tuboscope and Drexel generally. See "The Merger Transactions--
Interests of Certain Persons in the Merger Transactions."
14
<PAGE>
THE ANNUAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished by the Company to the
holders of Tuboscope Common Stock in connection with the solicitation of
proxies by the Board of Directors for use at the Annual Meeting of Stockholders
of the Company to be held on April 24, 1996 at The Ritz Carlton Hotel, 1919
Briar Oaks Lane, Houston, Texas at 10:00 a.m., local time, and any adjournment
or postponement thereof.
This Proxy Statement/Prospectus, the attached Notice of Meeting and the
accompanying form of proxy are first being mailed to stockholders of the
Company on or about March 25, 1996.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, including any adjournment thereof, holders of shares
of Tuboscope Common Stock will consider and vote upon the following three
related Merger Proposals: (i) approval and adoption of the Merger Agreement and
the transactions contemplated thereby (including the assumption by the Company
of the rights and obligations of Drexel under the Drexel Stock Option Plans),
(ii) approval of the SCF Sale, and (iii) approval of an amendment to
Tuboscope's Certificate of Incorporation to increase the number of authorized
shares of Tuboscope Common Stock from 35,000,000 to 60,000,000. THE APPROVAL OF
EACH OF THE MERGER PROPOSALS IS CONDITIONED UPON THE APPROVAL OF ALL OF THE
MERGER PROPOSALS BY THE STOCKHOLDERS OF TUBOSCOPE. ACCORDINGLY, A VOTE AGAINST
ANY ONE OR MORE OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST ALL OF THE MERGER PROPOSALS.
In addition, at the Annual Meeting holders of shares of Tuboscope Common
Stock will consider and vote upon the following two Additional Proposals: (i)
the election of the Tuboscope Board of Directors and (ii) approval of the 1996
Equity Participation Plan. THE APPROVAL OF ANY OF THE ADDITIONAL PROPOSALS IS
NOT CONDITIONED ON THE APPROVAL OF ANY OTHER TUBOSCOPE ADDITIONAL PROPOSAL OR
THE MERGER PROPOSALS.
The Tuboscope Board of Directors has unanimously approved the Merger
Proposals (including the assumption by the Company of the rights and
obligations of Drexel under the Drexel Stock Option Plans) and the 1996 Equity
Participation Plan. The Tuboscope Board of Directors unanimously recommends
that the holders of Tuboscope Common Stock vote FOR the approval of each of the
Merger Proposals and the 1996 Equity Participation Plan. In addition, the
Tuboscope Board of Directors recommends a vote FOR the election of each nominee
to the Tuboscope Board of Directors named in this Proxy Statement/Prospectus.
For further information, see "Risk Factors," "The Merger Transactions," "The
Merger Agreement," "The Subscription Agreement," "Proposal to Amend Tuboscope's
Certificate of Incorporation," "Proposal to Elect Tuboscope Directors" and
"Proposal to Approve the 1996 Equity Participation Plan."
Ernst & Young LLP has been appointed as auditors for Tuboscope for fiscal
year 1996, subject to the discretion of the Tuboscope Board of Directors to
appoint different auditors if it deems appropriate. It is currently expected
that representatives of the Company's principal accountants for the current
year will be present at the Annual Meeting where they will have the opportunity
to make a statement if they so decide and will be available to respond to
appropriate questions.
RECORD DATE
The Board of Directors of Tuboscope has fixed the close of business on March
15, 1996 as the Record Date for the determination of stockholders entitled to
notice of, and to vote at, the Annual Meeting. Accordingly, only holders of
record of shares of Tuboscope Common Stock at the close of business on the
Record Date are entitled to notice of, and to vote at, the Annual Meeting. As
of the Record Date, 18,560,075 shares of Tuboscope Common Stock were
outstanding and held of record by approximately 270 stockholders.
15
<PAGE>
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder does not attend the Annual Meeting and does not
return the signed proxy card, such stockholder's shares will not be voted. If a
stockholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted FOR approval of each of the
Merger Proposals, FOR the election of the persons nominated to the Tuboscope
Board of Directors and FOR approval of the 1996 Equity Participation Plan. As
of the date of this Proxy Statement/Prospectus, the Board of Directors of
Tuboscope does not know of any other matters which are to come before the
Annual Meeting. If any other matters are properly presented at the Annual
Meeting for consideration, including, among other things, consideration of a
motion to adjourn the Annual Meeting to another time and/or place, the persons
named in the enclosed form of proxy and acting thereunder will have discretion
to vote on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Tuboscope, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares of
Tuboscope Common Stock and delivering it to the Secretary of Tuboscope before
the taking of the vote at the Annual Meeting or (iii) attending the Annual
Meeting and voting in person (although attendance at the Annual Meeting will
not in and of itself constitute a revocation of a proxy). In addition, brokers
who hold shares of Tuboscope Common Stock as nominees will not have
discretionary authorization to vote such shares on any of the Merger Proposals
in the absence of instructions from the beneficial owners. Any written notice
of revocation or subsequent proxy should be sent so as to be delivered to
Tuboscope Vetco International Corporation, 2835 Holmes Road, Houston, Texas
77051, Attention: Corporate Secretary, or hand delivered to the Secretary of
Tuboscope at or before the taking of the vote at the Annual Meeting.
Tuboscope will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Tuboscope in person or by
telephone or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for out-
of-pocket expenses incurred in connection with such solicitation. Arrangements
also will be made with custodians, nominees and fiduciaries for the forwarding
of proxy solicitation materials to beneficial owners of shares held of record
by such custodians, nominees and fiduciaries, and Tuboscope will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith. In addition, Morrow & Co., Inc. will assist in the
solicitation of proxies by Tuboscope for a fee of $5,000, plus reimbursement of
reasonable out-of-pocket expenses.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of Tuboscope Common Stock is
necessary to constitute a quorum at the Annual Meeting. Under Tuboscope's
bylaws and the DGCL, shares represented by proxies that reflect abstentions or
"broker non-votes" (i.e., shares held by a broker or nominee which are
represented at the meeting, but with respect to which such broker or nominee is
not empowered to vote on a particular proposal) will be counted as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum.
VOTE REQUIRED
Tuboscope stockholders are entitled to one vote at the Annual Meeting for
each share of Tuboscope Common Stock held of record by them on the Record Date.
The affirmative vote of the holders of a majority of the outstanding shares of
Tuboscope Common Stock is required to approve each of the Merger Proposals. The
affirmative vote of a majority of the outstanding shares of Tuboscope Common
Stock present at the Annual Meeting either in person or by properly executed
proxies and entitled to vote is required to approve
16
<PAGE>
the 1996 Equity Participation Plan. Abstentions as to a particular proposal
will have the same effect as votes against such proposal. Broker non-votes,
however, will be treated as unvoted for purposes of determining approval of
such proposal and will not be counted as votes for or against such proposal.
The favorable vote of a plurality of the shares of Tuboscope Common Stock
present at the Annual Meeting, either in person or by properly executed
proxies, and entitled to vote is required to elect members of the Tuboscope
Board of Directors. Abstentions or broker non-votes as to the election of
directors will not affect the election of the candidates receiving the
plurality of votes. EACH OF THE MERGER PROPOSALS AND EACH OF THE ADDITIONAL
PROPOSALS WILL BE VOTED UPON SEPARATELY. HOWEVER, THE APPROVAL OF EACH OF THE
MERGER PROPOSALS IS CONDITIONED UPON THE APPROVAL OF ALL THE MERGER PROPOSALS
BY THE STOCKHOLDERS OF TUBOSCOPE. ACCORDINGLY, A VOTE AGAINST ANY ONE OR MORE
OF THE MERGER PROPOSALS WILL HAVE THE SAME EFFECT AS A VOTE AGAINST ALL OF THE
MERGER PROPOSALS. THE APPROVAL OF ANY OF THE ADDITIONAL PROPOSALS IS NOT
CONDITIONED ON THE APPROVAL OF ANY OTHER ADDITIONAL PROPOSAL OR THE MERGER
PROPOSALS.
As of the Record Date, Tuboscope's directors, executive officers and
affiliates may be deemed to be beneficial owners of an aggregate of 3,899,393
shares of Tuboscope Common Stock (excluding 777,619 shares which may be
acquired upon exercise of options or other rights which are exercisable within
60 days of the Record Date), or approximately 21.0% of the then outstanding
shares of Tuboscope Common Stock. BHI and Brentwood have entered into a voting
agreement with Drexel pursuant to which each such stockholder agreed to vote an
aggregate of 2,911,111 shares of Tuboscope Common Stock, representing 16.1% of
the outstanding Tuboscope Common Stock, in favor of the Merger Proposals. See
"The Merger Transactions--Voting Agreements" and "Security Ownership of Certain
Beneficial Owners and Management of Tuboscope."
17
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31,
1995 and the Unaudited Pro Forma Condensed Combined Statements of Income for
the year ended December 31, 1995 give effect to the Merger Transactions. The
Unaudited Pro Forma Condensed Combined Statement of Income for the year ended
December 31, 1995 combines the results of operations for Tuboscope's fiscal
year ended December 31, 1995 with results of operations for Drexel's twelve
month period ended December 31, 1995 and SOFS's 10.5 month period ended
November 15, 1995. SOFS was purchased by Drexel on November 16, 1995. The
Unaudited Pro Forma Condensed Combined Statement of Income assumes all such
transactions occurred on January 1, 1995. The Unaudited Pro Forma Condensed
Combined Balance Sheet assumes all such transactions occurred on December 31,
1995. The pro forma information is based upon the historical financial
statements of Tuboscope, Drexel and SOFS, giving effect to the acquisition
under the purchase method of accounting and the assumptions and adjustments in
the accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
The Unaudited Pro Forma Condensed Combined Financial Statements have been
prepared based upon the financial statements of Tuboscope, Drexel and SOFS. The
Unaudited Pro Forma Condensed Combined Financial Statements may not be
indicative of the results which would have occurred if the combination had been
in effect on the dates indicated or which may occur in the future. The
Unaudited Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the financial statements of Tuboscope (which are incorporated
herein by reference) and Drexel (which are included elsewhere in this Proxy
Statement/Prospectus).
18
<PAGE>
TUBOSCOPE/DREXEL
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
TUBOSCOPE/DREXEL TUBOSCOPE/DREXEL
PRO FORMA PRO FORMA TUBOSCOPE/DREXEL
DREXEL TUBOSCOPE ACQUISITION CAPITAL INFUSION PRO FORMA
ASSETS HISTORICAL(2) HISTORICAL ADJUSTMENTS(3) ADJUSTMENTS(4) CONSOLIDATION
------ ------------- ---------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............ $ 2,063 $ 9,394 $ $ $ 11,457
Accounts receivable,
net.................... 31,598 52,071 83,669
Inventory, net......... 23,903 14,364 38,267
Deferred federal
income taxes........... 1,357 2,521 3,878
Prepaid expenses and
other.................. 1,075 6,403 7,478
-------- -------- ------- -------- --------
Total current assets. 59,996 84,753 144,749
Property and equipment.. 43,496 186,744 (12,113) 218,127
Accumulated depreciation
and amortization........ (17,113) (46,706) 17,113 (46,706)
-------- -------- ------- -------- --------
Net property and
equipment............ 26,383 140,038 5,000 171,421
Identified intangibles,
net..................... -- 29,379 3,000 32,379
Goodwill, net........... 19,663 47,751 58,541 125,955
Other assets, net....... 2,446 4,758 7,204
-------- -------- ------- -------- --------
Total assets......... $108,488 $306,679 $66,541 $ $481,708
======== ======== ======= ======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable....... $ 16,497 $ 14,306 $ $ $ 30,803
Accrued liabilities.... 9,597 18,705 175 28,477
Federal and foreign
income taxes payable... -- 2,557 2,557
Current portion of
long-term debt......... 5,081 4,562 9,643
-------- -------- ------- -------- --------
Total current
liabilities.......... 31,175 40,130 175 71,480
Long-term debt.......... 30,760 107,055 13,600 (29,100) 122,315
Pension liabilities..... -- 9,869 9,869
Deferred taxes payable.. 700 16,411 1,890 19,001
Other liabilities....... -- 1,598 1,598
-------- -------- ------- -------- --------
Total liablities..... 62,635 175,063 15,490 (28,925) 224,263
Redeemable Series A
Convertible Preferred
Stock................... -- 10,175 (10,175) --
-------- -------- ------- -------- --------
Common stockholders'
equity:
Common stock........... 3,597 185 (3,430) 57 409
Paid-in capital........ 32,619 116,379 69,409 39,043 257,450
Retained earnings
(deficit).............. 9,251 6,650 (14,542) 1,359
Cumulative translation
adjustment............. 386 (1,773) (386) (1,773)
-------- -------- ------- -------- --------
Total common
stockholders' equity. 45,853 121,441 51,051 39,100 257,445
-------- -------- ------- -------- --------
Total liabilities and
equity............... $108,488 $306,679 $66,541 $ $481,708
======== ======== ======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
19
<PAGE>
TUBOSCOPE/DREXEL
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------------------------
HISTORICAL
---------------------------
TWELVE MONTHS 10.5 MONTHS PRO FORMA PRO FORMA
ENDED DEC. 31 ENDED NOV. 15 PRO FORMA PRO FORMA PRO FORMA CAPITAL CAPITAL INFUSION
1995 1995 ACQUISITION DREXEL/SOFS HISTORICAL ACQUISITION INFUSION & ACQUISITION
DREXEL(2) SOFS(2) ADJUSTMENTS COMBINED TUBOSCOPE ADJUSTMENTS ADJUSTMENT COMBINED
------------- ------------- ----------- ----------- ----------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......... $88,717 $36,228 $ $124,945 $ 190,015 $ $ $ 314,960
Cost of sales... 66,849 22,817 (364)(5) 88,426 138,367 500(9) 229,007
(876)(6) 1,714(10)
------- ------- ------ -------- ----------- ----------- ---------- -----------
Gross profit.... 21,868 13,411 1,240 36,519 51,648 (2,214) 85,953
Selling, general
and
administrative
costs.......... 13,401 9,780 23,181 24,188 47,369
------- ------- ------ -------- ----------- ----------- ---------- -----------
Operating
profit......... 8,467 3,631 1,240 13,338 27,460 (2,214) 38,584
Interest
expense........ 491 1,008 1,575 (7) 3,074 12,328 1,088 (11) (2,328)(13) 14,162
Other expense
(income)....... (120) 149 29 (73) (44)
------- ------- ------ -------- ----------- ----------- ---------- -----------
Income before
income taxes... 8,096 2,474 (335) 10,235 15,205 (3,302) 2,328 24,466
Provision
(benefit) for
income taxes... (215) 1,807 (117)(8) 1,475 6,386 (643)(12) 815 (12) 8,033
------- ------- ------ -------- ----------- ----------- ---------- -----------
Net income...... 8,311 667 (218) 8,760 8,819 (2,659) 1,513 16,433
Dividends
applicable to
Series A
Convertible
Preferred
Stock.......... -- -- -- 700 (700)(14) --
------- ------- ------ -------- ----------- ----------- ---------- -----------
Net income
applicable to
common stock... $ 8,311 $ 667 $ (218) $ 8,760 $ 8,119 $ (2,659) $ 2,213 $ 16,433
======= ======= ====== ======== =========== =========== ========== ===========
Net income per
share.......... $ 0.44 $ 0.40
=========== ===========
Weighted average
shares(15)..... 18,530,338 17,369,670 5,700,000 41,600,008
=========== =========== ========== ===========
Depreciation and
amortization... $ 3,352 $ 1,770 $ (364) $ 4,758 $ 15,037 $ 2,214 $ $ 22,009
======= ======= ====== ======== =========== =========== ========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION--The Unaudited Pro Forma Condensed Combined Financial
Statements are presented to give pro forma effect to (i) Tuboscope's merger
with Drexel valued at $102,195,258, (ii) the sale of 4,200,000 shares of
Tuboscope's Common Stock and warrants to purchase up to 2,533,000 shares of
Tuboscope Common Stock for an aggregate purchase price of $31,000,000, and
(iii) the exchange of 100,000 shares of outstanding Tuboscope Series A
Preferred Stock for 1,500,000 shares of Tuboscope Common Stock and warrants
to purchase up to 1,250,000 shares of Tuboscope Common Stock.
The purchase method of accounting has been used in preparing the Unaudited
Pro Forma Condensed Combined Financial Statements of the Company with
respect to the acquisition of Drexel. The statement of income for the fiscal
year ended December 31, 1995 combines the results of operations for
Tuboscope's fiscal year ended December 31, 1995 with the results of
operations for Drexel's twelve months ended December 31, 1995. Purchase
accounting values have been assigned on a preliminary basis and will be
adjusted upon the completion of independent valuations by valuation experts.
Management expects the final purchase accounting to be completed before
December 31, 1996.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
include consolidation savings which the Company expects to achieve from the
merger of Tuboscope and Drexel and the acquisition of SOFS. See "Risk
Factors--No Assurance of Achieving Anticipated Consolidation Savings."
(2) The historical December 31, 1995 Drexel Balance Sheet includes the
acquisition of SOFS on November 16, 1995. The historical December 31, 1995
Drexel Income Statement includes SOFS results of operations from the
November 16, 1995 acquisition date to December 31, 1995.
As allowed under A.P.B. No. 16, Drexel management is holding the allocation
period open to properly assess the fair market value of the individual
assets acquired. Assessment of value must be obtained for the real estate
acquired in the transaction and the equipment utilized in the rental
operation. It is anticipated this process will require an additional six to
eight months to complete. In addition, it will require more time to
properly assess the total impact on goodwill due to the many facility
consolidations and the rationalization of overlapping product lines.
Drexel's initial assessment is that there is not a material value to be
placed on intangibles in this acquisition. SOFS did not have any
intellectual property of material value or any major long term contracts.
Additionally, because SOFS participated in one of the same businesses as
Drexel, there does not appear to be any great value to customer or supplier
lists or relationships. Purchase accounting values assigned at December 31,
1995 are preliminary. A final purchase accounting evaluation should be
completed by December 31, 1996.
(3) To record the purchase of Drexel valued at $102,195,258 by Tuboscope,
through the issuance of 16,709,105 shares of Tuboscope Common Stock at
$6.00 per share plus the assumption of the outstanding Drexel stock
options. Adjustments to assets included the estimated step-up of fixed
assets of $5,000,000, the estimated fair market value of identified
intangibles of $3,000,000 and goodwill represented by the excess purchase
price over the estimated fair market value of net tangible assets.
Adjustments to liabilities and equity included transaction costs of
$13,600,000 which are included in debt, deferred taxes of $2,800,000
associated with the Merger, and the elimination of the Drexel equity
accounts. The transaction costs included $6,200,000 of executive severance
costs ($5,290,000 of which was charged directly to retained earnings, net
of taxes of $910,000) and $7,400,000 of acquisition costs. The acquisition
costs of $7,400,000 included investment banking fees and costs associated
with the Merger and related filings including legal, accounting, printing
and filing fees.
The purchase price of $6.00 per share assigned to the Tuboscope Common
Stock was based on the Company's trading history prior to the Drexel merger
announcement. The average price of Tuboscope Common Stock in December and
the fourth quarter of 1995 was $6.03 and $5.96, respectively.
21
<PAGE>
The Drexel stock options were valued at $1,940,628, which represented the
difference between the option price and fair market price multiplied by
the total Drexel options being assumed.
The estimated fair market values assigned to fixed assets, identified
intangibles, and goodwill are preliminary and may be adjusted upon the
completion of independent valuations by valuation experts. Drexel has
various intellectual property, including patents, associated with its
operations, the value of which needs to be assessed and independently
appraised. The Company has assigned a preliminary estimate of $3 million
and an estimated useful life of 12 years to this intellectual property.
The final purchase accounting is expected to be completed before December
31, 1996. The deferred tax liability recognized in the Drexel purchase
accounting was created by the tax effect of the book and tax basis
differences for fixed assets and identified intangibles.
(4) To record the capital infusion of $29,100,000 ($31,000,000 aggregate
proceeds net of costs and fees of $1,900,000) for the sale of 4,200,000
shares of Tuboscope Common Stock and warrants to purchase up to 2,533,000
shares of Tuboscope Common Stock. Adjustments also represent the exchange
of 100,000 shares of outstanding Tuboscope Series A Preferred Stock for
1,500,000 shares of Tuboscope Common Stock and warrants to purchase up to
1,250,000 shares of Tuboscope Common Stock.
(5) To record additional depreciation and amortization on goodwill resulting
from the allocation of the purchase price of SOFS, and to apply consistent
depreciation lives on solids control equipment in accordance with Drexel's
accounting policies. Goodwill is amortized over 40 years based on
estimated economic life. The amortization period is consistent with that
used by Tuboscope and various other companies in the oilfield industry.
(6) To reflect an adjustment to capitalize certain equipment associated with
SOFS's operation which was expensed in SOFS's historical numbers. The
equipment primarily represented conveyor belts, rotating assemblies, and
other equipment used in SOFS's operations in Venezuela and Colombia. The
capitalization of this equipment is consistent with Tuboscope's and
Drexel's capitalization policies.
(7) To record additional interest expense on debt incurred due to the
acquisition of SOFS by Drexel. The assumed interest rate on the debt is
8%. The average interest on the Drexel debt associated with the
acquisition of SOFS was approximately 7.7%. In addition, Tuboscope's
variable rate debt approximated 7.7% in the fourth quarter of 1995.
(8) To record the tax effect on the pro forma adjustments.
(9) To record additional depreciation on fixed assets resulting from the
allocation of the purchase price of Drexel.
(10) To record additional amortization on identified intangibles and goodwill
resulting from the allocation of the purchase price of Drexel.
(11) To record additional interest expense on debt which will be incurred as a
result of payments associated with $13,600,000 of transaction costs. The
assumed interest rate on the debt is 8%, consistent with note (7) above.
(12) To reflect the tax effect on the pro forma adjustments.
(13) To record a reduction of interest expense due to the net proceeds received
from the sale of 4,200,000 shares of Tuboscope Common Stock and warrants
to purchase up to 2,533,000 shares of Tuboscope Common Stock. The assumed
interest rate on the reduced debt is 8%, consistent with the incremental
increase in debt identified in notes (7) and (11) above. Each 0.125%
increase in the interest rate assumptions used in notes (7), (11) and
(13), collectively, would reduce net income before taxes by $8,750.
(14) To reflect reduction of preferred stock dividends due to the exchange of
100,000 shares of outstanding Tuboscope Series A Preferred Stock for
1,500,000 shares of Tuboscope Common Stock and warrants to purchase up to
1,250,000 shares of Tuboscope Common Stock.
22
<PAGE>
(15) The pro forma weighted average shares are calculated as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Tuboscope historical weighted average shares.................... 18,530,338
Shares issued to acquire Drexel................................. 16,709,105
Common stock equivalents related to Drexel options assumed...... 323,438
Common stock equivalents related to Tuboscope options........... 337,127
New shares purchased............................................ 4,200,000
Shares issued for conversion of outstanding preferred stock..... 1,500,000
----------
Pro forma weighted average shares............................... 41,600,008
==========
</TABLE>
23
<PAGE>
THE MERGER TRANSACTIONS
BACKGROUND OF THE MERGER TRANSACTIONS
In October 1994, because the Tuboscope Board of Directors had for some time
believed that the trading price of Tuboscope Common Stock did not properly
reflect the business value of Tuboscope's operations, the Company engaged a
nationally-recognized investment banking firm to review strategic alternatives,
and as a result solicited proposals to purchase all or part of Tuboscope. No
parameters were imposed on the proposals solicited to purchase all or part of
the Company. Although the investment banking firm circulated a confidential
offering memorandum to over 30 companies and financial buyers soliciting offers
to purchase all or part of Tuboscope, the Company did not receive any offers to
purchase the entire Company or any reasonable offer to purchase any part of the
Company. The Tuboscope Board of Directors discontinued its attempt to sell
Tuboscope in June 1995.
During the last week of September 1995, L.E. Simmons, Chairman of Drexel,
called William V. Larkin, Jr., Chief Executive Officer of Tuboscope, to suggest
that they get together to discuss common interests of Drexel and Tuboscope. Mr.
Larkin arranged for such a meeting and on October 5, 1995, Martin R. Reid,
Chairman of the Tuboscope Board of Directors, Frederick J. Warren, a director
of the Company, and Mr. Larkin had breakfast with Mr. Simmons prior to a
regularly scheduled Tuboscope Board of Directors meeting. At that meeting, Mr.
Simmons described the possible benefits of a business combination between
Tuboscope and Drexel. Both parties agreed at the meeting that such a
combination would only be possible on a stock-for-stock and not on a cash-for-
stock basis, both because each company desired to share in the future growth
and synergies of a possible combination and because each company believed that
a cash-for-stock combination would result in the surviving corporation having
an unacceptable level of debt. Later that day, at a regularly scheduled
Tuboscope Board of Directors meeting, Messrs. Reid, Larkin and Warren reported
on their meeting with Mr. Simmons and discussed with the Tuboscope Board of
Directors the possible benefits of combining Tuboscope's business with that of
Drexel. After discussion, the Tuboscope Board of Directors authorized
management to proceed with a review and investigation of Drexel's business and
with discussions regarding a possible business combination with Drexel.
As a result of the interest by both parties in investigating a possible
transaction, the parties entered into a confidentiality agreement in late
October and began exchanging financial and other information and conducting due
diligence on each other's businesses. In addition, Tuboscope engaged CS First
Boston and Drexel engaged Merrill Lynch, Pierce, Fenner & Smith ("Merrill
Lynch") to advise each of them, respectively, with respect to a possible
business combination. Drexel also engaged SCF GP to provide additional
financial advisory services.
On November 13, 1995, Mr. Reid along with representatives of CS First Boston
and Mr. Simmons along with representatives of Merrill Lynch met to discuss
relative valuations of Tuboscope and Drexel. At that meeting, Tuboscope's
representatives suggested that the appropriate number of shares of Tuboscope
Common Stock to be exchanged for Drexel's operations was in the 16 million
share range. Drexel's representatives indicated that they believed that the
appropriate number was in the 18 million share range. In discussing relative
valuations, Drexel believed its operations had significantly greater growth
prospects than those of Tuboscope's operations. Drexel indicated that certain
industry observers believed that coiled tubing had a projected growth rate in
the 20% range and that Drexel's solids control business was integral to
improving drilling efficiency and reducing total well costs.
Between November 13 and December 1, 1995 members of senior management of
Tuboscope and Drexel, together with their financial advisors, continued to
discuss the possible terms on which a business combination of Tuboscope and
Drexel could be consummated. During the discussions, it became evident that an
important element of the proposed transaction was the continued growth of the
combined business; however, there was concern that such growth could be capital
constrained because of the high debt of Tuboscope. Because both Tuboscope's and
Drexel's growth strategies included making acquisitions, the parties came to
believe that
24
<PAGE>
additional equity capital would be needed to operate the combined entity in the
near term. As a result of the perceived need for additional capital in the
combined company, the parties began discussing an investment in Tuboscope by
SCF. SCF is a limited partnership, whose ultimate general partner is owned by
Mr. Simmons, organized to invest capital in the oilfield service industry. Mr.
Simmons believed an equity investment by SCF in Tuboscope would be an
attractive investment opportunity for SCF and could substantially address the
combined entity's capital needs.
By December 1, 1995 Mr. Reid with the assistance of representatives of CS
First Boston and in consultation with Messrs. Warren and Mattson, directors of
Tuboscope and representatives of significant stockholders of Tuboscope, had
negotiated with Mr. Simmons, representatives of Drexel and representatives of
Merrill Lynch the framework of a possible merger of Drexel and Tuboscope and
the sale of additional equity to SCF. On December 1, 1995, a special Tuboscope
Board of Directors meeting was held at which Tuboscope management and CS First
Boston presented a review of Drexel's business and the merits of the proposed
transaction and an analysis of the market value of Drexel. At that meeting, the
Tuboscope Board of Directors reviewed the possibility of acquiring Drexel for
approximately 16.5 million shares of Tuboscope Common Stock and four million
warrants to purchase Tuboscope Common Stock at $10 per share and SCF purchasing
shares of Tuboscope Common Stock at a price to be determined. After extensive
discussions, the Tuboscope Board of Directors authorized management to
negotiate an agreement within the parameters discussed, subject to further
financial and business due diligence.
The Tuboscope Board of Directors met subsequently on December 14, 1995 with
Messrs. Simmons and John F. Lauletta, Chief Executive Officer of Drexel, to
discuss with them issues related to Drexel's business and their view of the
merits of a business combination with Tuboscope. The Tuboscope Board of
Directors met again on December 20, 1995 (telephonically) to discuss in detail
Drexel's historical and pro forma (for the acquisition of SOFS) financial
statements and 1996 projections.
At a meeting between members of senior management of Tuboscope and Drexel,
together with their financial advisors on December 18, 1995, Tuboscope and
Drexel agreed, subject to final documentation, additional due diligence and
board approval, to the material terms reflected in the Merger Proposals,
including Tuboscope's request made that day to escrow certain of the Merger
consideration pending delivery of Drexel's audited financial statements for the
year ended March 31, 1996.
On a few occasions during December 1995, Mr. Mattson, a director of Tuboscope
and Chief Financial Officer of BHI, and Mr. Reid discussed the possibility of
BHI exchanging the Tuboscope Series A Preferred Stock held by BHI for Tuboscope
Common Stock. The Tuboscope Series A Preferred Stock is mandatorily redeemable
on December 1, 1996 for $10 million in cash or, under certain circumstances and
at Tuboscope's option, for Tuboscope Common Stock valued at the then current
market price. During December 1995, Mr. Reid consulted with various directors,
CS First Boston and Mr. L. E. Simmons about the advantages to the Company of
improving its capital structure by providing BHI with an incentive to convert
the Tuboscope Series A Preferred Stock. By early January 1996, Mr. Mattson
advised Mr. Reid that BHI supported the Merger and, as a result, would be
willing to exchange its Tuboscope Series A Preferred Stock for a combination of
shares of Tuboscope Common Stock and warrants to purchase Tuboscope Common
Stock valued at approximately $10 million.
On January 3, 1996, a special meeting of the Tuboscope Board of Directors was
held to consider the Merger Transactions, including the proposed Merger, the
proposed acquisition of shares of Tuboscope Common Stock and warrants by SCF
and the exchange of Tuboscope Series A Preferred Stock held by BHI for
Tuboscope Common Stock and warrants. At this meeting, members of Tuboscope's
senior management, together with representatives of CS First Boston, reviewed
with the Tuboscope Board of Directors, among other things, the background of
the proposed Merger Transactions, Tuboscope's strategic alternatives,
25
<PAGE>
financial and valuation analysis of the Merger Transactions and the terms of
the Merger Agreement, the Subscription Agreement and Exchange Agreement.
In addition, at the January 3, 1996 meeting, CS First Boston delivered its
oral opinion (subsequently confirmed in a written opinion dated as of January
3, 1996) to the Tuboscope Board of Directors that the consideration to be paid
and received by Tuboscope in the Merger Transactions was fair to Tuboscope from
a financial point of view. CS First Boston subsequently confirmed such opinion
by delivery of its written opinion dated as of the date of this Proxy
Statement/Prospectus. After extensive discussion and consideration, the
Tuboscope Board of Directors unanimously approved the Merger Transactions,
including the acquisition of Drexel, the sale of shares and warrants to SCF,
the Exchange Agreement with BHI and the other transactions contemplated
thereby. The Merger Agreement and the Subscription Agreement were executed by
the parties on the evening of January 3, 1996. The public announcement of the
signing was made on January 4, 1996 prior to the opening of the financial
markets. The Exchange Agreement was subsequently executed as of January 3,
1996.
TUBOSCOPE'S REASONS FOR THE MERGER TRANSACTIONS
The Tuboscope Board of Directors believes that Tuboscope shareholder value
will be enhanced by the Merger Transactions because of the additional growth
opportunities, increased market capitalization, improved capital structure and
additional management expertise that are expected to result from the Merger
Transactions. The Tuboscope Board of Directors believes that the terms of
Merger Transactions are fair to and in the best interests of Tuboscope and its
stockholders. In unanimously approving the Merger Transactions, and in
recommending that Tuboscope's stockholders approve the Merger Proposals, the
Tuboscope Board of Directors consulted with Tuboscope management, as well as
its financial and legal advisors, and considered a number of factors,
including, but not limited to, the following:
(i) Drexel's business, management expertise, current business strategy,
prospects and competitive position in the oilfield service industry;
(ii) the growth opportunities in Drexel's markets;
(iii) the potential consolidation benefits of the Merger, primarily those
arising out of the complementary geographic locations of Tuboscope and
Drexel facilities throughout the world;
(iv) the historical, current and projected results of operations and
financial condition of Tuboscope and Drexel before and after giving effect
to the Merger Transactions;
(v) the enhanced position of Tuboscope after the Merger Transactions to
deal with the volatility of its business due to changes in rig count;
(vi) the improved capital structure of Tuboscope after the Merger
Transactions;
(vii) the market capitalization of Tuboscope subsequent to the Merger
Transactions, which will be considerably larger than Tuboscope's current
market capitalization;
(viii) advantages to association with L. E. Simmons and SCF Partners;
(ix) the prices paid in recent acquisitions of similar companies;
(x) general economic and stock market conditions;
(xi) the Merger's structure, which will not result in recognition of
income or gain for U.S. federal income tax purposes by Tuboscope;
(xii) the financial analyses and opinion of CS First Boston;
(xiii) the stock ownership of Tuboscope after giving effect to the Merger
Transactions;
(xiv) the lack of alternative transactions for Tuboscope given the
absence of any reasonable offers to purchase all or any part of Tuboscope;
26
<PAGE>
(xv) the likelihood that the Merger would be consummated; and
(xvi) the opportunity for other potentially interested parties to make an
offer subject to the termination fee.
Due to the wide variety of factors considered in connection with the
evaluation of the Merger Transactions, the Tuboscope Board of Directors did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its
determination. Rather, the Tuboscope Board of Directors viewed its approval and
recommendation as being based on the totality of the information presented to,
and considered by, it. Individual members of the Tuboscope Board of Directors
also may have attributed differing levels of importance to each of the factors
presented to the Tuboscope Board of Directors.
THE TUBOSCOPE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TUBOSCOPE
STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER PROPOSALS AND THE
TRANSACTIONS CONTEMPLATED THEREBY. TUBOSCOPE'S STOCKHOLDERS ARE URGED TO
CAREFULLY REVIEW THE FACTORS DISCUSSED IN "RISK FACTORS" IN CONNECTION WITH
EVALUATING AND VOTING ON THE MERGER PROPOSALS.
DREXEL'S REASONS FOR THE MERGER
The Drexel Board of Directors believes that the terms of the Merger are fair
to and in the best interests of Drexel and its stockholders. In approving the
Merger Agreement and the transactions contemplated thereby, and in recommending
that Drexel stockholders approve the same, Drexel's Board of Directors
consulted with Drexel management, as well as its financial and legal advisors,
and considered a number of factors, including, but not limited to:
(i)the potential for increasing Drexel's growth through the use of
Tuboscope's world-wide infrastructure;
(ii) information concerning the financial performance and condition,
business operations and prospects of each of Drexel and Tuboscope, and
Drexel's projected future performance and prospects as a separate entity
and on a combined basis with Tuboscope;
(iii) current industry, economic and market conditions, which have
encouraged business combinations and other strategic alliances in the
energy services industry;
(iv) recent and prior market prices of the Tuboscope Common Stock;
(v) the structure of the transaction and terms of the Merger Agreement,
including the consideration to be received by Drexel's stockholders, which
were the result of arm's-length negotiations between Tuboscope and Drexel;
(vi) the fact that the Merger would enhance the liquidity of the
investment of the holders of Drexel Common Stock by converting their Drexel
Common Stock into a publicly traded security;
(vii) consolidation benefits that would be available to the combined
entity after the Merger;
(viii) the expectation that the Merger will afford Drexel stockholders
the opportunity to receive Tuboscope Common Stock in a transaction that is
nontaxable for U.S. federal income tax purposes;
(ix) the likelihood that the Merger would be consummated; and
(x) opportunities for Drexel's employees in Tuboscope after the Merger.
In determining the Merger was fair to and in the best interest of Drexel's
stockholders, the Drexel Board of Directors considered the factors above as a
whole and did not assign specific or relative weights to such
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factors. The Drexel Board of Directors believes that the Merger is an
opportunity for Drexel's stockholders to participate in a combined enterprise
that has significantly greater business and financial resources than Drexel
would have absent the Merger.
OPINION OF TUBOSCOPE'S FINANCIAL ADVISOR
At its meeting on January 3, 1996 to consider and vote on entering into the
Merger Transactions, the Tuboscope Board of Directors received the opinion of
CS First Boston that, as of such date, the consideration to be paid and
received by Tuboscope in the Merger Transactions was fair to Tuboscope from a
financial point of view. CS First Boston subsequently confirmed its opinion by
delivery of a written opinion dated as of the date of this Proxy
Statement/Prospectus. CS First Boston's opinion relates only to the
consideration to be paid and received by Tuboscope in connection with the
Merger Transactions and does not constitute a recommendation to any stockholder
of Tuboscope as to how such stockholder should vote at the Annual Meeting. The
full text of CS First Boston's written opinion, which summarizes assumptions
made, procedures followed and matters considered in connection with such
opinion, is attached as Appendix D to this Proxy Statement/Prospectus and is
incorporated herein by reference. STOCKHOLDERS OF TUBOSCOPE ARE URGED TO READ
THE OPINION IN ITS ENTIRETY, ESPECIALLY WITH REGARD TO THE ASSUMPTIONS MADE AND
MATTERS CONSIDERED BY CS FIRST BOSTON.
In connection with rendering its opinions, CS First Boston, among other
things: (i) reviewed Tuboscope's Annual Report on Form 10-K for the year ended
December 31, 1994 and its quarterly reports on Form 10-Q for the quarters ended
March 31, June 30 and September 30, 1995; (ii) reviewed certain information,
including financial forecasts prepared by Drexel and Tuboscope, relating to the
business, earnings, cash flow, assets and prospects of Drexel and Tuboscope,
respectively, furnished to CS First Boston by Drexel and Tuboscope,
respectively; (iii) compared the results of operations of Drexel and Tuboscope
with each other and with that of certain companies CS First Boston deemed to be
reasonably similar to Drexel and Tuboscope; (iv) compared the proposed
financial terms of the transactions contemplated by the Merger Agreement with
the financial terms of certain other mergers and acquisitions CS First Boston
deemed to be relevant; (v) considered the pro forma effect of the Merger
Transactions on Tuboscope's capitalization ratios and earnings, cash flow and
earnings before interest, taxes, depreciation and amortization ("EBITDA"); (vi)
reviewed a draft of the Merger Agreement and Subscription Agreement, each dated
as of January 3, 1996; and (vii) reviewed such other financial studies and
analyses and performed such other investigations and took into account such
other matters as CS First Boston deemed necessary or appropriate. All financial
information reviewed for Drexel included pro forma adjustments for the
acquisition of SOFS in November 1995.
In connection with its opinions and its presentation to the Tuboscope Board
of Directors on January 3, 1996, CS First Boston performed a variety of
financial and comparative analyses, including those described below. Among
those analyses so described are evaluations of cash flow and cash flow per
share. Stockholders are advised that such terms are not defined by generally
accepted accounting principles and should not be considered as an alternative
to any other generally accepted accounting principle measure as an indicator of
the Company's performance. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances. Consequently, the analysis underlying such an opinion is not
readily susceptible to summary description. In arriving at its opinion, CS
First Boston did not attribute any particular weight to any analysis or factors
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, CS First Boston
believes that its analyses must be considered as a whole and that considering
any portions of such analyses or such factors without considering all analyses
and factors could create an incomplete or misleading view of the process CS
First Boston undertook with respect to rendering its opinion. The data employed
by CS First Boston in its analyses contained numerous assumptions made by
Drexel and Tuboscope with respect to general business and economic conditions,
industry performance and other matters, many of which are beyond Drexel's or
Tuboscope's control. Any estimates contained in such materials or described
below are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than as
set forth therein. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may trade or be acquired or sold.
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The following summary does not purport to be a complete description of the
opinion rendered to the Tuboscope Board of Directors on January 3, 1996 or of
the analyses performed by CS First Boston in connection with the Merger
Transactions.
Valuation of Drexel
Comparable Company Analysis. CS First Boston analyzed selected Adjusted
Market Values (defined below) determined on the basis of a multiple of EBITDA,
focusing primarily on 1995 and 1996 estimated EBITDA multiples, for selected
companies comparable to Drexel. CS First Boston focused on comparable oilfield
service companies, including (in alphabetical order) Daniel Industries, Dreco
Energy Services Ltd., Lone Star Technologies Inc., Lufkin Industries, Maverick
Tube and Varco International. For purposes of this analysis, data with respect
to comparable companies was derived from a compilation of certain publicly
available information concerning estimates of future operating and financial
performance of the companies as prepared by a number of oilfield service
research analysts.
The median ratio of Adjusted Market Value (defined as equity market value at
December 27, 1995 plus short- and long-term debt less cash and marketable
securities) to estimated 1995 EBITDA was 8.0x. A median ratio of 5.6x was
derived based on 1996 projected EBITDA. Based upon this analysis, CS First
Boston applied comparable multiple ranges to Drexel's 1995 estimated EBITDA and
1996 estimated EBITDA. Those ranges were 6.5x to 7.5x and 5.1x to 5.8x,
respectively. Application of these multiples yielded a reference value range of
$129 million to $149 million for Drexel. Assuming a Tuboscope Common Stock
price of $6.00 per share, Tuboscope's purchase of Drexel at the $129 million to
$149 million reference value range would require the issuance of 16.2 million
to 19.6 million shares of Tuboscope Common Stock.
Because of the inherent differences between the operations of Drexel and the
selected comparable companies, CS First Boston believed that a purely
quantitative comparable company analysis would not be exclusively dispositive
in the context of the Merger Transactions. CS First Boston believed that an
appropriate use of a comparable company analysis in this instance would involve
qualitative judgments concerning differences between the financial and
operating characteristics of Drexel and the selected companies, including
growth prospects, which judgments are reflected in CS First Boston's opinion.
Comparable Acquisition Analysis. CS First Boston analyzed adjusted market
values on a multiple of latest twelve-month EBITDA for a number of comparable
oilfield service acquisitions. Five recent transactions, consummated between
October 1991 and September 1994, were considered most relevant for this
analysis. The acquisitions considered by CS First Boston include (in order from
September 1994 to October 1991 and presented as acquiror/seller): Weatherford
International/H&H Oil Tool Co.; Dresser Industries/Wheatley TXT; Enterra/Total
Energy; Wheatley TXT/Axelson, Inc.; and Tuboscope/BHTS Eastern Hemisphere.
CS First Boston examined the multiples of the total consideration paid in
each transaction to, among other measures, such acquired companies' respective
EBITDA, which was considered to be the most relevant measure. The multiples
based on EBITDA ranged from 6.7x to 11.0x, with a median of 7.8x. This analysis
provided an implied enterprise valuation range for Drexel of $134 million to
$151 million, based on Drexel's EBITDA for the latest twelve months and a
multiple range of 7.5x to 8.5x. Assuming a Tuboscope Common Stock price of
$6.00 per share, Tuboscope's purchase of Drexel at the implied $134 million to
$151 million valuation range would require the issuance of 17.1 million to 19.9
million shares of Tuboscope Common Stock.
Because the reasons for, and circumstances surrounding, each of the
transactions analyzed were diverse and due to the inherent differences between
the operations of Tuboscope, Drexel and the selected companies involved in the
comparable acquisitions, CS First Boston believed that a purely quantitative
comparable transaction analysis would not be exclusively dispositive in the
context of the proposed Merger Transactions. CS First Boston further believed
that an appropriate use of a comparable transaction analysis in this instance
would involve qualitative judgments concerning differences between the
characteristics of these transactions
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and the Merger Transactions that would affect the acquisition value of the
acquired companies and businesses and Drexel, which judgments are reflected in
CS First Boston's opinion.
Discounted Cash Flow Analysis. Employing certain data provided by Drexel and
reviewed by Tuboscope, CS First Boston performed a discounted cash flow
analysis of Drexel in order to estimate the present value of the future
unlevered free cash flows that Drexel could be expected to generate during the
period from January 1, 1996 to December 31, 2000.
While CS First Boston assumed that the information provided by Drexel was
reasonably prepared based upon the best available estimates and judgments of
the management of Drexel, CS First Boston met with Tuboscope to discuss such
information. Pursuant to such discussions, growth estimates utilized for Drexel
after 1996 were more conservative than for prior periods and than those
projected by Drexel's management. The estimated future unlevered free cash
flows were discounted at after-tax rates of 12% and 13%, based on a review of
the weighted average cost of capital of the comparable companies described in
"--Comparable Company Analysis" above, and terminal multiples of 5.0x, 5.5x and
6.0x were employed based on current EBITDA multiples of Drexel's comparable
companies. These calculations provided a reference value range for Drexel of
$135 million to $155 million. Assuming a Tuboscope Common Stock price of $6.00
per share, Tuboscope's purchase of Drexel at the implied $135 million to $155
million reference range would require the issuance of 17.2 million to 20.6
million shares of Tuboscope Common Stock.
Valuation of Tuboscope
Comparable Company Analysis. CS First Boston analyzed selected Adjusted
Market Values on a multiple of EBITDA, focusing primarily on 1995 estimated
EBITDA multiples, for selected companies comparable to Tuboscope. CS First
Boston focused on comparable oilfield service companies, including (in
alphabetical order) Daniel Industries, Dreco Energy Services Ltd., ICO, Inc.,
Lufkin Industries, Pool Energy Services Co. and Seacor Holdings, Inc. For
purposes of this analysis, data with respect to the companies was derived from
a compilation of certain publicly available information concerning estimates of
future operating and financial performance of the companies as prepared by a
number of oilfield service research analysts.
An analysis of the ratio of Adjusted Market Value to the estimated 1995 and
1996 EBITDAs of Tuboscope's comparable companies yielded median multiple ranges
of 6.3x and 4.7x, respectively. Using multiple ranges of 6.0x to 7.0x for
Tuboscope's 1995 estimated EBITDA and 4.5x to 5.5x for its 1996 estimated
EBITDA yielded a valuation reference range of $220 million to $250 million for
Tuboscope with an implied stock price of $5.04 to $6.66 per share.
Because of the inherent differences between the operations of Tuboscope and
the selected comparable companies, CS First Boston believed that a purely
quantitative comparable company analysis would not be exclusively dispositive
in the context of the Transaction. CS First Boston believed that an appropriate
use of a comparable company analysis in this instance would involve qualitative
judgments concerning differences between the financial and operating
characteristics of Tuboscope and the selected companies, which judgments are
reflected in CS First Boston's opinion.
Comparable Acquisition Analysis. As discussed elsewhere in this Proxy
Statement/Prospectus under "The Merger Transactions--Background of the Merger
Transactions," Tuboscope engaged an investment banking firm to evaluate
strategic alternatives, including a possible sale of the company, from October
1994 through June 1995. Although the investment banking firm circulated a
confidential offering memorandum to over 30 companies and financial buyers
soliciting offers to purchase all or part of Tuboscope, the Company did not
receive any offers to purchase the entire company or any reasonable offer to
purchase any part of the Company. Accordingly, due to the absence of any
acceptable offers and the length of time the Company and its advisors were
exploring possible sales opportunities, CS First Boston did not believe that a
comparable acquisition analysis was particularly relevant in determining the
fairness of the consideration to be paid and received by Tuboscope in the
Merger Transactions from a financial point of view.
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Discounted Cash Flow Analysis. Employing certain data provided by Tuboscope,
CS First Boston performed a discounted cash flow analysis of Tuboscope in order
to estimate the present value of the future unlevered free cash flows that
Tuboscope could be expected to generate during the period from January 1, 1996
to December 31, 2000.
With respect to the information provided by Tuboscope, CS First Boston
assumed that such information was reasonably prepared based upon the best
available estimates and judgments of management. The estimated future unlevered
free cash flows were discounted at after-tax rates of 12% and 13%, and terminal
multiples of 4.5x, 5.0x and 5.5x were applied to the estimated EBITDA of
Tuboscope based upon Tuboscope's slower expected growth profile relative to
Drexel. These calculations provided a reference value range of $240 million to
$260 million for Tuboscope, with an implied stock price of $6.12 to $7.20 per
share.
Review of Pro Forma Results
Pro Forma Transaction Analysis. CS First Boston also deemed it appropriate
for purposes of its evaluation to consider the expected benefits from the
formation of the new combined entity. CS First Boston analyzed certain pro
forma effects that could result from the Merger Transactions. The data employed
in this analysis assumed the acquisition of Drexel, the SCF Sale and the BHI
Exchange, as well as expected consolidation savings, and excluded non-recurring
charges related to the transaction except as they impacted debt levels. CS
First Boston expressed no view as to whether consolidation savings could be
obtained. This analysis indicated that the pro forma earnings per share of the
combined company would be accretive in 1995 and 1996 as compared to the
comparable stand-alone projections for Tuboscope. The analysis also indicated
that there would be cash flow per share dilution. CS First Boston also analyzed
the effects of the Merger Transactions on the balance sheet of the combined
company. The combined company's pro forma debt and preferred stock-to-book
capitalization ratio as of December 31, 1995 was estimated to be 34% as
compared to 52% for Tuboscope on a stand-alone basis.
Comparable Company Analysis. CS First Boston also reviewed the pro forma
results in the context of a comparable company analysis. CS First Boston
analyzed selected Adjusted Market Values determined on the basis of a multiple
of EBITDA, focusing primarily on 1995 estimated EBITDA multiples, for selected
companies comparable to the combined entity. CS First Boston focused on
comparable oilfield service companies, including (in alphabetical order) Camco
International, Inc., Daniel Industries, Energy Ventures, Lone Star Technologies
Inc., Smith International and Varco International. For purposes of this
analysis, data with respect to the companies was derived from a compilation of
certain publicly available information concerning estimates of future operating
and financial performance of the companies as prepared by a number of oilfield
service research analysts. An analysis of the ratio of Adjusted Market Value to
the 1995 and 1996 estimated EBITDAs of comparable companies yielded multiple
medians of 9.1x and 7.8x, respectively.
Despite the significant strategic rationale associated with the Merger
Transactions, there are earnings accretion and cash flow per share dilution
projected for the periods immediately following the combination of the two
companies. At the time CS First Boston rendered its opinion, Tuboscope was
trading at less than 6.0x 1995 and 1996 estimated EBITDA while the combined
entity's peer group was trading at the higher multiples described above. CS
First Boston believes that achievement of the higher peer group multiples will
require substantial repositioning of Tuboscope in order for the marketplace to
recognize the growth opportunities associated with Drexel's businesses. As a
result of the time required to achieve such repositioning, CS First Boston
believes multiple expansion is not likely to occur before the end of 1996, with
only gradual expansion possibly occurring prior to that time.
Because of the inherent differences between the operations of the combined
entity and the selected comparable companies, CS First Boston believed that a
purely quantitative comparable company analysis would not be exclusively
dispositive in the context of the Merger Transactions. CS First Boston believed
that an appropriate use of a comparable company analysis in this instance would
involve qualitative judgments concerning differences between the financial and
operating characteristics of the combined entity and the selected companies,
which judgments are reflected in CS First Boston's opinion.
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In connection with rendering its opinion, CS First Boston relied, without
assuming any responsibility for independent verification, upon the accuracy and
completeness of all of the financial and other information furnished to CS
First Boston by Tuboscope and Drexel. With respect to the forecasted financial
information furnished to CS First Boston by Tuboscope and Drexel (including
estimates of consolidation benefits from the Merger Transactions), CS First
Boston assumed such information to have been reasonably prepared and to reflect
the best currently available estimates and judgments of the management of each
of Tuboscope and Drexel as to the expected future financial performance of
Tuboscope and Drexel, respectively, and of the two companies combined. In
rendering its opinion, CS First Boston did not make or receive an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Tuboscope or Drexel, nor did it independently verify any of the publicly
available information relating to Tuboscope or the information with which it
was provided pertaining to Drexel. The opinion of CS First Boston is
necessarily based upon market, economic and other conditions as they existed
on, and could be evaluated as of, the date of such opinion. In rendering its
opinion, CS First Boston relied upon Tuboscope as to certain accounting aspects
of the Merger Transactions and assumed, with Tuboscope's consent, that the
Merger Transactions would be treated as a tax-free reorganization within the
meaning of Section 368(a) of the Code and that the Merger Transactions would be
accounted for as a purchase.
CS First Boston's opinion and presentation to the Tuboscope Board of
Directors were one of the many factors taken into consideration by such Board
of Directors in making its determination on January 3, 1996 to approve the
Merger Transactions. While CS First Boston participated in a number of meetings
between representatives of Tuboscope and Drexel at which the Merger
consideration was generally negotiated and meetings of the Tuboscope Board of
Directors at which the Merger consideration was discussed and approved, CS
First Boston's advice at such meetings was only one of many factors considered
in determining the Merger consideration.
CS First Boston is an internationally recognized investment banking firm
that, as part of its investment banking business, regularly is engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Tuboscope selected CS
First Boston to act as its financial advisor in connection with the Merger
Transactions on the basis of such firm's expertise. Neither CS First Boston nor
any of its affiliates has had any material relationship with Tuboscope, Drexel
or any of their affiliates in the past two years.
In exchange for financial advisory services rendered in connection with the
Merger Transactions and delivery of the written opinion, Tuboscope has paid CS
First Boston a $400,000 fee. In addition, Tuboscope has agreed to pay CS First
Boston as compensation for its services a $1,100,000 transaction fee, payable
upon the consummation of the Merger Transactions. If any other combination is
completed between Tuboscope and Drexel, CS First Boston and Tuboscope will
mutually agree on a transaction fee in accordance with customary industry
practice. In addition, Tuboscope has agreed to reimburse CS First Boston for
all reasonable out-of-pocket expenses, including the fees and expenses of its
legal counsel and any other advisor retained by CS First Boston resulting from
or arising out of Tuboscope's engagement of CS First Boston with respect to the
Merger Transactions and has agreed to indemnify CS First Boston (and its
employees and directors) against certain liabilities and expenses in connection
with the Merger Transactions, including certain liabilities under the federal
securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Tuboscope Board of Directors with
respect to the Merger Proposals, stockholders should be aware that certain
members of the Tuboscope Board of Directors and management and Drexel's Board
of Directors and management have certain interests in the Merger Transactions
that are in addition to the interests of the stockholders of Tuboscope
generally. The Tuboscope Board of Directors was aware of these interests and
considered them, among other factors, in approving the Merger Transactions.
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Severance Payments. Upon consummation of the Merger Transactions and as a
result of the assumption of the duties of the Chairman of the Board, Chief
Executive Officer and Chief Financial Officer by Messrs. Simmons, Lauletta and
Winkler, respectively, Tuboscope will be required to make payments to Messrs.
Reid, Larkin and Koons under executive agreements originally executed in 1993
currently estimated to be $2.4 million, $2.4 million and $1.5 million,
respectively. A substantial portion of these severance payments will not be
deductible for federal income tax purposes. Mr. Reid's agreement was amended at
Tuboscope's January 3, 1996 Board of Directors' meeting to provide that he
would be paid the amount that would have otherwise been owed to him if the
Merger Transactions had been consummated on December 31, 1995. Mr. Reid's
severance arrangement provided in part that he would be paid two and one-half
times his annual salary and annual incentive compensation opportunity in effect
at the time of the Merger; provided, however, that if his annual base salary
and annual incentive compensation opportunity for either of the two years
previous to the Merger were greater than such amounts in effect at the time of
the Merger, then Mr. Reid's severance payments would be calculated using the
higher compensation amounts. Under the terms of that severance arrangement, Mr.
Reid would receive approximately $1.8 million if the Merger closed in 1996 and
approximately $2.4 million if the Merger closed in 1995. The Tuboscope Board of
Directors determined that because of the value that Mr. Reid had brought to the
Company both in negotiating the Merger Transactions and in managing the Company
and because the Merger Transactions were substantially negotiated in 1995, Mr.
Reid should receive severance payments based on the 1995 amounts.
Upon consummation of the Merger, Drexel will be required to make a $500,000
severance payment to Mr. Loh, a director of Drexel and an executive officer of
a Drexel subsidiary, and will enter into a one-year consulting agreement with
Mr. Loh providing for twelve monthly payments of $4,167 each.
BHI Exchange. In connection with the other Merger Transactions, Tuboscope and
BHI have entered into the Exchange Agreement, whereby Tuboscope has agreed to
issue to BHI 1,500,000 shares of Tuboscope Common Stock and warrants to
purchase, subject to adjustment under certain circumstances, an aggregate of
1,250,000 shares of Tuboscope Common Stock at an exercise price of $10 per
share expiring on December 31, 2000, in exchange for all of the 100,000 shares
of Tuboscope Series A Preferred Stock held by BHI. The BHI Warrants are
substantially similar to the SCF Warrants. The Tuboscope Series A Preferred
Stock is mandatorily redeemable by Tuboscope for $10 million on December 1,
1996 and pays a quarterly dividend of $175,000. See "Description of Tuboscope
Capital Stock--Redeemable Series A Convertible Preferred Stock." Mr. Mattson, a
Vice President and the Chief Financial Officer of BHI, is a director of
Tuboscope. The Tuboscope Board of Directors entered into the Exchange
Agreement, in part, because of the improvement to Tuboscope's capital structure
which would result from the exchange. Pursuant to the Exchange Agreement, BHI
has agreed not to sell or otherwise dispose of the shares of Tuboscope Common
Stock it receives in the BHI Exchange prior to December 31, 1997. See "The
Exchange Agreement."
Financial Advisory Fee. SCF G.P. has provided certain financial advisory
services to Drexel in connection with the Merger pursuant to a written
agreement. As compensation for such services, SCF G.P. will receive a fee of $2
million upon the closing of the Merger Transactions. Any such fees received by
SCF G.P. are credited against the management fees owed by the limited partners
of SCF to the general partner of SCF, which is controlled by SCF G.P. L. E.
Simmons, the sole shareholder of SCF G.P., is the Chairman of the Board of
Drexel and will be the Chairman of the Board of Tuboscope upon consummation of
the Merger. SCF G.P. controls the general partner of DOS Partners, a 32%
stockholder of Drexel. See "--Other Arrangements Involving SCF."
Other Arrangements Involving SCF. In connection with the SCF Sale, Drexel has
agreed to pay SCF a fee of $1.9 million upon consummation of the Merger. SCF
negotiated this fee in consideration for its entering into the Subscription
Agreement. Pursuant to the Subscription Agreement, if the Merger Agreement is
terminated and Drexel receives a fee from Tuboscope in connection therewith,
SCF is entitled to receive 25% of any such fee. Mr. Simmons is the Chairman of
the Board of Drexel and will be the Chairman of the Board of Tuboscope upon
consummation of the Merger. SCF is controlled by SCF G.P., of which Mr. Simmons
is the sole shareholder. See "The Subscription Agreement-- Termination;
Termination Fee."
Registration Rights. SCF, DOS Partners, Panmell, Actinium and KMIL will each
be entitled to certain registration rights relating to the Tuboscope Common
Stock received pursuant to the Merger and SCF Sale or upon exercise of the
warrants acquired pursuant to the SCF Sale. Mr. Simmons, the Chairman
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of the Board of Drexel and, upon the consummation of the Merger Transactions,
the Chairman of the Board of Tuboscope, owns the ultimate general partner of
each of SCF and DOS Partners. Panmell is controlled by Mr. Loh, a director of
Drexel. See "The Merger Transactions--Registration Rights" and "The
Subscription Agreement." In connection with the BHI Exchange, BHI received
certain registration rights for the BHI shares and BHI warrants.
Stock Option Plans. As provided in the Merger Agreement, by virtue of the
Merger, all Drexel Options outstanding at the Effective Time under the Drexel
Stock Option Plans, whether or not then exercisable, will be assumed by
Tuboscope and become exercisable for shares of Tuboscope Common Stock. Each
Drexel Option assumed by Tuboscope will be exercisable upon the same terms and
conditions as under the applicable Drexel Stock Option Plan (with appropriate
adjustments to the number of shares subject to, and the exercise price of, each
Drexel Option in accordance with the terms of the Merger Agreement) and option
agreements issued thereunder, and Tuboscope will assume the Drexel Stock Option
Plans for such purposes. As of January 23, 1996, employees (or former
employees) of Drexel held Drexel Options to purchase an aggregate of 2,079,466
shares of Drexel Common Stock at a weighted average price of $1.87 per share
(at exercise prices ranging from $0.67 to $2.85 per share). After giving effect
to the appropriate adjustments to the number of shares subject to, and the
exercise price of, each Drexel Option in accordance with the terms of the
Merger Agreement, and assuming no claims are made under the Escrow Agreement,
as of January 23, 1996, employees (or former employees) of Drexel held Drexel
Options to purchase an aggregate of 965,912 shares of Tuboscope Common Stock at
a weighted average price of $4.02 per share (at exercise prices ranging from
$1.44 to $6.13 per share). Approval of the Merger Agreement by the stockholders
of Tuboscope will constitute stockholder approval of the assumption by
Tuboscope of the rights and obligations of Drexel under the Drexel Stock Option
Plans and of the amendment of such plan to provide for, among other things, the
conversion at the Effective Time of each outstanding Drexel Option into an
option to purchase shares of Tuboscope Common Stock. See "The Merger
Agreement--Treatment of Drexel Options."
Indemnification and Insurance. Under the terms of the Merger Agreement,
Tuboscope is required to indemnify and advance expenses to current and former
officers, directors, employees and agents of Tuboscope and Drexel (the
"Indemnified Parties"), to the fullest extent permitted under applicable law,
against all losses, claims, damages, liabilities, costs or expenses (including
attorneys' fees), judgments, fines, penalties and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation arising
out of or pertaining to acts or omissions, or alleged acts or omissions, by
them in their capacities as such, whether commenced, asserted or claimed before
or after the Effective Time, including claims arising under the Securities Act,
the Exchange Act and state corporation laws in connection with the Merger. For
a period of six years after the Effective Time, Tuboscope is obligated, under
certain circumstances, to maintain in effect certain policies of directors' and
officers' liability insurance that are substantially no less advantageous to
the Indemnified Parties than the policies presently covering such individuals.
Board of Directors. Pursuant to the Merger Agreement, the current members of
the Tuboscope Board of Directors, other than Messrs. Reid, Mattson and Baier
who will continue to serve as Tuboscope directors subsequent to the Merger,
have resigned from the Tuboscope Board of Directors subject only to the
effectiveness of the Merger. In addition, pursuant to the Merger Agreement,
Tuboscope has agreed to cause L. E. Simmons, currently Chairman of the Board of
Drexel, John F. Lauletta, currently President of Drexel, J.S. Dickson Leach,
currently a director of Drexel, and an individual mutually agreed upon by
Tuboscope and Drexel, to be appointed to the Tuboscope Board of Directors upon
consummation of the Merger. See "Management and Operations After the Merger--
Directors After the Merger" and "Proposal to Elect Tuboscope Directors--
General."
Key Employee Stock Options. In connection with the approval of the Merger
Transactions, the Tuboscope Board of Directors agreed to amend the executive
agreements with Messrs. Greenberg, Hage, Koons, Larkin, Maroney, Nibling and
Reid to provide that all of their outstanding options will be exercisable until
two years after their termination of employment with Tuboscope or five years
from the consummation of the Merger Transactions with respect to outstanding
options held by Messrs. Larkin and Reid. Prior to such amendment, the executive
agreements provided that upon consummation of a transaction similar to the
Merger Transactions, each such employee would receive in cash the difference
between the exercise price of his options and the value of the underlying stock
upon such consummation. In connection with the Merger
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Transactions, unvested options held by Messrs. Greenberg, Hage, Koons, Larkin,
Maroney, Nibling and Reid totalling 50,720, 59,660, 58,760, 91,480, 44,420,
44,420 and 131,760, respectively, will be accelerated under the terms of their
executive agreements.
Non-Employee Director Stock Options. Upon consummation of the Merger
Transactions, each of the agreements evidencing the outstanding options under
Tuboscope's Stock Option Plan for Non-Employee Directors of the Company and
held by current non-employee directors of the Company will be amended to
accelerate the vesting of the 112,000 in the aggregate unvested options and
extend the exercise period for all of the outstanding options held by such
directors, so that such options shall be exercisable in accordance with the
provisions of each option agreement until the fifth anniversary of the
Effective Time. The number of unvested options whose vesting will be
accelerated for each of Messrs. Baier, Hubbard, Mattson, Pennington, Seaver,
Shelton and Warren is 9,600, 9,600, 6,400, 9,600, 4,000, 9,600 and 9,600,
respectively.
VOTING AGREEMENTS
Drexel Stockholders. On January 3, 1996, as a condition to Tuboscope entering
into the Merger Agreement, DOS Partners, Panmell and Zink, each a significant
stockholder of Drexel, entered into a voting agreement with Tuboscope, pursuant
to which each such stockholder agreed that, prior to the termination of the
Merger Agreement or consummation of the Merger, at any meeting of the
stockholders of Drexel and in any action by consent of the stockholders of
Drexel, it would (i) vote its shares of Drexel Common Stock in favor of the
Merger and the Merger Agreement and any of the other transactions contemplated
by the Merger Agreement and (ii) not solicit, encourage or recommend to other
stockholders of Drexel that such other stockholders (a) vote their shares of
Drexel Common Stock in any contrary manner, (b) not vote their shares at all,
(c) sell, transfer, tender or otherwise dispose of their shares of Drexel
Common Stock or (d) attempt to execute any statutory appraisal or other similar
rights they may have. Each of DOS Partners, Panmell and Zink also granted to
Tuboscope an irrevocable proxy and power of attorney to vote all of its shares
of Drexel Common Stock at any meeting of the stockholders of Drexel on matters
which relate to or affect the Merger or the Merger Agreement. Subsequent
thereto, Zink liquidated and distributed its shares of Drexel Common Stock to
Actinium and KMIL, each of which has agreed to be bound by the voting agreement
between Zink and Tuboscope.
As of January 3, 1996, DOS Partners, Panmell and Zink, collectively,
possessed the power to vote 33,076,885 shares of Drexel Common Stock or
approximately 92.0% of the total outstanding Drexel Common Stock. As of such
date, 35,972,240 shares of Drexel Common Stock were outstanding and held of
record by approximately 53 stockholders.
Tuboscope Stockholders. On January 3, 1996, as a condition to Drexel entering
into the Merger Agreement, BHI and Brentwood a significant stockholder of
Tuboscope, entered into a voting agreement with Drexel, pursuant to which each
such stockholder agreed that, prior to the termination of the Merger Agreement
or consummation of the Merger (or with respect to Brentwood only, the later of
(i) May 15, 1996 or (ii) the first date that Brentwood distributes all of the
shares of Tuboscope Common Stock that it owns to its partners), at any meeting
of the stockholders of Tuboscope and in any action by consent of the
stockholders of Tuboscope, it would (i) vote its shares of Tuboscope Common
Stock in favor of the Merger Proposals and (ii) not solicit, encourage or
recommend to other stockholders of Tuboscope that such other stockholders (a)
vote their shares of Tuboscope Common Stock in any contrary manner, (b) not
vote their shares at all, (c) sell, transfer, tender or otherwise dispose of
their shares of Tuboscope Common Stock or (d) attempt to execute any statutory
appraisal or other similar rights they may have. Each of BHI and Brentwood also
granted to designees of Drexel an irrevocable proxy and power of attorney to
vote all of its shares of Tuboscope Common Stock at any meeting of the
stockholders of Tuboscope on matters which relate to or effect the Merger
Proposals.
As of January 3, 1996, BHI and Brentwood, collectively, possessed the power
to vote 2,991,111 shares of Tuboscope Common Stock or approximately 16.1% of
the total outstanding Tuboscope Common Stock. See "Security Ownership of
Certain Beneficial Owners and Management of Tuboscope."
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REGISTRATION RIGHTS
In connection with the Merger, Tuboscope will enter into a registration
rights agreement with SCF, DOS Partners, Panmell, Actinium and KMIL (the
"Registration Rights Agreement"). Under the terms of the Registration Rights
Agreement, such stockholders will be granted certain piggy-back and demand
rights, subject to certain terms and conditions, to register for resale shares
of Tuboscope Common Stock obtained pursuant to the Merger, the 4,200,000 shares
of Tuboscope Common Stock to be obtained by SCF pursuant to the Subscription
Agreement and the 2,533,000 shares (subject to adjustment) of Tuboscope Common
Stock which may be obtained by SCF upon exercise of the SCF Warrants (the
"Registrable Securities"). See "The Subscription Agreement." From and after the
first anniversary date of the Registration Rights Agreement, and subject to the
conditions contained therein, the holder or holders of an aggregate of a
majority of the Registrable Securities then owned or held by SCF and DOS
Partners or their assignees and the holder or holders of an aggregate of a
majority of the Registrable Securities then owned or held by Panmell, Actinium,
KMIL or their assignees may each make one written demand that Tuboscope
register for sale all or part of the Registrable Securities owned or held by
such group; provided, however, that the estimated proceeds of the Registrable
Securities proposed to be sold must exceed $10,000,000 and provided further
that Tuboscope shall not be required to effect more than one demand
registration in a twelve month period.
At any time following the execution of the Registration Rights Agreement, if
Tuboscope proposes to file a registration statement under the Securities Act,
Tuboscope is required to offer each holder of Registrable Securities the
opportunity to register such number of Registrable Securities as such holder
may request; provided, however, that Tuboscope is not required to offer the
holders of the Registrable Securities the opportunity for registration if the
proposed registration statement is a registration of securities to be offered
in connection with or pursuant to (i) a stock option or employee incentive
compensation plan, (ii) a stockholder reinvestment plan or (iii) an exchange
for any securities or assets of, or in connection with a merger or
consolidation with, an unaffiliated company.
The above registration rights are subject to further restrictions as may be
imposed by the underwriters in any underwritten public offering, and, with
respect to the demand registration rights, to certain "black-out" periods as
described in the Registration Rights Agreement.
To the extent not inconsistent with applicable law, each holder of
Registrable Securities that are included in a registration statement that
registers Registrable Securities or who is given the option to include
Registrable Securities in a registration statement that registers Registrable
Securities, has agreed not to effect any public sale or distribution of the
issue being registered (or any securities of Tuboscope convertible into or
exchangeable or exercisable for securities of the same type as the issue being
registered) during the ten days prior to, and 90-day period beginning on, the
effective date of a registration statement filed by Tuboscope (except pursuant
to such registration), but only if and to the extent requested in writing (with
reasonable prior notice) by the managing underwriter or underwriters in the
case of an underwritten public offering by Tuboscope of securities of the same
type as the Registrable Securities; provided, that the period of time for which
Tuboscope is required to keep such registration statement which includes the
Registrable Securities continuously effective shall be increased by a period
equal to such requested holdback period.
The Registration Rights Agreement also provides that Tuboscope will not
effect any public sale or distribution of any securities similar to those being
registered, or any securities convertible into or exchangeable or exercisable
for such securities, except on a Form S-8 (or its successor form), during the
ten days prior to, and during the 90-day period beginning on, the effective
date of any demand registration in which the holders of Registrable Securities
are participating (except pursuant to such registration statement).
Expenses of registration pursuant to either the piggy-back or demand
registration rights will generally be borne by Tuboscope.
Under the terms of the Registration Rights Agreement, Tuboscope may not grant
any new registration rights to any person without the prior written consent of
the holder or holders of a majority of the Registrable
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Securities unless such rights are subordinate to the rights described in the
Registration Rights Agreement and not inconsistent with such rights.
In connection with the BHI Exchange, BHI agreed to modify certain
registration rights it was entitled to with respect to certain Tuboscope
securities. See "The Exchange Agreement--Modification of Registration Rights;
Effect of Existing Stockholder Agreement" and "Proposal to Elect Tuboscope
Directors--Certain Stockholder Agreements--Registration Rights."
REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by 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 and
specified waiting period requirements have been satisfied. Tuboscope, Drexel,
SCF and DOS Partners filed pre-merger notification and report forms with the
FTC and the Antitrust Division on February 29, 1996. Early termination of the
waiting period under the HSR Act has been granted with respect to these
filings.
In addition, Tuboscope and BHI filed premerger notification and report forms
with the FTC and the Antitrust Division on March 14, 1996. Unless early
termination of the waiting period under the HSR Act is granted or unless a
request for additional information is received from the FTC or the Antitrust
Division, the waiting period under the HSR Act with respect to these filings
will expire on April 13, 1996. As of the date of this Proxy
Statement/Prospectus, neither Tuboscope nor BHI has received a request for
additional information from the FTC or the Antitrust Division.
At any time before or after the Effective Time, the Justice Department, the
FTC or a private person or entity could seek under the antitrust laws, among
other things, to enjoin the Merger Transactions or to cause Tuboscope to divest
itself, in whole or in part, of Drexel or of other businesses conducted by
Tuboscope. There can be no assurance that a challenge to the Merger will not be
made or that, if such a challenge is made, Tuboscope will prevail. The
obligations of Drexel and Tuboscope to consummate the Merger are subject to the
condition that there be no temporary restraining order, preliminary or
permanent injunction or other order by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the Merger.
Each party has agreed to use its best efforts to have any such injunction or
order lifted. See "The Merger Agreement--Conditions to the Merger" and "--
Amendment, Waiver and Termination."
Drexel and Tuboscope are not aware of any license or regulatory permit which
is material to the businesses of Drexel or Tuboscope and which is likely to be
adversely affected by consummation of the Merger or of any approval or other
action by any state, federal or foreign government or governmental agency
(other than routine re-licensing procedures) that would be required prior to
the Merger.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the Merger will be accounted
for using the purchase method under generally accepted accounting principles.
RESTRICTIONS ON SALES OF STOCK
Shares of Tuboscope Common Stock to be received in connection with the Merger
by Drexel stockholders who are deemed to be "affiliates" (as such term is
defined in Rule 144 under the Securities Act) of Drexel prior to the Merger
("Drexel Affiliates") (the "Restricted Securities") may be resold by them only
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pursuant to an effective registration statement under the Securities Act
covering such securities or in transactions permitted by the resale provisions
of Rule 145(d) under the Securities Act or as otherwise permitted under the
Securities Act. Under Rule 144 under the Securities Act, an affiliate is a
person who directly or indirectly controls or is controlled by or is under
common control with Drexel and may include certain officers and directors of
Drexel, principal shareholders of Drexel and certain other shareholders with
special relationships with Drexel. This Proxy Statement/Prospectus may not be
used by such affiliates in connection with any resale of their Restricted
Securities.
Rule 145 requires that, in a resale of their Restricted Securities, Drexel
Affiliates comply with a volume restriction and other restrictions on the
manner of sale and that certain information about Tuboscope be currently
available to the public. The volume restriction limits the number of shares
that an affiliate may transfer, in the aggregate, within any three-month period
to the greater of (i) 1% of the outstanding Tuboscope Common Stock or (ii) the
average weekly reported trading volume in the Tuboscope Common Stock during the
preceding four calendar weeks. A Drexel Affiliate may sell its shares of
Tuboscope Common Stock without regard to the volume restrictions and
restrictions on the manner of sale if it has owned the shares for at least two
years, certain information about Tuboscope is currently available to the public
and the Drexel Affiliate is not then an affiliate of Tuboscope. A Drexel
Affiliate may also sell its shares of Tuboscope Common Stock without regard to
the foregoing restrictions (including the requirement that certain information
about Tuboscope is currently available to the public) if it has held its shares
of Tuboscope Common Stock for a period of at least three years and such person
has not been an affiliate of Tuboscope for at least three months. A Drexel
Affiliate who is also an affiliate of Tuboscope may sell its shares of
Tuboscope Common Stock, subject to the volume restrictions and restrictions on
the manner of sale, if it has held the shares of Tuboscope Common Stock for a
period of at least two years and certain information about Tuboscope is
currently available to the public.
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 THE TERMS OF THE MERGER AGREEMENT IS QUALIFIED BY, AND
MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE MERGER
AGREEMENT.
MERGER CONSIDERATION
Pursuant to the Merger Agreement, Sub will merge with and into Drexel and
each share of Drexel Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares of Drexel Common Stock owned by Drexel as
treasury stock or owned by Tuboscope or any wholly owned subsidiary of
Tuboscope or Drexel, which shares are to be canceled in accordance with the
Merger Agreement) will be converted into (i) .4372 share of Tuboscope Common
Stock, which will be immediately available for distribution to Drexel
stockholders and (ii) an additional .0273 Escrowed Share. See "--Escrowed
Shares."
CONVERSION OF SHARES; FRACTIONAL SHARES
The conversion of Drexel Common Stock into Tuboscope Common Stock will occur
automatically at the Effective Time. As soon as practicable after the Effective
Time, Chemical Shareholder Services Group, Inc., in its capacity as exchange
agent (the "Exchange Agent"), will send a transmittal form to each Drexel
stockholder. The transmittal form will contain instructions with respect to the
surrender of certificates representing Drexel Common Stock to be exchanged for
certificates representing Tuboscope Common Stock.
All shares of Tuboscope Common Stock issued upon conversion of shares of
Drexel Common Stock will be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Drexel Common Stock.
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NO FRACTIONAL SHARES OF TUBOSCOPE COMMON STOCK WILL BE ISSUED TO ANY DREXEL
STOCKHOLDER UPON CONSUMMATION OF THE MERGER. FOR EACH FRACTIONAL SHARE THAT
WOULD OTHERWISE BE ISSUED, TUBOSCOPE WILL PAY AN AMOUNT IN CASH (WITHOUT
INTEREST) EQUAL TO THE VALUE OF SUCH FRACTION OF A SHARE BASED UPON THE
CLOSING PRICE OF TUBOSCOPE COMMON STOCK ON THE NASDAQ ON THE DATE ON WHICH THE
EFFECTIVE TIME (AS DEFINED IN THE MERGER AGREEMENT) SHALL OCCUR (OR IF THE
TUBOSCOPE COMMON STOCK SHALL NOT TRADE ON THE NASDAQ ON SUCH DATE, THE FIRST
DAY THAT TUBOSCOPE COMMON STOCK SHALL TRADE ON THE NASDAQ THEREAFTER).
ESCROWED SHARES
As set forth above, each share of Drexel Common Stock outstanding
immediately prior to the Effective Time shall be converted into a fraction of
a share of Tuboscope Common Stock immediately available for distribution to
the Drexel stockholders and a fraction of an Escrowed Share pursuant to the
terms of the Escrow Agreement.
Prior to the fifteenth business day following the delivery to the Tuboscope
Board of Directors of audited financial statements of Drexel and its
subsidiaries for the period ending on March 31, 1996 (the "Claim Expiration
Date"). Tuboscope will have the right to make one claim on the Escrowed Shares
for any net damages suffered by Tuboscope as a result of any breach by Drexel
of any representation or warranty of Drexel contained in the Merger Agreement
(other than any breach that Drexel has notified Tuboscope of prior to the
Effective Time or that an executive officer of Tuboscope has actual knowledge
of prior to the Effective Time) if such net damages would result in a material
adverse effect on Drexel, and then only to the extent such damages exceed
$1,000,000 in the aggregate.
If Tuboscope makes a claim on the Escrowed Shares prior to or on the Claim
Expiration Date, the Escrowed Shares shall continue to be held in escrow
pending the resolution of such claim. If Tuboscope does not make a claim prior
to the Claim Expiration Date, the Escrowed Shares will be distributed to the
nondissenting Drexel stockholders pro rata, in accordance with their ownership
interest in Drexel immediately prior to the Effective Time.
While the Escrowed Shares are held in escrow, if any matter concerning
Tuboscope is put to a stockholder vote, the Escrow Agent will seek voting
instructions from the stockholders whose stock is escrowed and will vote the
Escrowed Shares in accordance with such instructions or, if no instructions
are received with respect to the Escrowed Shares, the Escrow Agent will not
take any action with respect to such stock.
Prior to the closing date, holders of a majority of the outstanding shares
of Drexel Common Stock may designate an individual or entity to be the
Stockholders Representative for purposes of the Escrowed Shares. The
Stockholders Representative will have the authority to negotiate, dispute,
compromise or settle any claim made by Tuboscope. Any unresolved disputes with
respect to claims will be resolved through arbitration. For purposes of
valuing the Escrowed Shares if a claim by Tuboscope is made, each Escrowed
Share will be valued at $7.00 per share. Tuboscope has agreed to pay all
reasonable out-of-pocket expenses incurred by the Stockholders Representative.
All actions to be taken by Tuboscope with respect to the Escrowed Shares are
to be taken by a committee of the Tuboscope Board of Directors comprised of
one or more members who were not prior to the Effective Time affiliated with
Drexel or affiliates of Drexel and who were not stockholders of Drexel.
APPRAISAL RIGHTS
If the Merger is consummated, dissenting holders of shares of Drexel Common
Stock are entitled to appraisal rights under Section 106 of the Bermuda Act,
provided that they comply with the conditions established thereunder.
TREATMENT OF DREXEL OPTIONS
Pursuant to the Merger Agreement, at the Effective Time, all Drexel Options
then outstanding under the Drexel Stock Option Plans will remain outstanding
and will be assumed by Tuboscope. Each Drexel
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Option assumed by Tuboscope will be exercisable into Tuboscope Common Stock
upon the same terms and conditions as under the applicable Drexel Stock Option
Plan and the applicable option agreement issued thereunder, except that (i) the
number of shares of Tuboscope Common Stock subject to each Drexel Option will
be determined by multiplying the number of shares of Drexel Common Stock
subject to the Drexel Option immediately prior to the Effective Time by the
Drexel Stock Option Exchange Ratio and (ii) the per share price will be
determined by dividing the per share exercise price in effect immediately prior
to the Effective Time under the Drexel Option by the Drexel Stock Option
Exchange Ratio. The Drexel Stock Option Exchange Ratio shall mean initially
.4372, which amount shall be increased as of the date that Escrowed Shares are
distributed pursuant to the Escrow Agreement by (i) the product of .0273
multiplied by (ii) the quotient of the number of Escrowed Shares distributed to
former holders of Drexel Common Stock divided by the aggregate number of
Escrowed Shares. Notwithstanding the foregoing, if a Drexel Option is exercised
prior to the date that Escrowed Shares are distributed pursuant to the Escrow
Agreement, upon such date appropriate adjustments shall be made so that such
optionee will be in the same position with respect to Tuboscope Common Stock as
if the Drexel Stock Option Exchange Ratio on the date of such exercise had been
the adjusted Drexel Stock Option Exchange Ratio as of such date. Approval of
the Merger Agreement by the stockholders of Tuboscope will constitute
stockholder approval of the assumption by Tuboscope of the rights and
obligations of Drexel under the Drexel Stock Option Plans. See "The Merger
Transactions--Interests of Certain Persons in the Merger Transactions--Stock
Option Plans."
LIQUIDATION OF DREXEL
As soon as practicable after the Effective Time, Tuboscope shall cause Drexel
to be liquidated into Tuboscope so that the Merger and the Liquidation will be
collectively treated for federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code.
CONDITIONS TO THE MERGER
Conditions to Obligations of Each Party to Effect the Merger
The respective obligations of each party to effect the Merger are subject to
the satisfaction prior to the closing of the Merger (the "Closing") of the
following conditions:
Drexel Stockholder Approval. The Merger Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the holders of not less
than 90% of the outstanding shares of Drexel Common Stock entitled to vote
thereon. Four Drexel stockholders holding an aggregate of 33,076,885 shares of
Drexel Common Stock (92.0% of the currently outstanding Drexel Common Stock)
have agreed to vote in favor of the Merger and the Merger Agreement. See "The
Merger Transactions--Voting Agreements."
Tuboscope Stockholder Approval. The Merger Proposals shall have been approved
and adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Tuboscope Common Stock entitled to vote thereon.
Tuboscope stockholders holding an aggregate of 2,991,111 shares of Tuboscope
Common Stock (16.1% of the currently outstanding Tuboscope Common Stock) have
agreed to vote in favor of the Merger Proposals. See "The Merger Transactions--
Voting Agreements."
Listing of Tuboscope Common Stock. The shares of Tuboscope Common Stock
issuable to Drexel stockholders pursuant to the Merger, the SCF Shares, the
shares of Tuboscope Common Stock issuable upon the exercise of the SCF Warrants
and such other shares of Tuboscope Common Stock required to be reserved for
issuance in connection with the Merger and related transactions, if any, shall
have been authorized for trading on Nasdaq upon official notice of issuance.
Governmental Approvals. The waiting period applicable to the consummation of
the Merger under the HSR Act must 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
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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 Drexel, Tuboscope and Sub must have been made or
obtained and the Registration Statement must have become effective under the
Securities Act and must not be the subject of any stop order or proceeding
seeking a stop order. See "The Merger Transactions--Regulatory Approvals."
Other Approvals. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the Merger
may be in effect at the Effective Time. In addition, SCF must have complied
with its obligations under the Subscription Agreement (see "The Subscription
Agreement"), Tuboscope must have obtained all necessary consents required under
that certain Secured Credit Agreement dated June 30, 1994 among Tuboscope,
certain subsidiaries of Tuboscope and ABN AMRO Bank, N.V., as agent, and Drexel
must have obtained all necessary consents required under that certain
$37,000,000 Amended and Restated Revolving and Term Credit Agreement by and
among Drexel Holdings, Inc. and Texas Commerce Bank.
Additional Conditions to Obligations of Tuboscope and Sub
The obligations of Tuboscope and Sub to effect the Merger are subject to the
satisfaction of certain other conditions, including:
Tax Opinion. Tuboscope shall have received an opinion, reasonably
satisfactory to Tuboscope, to the effect that, if the Merger and the
Liquidation are consummated in accordance with the terms of the Merger
Agreement, the Merger and the Liquidation will be collectively treated as a
reorganization within the meaning of Section 368(a) of the Code, Tuboscope and
Drexel will each be a party to that reorganization within the meaning of
Section 368(b) of the Code and no gain or loss will be recognized for U.S.
federal income tax purposes by Tuboscope, Sub or Drexel as a result of the
Merger and the Liquidation, which opinion shall have been confirmed at the
Closing. See "Certain United States Federal Income Tax Consequences."
Opinion of Tuboscope's Financial Advisor. Tuboscope has received the opinion
of CS First Boston to the effect that, as of the date of the execution of the
Merger Agreement, the consideration to be paid and received by Tuboscope in the
Merger Transactions was fair to Tuboscope from a financial point of view. As a
condition to Tuboscope's obligations, such opinion shall not have been
withdrawn at Closing. See "The Merger Transactions--Opinion of Tuboscope's
Financial Advisor."
Letters from Drexel Affiliates. Drexel shall cause to be prepared and
delivered to Tuboscope a list identifying all persons who, at the time of the
meeting of the Drexel stockholders to vote on the Merger and the Merger
Agreement (the "Drexel Stockholder Meeting"), may be deemed to be Drexel
Affiliates. As a condition to its obligations, Tuboscope shall have received
signed copies of agreements from all parties deemed to be Drexel Affiliates
pursuant to which each such party acknowledges that it is subject to the
provisions of Rule 145(d).
Additional Conditions to Obligations of Drexel
The obligations of Drexel to effect the Merger are subject to the
satisfaction of certain other conditions, including that Drexel shall have
received an opinion, reasonably satisfactory to Drexel, to the effect that, if
the Merger and the Liquidation are consummated in accordance with the terms of
the Merger Agreement, the Merger and the Liquidation will be collectively
treated as a reorganization within the meaning of Section 368(a) of the Code,
each of Tuboscope and Drexel will be a party to that reorganization within the
meaning of Section 368(b) of the Code and no gain or loss will be recognized
for U.S. federal income tax purposes by a stockholder of Drexel as a result of
the Merger and the Liquidation upon the conversion of shares of Drexel Common
Stock into shares of Tuboscope Common Stock except with respect to (i) cash, if
any, received in lieu of fractional shares of Tuboscope Common Stock, (ii) a
stockholder in special circumstances, such as a
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stockholder who acquired shares of Drexel Common Stock through exercise of
employee stock options or otherwise as compensation for employment, or (iii) a
stockholder who failed to comply with certain filing requirements, which
opinion shall have been confirmed at the Closing. See "Certain United States
Federal Income Tax Consequences."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by each
of Tuboscope, Sub and Drexel relating to, among other things, (i) the
organization and similar corporate matters of it and certain of its
subsidiaries, (ii) its capital structure, (iii) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters, and the absence of conflicts, violations of or defaults under its
governing documents or any loan or credit agreement, note, bond, mortgage,
indenture or other agreement, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to it, any of its respective subsidiaries or any of their respective
properties or assets, (iv) the absence of undisclosed material liabilities,
(viii) the absence of defaults in any material agreements, (v) compliance with
certain laws, (vi) compliance with environmental laws and (vii) title to real
and personal property. The Merger Agreement also contains representations and
warranties of Drexel relating to its audited and pro forma financial
statements, and representations and warranties of Tuboscope and Sub regarding
the documents and reports that Tuboscope has filed with the Commission and the
interim operations of Sub.
CERTAIN COVENANTS; CONDUCT OF BUSINESS
During the period from the date of the Merger Agreement and continuing until
the Effective Time, each of Tuboscope and Drexel has agreed as to itself and
its subsidiaries that it will: (i) carry on its businesses in the usual,
regular and ordinary course in substantially the same manner as previously
conducted, (ii) not declare or pay any dividends on or make other distributions
in respect of any of its capital stock or partnership interests, except for
certain permitted intercompany transactions, (iii) not 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 its capital stock, (iv) not repurchase, redeem or otherwise
acquire, or permit any of its subsidiaries to purchase, redeem or otherwise
acquire, any shares of its capital stock, subject to limited exceptions, (v)
not deliver or sell, or authorize or propose to issue, deliver or sell, any
shares of its capital stock of any class, any indebtedness having the right to
vote or any securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting debt or convertible securities, (vi) not amend
or propose to amend its charter documents, (vii) not acquire or agree to
acquire any business or any corporation, partnership, association or other
business organization or division thereof, (viii) not 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 to any associates, affiliates, or holders of in excess of five percent
of the equity securities of Tuboscope, other than in the ordinary course of
business on an arms'-length basis, (ix) 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, (x) not grant
any increases in the compensation of any of its directors, officers or
employees, except increases in the ordinary course of business and in
accordance with past practice, (xi) not pay or agree to pay any pension,
retirement allowance or other employee benefit not required or contemplated by
any of the existing Tuboscope or Drexel benefit programs or plans to any
director, officer or employee, whether past or present, (xii) not enter into
any new, or amend any existing, employment or severance or termination
agreement with any director, officer or key employee, (xiii) not become
obligated under any new benefit program or plan, which was not in existence or
approved by the Tuboscope or Drexel Board of Directors 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, (xiv) not incur any indebtedness
for borrowed money (except for working capital under existing credit
facilities, and refinancings of existing debt that permit prepayment of such
debt without penalty or guarantee any such indebtedness) or issue or sell any
debt
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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, (xv) not
commit to aggregate capital expenditures in excess of $1,000,000 outside such
party's capital budget and (xvi) not, directly or indirectly, solicit or
initiate any prospective buyer or make any proposal that constitutes, or may
reasonably be expected to lead to, an Acquisition Proposal (as defined below)
except for certain unsolicited proposals which the directors of either party
may be required to respond to pursuant to their fiduciary duties. An
"Acquisition Proposal" means any proposal or offer, other than one by Drexel or
its affiliates, for a tender or exchange offer, a merger, consolidation or
other business combination involving Tuboscope or any of its significant
subsidiaries or any proposal to acquire in any manner a substantial equity
interest in, or substantially all of the assets of, Tuboscope or any of its
significant subsidiaries.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, Tuboscope and Drexel have agreed that (i)
Tuboscope will prepare and file this Registration Statement, and will use its
reasonable best efforts to (a) have the Registration Statement declared
effective as promptly as practicable and (b) obtain all necessary state
securities laws or "blue sky" permits, approvals, and registrations, (ii) each
will use its reasonable best efforts to have timely delivered to the other
"comfort" letters from its independent public accountants, (iii) each will each
afford to the other access to its respective officers, properties and other
information as the other party may reasonably request, (iv) each will call a
meeting of its stockholders to be held as promptly as practicable, (v) each
will comply with all legal requirements imposed on it with respect to the
Merger and furnish information to the other in connection with such legal
requirements, (vi) Tuboscope will take all corporate action necessary to permit
it to issue shares of Tuboscope Common Stock pursuant to the Merger and will
use all reasonable efforts to have approved for listing on the Nasdaq Stock
Market or the New York Stock Exchange, subject to official notice of issuance,
the shares of Tuboscope Common Stock to be issued in the Merger, the SCF Sale,
upon exercise of the SCF Warrants and upon exercise of the Drexel Options,
(vii) each agrees to certain employee matters (see "The Merger Transactions--
Interests of Certain Persons in the Merger Transactions"), (viii) Tuboscope
will assume the Drexel Options (except under certain limited circumstances),
(ix) Tuboscope will, subject to certain limitations, maintain directors and
officers liability insurance for officers and directors of Drexel and its
subsidiaries (see "--Indemnification"), (x) Tuboscope will execute the
Registration Rights Agreement (see "The Merger Transactions--Registration
Rights" and "--Restrictions on Sales of Stock"), (xi) each will cooperate and
consult with the other regarding press releases and changes that may have a
material adverse effect on the business of Tuboscope, (xii) neither will take
nor omit to take any action that would affect the qualification of the Merger
as a reorganization described in Section 368(a) of the Code, (xiii) the
transactions contemplated by the Merger Agreement shall constitute a "Change in
Control" as defined in the executive employment agreements of Tuboscope and
(xiv) Drexel will provide certain statements certifying that the stock of
certain of its subsidiaries are not United States real property interests.
EXPENSES AND TERMINATION FEE
Except as otherwise provided in the Escrow Agreement, each party to the
Merger Agreement shall pay its own expenses incident to preparing for entering
into and carrying out the Merger Agreement and the consummation of the
transactions contemplated thereby, whether or not the Merger shall be
consummated.
The Merger Agreement also provides that Tuboscope will pay to Drexel a fee
(the "Termination Fee") equal to $4,000,000 if (i) either Tuboscope or Drexel
terminates the Merger Agreement because the Tuboscope Board of Directors, in
the exercise of its good faith judgment as to its fiduciary duties to its
stockholders imposed by law, as advised by outside counsel, determines that
such termination is required by reason of an Acquisition Proposal having been
made (subject to notice to, and an opportunity to respond by, Drexel), (ii)
Drexel terminates or resolves to terminate the Merger Agreement because the
Tuboscope Board of Directors withdraws, modifies or changes its recommendation
of the Merger Proposals in a manner adverse to Drexel and if Drexel is in
material compliance with its obligations under the Merger Agreement if an
Acquisition Proposal was outstanding at the time of such termination, or (iii)
either Tuboscope or Drexel
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terminates the Merger Agreement because the stockholders of Tuboscope have not
approved the Merger Proposals and if Drexel is not in material breach of its
obligations under the Merger Agreement at the time of such termination and (a)
if after the date of the Merger Agreement and on or prior to the meeting of
Drexel stockholders, any person or group (within the meaning of Section
13(d)(3) of the Exchange Act) became the beneficial owner of 33% or more of the
outstanding Tuboscope Common Stock, or (b) if no fee is paid pursuant to clause
(a) above and if an Acquisition Proposal had been publicly disclosed at or
prior to the time of the Annual Meeting and if after the Annual Meeting,
Tuboscope consummates an Acquisition Proposal within one year following such
termination. See "The Subscription Agreement--Termination; Termination Fee."
If the Merger Agreement is terminated because Tuboscope's stockholders do not
approve the Merger Proposals or if Tuboscope's Board of Directors has withdrawn
its approval of the Merger Proposals, if no Termination Fee is payable to
Drexel pursuant to clauses (i), (ii) or (iii), and if Drexel is not in material
breach of the Merger Agreement at the time of such termination, then Tuboscope
shall pay to Drexel a Termination Fee of $1,000,000 as a partial reimbursement
of out-of-pocket expenses incurred by Drexel in connection with the
transactions contemplated by the Merger Agreement. See "The Subscription
Agreement--Termination; Termination Fee."
INDEMNIFICATION
From and after the Effective Time, Tuboscope and Drexel have agreed to
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 Tuboscope or Drexel or any of their
subsidiaries or an employee of Tuboscope or Drexel or any of their subsidiaries
who acts as a fiduciary under any of the Tuboscope benefit programs or plans or
the Drexel benefit programs or plans, 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
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 Tuboscope or Drexel or any of their subsidiaries, 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.
AMENDMENT, WAIVER AND 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 Drexel
or Tuboscope:
(i) by mutual written consent of Drexel and Tuboscope, or by mutual
action of their respective Boards of Directors;
(ii) by either Drexel or Tuboscope if (a) the Merger shall not have been
consummated by June 30, 1996 (provided that the right to terminate the
Merger Agreement shall not be available to any party whose breach of any
representation or warranty or 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); (b) any court of competent
jurisdiction, or 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;
(c) the stockholders of Tuboscope shall not have approved the Merger
Proposals; or (d) in the exercise of its good faith judgment as to its
fiduciary duties to its stockholders imposed by law, as advised by outside
counsel, the Tuboscope Board of Directors determines that such termination
is required by reason of an Acquisition Proposal having been made (subject
to notice to, and an opportunity to respond by, Drexel);
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(iii) by Tuboscope if (a) Drexel shall have failed to comply in any
material respect with any of its covenants or agreements contained in the
Merger Agreement to be complied with or performed by Drexel at or prior to
such date of termination (subject to notice and an opportunity to cure); or
(b) subject to limited exceptions, any representation or warranty of Drexel
contained in the Merger Agreement shall not be true in all material
respects when made (subject to notice and an opportunity to cure) or on and
as of the Effective Time as if made on and as of the Effective Time (except
to the extent it relates to a particular date); or
(iv) by Drexel if (a) Tuboscope or Sub shall have failed to comply in any
material respect with any of its covenants or agreement contained in the
Merger Agreement to be complied with or performed by it at or prior to such
date of termination (subject to notice and an opportunity to cure); (b)
subject to limited exceptions, any representation or warranty of Tuboscope
or Sub contained in the Merger Agreement shall not be true in all material
respects when made (subject to notice and an opportunity to cure) or on and
as of the Effective Time as if made on and as of the Effective Time (except
to the extent it relates to a particular date); or (c) the Tuboscope Board
of Directors withdraws, modifies or changes its recommendation of the
Merger Proposals in a manner adverse to Drexel or resolves to do any of the
foregoing.
THE SUBSCRIPTION AGREEMENT
THE DETAILED TERMS OF AND CONDITIONS TO THE SCF SALE ARE CONTAINED IN THE
SUBSCRIPTION AGREEMENT, WHICH IS INCLUDED IN FULL AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING
SUMMARY DESCRIPTION OF THE TERMS OF THE SUBSCRIPTION AGREEMENT IS QUALIFIED BY,
AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE
SUBSCRIPTION AGREEMENT.
SALE OF SCF SHARES AND SCF WARRANTS
Pursuant to the Subscription Agreement, at the Closing Tuboscope will sell to
SCF, for an aggregate consideration of $31,000,000, 4,200,000 shares of
Tuboscope Common Stock and warrants to purchase, subject to adjustment under
certain circumstances, an aggregate of 2,533,000 shares of Tuboscope Common
Stock at an exercise price of $10 per share expiring on December 31, 2000.
CONDITIONS TO THE SCF SALE
The respective obligations of Tuboscope and SCF to effect the SCF Sale are
subject to the satisfaction prior to the Closing of certain terms and
conditions, including (i) obtaining all third party consents and approvals
necessary in connection with the Subscription Agreement and the transactions
contemplated thereby, (ii) expiration or termination of the waiting period
applicable to the consummation of the transactions contemplated by the
Subscription Agreement under the HSR Act and (iii) satisfaction or waiver of
all of the conditions precedent to the consummation of the Merger set forth in
the Merger Agreement. See "The Merger Agreement--Conditions to the Merger."
TERMINATION; TERMINATION FEE
The Subscription Agreement may be terminated at any time prior to the Closing
(i) by mutual consent of Tuboscope and SCF, (ii) by either party if the Closing
shall not have occurred by June 30, 1996 or (iii) by either party if the Merger
Agreement has been terminated. If the Merger Agreement is terminated and Drexel
receives a $4,000,000 Termination Fee in accordance with the Merger Agreement,
SCF shall receive $1,000,000 of such Termination Fee. If Drexel receives a
$1,000,000 Termination Fee in accordance with the Merger Agreement, SCF shall
receive $250,000 of such Termination Fee. See "The Merger Agreement-- Expenses
and Termination Fee."
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CERTAIN ANTIDILUTIVE ADJUSTMENTS TO THE SCF WARRANTS
The number of shares of Tuboscope Common Stock which the holder of the SCF
Warrants shall be entitled to receive upon each exercise thereof shall be
determined by multiplying the number of shares of Tuboscope Common Stock which
would otherwise be issuable upon such exercise, as designated by the holder
thereof, by a fraction of which (a) the numerator is $10.00 and (b) the
denominator is the exercise price in effect on the date of such exercise.
The exercise price of each SCF Warrant shall be adjusted, in accordance with
certain formulas set forth in the SCF Warrant, if Tuboscope (i) issues
additional shares of Tuboscope Common Stock without consideration or for a
consideration per share of less than the current market price, (ii) declares a
dividend or makes a distribution on Tuboscope Common Stock in shares of
Tuboscope Common Stock, (iii) subdivides or reclassifies the outstanding shares
of Tuboscope Common Stock into a smaller number of shares, (iv) combines or
reclassifies the outstanding Tuboscope Common Stock into a smaller number of
shares or (v) fixes a record date for the making of a distribution to holders
of Tuboscope Common Stock (a) of shares of any class of Tuboscope stock other
than Tuboscope Common Stock, (b) of evidences of indebtedness of Tuboscope, (c)
of other assets, including cash (other than cash dividends which, when combined
with all other cash dividends paid during the prior twelve months, do not
exceed 10% of the current market price), or (d) of rights or warrants.
THE EXCHANGE AGREEMENT
THE DETAILED TERMS OF AND CONDITIONS TO THE BHI EXCHANGE ARE CONTAINED IN THE
EXCHANGE AGREEMENT. THE FOLLOWING SUMMARY DESCRIPTION OF THE MATERIAL TERMS OF
THE EXCHANGE AGREEMENT IS QUALIFIED BY, AND MADE SUBJECT TO, THE MORE COMPLETE
INFORMATION SET FORTH IN THE EXCHANGE AGREEMENT.
EXCHANGE OF BHI SHARES AND BHI WARRANTS
Pursuant to the Exchange Agreement, at the Closing Tuboscope will issue to
BHI 1,500,000 shares of Tuboscope Common Stock and warrants to purchase,
subject to adjustment under certain circumstances, an aggregate of 1,250,000
shares of Tuboscope Common Stock at an exercise price of $10 per share expiring
on December 31, 2000, in exchange for all of the 100,000 shares of Tuboscope
Series A Preferred Stock held by BHI. In addition, BHI has agreed not to
dispose of any of the shares of Tuboscope Common Stock received in the BHI
Exchange prior to December 31, 1997.
CONDITIONS TO THE BHI EXCHANGE
The respective obligations of Tuboscope and BHI to effect the BHI Exchange
are subject to the satisfaction prior to the Closing of certain terms and
conditions, including (i) obtaining all third party consents and approvals
necessary in connection with the Exchange Agreement and the transactions
contemplated thereby, (ii) expiration or termination of the waiting period
applicable to the consummation of the transactions contemplated by the Exchange
Agreement under the HSR Act and (iii) satisfaction or waiver of all of the
conditions precedent to the consummation of the Merger set forth in the Merger
Agreement. See "The Merger Agreement--Conditions to the Merger."
TERMINATION
The Exchange Agreement may be terminated at any time prior to the Closing (i)
by mutual consent of Tuboscope and BHI, (ii) by either party if the Closing
shall not have occurred by June 30, 1996 or (iii) by either party if the Merger
Agreement has been terminated.
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MODIFICATION OF REGISTRATION RIGHTS; EFFECT OF EXISTING STOCKHOLDER AGREEMENT
In connection with BHI's acquisition in 1991 of Tuboscope Common Stock and
Tuboscope Series A Preferred Stock, BHI received certain registration rights,
including the right to make two written demands that Tuboscope register for
sale all or part of such Tuboscope Common Stock and any Tuboscope Common Stock
received in exchange for such Tuboscope Series A Preferred Stock. BHI also
received the right to include such securities on up to four occasions in
certain other registration statements filed by Tuboscope. See "Proposal to
Elect Tuboscope Directors--Certain Stockholder Agreements--Registration
Rights." In the Exchange Agreement, BHI agreed to certain modifications to its
existing registration rights, including agreeing that its registration rights
with respect to the shares of Tuboscope Common Stock received pursuant to the
Exchange Agreement and shares acquirable pursuant to the exercise of the BHI
Warrants will be subordinate to the registration rights granted pursuant to
the Registration Rights Agreement. See "The Merger Transactions--Registration
Rights." BHI's registration rights with respect to the 1,686,047 shares of
Tuboscope Common Stock currently owned by BHI will be superior to the
registration rights granted pursuant to the Registration Rights Agreement.
The Exchange Agreement provides that shares of Tuboscope Common Stock to be
acquired by BHI pursuant to the Exchange Agreement and shares acquirable
pursuant to the exercise of the BHI Warrants will be subject to the right of
first refusal in favor of Tuboscope provided for in a stockholders' agreement
to which BHI is currently a party. BHI will also remain subject to certain
standstill provisions included in such stockholders' agreement. See "Proposal
to Elect Tuboscope Directors--Certain Stockholder Agreements." The Exchange
Agreement further provides that BHI may not prior to December 31, 1997 sell
the BHI Warrants or shares of Tuboscope Common Stock acquired pursuant to the
Exchange Agreement or the BHI Warrants, subject to certain exceptions.
CERTAIN ANTIDILUTIVE ADJUSTMENTS TO THE BHI WARRANTS
The number of shares of Tuboscope Common Stock which the holder of the BHI
Warrants shall be entitled to receive upon each exercise thereof shall be
determined by multiplying the number of shares of Tuboscope Common Stock which
would otherwise be issuable upon such exercise, as designated by the holder
thereof, by a fraction of which (a) the numerator is $10.00 and (b) the
denominator is the exercise price in effect on the date of such exercise.
The exercise price of each BHI Warrant shall be adjusted, in accordance with
certain formulas set forth in the BHI Warrant, if Tuboscope (i) issues
additional shares of Tuboscope Common Stock without consideration or for a
consideration per share of less than the current market price, (ii) declares a
dividend or makes a distribution on Tuboscope Common Stock in shares of
Tuboscope Common Stock, (iii) subdivides or reclassifies the outstanding
shares of Tuboscope Common Stock into a smaller number of shares, (iv)
combines or reclassifies the outstanding Tuboscope Common Stock into a smaller
number of shares or (v) fixes a record date for the making of a distribution
to holders of Tuboscope Common Stock (a) of shares of any class of Tuboscope
stock other than Tuboscope Common Stock, (b) of evidences of indebtedness of
Tuboscope, (c) of other assets, including cash (other than cash dividends
which, when combined with all other cash dividends paid during the prior
twelve months, do not exceed 10% of the current market price), or (d) of
rights or warrants.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences to Tuboscope, Drexel and their respective stockholders of the
Merger and the Liquidation (together, for purposes of this section, the
"Transaction"). The discussion below of the tax consequences of the
Transaction to the stockholders of Drexel applies only to stockholders who are
United States persons for United States federal income tax purposes or who are
otherwise subject to United States federal income tax on their income. In the
opinion of each of Baker & Botts, L.L.P., counsel to Tuboscope, and Vinson &
Elkins L.L.P., counsel to Drexel, the following discussion, insofar as it
relates to matters of law and legal conclusions, and based on the assumptions
and subject to the qualifications set forth herein and therein, accurately
describes the material U.S. federal income tax consequences to Tuboscope,
Drexel and their respective stockholders of the Transaction.
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OPINIONS
Tuboscope has received an opinion from Baker & Botts, L.L.P. to the effect
that, if the Transaction is consummated in accordance with the terms of the
Merger Agreement, (i) the Transaction will be treated as a reorganization under
Section 368(a) of the Code, (ii) each of Tuboscope and Drexel will be a party
to such reorganization within the meaning of Section 368(b) of the Code and
(iii) no gain or loss will be recognized for federal income tax purposes by
Tuboscope, Sub or Drexel as a result of the Transaction. In addition, Drexel
has received an opinion from Vinson & Elkins L.L.P. to the effect that, if the
Transaction is consummated in accordance with the terms of the Merger
Agreement, (i) the Transaction will be treated as a reorganization under
Section 368(a) of the Code, (ii) each of Tuboscope and Drexel will be a party
to such reorganization within the meaning of Section 368(b) of the Code and
(iii) no gain or loss will be recognized for federal income tax purposes by a
stockholder of Drexel as a result of the Transaction upon the conversion of
shares of Drexel Common Stock into shares of Tuboscope Common Stock except with
respect to cash, if any, received in lieu of fractional shares of Tuboscope
Common Stock. Each of those opinions was based upon such counsel's review of
those documents and materials that it considered to be relevant, including this
Proxy Statement/Prospectus and the Merger Agreement. In addition, in rendering
those opinions, each such counsel received and relied upon representations of
fact and covenants contained in certificates of Tuboscope and Drexel.
An opinion of counsel is not binding on the Internal Revenue Service ("IRS")
or on the courts. Therefore, there can be no assurance that the Transaction
will constitute a reorganization or that any of the tax consequences of a
reorganization that are described herein will be available to the Drexel
stockholders. Because of the complexity of the tax laws and because the tax
consequences to any particular stockholder may be affected by matters not
discussed herein, each Drexel stockholder is advised to consult his or her own
tax advisor concerning the federal income tax consequences of the Transaction.
GENERAL TAX CONSEQUENCES
Assuming qualification of the Transaction as a reorganization under Section
368(a) of the Code, for federal income tax purposes, (i) no gain or loss will
be recognized by Drexel, Sub, Tuboscope or Tuboscope's stockholders as a result
of the Transaction, (ii) no gain or loss will be recognized by a Drexel
stockholder upon the receipt of Tuboscope Common Stock in the Merger solely in
exchange for shares of Drexel Common Stock (except for cash received in lieu of
a fractional share), (iii) the aggregate basis of the shares of Tuboscope
Common Stock to be received by a Drexel stockholder in the Merger (including a
fractional share and the Escrowed Shares allocable to such stockholder) will be
the same as the aggregate basis of the shares of Drexel Common Stock exchanged
therefor and (iv) the holding period of the shares of Tuboscope Common Stock to
be received by a Drexel stockholder in the Merger (including a fractional share
and the Escrowed Shares allocable to such stockholder) will include the holding
period of the shares of Drexel Common Stock exchanged therefor, provided that
such Drexel Common Stock was held as a capital asset by such stockholder as of
the Effective Time.
CASH IN LIEU OF FRACTIONAL SHARES
A Drexel stockholder who receives cash in lieu of a fractional share of
Tuboscope Common Stock in accordance with the Merger Agreement will recognize
gain or loss for federal income tax purposes equal to the difference between
the cash received in lieu of such fractional share and the basis of such
fractional share. Such gain or loss will be capital gain or loss, provided that
the Drexel Common Stock was held as a capital asset. Any such capital gain or
loss will be long-term capital gain or loss if the stockholder's holding period
for such Drexel Common Stock exceeds one year as of the Effective Time.
ESCROWED SHARES
If any Escrowed Shares allocable to a Drexel stockholder are subsequently
distributed by the Escrow Agent to such stockholder, such stockholder will not
recognize income, gain or loss for federal income tax purposes upon such
distribution. If any Escrowed Shares are subsequently returned by the Escrow
Agent to Tuboscope, such stockholder will not recognize gain or loss for
federal income tax purposes upon such return and the basis of such shares will
be added to the basis of the remaining shares of Tuboscope Common Stock
received by such stockholder in connection with the Merger.
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FILING REQUIREMENTS
A Drexel stockholder who realizes gain on the exchange of Drexel Common Stock
for Tuboscope Common Stock in connection with the Transaction will be required
to file a notice of such exchange with the IRS along with such stockholder's
federal income tax return for the taxable year in which such exchange occurs.
The failure to file such a notice could result in such gain being recognized by
the stockholder for federal income tax purposes.
PROPOSED REGULATIONS
Under proposed regulations issued in 1991 which are not currently in effect,
each Drexel stockholder would generally be required to recognize gain for
federal income tax purposes on the exchange of Drexel Common Stock for
Tuboscope Common Stock in connection with the Transaction. In addition, under
those proposed regulations, the basis of the assets of Drexel might in certain
circumstances be reduced as a result of the Transaction. The proposed
regulations would generally apply to exchanges occurring at least 30 days after
the date the regulations are published in final form. Therefore, if the
proposed regulations are finalized in their current form 30 or more days before
the date on which the Effective Time occurs, the rules described in this
paragraph would apply to the Transaction.
DISSENTING STOCKHOLDERS
In the case of a Drexel stockholder who exercises dissenters' rights with
respect to such stockholder's shares of Drexel Common Stock and who receives
payment for such shares in cash, the IRS can be expected to take the position
that such stockholder received such cash as a distribution in redemption of
such shares subject to the provisions and limitations of Section 302 of the
Code. Therefore, such a dissenting stockholder who does not own, actually or
constructively in accordance with Section 318 of the Code, any shares of
Tuboscope Common Stock immediately after the Transaction will recognize gain or
loss for federal income tax purposes equal to the difference between the cash
received and the basis of such shares. Such gain or loss generally would be
capital gain or loss, provided such shares were held as a capital asset. Any
such capital gain or loss would be long-term capital gain or loss if such
stockholder's holding period for such shares exceeds one year as of the
Effective Time. In certain circumstances, however, the provisions of Section
302 or 306 of the Code might cause all or some of the cash received by such a
dissenting stockholder to be treated for federal income tax purposes as
ordinary dividend income.
PROPOSED LEGISLATION
Under a provision that was included in the proposed Revenue Reconciliation
Act of 1995 which was passed by the Senate in November 1995, Drexel could be
subject to federal income tax at the rates applicable to United States
corporations generally on all or a portion of any gain it will realize on the
transfer of the stock of its United States subsidiary pursuant to the
Transaction. This provision was proposed to apply to dispositions of stock
occurring after December 31, 1995. However, the provision was deleted from the
bill by the House-Senate Conference Committee and was not included in the
version of the bill that was subsequently approved by Congress and vetoed by
the President. There can be no assurance that a similar provision will not be
enacted in the future or that such a provision, if enacted, would not apply to
the Transaction.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
DISCUSSION DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE
TRANSACTION. IN ADDITION, THE DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES
RELATED TO PLANS, CONTRACTS OR ARRANGEMENTS WITH RESPECT TO EMPLOYEE
COMPENSATION. EXCEPT AS OTHERWISE STATED ABOVE, THE DISCUSSION IS BASED ON
CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING TREASURY REGULATIONS UNDER
THE CODE, THE LEGISLATIVE HISTORY OF THE CODE, CURRENT RULINGS AND
PRONOUNCEMENTS OF THE IRS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT
TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THE
DISCUSSION. THE DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN DREXEL
STOCKHOLDERS, INCLUDING STOCKHOLDERS WHO ACQUIRED THEIR SHARES THROUGH THE
EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION FOR EMPLOYMENT.
EACH TUBOSCOPE AND DREXEL STOCKHOLDER SHOULD CONSULT HIS ON HER OWN TAX ADVISOR
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTION TO HIM OR HER.
49
<PAGE>
MANAGEMENT AND OPERATIONS AFTER THE MERGER
DIRECTORS AFTER THE MERGER
As provided in the Merger Agreement, the Tuboscope Board of Directors must
take all actions necessary so that as of the Effective Time the directors of
Tuboscope shall be only the following seven individuals: Martin R. Reid, Eric
L. Mattson, Jerome R. Baier, L. E. Simmons, John F. Lauletta, J. S. Dickson
Leach and an individual to be mutually agreed upon by Tuboscope and Drexel,
except to the extent any such individual is unwilling or unable to serve in
such capacity. If prior to the Effective Time any of these individuals is
unable or unwilling to serve as a director, then the remaining individuals who
are able and willing to serve in such capacity shall fill any vacancies.
Tuboscope has received irrevocable letters of resignation from all its current
directors who will not be continuing as directors after the Merger. See
"Proposal to Elect Tuboscope Directors."
Directors are elected at each annual meeting of stockholders of Tuboscope and
hold office until their successors are duly elected and qualified at the next
annual meeting of stockholders. Biographical information with respect to the
proposed directors of Tuboscope after the Merger is set forth below.
Jerome R. Baier, 43, is and has been Director-Securities of Northwestern
Mutual Life Insurance Company ("Northwestern") since October 1989. For more
than five years prior to October 1989, Mr. Baier was Associate Director-
Securities of Northwestern.
John F. Lauletta, 51, joined Drexel in 1993 as President and Chief Executive
Officer. From 1973 until 1993, Mr. Lauletta was with BHI, holding several
executive positions, including President of Exlog/TOTCO, President of Milpark
Drilling Fluids and Vice President of Baker Hughes INTEQ.
J. S. Dickson Leach, 50, has been a director of Drexel for 15 years. He has
been a director and executive officer of Sir Elly Kadoorie & Sons which is a
management firm for Actinium and certain other investments on behalf of Michael
D. Kadoorie and his family, since 1973, and is also a director of several
publicly quoted Hong Kong companies including China Light and Power, The Hong
Kong & Shanghai Hotel group and Hong Kong Aircraft Engineering Company.
Eric L. Mattson, 44, has been a director of Tuboscope since January 1994. Mr.
Mattson is and has been Vice President and Chief Financial Officer of BHI since
July 1993. For more than five years prior to 1993, Mr. Mattson was Vice
President and Treasurer of BHI.
Martin R. Reid, 53, has been Chairman of the Board of Tuboscope and TVI since
October 1990. Mr. Reid was Chief Executive Officer of the Company and TVI from
May 1991 to October 1993. From June 1994 to present, Mr. Reid has served as the
Chairman of the Board and Chief Executive Officer of Acme Holdings Inc., an
equipment rental company. From 1990 through 1993, Mr. Reid was a general
partner in MDR Associates, a private investment concern. From September 1986 to
June 1990, Mr. Reid was Chief Executive Officer of Eastman Christensen Co., a
leading worldwide provider of directional and horizontal drilling systems to
the oil and gas industry. Mr. Reid was also Vice Chairman of Eastman
Christensen Co. from August 1989 to June 1990. Prior to September 1986, Mr.
Reid was Senior Vice President of Operations of Norton Christensen, the
predecessor to Eastman Christensen Co.
L. E. Simmons, 49, has for more than five years served as President of SCF
G.P. which, through an affiliate, manages private institutional investment
partnerships. He has been Chairman of the Board of Drexel since 1994 and a
director since 1992. Mr. Simmons also serves as a director of Hornbeck Offshore
Services, Inc., Zions Bancorporation, CE Franklin, Ltd. and Computalog Limited.
EXECUTIVE OFFICERS AFTER THE MERGER
The Tuboscope Board of Directors is obligated to take all action necessary to
cause the principal executive officers of Tuboscope after the Merger to be as
follows: President and Chief Executive Officer--John Lauletta, Executive Vice
President, Chief Financial Officer and Treasurer--Joseph Winkler, Senior Vice
50
<PAGE>
President-International Operations--Gerhard H. Hage, Vice President,
Controller, Assistant Treasurer and Assistant Secretary--Martin I. Greenberg,
Vice President-Human Resources and Administration--Kenneth L. Nibling, and Vice
President, Secretary and General Counsel--James F. Maroney. For biographical
information with respect to Mr. Lauletta, see "--Directors After the Merger."
Biographical information with respect to Messrs. Winkler, Greenberg, Hage,
Maroney, Nibling and Winkler is set forth below.
Martin I. Greenberg, 56, has been Vice President, Controller, Assistant
Treasurer and Assistant Secretary of Tuboscope and TVI since November 1991.
From June 1991 to November 1991, Mr. Greenberg was Vice President-Finance and
Controller of the Company and TVI. Mr. Greenberg served as Vice President-
Controller and Assistant Secretary of the Company and TVI from July 1990 to
June 1991. Mr. Greenberg was Assistant Controller of TVI from January 1974 to
July 1990.
Gerhard H. Hage, 61, has been Senior Vice President-International Operations
of Tuboscope and TVI since October 1991. From March 1989 to October 1991, Mr.
Hage served as Vice President-Eastern Hemisphere of Baker Hughes Tubular
Services, Inc. From 1985 to March 1989, Mr. Hage was President-Eastern and
Western Hemisphere of CE Vetco Services.
James F. Maroney, III, 44, has been Vice President of Tuboscope and TVI since
May 1991, Secretary of the Company and TVI since January 1991 and General
Counsel of the Company and TVI since November 1989. Mr. Maroney was Assistant
Secretary of the Company and TVI from December 1989 to January 1991. Mr.
Maroney was Associate General Counsel and Head of Litigation for TransAmerican
Natural Gas Corporation, a gas production company, from 1987 to 1989. From 1985
to 1987, Mr. Maroney was in a private law practice specializing in commercial
litigation.
Kenneth L. Nibling, 45, has been Vice President-Human Resources and
Administration of Tuboscope and TVI since December 1991. From July 1988 to
November 1991, Mr. Nibling was Director of Human Resources for Union Texas
Petroleum Corp., an international exploration and production company. From
January 1984 to July 1988, Mr. Nibling was Manager, Compensation and Employment
for Louisiana Land and Exploration Company.
Joseph C. Winkler, 44, has served as the Chief Financial Officer of Drexel
since 1993. Prior to joining Drexel, he was Chief Financial Officer of Baker
Hughes INTEQ and served in a similar role for various BHI companies, including
Eastman/Teleco and Milpark Drilling Fluids. For ten years prior to joining BHI,
Mr. Winkler held the position of Chief Financial Officer of an independent oil
and gas producer after having spent several years with Arthur Young and
Company.
Neither Drexel nor Tuboscope is aware of any material relationships between
Drexel or its directors or executive officers and Tuboscope or its directors or
executive officers, except as contemplated by the Merger Agreement or as
described herein, including the documents incorporated herein by reference.
51
<PAGE>
EXECUTIVE COMPENSATION OF EXECUTIVE OFFICERS AFTER THE MERGER
Summary Compensation Table. The following table sets forth certain
information regarding the annual and long-term compensation for the calendar
year ended December 31, 1995 of those persons who will be either (i) the Chief
Executive Officer or (ii) one of the four most highly compensated executive
officers of Tuboscope after the Merger (the "Future Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ------------
AWARDS OF
STOCK ALL
NAME AND OTHER ANNUAL OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) (SHARES) COMPENSATION
------------------ ---- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Lauletta ..... 1995 $181,225 $53,000 $ 0 34,837 $2,401(2)
President and Chief
Executive Officer
Gerhard H. Hage....... 1995 $200,669(3) $10,025 $ 0 14,200 $ 0
Senior Vice
President--
International
Operations
James F. Maroney, III. 1995 $125,000(3) $50,000(4) $ 0 10,900 $1,875(5)
Vice President and
General Counsel
Joseph C. Winkler..... 1995 $103,557 $30,000 $ 0 23,225 $ 690(2)
Executive Vice
President,
Chief Financial
Officer
Kenneth L. Nibling.... 1995 $115,000(3) $18,400 $ 0 10,900 $1,747(5)
Vice President-Human
Resources and
Administration
</TABLE>
- --------
(1) Includes (a) living, travel and other expense reimbursement, (b) the cost
of company provided automobiles and (c) club dues reimbursement, but only
if such payments to the Future Named Officer exceed the lesser of $50,000
or 10% of the total annual salary and bonus of the Future Named Officer.
(2) Includes (a) matching contributions by Drexel under the Drexel 401(k)
Thrift Savings Plan in the amount of $1,624 for Mr. Lauletta and $578 for
Mr. Winkler and (b) company paid life insurance premiums in the amount of
$777 for Mr. Lauletta and $112 for Mr. Winkler.
(3) Includes amounts deferred under Tuboscope's 401(k) Thrift Savings Plan.
(4) Includes a $30,000 special recognition bonus for Mr. Maroney.
(5) Includes (a) matching contributions by Tuboscope under Tuboscope's 401(k)
Thrift Savings Plan in the amount of $1,458 for Mr. Maroney and $1,342 for
Mr. Nibling and (b) matching contributions by Tuboscope under Tuboscope's
non-qualified deferred compensation plan in the amount of $417 for Mr.
Maroney and $405 for Mr. Nibling.
52
<PAGE>
Option Grants in 1995. The following table sets forth certain information
with respect to grants of stock options to the Future Named Officers during the
calendar year ended December 31, 1995:
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
PERCENTAGE POTENTIAL
OF TOTAL REALIZABLE VALUE AT
OPTIONS EXERCISE ASSUMED ANNUAL
GRANTED TO OR BASE RATES OF STOCK PRICE
OPTIONS EMPLOYEES PRICE APPRECIATION
GRANTED IN FISCAL PER EXPIRATION FOR OPTION TERM
NAME (SHARES) YEAR SHARE DATE 5% 10%
- ---- -------- ---------- -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
John F. Lauletta........ 34,837(1) 7.8 $3.77(1) 12/20/02 168,959 284,618
Gerhard H. Hage......... 14,200(2) 3.2 6.25 01/02/05 55,814 141,445
James F. Maroney, III... 10,900(2) 2.4 6.25 01/02/05 42,843 108,574
Joseph C. Winkler....... 23,225(1) 5.2 3.77(1) 12/20/02 112,641 189,748
Kenneth L. Nibling...... 10,900(2) 2.4 6.25 01/02/05 42,843 108,574
</TABLE>
- --------
(1) Adjusted to give effect to the assumption of Drexel Options by Tuboscope
and the related adjustments to the number of shares purchasable and the
per-share exercise price. Assumes that all Escrowed Shares have been
distributed, resulting in a Drexel Stock Option Exchange Ratio of .4645.
See "The Merger Agreement--Treatment of Drexel Options."
(2) All options granted become exercisable in five equal annual installments
beginning on the date of grant. Under the terms of the Tuboscope Stock
Option Plan, the Stock Option Committee retains discretion, subject to
certain restrictions, to modify the terms of outstanding options and to
reprice outstanding options. Options are granted for a term of ten years,
subject to earlier termination in certain events. The exercise price is
equal to the closing price of the Tuboscope Common Stock on Nasdaq on the
date of grant.
Aggregated Option Exercises in 1995 and 1995 Year-End Values. The following
table sets forth certain information with respect to the unexercised options
held by the Future Named Officers at December 31, 1995. No options were
exercised by the Future Named Officers during 1995.
1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
MONEY
NUMBER OF UNEXERCISED OPTIONS OPTIONS AT DECEMBER 31, 1995(1)
--------------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
John F. Lauletta........ -- 203,915(2) $ 0 $ 427,831(2)
Gerhard H. Hage......... 22,100 38,850(3) 0 0
James F. Maroney, III... 16,300 29,350(3) 0 0
Joseph C. Winkler....... -- 69,675(2) 0 143,776(2)
Kenneth L. Nibling...... 16,300 29,350(3) 0 0
</TABLE>
- --------
(1) Based on the closing price of Tuboscope Common Stock on Nasdaq on December
29, 1995, the last trading day of 1995 ($5 11/16).
(2) Adjusted to give effect to the assumption of Drexel Options by Tuboscope
and the related adjustments to the number of shares purchasable and the
per-share exercise price. Assumes that all Escrowed Shares have been
distributed, resulting in a Drexel Stock Option Exchange Ratio of .4645.
See "The Merger Agreement--Treatment of Drexel Options."
(3) All unexercisable options held by Messrs. Hage, Maroney and Nibling will
become exercisable upon the consummation of the Merger Transactions. Each
of these options has an exercise price of $6 or more.
53
<PAGE>
DREXEL
Drexel is the world's leading provider of (i) solids control equipment and
services to the oil and natural gas industry and (ii) coiled tubing units and
related pressure control equipment to oilfield service companies. Drexel's
solids control equipment sales and rental revenue accounted for approximately
60% of Drexel's revenue and coiled tubing equipment sales accounted for
approximately 40% of Drexel's revenue for the twelve months ended December 31,
1995 on a pro forma basis giving effect to the acquisition of SOFS. The growth
in the market for solids control equipment has been driven by the oil and gas
industry's focus on total well economics and environmental compliance. The use
of coiled tubing products and technology has grown significantly as a cost
effective and time saving alternative method to perform workovers, stimulations
and well completions. Drexel believes that the solids control and coiled tubing
markets will evolve and expand as oil and natural gas service companies expand
their focus on cost savings and increased efficiency in the drilling,
completion and operation of oil and gas wells.
Drexel's oilfield products enjoy strong brand name recognition and its
customers include the world's largest oilfield service companies and operators.
Drexel estimates that approximately 60% of its revenue in fiscal 1995 was
generated from rentals and sales for use outside the United States. Drexel's
customers are primarily located in North America, Europe, Latin America, the
Middle East and the Far East.
RECENT DEVELOPMENTS
SOFS Acquisition. Drexel acquired SOFS in November 1995. SOFS, which was
founded in 1917, was the second largest oilfield solids control equipment
supplier in the world with revenues for the years ended May 31, 1993, 1994 and
1995 of $25.0 million, $29.8 million and $38.0 million, respectively.
Approximately 65% of SOFS's revenue during its most recently completed fiscal
year was derived from the rental of solids control equipment and the balance
from sales of such equipment. The acquisition of SOFS complemented Drexel's
existing operations because of (i) SOFS' strong market presence in the solids
control market in Latin America, (ii) SOFS' greater emphasis on the higher
margin rental market and (iii) SOFS's additional product offerings and
technology which will allow Drexel to increase its product lines in the United
States and other markets. In addition to the strategic enhancements to Drexel's
business, Drexel believes that there will be consolidation benefits from the
acquisition of SOFS as a result of the integration of SOFS's United States
rental operations with those of Drexel and the consolidation of SOFS's
manufacturing operations into Drexel manufacturing facilities.
New Management Team. In late 1993, Drexel's Board of Directors recruited John
F. Lauletta as President and Chief Executive Officer and Joseph C. Winkler as
Chief Financial Officer. Messrs. Lauletta and Winkler have extensive experience
in the oilfield services industry most recently through their positions in the
management of operating divisions of BHI, one of the largest oilfield services
companies in the world. Since their arrival, the new management team has
instituted significant cost reductions and margin improvements throughout
Drexel's operations, focusing on improving operating procedures and shifting
emphasis to sales of higher margin product lines and services.
STRATEGY
Drexel's business strategy emphasizes internal growth, margin improvements
and strategic acquisitions in current business areas. Drexel intends to
strengthen its position in the worldwide solids control and coil tubing markets
by undertaking strategic business combinations, such as the acquisition of
SOFS, that give Drexel access to new markets and new technology. Drexel will
attempt to use its broader size and reach as a result of the acquisition of
SOFS to effect operating cost reductions in several overlapping regions, and
expects to benefit from new access to promising oilfield markets in Latin
America to increase profitability. Drexel believes that, as a result of its
experience and previously underutilized capacity, it is well positioned to grow
internally in the coil tubing market as oil and natural gas producers
increasingly expand their use of this technology. Drexel will continue to focus
on increasing operating efficiency and cost reductions. Drexel will
54
<PAGE>
use the complementary manufacturing capabilities of its facility in Conroe,
Texas (the "Brandt Facility") and SOFS to improve manufacturing efficiency by
reducing the cost of solids control equipment manufactured for sale or rent. In
addition, Drexel intends to continue to pursue several emerging non-oilfield
related applications of its solids control equipment as the demand for such
applications increases.
SOLIDS CONTROL EQUIPMENT
Solids control technology is used in the oil and gas industry to reduce
drilling costs and minimize the environmental impact of drilling operations. By
removing rock cuttings and other solid contaminants from the mud used in
drilling operations, solids control equipment reduces the volume of drilling
fluids and solids for disposal subsequent to drilling operations, which
minimizes the environmental impact of the drilling operation and reduces post-
drilling reclamation costs. Effective solids control also reduces the
probability of sticking and losing expensive downhole drilling equipment in the
wellbore and the resulting need to redrill the well. The use of solids control
technology improves the efficiency of the drilling process by preventing the
recirculation and subsequent recutting of solids at the drill bit and by
reducing wear on mechanical components such as mud pumps and mud motors. Drexel
has played an integral part in the recent development of innovations in solids
control technology, such as linear motion shale shakers and closed loop
drilling fluids systems, which have become a substantial portion of Drexel's
sales. Drexel believes the trend towards more technically complex drilling,
including highly deviated directional wells and slim-hole completions, will
favorably impact the demand for solid controls technology because of its
ability to reduce costly downhole problems.
Drexel is the world's leading manufacturer and provider of solids control
equipment to the oil and natural gas drilling industry. Drexel manufactures
conventional and linear motion shale shakers, high speed and conventional
centrifuges, desanders, desilters, screens, degassers, and closed loop drilling
fluids systems at the Brandt Facility and its facility in Dundee, United
Kingdom. Drexel maintains solids control rental and sales operations in North
America, South America, Europe, the Middle East, Africa, and in the Pacific
Rim. Drexel markets solids control equipment under the Brandt/EPI(TM) brand
name. Approximately 50% of Drexel's solids control equipment revenue was
generated from the sale of solids control equipment and 50% of such revenue was
generated from rentals for the twelve months ended December 31, 1995 on a pro
forma basis giving effect to the SOFS acquisition.
Outside the petroleum market, solids control equipment is used in numerous
applications. Drexel has recently expanded into the kaolin (clay) paper
processing and rock and aggregate markets by providing its shakers for use in
the separation process utilized in these industries. Management believes that
there are additional opportunities for expansion into these and other markets
such as the food processing and municipal waste water markets.
COILED TUBING EQUIPMENT
Drexel is the world's leading designer and manufacturer of coiled tubing
equipment used in oil and gas well workover operations. Coiled tubing generally
consists of flexible steel tubing manufactured in a continuous string and
wrapped on a spool, which can extend several thousand feet in length and is run
in and out of the well bore at a high rate of speed by a hydraulically operated
coiled tubing unit. A coiled tubing unit is typically mounted on a truck or
skid and consists of a hydraulically operated tubing reel or drum, an injector
head which pushes or pulls the tubing in or out of the well bore, well head
pressure control equipment such as blowout preventors, and various power and
control systems.
Coiled tubing provides a number of significant functional advantages over the
principal alternative of conventional drill pipe. Coiled tubing allows faster
"tripping" since the coiled tubing can be reeled very quickly on and off a drum
and in and out of a well bore. In addition, the small size of the coiled tubing
unit in comparison to an average workover rig reduces preparation time at the
well site. Coiled tubing permits a variety of workover and other operations to
be performed without having to pull the existing production
55
<PAGE>
tubing from the well and allows ease of operation in horizontal/highly deviated
wells. Thus, operations using coiled tubing can be performed much more quickly
and at a substantially lower cost. Finally, use of coiled tubing generally
allows continuous production of the well, eliminating the need to temporarily
stop the flow of hydrocarbons. As a result, the economics of a workover are
improved because the well can continue to produce hydrocarbons and thus produce
revenues while the well treatments are occurring. Continuous production also
reduces the risk of formation damage which can occur when the well is "shut
in."
Currently, most coiled tubing units are used in workover applications. Drexel
believes that advances in the manufacturing process of coiled tubing, tubing
fatigue protection and the capability to manufacture larger diameter coiled
tubing strings have resulted in increased uses and applications for coiled
tubing products. For example, well operators are increasingly finding uses for
coiled tubing in drilling applications such as slim hole reentries of existing
wells and through tubing delivered deepening of existing wells.
There are certain limitations to the use of coiled tubing. Coiled tubing
generally is made of high strength, alloy steel which wears down or fatigues
over time as a result of internal pressure, acidic operating environments and
normal bending cycles. Thus, operators must carefully monitor the use of the
tubing. In addition, coiled tubing will buckle if the weight the coiled tubing
is pushing becomes too great or if the tube becomes inhibited by some obstacle
or irregularity in the well bore. Buckling has not proven to be a significant
obstacle in most workover applications, and Drexel believes it will become less
of an issue as the result of the availability of stronger and larger diameter
coiled tubing.
Generally, Drexel supplies customers with the equipment and components
necessary to use coiled tubing, which the customers typically purchase
separately. Drexel's coiled tubing product line consists of coiled tubing
units, coiled tubing injector heads, coiled tubing and wireline pressure
control equipment, snubbing units, nitrogen pumping equipment, and cementing,
stimulation, and blending equipment. Drexel markets its coiled tubing equipment
under the Hydra Rig(R) brand name primarily to providers of coiled tubing
drilling and workover services. Drexel's primary coiled tubing unit production
facilities are located at its Hydra Rig facility based in Fort Worth, Texas. In
addition Drexel markets coiled tubing pressure control equipment under the
Texas Oil Tools(R) brand name and manufactures such equipment at the Brandt
Facility and to a lesser extent at the Dundee facility in the United Kingdom.
MARKETING, DISTRIBUTION AND CUSTOMERS
Drexel's solids control customers are predominantly oil and natural gas
producers and rig operators and its coiled tubing equipment customers are
primarily oil and natural gas service companies. In fiscal 1995, Dowell
Schlumberger accounted for approximately 17% of Drexel's revenue and was the
only customer that represented more than 10% of Drexel's revenue. Drexel
operates sales and distribution facilities at strategic locations worldwide to
service areas with intensive drilling activity. Drexel's 20 sales offices are
complemented by service and engineering facilities which provide specialty
repair and maintenance services to existing customers. See "--Facilities."
BACKLOG
Drexel's backlog is based upon anticipated revenues from customer orders that
Drexel believes are firm and scheduled for shipment within twelve months. The
level of backlog at any particular time is not necessarily indicative of the
future operating performance of Drexel, and orders may be changed at any time.
As of December 31, 1995, Drexel's backlog of coiled tubing equipment was $18.2
million, an increase of approximately 100% above the $9.0 million in backlog as
of December 31, 1994. Such increase was primarily a result of an increase in
demand by international customers. As of December 31, 1995, Drexel's backlog
for solids control equipment was $6.0 million, an increase of 25% over the $4.8
million in backlog as of December 31, 1994. Such increase was the result of
both increased product demand and the acquisition of SOFS.
56
<PAGE>
COMPETITION
Drexel's solids control equipment is sold or rented in highly competitive
markets. The coiled tubing equipment market is also competitive although with
fewer market participants. Management believes that on site service is becoming
an increasingly strong element in the solids control equipment market.
Management believes that the principal competitive factors affecting its
business are performance, quality, reputation, customer service, product
availability, breadth of product line and price. A number of competitors are
divisions or subsidiaries of larger companies with financial resources much
greater than those of Drexel.
Management believes that its broad product lines, product design, delivery
capability, customer responsiveness and experienced personnel are competitive
advantages in its relevant markets. Drexel's primary competitors in its solids
control equipment operations include SWACO, a subsidiary of Smith
International, Inc., Derrick Corporation and Thule, a division of Varco
International, Inc. Drexel's primary competitors in its coiled tubing equipment
business include Stewart & Stevenson Services, Inc., DRECO Energy Services Ltd.
and Rebound Rig International Ltd.
FACILITIES
Drexel maintains various facilities worldwide and considers all of its
facilities to be in good operating condition and adequate for their present
uses. Drexel believes that it has sufficient capacity to meet its current and
anticipated manufacturing requirements. The following table set forth Drexel's
principal offices and manufacturing plants:
<TABLE>
<CAPTION>
APPROXIMATE LEASED
SQUARE OR
FOOTAGE OWNED
----------- ------
<S> <C> <C>
MANUFACTURING/CORPORATE
Houston.................................................... 34,000 Owned
Conroe, TX................................................. 105,000 Owned
Fort Worth, TX............................................. 90,000 Owned
Houston, TX................................................ 2,000 Owned
New Iberia, LA............................................. 2,500 Owned
Montrose, Scotland......................................... 37,000 Owned
Dundee, Scotland........................................... 17,000 Owned
SALES/SERVICE/ENGINEERING
Houston, TX................................................ 36,000 Owned
Conroe, TX................................................. 20,000 Owned
Lafayette/New Iberia, LA................................... 23,000 Leased
Oklahoma City, OK.......................................... 14,000 Leased
Cleveland, TX.............................................. 19,400 Owned
Odessa, TX................................................. 8,000 Leased
Bakersfield, CA............................................ 11,000 Leased
Corpus Christi, TX......................................... 20,800 Owned
Dickinson, ND.............................................. 6,000 Leased
Singapore.................................................. 26,000 Leased
Aberdeen, Scotland......................................... 30,000 Leased
Malaysia/Brunei............................................ 11,000 Leased
Dubai...................................................... 10,000 Leased
Maracaibo, Venezuela....................................... 20,000 Owned
Anaco, Venezuela........................................... 8,000 Owned
Del Carmen, Mexico......................................... 5,000 Leased
Bogota, Colombia........................................... 13,000 Leased
Beijing, China............................................. 2,000 Leased
</TABLE>
57
<PAGE>
EMPLOYEES
At December 31, 1995, Drexel employed approximately 1,025 persons,
approximately 60% of whom were employed in the United States. Drexel considers
its employee relations to be satisfactory.
INSURANCE AND LITIGATION
Drexel maintains liability and property damage insurance, as well as product
liability, workers' compensation, business interruption and other insurance.
Drexel's products are used in complex industrial applications. Litigation
arising from a catastrophic occurrence at such applications may result in
Drexel being named as a defendant in lawsuits asserting large claims. Although
Drexel believes its insurance coverage is adequate for its current operations
and its uninsured losses from product liability claims have not been
significant, a successful liability claim for which Drexel is underinsured or
uninsured could have a material adverse effect on Drexel.
SOFS is a defendant in certain patent and trademark litigation for which
Drexel has been partially indemnified by the prior stockholders of SOFS related
to certain of the wirecloth screens in the SOFS solid controls product line.
Management is vigorously defending these claims. However, discovery is
incomplete and in view of the early stages of this litigation there can be no
assurances that the indemnities from the SOFS stockholders will be sufficient
to protect Drexel from suffering additional liabilities if an adverse decision
is rendered against SOFS.
Drexel's product liability coverage is occurrence based. Drexel is not a
party to any material pending legal proceedings, other than ordinary routine
litigation incidental to its business and other than as discussed above, that
management believes would have a material adverse effect on its financial
condition or results of operations.
ENVIRONMENTAL REGULATION
Drexel's operations are subject to numerous local, state, federal and foreign
laws and regulations concerning the containment and disposal of hazardous
materials, pursuant to which Drexel has incurred compliance costs. Such costs
to date have not been material. Drexel does not presently foresee the need for
significant expenditures to ensure continued compliance with current
environmental protection laws. Regulations in this area are subject to change
and there can be no assurance that future laws or regulations will not have a
material adverse effect on Drexel.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF DREXEL
The following discussion should be read in conjunction with Drexel's
historical financial statements included elsewhere in this Proxy
Statement/Prospectus.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial statement data
as of the dates and for the periods indicated.
D.O.S. LTD.
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------- --------------------
1993 1994 1995 1994 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue............... $ 66,411 $ 67,370 $ 80,173 $ 59,113 $ 67,657
Gross margin.......... 14,178 10,102 16,634 12,059 17,293
Operating expenses.... 12,475 13,215 11,944 9,264 10,721
Operating profit
(loss)............... 1,703 (3,113) 4,690 2,795 6,572
Other expenses........ (1,675) (2,002) (373) (235) (233)
Income tax benefit
(expense)............ (53) 151 1,526 (895) (2,206)
Net income (loss)..... $ (25) $ (4,964) $ 5,843 $ 1,665 $ 4,133
========= ========= ========= ========= =========
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1994
Revenue. Revenue was $67.7 million for the nine months ended December 31,
1995, an increase of $8.6 million, or 14.5%, compared to the same period in
1994.
Revenue from Drexel's sales of coiled tubing products was $37.2 million for
the nine months ended December 31, 1995, an increase of $2.4 million, or 6.9%,
compared to the same period in 1994. This slight increase resulted from strong
demand growth in the coiled tubing unit market which was substantially offset
by a decline in revenues resulting from Drexel's strategic decision to
discontinue the manufacture of low margin units and refocus its marketing
efforts towards high value-added, higher gross margin units.
Drexel's strategic decision to increase the profitability of its coiled
tubing products business by rationalizing its product line resulted in an
increase in gross margin for coiled tubing products compared to the same period
last year, as discussed below. During the nine months ended December 31, 1995,
Drexel was able to more than replace lost revenues resulting from the reduction
in the types of coiled tubing units offered by focusing on the growing market
for more sophisticated coiled tubing products. In addition, Drexel's ability to
capitalize on the growing coiled tubing market resulted in an increase in its
coiled tubing product backlog from $9.0 million at December 31, 1994 to $18.2
million at December 31, 1995.
Revenue from Drexel's sales and rental of solids control products was $30.5
million for the nine months ended December 31, 1995, an increase of $6.2
million, or 25.5%, compared to the same period in 1994. The majority of the
increase, or $4.8 million, resulted from the acquisition of SOFS in November
1995. Excluding the effect of the SOFS acquisition, Drexel's solids control
related revenues increased by $1.4 million, or 5.8%, due to growth in the
Middle Eastern, European and West African markets. The SOFS acquisition gives
Drexel exposure to the rapidly growing markets in Latin America, which is
expected to generate higher overall growth for Drexel's solids control
businesses.
59
<PAGE>
Gross Margin. Gross margin was $17.3 million for the nine months ended
December 31, 1995, an increase of $5.3 million, or 44.1%, compared to the same
period in 1994. The increase was due primarily to improvement in the gross
margin percentage from 20.1% to 25.5% as a result of Drexel's focus on higher
margin coiled tubing products and cost control improvements implemented by
Drexel's management. In addition, gross margin improved as a result of the
additional revenue generated during the period ended December 31, 1995.
Operating Expenses. Operating expenses were $10.7 million for the nine months
ended December 31, 1995, an increase of $1.5 million, or 14.0%, compared to the
same period in 1994. The increase was due primarily to the acquisition of SOFS
and expenses associated with the increased amount of non-SOFS revenue during
the period ended December 31, 1995.
Operating Profit. Operating profit was $6.5 million for the nine months ended
December 31, 1995, an increase of $3.7 million compared to the same period in
1994. The increase was a result of the factors discussed above.
Other Expenses. Interest expense was $435,000 for the nine months ended
December 31, 1995, an increase of $261,000 compared to the same period in 1994.
This increase was due to the debt incurred in connection with the SOFS
acquisition. Other income was $201,000 for the nine months ended December 31,
1995, compared to other expense of $61,000 for the same period in 1994.
Income Tax Expense. Drexel recorded a tax expense of $2.2 million for the
nine months ended December 31, 1995, compared to a tax expense of $895,000 for
the same period in 1994. The change was due primarily to Drexel's higher net
income in the nine months ended December 31, 1995.
Net Income. Drexel generated net income of $4.1 million for the nine months
ended December 31, 1995, an increase of $2.4 million compared to the same
period in 1994. The increase in net income was a result of the factors
discussed above.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
Revenue. Revenue was $80.2 million for the fiscal year ended March 31, 1995,
an increase of $12.8 million, or 19%, compared to the same period in fiscal
1994.
Revenue from Drexel's sales of coiled tubing products was $48.2 million for
the fiscal year ended March 31, 1995, an increase of $7.1 million, or 17.2%,
compared to the same period in fiscal 1994. The increase was due primarily to
greater use of coiled tubing in workover and drilling applications, higher
prices on certain coiled tubing products and increased demand for larger, more
specialized units in 1995.
Revenue from Drexel's sales and rentals of solids control products was $31.9
million for the fiscal year ended March 31, 1995, an increase of $5.7 million,
or 21.8%, compared to the same period in fiscal 1994. The increase was due
primarily to (i) a rise in demand for oil field solids control equipment driven
by the oil and gas industry's increased emphasis on total well economics and
environmental compliance; (ii) Drexel's efforts to expand into the industrial
(non-petroleum) market area; and (iii) an increase in rental and service income
related to the increased focus on the rental and service market by Drexel's new
management.
Gross Margin. Gross margin was $16.6 million for the fiscal year ended March
31, 1995, an increase of $6.5 million, or 64.7%, compared to the same period in
fiscal 1994. The increase was due primarily to the increase in revenue,
improvements in cost controls implemented by management and certain price
increases.
Operating Expenses. Operating expenses were $12.0 million for the fiscal year
ended March 31, 1995, a decrease of $1.3 million, or 9.6%, compared to the same
period in fiscal 1994. The decrease was due primarily to improvements in cost
controls implemented by management, most significantly a reduction in
personnel.
60
<PAGE>
Operating Profit. Operating profit was $4.7 million for the fiscal year ended
March 31, 1995, an increase of $7.8 million compared to the same period in
fiscal 1994. The increase was a result of the factors discussed above.
Other Expenses. Interest expense was $230,000 for the fiscal year ended March
31, 1995, substantially equal to that for the same period in fiscal 1994. Other
expense was $143,000 for the fiscal year ended March 31, 1995, a decrease of
$1.6 million compared to the same period in fiscal 1994. The decrease in other
expense was due primarily to a goodwill write-off of $2.0 million in fiscal
1994, which represented the remaining goodwill associated with the September
1990 acquisition of Hydra Rig.
Income Tax Benefit (Expense). Drexel recorded a tax benefit of $1.5 million
for the fiscal year ended March 31, 1995, compared to a net tax benefit of
$151,000 for the same period in fiscal 1994. The change was due primarily to
Drexel's adoption in fiscal 1994, on a prospective basis, of SFAS No. 109,
Accounting for Income Tax. In accordance with SFAS No. 109, Drexel established
a valuation allowance of $3.0 million for deferred tax benefits in fiscal 1994,
which allowance was reversed in fiscal 1995 because of Drexel's improved
financial performance in fiscal 1995.
Net Income (Loss). Drexel generated net income of $5.8 million for the fiscal
year ended March 31, 1995 an increase of $10.8 million compared to the same
period in fiscal 1994. This increase in net income was a result of the factors
discussed above.
FISCAL YEAR ENDED MARCH 31, 1994 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1993
Revenue. Revenue was $67.3 million for the fiscal year ended March 31, 1994,
an increase of $1.0 million, or 1.4%, compared to the same period in fiscal
1993.
Revenue from Drexel's sales of coiled tubing products was $41.2 million for
the fiscal year ended March 31, 1994, an increase of $3.9 million, or 10.6%,
compared to the same period in fiscal 1993. The increase was due primarily to
increased use of coiled tubing in workover and drilling applications and the
increased demand for larger, more specialized units.
Revenue from Drexel's sales and rentals of solids control products was $26.2
million for the fiscal year ended March 31, 1994, a decrease of $3.0 million,
or 10.2%, compared to the same period in fiscal 1993. The decrease was due
primarily to Drexel's exit from unprofitable markets in Egypt and Norway in
1994 and a substantial sale to Algeria in fiscal 1993. These decreases were
partially offset by (i) an increase in rental and service income in the United
States of $2.6 million attributable to Drexel's decision to focus on the rental
and service market and (ii) an increase in revenue from sales to the industrial
(non-petroleum) markets of $1.2 million.
Gross Margin. Gross margin was $10.1 million for the fiscal year ended March
31, 1994, a decrease of $4.1 million, or 28.7%, compared to the same period in
fiscal 1993. The decrease was due primarily to reduced gross margins in the
coiled tubing product line due to (i) capacity constraints related to the
increased time necessary to manufacture new, more specialized products and (ii)
underpricing of the new, more specialized products.
Operating Expenses. Operating expenses were $13.2 million for the fiscal year
ended March 31, 1994, an increase of $740,000, or 5.9%, compared to the same
period in fiscal 1993. The increase was due primarily to additional sales and
engineering efforts in an attempt to capture business in new geographic markets
and was partially offset by cost reductions resulting from Drexel's exit from
certain unprofitable markets.
Operating Profit (Loss). Operating loss was $3.1 million for the fiscal year
ended March 31, 1994, compared to an operating profit of $1.7 million for the
same period in fiscal 1993. The change was due primarily to the factors
discussed above.
61
<PAGE>
Other Income and (Expenses). Interest expense was $234,000 for the fiscal
year ended March 31, 1994, a decrease of $198,000, or 45.8%, for the same
period in fiscal 1993. This decrease resulted from Drexel's repayment of bank
debt in 1993 using proceeds from the issuance of equity. Other expense was $1.8
million for the fiscal year ended March 31, 1994, an increase of $525,000, or
42.2%, compared to the same period in fiscal 1993. This increase was due
primarily to a goodwill write-off of $2.0 million in fiscal 1994, and was
partially offset by a write-off of $1.3 million in fiscal 1993 related to a
discontinued joint venture.
Income Tax Benefit (Expense). Drexel recorded a net tax benefit $151,000 for
the fiscal year ended March 31, 1994, compared to a tax expense of $53,000 for
the same period in fiscal 1993. The change was due primarily to Drexel's
adoption, in fiscal 1994, on a prospective basis of SFAS No. 109, Accounting
for Income Tax, resulting in a $3.0 million valuation allowance for deferred
tax benefits in fiscal 1994.
Net Loss. Drexel generated a net loss of approximately $5.0 million for the
fiscal year ended March 31, 1994, as compared to a net loss of $25,000 for the
same period in fiscal 1993. This increase in net loss was a result of the
factors discussed above.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow Analysis
Cash flows provided by operating activities were $2.8 million and $661,000
for the nine months ended December 31, 1995 and 1994, respectively. Cash flows
from operating activities can be significantly impacted by changes in operating
assets and liabilities. During the period ended December 31, 1995, cash flows
provided by operating activities were affected by increases in inventories and
accounts receivable, offset partially by increases in accounts payable and
deferred revenue. During this period, Drexel's management decided to
strategically increase levels of certain inventory to meet or improve upon
customer delivery schedules and in order to meet the revenue volume increase.
The increase in accounts receivable and in accounts payable was due primarily
to the additional revenue. The deferred revenue increase was related to an
advance payment received from a customer for equipment to be delivered at a
later date. During the period ended December 31, 1994, cash flows provided by
operating activities were affected by decreases in accounts payable and
increases in accounts receivable, offset partially by decreases in inventories.
These changes were primarily driven by an increase in volume.
Cash flows used in investing activities were $30.0 million and $1.9 million
for the nine months ended December 31, 1995 and 1994, respectively. Investing
activities for the period ended December 31, 1995 consisted primarily of $24.8
for the purchase of SOFS, net of cash acquired, and $4.6 million for capital
expenditures. Capital expenditures consisted primarily of additions to the
solids control rental fleet and some routine renovation and additions to
manufacturing equipment. Investing activities for the period ended December 31,
1994 consisted primarily of capital expenditures, the majority of which
represented additions to the solids control rental fleet.
Cash flows provided by (used in) financing activities were $27.5 million and
$(464,000) for the nine months ended December 31, 1995 and 1994, respectively.
Cash flows provided by financing transactions for the period ended December 31,
1995 are primarily related to proceeds of $30.2 million from borrowings under
Drexel's credit facility in connection with the SOFS acquisition and the
issuance of certain notes to the SOFS stockholders, the issuance of Drexel
Common Stock for proceeds of $5.0 million and repayment of long-term debt and
notes payable in the amount of $7.5 million. During the period ended December
31, 1994, financing activities were not material.
Cash flows provided by operating activities were $2.5 million and $349,000
for the fiscal years ended March 31, 1995 and 1994, respectively. During the
period ended March 31, 1995, cash flows provided by operating activities were
affected by a management decision to reduce levels of inventory. Cash flows
used in investing activities were $2.9 million and $3.1 million for the fiscal
years ended December 31, 1995 and 1994, respectively. Investing activities for
the period ended March 31, 1995 consisted primarily of $3.0 million for
62
<PAGE>
capital expenditures. Investing activities for the period ended March 31, 1994
consisted primarily of $3.9 million for capital expenditures, offset partially
by proceeds of $798,000 from the sale of assets. Cash flows provided by (used
in) financing activities were $(703,000) and $336,000 for the fiscal years
ended March 31, 1995 and 1994, respectively. During the periods ended March 31,
1995 and 1994, financing activities were not material.
Cash flows provided by (used in) operating activities were $349,000 and
$(408,000) for the fiscal years ended March 31, 1994 and 1993, respectively.
Cash flows used in investing activities were $3.1 million and $2.3 million for
the fiscal years ended December 31, 1994 and 1993, respectively. Investing
activities for the period ended March 31, 1994 consisted primarily of $3.9
million for capital expenditures, the majority of which represented additions
to the solids control fleet. Investing activities for the period ended March
31, 1993 consisted primarily of $2.3 million for capital expenditures. Cash
flows provided by (used in) financing activities were $336,000 and $6.9 million
for the fiscal years ended March 31, 1994 and 1993, respectively. During the
period ended March 31, 1994, financing activities were not material. Cash flows
provided by financing transactions for the period ended March 31, 1993 are
primarily related to proceeds of $20.1 million from a private placement of
equity and the use of $13.0 million of such proceeds to repay substantially all
of Drexel's then existing bank debt.
Future Capital Expenditures
Capital expenditures for the last quarter of fiscal 1996 are expected to be
approximately $1.5 million. Capital expenditure budgets have not been
established for fiscal year 1997. Drexel expects to fund its capital
expenditure requirements principally from cash generated from operations and,
if necessary, through short term debt borrowings.
Drexel Credit Facility and other Indebtedness
In connection with Drexel's acquisition of SOFS, on November 16, 1995,
Drexel's principal subsidiaries located in the United States entered into a
$37.0 million Amended and Restated Credit Facility with Texas Commerce Bank
National Association individually and as agent for another financial
institution (the "Drexel Credit Facility"). The Drexel Credit Facility provides
for a $15 million term loan due November 16, 2000, a $20 million revolving line
of credit due November 16, 1998 and a $2 million letter of credit facility.
These obligations are guaranteed by Drexel, subject to certain limitations, and
are secured by substantially all the assets located in the United States owned
by Drexel and its subsidiaries and by the stock of certain Drexel subsidiaries.
The available amount under the revolving line of credit is determined using
the borrowing base, as defined, but not to exceed the maximum commitment of $20
million. A .5% annual commitment fee is payable on the unused portion of the
revolver. The Drexel Credit Facility provides for the borrowers to elect an
interest rate on the revolver equal to a base rate or an adjusted LIBOR rate,
as defined. Interest on the base rate loans accrue at the base rate or the base
rate plus .5%, depending on the then ratio of consolidated debt to consolidated
capital of Drexel. Interest on the adjusted LIBOR rate loans accrues at LIBOR
plus 1.5%, 1.75% or 2.0%, depending on the then ratio of consolidated debt to
consolidated capital of Drexel. Interest on the revolving line of credit is
payable quarterly.
The term loan provides for repayment of principal in twenty equal quarterly
installments, commencing on March 31, 1996. Although the Drexel Credit Facility
provides for a floating LIBOR interest rate on the term loan, Drexel has
entered into an interest rate swap agreement that effectively fixes the
interest rate on the term loan to approximately 7.85%.
The Drexel Credit Facility provides for a fee of 1.0 % per annum on the
principal amount of letters of credit issued under the agreement. The Drexel
Credit Facility also provides for, among other things, certain mandatory
prepayment provisions, limitations on dividends and capital expenditures,
change
63
<PAGE>
of control provisions and maintenance of certain financial ratios. As of
December 31, 1995, the $15 million term loan was outstanding and $15.1 million
was outstanding under the revolving credit line.
In addition, in connection with the SOFS acquisition, Drexel issued two $2
million promissory notes to the SOFS stockholders. One of the notes is payable
quarterly over a four year period and the other is payable in an initial
installment of $500,000 commencing August 16, 1996 and thereafter quarterly for
a two and one quarter year period. The notes may be subject to offset in the
event that Drexel has any indemnification claims in connection with the SOFS
acquisition. As a result of the SOFS acquisition, Drexel's debt to total
capitalization of 4.3% at March 31, 1995 increased to 43.3% at December 31,
1995. Drexel expects, however, future cash flow from current operations to be
sufficient to meet these debt payment obligations.
Inflation; Foreign Currency Fluctuations
Drexel's income is predominately in U.S. dollars. Drexel's management
believes that the effect of inflation and changing prices on Drexel's revenues
or net income is not material. Drexel does not currently engage in any hedging
activities to offset foreign currency fluctuations as such fluctuations
historically have not had a material effect on Drexel's financial condition or
results of operations.
64
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF DREXEL
The following table indicates the number of shares of Drexel Common Stock
owned beneficially as of March 15, 1996 and Tuboscope Common Stock after giving
effect to the Merger Transactions by (i) each person known to Drexel to
beneficially own more than 5% of the outstanding shares of Drexel Common Stock,
(ii) each member of the Board of Directors of Drexel, (iii) the Chief Executive
Officer of Drexel and the three other most highly compensated executive
officers of Drexel earning more than $100,000 in 1995 and (iv) all directors
and executive officers of Drexel as a group. Except as otherwise noted, each
stockholder has sole voting and investment power with respect to shares
beneficially owned.
<TABLE>
<CAPTION>
AMOUNT OF SHARES BENEFICIALLY OWNED
-------------------------------------------
TUBOSCOPE AFTER
MERGER
DREXEL TRANSACTIONS(1)
--------------------- ---------------------
PERCENTAGE PERCENTAGE
SHARES OF CLASS SHARES OF CLASS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
L.E. Simmons(2)(3)................ 11,553,106 32.1% 12,099,417 27.8%
6600 Texas Commerce Tower
Houston, Texas 77002
SCF-III, L.P.(4).................. -- -- 6,733,000 15.5%
6600 Texas Commerce Tower
Houston, Texas 77002
DOS Partners, L.P.(5)............. 11,553,106 32.1% 5,366,417 13.1%
6600 Texas Commerce Tower
Houston, Texas 77002
Panmell (Holdings) Ltd.(5)........ 7,508,853 20.9% 3,487,862 8.5%
905 Silvercord, Tower 2
30 Canton Road
Tsimshatsui, Kowloon
Hong Kong
Y. L. Loh(3)(6)................... 7,508,853 20.9% 3,487,862 8.5%
9, Lorong Tukang Dua
Singapore 2261
Kadoorie McAulay International
Ltd.(5)(7)....................... 7,307,463 20.3% 3,394,316 8.3%
23rd Floor, St. George's Building
2, Ice House Street, Central
Hong Kong
Actinium Holding
Corporation(5)(8)................ 7,007,463 19.5% 3,254,967 7.9%
24th Floor, St. George's Building
2, Ice House Street, Central
Hong Kong
Vincent D. Leone, Sr.(9).......... 994,304 2.8% 461,854 1.1%
12146 Burgoyne
Houston, Texas
J. S. Dickson Leach(3)............ 390,000 1.1% 181,155 *
St. George's Building, 24th Floor
Ice House Street
Hong Kong
Joe McAnally(10)(11).............. 212,000 * 98,474 *
John F. Lauletta(3)(10)........... 83,621 * 38,841 *
Joseph C. Winkler(10)............. 35,375 * 16,431 *
Peter J. Stuart(10)............... 12,461 * 5,788 *
Edith G. Conyers(3)(10)........... -- -- -- --
Sharonlee E. Evans(3)(10)......... -- -- -- --
All directors and executive
officers as a group
(11 persons)(2)(6)(9)(12)........ 20,966,607 57.5% 16,471,986 39.9%
</TABLE>
- --------
* Represents ownership of less than one percent.
65
<PAGE>
(1) Includes each Drexel stockholder's proportionate interest in the Escrowed
Shares. Drexel stockholders will have voting rights with respect to the
Escrowed Shares immediately following the Effective Date, but will not have
dispositive rights over such shares until they are released from escrow. See
"The Merger Agreement--Escrowed Shares."
(2) All of the shares Drexel Common Stock indicated as beneficially owned by
L. E. Simmons are owned by DOS Partners, L.P., a limited partnership of which
SCF Partners, L.P. is the managing general partner. SCF Partners, L.P. is a
limited partnership of which SCF G.P. is the managing general partner. Mr.
Simmons is the President and Chief Executive Officer, the sole director and the
sole shareholder of SCF G.P. The shares of Tuboscope Common Stock indicated as
beneficially owned by L. E. Simmons after the Merger Transactions are the
shares held of record by DOS Partners and SCF.
(3) Individual is currently a director of Drexel.
(4) Includes 4,200,000 shares that may be acquired pursuant to the
Subscription Agreement and 2,533,000 shares that may be acquired upon exercise
of the SCF Warrants. SCF is a limited partnership that is indirectly controlled
by L.E. Simmons.
(5) Zink, DOS Partners, and Panmell have entered into a voting agreement
with, and have granted an irrevocable proxy and power of attorney to, Tuboscope
to vote their shares of Drexel Common Stock at any meeting of the stockholders
of Drexel on matters which relate to or affect the Merger or Merger Agreement.
Actinium and Kadoorie, as successors in interest to the shares of Tuboscope
Common Stock previously held by Zink, are bound by the terms of the voting
agreement between Zink and Tuboscope. See "The Merger Transactions--Voting
Agreements."
(6) All of the shares indicated as being beneficially owned by Y.L. Loh are
owned by Panmell (Holdings) Inc., a corporation that is wholly-owned by Mr.
Loh.
(7) KMIL is a wholly-owned subsidiary of Kadoorie McAulay Holdings Ltd., a
Bermuda corporation the shares of which are owned by certain discretionary
trusts. As a result of these trusts, R. J. McAulay, who is the brother-in-law
of Michael D. Kadoorie, may be deemed to be the "beneficial owner" of the
shares owned by KMIL under the Commission's regulations. Mr. McAulay disclaims
beneficial ownership of such shares.
(8) The shares of Actinium are owned by private trust companies as trustees
of certain discretionary trusts. As a result of these trusts, Michael D.
Kadoorie, who is the brother-in-law of R. J. McAulay, may be deemed to be the
"beneficial owner" of the shares owned by Actinium under the Commission's
regulations. Mr. Kadoorie disclaims beneficial ownership of such shares.
(9) Includes 100,000 shares of Drexel Common Stock (46,450 shares of
Tuboscope Common Stock) that may be acquired under options exercisable within
60 days of March 15, 1996.
(10) The address of Messrs. McAnally, Lauletta, Winkler and Stuart is 2800 N.
Frazier, Conroe, Texas 77305 and the address of Ms. Conyers and Ms. Evans is
Bermuda Commercial Bank Building, Church Street, Hamilton, Bermuda.
(11) Includes 40,000 shares of Drexel Common Stock (18,580 shares of
Tuboscope Common Stock) that may be acquired under options exercisable within
60 days of March 15, 1996.
(12) Includes 227,500 shares of Drexel Common Stock (105,674 shares of
Tuboscope Common Stock) that may be acquired under options exercisable within
60 days of March 15, 1996.
66
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF TUBOSCOPE
The following table indicates the number of shares of Tuboscope Common Stock
owned beneficially as of March 15, 1996 and after giving effect to the Merger
Transactions by (i) each person known to Tuboscope to beneficially own more
than 5% of the outstanding shares of Tuboscope Common Stock, (ii) each
Tuboscope director, (iii) the Chief Executive Officer of Tuboscope and the
other four most highly compensated executive officers of Tuboscope and (iv) all
directors and executive officers of Tuboscope as a group. Except to the extent
indicated in the footnotes to the following table, each of the persons or
entities listed therein has sole voting and sole investment power with respect
to the shares which are deemed beneficially owned by such person or entity.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
BENEFICIALLY OWNED(1)
------------------------------------------------
BEFORE MERGER AFTER MERGER
TRANSACTIONS TRANSACTIONS(2)
----------------------- ------------------------
PERCENT OF PERCENTAGE
NAME SHARES CLASS SHARES OF CLASS
- ---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Eric L. Mattson(3)............. 2,687,647 13.7% 4,444,047(4) 10.8%
Baker Hughes Incorporated...... 2,686,047(5) 13.7% 4,436,047(6) 10.8%
3900 Essex Lane, Suite 1200
Houston, TX 77027
State of Wisconsin Investment
Board(7)...................... 1,782,000 9.6% 1,782,000 4.3%
P.O. Box 7842
Madison, WI 53707
Timothy M. Pennington III(8)... 1,327,464 7.1% 1,337,064(9) 3.3%
Frederick J. Warren(8)......... 1,327,464 7.1% 1,337,064(9) 3.3%
Brentwood Associates IV,
L.P.(8)....................... 1,305,064 7.0% 1,305,064 3.2%
11150 Santa Monica Boulevard,
Suite 1200
Los Angeles, CA 90025
Heartland Advisors, Inc.(9) ... 1,267,300 6.8% 1,267,300 3.1%
790 North Milwaukee Street
Milwaukee, WI 53202
Jerome R. Baier(11)............ 763,429 4.1% 773,029(9) 1.9%
Martin R. Reid................. 351,252 1.9% 483,012(12) 1.2%
William V. Larkin, Jr.......... 184,266 1.0% 277,746(13) *
Ronald L. Koons................ 94,140 * 152,899(14) *
James J. Shelton............... 84,181 * 93,781(9) *
Martin G. Hubbard(15).......... 42,400 * 52,000(9) *
Gerhard H. Hage................ 31,290 * 90,950(16) *
James F. Maroney............... 24,436 * 68,813(17) *
Patrick T. Seaver.............. 1,000 * 5,000(18) *
All directors and executive
officers as a group (14
persons)(19).................. 5,677,012 27.9% 8,031,963(20) 19.0%
</TABLE>
- --------
* Represents ownership of less than one percent.
(1) Except for information based on Schedules 13G, as indicated in the
footnotes hereto, beneficial ownership is stated as of March 15, 1996 and
includes shares subject to options exercisable within 60 days after March
15, 1996 held by each person, as if such shares were outstanding on March
15, 1996.
(2) Assumes all of the Escrowed Shares have been delivered to Drexel
Stockholders. See "The Merger Agreement--Escrowed Shares".
(3) Includes shares which are beneficially owned by BHI. Mr. Mattson disclaims
beneficial ownership of the shares owned by BHI as set forth in Note (5)
below.
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(4) Includes 1,600 shares subject to options exercisable within 60 days after
March 15, 1996 and 6,400 shares subject to options which will immediately
vest upon consummation of the Merger Transactions.
(5) According to the Schedule 13D filed by BHI. Includes 1,000,000 shares of
Tuboscope Common Stock, assuming the conversion from 100,000 shares of
Tuboscope Series A Preferred Stock held by BHI. Each share of Tuboscope
Series A Preferred Stock may initially be converted at the option of BHI
into ten shares of Tuboscope Common Stock, subject to certain adjustments.
See "Description of Tuboscope Capital Stock--Redeemable Series A
Convertible Preferred Stocks." Eric L. Mattson was nominated by BHI to
serve as a director of Tuboscope pursuant to BHI's rights received in
connection with the Vetco Services acquisition. Eric L. Mattson, as Vice
President and Chief Financial Officer of BHI, has or may have in the
future, from time to time, the authority to exercise voting or investment
power on behalf of BHI with respect to all or part of these shares. See
"Proposal to Elect Tuboscope Directors--Certain Stockholder Agreements--
BHI Standstill."
(6) Includes 1,500,000 shares of Tuboscope Common Stock and warrants to
purchase an aggregate of 1,250,000 shares of Tuboscope Common Stock to be
received by BHI upon consummation of the BHI Exchange in exchange for the
100,000 shares of Tuboscope Series A Preferred Stock held by BHI. See "The
Merger Transactions--Interests of Certain Persons in the Merger
Transactions--The BHI Exchange" and "The Exchange Agreement."
(7) According to the Schedule 13G filed by the State of Wisconsin Investment
Board, an agency of the State of Wisconsin, which manages public pension
funds.
(8) According to the Schedule 13G filed by Brentwood. Messrs. Pennington and
Warren, along with William M. Barnum, Jr., David W. Shonette, Roger L.
Davisson, Berge K. Hogopian and G. Bradford Jones, are the general
partners of Brentwood Venture Partners, L.P., which is the general partner
of Brentwood. All of the general partners of Brentwood Venture Partners,
L.P. share voting and investment power with respect to such shares and
therefore may be deemed to beneficially own such shares. Except to the
extent of their individual proportionate interests as general and limited
partners of Brentwood Venture Partners, L.P., each of Messrs. Pennington
and Warren disclaims beneficial ownership of such shares.
(9) Includes 22,400 shares subject to options exercisable within 60 days after
March 15, 1996 and 9,600 shares subject to options which will immediately
vest upon consummation of the Merger Transactions.
(10) According to the Schedule 13G filed by Heartland Advisors, Inc., a
registered investment advisor ("Heartland"). Heartland has sole
disposition power with respect to all 1,267,300 shares and sole voting
power with respect to 1,205,000 shares. All of the 1,267,300 shares are
held in investment advisory accounts of Heartland and, accordingly,
various persons have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, such shares.
(11) Mr. Baier is Director-Securities of The Northwestern Mutual Life Insurance
Company ("Northwestern"). Northwestern owns 741,029 shares. Mr. Baier has
shared voting and investment power with respect to the shares owned by
Northwestern and therefore he may be deemed to beneficially own
Northwestern's shares. However, Mr. Baier disclaims beneficial ownership
of these shares.
(12) Includes 344,940 shares subject to options exercisable within 60 days
after March 15, 1996 and 131,760 shares subject to options which will
immediately vest upon consummation of the Merger Transactions.
(13) Includes 129,322 shares subject to options exercisable within 60 days
after March 15, 1996 and 91,480 shares subject to options which will
immediately vest upon consummation of the Merger Transactions.
(14) Includes 78,440 shares subject to options exercisable within 60 days after
March 15, 1996 and 58,760 shares subject to options which will immediately
vest upon consummation of the Merger Transaction.
(15) Includes shares held by Hub Associates ("Hub"). Mr. Hubbard is a general
partner of Hub.
(16) Includes 31,290 shares subject to options exercisable within 60 days as of
March 15, 1996 and 59,660 shares subject to options which will immediately
vest upon consummation of the Merger Transactions.
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(17) Includes 24,436 shares subject to options exercisable within 60 days after
March 15, 1996 and 68,813 shares subject to options exercisable
immediately upon consummation of the Merger Transactions.
(18) Includes 4,000 shares subject to options which will vest immediately upon
consummation of the Merger Transactions.
(19) Includes shares which may be deemed to be beneficially owned by Messrs.
Baier, Mattson, Pennington and Warren. See Notes (3), (8) and (11).
(20) Includes 777,619 shares subject to options exercisable within 60 days of
March 15, 1996 and 535,620 shares subject to options which will
immediately vest upon consummation of the Merger Transactions.
DESCRIPTION OF TUBOSCOPE CAPITAL STOCK
The following is a description of the capital stock of Tuboscope as set forth
in the Tuboscope Certificate of Incorporation.
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
The Tuboscope Certificate of Incorporation authorizes 5,000,000 shares of
preferred stock, par value $.01 per share (the "Tuboscope Preferred Stock"),
100,000 shares of which are issued and outstanding, and have been designated as
Tuboscope Series A Preferred Stock. The Tuboscope Board of Directors is
authorized to issue the Tuboscope Preferred Stock in one or more series with
such designations, powers, preferences and rights, and qualifications,
limitations or restrictions thereof. Subject to the terms of the Tuboscope
Series A Preferred Stock and applicable law, the remaining shares of
undesignated Tuboscope Preferred Stock may be issued by Tuboscope in one or
more series, at any time or from time to time, with such designations, powers,
preferences and rights, and qualifications, limitations or restrictions
thereof, as the Tuboscope Board of Directors shall determine, all without
further action of the stockholders, including holders of the Tuboscope Series A
Preferred Stock; provided, however, that holders of the Tuboscope Series A
Preferred Stock must consent to any proposed issuance of stock which ranks
senior to it in terms of payment of dividends or distributions upon
liquidation.
Dividend Rights. Holders of shares of Tuboscope Series A Preferred Stock are
entitled to receive, but only when and as declared by the Tuboscope Board of
Directors out of funds legally available therefor, cumulative cash dividends
compounded at the annual rate of $7 per share, payable quarterly on March 31,
June 30, September 30, and December 31, in each year. In the event that full
cumulative dividends on the Tuboscope Series A Preferred Stock have not been
declared and paid or set apart for payment, Tuboscope may not declare or pay or
set apart for payment any dividends or make any other distributions on, or make
any payment on account of the purchase, redemption or retirement of, the
Tuboscope Common Stock or any other stock of Tuboscope ranking as to dividends
or distributions of assets on liquidation, dissolution or winding up of
Tuboscope junior to the Tuboscope Series A Preferred Stock (other than, in the
case of dividends or distributions, dividends or distributions paid in shares
of Tuboscope Common Stock or such other junior ranking stock), until full
cumulative dividends on the Tuboscope Series A Preferred Stock are declared and
paid or set apart for payment.
Conversion Rights. The shares of Tuboscope Series A Preferred Stock are
convertible into Tuboscope Common Stock at any time prior to the second
business day before any date fixed for redemption at an initial conversion
price of $10 per share, with each share of Tuboscope Series A Preferred Stock
being taken at $100 for the purpose of such conversion.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
Tuboscope, whether voluntary or involuntary, the holders of the Tuboscope
Series A Preferred Stock shall have the preference and priority of $100 per
share plus all dividends accrued and unpaid thereon over the Tuboscope Common
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Stock and any other class or series of stock ranking junior to the Tuboscope
Series A Preferred Stock upon liquidation, for payment out of the assets of
Tuboscope or proceeds thereof available for distribution to shareholders.
Optional Redemption. The shares of Tuboscope Series A Preferred Stock may be
redeemed by Tuboscope at its option, in whole at any time or from time to time
in part, upon written notice, at redemption prices, together in each case with
accrued and unpaid dividends (if any) to the date fixed for redemption,
declining annually by the amount of $1.75 per share from $101.75 per share if
redeemed during the twelve-month period beginning October 31, 1995.
Mandatory Redemption. Subject to restrictions on the ability of Tuboscope to
redeem securities as the result of certain restrictions on TVI, Tuboscope must
redeem all of the shares of Tuboscope Series A Preferred Stock then outstanding
on December 1, 1996, at $100 per share plus accrued and unpaid dividends
thereon; provided, however, that Tuboscope may at its option and in lieu
thereof, exchange such shares for shares of Tuboscope Common Stock if the
Tuboscope Board of Directors determines in good faith that the redemption of
such shares for cash would violate any applicable law or would be detrimental
to Tuboscope. If so exchanged, the number of shares of Tuboscope Common Stock
to be received for each share of Tuboscope Series A Preferred Stock shall be of
a value equal to $100 plus any accrued and unpaid dividends divided by the
current market price per share of Tuboscope Common Stock.
Voting Rights. Holders of the Tuboscope Series A Preferred Stock have no
voting rights except as set forth hereinafter or as otherwise from time to time
may be required by law. Subject to certain restrictions, whenever dividends on
the Tuboscope Series A Preferred Stock are in arrears in an amount equal to at
least six quarterly dividends, the holders thereof are entitled to elect two
directors at the next annual meeting of stockholders of Tuboscope or at any
special meeting until all dividends accumulated on the Tuboscope Series A
Preferred Stock have been paid in full. In voting on the election of directors,
each holder of the Tuboscope Series A Preferred Stock has one vote for each
share held. Upon the termination of the right of the holders of the Tuboscope
Series A Preferred Stock to elect directors, the term of office of all
directors then in office elected by such holders shall terminate immediately.
The BHI Exchange. Upon consummation of the Merger transactions, all of the
outstanding shares of Tuboscope Series A Preferred Stock will be exchanged for
shares of Tuboscope Common Stock and BHI Warrants pursuant to the Exchange
Agreement. See "The Exchange Agreement." Following the BHI Exchange, 5,000,000
shares of undesignated Tuboscope Preferred Stock will be available for issuance
in one or more series, with such designations, powers, preferences and rights,
and qualifications, limitations or restrictions thereof, as the Tuboscope Board
of Directors shall determine.
TUBOSCOPE COMMON STOCK
The Tuboscope Certificate of Incorporation authorizes 35,000,000 shares of
Tuboscope Common Stock, par value $.01 per share, of which 18,560,075 shares
were issued and outstanding as of the Record Date. All issued and outstanding
shares of Tuboscope Common Stock are validly issued, fully paid and
nonassessable.
Holders of Tuboscope Common Stock are entitled to such dividends as may be
declared from time to time by the Tuboscope Board of Directors out of funds
legally available therefore. However, a restrictive convenant contained in
TVI's Secured Credit Agreement expressly prohibits Tuboscope from paying
dividends on the Tuboscope Common Stock in all circumstances. The terms of the
Tuboscope Series A Preferred Stock also restrict Tuboscope's ability to pay
dividends. Tuboscope has not paid any dividends on the Tuboscope Common Stock
since its inception.
Holders of Tuboscope Common Stock have no preemptive, redemption, conversion
or sinking fund rights. Holders of Tuboscope Common Stock are entitled to one
vote per share on all matters submitted to a
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vote of holders of Tuboscope Common Stock and do not have any cumulative voting
rights. In the event of a liquidation, dissolution or winding up of Tuboscope,
the holders of Tuboscope Common Stock are entitled to share equally and
rateably in the assets of Tuboscope, if any, remaining after the payment of all
debts and liabilities of Tuboscope and the liquidation preference of any
outstanding Tuboscope Preferred Stock. As of the Record Date, there were
approximately 270 holders of record of Tuboscope Common Stock.
DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation will not engage in any business combination
with any "interested stockholder" for a three year period following the date
that such stockholder becomes an interested stockholder unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers and shares subject to employee stock
purchase plans in which employee participants do not have the right to
determine confidentially whether plan shares will be tendered in a tender or
exchange offer), or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and by the
affirmative vote at an annual meeting, and not by written consent, of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified in Section 203 of the DGCL, an interested
stockholder is defined to include (a) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation or is an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation, at any time within three years
immediately prior to the relevant date and (b) the affiliates and associates of
any such person.
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the corporation's certificate of incorporation or stockholders may
elect to exclude a corporation from the restrictions imposed thereunder. The
Tuboscope Certificate of Incorporation does not exclude Tuboscope from the
restrictions imposed under Section 203 of the DGCL.
COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
As a result of the Merger, holders of Drexel Common Stock will become
stockholders of Tuboscope and the rights of all such former Drexel stockholders
will thereafter be governed by the Tuboscope Certificate of Incorporation, the
Tuboscope Bylaws and the DGCL. The rights of the holders of Drexel Common Stock
are presently governed by the Memorandum of Association of Drexel (the "Drexel
Charter"), the Bye-laws of Drexel (the "Drexel Bye-laws") and the Bermuda Act.
The following summary, which does not purport to be a complete statement of the
general differences among the rights of the stockholders of Tuboscope and
Drexel, sets forth certain differences between the Tuboscope Certificate of
Incorporation and the Drexel Charter, the Tuboscope Bylaws and the Drexel Bye-
laws and the DGCL and the Bermuda Act. This summary is qualified by reference
to the full text of each of such documents, the DGCL and the Bermuda Act. For
information as to how such documents may be obtained, see "Available
Information."
BERMUDA AND DELAWARE CORPORATE LAW
The Bermuda Act, under which Drexel was incorporated, differs in certain
material respects from the provisions of the DGCL. Set forth below is a summary
of certain significant provisions of the Bermuda Act which are materially
different from the DGCL. The following statements are summaries, and do not
purport to deal with all aspects of Bermuda or Delaware law that may be
relevant to Drexel and its stockholders.
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Voting Rights with Respect to Extraordinary Corporate Transactions
Bermuda. Bermuda law permits amalgamation between two or more Bermuda
companies (or between a Bermuda company and one or more Bermuda or foreign
companies, provided that a Bermuda company is the surviving corporation) and,
subject to any requirement of the bye-laws of any of such companies, generally
requires the approval, in the case of the amalgamation of non-affiliated
companies, of a majority vote of three-fourths of stockholders of each such
company present, in person or by proxy, at a meeting called for the purpose. A
90% vote may be required where such an amalgamation amounts to a scheme under
Section 102 of the Bermuda Act. A majority vote of stockholders is required to
increase the authorized capital of a Bermuda company, but unless such increase
is required, and subject to any provision of the bye-laws to the contrary, no
stockholder approval is required for the issue of shares by an acquiring
company in a share-for-share exchange, asset purchase or, subject to the
limitations set forth below, other form of reorganization.
Delaware. Approval of mergers and consolidations and of sales, leases or
exchanges of all or substantially all of the property or assets of a company,
requires the approval of the holders of a majority of the outstanding shares
entitled to vote, except that no vote of stockholders of the company surviving
a merger is necessary if: (i) the merger does not amend the certificate of
incorporation of the company, (ii) each outstanding share immediately prior to
the merger is to be an identical share after the merger, and (iii) either no
common stock of the company and no securities or obligations convertible into
common stock are to be issued in the merger; or the common stock to be issued
in the merger plus that initially issuable on conversion of other securities
issued in the merger does not exceed 20% of the common stock of the company
immediately before the merger.
Dissenters' Rights
Bermuda. Under Bermuda law, a dissenting stockholder of a company
participating in certain transactions may, under varying circumstances, receive
cash in the amount of the fair market value of his shares (as determined by a
court), in lieu of the consideration he would otherwise receive in any such
transaction. Bermuda law generally does not condition dissenters' rights to
circumstances in which a vote of the stockholders of the surviving company is
required. Bermuda law, in general, provides for dissenters' rights in an
amalgamation between nonaffiliated companies, a scheme of arrangement, a
reconstruction and certain other transactions.
Delaware. Stockholders are entitled to demand appraisal of their shares in
the case of mergers or consolidations, except where (i) they are stockholders
of the surviving company and the merger did not require their approval under
the DGCL or (ii) the company shares are either listed on a national securities
exchange or Nasdaq or held of record by more than 2,000 stockholders. Appraisal
rights are available in either (i) or (ii) above, however, if the stockholders
are required by the terms of the merger or consolidation to accept any
consideration other than (a) stock of the company surviving or resulting from
the merger or consolidation, (b) shares of stock of another company which are
either listed on a national securities exchange or held of record by more than
2,000 stockholders, (c) cash in lieu of fractional shares or (d) any
combination of the foregoing. Appraisal rights are not available in the case of
a sale, lease, exchange or other disposition by a company of all or
substantially all of its property and assets.
Derivative Suits
Bermuda. Neither class actions nor derivative actions are available to
stockholders under the laws of Bermuda. The Bermuda Act enables a stockholder
who complains that the affairs of a company are being or have been conducted in
a manner oppressive or prejudicial to some part of the stockholders, including
himself, to petition the court, which may, if it is of the opinion that to wind
up a company would unfairly prejudice those stockholders, but that otherwise
the facts would justify a winding up order on just and equitable grounds, make
such order as it thinks fit. The Bermuda Act also provides that a company may
be wound up by the court if the court is of the opinion that it is just and
equitable to do so. The latter provision is also available to minority
stockholders seeking relief from the oppressive conduct of the majority, and
the court has wide discretion to make such order as it may think fit. Except as
mentioned above, claims against a
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Bermuda company by its stockholders must be based on the general laws of
contract or tort of Bermuda. A statutory right of action is conferred on
subscribers to shares of a Bermuda company against persons (including directors
and officers) responsible for the issue of a prospectus in respect of damage
suffered by reason of an untrue statement therein, but this confers no right of
action against the company itself. In addition, the company itself (as opposed
to its stockholders) may take actions against the officers (including
directors) of a Bermuda company for breach of their statutory and fiduciary
duty to act honestly and in good faith with a view to the best interests of the
company.
Delaware. The plaintiff must have been a stockholder of the company at the
time of the transaction of which he complains or his stock thereafter must have
devolved upon him by operation of law.
Special Meetings of Stockholders
Bermuda. Under Bermuda law, a special meeting of stockholders may be convened
by the Board of Directors at anytime and must be convened upon the requisition
of stockholders holding not less than one-tenth of the paid-in capital of the
company carrying the right to vote at general meetings.
Delaware. Stockholders generally do not have the right to call meetings of
stockholders unless such right is granted in the certificate of incorporation
or bylaws. However, if a company fails to hold its annual meeting within a
period of 30 days after the date designated therefor, or if no date has been
designated for a period of 13 months after its last annual meeting, the
Delaware Court of Chancery may order a meeting to be held upon the application
of a stockholder. The Tuboscope Bylaws provide that the holders of a majority
of the outstanding Tuboscope Common Stock may call special meetings of
stockholders. See "--Charter and Bylaw Provisions--Special Meetings of
Stockholders."
Amendments to Charter
Bermuda. Amendments to the memorandum and bye-laws of a Bermuda company must
be submitted to a general meeting of the stockholders and shall be effective
only to the extent approved by the stockholders at such meeting.
Delaware. Amendments to the certificate of incorporation require the
affirmative vote of the holders of a majority of the outstanding shares
entitled to vote thereon; except that if the certificate of incorporation
requires the vote of a greater number or proportion of the directors or of the
holders of any class of stock than is required by Delaware law with respect to
any matter, the provision of the certificate of incorporation may not be
amended, altered or repealed except by such greater vote. The Tuboscope
Certificate of Incorporation requires a 66 2/3% vote to amend certain of its
provisions. See "--Charter and Bylaw Provisions--Amendments to Charter."
Tender Offer Statutes
Bermuda. Bermuda does not currently have a tender offer statute.
Delaware. Generally, Section 203 of the DGCL prohibits a publicly held
Delaware company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the company, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interest stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock or (iii) on or
after such date the business combination is approved by the board and by the
affirmative vote of at least 66 2/3% includes mergers, assets sales and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates an
associates, owns (or within three years, did own) 15% or more of the company's
voting stock.
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Limitations on Director Liability
Bermuda. Under Bermuda law, a director must observe the statutory duty of
care which requires such director to act honestly and in good faith with a view
to the best interests of the company and exercise the care, diligence and skill
that a reasonably prudent person would exercise in comparable circumstances.
Bermuda law renders void any provision in the bye-laws or any contract between
a company and any such director exempting him from or indemnifying him against
any liability in respect of any willful negligence, willful default, fraud or
dishonesty of which he may be guilty in relation to the company. The Drexel
Bye-laws contain certain provisions limiting the liability of directors as
permitted under Bermuda law. See "--Charter and By-law Provisions--Limitation
on Director Liability."
Delaware. Under Delaware law, a company may include in its certificate of
incorporation, a provision eliminating or limiting the liability of a director
to the company or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision may not eliminate or limit the
liability of a director: (i) for any breach of the director's duty of loyalty
to the company or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) certain acts concerning unlawful payments of dividends or stock purchases
or redemptions under Section 174 of the DGCL; or (iv) for any transaction from
which a director derived an improper personal benefit. The Tuboscope
Certificate and Bylaws contain certain provisions limiting the liability of its
directors as permitted under Delaware law. See "--Charter and Bylaw
Provisions--Limitations on Director Liability."
Indemnification of Directors and Officers
Bermuda. Under Bermuda law, a company is permitted to indemnify its officers
and directors, out of the funds of the company, against any liability incurred
by him in defending any proceedings, whether civil or criminal, in which
judgment is given in his favor, or in which he is acquitted, or in connection
with any application under relevant Bermuda legislation in which relief from
liability is granted to him by the court. The Drexel Bye-laws contain certain
provisions regarding the indemnification of officers and directors. See "--
Charter and Bylaw Provisions--Indemnification of Directors and Officers."
Delaware. Under Delaware law, a company is permitted to indemnify its
officers, directors and certain others against any liability incurred in any
civil, criminal, administrative or investigative proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the company, and, with respect to any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. In addition, under
Delaware law, to the extent that a director, officer, employee or agent of a
company has been successful on the merits or otherwise in defense of any
proceeding referred to above or in defense of any claim, issue or matter
therein, he must be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith. The Tuboscope
Bylaws contain provisions regarding the indemnification of their officers and
directors.
Inspection of Books and Records; Stockholder Lists
Bermuda. Bermuda law provides the general public with a right of inspection
of a Bermuda company's public documents at the office of the Registrar of
Companies in Bermuda, and provides a Bermuda company's stockholders with a
right of inspection of such company's bye-laws, minutes of general
(stockholder) meetings and audited financial statements. The register of
stockholders is also open to inspection by stockholders free of charge and,
upon payment of a small fee, by any other person. A Bermuda company is required
to maintain its share register in Bermuda but may establish a branch register
outside of Bermuda. A Bermuda company is required to keep at its registered
office a register of its directors and officers which is open for inspection by
members of the public without charge. Bermuda law does not, however, provide a
general right for stockholders to inspect or obtain copies of any other
corporate records.
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Delaware. Any stockholder of record, upon written demand under oath stating
the purpose thereof, has the right during the company's usual hours for
business to inspect for any proper purpose the company's stock ledger, a list
of its stockholders, and its other books and records, and to make copies or
extracts therefrom.
CHARTER AND BYLAW PROVISIONS
The Tuboscope Certificate of Incorporation and Bylaws differ in certain
material respects from the provisions of the Drexel Charter and Bye-laws. Set
forth below is a summary of certain significant material differences between
such documents. The following statements are summaries and do not purport to
deal with all aspects of such documents that may be relevant to Drexel and its
stockholders.
Limitations on Director Liability
Drexel. The Drexel Bye-laws provide that each stockholder agrees to waive any
claim or right of action he may have, whether individually or by or in the
right of Drexel against any director of Drexel on account of any action taken
by such director, or the failure of such director to take any action in the
performance of his duties with or for Drexel; provided, however, that such
waiver shall not apply to any claims or rights of action arising out of the
gross negligence, wilful misconduct or fraud of such director or to recover any
gain, personal profit or advantage to which such director is not legally
entitled.
Tuboscope. The Tuboscope Certificate of Incorporation limits director
liability as described under "--Bermuda and Delaware Law--Limitations on
Director Liability."
Indemnification of Directors and Officers
Drexel. The Drexel Bye-laws generally provide that the officers and directors
of Drexel and their heirs shall be indemnified and held harmless out of the
assets and profits of Drexel from and against all actions, costs, charges,
losses, damages and expenses which they or their heirs may incur by reason of
any act done or omitted in the execution of their duty in their respective
offices; provided, that, such indemnity shall not extend to any matter in
respect of any willful negligence, willful default, fraud or dishonesty which
may attach to any of such persons.
Tuboscope. The Tuboscope Bylaws generally provide that Tuboscope's officers,
directors and certain others will be indemnified by Tuboscope against any
liability incurred in any civil, criminal, administrative or investigative
proceeding if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of Tuboscope, and, with respect
to any criminal proceeding, had no reasonable cause to believe their conduct
was unlawful. In addition, to the extent that a director, officer, employee or
agent of Tuboscope has been successful on the merits or otherwise in defense of
any proceeding referred to above or in defense of any claim, issue or matter
therein, he will be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Amendments to Charter
Drexel. Neither the Drexel Charter nor the Drexel Bye-laws contain any
special provisions regarding amendments to such documents. Consequently, such
documents may be amended by a vote of the holders of a majority of the
outstanding Drexel Common Stock. See "--Bermuda and Delaware Corporate Law--
Amendments to Charter."
Tuboscope. The Tuboscope Certificate of Incorporation provides that certain
provisions of such certificate may only be amended by a vote of the holders of
66 2/3% of the outstanding Tuboscope Common Stock. Such provisions (i) give the
directors the power to determine that a person may not serve as a director of
Tuboscope if such director holds a position with another company which the
directors judge to be a
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<PAGE>
competitor, (ii) set the number of directors of Tuboscope at not less than one
nor more than ten and gives the stockholders of Tuboscope the power to remove a
director at any time for cause by a vote of the holders of at least 66 2/3% of
the outstanding Tuboscope Common Stock and (iii) expressly deny the right of
stockholders to act by written consent. The other provisions of the Tuboscope
Certificate of Incorporation may be amended by the holders of a majority of
outstanding Tuboscope Common Stock as provided under the DGCL since no other
provisions for amendment are made in the certificate. See "--Bermuda and
Delaware Corporate Law--Amendments to Charter."
Special Meetings of Stockholders
Drexel. The Drexel Bye-laws provide that a special meeting of stockholders
may be called by stockholders as provided under the Bermuda Act. The Bermuda
Act provides that a special meeting may be called by the holders of 10% of the
outstanding shares of a company's voting securities. See "--Bermuda and
Delaware Corporation Law--Special Meetings of Stockholders."
Tuboscope. The Tuboscope Bylaws provide that the holders of a majority of the
outstanding Tuboscope Common Stock may call a special meeting of stockholders.
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<PAGE>
PROPOSAL TO AMEND TUBOSCOPE'S CERTIFICATE OF INCORPORATION
The Tuboscope Board of Directors proposes to amend Tuboscope's Certificate of
Incorporation to increase the number of authorized shares of Tuboscope Common
Stock from 35,000,000 shares to 60,000,000. As of the Record Date, 18,560,075
shares of Tuboscope Common Stock were outstanding and 1,760,119 shares of
Tuboscope Common Stock were reserved for issuance under stock option and
employee benefit plans. If the Merger Transactions are consummated and the 1996
Equity Participation Plan is adopted, Tuboscope will have outstanding
40,969,180 shares of Tuboscope Common Stock and will have 3,926,031 shares of
Tuboscope Common Stock reserved for issuance under stock option and employee
benefit plans. As a result, the Company needs to authorize additional Tuboscope
Common Stock to issue the appropriate number of shares of Tuboscope Common
Stock in the Merger. The Tuboscope Board of Directors believes that the
amendment of Tuboscope's Certificate of Incorporation is advantageous to
Tuboscope and its stockholders, providing additional authorized shares of
Tuboscope Common Stock that could be used from time to time, without further
action or authorization by the stockholders (except as may be required by law
or by any stock exchange on which Tuboscope securities may then be listed), for
corporate purposes which the Tuboscope Board of Directors may deem desirable,
including, without limitation, stock splits, stock dividends or other
distributions, financings, acquisitions, stock grants, stock options and
employee benefit plans. While Tuboscope has no present plans, agreements or
commitments for the issuance of additional shares of Tuboscope Common Stock
(except as described herein), other than pursuant to its employee benefit
plans, upon the exercise of stock options and warrants and the conversion of
outstanding debt securities, the Board of Directors believes that the
availability of these shares would allow Tuboscope to issue additional shares
of Tuboscope Common Stock if market or other conditions indicate that such a
course of action is advisable.
THE PROPOSAL TO AMEND TUBOSCOPE'S CERTIFICATE OF INCORPORATION WILL BE VOTED
UPON BY THE STOCKHOLDERS OF TUBOSCOPE SEPARATELY FROM EACH OF THE OTHER MERGER
PROPOSALS AND THE ADDITIONAL PROPOSALS. HOWEVER, THE APPROVAL OF EACH OF THE
MERGER PROPOSALS IS CONDITIONED UPON APPROVAL OF ALL OF THE MERGER PROPOSALS BY
THE STOCKHOLDERS OF TUBOSCOPE. ACCORDINGLY, A VOTE AGAINST THE PROPOSAL TO
AMEND TUBOSCOPE'S CERTIFICATE OF INCORPORATION WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST ALL OF THE MERGER PROPOSALS.
THE TUBOSCOPE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TUBOSCOPE
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE PROPOSAL TO AMEND TUBOSCOPE'S
CERTIFICATE OF INCORPORATION.
The foregoing discussion of the amendment to Tuboscope's Certificates of
Incorporation constitutes a summary of the proposed amendment to Tuboscope's
Certificate of Incorporation. Such summary is qualified by reference to the
complete text of such amendment, which is set forth in the form of the
Amendment to Tuboscope's Certificate of Incorporation, a copy of which is
attached as Appendix E to this Proxy Statement/Prospectus.
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<PAGE>
PROPOSAL TO ELECT TUBOSCOPE DIRECTORS
GENERAL
Nine directors are to be elected at the Annual Meeting. Absent written
instructions to the contrary, proxies representing shares of Tuboscope Common
Stock will be voted FOR the election of each of the persons listed below as
directors of Tuboscope for a term of one year and until their successors are
duly elected and qualified; provided, however, that if the Merger Proposals and
the transactions contemplated thereby are approved and the Merger is
consummated, the authorized number of directors will be reduced to seven,
Martin G. Hubbard, William V. Larkin, Jr., Timothy M. Pennington III, Patrick
T. Seaver, James Shelton and Frederick J. Warren will resign as members of the
Tuboscope Board of Directors and, pursuant to the Merger Agreement, Jerome R.
Baier, Eric L. Mattson and Martin R. Reid will continue as directors of
Tuboscope and L.E. Simmons, John F. Lauletta, J.S. Dickson Leach and an
individual to be mutually agreed upon by Tuboscope and Drexel will be appointed
to the Tuboscope Board of Directors to hold office until their successors are
duly elected and qualified at the next Annual Meeting of Stockholders.
If any nominee for director should be unable or decline to serve, the
authority provided in the proxy to vote for the election of directors will be
exercised to vote for a substitute or substitutes. As of the date of this Proxy
Statement/Prospectus, management has no knowledge that any of the nominees will
be unable or will decline to serve. None of the nominees has any family
relationship among themselves or with any executive officer of Tuboscope. The
Certificate of Incorporation and Bylaws of Tuboscope contain provisions
eliminating or limiting the personal liability of directors for violations of a
director's fiduciary duty to the extent permitted by the DGCL.
INFORMATION CONCERNING NOMINEES TO THE TUBOSCOPE BOARD OF DIRECTORS
Set forth below are the names and descriptions of the backgrounds of the
nominees for election as directors of Tuboscope. Each of the Tuboscope's nine
nominees for election to the Tuboscope Board of Directors is currently serving
as a director of Tuboscope and was elected to his present term of office by the
stockholders of Tuboscope. In January 1994, the Board of Directors appointed
Eric L. Mattson as a director. Mr. Mattson's appointment in 1994, and his
nomination at this Annual Meeting, is pursuant to certain rights granted to BHI
in connection with the Company's acquisition of Vetco Services in 1992.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH TUBOSCOPE DIRECTOR SINCE
---- --- ----------------------- --------------
<S> <C> <C> <C>
Martin R. Reid.......... 53 Chairman of the Board 1990
William V. Larkin, Jr. . 42 President and Chief Executive Officer 1993
Jerome R. Baier......... 43 Director 1988
Martin G. Hubbard....... 58 Director 1988
Eric L. Mattson......... 44 Director 1994
Timothy M. Pennington
III.................... 55 Director 1988
Patrick T. Seaver....... 45 Director 1995
James J. Shelton........ 79 Director 1988
Frederick J. Warren..... 56 Director 1988
</TABLE>
For biographical information with respect to Messrs. Baier, Mattson and Reid,
see "Management and Operations After the Merger."
Martin G. Hubbard was Secretary and Treasurer of the Company from May 1988 to
February 1989. Mr. Hubbard is, and has been since January 1987, a general
partner in Hub, a private investment firm specializing in leveraged management
buyouts. From 1980 to 1990, Mr. Hubbard was also a general partner in Hub
Energy Associates, a general partnership formed with Brentwood Associates to
investigate and pursue investments in the oil service industry. Mr. Hubbard was
President of Kobe Inc., an oil well pump and process equipment subsidiary of
Baker Oil Tools a predecessor of BHI, from 1976 to 1980.
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<PAGE>
William V. Larkin, Jr. has been President of the Company and TVI since May
1991 and Chief Executive Officer of the Company and TVI since October 1993. Mr.
Larkin was Chief Operating Officer of the Company and TVI from May 1991 to
October 1993, Senior Vice President-International and Specialty Services of TVI
from December 1989 to May 1991 and Senior Vice President of the Company from
May 1988 to May 1991. From 1984 to December 1989, Mr. Larkin was Vice
President-Specialty Services of TVI.
Timothy M. Pennington III served as Chairman of the Board of the Company from
January 1990 to October 1990 and Chairman of the Board of TVI from June 1988 to
October 1990. Mr. Pennington is, and has been since prior to 1984, a partner in
various partnerships specializing in leveraged management buyouts and growth
oriented venture capital investments sometimes collectively referred to as
"Brentwood Associates."
Patrick T. Seaver is and has been a partner in the law firm of Latham &
Watkins, counsel to the Company, since February 1985.
James J. Shelton has been retired but has been engaged in certain private
investment concerns since 1984. Prior to 1981, Mr. Shelton was employed by
Baker Oil Tools and at various times during that period served as the Vice
President of Corporate Development, an Operating Group President, and as a
director of its parent company. Mr. Shelton is also a director of EIP
Microwave.
Frederick J. Warren is, and has been since 1984, a partner in Brentwood
Associates. Mr. Warren is also a director of Graphic Controls Corp. and Digital
Sound Corp.
VOTE
Directors will be elected by a favorable vote of a plurality of the shares of
voting stock present and entitled to vote, in person or by proxy, at the Annual
Meeting. Accordingly, abstentions or broker non-votes as to the election of
directors will not affect the election of the candidates receiving the
plurality of votes. Unless instructed to the contrary, the shares represented
by the proxies will be voted FOR the election of the eight nominees named above
as directors.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Tuboscope Board of Directors held 11 meetings during the fiscal year
ended December 31, 1995. Each director attended at least 75% of the aggregate
of the total number of meetings of the Tuboscope Board of Directors held during
such period and the total number of meetings held during such period by all
committees of the Tuboscope Board of Directors on which that director served.
The Company has standing Audit, Stock Option and Executive Committees but has
not established a Nominating Committee. During fiscal 1995, Messrs. Baier,
Mattson, Seaver and Shelton comprised the Audit Committee. The Audit Committee
met once during the fiscal year ended December 31, 1995. The Audit Committee's
responsibilities include recommending the selection of the Company's
independent auditors to the Board of Directors and reviewing the (i) scope and
results of the audit engagement with the independent auditors and management,
(ii) adequacy of the Company's internal accounting control procedures, (iii)
independence of the independent auditors and (iv) range of audit and non-audit
fees charged by the independent auditors. Messrs. Warren, Hubbard and
Pennington comprised the Stock Option Committee, which met two times during the
fiscal year ended December 31, 1995. The Stock Option Committee is responsible
for administration of Tuboscope's stock option plans. Throughout 1995, Messrs.
Hubbard, Reid, Pennington and Shelton comprised the Executive Committee. The
Executive Committee met once during the fiscal year ended December 31, 1995.
The Executive Committee's responsibilities include reviewing and approving the
compensation of the Company's directors, officers and employees and performing
other related functions upon request of the Board of Directors.
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<PAGE>
DIRECTOR COMPENSATION AND AUTOMATIC-GRANT STOCK OPTION PLAN
Each of the directors of the Company who is neither an employee nor otherwise
subject to an agreement to provide services to the Company (a "Qualified
Director") is entitled to receive $10,000 per year as compensation for
membership on the Board of Directors, plus $1,000 for each regular and special
meeting of the Board of Directors attended by him. In addition, if a Qualified
Director is a member of such committee, he is entitled to receive an attendance
fee of $1,000 for each Executive Committee meeting and an attendance fee of
$300 for each meeting of the Audit Committee or Stock Option Committee attended
by him. In addition, certain directors may be granted options under the terms
of the Stock Option Plan for Non-Employee Directors (the "Non-Employee Director
Plan").
Under the terms of the Non-Employee Director Plan, each director of Tuboscope
who was not an employee of Tuboscope was automatically granted an initial
option to purchase 20,000 shares of Tuboscope Common Stock on March 30, 1992.
Each non-employee director who is first appointed or elected to the Board after
March 30, 1992 is automatically granted an initial option to purchase 4,000
shares of Tuboscope Common Stock on the date of such appointment or election to
the Board. In addition, each non-employee director of the Company is granted
automatically options to purchase an additional 4,000 shares on the date of the
Annual Meeting of Stockholders each year following the initial grant. All
options are granted with an exercise price equal to the fair market value of
Tuboscope Common Stock on the date of grant.
If the Merger is consummated, no options will be granted to the current
directors who are resigning as a result of the Merger. In connection with the
Merger, certain terms with respect to the exercisability and termination of
options granted under the Non-Employee Director Plan were amended. See "The
Merger Transactions--Interests of Certain Persons in the Merger--Non-Employee
Director Stock Options."
TUBOSCOPE EXECUTIVE OFFICERS
Set forth below are the names, ages and titles of the executive officers of
Tuboscope and TVI. Executive officers serve in the same capacity for both
Tuboscope and TVI.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Martin R. Reid.......... 53 Chairman of the Board
William V. Larkin, Jr. . 42 President and Chief Executive Officer
Ronald L. Koons......... 48 Executive Vice President, Chief Financial Officer
and Treasurer
Gerhard H. Hage......... 61 Senior Vice President--International Operations
Martin I. Greenberg..... 56 Vice President, Controller, Assistant Treasurer
and Assistant Secretary
Kenneth L. Nibling...... 45 Vice President--Human Resources and
Administration
James F. Maroney, III... 44 Vice President, Secretary and General Counsel
</TABLE>
For a description of the backgrounds of Messrs. Reid and Larkin, see
"Management and Operations After the Merger--Directors After the Merger" and
"Proposal to Elect Tuboscope Directors--Information Concerning Nominees of the
Tuboscope Board of Directors," respectively. For a description of the
backgrounds of Messrs. Hage, Greenberg, Nibling and Maroney, see "Management
and Operations After the Merger--Executive Officers After the Merger." The
biographical information with respect to Mr. Koons is set forth below.
Ronald L. Koons has been Executive Vice President of the Company and TVI
since October 1993 and Chief Financial Officer and Treasurer of the Company and
TVI since November 1991. From August 1988 to November 1991, Mr. Koons served as
Vice President and Chief Financial Officer of Eastman Christensen
80
<PAGE>
Co. From June 1987 to August 1988, Mr. Koons was Controller of Eastman
Christensen Co. From September 1986 to June 1987, Mr. Koons served as Treasurer
of Eastman Christensen Co.
EXECUTIVE COMPENSATION
Summary Compensation Table. No cash compensation has been paid or is
anticipated to be paid to any of the directors of the Company or TVI, or to any
officers of the Company, in their capacities as such, except that certain of
such persons receive annual compensation for membership on the Board of
Directors plus compensation for attending meetings of the Board of Directors or
certain committees of the Board of Directors of the Company and TVI. See "--
Director Compensation and Automatic Grant Stock Option Plan." The following
table sets forth certain information regarding the annual and long-term
compensation for services in all capacities to TVI for the fiscal years ended
December 31, 1993, 1994 and 1995, of those persons who were at December 31,
1995 either (i) Chief Executive Officer or (ii) one of the other four most
highly compensated executive officers of TVI (the "Named Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ------------
AWARDS OF
STOCK ALL
NAME AND OTHER ANNUAL OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) (SHARES) COMPENSATION(4)
------------------ ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
William V. Larkin,
Jr. ................. 1995 $250,000 $100,000 $ 0 43,800 $4,415
President and Chief 1994 242,708 250,000 0 40,000 2,991
Executive Officer 1993 211,979 0 0 37,500 5,469
Martin R. Reid........ 1995 $201,042 $ 40,000 $ 0 38,200 $2,671
Chairman of the Board 1994 227,083 168,750 46,503 35,000 2,250
1993 275,000 0 49,840 57,500 6,338
Gerhard H. Hage....... 1995 $200,669 $ 10,025 $ 0 14,200 $ 0
Senior Vice
President-- 1994 179,504 0 0 13,000 0
International
Operations 1993 171,940 0 0 18,750 0
Ronald L. Koons....... 1995 $175,000 $ 52,500 $ 0 27,200 $2,468
Executive Vice
President, 1994 167,708 131,250 0 25,000 2,406
Chief Financial
Officer 1993 150,000 110,000 0 25,000 4,031(4)
James F. Maroney, III. 1995 $125,000 $ 50,000(2) $ 0 10,900 $1,953
Vice President,
Secretary and 1994 103,800 50,000 0 10,000 1,476
General Counsel 1993 97,200 0 0 13,750 2,612
</TABLE>
- --------
(1) Includes amounts deferred by the Named Officers under Tuboscope's 401(k)
Thrift Savings Plan.
(2) Includes a $30,000 special recognition bonus for Mr. Maroney.
(3) Includes living, travel and other expense reimbursement, but only if such
payments to the Named Officer exceed the lesser of $50,000 or 10% of the
total annual salary and bonus of the Named Officer. For Mr. Reid, the
amounts shown include living expense reimbursements of $25,740 in 1994 and
$25,200 in 1993 and travel and other expense reimbursements of $20,963 in
1994 and $24,640 in 1993. For Mr. Koons, the amount shown in 1993
represents a required payment under his then current employment contract.
(4) Includes (a) matching contributions by Tuboscope under Tuboscope's 401(k)
Thrift Savings Plan in the 1995, 1994 and 1993 amounts of $2,915, $2,991
and $5,469 for Mr. Larkin, $2,177, $2,250 and $6,338 for Mr. Reid, $2,098,
$2,406 and $4,031 for Mr. Koons and $1,536, $1,476 and $2,612 for Mr.
Maroney and (ii) matching contributions by Tuboscope under Tuboscope's non-
qualified deferred compensation plan in the 1995 amounts of $1,500 for Mr.
Larkin, $494 for Mr. Reid, $370 for Mr. Koons and $417 for Mr. Maroney.
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<PAGE>
Management Employment Agreements. In July 1993, the Company (and TVI) and Mr.
Reid amended and restated his employment agreement (the "Reid Agreement"). The
Reid Agreement continues until December 31, 1998, employing Mr. Reid as
Chairman of the Board (subject to annual re-election to the Board) and chief
executive officer. The Reid Agreement provides that during each year in which
Mr. Reid is chief executive officer he shall receive an annual base salary of
$275,000. Mr. Reid resigned his position as chief executive officer effective
October 1993. For the first year following Mr. Reid's resignation as chief
executive (i.e., fiscal 1994) Mr. Reid shall be paid a base salary of $225,000,
and for each year thereafter through the term of the Reid Agreement, Mr. Reid
shall be paid an annual base salary of $200,000. Mr. Reid is also entitled (i)
to participate in the Annual Incentive Program, as outlined in the "Executive
Committee Report on Compensation," (ii) once Mr. Reid resigns as chief
executive officer, to receive option grants under the Amended and Restated
Stock Option Plan for Key Employees of Tuboscope (the "Company Stock Option
Plan") in an amount which is proportionate to the number of options granted to
the chief executive officer based on the respective salaries of Mr. Reid and
the chief executive officer, (iii) to reimbursement of certain living and
travel expenses and (iv) to certain payments to offset any untoward tax
liabilities resulting from certain provisions of the Reid Agreement. The Reid
Agreement also provides that following a termination without cause or by reason
of death or disability, Mr. Reid shall be entitled as applicable, to immediate
vesting of, and extension of exercise periods for, all of his unvested stock
options, and to participation in all benefit plans available to executives of
the Company. In addition, in the event of termination without cause, Mr. Reid
shall receive severance pay equal to aggregate base salary and annual bonus
payable for the remaining term of the Reid Agreement, and following disability
or death, Mr. Reid shall receive prorated base salary and annual bonus. In the
event of a change of control (as defined in the Reid Agreement) and cessation
of Mr. Reid's employment in connection therewith, Mr. Reid shall be entitled to
receive two and one-half times the greater of (x) the sum of his annual base
salary and annual bonus opportunity in effect upon the change in control or (y)
the sum of his annual salary and annual bonus opportunity for any of the three
previous years, continued participation in certain insurance and benefit plans
for 30 months, ownership of a Company automobile or an allowance in lieu
thereof equal to two and one-half times Mr. Reid's car allowance in effect upon
the change in control, payment of excise tax on any deemed parachute payments
and a gross up amount for any income tax payment due on any of the foregoing
benefits. In addition, upon a change of control, all of Mr. Reid's outstanding
stock options will vest and will be exercisable until five years from the date
of the change of control.
In connection with the appointment of Mr. Hage as Senior Vice President-
International Operations in October 1991, the Company assumed an existing
employment agreement with Mr. Hage. Under this agreement, Mr. Hage's annual
base salary is approximately $191,000 (the amount is paid in deutschemarks, and
thus fluctuates based on current exchange rates), and he is eligible to receive
other fringe benefits generally available to executives of TVI and to receive
an annual bonus under the Company's Operations Incentive Plan (as described
under the "Executive Committee Report on Compensation"). Mr. Hage's employment
agreement is for an indefinite period of time and can be terminated (except for
cause) only at the end of a quarter upon notice received six months prior to
the end of such quarter.
Other Severance Arrangements. Each of Messrs. Larkin, Koons and Maroney are
generally entitled to receive severance pay equal to the greater of six months'
base salary ($125,000 for Mr. Larkin, $87,500 for Mr. Koons and $62,500 for Mr.
Maroney as of March 1, 1996) or one and one half weeks' base salary for each
year of their employment with TVI (or TVI's predecessor) (approximately
$108,173 for Mr. Larkin, $20,192 for Mr. Koons and $21,635 for Mr. Maroney as
of March 1, 1996). Additionally, a pro rata portion of Messrs. Larkin's, Koons'
and Maroney's bonuses and stock options received pursuant to the Company's
Stock Option Plan becomes immediately vested and fully exercisable if his
employment is terminated under certain circumstances.
In October 1993, E. Wayne Overman resigned his employment with the Company.
In connection therewith, Mr. Overman and the Company entered into a severance
agreement pursuant to which the Company agreed: to pay Mr. Overman $120,000 per
year until September 1995; to continue certain medical
82
<PAGE>
insurance benefits until no later than September 1997 and certain life
insurance benefits until no later than 1995; to immediately vest all
outstanding options held by Mr. Overman and to extend the exercise date of such
options until October 1, 1996; to pay certain club dues until 1995; and to
transfer title of his company car to Mr. Overman. Also pursuant to this
agreement, Mr. Overman agreed to perform certain consulting duties for
additional consideration and agreed to certain terms limiting his ability to
compete with the Company for a period of two years following the termination of
the agreement.
Other Change of Control Agreements. All of the executive officers have
written arrangements with the Company which provide certain benefits upon a
change in control of the Company. Change of control is generally deemed to
occur when: (i) a person becomes or enters into a contract to become beneficial
owner of 50% or more of the common stock of the Company or TVI, (ii) all or
substantially all of the business of the Company or TVI is disposed of pursuant
to a merger, consolidation or otherwise (or a contract providing for such
disposition is entered into) and the Company or TVI, as applicable, is not the
surviving corporation or the stockholders of the applicable company prior to
the transaction do not continue to own at least 60% of the surviving
corporation, (iii) the Company or TVI is materially or completely liquidated,
(iv) any person purchases stock of the Company or TVI in a tender or exchange
offer with the express or implied intent of acquiring control of the Company or
TVI, as applicable, or (v) a majority of the board of directors of the Company
or TVI is replaced over a two-year period, unless such replacements have been
approved by at least of those remaining directors who were directors at the
beginning of such two-year period. The Merger Transactions will constitute such
a change of control. Immediately upon a change in control, all unvested stock
options and other applicable grants of long-term incentives, if any, will vest.
In addition, if during the two year period following a change of control, any
executive officer (i) is involuntarily terminated other than for cause (as
defined therein), death or disability or (ii) voluntarily terminates for good
reason (as defined therein), such executive officer will receive severance pay
equal to two and one half times the greater of (x) the sum of his or her annual
salary then in effect and his or her maximum annual bonus opportunity (as
defined) then in effect or (y) the sum of his or her annual salary and his or
her maximum annual bonus opportunity for either of the two previous years. Such
executive officer will also be provided ownership of a Company automobile or
payment of 2 times his or her annual car allowance, life and health insurance
benefits and participation (including Company contributions) in the Company's
401(k) Plan for a period of thirty months, outplacement assistance, payment of
excise tax on any deemed parachute payments and a gross up amount for any
income tax payment due on any additional benefits which may be provided by
individual employment agreements.
Defined Benefit Plan. A German subsidiary of the Company offers a defined
benefit plan for its employees. Plan benefits are determined based on years of
employment and a pension formula, and are subject to certain national insurance
rates. The pension formula provides that payment of the pension benefits will
be based on an average of the employee's annual salary for the last three years
(the "Average Annual Salary"). That portion of the employee's Average Annual
Salary up to the average social security contribution ceiling for the last
three years is multiplied by 0.5% and the remaining Average Annual Salary is
multiplied by 1.65%. The products of the two calculations are then added
together, and the resulting amount is multiplied by the years of employment to
determine the plan benefits to be received by the employee. Mr. Hage
participates in this plan and, based on retirement at age 65, would receive an
annual benefit equal to 76,897 deutschemarks (or $52,081 based on exchange
rates as of March 1, 1996). In connection with the Merger Transactions, certain
terms with respect to the termination of the options granted to the executive
officers have been amended. See "The Merger Transactions--Interests of Certain
Persons in the Merger Transactions."
83
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth certain
information with respect to grants of stock options pursuant to the Company
Stock Option Plan during fiscal year 1995 to the Named Officers.
<TABLE>
<CAPTION>
PERCENTAGE POTENTIAL
OF TOTAL REALIZABLE VALUE AT
OPTIONS EXERCISE ASSUMED ANNUAL
GRANTED TO OR BASE RATES OF STOCK PRICE
OPTIONS EMPLOYEES PRICE APPRECIATION
GRANTED IN FISCAL PER EXPIRATION FOR OPTION TERM
NAME (SHARES)(1) YEAR SHARE DATE 5% 10%
- ---- ----------- ---------- -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
William V. Larkin, Jr... 43,600 20.1 $6.25 01/02/05 $ 171,374 $ 434,295
Martin R. Reid.......... 38,200 17.6 6.25 01/02/05 150,149 380,506
Ronald L. Koons......... 27,200 12.5 6.25 01/02/05 106,912 270,936
Gerhard H. Hage......... 14,200 6.5 6.25 01/02/05 55,814 141,445
James F. Maroney, III... 10,900 5.0 6.25 01/02/05 42,843 108,574
</TABLE>
- --------
(1) All options granted become exercisable in five equal annual installments
beginning on the date of grant. Under the terms of the Company Stock Option
Plan, the Stock Option Committee retains discretion, subject to certain
restrictions, to modify the terms of outstanding options and to reprice
outstanding options. Options are granted for a term of ten years, subject
to earlier termination in certain events. The exercise price is equal to
the closing price of the Tuboscope Common Stock on Nasdaq on the date of
grant.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Values. The following table sets forth certain information with respect to the
unexercised options to purchase shares of Common Stock under the Company Stock
Option Plan to the Named Officers and held by them at December 31, 1995. No
options were exercised by any of the Named Officers in 1995.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
MONEY
NUMBER OF UNEXERCISED OPTIONS OPTIONS AT DECEMBER 31, 1995(1)
-------------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
William V. Larkin, Jr... 104,166 116,836 $ 25,125 $ 0
Martin R. Reid.......... 331,800 144,900 0 0
Ronald L. Koons......... 55,000 82,200 0 0
Gerhard H. Hage......... 22,100 38,850 0 0
James F. Maroney, III... 16,300 29,350 0 0
</TABLE>
- --------
(1) Based on the closing price of Tuboscope Common Stock on Nasdaq on December
29, 1995, the last trading day of 1995 ($5 11/16).
EXECUTIVE COMMITTEE REPORT ON COMPENSATION
To: The Board of Directors
The compensation policies of the Company are structured to link the
compensation of the executive officers of the Company with enhanced stockholder
value. Through the establishment of short- and long-term incentive plans, the
Company has aligned the financial interests of the executive officers with
those of its stockholders.
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Executive Compensation Philosophy
In designing its compensation programs, the Company follows its belief that
compensation should reflect the value created for stockholders while supporting
the business strategies and long-range plans of the Company and the markets the
Company serves. In doing so, the compensation programs reflect the following
themes:
A compensation program that stresses the Company's financial performance
and the executive officers' individual performance.
A compensation program that strengthens the relationship between pay and
performance by providing variable, at-risk compensation that is reflective
of current market practices and comparable executive rates and is dependent
upon the level of success in meeting specified Company and individual
performance goals.
An annual incentive plan, that supports a performance-oriented
environment and which generates a portion of compensation based on the
achievement of specific performance goals, with superior performance
resulting in total annual compensation above competitive levels.
A long-term incentive plan that is designed to reward executive officers
for long-term strategic management of the Company and the enhancement of
stockholder value.
The Executive Committee (the "Committee") reviews and determines the
compensation of the executive officers of the Company with this philosophy on
compensation as its basis.
Executive Compensation Components
The Company's executive compensation is based on three components, each of
which is intended to serve the overall compensation philosophy.
Base Salary. Base salary is intended to be set at a level competitive with
amounts paid to executive officers of companies with a similar business
structure, size and marketplace orientation. Competitive market data was most
recently provided by an independent executive compensation consultant in 1994.
The data provided compared the Company's compensation practices to general
industry and to a group of ten comparable companies having similar business
structure, size and marketplace orientation. Eight of these ten comparable
companies are included in the SCI Upstream Index, the peer index of 76 oil
service companies which is used to compare stockholder returns in the
performance graph set forth in the Proxy Statement/Prospectus. See "--
Performance Graph." The performance of the comparable companies evaluated was
not factored into the comparative analysis performed by the consultant. The
Committee believes that the compensation of Tuboscope's executive officers is
competitive with the compensation of the executives of the comparable companies
evaluated.
In determining appropriate salary levels, the Committee considers each
executive officer's scope of responsibility, experience and performance. An
executive officer's scope of responsibility is dependent upon the revenue,
number of employees and geographic scope of the operations overseen by such
individual. An executive officer's experience is measured not only in terms of
seniority but also, and more importantly, in terms of proven leadership
capabilities. The Committee evaluates the performance of executive officers
based on Company results, using such criteria as the Company's earnings per
share, and the achievement of personal goals, using such criteria as amount of
new business developed. Of the three criteria considered, the Committee places
the greatest emphasis on performance. However, the Committee's review of these
criteria is subjective, and the Committee does not attempt to quantify each
factor of an executive officer's scope of responsibility, experience and
performance.
Salaries for executive officers are reviewed by the Committee on an annual
basis. Increases to base salaries are driven primarily by individual
performance. Base salaries allow executives to be rewarded for individual
performance based on the Company's evaluation process which encourages the
development of executives and sustained levels of contribution to the Company.
Base salaries also offer security to executives and allow the Company to
attract competent executive talent and maintain a stable management team.
85
<PAGE>
Mr. Larkin's base salary was not increased in 1995. In determining Mr.
Larkin's salary, the Committee considers his individual performance and his
long-term contributions to the success of the Company. Similar consideration is
given in determining the base salaries of the other executives.
Annual Management Incentive Compensation. Under the Company's Management
Incentive Plan, annual incentive awards are granted upon the achievement by the
executive officers of annual financial criteria established by the Committee at
the beginning of the fiscal year. External market data is reviewed periodically
to determine competitive incentive opportunities for individual executives. The
financial measure for the 1995 fiscal year was, and for the 1996 fiscal year
will be, growth in earnings per share and is stated in terms of target and
maximum goals as determined by the Committee. Under the plan as in effect
during 1995 and 1996, each executive officer is entitled to receive a
percentage of his salary in the event the Company meets targeted earnings per
share, and a higher percentage of his salary if the Company exceeds a higher
targeted earnings per share. Under the plan as in effect in 1995, Messrs.
Larkin, Reid, Koons and Maroney were entitled to receive 100%, 50%, 75% and
40%, respectively, of their respective salaries if targeted earnings per share
were met, and 150%, 75%, 112.5% and 60%, respectively, of their respective
salaries if higher targeted earnings per share were exceeded. As the initial
targeted earnings per share level was met for 1995, incentive compensation was
earned by Messrs. Larkin, Reid, Koons and Maroney as set forth in the Summary
Compensation Table above. Under the plan as in effect for 1996, Messrs. Larkin,
Reid, Koons and Maroney are entitled to receive 100%, 50%, 75% and 40%,
respectively, of their respective salaries if targeted earnings per share are
met, and 150%, 75%, 112.5% and 60%, respectively, of their respective salaries
if higher targeted earnings per share are exceeded. Bonuses are pro rated if
the Company's financial measure falls between the two targeted levels. Targeted
earnings are generally based on the previous year's actual earnings per share
plus projected increased earnings as a result of reasonably anticipated
improvements in operations; the higher targeted earnings are generally based on
the foregoing plus more aggressive projections concerning improvements in
operations, planned and potential special projects, and expansion of certain of
the Company's market segments.
The Company also has an Operations Incentive Plan, available for general
managers and operation managers. Mr. Hage participates in this Plan and is
entitled to receive a bonus, equal to a maximum of 50% of his salary in the
event the Company's eastern hemisphere operations achieve more than 80% and up
to 120% of (i) targeted operating profit margins and (ii) targeted days sales
outstanding. Targeted margins must be achieved in order for Mr. Hage to be
eligible for a bonus, and approximately 85% of Mr. Hage's bonus is based on
margin performance and approximately 15% is based on the days sales outstanding
performance (day sales outstanding is a measure of the speed of accounts
receivable collection and is thus critical to generation of cash flow).
Targeted operating profit margins for the Company's eastern hemisphere
operations are determined by the Board and are generally based on prior years
actual performance plus projected revenue growth, results from planned special
projects and cost containment. Targeted days sales outstanding is similarly
determined by the Board and based on prior years actual performance plus
projected improvements. As set forth in the Summary Compensation Table above,
Mr. Hage received a bonus under a special days sales outstanding incentive plan
for the fourth quarter of fiscal year 1995.
Stock Option Plan. The Company provides a stock option plan that is linked to
the long-term performance of the Company. Executive officers are eligible to
receive annual grants of non-qualified stock options pursuant to the Amended
and Restated Stock Option Plan for Key Employees of Tuboscope Vetco
International Corporation. In keeping with the Company's commitment to provide
a total compensation package which emphasizes at-risk components of
compensation, the awards are intended to retain and motivate executive officers
to improve long-term stock market performance.
Stock options are granted at the fair market value of the underlying
Tuboscope Common Stock at the date of grant. Accordingly, stock options have
value only if the stock price appreciates from the date of grant. This at-risk
component of pay focuses executives on the creation of stockholder value over
the long-term and encourages equity ownership in the Company.
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<PAGE>
In determining the size of the stock option grant, the Committee's objective
is to provide executives with long-term incentive award opportunities that are
at a market level. The size of the award, however, can be adjusted based on
individual factors and historical award data. Further, the Committee's
objective is to deliver a competitive award opportunity based on the initial
dollar value of the award granted. Accordingly, the number of shares underlying
stock option awards varies from year to year and is dependent on the stock
price on the date of grant.
In 1995, Mr. Larkin received options to purchase 43,600 shares with an
exercise price of $6.25 as set forth in the option grants table above. The
Committee has determined that the compensation opportunities should remain
relatively constant as long as total compensation fairly reflects overall
Company and individual achievement. An independent executive compensation
consultant previously reviewed the Company's stock option grants to executive
officers and determined such grants to be at or below the grant levels of
comparable companies. Mr. Larkin now holds options to purchase 221,002 shares
of Tuboscope Common Stock. The Committee believes this equity interest provides
an appropriate link to the interests of stockholders.
Rule 162(m). The 1993 Omnibus Budget Reconciliation Act ("OBRA") became law
in August 1993. Under the new law, income tax deductions of publicly-traded
companies in tax years beginning on or after January 1, 1994 may be limited to
the extent total compensation (including base salary, annual bonus, stock
option exercises, and non-qualified benefits) for certain executive officers
exceeds $1 million (less the amount of any "excess parachute-payments" as
defined in Section 280G of the Code) in any one year. Under OBRA, the deduction
limit does not apply to payments which qualify as "performance-based." To
qualify as "performance-based," compensation payments must be based solely upon
the achievement of objective performance goals and made under a plan that is
administered by a committee of outside directors. In addition, the material
terms of the plan must be disclosed to and approved by stockholders, and the
compensation committee must certify that the performance goals were achieved
before payments can be made.
The Committee intends to design the Company's compensation to conform with
the OBRA legislation and related regulations so that total compensation paid to
any employee will not exceed $1 million in any one year, except for
compensation payments which qualify as "performance-based." The Company may,
however, pay compensation which is not deductible in limited circumstances when
sound management of the Company so requires.
The Committee believes that the performance of the Company should be an
important element in determining the compensation of the Company's executive
officers and will continue to review salaries of executive officers in light of
the Company's performance.
Martin G. Hubbard
William V. Larkin, Jr.
Timothy M. Pennington
Martin R. Reid
James J. Shelton
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee, which is responsible for the compensation policies
of the Company with respect to its executive officers, is comprised of Messrs.
Hubbard, Larkin, Pennington, Reid and Shelton. Mr. Reid is the Chairman of the
Board and Mr. Larkin is the President and Chief Executive Officer of the
Company and TVI. Neither of Messrs. Larkin or Reid participate in compensation
decisions concerning himself. Martin G. Hubbard, a general partner of Hub, is a
director of the Company and TVI. Hub and TVI were previously parties to an
agreement pursuant to which TVI paid Hub certain fees in consideration of Hub
providing acquisition and strategic planning services to the Company and TVI.
This agreement with Hub was terminated as of December 31, 1992 and there is
currently no outstanding balance owed to Hub.
87
<PAGE>
The Company and the general partners of Hub are parties to indemnification
agreements which provide that they shall be indemnified by the Company to the
fullest extent provided by law for all losses that may be incurred by them in
connection with any action, suit or proceeding in which they become involved by
reason of their serving as agents of the Company.
PERFORMANCE GRAPH(1)
The following line graph compares the yearly percentage change in the
cumulative total shareowner return on the Common Stock against the cumulative
total return of a peer index of 76 oil service companies prepared by Simmons &
Company International, an independent third party, and the Nasdaq Composite
Stock Index, each for the period from December 31, 1990 to December 31, 1995.
[CHART APPEARS HERE]
NASDAQ INDEX VALUES
Dec-90 100
Jan-91 111 Jan-93 186 Jan-95 202
Feb-91 121 Feb-93 179 Feb-95 212
Mar-91 129 Mar-93 185 Mar-95 219
Apr-91 130 Apr-93 177 Apr-95 226
May-91 135 May-93 187 May-95 231
Jun-91 127 Jun-93 188 Jun-95 250
Jul-91 134 Jul-93 189 Jul-95 268
Aug-91 141 Aug-93 199 Aug-95 273
Sep-91 141 Sep-93 204 Sep-95 279
Oct-91 145 Oct-93 208 Oct-95 277
Nov-91 140 Nov-93 202 Nov-95 283
Dec-91 157 Dec-93 208 Dec-95 281
Jan-92 166 Jan-94 214
Feb-92 169 Feb-94 212
Mar-92 162 Mar-94 199
Apr-92 155 Apr-94 196
May-92 157 May-94 197
Jun-92 151 Jun-94 189
Jul-92 155 Jul-94 193
Aug-92 151 Aug-94 205
Sep-92 156 Sep-94 204
Oct-92 162 Oct-94 208
Nov-92 175 Nov-94 201
Dec-92 181 Dec-94 201
TUBOSCOPE
12/31/90 100
6/28/91 84
12/31/91 89
6/30/92 84
12/31/92 76
6/30/93 110
12/31/93 78
6/30/94 86
12/30/94 76
6/30/95 81
12/29/95 72
SCI UPSTREAM INDEX VALUES
Dec-90 100
Jan-91 97 Jan-93 93 Jan-95 131
Feb-91 116 Feb-93 105 Feb-95 133
Mar-91 109 Mar-93 116 Mar-95 143
Apr-91 109 Apr-93 125 Apr-95 156
May-91 109 May-93 137 May-95 161
Jun-91 95 Jun-93 135 Jun-95 162
Jul-91 98 Jul-93 141 Jul-95 162
Aug-91 99 Aug-93 149 Aug-95 171
Sep-91 91 Sep-93 150 Sep-95 173
Oct-91 94 Oct-93 149 Oct-95 166
Nov-91 86 Nov-93 128 Nov-95 178
Dec-91 83 Dec-93 126 Dec-95 205
Jan-92 85 Jan-94 134
Feb-92 86 Feb-94 134
Mar-92 78 Mar-94 128
Apr-92 82 Apr-94 134
May-92 89 May-94 143
Jun-92 81 Jun-94 142
Jul-92 82 Jul-94 143
Aug-92 87 Aug-94 138
Sep-92 94 Sep-94 144
Oct-92 93 Oct-94 148
Nov-92 91 Nov-94 135
Dec-92 87 Dec-94 133
- --------
(1) Assumes $100 invested on December 31, 1990 and all dividends reinvested.
88
<PAGE>
CERTAIN STOCKHOLDER AGREEMENTS
Registration Rights. The Company, Brentwood, Hub (together with Brentwood,
"BA"), the Management Investors (as hereinafter defined), certain institutional
and other investors (collectively, the "Other Investors"), and certain other
institutional and other investors (the "Institutional Investors") who acquired
shares of Tuboscope Common Stock in connection with the initial capitalization
of Tuboscope are parties to a stockholders' agreement (the "Stockholders'
Agreement"). The Stockholders' Agreement provides for demand registration
rights for each of BA and the Other Investors, as a group, and the
Institutional Investors, as a group. These demands may be triggered at any time
by the written request of holders of at least 25% (with respect to the initial
demand registration) or 50% (with respect to any subsequent demand
registration) of the shares of Tuboscope Common Stock initially issued to
either of such groups which remain privately held by members of such groups.
Such registration rights are subject to termination under certain
circumstances. The number of demand registrations which may be instituted by
each of BA and the Other Investors, as a group, and the Institutional
Investors, as a group, may not exceed two by each group. In the case of a
demand registration instituted by either group, the Stockholders' Agreement
provides piggyback registration rights to the other group, Tuboscope and any of
Tuboscope's other current stockholders which allow them to sell all or part of
their Tuboscope Common Stock as part of such demand registration under certain
circumstances and subject to certain restrictions. In addition, the
Stockholders' Agreement provides for certain piggyback registration rights to
BA, the Other Investors and the Institutional Investors when Tuboscope proposes
to register shares of Tuboscope Common Stock (or securities convertible or
exchangeable for Tuboscope Common Stock) under the Securities Act of 1933, as
amended (the "Securities Act") for public sale, whether or not for its own
account. The Stockholders' Agreement provides that Tuboscope will pay
substantially all of the expenses associated with the foregoing registration
rights.
As partial consideration for the acquisition of substantially all of the
foreign operations of Baker Hughes Tubular Services, Inc. ("Vetco Services")
from BHI, the Company issued to BHI 100,000 shares of Tuboscope Series A
Preferred Stock and 1,686,047 shares of Tuboscope Common Stock. In connection
therewith, Tuboscope granted to BHI certain demand registration rights which
may be triggered with respect to such shares of Tuboscope Common Stock or
shares of Tuboscope Common Stock which are issued by Tuboscope upon conversion
or exchange of the Tuboscope Series A Preferred Stock (the "BHI Registrable
Securities") by the written request of holders of at least 50% of the BHI
Registrable Securities who request that at least 25% of the BHI Registrable
Securities be registered, provided the expected price to the public is equal to
or greater than $8,000,000. Such registration rights are subject to termination
under certain circumstances and such holders may not request more than two
demand registrations. In addition, BHI received piggyback registration rights
which allow it to sell all or part of its shares as part of a proposed
registration by Tuboscope under the Securities Act for the public sale of such
shares of Tuboscope Common Stock, whether or not for its own account, subject
to certain conditions and restrictions. Tuboscope will pay substantially all of
the expenses associated with the above-mentioned registration rights. BHI and
the Company have agreed to certain modifications of BHI's registration rights.
See "The Exchange Agreement--Modification of Registration Rights; Effect of
Existing Stockholder Agreement."
BHI Right of First Refusal. BHI is prohibited from selling or otherwise
disposing of (except in privately negotiated transactions) more than an
aggregate of 3% of Tuboscope's then outstanding shares of Tuboscope Common
Stock during any period of six months or less without first offering Tuboscope
the opportunity to repurchase the number of proposed shares to be sold which
exceeds 3% of the total outstanding shares. Tuboscope has five business days
after its receipt of notice of such proposed sale to elect to repurchase the
shares at a price per share equal to the average of the market prices of the
Tuboscope Common Stock over a ten-day period. If Tuboscope fails to make such
election, then BHI may sell or so dispose of such shares for a period of six
months. BHI is also prohibited from selling or otherwise disposing of more than
an aggregate of 5% of Tuboscope's then outstanding shares of Tuboscope Common
Stock in a privately negotiated transaction or series of transactions without
first offering such shares to Tuboscope. Tuboscope has five business days after
its receipt of notice of such proposed sale to elect to repurchase either all
such shares or any or all of such shares in excess of 500,000 shares for the
price and upon the terms specified in the notice.
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<PAGE>
If Tuboscope fails to make such election, then BHI may sell or so dispose of
such shares for a period of 90 days at a price and on terms no more favorable
than was specified in the notice.
BHI Standstill. BHI has agreed that so long as it is the beneficial owner of
the shares of Tuboscope Common Stock acquired in connection with the Vetco
Services acquisition, it will not (i) acquire, offer to acquire, or agree to
acquire any shares of Tuboscope Common Stock (or rights to acquire Tuboscope
Common Stock), which would increase its percentage ownership of the outstanding
Tuboscope Common Stock to that greater than its percentage ownership
immediately following the acquisition, (ii) make or participate in any
solicitation of proxies to vote any of Tuboscope's voting securities or (iii)
form, join in, or participate in a voting group with respect to any of
Tuboscope's voting securities. Notwithstanding the foregoing and subject to the
provisions of Tuboscope's Certificate of Incorporation, if, during the term of
the standstill, BHI beneficially owns restricted securities issued as part of
the Vetco Services acquisition which represent more than 5% of Tuboscope's
outstanding Tuboscope Common Stock and BHI derives no greater than $2,000,000
of revenue from its businesses in direct competition with Tuboscope, then, at
BHI's request, Tuboscope shall nominate at BHI's direction one person to the
Tuboscope Board of Directors. See "Election of Tuboscope Directors--Information
Concerning Nominees to the Tuboscope Board of Directors."
CERTAIN TRANSACTIONS
Brentwood, Hub, Northwestern and certain other persons are parties to the
Stockholders' Agreement, pursuant to which they are granted registration rights
which are not available to other stockholders of the Company. See "--Certain
Stockholder Agreements--Registration Rights." Pursuant to the terms of the
Vetco Services acquisition, BHI was also granted certain registration and other
rights not generally available to other stockholders. See "--Certain
Stockholder Agreements--BHI Right of First Refusal" and "--Certain Stockholder
Agreements--BHI Standstill."
The Company and BHI currently are engaged in discussions relating to various
indemnification provisions contained in the agreement governing the sale of
Vetco Services by BHI to the Company. Mr. Mattson, a director of the Company
and an executive officer of BHI, has advised the Company that a conflict of
interest exists and has been excused from discussions by the Board relating to
this matter.
The Company retained Latham & Watkins to perform certain legal services
during 1994 and 1995. Patrick T. Seaver, a senior partner at Latham & Watkins,
is also a director of the Company.
COMPLIANCE WITH SECURITIES LAWS
Section 16(a) of the Exchange Act, requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities (collectively, "Insiders"), to file with the
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Insiders are required
by regulation of the Commission to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company or written representations that no other
reports were required, during the year ended December 31, 1995, Insiders
complied with all applicable Section 16(a) filing requirements, except that Mr.
Hage failed to timely file his Form 5 filing reporting his exempt grants of
options under the Company's Stock Option Plan, Mr. Hubbard did not timely file
his Form 5 filing reporting the gift of Tuboscope Common Stock to a charitable
organization and Mr. Greenberg reported a non-exempt purchase of Tuboscope
Common Stock by a partnership in which he is a general partner on his Form 5.
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PROPOSAL TO APPROVE THE 1996 EQUITY PARTICIPATION PLAN
The Tuboscope Board of Directors recommends to its stockholders that they
approve the proposal to adopt the 1996 Equity Participation Plan. The
affirmative vote of the majority of the shares of Tuboscope Common Stock
present at the Annual Meeting either in person or by properly executed proxies
and entitled to vote will be required to approve the adoption of the 1996
Equity Participation Plan.
DESCRIPTION OF THE 1996 EQUITY PARTICIPATION PLAN
In February 1996 the Tuboscope Board of Directors adopted the 1996 Equity
Participation Plan. The 1996 Equity Participation Plan succeeds (i) the
Company's Amended and Restated Stock Option Plan for Key Employees of Tuboscope
Vetco International Corporation (the "Tuboscope Stock Option Plan"), which
covered 1,799,000 shares of Tuboscope Common Stock and was adopted by the
Tuboscope Board of Directors on December 31, 1989 and approved by the Tuboscope
stockholders on January 22, 1990, as amended by the First Amendment thereto
adopted by the Tuboscope Board of Directors on September 30, 1990, as amended
by the Second Amendment thereto adopted by the Tuboscope Board of Directors and
approved by the Tuboscope stockholders on April 30, 1991, as amended by the
Third Amendment thereto adopted by the Tuboscope Board of Directors on July 30,
1991, as amended by the Fourth Amendment thereto adopted by the Tuboscope Board
of Directors on December 18, 1991 and approved by the Tuboscope stockholders on
May 12, 1992, as amended by the Fifth Amendment thereto adopted by the
Tuboscope Board of Directors on June 8, 1995 and (ii) the Stock Option Plan for
Non-Employee Directors of Tuboscope Vetco International Corporation which
covers 200,000 shares of Tuboscope Common Stock and was adopted by the
Tuboscope Board of Directors on March 30, 1992, as amended by the Tuboscope
Board of Directors on May 11, 1993 (the "Tuboscope Non-Employee Directors Stock
Option Plan").
The principal purposes of the 1996 Equity Participation Plan are to provide
incentives for officers, key employees and consultants of the Company and its
subsidiaries through granting of options, restricted stock and other awards,
thereby stimulating their personal and active interest in the Company's
development and financial success, and inducing them to remain in the Company's
employ. In addition to grants and awards made to officers, employees and
consultants, the 1996 Equity Participation Plan provides for automatic annual
grants to non-employee directors of the Company.
Under the 1996 Equity Participation Plan, not more than 1,200,000 shares of
Tuboscope Common Stock (or their equivalent in other equity securities) are
authorized for issuance upon exercise of options, stock appreciation rights
("SARs"), and other awards, or upon vesting of restricted or deferred stock
awards. Furthermore, the maximum number of shares which may be subject to
options, rights or other awards granted under the 1996 Equity Participation
Plan to any individual in any calendar year cannot exceed 100,000. As of March
15, 1996, a total of 1,464,824 shares were subject to outstanding stock options
held by approximately 37 officers and key employees under the Tuboscope Stock
Option Plan, and only 296,133 shares remained available for the grant of new
stock options or SARs under the Tuboscope Stock Option Plan. Assuming that the
Company's stockholders approve the 1996 Equity Participation Plan, no further
grants will be made under the Tuboscope Stock Option Plan. As of March 15,
1996, a total of 186,000 shares were subject to outstanding stock options held
by non-employee directors under the Tuboscope Non-Employee Directors Stock
Option Plan and no shares remained available for issuance under the Tuboscope
Non-Employee Directors Stock Option Plan. On March 15, 1996, the closing price
of a share of Tuboscope Common Stock on Nasdaq was $9 7/8.
The shares available under the 1996 Equity Participation Plan upon exercise
of stock options, SARs and other awards, and for issuance as restricted or
deferred stock, may be either previously unissued shares or treasury shares,
and may be equity securities of the Company other than Tuboscope Common Stock.
The 1996 Equity Participation Plan provides for appropriate adjustments in the
number and kind of shares subject to the 1996 Equity Participation Plan and to
outstanding grants thereunder in the event of a stock split, stock dividend or
certain other types of recapitalizations, including restructuring.
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If any portion of a stock option, SAR or other award terminates or lapses
unexercised, or is cancelled upon grant of a new option, SAR or other award
(which may be at a higher or lower exercise price than the option, SAR or other
award so cancelled), the shares which were subject to the unexercised portion
of such option, SAR or other award, will continue to be available for issuance
under the 1996 Equity Participation Plan.
The principal features of the 1996 Equity Participation Plan are summarized
below, but the summary is qualified by reference to the 1996 Equity
Participation Plan itself. Copies of the 1996 Equity Participation Plan will be
available at the Annual Meeting and can also be obtained by making written
request of the Company's Secretary.
Administration
The 1996 Equity Participation Plan is administered by the Compensation
Committee or a subcommittee of the Board (for purposes of this section, the
"Committee"), consisting of at least two members of the Tuboscope Board of
Directors, none of whom is an officer or employee of the Company. The Committee
is authorized to select from among the eligible employees and consultants the
individuals to whom options, SARs, restricted stock purchase rights and other
awards are to be granted and to determine the number of shares to be subject
thereto and the terms and conditions thereof, consistent with the 1996 Equity
Participation Plan. The Committee is also authorized to adopt, amend and
rescind rules relating to the administration of the 1996 Equity Participation
Plan.
Payment for Shares
The exercise or purchase price for all options, SARs, restricted stock and
other rights to acquire Tuboscope Common Stock, together with any applicable
tax required to be withheld, must be paid in full in cash at the time of
exercise or purchase or may, with the approval of the Committee, be paid in
whole or in part in Tuboscope Common Stock owned by the optionee (or issuable
upon exercise of the option) and having a fair market value on the date of
exercise equal to the aggregate exercise price of the shares so to be
purchased. The Committee may also provide, in the terms of an option or other
right, that the purchase price may be payable within thirty days after the date
of exercise. The Committee may also authorize other lawful consideration to be
applied to the exercise or purchase price of an award. This may also include
services rendered, or the difference between the exercise price of presently
exercisable options and the fair market value of Tuboscope Common Stock covered
by such options on the date of exercise.
Amendment and Termination
Amendments to the 1996 Equity Participation Plan to increase the number of
shares as to which options, SARs, restricted stock and other awards may be
granted (except for adjustments resulting from stock splits and the like)
require the approval of the Company's stockholders. In all other respects the
1996 Equity Participation Plan can be amended, modified, suspended or
terminated by the Committee or the Tuboscope Board of Directors, unless such
action would otherwise require stockholder approval as a matter of applicable
law, regulation or rule. Amendments of the 1996 Equity Participation Plan will
not, without the consent of the participant, affect such person's rights under
an award previously granted, unless the award itself otherwise expressly so
provides. No termination date is specified for the 1996 Equity Participation
Plan.
Eligibility
Options, SARs restricted stock and other awards under the 1996 Equity
Participation Plan may be granted to individuals who are then officers or other
employees of the Company or any of its present or future subsidiaries and who
are determined by the Committee to be key employees. Such awards also may be
granted to consultants of the Company selected by the Committee for
participation in the 1996 Equity Participation Plan. Non-employee directors of
the Company are eligible to receive automatic grants of non-qualified stock
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options under the 1996 Equity Participation Plan. More than one option, SAR,
restricted stock grant or other award may be granted to a plan participant, but
the aggregate fair market value (determined at the time of grant) of shares
with respect to which an incentive stock option is first exercisable by an
optionee (i.e. "vests") during any calendar year cannot exceed $100,000.
Awards under the 1996 Equity Participation Plan
The 1996 Equity Participation Plan provides that the Committee may grant or
issue stock options, SARs, restricted stock, deferred stock, dividend
equivalents, performance awards, stock payments and other stock related
benefits, or any combination thereof. Each grant or issuance will be set forth
in a separate agreement with the person receiving the award and will indicate
the type, terms and conditions of the award.
Nonqualified stock options ("NQSOs") will provide for the right to purchase
Tuboscope Common Stock at a specified price which may be less than fair market
value on the date of grant (but not less than par value), and usually will
become exercisable (in the discretion of the Committee) in one or more
installments after the grant date. NQSOs may be granted for any term specified
by the Committee.
Automatic Grants to Non-Employee Directors. During the term of the 1996
Equity Participation Plan, (i) a person who is a non-employee director of
Tuboscope as of the effective date of the 1996 Equity Participation Plan
automatically shall be granted an option to purchase four thousand (4,000)
shares of Tuboscope Common Stock (subject to adjustment in the event of certain
corporate changes) on the date of each annual meeting of stockholders at which
the non-employee director is reelected to the Tuboscope Board of Directors; and
(ii) a person who is initially elected or appointed to the Tuboscope Board of
Directors and is at the time of election or appointment a non-employee director
automatically shall be granted (A) an option to purchase four thousand (4,000)
shares of Tuboscope Common Stock (subject to adjustment in the event of certain
corporate changes) on the date of such initial election or appointment and (B)
an option to purchase four thousand (4,000) shares of Tuboscope Common Stock
(subject to adjustment in the event of certain corporate changes) on the date
of each annual meeting of stockholders after such initial election or
appointment at which the non-employee director is reelected to the Tuboscope
Board of Directors. Members of the Tuboscope Board of Directors who are
employees of the Company who subsequently retire from the Company and remain on
the Tuboscope Board of Directors will not receive an initial option grant
pursuant to clause (ii)(A) of the preceding sentence, but to the extent that
they are otherwise eligible, will receive, after retirement from the Company,
options as described in the clause (ii)(B) of the preceding sentence. The price
per share of the shares subject to each option granted to non-employee
directors shall equal 100% of the fair market value of a share of Tuboscope
Common Stock on the date the option was granted.
Incentive stock options ("ISOs"), if granted, will be designed to comply with
the provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value of
Tuboscope Common Stock on the grant date and a ten year restriction on their
term, but may be subsequently modified to disqualify them from treatment as an
incentive stock option. Incentive stock options may be granted only to
employees.
Restricted stock may be sold to participants at various prices (but not below
par value) and made subject to such restrictions as may be determined by the
Committee. Restricted stock, typically, may be repurchased by the Company at
the original purchase price if the conditions or restrictions are not met. In
general, restricted stock may not be sold, or otherwise transferred or
hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and
will receive dividends prior to the time when the restrictions lapse.
Deferred stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Committee. Like restricted stock,
deferred stock may not be sold, or otherwise transferred or hypothecated,
93
<PAGE>
until vesting conditions are removed or expire. Unlike restricted stock,
deferred stock will not be issued until the deferred stock award has vested,
and recipients of deferred stock generally will have no voting or dividend
rights prior to the time when vesting conditions are satisfied.
Stock appreciation rights may be granted in connection with stock options or
other awards, or separately. SARs granted by the Committee in connection with
stock options or other awards typically will provide for payments to the holder
based upon increases in the price of Tuboscope Common Stock over the exercise
price of the related option or other awards, but alternatively may be based
upon criteria such as book value. There are no restrictions specified in the
1996 Equity Participation Plan on the exercise of SARs or the amount of gain
realizable therefrom, although they can be imposed by the Committee in the SAR
agreements. The Committee may elect to pay SARs in cash or in Tuboscope Common
Stock or in a combination of cash and Tuboscope Common Stock.
Dividend equivalents may be credited to a participant in the 1996 Equity
Participation Plan. They represent the value of the dividends per share paid by
the Company, calculated with reference to the number of shares covered by the
stock options, SARs or other awards held by the participant.
Performance awards may be granted by the Committee on an individual or group
basis. Generally, these awards will be based upon specific agreements and may
be paid in cash or in Tuboscope Common Stock or in a combination of cash and
Tuboscope Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of Tuboscope Common
Stock over a predetermined period. Performance awards may also include bonuses
which may be granted by the Committee on an individual or group basis and which
may be payable in cash or in Tuboscope Common Stock or in a combination of cash
and Tuboscope Common Stock.
Stock payments may be authorized by the Committee in the form of shares of
Tuboscope Common Stock or an option or other right to purchase Tuboscope Common
Stock as part of a deferred compensation arrangement in lieu of all or any part
of compensation, including bonuses, that would otherwise be payable to a key
employee or consultant in cash.
Miscellaneous Provisions
The 1996 Equity Participation Plan specifies that the Company may make loans
to 1996 Equity Participation Plan participants to enable them to exercise
options, purchase shares or realize the benefits of other awards granted under
the 1996 Equity Participation Plan. The terms and conditions of such loans, if
any are made, are to be set by the Committee.
In consideration of the granting of a stock option, SAR, dividend equivalent,
performance award, stock payment, or right to receive restricted or deferred
stock, the employee or consultant must agree in the written agreement embodying
such award to remain in the employ of, or to continue as a consultant for, the
Company or a subsidiary of the Company for at least one year after the award is
granted (or such shorter period as may be fixed by agreement or by action of
the Committee following grant of the award).
The dates on which options or other awards under the 1996 Equity
Participation Plan first become exercisable and on which they expire will be
set forth in individual stock options or other agreements setting forth the
terms of the awards. Such agreements generally will provide that options and
other awards expire upon termination of the optionee's status as an employee,
consultant or director, although the Committee may provide that such options
continue to be exercisable following a termination without cause, or following
a change in control of the Company, or because of the grantee's retirement,
death, disability or otherwise. Similarly, restricted stock granted under the
1996 Equity Participation Plan which has not vested generally
94
<PAGE>
will be subject to repurchase by the Company in the event of the grantee's
termination of employment or consultancy, although the Committee may make
exceptions, based on the reason for termination or on other factors, in the
terms of an individual restricted stock agreement.
No option, SAR or other right to acquire Tuboscope Common Stock granted under
the 1996 Equity Participation Plan may be assigned or transferred by the
grantee, except by will or the laws of intestate succession or pursuant to a
qualified domestic relations order (as defined by the Code or Title I to the
Employee Retirement Income Security Act of 1994, as amended, or the rules
thereunder), although the shares underlying such rights may be transferred if
all applicable restrictions have lapsed. During the lifetime of the holder of
any option or right, the option or right may be exercised only by the holder.
The Company requires participants to discharge withholding tax obligations in
connection with the exercise of any option or other right granted under the
1996 Equity Participation Plan, or the lapse of restrictions on restricted
stock, as a condition to the issuance or delivery of stock or payment of other
compensation pursuant thereto. Shares held by or to be issued to a participant
may also be used to discharge tax withholding obligations related to exercise
of options or receipt of other awards, subject to the discretion of the
Committee to disapprove such use. In addition, the Committee may grant to
employees a cash bonus in the amount of any tax related to awards.
FEDERAL INCOME TAX CONSEQUENCES
The tax consequences of the 1996 Equity Participation Plan under current
federal law are summarized in the following discussion which deals with the
general tax principles applicable to the 1996 Equity Participation Plan, and is
intended for general information only. In addition, the tax consequences
described below are subject to the limitation of the 1993 Omnibus Budget
Reconciliation Act ("OBRA"), as discussed in further detail below. Alternative
minimum tax and state and local income taxes are not discussed, and may vary
depending on individual circumstances and from locality to locality.
Nonqualified Stock Options. For United States income tax purposes, the
recipient of NQSOs granted under the 1996 Equity Participation Plan will not
have taxable income upon the grant of the option, nor will the Company then be
entitled to any deduction. Generally, upon exercise of NQSOs the optionee will
realize ordinary income, and the Company will be entitled to a deduction, in an
amount equal to the difference between the option exercise price and the fair
market value of the stock at the date of exercise. An optionee's basis for the
stock for purposes of determining his gain or loss on his subsequent
disposition of the shares generally will be the fair market value of the stock
on the date of exercise of the NQSO.
Incentive Stock Options. There is no taxable income to an employee when an
ISO is granted to him or when that option is exercised; however, the amount by
which the fair market value of the shares at the time of exercise exceeds the
option price will be an "item of tax preference" for the optionee. Gain
realized by an optionee upon sale of stock issued on exercise of an ISO is
taxable at capital gains rates, and no tax deduction is available to the
Company, unless the optionee disposes of the shares within two years after the
date of grant of the option or within one year of the date the shares were
transferred to the optionee. In such event the difference between the option
exercise price and the fair market value of the shares on the date of the
option's exercise will be taxed at ordinary income rates, and the Company will
be entitled to a deduction to the extent the employee must recognize ordinary
income. An ISO exercised more than three months after an optionee's retirement
from employment, other than by reason of death or disability, will be taxed as
an NQSO, with the optionee deemed to have received income upon such exercise
taxable at ordinary income rates. The Company will be entitled to a tax
deduction equal to the ordinary income, if any, realized by the optionee.
Stock Appreciation Rights. No taxable income is realized upon the receipt of
an SAR, but upon exercise of the SAR the fair market value of the shares (or
cash in lieu of shares) received must be treated as compensation taxable as
ordinary income to the recipient in the year of such exercise. The Company will
be entitled to a deduction for compensation paid in the same amount which the
recipient realized as ordinary income.
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<PAGE>
Restricted Stock and Deferred Stock. An employee to whom restricted or
deferred stock is issued will not have taxable income upon issuance and the
Company will not then be entitled to a deduction, unless in the case of
restricted stock an election is made under Section 83(b) of the Code. However,
when restrictions on shares of restricted stock lapse, such that the shares are
no longer subject to repurchase by the Company, the employee will realize
ordinary income and the Company will be entitled to a deduction in an amount
equal to the fair market value of the shares at the date such restrictions
lapse, less the purchase price therefor. Similarly, when deferred stock vests
and is issued to the employee, the employee will realize ordinary income and
the Company will be entitled to a deduction in an amount equal to the fair
market value of the shares at the date of issuance. If an election is made
under Section 83(b) with respect to restricted stock, the employee will realize
ordinary income at the date of issuance equal to the difference between the
fair market value of the shares at that date less the purchase price therefor
and the Company will be entitled to a deduction in the same amount. The Code
does not permit a Section 83(b) election to be made with respect to deferred
stock.
Dividend Equivalents. A recipient of a dividend equivalent award will not
realize taxable income at the time of grant, and the Company will not be
entitled to a deduction at that time. When a dividend equivalent is paid, the
participant will recognize ordinary income, and the Company will be entitled to
a corresponding deduction.
Performance Awards. A participant who has been granted a performance award
will not realize taxable income at the time of grant, and the Company will not
be entitled to a deduction at that time. When an award is paid, whether in cash
or Tuboscope Common Stock, the participant will have ordinary income, and the
Company will be entitled to a corresponding deduction.
Stock Payments. A participant who receives a stock payment in lieu of a cash
payment that would otherwise have been made will be taxed as if the cash
payment has been received, and the Company will have a deduction in the same
amount.
Deferred Compensation. Participants who defer compensation generally will
recognize no income, gain or loss for federal income tax purposes when NQSOs
are granted in lieu of amounts otherwise payable, and the Company will not be
entitled to a deduction at that time. When and to the extent options are
exercised, the ordinary rules regarding nonqualified stock options outlined
above will apply.
Effect of 1993 Omnibus Budget Reconciliation Act on the 1996 Equity
Participation Plan. Under OBRA, which became law in August 1993, income tax
deductions of publicly-traded companies may be limited to the extent total
compensation (including base salary, annual bonus, stock option exercises and
non-qualified benefits paid in 1996 and thereafter) for certain executive
officers exceeds $1 million (less the amount of any "excess parachute payments"
as defined in Section 280G of the Code) in any one year. However, under OBRA,
the deduction limit does not apply to certain "performance-based" compensation
established by an independent compensation committee which is adequately
disclosed to, and approved by, stockholders. In particular, stock options and
SARs will satisfy the performance-based exception if the awards are made by a
qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any particular employee within a specified period and
the compensation is based solely on an increase in the stock price after the
grant date (i.e. the option exercise price is equal to or greater than the fair
market value of the stock subject to the award on the grant date).
It is the Company's policy generally to design the Company's compensation
programs to conform with the OBRA legislation and related regulations so that
total compensation paid to any employee will not exceed $1 million in any one
year, except for compensation payments in excess of $1 million which qualify as
"performance-based." Accordingly, the Tuboscope Board of Directors is asking
stockholders to approve the 1996 Equity Participation Plan in compliance with
OBRA requirements. The Company intends to comply with other requirements of the
performance-based compensation exclusion under OBRA, including option pricing
requirements and requirements governing the administration of the 1996 Equity
Participation Plan, so that, upon stockholder approval of the 1996 Equity
Participation Plan, the deductibility of compensation paid to top executives
thereunder is not expected to be disallowed.
96
<PAGE>
REASONS FOR ADOPTION OF THE 1996 EQUITY PARTICIPATION PLAN
The Tuboscope Stock Option Plan currently provides that 1,799,000 shares of
Tuboscope Common Stock are authorized for issuance. As of March 15, 1996,
approximately 296,133 shares remained available for future awards under the
Tuboscope Stock Option Plan. Also on that date, options covering approximately
1,463,986 shares were outstanding under the Tuboscope Stock Option Plan, of
which approximately 797,984 were exercisable. The Tuboscope Non-Employee
Directors Stock Option Plan currently provides that 200,000 shares of Tuboscope
Common Stock are authorized for issuance. As of March 15, 1996 no shares
remained available for future awards under the Tuboscope Non-Employee Directors
Stock Option Plan. Also on that date, options covering approximately 186,000
shares were outstanding under the Tuboscope Non-Employee Directors Stock Option
Plan, of which approximately 120,000 were exercisable. The Tuboscope Board of
Directors has determined that it is advisable to continue to provide stock-
based incentive compensation to the Company's key employees and consultants,
thereby continuing to align the interests of such employees and consultants
with those of the stockholders, and that awards under the 1996 Equity
Participation Plan are an effective means of providing such compensation. In
addition, the Tuboscope Board of Directors has determined that it is advisable
to provide automatic grants of stock options to non-employee directors of the
Company. Therefore, the Tuboscope Board of Directors recommends that the 1996
Equity Participation Plan be adopted, and that 1,200,000 shares of Tuboscope
Common Stock be reserved for issuance on exercise of options and other awards
thereunder. Assuming that the Company's stockholders approve the 1996 Equity
Participation Plan, no further grants will be made under the Tuboscope Stock
Option Plan or the Tuboscope Non-Employee Directors Stock Option Plan. The
Company currently has no plans or proposals to grant any benefits to officers
or directors of the Company under the 1996 Equity Participation Plan other than
the automatic grant of stock options to each of the non-employee directors of
Tuboscope on the date of their election (or re-election) to the Tuboscope Board
of Directors as provided in the 1996 Equity Participation Plan.
Grants of awards under the 1996 Equity Participation Plan are intended to
satisfy the conditions of Rule 16b-3 of the Exchange Act and thereby be
generally exempt from the short term profit provisions of Section 16(b) of the
Exchange Act. Tuboscope's compliance with the conditions of Rule 16b-3 allows
Tuboscope to provide Section 16(b)-exempt awards to its officers and directors,
permitting Tuboscope to attract highly qualified officers and directors by
offering competitive executive compensation packages.
REQUIRED VOTE FOR APPROVAL AND RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative vote of a majority of the shares present or represented and
entitled to vote at the Annual Meeting is required to approve the 1996 Equity
Participation Plan. Your Board of Directors recommends a vote FOR approval of
the 1996 Equity Participation Plan.
LEGAL MATTERS
The legality of the shares of Tuboscope Common Stock to be issued in
connection with the Merger will be passed upon for Tuboscope by Latham &
Watkins, Costa Mesa, California, and certain legal matters, including certain
United States federal income tax matters, will be passed upon by Baker & Botts,
L.L.P., Houston, Texas, special counsel to Tuboscope. Vinson & Elkins L.L.P.,
Houston, Texas, is acting as counsel for Drexel in connection with certain
legal matters, including certain United States federal income tax matters,
relating to the Merger and the transactions contemplated thereby.
97
<PAGE>
EXPERTS
The consolidated financial statements of Tuboscope appearing in Tuboscope's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
The consolidated financial statements of Drexel as of March 31, 1994 and
1995, and each of the years in the three year period ended March 31, 1995, have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the March
31, 1994 consolidated financial statements of Drexel refers to a change in
accounting for income taxes to comply with SFAS No. 109.
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
All proposals of stockholders intended to be presented at Tuboscope's 1997
Annual Meeting of Stockholders must be directed to the attention of the
Secretary of the Company, at the address of the Company set forth on the first
page of this Proxy Statement/Prospectus, by December 25, 1996 if they are to be
considered for possible inclusion in the Proxy Statement/Prospectus and form of
proxy used in connection with such meeting.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus the Board of Directors
knows of no other matters which may be presented for consideration at the
Annual Meeting. However, if any other matter is presented properly for
consideration and action at the Annual Meeting, or any adjournment or
postponement thereof, it is intended that the proxies will be voted with
respect thereto in accordance with the best judgment and in the discretion of
the proxy holders.
98
<PAGE>
D.O.S. LTD
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors Report................................................ F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-8
Notes to Unaudited Consolidated Financial Statements....................... F-15
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
D.O.S. Ltd.:
We have audited the accompanying consolidated balance sheets of D.O.S. Ltd.,
a Bermuda Corporation, and subsidiaries as of March 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of D.O.S. Ltd.
and subsidiaries as of March 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 1(g) and 7 to the consolidated financial statements,
the Company changed its method of accounting for income taxes as of April 1,
1993 to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
KMPG Peat Marwick LLP
Fort Worth, Texas
June 16, 1995
F-2
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
---------------- DECEMBER 31,
ASSETS 1994 1995 1995
------ ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 2,784 $ 2,039 $ 2,063
Accounts receivable, net of allowance for
doubtful accounts of $1,229, $1,276 and
$1,544, respectively (note 2)................. 13,124 17,310 31,598
Inventories, net (note 3)...................... 16,062 13,483 23,903
Prepaid expenses............................... 761 680 867
Restricted deposits............................ 772 137 208
Deferred income taxes (note 7)................. -- 1,357 1,357
------- ------- --------
Total current assets......................... 33,503 35,006 59,996
Property, plant and equipment, net of accumulated
depreciation (note 4)........................... 12,461 12,350 26,383
Long-term restricted deposits.................... -- 316 --
Other assets, net................................ 568 512 1,363
Deferred income taxes (note 7)................... -- 722 1,083
Goodwill......................................... -- -- 19,663
------- ------- --------
Total assets................................. $46,532 $48,906 $108,488
======= ======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Bank overdraft................................. $ 326 $ 211 $ 848
Note payable (note 2).......................... 1,252 453 690
Current portion of long term debt (note 2)..... 491 744 4,372
Current portion of capital lease obligations... 271 72 19
Accounts payable............................... 9,990 6,650 15,649
Accrued liabilities............................ 3,313 4,077 8,244
Deferred revenue............................... 657 101 1,353
------- ------- --------
Total current liabilities.................... 16,300 12,308 31,175
Long-term debt, less current portion (note 2).... 774 818 30,760
Capital lease obligations, less current portion.. 187 -- --
Deferred income tax.............................. -- -- 700
------- ------- --------
Total liabilities............................ 17,261 13,126 62,635
------- ------- --------
Stockholders' equity:
Common stock, $.10 par value, 40,000,000 shares
authorized; 31,849,253, 32,134,036 and
35,972,240 shares, issued and outstanding at
March 31, 1994 and 1995 and December 31, 1995,
respectively (note 10)........................ 3,185 3,213 3,597
Additional paid in capital..................... 26,626 26,898 32,619
Cumulative translation adjustment.............. 185 551 386
Retained earnings (deficit).................... (725) 5,118 9,251
------- ------- --------
Total stockholders' equity................... 29,271 35,780 45,853
Commitments and contingencies (notes 6, 9 and
10).............................................
------- ------- --------
Total liabilities and stockholders' equity... $46,532 $48,906 $108,488
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31,
------------------------- ----------------
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales........................... $61,585 $60,879 $71,432 $52,385 $58,037
Rental and service.............. 4,755 6,455 8,435 6,493 9,554
Other........................... 71 36 306 235 66
------- ------- ------- ------- -------
Total Revenue................. 66,411 67,370 80,173 59,113 67,657
------- ------- ------- ------- -------
Cost of Sales:
Product cost.................... 45,256 48,156 54,512 40,367 41,589
Rental and service.............. 3,594 5,143 5,220 3,893 5,954
Engineering, research and
development.................... 3,383 3,969 3,807 2,794 2,821
------- ------- ------- ------- -------
Total cost of sales........... 52,233 57,268 63,539 47,054 50,364
------- ------- ------- ------- -------
Gross margin.................. 14,178 10,102 16,634 12,059 17,293
Operating expenses:
Selling......................... 4,618 6,303 6,580 5,130 4,709
Administrative.................. 7,857 6,912 5,364 4,134 6,012
------- ------- ------- ------- -------
Total operating expenses...... 12,475 13,215 11,944 9,264 10,721
------- ------- ------- ------- -------
Operating profit (loss)....... 1,703 (3,113) 4,690 2,795 6,572
Other income and (expenses):
Loss on joint venture (note 12). (1,287) -- -- -- --
Interest expense, net........... (432) (234) (230) (174) (435)
Goodwill write-off (note 5)..... -- (1,956) -- -- --
Other income (expense), net..... 44 188 (143) (61) 202
------- ------- ------- ------- -------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle.......... 28 (5,115) 4,317 2,560 6,339
Income tax benefit (expense) (note
7)............................... (53) (246) 1,526 (895) (2,206)
------- ------- ------- ------- -------
Income (loss) before cumulative
effect of change in accounting
principle........................ (25) (5,361) 5,843 1,665 4,133
Cumulative effect at April 1, 1993
of change in accounting for
income taxes (note 7)............ -- 397 -- -- --
------- ------- ------- ------- -------
Net income (loss)............. $ (25) $(4,964) $ 5,843 $ 1,665 $ 4,133
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE RETAINED TOTAL
COMMON PAID IN TRANSLATION EARNINGS STOCKHOLDERS'
STOCK CAPITAL ADJUSTMENT (DEFICIT) EQUITY
------ ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances at March 31,
1992................... $1,000 $ 8,183 $447 $4,264 $13,894
Issuance of common
stock.................. 2,139 17,861 -- -- 20,000
Capital contribution.... -- 105 -- -- 105
Cumulative translation
adjustment............. -- -- (231) -- (231)
Net loss................ -- -- -- (25) (25)
------ ------- ---- ------ -------
Balances at March 31,
1993................... 3,139 26,149 216 4,239 33,743
Issuance of common
stock.................. 46 477 -- -- 523
Cumulative translation
adjustment............. -- -- (31) -- (31)
Net loss................ -- -- -- (4,964) (4,964)
------ ------- ---- ------ -------
Balances at March 31,
1994................... 3,185 26,626 185 (725) 29,271
Issuance of common
stock.................. 28 272 -- -- 300
Cumulative translation
adjustment............. -- -- 366 -- 366
Net income.............. -- -- -- 5,843 5,843
------ ------- ---- ------ -------
Balances at March 31,
1995................... 3,213 26,898 551 5,118 35,780
Issuance of common stock
(unaudited)............ 426 6,579 -- -- 7,005
Purchase of common stock
(unaudited)............ (42) (858) -- -- (900)
Cumulative translation
adjustment (unaudited). -- -- (165) -- (165)
Net income (unaudited).. -- -- -- 4,133 4,133
------ ------- ---- ------ -------
Balances at December 31,
1995 (unaudited)....... $3,597 $32,619 $386 $9,251 $45,853
====== ======= ==== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------------- ----------------
1993 1994 1995 1994 1995
-------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $ (25) $(4,964) $ 5,843 $ 1,665 $ 4,133
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Provision for bad debts...... 739 888 289 259 268
Depreciation and
amortization................ 3,011 2,603 3,014 2,213 2,580
Write-off of goodwill........ -- 1,956 -- -- --
Loss (gain) on sale of
assets...................... (40) (236) 27 25 2
Deferred income taxes........ (75) (397) (2,079) (39) --
Changes in assets and
liabilities, net of
acquisition:
Accounts receivable........ (4,799) 1,520 (4,475) (2,946) (4,565)
Inventories................ 1,982 (2,379) 2,579 3,400 (5,946)
Prepaid expenses........... 335 (176) 81 406 345
Restricted deposits........ (523) (165) 319 239 245
Accounts payable........... (178) 2,289 (3,340) (4,072) 4,422
Accrued liabilities........ (547) 712 764 (143) 17
Reserve for loss on joint
venture................... 509 (509) -- -- --
Deferred revenue........... (797) (793) (556) (346) 1,252
-------- ------- ------- ------- -------
Net cash provided by
(used in) operating
activities.............. (408) 349 2,466 661 2,753
-------- ------- ------- ------- -------
Cash flows provided by (used in)
investing activities:
Additions to property, plant
and equipment................. (2,323) (3,923) (2,995) (1,940) (4,576)
Proceeds from sale of assets... 115 798 121 30 10
Additions to other assets...... (120) (2) -- (3) (624)
Purchase of SOFS, net of cash
acquired...................... -- -- -- -- (24,827)
-------- ------- ------- ------- -------
Net cash used in
investing activities.... (2,328) (3,127) (2,874) (1,914) (30,017)
-------- ------- ------- ------- -------
Cash flows provided by (used in)
financing activities:
Bank overdraft................. (271) (613) (115) (284) 637
Proceeds from long-term debt
and note payable.............. 91 1,253 1,062 152 30,240
Repayments of long-term debt,
capital lease obligations and
notes payable................. (13,007) (527) (1,650) (332) (7,523)
Proceeds from issuance of
common stock and capital
contributions................. 20,105 223 -- -- 4,999
Repurchase of common stock..... -- -- -- -- (900)
-------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities.............. 6,918 336 (703) (464) 27,453
-------- ------- ------- ------- -------
Effect of exchange rate changes.. (231) (327) 366 416 (165)
-------- ------- ------- ------- -------
Net increase (decrease) in cash.. 3,951 (2,769) (745) (1,301) 24
Cash at beginning of year........ 1,602 5,553 2,784 2,784 2,039
-------- ------- ------- ------- -------
Cash at end of year.............. $ 5,553 $ 2,784 $ 2,039 $ 1,463 $ 2,063
======== ======= ======= ======= =======
</TABLE>
F-6
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
The Company issued $300,000 worth of common stock in 1994 and 1995 to a
related party in settlement of an outstanding note payable balance.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was approximately $563,000, $258,000 and $285,000 and
for the years ended March 31, 1993, 1994 and 1995, respectively.
Cash paid for income taxes was approximately $454,000, $199,000 and $81,000
for the years ended March 31, 1993, 1994 and 1995, respectively.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1993, 1994 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Operations
D.O.S. Ltd., a Bermuda Corporation ("the Company") is incorporated under the
laws of Bermuda and carries on business as a supplier of equipment and services
for the oil and gas industry. The Company is engaged in the manufacture and
sale of pressure control equipment (under the trade name of Texas Oil Tools),
the manufacture, sale and leasing of solids control equipment (under the trade
name The Brandt Company) and the manufacture and sale of coiled tubing units
(under the trade name Hydra-Rig). The Company also serves as a sales agent for
a company involved in desalination plants for freshwater production.
(b) Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries and are prepared in accordance with generally
accepted accounting principles. All significant intercompany balances and
transactions have been eliminated.
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with initial maturities of 90 days or less from the
date of purchase to be cash equivalents.
(d) Restricted Deposits
Restricted deposits are pledged for security of performance under certain
contracts. Additional deposits are restricted for use by the Company's third-
party health care administrator to meet various employee medical costs as they
are submitted and approved.
(e) Revenue Recognition
The Company recognizes revenue from product sales as they are shipped. Rental
revenues are recognized on a daily basis according to the agreement with the
customer. The Company occasionally receives advance payments from its customers
prior to the time that the product is shipped. These amounts are reflected as
deferred revenue in the accompanying consolidated financial statements.
(f) Translation of Foreign Currencies
The Company maintains its books and records in United States dollars. Assets
and liabilities of the Company's foreign subsidiaries are translated to United
States dollars at exchange rates in effect at the balance sheet date and income
and expenses are translated at an average rate of exchange for the year.
Exchange differences arising on translation are taken directly to cumulative
translation adjustment in stockholder's equity in the accompanying consolidated
balance sheets.
F-8
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1993, 1994 AND 1995
(g) Income Taxes
The Company's U.S. subsidiaries file a consolidated U.S. Federal income tax
return under the consolidation provisions of the Internal Revenue Code.
Effective April 1, 1993, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (Statement 109), on a prospective basis. Statement
109 requires accounting for income taxes on the asset and liability method
under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to existing differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, a valuation allowance is established to reduce any
deferred tax asset in which it is determined that it is more likely than not
that some portion of the deferred tax asset will not be realized (see note 7).
Prior to April 1, 1993, the Company provided for income taxes based upon APB
Opinion 11.
(h) Prior-Year Reclassifications
Certain 1993 and 1994 amounts have been reclassified to conform with the 1995
basis of presentation.
(2) LONG-TERM DEBT AND NOTES PAYABLE
Long-term obligations as of March 31, 1994 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1994 1995
------ -----
(IN
THOUSANDS)
<S> <C> <C>
Unsecured obligations to prior owner of Hydra-Rig, Inc.
Total future payment as of March 31, 1995 is $550,000,
which is recorded at its present value, discounted at 10%,
and is payable on May 24, 1995............................. $ 909 $ 500
Various installment notes payable secured by assets of U.K.
and U.S. subsidiaries, interest at varying rates, monthly
installments over periods ranging from one year to nine
years...................................................... 356 1,062
------ -----
1,265 1,562
Less--current portion....................................... 491 744
------ -----
$ 774 $ 818
====== =====
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, (IN THOUSANDS)
--------------------- --------------
<S> <C>
1996...................................................... $ 744
1997...................................................... 496
1998...................................................... 214
1999...................................................... 108
------
$1,562
======
</TABLE>
F-9
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1993, 1994 AND 1995
Notes payable as of March 31, 1994 and 1995, consist of the following:
<TABLE>
<CAPTION>
1994 1995
------ ----
(IN
THOUSANDS)
<S> <C> <C>
Line of credit with a bank (Maximum limit of $700,000),
secured by certain accounts receivable of the Company, with
interest at the bank's prime rate plus 1.5%, matured in
September 1994............................................. $ 700 $ --
The remaining note payable consists of a note for the
purchase of insurance, at an interest rate of 7.43%, due on
March 17, 1996............................................. 552 453
------ ----
$1,252 $453
====== ====
</TABLE>
On September 28, 1994, the Company obtained a $6,000,000 line of credit from
a bank. The line of credit bears interest, at the Company's option, either at
varying rates based on the prime rate or the LIBOR rate. The agreement also
contains certain restrictive debt covenants, and is secured by the inventory
and accounts receivable of the Company's U.S. subsidiaries. A portion of these
borrowings were used to pay the Company's existing line of credit at
origination. There was no outstanding balance on this line of credit at March
31, 1995.
(3) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market (net realizable value). Such costs include raw materials, direct labor
and production overhead. Inventories at March 31, 1994 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Component parts and raw materials....................... $ 6,617 $ 7,587
Work in process......................................... 7,147 2,900
Finished goods.......................................... 2,882 3,541
------- -------
16,646 14,028
Less: provision for obsolescence........................ (584) (545)
------- -------
$16,062 $13,483
======= =======
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets.
Repairs and maintenance are expended as incurred. The major classes of
property, plant and equipment at March 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................. $ 1,478 $ 1,490
Buildings............................................. 5,343 5,471
Machinery and equipment............................... 13,649 15,606
Furniture and fixtures................................ 2,350 2,838
Vehicles.............................................. 1,001 1,280
Leasehold improvements................................ 194 198
-------- --------
24,015 26,883
Less--accumulated depreciation........................ (11,554) (14,533)
-------- --------
$ 12,461 $ 12,350
======== ========
</TABLE>
F-10
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1993, 1994 AND 1995
(5) OTHER ASSETS
Other assets are amortized utilizing the straight-line method and consist of:
<TABLE>
<CAPTION>
1994 1995
------ -----
(IN
THOUSANDS)
<S> <C> <C>
Agreement not to compete................................... $ 300 $ --
Patents.................................................... 408 217
Organizational costs....................................... 258 171
Investment in joint venture................................ 373 264
Other...................................................... -- 8
------ -----
1,339 660
Accumulated amortization................................... (771) (148)
------ -----
$ 568 $ 512
====== =====
</TABLE>
Based upon management's ongoing evaluation of the recoverability of goodwill,
all goodwill was written off as of March 31, 1994. This led to a charge of
$1,956,000 which is included in other expenses on the accompanying consolidated
statement of operations.
(6) OPERATING LEASE OBLIGATIONS
The Company leases office facilities, office equipment and vehicles under
noncancelable operating leases expiring at various times through December 1998.
Rent and lease expense for the fiscal years ended March 31, 1993, 1994 and
1995, were $364,000, $312,000 and $164,000, respectively. The following is a
schedule of future minimum lease payments for operating leases with initial or
remaining terms in excess of one year as of March 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, (IN THOUSANDS)
-------------------- --------------
<S> <C>
1996....................................................... $l27
1997....................................................... 10
1998....................................................... 2
1999....................................................... --
2000....................................................... --
----
$139
====
</TABLE>
(7) INCOME TAXES
As discussed in note 1, the Company adopted Statement 109 as of April 1,
1993. The cumulative effect of this change in accounting for income tax
benefits of $397,000 is determined as of April 1, 1993 and is reported
separately in the consolidated statement of earnings for the year ended March
31, 1994.
F-11
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1993, 1994 AND 1995
Income tax expense (benefit) attributable to income from continuing operation
consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended March 31, 1993:
U.S. Federal............................... $ (3) $ (75) $ (78)
Foreign.................................... 131 -- 131
State and local............................ -- -- --
----- ------- -------
$ 128 $ (75) $ 53
===== ======= =======
Year ended March 31, 1994:
U.S. Federal............................... $(114) -- $ (114)
Foreign.................................... 360 -- 360
State and local............................ -- -- --
----- ------- -------
$ 246 -- $ 246
===== ======= =======
Year ended March 31, 1995:
U.S. Federal............................... $ 128 $(1,832) $(1,704)
Foreign.................................... 417 -- 417
State and local............................ 8 (247) (239)
----- ------- -------
$ 553 $(2,079) $(1,526)
===== ======= =======
</TABLE>
The domestic and foreign components of income (loss) before income taxes and
cumulative effect of change in accounting principle are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
--------------------
1993 1994 1995
----- ------ -----
<S> <C> <C> <C>
Domestic............................................. $(532) (5,764) 3,670
Foreign.............................................. 560 649 647
----- ------ -----
$ 28 (5,115) 4,317
===== ====== =====
</TABLE>
Income tax expense (benefit) attributable to income from continuing
operations was $53, $246 and $(1,526) for the years ended March 31, 1993, 1994
and 1995, respectively, and differed from the amount computed by applying the
U.S. federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)...... $(10) $(1,739) $ 1,468
Increase (reduction) in income taxes resulting
from:
Nondeductible travel and entertainment
expenses.................................... -- 28 43
Increase (decrease) in the beginning-of-the-
year balance of the valuation allowance for
deferred tax assets......................... -- 1,057 (3,035)
Other, net................................... 63 232 (2)
Write-off of Goodwill........................ -- 668 --
---- ------- -------
$ 53 $ 246 $(1,526)
==== ======= =======
</TABLE>
F-12
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1993, 1994 AND 1995
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at March 31, 1994 and 1995, are presented
below:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for
doubtful accounts............................................ $ 192 $ 389
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986 and
obsolescence reserves........................................ 325 274
Property, plant and equipment, principally due to differences
in depreciation.............................................. -- 277
Long-term debt, principally due to a non-compete note payable
that has no basis for tax purposes........................... 336 185
Accrued expenses.............................................. 396 410
Deferred revenue.............................................. 243 37
Net operating loss carryforwards.............................. 1,438 458
Other......................................................... 105 49
------ ------
Gross deferred tax assets..................................... 3,035 2,079
Less valuation allowance...................................... (3,035) --
------ ------
Net deferred tax assets....................................... $ -- $2,079
====== ======
</TABLE>
Based on the Company's projected future ability to generate taxable income,
management of the Company believes it is more likely than not that all deferred
tax assets will be realized or settled, and accordingly, no valuation allowance
has been recorded as of March 31, 1995.
During 1993 deferred income taxes arose from differences in the timing of
deductions for financial reporting and income tax purposes, primarily relating
to depreciation methods and the accrual for losses of a discontinued joint
venture at March 31, 1993.
In addition, the Company has net operating loss (NOL) carryforwards arising
from its U.S. operations of approximately $1,238,000 for federal income tax
purposes. These NOL's expire from fiscal year 2000 to 2003 and a portion is
restricted due to limitations imposed by U.S. federal income tax regulations.
In addition, the Company has alternative minimum tax credit carryforwards of
approximately $49,000 which are available to reduce future federal regular
income taxes, if any, over an indefinite period.
(8) SUBSIDIARIES
The details of the wholly-owned subsidiaries are as follows:
<TABLE>
<CAPTION>
SUBSIDIARY LOCATION
---------- --------------
<S> <C>
Drexel Oilfield Services (s) Pte. Ltd...................... Singapore
Drexel Oilfield Services, Inc.............................. U.S.A.
Drexel Equipment (U.K.) Ltd................................ United Kingdom
Drexel Holdings, Inc....................................... U.S.A.
The Brandt Company (U.K.) Ltd.............................. United Kingdom
Drexel Equipment A/S....................................... Norway
Hydra-Rig, Inc............................................. U.S.A.
Hydra-Rig Tools............................................ U.S.A.
M/S. Drexel Oilfield Services (Middle East) W.L.L.......... Dubai
Drexel Oilfield Services Ltd............................... Bermuda
</TABLE>
F-13
<PAGE>
D.O.S. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1993, 1994 AND 1995
(9) EMPLOYEE BENEFITS
(a) Incentive Plans--U.S. Subsidiaries
The U.S. subsidiaries have defined contribution plans for all employees who
have completed specified periods of service up to one year. Contributions to
the plans are limited to 20 percent of the first 5 percent contributed by the
participant. Additional contribution levels are determined by the Board of
Directors. Employee contributions to the plans are permitted, but not required.
Company contributions to the plans in the amounts of approximately $63,000,
$92,000 and $86,000 were expensed for fiscal year 1993, 1994 and 1995,
respectively. In addition, Hydra-Rig, Inc. has incentive plans with certain
officers. Expenses incurred under these profit-sharing arrangements were
approximately $91,000 and $88,000 for the years ended March 31, 1993 and 1995.
No incentives were paid for the year ended March 31, 1994. These expenses are
included in general and administrative expense.
(b) Pension Plan--U.K. Subsidiaries
Pension coverage for employees of the Company's U.K. subsidiaries is provided
through a separate defined benefit plan. Obligations under such plan is
systematically provided for by depositing funds with a trustee. The 1993, 1994,
and 1995 pension cost for these plans was approximately $105,000, $132,000 and
$127,000, respectively. The actuarial present value of accumulated benefits at
March 31, 1995 and 1994 was approximately $3,000,000 and $2,350,000,
respectively, substantially all of which was vested, compared with net assets
available for benefits of approximately $3,375,000 and $2,825,000,
respectively.
(10) INCENTIVE STOCK OPTION PLAN
The Company has an Employee Incentive Stock Option Plan which permits the
Board of Directors to grant stock options to key management personnel up to an
aggregate of 2,000,000 shares of common stock subject to certain restrictions.
The Board of Directors granted stock options in 1993 as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
YEAR OF GRANT SHARES PRICE
------------- --------- --------
<S> <C> <C>
1993 98,918 $.667
1993 85,000 .75
1993 1,240,000 1.65
--------- ----
1,423,918
=========
</TABLE>
Options granted are exercisable annually beginning three years after the date
of grant with 33% exercisable beginning in year 4, an additional 33% beginning
in year 5 with the balance in the beginning of year 6. The options expire 7
years from the date of grant.
(11) SUBSEQUENT EVENT
On May 24, 1995 the Company purchased 759,259 shares of common stock of a
related party for $1,200,000 which approximated market value.
(12) LOSS ON JOINT VENTURE
In 1991, the Company entered into a joint venture agreement to utilize a
third party's enzyme technology to remediate contaminated soils. As of October
1993, the Company determined the joint venture was not commercially viable and
all operations of the joint venture were ceased. Accordingly, the Company wrote
off $762,000 in the investment as of March 31, 1993 and provided an additional
reserve of $509,000 for costs to be incurred during 1994. No additional
expenses exceeding the provided accrual were incurred subsequent to March 31,
1996.
F-14
<PAGE>
D.O.S. LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
and its wholly-owned subsidiaries have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information in
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to these rules and regulations. The unaudited consolidated
financial statements included in this report reflect all the adjustments which
the Company considers necessary for a fair presentation of the results of
operations of the interim periods covered and for the financial condition of
the Company at the date of the interim balance sheet. Results for the interim
periods are not necessary indicative of results of the year.
The financial statements included in this report should be read in
conjunction with the audited financial statements and accompanying notes
included in the Company's 1995 audited consolidated financial statements. The
preparation of the consolidated financial statements and related notes, which
have been prepared in conformity with generally accepted accounting principles,
requires the use of management estimates.
2. INVENTORY
At December 31, 1995 inventories consist of the following (in thousands):
<TABLE>
<S> <C>
Component parts and raw materials............................... $13,033
Work in process/finished goods.................................. 12,107
Less: provision for obsolesence................................. (1,237)
-------
$23,903
=======
</TABLE>
F-15
<PAGE>
D.O.S. LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
3. SIGNIFICANT EVENTS
On November 16, 1995 the Company acquired all of the outstanding shares of
Environmental Procedures, Incorporated including its division SWECO(R) Oilfield
Services, Venezuela Well Analysis, Venwell International Inc. ONEA Corporation
and Screen Manufacturing Ltd. (collectively referred to as "SOFS") for a total
consideration of $38,000,000. SOFS is a leading provider of solids control
sales and services for the oilfield with operations in Latin America and the
United States. Revenues for the twelve months ended May 31, 1995 were
approximately $37,000,000. The transaction will be accounted for under the
purchase method of accounting. In connection with this transaction certain
significant shareholders of the Company subscribed for an additional $5,000,000
(3,030,303 shares) in equity and the Company amended its bank facility by
entering into a new $37,000,000 credit agreement. The new credit agreement
provides for a $15,000,000 five year term loan, a $20,000,000 three year term
revolver and a $2,000,00 letter of credit facility. Substantially all of the
Company's United States assets are pledged to secure this indebtedness. The
table below summarizes the transaction:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
----------
<S> <C>
Consideration Paid to Seller
Issuance of Company Stock (1,146,469 shares)....................... $ 2,006
Issuance of Promissory Notes....................................... 4,000
Assumption of Bank Debt
Refinanced....................................................... 6,500
Assumed.......................................................... 200
Cash............................................................... 25,294
-------
Total.......................................................... $38,000
=======
Funding of Consideration
Issuance of Company Stock.......................................... $ 2,006
Issuance of Promissory Notes....................................... 4,000
New Equity......................................................... 5,000
Debt Assumption.................................................... 200
Bank Borrowing..................................................... 26,794
-------
Total.......................................................... $38,000
=======
</TABLE>
Among other things, the purchase agreement provides for certain Seller
indemnification. The Promissory Notes issued to the Sellers provide, under
certain circumstances, for the recovery from the Sellers of amounts claimed
under the indemnification.
F-16
<PAGE>
D.O.S. LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
The following table presents unaudited pro forma results of operations as if
the acquisition had occurred at the beginning of each period presented. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made at the beginning of each year presented or of results which may occur in
the future. Furthermore, no effect has been given in the pro forma information
for operating and synergistic benefits that are expected to be realized through
the combination of the entities because precise estimates of such benefits
cannot be quantified.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER
31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenue......................................................... $87,677 $94,714
Operating Profit................................................ 4,784 10,979
Income before income taxes...................................... 2,964 8,729
Net Income...................................................... 1,587 4,990
</TABLE>
4. SUBSEQUENT EVENT
On January 3, 1996, the Company entered into an Agreement and Plan of Merger
with Tuboscope Vetco International Corporation ("Tuboscope") whereby all of the
outstanding shares of the Company will be exchanged for shares in Tuboscope.
The merger is subject to a number of conditions including the approval of
Tuboscope shareholders.
F-17
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
TUBOSCOPE VETCO INTERNATIONAL CORPORATION,
GROW ACQUISITION LIMITED
AND
D.O.S. LTD.
DATED AS OF JANUARY 3, 1996
A-1
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TABLE OF CONTENTS
<TABLE>
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----
<S> <C>
ARTICLE I THE MERGER..................................................... A-11
1.1 The Merger; Effective Time of the Merger........................... A-11
1.2 Closing ........................................................... A-11
1.3 Effects of the Merger.............................................. A-12
1.4 Liquidation of Surviving Corporation............................... A-12
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES.................................. A-12
2.1 Effect on Capital Stock............................................ A-12
(a) Capital Stock of Sub.............................................. A-12
(b) Cancellation of Parent-Owned Stock................................ A-12
(c) Exchange Ratio for Company Common Stock........................... A-12
(d) Assumption of Stock Options....................................... A-13
2.2 Exchange of Certificates........................................... A-13
(a) Exchange Agent.................................................... A-13
(b) Exchange Procedures............................................... A-13
(c) Distributions with Respect to Unexchanged Shares.................. A-13
(d) No Further Ownership Rights in Company Common Stock............... A-14
(e) No Fractional Shares.............................................. A-14
(f) Termination of Exchange Fund...................................... A-14
(g) No Liability...................................................... A-14
2.3 Dissenting Shares.................................................. A-15
2.4 Escrowed Shares.................................................... A-15
ARTICLE III REPRESENTATIONS AND WARRANTIES............................... A-15
3.1 Representations and Warranties of the Company...................... A-15
(a) Organization, Standing and Power.................................. A-15
(b) Capital Structure................................................. A-16
(c) Non-Subsidiaries Equity Investment................................ A-16
(d) Authority; No Violations; Consents and Approvals.................. A-17
(e) Financial Statements.............................................. A-18
(f) Pro Forma Financial Information................................... A-18
(g) Information Supplied.............................................. A-19
(h) Absence of Certain Changes or Events.............................. A-19
(i) No Undisclosed Material Liabilities............................... A-19
(j) Material Contracts; No Defaults................................... A-20
(k) Compliance with Applicable Laws................................... A-21
(l) Litigation........................................................ A-21
(m) Taxes............................................................. A-21
(n) Pension and Benefit Plans; ERISA.................................. A-23
(o) Labor Matters..................................................... A-24
(p) Intangible Property............................................... A-25
(q) Environmental Matters............................................. A-25
(r) Opinion of Financial Advisor...................................... A-27
(s) Vote Required..................................................... A-27
(t) Insurance......................................................... A-27
(u) Brokers........................................................... A-27
(v) Tax Matters....................................................... A-27
(w) Title............................................................. A-27
(x) Books and Records................................................. A-27
</TABLE>
A-2
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(y) Certain Payments................................................... A-28
(z) Transactions with Related Parties.................................. A-28
3.2 Representations and Warranties of Parent and Sub.................... A-28
(a) Organization, Standing and Power................................... A-28
(b) Capital Structure.................................................. A-28
(c) Non-Subsidiary Equity Investment................................... A-29
(d) Authority; No Violations; Consents and Approvals................... A-29
(e) SEC Documents...................................................... A-31
(f) Information Supplied............................................... A-31
(g) Absence of Certain Changes or Events............................... A-31
(h) No Undisclosed Material Liabilities................................ A-32
(i) Material Contracts; No Defaults.................................... A-32
(j) Compliance with Applicable Laws.................................... A-32
(k) Litigation......................................................... A-33
(l) Taxes.............................................................. A-33
(m) Pension and Benefit Plans; ERISA................................... A-34
(n) Labor Matters...................................................... A-35
(o) Intangible Property................................................ A-36
(p) Environmental Matters.............................................. A-36
(q) Opinion of Financial Advisor....................................... A-37
(r) Vote Required...................................................... A-37
(s) Insurance.......................................................... A-37
(t) Brokers............................................................ A-37
(u) Tax Matters........................................................ A-37
(v) Interim Operations of Sub.......................................... A-38
(w) Title.............................................................. A-38
(x) Books and Records.................................................. A-38
(y) Certain Payments................................................... A-38
(z) Transactions with Related Parties.................................. A-38
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS...................... A-38
4.1 Conduct of Business by the Company Pending the Merger............... A-38
(a) Ordinary Course.................................................... A-38
(b) Dividends; Changes in Stock........................................ A-39
(c) Issuance of Securities............................................. A-39
(d) Governing Documents................................................ A-39
(e) No Acquisitions.................................................... A-39
(f) No Dispositions.................................................... A-39
(g) No Dissolution, Etc................................................ A-39
(h) Certain Employee Matters........................................... A-40
(i) Indebtedness; Leases; Capital Expenditures......................... A-40
(j) No Solicitation.................................................... A-40
4.2 Conduct of Business by Parent Pending the Merger.................... A-41
(a) Ordinary Course.................................................... A-41
(b) Dividends; Changes in Stock........................................ A-41
(c) Issuance of Securities............................................. A-41
(d) Governing Documents................................................ A-41
(e) No Acquisitions.................................................... A-41
(f) No Dispositions.................................................... A-41
(g) No Dissolution, Etc................................................ A-42
(h) Certain Employee Matters........................................... A-42
</TABLE>
A-3
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(i) Indebtedness; Leases; Capital Expenditures......................... A-42
(j) No Solicitation.................................................... A-42
ARTICLE V ADDITIONAL AGREEMENTS........................................... A-43
5.1 Preparation of S-4 and the Proxy Statement......................... A-43
5.2 Letter of the Company's Accountants................................ A-43
5.3 Letter of Parent's Accountants..................................... A-43
5.4 Access to Information.............................................. A-43
5.5 Stockholders Meetings.............................................. A-44
5.6 Legal Conditions to Merger......................................... A-44
5.7 Agreements of Others............................................... A-44
5.8 Listing............................................................ A-44
5.9 Board of Directors and Officers at the Effective Time.............. A-45
5.10 Stock Options...................................................... A-45
5.11 Indemnification; Directors' and Officers' Insurance................ A-45
5.12 Registration Rights................................................ A-46
5.13 Public Announcements............................................... A-46
5.14 Other Actions...................................................... A-47
5.15 Advice of Changes; SEC Filings..................................... A-47
5.16 Reorganization..................................................... A-47
5.17 Change of Control.................................................. A-47
5.18 Certain Tax Agreements............................................. A-47
5.19 Formation of Sub................................................... A-47
ARTICLE VI CONDITIONS PRECEDENT........................................... A-47
6.1 Conditions to Each Party's Obligation to Effect the Merger.......... A-47
(a) Stockholder Approval............................................... A-47
(b) Listing............................................................ A-48
(c) Other Approvals.................................................... A-48
(d) S-4................................................................ A-48
(e) No Injunctions or Restraints....................................... A-48
(f) Subscription Agreement............................................. A-48
(g) Escrow Agreement................................................... A-48
6.2 Conditions of Obligations of Parent and Sub......................... A-48
(a) Representations and Warranties..................................... A-48
(b) Performance of Obligations of the Company.......................... A-48
(c) Letters from the Company Affiliates................................ A-48
(d) Tax Opinion........................................................ A-48
(e) Fairness Opinion................................................... A-49
6.3 Conditions of Obligations of the Company............................ A-49
(a) Representations and Warranties..................................... A-49
(b) Performance of Obligations of Parent and Sub....................... A-49
(c) Tax Opinion........................................................ A-49
ARTICLE VII TERMINATION AND AMENDMENT..................................... A-49
7.1 Termination......................................................... A-49
7.2 Effect of Termination............................................... A-50
7.3 Amendment........................................................... A-51
7.4 Extension; Waiver................................................... A-51
ARTICLE VIII GENERAL PROVISIONS........................................... A-52
8.1 Payment of Expenses................................................. A-52
8.2 Nonsurvival of Representations, Warranties and Agreements........... A-52
</TABLE>
A-4
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8.3 Notices.............................................................. A-52
8.4 Interpretation....................................................... A-53
8.5 Counterparts......................................................... A-53
8.6 Entire Agreement; No Third Party Beneficiaries....................... A-53
8.7 Governing Law........................................................ A-53
8.8 Severability......................................................... A-53
8.9 Assignment........................................................... A-53
</TABLE>
A-5
<PAGE>
D.O.S. LTD.
SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<C> <S>
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(h) --No Default
3.1(i) --Compliance with Applicable Laws
3.1(j)(i)(iii)(iv) --Litigation
3.1(k) --Taxes
3.1(l) --Employee and Employee Compensation Matters
3.1(m) --Labor Matters
3.1(n)(ii)(iii) --Intangible Property
3.1(o)(i)(ii) --Environmental Matters
3.1(p)
3.1(q)
3.1(u) --Brokers
3.1(v) --Tax Certificate
3.1(w)
3.1(z)
4.1(a) --Conduct of Business
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
5.7
8.4
</TABLE>
A-6
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<C> <S>
3.2(a) --Significant Subsidiaries; Jurisdiction
3.2(b) --Capital Structure
3.2(c)
3.2(d)
3.2(g) --No Undisclosed Material Liabilities
3.2(i) --Compliance with Applicable Laws
3.2(j) --Litigation
3.2(k)
3.2(l)
3.2(m)(ii)(iii) --Labor Matters
3.2(n)(i)(ii) --Intangible Property
3.2(o) --Environmental Matters
3.2(p)
3.2(t)
3.2(u) --Certificate of Parent
3.2(w)
3.2(z)
4.2(a)
4.2(b)
4.2(c)
4.2(e) --List of Acquisitions
4.2(f) --Dispositions, Proposed Dispositions
4.2(h)
4.2(i)
</TABLE>
A-7
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EXHIBITS TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
Exhibit A --List of Initial Directors and Officers of Surviving Corporation
Exhibit B --Escrow Agreement
Exhibit C-1 --List of Initial Directors of Parent
Exhibit C-2 --List of Initial Officers of Parent
Exhibit D --Registration Rights Agreement
</TABLE>
A-8
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED
DEFINED TERM IN SECTION
- ------------ ----------
<S> <C>
Affiliates.......................................................... 5.7
Bermuda Act......................................................... 1.1
CERCLA.............................................................. 3.1(o)(A)
Certificate of Merger............................................... 1.1
Certificates........................................................ 2.2(b)
Charter Amendment................................................... 3.2(c)(i)
Closing............................................................. 1.1
Closing Date........................................................ 1.2
Code................................................................ Recitals
Company............................................................. Preamble
Company Acquisition Proposal........................................ 4.1(j)
Company Benefit Programs............................................ 3.1(l)(i)
Company Common Stock................................................ 2.1(b)
Company Commonly Controlled Entity.................................. 3.1(l)(ii)
Company Financial Statements........................................ 3.1(d)
Company Intangible Property......................................... 3.1(n)
Company Letter...................................................... 3.1(a)
Company Litigation.................................................. 3.1(j)
Company Material Adverse Change..................................... 3.1(a)
Company Material Adverse Effect..................................... 3.1(a)
Company Order....................................................... 3.1(j)
Company Permits..................................................... 3.1(i)
Company Plans....................................................... 3.1(l)(i)
Company Representatives............................................. 4.1(j)
Company's Credit Facility........................................... 5.6
Company Stock Option................................................ 5.10
Company Stock Option Plan........................................... 3.1(b)
Company Voting Debt................................................. 3.1(b)
Company Voting Rights............................................... 3.1(b)
Confidentiality Agreement........................................... 5.4
Constituent Corporations............................................ 1.3(a)
Dissenting Shares................................................... 2.3
Effective Time...................................................... 1.1
Environmental Law................................................... 3.1(o)(A)
ERISA............................................................... 3.1(l)(i)
Escrow Agent........................................................ 2.4
Escrow Agreement.................................................... 2.4
Escrowed Shares..................................................... 2.1(c)
Exchange Act........................................................ 3.1(b)
Exchange Agent...................................................... 2.2(a)
Exchange Fund....................................................... 2.2(a)
GAAP................................................................ 3.1(d)
Governmental Entity................................................. 3.1(c)(iii)
Hazardous Material.................................................. 3.1(o)(B)
HSR Act............................................................. 3.1(c)(iii)
Indemnified Liabilities............................................. 5.11
Indemnified Parties................................................. 5.11
Injunction.......................................................... 6.1(e)
</TABLE>
A-9
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<TABLE>
<CAPTION>
DEFINED
DEFINED TERM IN SECTION
- ------------ ----------
<S> <C>
IRS................................................................. 3.1(k)(ii)
Liquidation......................................................... 1.4
Made Available...................................................... 8.4
Merger.............................................................. Recitals
Non-Escrowed Shares................................................. 2.1(c)
NYSE................................................................ 5.8
OSHA................................................................ 3.1(o)(A)
Parent.............................................................. Preamble
Parent Acquisition Proposal......................................... 4.2(j)
Parent Benefit Programs............................................. 3.2(l)(i)
Parent Common Stock................................................. 2.1(c)
Parent ERISA Affiliate.............................................. 3.2(l)(i)
Parent Intangible Property.......................................... 3.2(n)
Parent Letter....................................................... 3.2(a)
Parent Litigation................................................... 3.2(j)
Parent Material Adverse Change...................................... 3.2(a)
Parent Material Adverse Effect...................................... 3.2(a)
Parent Order........................................................ 3.2(j)
Parent Permits...................................................... 3.2(i)
Parent Plans........................................................ 3.2(l)(i)
Parent Representatives.............................................. 4.2(j)
Parent SEC Documents................................................ 3.2(d)
Parent Share Issuance............................................... 3.2(c)(i)
Parent Voting Debt.................................................. 3.2(b)
Parent's Credit Facility............................................ 5.6
PBGC................................................................ 3.1(l)(ii)
Pro Forma Financial Statements...................................... 3.1(f)
Proxy Statement..................................................... 3.2(c)(iii)
Release............................................................. 3.1(o)(C)
Remedial Action..................................................... 3.1(o)(D)
Returns............................................................. 3.1(k)(i)
S-4................................................................. 3.1(e)
SEC................................................................. 3.1(a)
Shares.............................................................. 2.1(c)
Significant Subsidiary.............................................. 3.1(a)
Stockholder Meetings................................................ 5.5
Stockholders Representative......................................... 2.4
Stock Option Exchange Ratio......................................... 5.10
Sub................................................................. Preamble
Subscription Agreement.............................................. Recitals
Subsidiary.......................................................... 2.1(b)
Surviving Corporation............................................... 1.3(a)
Sweco Entities...................................................... 3.1(d)(iii)
Sweco Options....................................................... 3.1(b)
Taxes............................................................... 3.1(k)
Warrant............................................................. Recitals
</TABLE>
A-10
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 3, 1996 (this "Agreement"),
among Tuboscope Vetco International Corporation, a Delaware corporation
("Parent"), and Grow Acquisition Limited, a Bermuda corporation to be formed by
Parent as a direct wholly owned subsidiary of Parent ("Sub"), and D.O.S. Ltd.,
a Bermuda corporation (the "Company").
WHEREAS, the Boards of Directors of Parent and the Company each have
determined that it is in furtherance of and consistent with their respective
long-term business strategies and is fair to and in the best interests of their
respective stockholders for Sub to merge with and into the Company (the
"Merger") upon the terms and subject to the conditions of this Agreement;
WHEREAS, in accordance with the understanding of Parent and the Company,
concurrently herewith: (i) the Company is entering into a Voting Agreement with
each of Baker Hughes Incorporated and Brentwood Associates IV, LP and (ii)
Parent is entering into a Voting Agreement with each of DOS Partners L.P.,
Panmell (Holdings), Ltd. and Zink Industries Limited;
WHEREAS, in accordance with the understanding of Parent and the Company,
concurrently herewith SCF-III, L.P., an affiliate of a stockholder of the
Company, is entering into a Subscription Agreement with Parent (the
"Subscription Agreement") whereby SCF-III, L.P. is agreeing to purchase for an
aggregate purchase price of $31,000,000 in connection with the Closing (as
defined herein) 4,200,000 shares of Parent Common Stock (as defined herein) and
warrants (the "Warrants") to purchase, subject to adjustment under certain
circumstances, an aggregate of 2,533,000 shares of Parent Common Stock at an
exercise price of $10 per share;
WHEREAS, for federal income tax purposes, it is intended that the Merger and
the Liquidation (as defined herein) shall collectively qualify as a
reorganization within the meaning of Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, Parent, Sub and the Company 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 conditions
of this Agreement and in accordance with the Companies Act 1981 of Bermuda, as
amended (the "Bermuda Act"), Sub shall be merged with and into the Company at
the Effective Time (as hereinafter defined). The Merger shall become effective
as of the date indicated in a certificate of amalgamation (the "Certificate of
Merger"), prepared and executed in accordance with the relevant provisions of
the Bermuda Act, that is filed with the Registrar of Companies pursuant to the
Bermuda Act (the "Effective Time"). The filing of the Certificate of Merger
shall be made upon, or as soon as practicable after, the closing of the Merger
(the "Closing").
1.2 Closing. The Closing shall take place at 10:00 a.m. on the first business
day after satisfaction (or waiver in accordance with this Agreement) of the
latest to occur of the conditions (other than deliveries of instruments to be
made at Closing) set forth in Article VI (the "Closing Date"), at the offices
of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002 unless another
date or place is agreed to in writing by the parties.
A-11
<PAGE>
1.3 Effects of the Merger. (a) At the Effective Time: (i) Sub shall be merged
with and into the Company, the separate existence of Sub shall cease and the
Company shall continue as the surviving corporation (Sub and the Company are
sometimes referred to herein as the "Constituent Corporations" and the Company
is sometimes referred to herein as the "Surviving Corporation"); (ii) the
Memorandum of Association of the Company as in effect immediately prior to the
Effective Time shall be the Memorandum of Association of the Surviving
Corporation; and (iii) the Bye-laws of the Company as in effect immediately
prior to the Effective Time shall be the Bye-laws of the Surviving Corporation.
(b) The individuals listed on Exhibit A hereto (which Exhibit indicates the
address of each such individual) shall, from and after the Effective Time, be
the initial directors and officers of the Surviving Corporation and shall serve
until their successors have been duly elected or appointed and qualified or
until the Liquidation or their earlier death, resignation or removal in
accordance with the Surviving Corporation's Memorandum of Association and Bye-
laws.
(c) The Merger shall have such other effects as specified in the Bermuda Act.
1.4 Liquidation of Surviving Corporation. As soon as practicable after the
Effective Time, Parent shall cause the Surviving Corporation to be liquidated
into Parent (the "Liquidation") so that the Merger and the Liquidation will be
collectively treated for federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code.
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 Parent, the Constituent Corporations or
their respective stockholders:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable ordinary share, par value $0.10 per share, of the Surviving
Corporation.
(b) Cancellation of Parent-Owned Stock. Each ordinary share, par value
$0.10 per share, of the Company ("Company Common Stock") owned by Parent,
Sub or any other wholly owned Subsidiary (as hereinafter defined) of Parent
or the Company shall be canceled and retired and shall cease to exist and
no stock of Parent or other consideration shall be delivered or deliverable
in exchange therefor. As used in this Agreement, "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 Company Common Stock. Subject to the provisions of
Section 2.2(e) hereof, each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares to
be canceled in accordance with Section 2.1(b) and Dissenting Shares (as
hereinafter defined)) shall be converted into (i) .4372 shares of common
stock, par value $0.01 per share, of Parent ("Parent Common Stock") (such
shares issuable upon such conversion are referred to herein as the "Non-
Escrowed Shares") and (ii) .0273 shares of Parent Common Stock which shall
be subject to the provisions of Section 2.4 and the Escrow Agreement (as
hereinafter defined) (such shares issuable upon
A-12
<PAGE>
such conversion are referred to herein as the "Escrowed Shares" and
together with the Non-Escrowed Shares, the "Shares"). All such shares of
Company Common Stock, when so converted, shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such shares shall cease to
have any rights with respect thereto, except the right to receive the
shares of Parent Common Stock and cash in lieu of fractional shares of
Parent 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) Assumption of Stock Options . Each outstanding Company Stock Option
(as defined in Section 5.10) shall be assumed by Parent as provided in
Section 5.10.
2.2 Exchange of Certificates
(a) Exchange Agent. As of the Effective Time, Parent shall deposit with
Chemical Shareholder Services Group, Inc. or such other bank or trust company
designated by Parent and reasonably acceptable to the Company (the "Exchange
Agent"), for the benefit of the holders of shares of Company Common Stock, for
exchange in accordance with this Article II, through the Exchange Agent,
certificates representing the Non-Escrowed Shares (such shares of Parent Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the Non-Escrowed Shares
contemplated to be 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 Company Common Stock (the "Certificates"),
which holder's shares of Company Common Stock were converted into the right to
receive shares of Parent 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 Parent may reasonably specify); and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent 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 Parent, 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 certificates representing that number
of whole shares of Non-Escrowed Shares which such holder has the right to
receive pursuant to the provisions of this Article II, certificates
representing that number of whole shares of Escrowed Shares which such holder
has the right to receive pursuant to the provisions of this Article II to the
extent and as of such time as provided in the Escrow Agreement and cash in lieu
of fractional Shares as contemplated by Section 2.2(e) and the Escrow
Agreement, and the Certificates so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of Company Common Stock which is not
registered in the share transfer records of Company, certificates representing
the appropriate number of shares of Parent Common Stock may be issued to a
transferee if the Certificates representing such Company Common Stock are
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 (other than Certificates representing shares to
be canceled in accordance with Section 2.1(b) or Dissenting Shares) shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificates representing shares of Parent
Common Stock and cash in lieu of any fractional shares of Parent 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 Parent 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 Parent Common Stock declared or made before or
after the Effective Time with a record date after the
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Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the right to receive shares of Parent 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 and, with respect to Escrowed Shares, until
such other time as provided in the Escrow Agreement. Subject to the effect of
applicable laws and the provisions of the Escrow Agreement with respect to
Escrowed Shares, following surrender of any such Certificate (other than
Certificates representing shares to be canceled in accordance with Section
2.1(b) or Dissenting Shares), 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 any fractional share of Parent 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 Parent 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 Parent
Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of Parent
Common Stock issued upon the surrender for exchange of shares of Company 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 Company 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 the Company on such
shares of Company 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 share transfer books of the Surviving Corporation of the shares of Company
Common Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article II.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of Parent 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 Parent. In lieu of any fractional share of Parent Common Stock, each
holder of shares of Company Common Stock who would otherwise have been entitled
to a fraction of a share of Parent 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 value of such fraction of a share based upon
the closing price of Parent Common Stock on the Nasdaq Stock Market on the date
on which the Effective Time shall occur (or if the Parent Common Stock shall
not trade on the Nasdaq Stock Market on such date, the first day of that Parent
Common Stock shall trade on the Nasdaq Stock Market thereafter). All shares of
Company Common Stock held by a record holder shall be aggregated for purposes
of computing the number of shares of Parent Common Stock to be issued pursuant
to this Section 2.2(e).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and any
cash in lieu of fractional shares of Parent Common Stock made available to the
Exchange Agent that remain undistributed to the former stockholders of the
Company on or after the one-hundred eightieth day following the Effective Time
shall be delivered to Parent, upon demand, and any stockholders of the Company
who have not theretofore complied with this Article II shall thereafter look
only to Parent for payment of their claim for Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock.
(g) No Liability. Neither Parent nor the Company shall be liable to any
holder of shares of Company Common Stock or Parent 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 Parent Common Stock delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
Any amounts remaining unclaimed
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by holders of any such shares on the day immediately preceding the day on which
such amounts would otherwise escheat to or become property of any governmental
entity) shall, to the extent permitted by applicable law, become the property
of Parent free and clear of any claims or interest of any such holders or their
successors, assigns or personal representatives previously entitled thereto.
2.3 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders who
have properly exercised appraisal rights with respect thereto under the Bermuda
Act (the "Dissenting Shares") shall not be converted into or represent the
right to receive shares of Parent Common Stock as provided in Section 2.1(c),
but the holders of Dissenting Shares shall be entitled to receive such payment
of the appraised value of such shares held by them from the Surviving
Corporation as shall be determined pursuant to the Bermuda Act; provided,
however, that if any such holder shall have failed to perfect or shall withdraw
or lose the right to appraisal and payment under the Bermuda Act, each such
holder's shares shall thereupon be deemed to have been converted as of the
Effective Time into the right to receive shares of Parent Common Stock, without
any interest thereon, as provided in Section 2.1(c), and upon surrender, in the
manner provided in Section 2.2 of the Certificate(s) representing such shares,
such shares shall no longer be Dissenting Shares.
2.4 Escrowed Shares. On the Closing Date, Parent, the Company, a wholly owned
Subsidiary of Parent designated by Parent or such other entity designated by
Parent and reasonably acceptable to the Company (the "Escrow Agent") and the
Stockholders Representative (as hereinafter defined) shall execute and deliver
an escrow agreement in the form attached as Exhibit B hereto (the "Escrow
Agreement"). The provisions of the Escrow Agreement are hereby incorporated by
reference into this Agreement. Promptly after the Effective Time, Parent shall
deposit with the Escrow Agent the Escrowed Shares in accordance with this
Article II and the Escrow Agreement. Prior to the Closing Date, holders of a
majority of the outstanding shares of Company Common Stock may, by written
notice to Parent, designate an individual or entity as the Stockholders
Representative for purposes of the Escrow Agreement (the "Stockholders
Representative"), which individual or entity need not be a holder of Company
Common Stock. If no such Stockholders Representative is so designated prior to
the Closing, Parent shall designate an individual or entity to act in such
capacity.
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of the Company. The Company represents and
warrants to Parent and Sub as follows:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
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 Company Material Adverse Effect (as defined below). The
Company has heretofore delivered to Parent complete and correct copies of
its Memorandum of Association and Bye-laws and the organizational documents
of each of its Significant Subsidiaries. All Subsidiaries of the Company,
the percentage of the Company's ownership of such Subsidiaries, the
identity and percentage ownership of all other persons with equity
interests in such Subsidiaries and their respective jurisdictions of
incorporation or organization are identified on Schedule 3.1(a) of the
letter dated and delivered to Parent on the date hereof (the "Company
Letter"), which relates to this Agreement and is designated therein as
being the Company Letter. As used in this Agreement: (i) a "Significant
Subsidiary" means any Subsidiary of the Company or Parent, as the case may
be, that would
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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 "Company Material Adverse Effect" or "Company Material
Adverse Change" shall mean, any effect or change that is, individually or
in the aggregate, materially adverse to the business, operations, assets,
condition (financial or otherwise) or results of operation of the Company
and its Subsidiaries taken as a whole except for general economic changes
and changes that may affect the industries of the Company or any of its
Subsidiaries generally.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of the Company consists of 40,000,000 shares of Company Common Stock.
At the close of business on December 1, 1995: 35,892,240 shares of Company
Common Stock were issued and outstanding and 1,659,466 shares of Company
Common Stock were reserved for issuance pursuant to the Company's 1993
Stock Option Plan and certain stock option agreements (the "Sweco Options")
entered into with certain former stockholders of the Sweco Entities (as
defined herein) identified on Schedule 3.1(b) of the Company Letter (the
Company's 1993 Stock Option Plan and the Sweco Options are collectively
referred to as the "Company Stock Option Plans") with an aggregate exercise
price of $2,658,591; and (ii) 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 the Company stockholders
may vote ("Company Voting Debt") were issued or outstanding. All
outstanding shares of Company Common Stock have been duly authorized,
validly issued, fully paid and nonassessable and are not subject to
preemptive rights. Except as set forth on Schedule 3.1(b) of the Company
Letter, all outstanding shares of capital stock of the Subsidiaries of the
Company are owned by the Company, or a direct or indirect wholly owned
Subsidiary of the Company, free and clear of all liens, charges,
encumbrances, claims and options of any nature. Except as set forth in this
Section 3.1(b) and except for changes since December 1, 1995 resulting from
the exercise of employee stock options granted pursuant to, or from
issuances or purchases under, the Company Stock Option Plans, or as
contemplated by this Agreement, there are outstanding: (i) no shares of
capital stock, Company Voting Debt or other voting securities of the
Company; (ii) no securities of the Company or any Subsidiary of the Company
convertible into or exchangeable for shares of capital stock, Company
Voting Debt or other voting securities of the Company or any Subsidiary of
the Company; and (iii) no options, warrants, calls, rights (including
preemptive rights), commitments or agreements to which the Company or any
Subsidiary of the Company is a party or by which it is bound in any case
obligating the Company or any Subsidiary of the Company 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
Company Voting Debt or other voting securities of the Company or of any
Subsidiary of the Company, or obligating the Company or any Subsidiary of
the Company to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. Except as set forth on Schedule 3.1(b) of
the Company Letter, there are no stockholder agreements, voting trusts or
other similar agreements or understandings to which the Company is a party
or by which it is bound. Except as set forth on Schedule 3.1(b) of the
Company Letter, there are no restrictions on the Company's ability to vote
the stock held by the Company of any of its Subsidiaries. Except as
identified on Schedule 3.1(b) of the Company Letter, neither the Company
nor any of its Subsidiaries is a party to any agreement granting
registration rights to any holders of its securities. To the knowledge of
the Company, as of the date of this Agreement, no stockholder of the
Company or "group" within the meaning of Section 13(d)3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") will be immediately
after the Effective Time the beneficial owner of more than 25% of the then
outstanding Parent Common Stock (excluding for such purpose any beneficial
ownership attributable to the Warrants).
(c) Non-Subsidiaries Equity Investment. Schedule 3.1(c) of the Company
Letter sets forth the book value of each investment by the Company or any
of its Subsidiaries in the voting securities, partnership interests or
other equity interests of any corporation, partnership or other entity
(other than a Subsidiary of the Company) and the nature and percentage of
the Company's or its Subsidiaries' ownership interests in such investment.
Except as set forth in Schedule 3.1(c) of the Company Letter, the voting
securities, partnership interests or other equity interests of the Company
or its Subsidiaries in such investments are owned free and clear of all
liens, charges and encumbrances.
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(d) Authority; No Violations; Consents and Approvals.
(i) The Board of Directors of the Company has approved the Merger and
this Agreement, by unanimous vote of the directors, and declared the
Merger and this Agreement to be in the best interests of the
stockholders of the Company. The Company 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 the Company in accordance with
the Bermuda Act, 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 the Company, subject, with
respect to consummation of the Merger, to approval of this Agreement
and the Merger by the stockholders of the Company in accordance with
the Bermuda Act. This Agreement has been duly executed and delivered by
the Company and, subject, with respect to consummation of the Merger,
to approval of this Agreement and the Merger by the stockholders of the
Company in accordance with the Bermuda Act, and assuming this Agreement
constitutes the valid and binding obligation of Parent and Sub,
constitutes a valid and binding obligation of the Company 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) Except as set forth on Schedule 3.1(d) of the Company Letter,
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 result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties or assets of the Company or
any of its Subsidiaries under, any provision of (i) the Memorandum of
Association or Bye-laws of the Company or any provision of the
comparable charter or organizational documents of any of its
Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
or indenture applicable to the Company or any of its Subsidiaries,
(iii) any other agreement, instrument, permit, concession, franchise or
license applicable to the Company or any of its Subsidiaries or (iv)
assuming the consents, approvals, authorizations or permits and filings
or notifications referred to in Section 3.1(d)(iii) are duly and timely
obtained or made and the approval of the Merger and this Agreement by
the stockholders of the Company has been obtained, any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the
Company or any of its Subsidiaries or any of their respective
properties or assets, other than, in the case of clause (iii), any such
conflicts, violations, defaults, rights, liens, security interests,
charges or encumbrances that, individually or in the aggregate, would
not have a Company Material Adverse Effect, materially impair the
ability of the Company 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,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (a "Governmental Entity"), is
required by or with respect to the Company or any of its Subsidiaries
in connection with the execution and delivery of this Agreement by the
Company or the consummation by the Company of the transactions
contemplated hereby, as to which the failure to obtain or make would
have a Company Material Adverse Effect, except for: (A) the filing of a
premerger notification report by the Company 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 approval of the Minister of Finance of Bermuda
and the filing of the Certificate of Merger with the Registrar of
Companies of Bermuda and the appropriate filings and consents required
for the Liquidation under Bermuda law; (C) such filings and approvals
as may be required by any applicable state
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securities, "blue sky" or takeover laws, or environmental laws; and (D)
such filings and approvals as may be required by any foreign premerger
notification, securities, corporate or other law, rule or regulation.
(e) Financial Statements. The Company previously has delivered to Parent
a true and complete copy of:
(i) the consolidated balance sheets of the Company and its
consolidated Subsidiaries as of March 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the fiscal years then ended on such dates, together with
the notes thereto, in each case audited by and accompanied by the
report of KPMG Peat Marwick LLP, independent accountants;
(ii) the unaudited consolidated balance sheet of the Company and its
consolidated Subsidiaries as of October 31, 1995, and the related
consolidated statements of operations and cash flows for the seven
months then ended;
(iii) the combined balance sheet of Environmental Procedures, Inc.,
Venezuela Well Analysis, Venwell International, and Onea Corporation
(collectively, the "Sweco Entities") as of May 31, 1995, and the
related combined statements of operations, changes in stockholders'
equity, and cash flows for the year then ended, together with the notes
thereto, audited by and accompanied by the report of Ernst & Young LLP,
independent accountants; and
(iv) the unaudited combined balance sheet of the Sweco Entities as of
October 31, 1995, and the related combined statements of operations and
cash flows for the five months then ended
(all the foregoing financial statements, including the notes thereto; being
referred to herein collectively as the "Company Financial Statements").
The Company Financial Statements were prepared in accordance with generally
accepted accounting principles in effect in the United States ("GAAP")
applied on a consistent basis during the periods involved (except (i) as
may be indicated in the notes thereto, (ii) in the case of the unaudited
financial statements, such differences in presentation or omissions as
permitted by Rule 10-01 of Regulation S-X of the SEC and (iii) the
unaudited financial statements do not contain all notes required by GAAP)
and fairly present in accordance with applicable requirements of GAAP
(subject, in the case of the unaudited financial statements, to normal
year-end adjustments on a basis comparable with past periods) the
consolidated financial position of the Company and its consolidated
Subsidiaries or the combined financial position of the Sweco Entities, as
the case may be, as of their respective dates and the consolidated results
of operations and the consolidated cash flows of the Company and its
consolidated Subsidiaries or combined results of operations and the
combined cash flows of the Sweco Entities, as the case may be, for the
periods presented therein.
(f) Pro Forma Financial Information. The Company previously has delivered
to Parent a true and complete copy of the pro forma balance sheet of the
Company, the SWECO Entities and their consolidated Subsidiaries as of
October 31, 1995 and a pro forma income statement of the Company, the SWECO
Entities and their consolidated Subsidiaries for the twelve months ended
September 30, 1995 (the "Pro Forma Financial Statements"). The underlying
unadjusted financial information included in the Pro Forma Financial
Statements was prepared in accordance with GAAP applied on a consistent
basis with the Company Financial Statements during the periods involved.
The pro forma adjustments included in the Pro Forma Financial Statements
have been fairly applied to such unadjusted financial information on the
basis of the assumptions set forth therein. The Pro Forma Financial
Statements fairly present the information shown therein and the assumptions
and adjustments relating thereto are reasonable and have been made in good
faith.
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(g) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger
(the "S-4") will, at the time the S-4 becomes effective under the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations thereunder 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 the
Company and included or incorporated by reference in the Proxy Statement
(as hereinafter defined) will, at the time of mailing thereof or at the
time of the meeting of the stockholders of Parent 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 the Company or any of
its Subsidiaries, or with respect to other information supplied by the
Company 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 Parent. The S-4 and the Proxy
Statement, insofar as they relate to the Company or its Subsidiaries or
other information supplied by the Company for inclusion therein, will
comply as to form in all material respects with the provisions of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder.
(h) Absence of Certain Changes or Events. Except as disclosed in Schedule
3.1(h) of the Company Letter, or except as contemplated by this Agreement,
since (x) March 31, 1995 with respect to the Company and its Subsidiaries
other than the SWECO Entities and (y) May 31, 1995 with respect to the
SWECO Entities, the Company has in all material respects conducted its
business only in the ordinary course and 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 the Company's
capital stock or the capital stock of the SWECO Entities; (ii) any
amendment of any material term of any outstanding equity security of the
Company or any Subsidiary; (iii) any repurchase, redemption or other
acquisition by the Company or any Subsidiary of any outstanding shares of
capital stock or other equity securities of, or other ownership interests
in, the Company or any Subsidiary, except as contemplated by the Company
Benefit Programs (as hereinafter defined); (iv) any material change in any
method of accounting or accounting practice, or in any tax method,
principle, election or practice by the Company or any Subsidiary; (v) if
the covenants and agreements with respect to the Company and its
Subsidiaries set forth in Section 4.1 had been applicable to the Company
and its Subsidiaries during the period from (x) March 31, 1995 with respect
to the Company and its Subsidiaries other than the SWECO Entities and (y)
May 31, 1995 with respect to the SWECO Entities to the date of this
Agreement, any action, transaction, commitment or failure to act that would
cause the Company or any such Subsidiary to fail to comply with such
covenants and agreements; or (vi) any other action, 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, or may reasonably be expected to have, a Company Material Adverse
Effect, except for general economic changes and changes that may affect the
industries of the Company or any of its Subsidiaries generally.
(i) No Undisclosed Material Liabilities. Except as fully reflected or
reserved against in the Company Financial Statements, or disclosed in the
footnotes thereto, or referred to in the Company Letter, as of the date
hereof the Company and its Subsidiaries have no liabilities, absolute or
contingent other than liabilities which, individually or in the aggregate,
are reasonably expected not to have a Company Material Adverse Effect.
Except as so reflected, reserved or disclosed, the Company and its
Subsidiaries have no commitments which, individually or in the aggregate,
are reasonably expected to have a Company Material Adverse Effect.
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(j) Material Contracts; No Defaults .
(i) Set forth in Schedule 3.1(j)(i) of the Company Letter is (A) a
list of all loan or credit agreements, notes, bonds, mortgages,
indentures, financing leases or other debt instruments or agreements
pursuant to which, as of a date within 30 days of the date hereof, any
indebtedness (determined in accordance with GAAP)of the Company or any
of its Subsidiaries in an aggregate principal amount in excess of
$1,000,000 is outstanding or may be incurred and (B) the respective
principal amounts outstanding thereunder as of the date of this
Agreement.
(ii) Schedule 3.1(j)(ii) of the Company Letter contains a listing of
all other contracts, agreements, arrangements or understandings to
which the Company or one of its Subsidiaries is a party or by which any
of them or any of their properties or assets is bound (exclusive of any
contracts, agreements, arrangements or understandings that are
immaterial as to amount and significance to the operations to which
they relate and are routinely entered into the ordinary course of
business) described in (A) through (I) below to which the Company or
any of its Subsidiaries is a party (the items referred to in clauses
(i) and (ii) of this Section 3.1(j) being collectively referred to
herein as "Contracts").
(A) Each Contract, whether in the ordinary course of business or
not, which involves performance of services or delivery of goods
and/or materials, by the Company or any of its Subsidiaries of an
amount or value in excess of $300,000 and which is not cancelable
without penalty on 30 days' notice or less;
(B) Each Contract or guaranty of third party debt or obligations
not in the ordinary course of business involving expenditures,
commitments or receipts of the Company or any of its Subsidiaries in
excess of $300,000;
(C) Each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Contract
affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real or personal property
(except real or personal property leases and installment and
conditional sales agreements having a value per property or item or
aggregate payments of less than $300,000 and with terms of less than
one year);
(D) Each collective bargaining agreement or other Contract to or
with any labor union or other employee representative of a group of
employees relating to wages, hours and other conditions of
employment;
(E) Each joint venture contract, partnership arrangement or other
Contract (however named) involving a sharing of profits, losses,
costs or liabilities by the Company or any of its Subsidiaries with
any other person;
(F) Each contract containing covenants which in any way purport to
limit the freedom of the Company or any of its Subsidiaries to
engage in any line of business or engage in business in any
geographic area or to compete with any person;
(G) Each general power of attorney granting the recipient the
power to commit material resources of the Company or its
Subsidiaries which is currently effective and outstanding;
(H) Each contract for capital expenditures in excess of $250,000;
and
(I) Each amendment, supplement and modification (whether written
or oral) in respect of any of the foregoing.
(iii) Except as disclosed on Schedule 3.1(j)(iii) of the Company
Letter (and, in the case of contracts and agreements arising after the
date hereof and prior to the Effective Time, which are not prohibited
by Section 4.1 of this Agreement and are disclosed in writing to
Parent), there is no contract or agreement that is material to the
business, financial condition or results of operations of the Company
and its Subsidiaries taken as a whole. Neither the Company nor any of
its Subsidiaries
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is in violation of or in default under (nor does there exist any
condition which upon the passage of time or the giving of notice would
cause such a violation of or default under) any Contract, other than
such violations or defaults as would not have a Company Material
Adverse Effect. To the knowledge of the Company, none of the other
parties to the Contracts are in violation of or in default under (nor
does there exist any condition which upon the passage of time or the
giving of notice would cause such a violation of or default under) any
Contract, other than such violations or defaults as would not have a
Company Material Adverse Effect.
(iv) Except as disclosed on Schedule 3.1j(iv) of the Company Letter,
there are no renegotiations of, or attempts to renegotiate, any
material amounts paid or payable to the Company or any of its
Subsidiaries under current or completed Contracts with any person or
entity having the contractual or statutory right to demand or require
such negotiation. To the knowledge of the Company, no such person or
entity has made written demand for such renegotiation.
(k) Compliance with Applicable Laws. The Company 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 "Company Permits"), except where the
failure so to hold would not have a Company Material Adverse Effect. The
Company and its Subsidiaries are in compliance with the terms of the
Company Permits, except where the failure so to comply would not have a
Company Material Adverse Effect. Except as disclosed or as set forth on
Schedule 3.1(k), 3.1(l), 3.1(m), 3.1(n), 3.1(o) or 3.1(q) of the Company
Letter, the businesses of the Company and its Subsidiaries are not being
conducted in violation of any law, ordinance, regulation, judgment or
decree of any Governmental Entity, except for possible violations which
would not have a Company Material Adverse Effect. Except as set forth on
Schedule 3.1(k) of the Company Letter, as of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to the
Company or any of its Subsidiaries is, to the best knowledge of the
Company, pending or threatened, other than those the outcome of which would
not have a Company Material Adverse Effect.
(l) Litigation. Schedule 3.1(l) of the Company Letter discloses all
suits, actions or proceedings pending, or, to the best knowledge of the
Company, threatened against the Company or any Subsidiary of the Company
("Company Litigation") on the date of this Agreement and all judgments,
decrees, injunctions, rules or orders of any Governmental Entity or
arbitrator outstanding against the Company or any Subsidiary of the Company
("Company Order")on the date of this Agreement, in each case in which the
amount claimed or that could be involved is in excess of $100,000. Except
as disclosed on Schedule 3.1(l) of the Company Letter, there is no Company
Litigation that, individually or in the aggregate with all other Company
Litigation, is reasonably likely to have a Company Material Adverse Effect,
nor is there any Company Order that, individually or in the aggregate with
all other Company Litigation, is reasonably likely to have a Company
Material Adverse Effect or a material adverse effect on the Company's
ability to perform its obligations hereunder or to consummate the
transactions contemplated by this Agreement.
(m) Taxes. Except as set forth on Schedule 3.1(m) of the Company Letter
and except for exceptions to the following that would not, individually or
in the aggregate, have a Company Material Adverse Effect:
(i) Each of the Company, 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 and timely (taking into
account any extensions) filed all federal, 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 (including estimated
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 the Company's or Sweco's most recent audited financial
statements) for which the Company or any of its Subsidiaries may be
liable, (C) established reserves that are adequate for the payment
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of all Taxes not yet due and payable with respect to the results of
operations of the Company and its Subsidiaries through the date hereof,
and (D) complied in all material respects with all applicable laws,
rules and regulations relating to the 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(m) of the Company Letter sets forth (i) the last
taxable period through which the United States federal income Tax
Returns of the Company and any of its Subsidiaries have been examined
by the Internal Revenue Service ("IRS") or otherwise closed and (ii)
any affiliated, consolidated, combined, unitary or similar group Return
in which the Company 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 federal, state,
local, foreign or other taxing authority have been paid, fully settled
or adequately provided for in the Company's or the Sweco Entities' most
recent audited financial statements. Except as adequately provided for
in the Company Financial Statements, no material tax audits or other
administrative proceedings or court proceedings are presently pending
with regard to any Taxes for which the Company or any of its
Subsidiaries would be liable, and no material deficiency for any such
Taxes has been proposed, asserted or assessed pursuant to such
examination against the Company or any of its Subsidiaries by any
federal, state, local, foreign or other taxing authority with respect
to any period.
(iii) Neither the Company nor any of its Subsidiaries has executed or
entered 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 Taxes for which the Company 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 federal, state, local, foreign or
other tax law that relates to the assets or operations of the Company
or any of its Subsidiaries.
(iv) Neither the Company nor any of its Subsidiaries is a party to an
agreement that provides for the payment of any amount that would
constitute a "parachute payment" within the meaning of Section 280G of
the Code.
(v) Neither the Company 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 the Company or any of its Subsidiaries.
(vi) Neither the Company 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.
(vii) None of the assets of the Company or any of its Subsidiaries
organized outside the United States constitutes a "United States real
property interest" within the meaning of Section 897(c) of the Code.
(viii) Neither the Company nor any of its Subsidiaries is or has been
at any time during the past five years a "controlled foreign
corporation" within the meaning of Section 957(a) of the Code.
(ix) The Company is not and has not been engaged in the conduct of a
trade or business within the United States for United States federal
income tax purposes.
For purposes of this Agreement, "Taxes" means all federal, state, local,
foreign and other taxes, charges, fees, levies, imposts, duties, licenses
or other governmental assessments, together with any interest, penalties,
additions to tax or additional amounts imposed by any taxing authority with
respect thereto.
A-22
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(n) Pension and Benefit Plans; ERISA .
(i) The Company has made available to Parent true, correct, and
complete copies of each of the following which is sponsored, maintained
or contributed to by the Company or any of its Subsidiaries for the
benefit of the employees of the Company or such Subsidiary:
(1) each "employee benefit plan," as such term is defined in
Section 3(3) of the United States Employee Retirement Income
Security Act of 1974, as amended ("ERISA") (including, but not
limited to, employee benefit plans, such as foreign plans, which are
not subject to the provisions of ERISA) ("Company Plans"); and
(2) each personnel policy, stock option plan, collective
bargaining agreement, bonus plan or arrangement, incentive award
plan or arrangement, vacation policy, severance pay plan, policy or
agreement, deferred compensation agreement or arrangement, executive
compensation or supplemental income arrangement, consulting
agreement, employment agreement and each other employee benefit
plan, agreement, arrangement, program, practice or understanding
which is not described in Section 3.1(n)(i)(1) ("Company Benefit
Programs").
(ii) Except as disclosed in Schedule 3.1(n)(ii) of the Company
Letter:
(1) The Company and its Subsidiaries do not contribute to or have
an obligation to contribute to, and have not at any time 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;
(2) The Company and its Subsidiaries have substantially performed
all material obligations, whether arising by operation of law or by
contract, required to be performed by them in connection with the
Company Plans and the Company Benefit Programs, and to the knowledge
of the Company there have been no material defaults or violations by
any other party to the Company Plans or Company Benefit Programs;
(3) All reports and disclosures relating to the Company Plans
required to be filed with or furnished to governmental agencies,
Company Plan participants or beneficiaries have been filed or
furnished substantially in accordance with applicable law in a
timely manner;
(4) Each Company Plan intended to be qualified under Section 401
of the Code satisfies the requirements of such Section and has
received a favorable determination letter from the Internal Revenue
Service regarding such qualified status and has not, since receipt
of the most recent favorable determination letter, been amended or,
to the knowledge of the Company, operated in a way which would
adversely affect such qualified status. As to any Company Plan
intended to be qualified under Section 401 of the Code, there has
been no termination or partial termination of the Company Plan
within the meaning of Section 411(d)(3) of the Code;
(5) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of the Company,
threatened against, or with respect to, any of the Company Plans or
Company Benefit Programs or their assets. To the knowledge of the
Company, there is no matter pending (other than routine
qualification determination filings) with respect to any of the
Company Plans before the IRS, the United States Department of Labor
or the Pension Benefit Guaranty Corporation ("PBGC");
(6) As to any Company Plan subject to Title IV of ERISA, there has
been no event or condition which presents the material risk of a
Company Plan termination, no accumulated funding deficiency, whether
or not waived, within the meaning of Section 302 of ERISA or Section
412 of the Code has been incurred, no reportable event within the
meaning of Section 4043 of ERISA (for which the disclosure
requirements of Regulation 2615.3 promulgated by the PBGC have not
been waived) has occurred, no notice of intent to terminate the
Company
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<PAGE>
Plan has been given under Section 4041(c) of ERISA, no proceeding
has been instituted under Section 4042 of ERISA to terminate the
Company Plan, no liability to the PBGC has been incurred;
(7) No act, omission or transaction has occurred which would
result in imposition on the Company or any of its Subsidiaries of
(A) liability for a breach of fiduciary duty under Section 409 of
ERISA, (B) a civil penalty assessed pursuant to subsections (c), (i)
or (l) of Section 502 of ERISA or (C) a tax imposed pursuant to
Chapter 43 of Subtitle D of the Code;
(8) With respect to any employee benefit plan, within the meaning
of Section 3(3) of ERISA, which is not a Company Plan but which is
sponsored, maintained or contributed to, or has been sponsored,
maintained or contributed to within six years prior to the Effective
Time, by any corporation, trade, business or entity under common
control with the Company, within the meaning of Section 414(b), (c)
or (m) of the Code or Section 4001 of ERISA ("Company Commonly
Controlled Entity"), (A) no withdrawal liability, within the meaning
of Section 4201 of ERISA, has been incurred, which withdrawal
liability has not been satisfied, (B) no liability to the PBGC has
been incurred by any Company Commonly Controlled Entity, which
liability has not been satisfied, (C) no 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 (D) all
contributions (including installments) to such plan required by
Section 302 of ERISA and Section 412 of the Code have been timely
made; and
(9) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (A)
require the Company or any of its Subsidiaries to make a larger
contribution to, or pay greater benefits under, any Company Plan or
Company Benefit Program than it otherwise would or (B) create or
give rise to any additional vested rights or service credits under
any Company Plan or Company Benefit Program.
(iii) Except as disclosed on Schedule 3.1(n)(iii) of the Company
Letter, there are no severance agreements or employment agreements
between the Company or any of its Subsidiaries and any employee of the
Company or such Subsidiary. True and correct copies of all such
severance and employment agreements have been provided to Parent.
Except as disclosed on Schedule 3.1(n)(iii) of the Company Letter, (A)
neither the Company nor any of its Subsidiaries has any consulting
agreement or arrangement with any person involving annual compensation
in excess of $100,000, except as are terminable without penalty upon
one month's notice or less, and (B) no stock or other security issued
by the Company or any of its Subsidiaries forms or has formed a
material part of the assets of any Company Plan or Company Benefit
Program.
(o) Labor Matters.
(i) Except as set forth in Schedule 3.1(o)(i) of the Company Letter,
as of the date of this Agreement, (1) no employees of the Company or
any of its Subsidiaries are represented by any labor organization; (2)
no labor organization or group of employees of the Company 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 the Company, there are no
organizing activities involving the Company or any of its Subsidiaries
pending with any labor organization or group of employees of the
Company or any of its Subsidiaries.
(ii) Except as set forth on Schedule 3.1(o)(ii) of the Company
Letter, the Company 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 Company Material Adverse Effect.
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<PAGE>
(p) Intangible Property. The Company and its Subsidiaries possess or have
adequate rights to use all material trademarks, trade names, patents,
service marks, brand marks, brand names, computer programs, database,
industrial designs and copyrights necessary for the operation of the
businesses of each of the Company and its Subsidiaries (collectively, the
"Company Intangible Property"), except where the failure to possess or have
adequate rights to use such properties would not reasonably be expected to
have a Company Material Adverse Effect. Schedule 3.1(p) lists all patents
and trademarks or licensing agreements with respect to any patent or
trademark, which in each case is applicable to a material portion of the
business of the Company or its Subsidiaries. Except as set forth on
Schedule 3.1(p) of the Company Letter, all of the Company Intangible
Property is owned by the Company or its Subsidiaries free and clear of any
and all liens, claims or encumbrances, except those that are not reasonably
likely to have a Company Material Adverse Effect, and neither the Company
nor any such Subsidiary has forfeited or otherwise relinquished any Company
Intangible Property which forfeiture would result in a Company Material
Adverse Effect. The use of the Company Intangible Property by the Company
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 the Company nor any of its
Subsidiaries has received any notice of any claim or otherwise knows, that
any of the Company 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 Company
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 Company
Material Adverse Effect.
(q) 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.
(B) "Hazardous Material" means any substance, material or waste
which is regulated, or which could be the subject of Remedial
Action, 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," "pollutant," "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
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<PAGE>
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 the Release of any Hazardous Materials 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(q) of the Company Letter, the
operations of the Company and its Subsidiaries have been and are
currently in compliance with all Environmental Laws, except where the
failure to so comply would not reasonably be expected to have a Company
Material Adverse Effect;
(ii) Except as disclosed on Schedule 3.1(q) of the Company Letter,
the Company and its Subsidiaries have obtained and maintained 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 Company Material
Adverse Effect;
(iii) Except as disclosed on Schedule 3.1(q) of the Company Letter,
as of the date hereof the Company 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(q) of the Company Letter,
the Company and its Subsidiaries have not received any written
communication alleging, with respect to any such party, and has no
knowledge of, or reasonable reason to suspect the existence of, the
violation of or liability under any Environmental Law, which violation
or liability would reasonably be expected to have a Company Material
Adverse Effect;
(v) Except as disclosed on Schedule 3.1(q) of the Company Letter,
neither the Company nor any of its Subsidiaries has any contingent
liability in connection with any Release, of any Hazardous Material
including, without limitation, in connection with the exposure of any
person or property to Hazardous Material that would reasonably be
expected to lead to a Company Material Adverse Effect;
(vi) Except as disclosed on Schedule 3.1(q) of the Company Letter,
the operations of the Company 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, or
any other Hazardous Material are in compliance with applicable
Environmental Laws, except where the failure to so comply would not
reasonably be expected to have a Company Material Adverse Effect; and
(vii) Except as disclosed on Schedule 3.1(q) of the Company Letter,
to the knowledge of the Company as of the date hereof, there is not now
on or in any property of the Company 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 Company Material Adverse Effect. None of the
properties owned or operated by the Company are restricted as to use or
as to transfer of title, or the subject of any special recorded notice
as a result of the existence of Hazardous Substances thereon.
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<PAGE>
With respect to Sections 3.1(q)(ii), (iii) and (iv), the Company will
disclose in writing to Parent all changes to such information occurring
subsequent to the date hereof and prior to the Closing Date.
(viii) The Company has made available to Parent for review all
written reports of environmental audits and assessments prepared for
the Company or any of its Subsidiaries within the last three years by
third party consultants or internal environmental, safety or health
personnel which are in the possession or control of the Company and
which relate to the assets or operations of the Company or any of its
Subsidiaries.
(r) Opinion of Financial Advisor. The Company has received the opinion of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (a copy of which has
been delivered to Parent) to the effect that, as of the date hereof, the
consideration to be received by the holders of Company Common Stock
pursuant to this Agreement is fair from a financial point of view to such
holders.
(s) Vote Required. The affirmative vote of the holders of ninety percent
of the shares of Company Common Stock voting at the Company Stockholder
Meeting (as defined herein) is the only vote of the holders of any class or
series of the Company capital stock necessary to approve this Agreement and
the transactions contemplated hereby and to cause the same to be binding
upon all shareholders of the Company in accordance with the Bermuda Act
subject to any dissenters' rights under the Bermuda Act.
(t) Insurance. The Company has delivered to Parent an insurance schedule
of the Company'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. The Company
maintains insurance coverage reasonably adequate for the operation of the
business of the Company 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.
(u) Brokers. Except as disclosed on Schedule 3.1(u) of the Company
Letter, 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 the Company.
(v) Tax Matters. As of the date hereof, the representations set forth in
the numbered paragraphs of the form of Certificate of the Company included
as Schedule 3.1(v) of the Company Letter are true and correct, assuming for
purposes of this representation and warranty that the Merger and the
Liquidation referred to in such form had been consummated on the date
hereof.
(w) Title. Except as disclosed in the Company Financial Statements or on
Schedule 3.1(w) of the Company Letter, the Company and each of its
Subsidiaries have good and indefeasible title to all real property and good
title to all personal property owned by them, in each case free and clear
of all liens, pledges or encumbrances securing money borrowed, the deferred
purchase price of property in excess of $300,000 or capital leases and free
and clear of all other liens, pledges, encumbrances or defects that could
affect the value or use thereof except for any such other liens, pledges,
encumbrances or defects that would not have a Company Material Adverse
Effect.
(x) Books and Records. The Company and its Subsidiaries (i) make and keep
accurate books and records and (ii) maintain internal accounting controls
which provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are recorded
as necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and (D) the
reported accountability for its assets is compared with existing assets at
reasonable intervals.
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(y) Certain Payments. Neither the Company nor any of its Subsidiaries,
nor any director, officer, agent, employee or other person associated with
or acting on behalf of the Company or any of its Subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic governmental official
or employee from corporate funds; violated or is in violation of an
provision of the United States Foreign Corrupt Practices Act of 1977; or
made any illegal bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) Transactions with Related Parties. Except as set forth in Schedule
3.1(z) of the Company Letter, there are no agreements, contracts or other
arrangements between (i) the Company or any of its Subsidiaries, on the one
hand, and (ii) any Related Person (as defined below) of the Company, on the
other hand. Except as set forth in Schedule 3.1(z) of the Company Letter,
and except for the ownership of the Parent Common Stock issued hereunder
after the Closing Date no Related Person of the Company and no present
officer or director of any Related Person of the Company has any interest
in any property (real or personal, tangible or intangible) or contract used
in or pertaining to the business of the Company and its Subsidiaries (or
the Surviving Corporation and its Subsidiaries) and no Related Person of
the Company has any direct or indirect ownership interest (excluding
immaterial passive investments) in any person (other than through the
Company or any of its Subsidiaries) with which the Company or any of its
Subsidiaries competes in any material respect or has a material business
relationship. Schedule 3.1(z) of the Company letter sets forth as of the
date of this Agreement a description of all such services provided by any
Related Person of the Company or the Company and any of its Subsidiaries. A
"Related Person" of any person shall mean any holder of in excess of 5% of
the equity securities of such person and any affiliates or associates (as
defined in Rule 12b-2 under the Exchange Act) of such holder (other than
such original person or its Subsidiaries).
3.2 Representations and Warranties of Parent and Sub. Parent, on behalf of
itself and Sub, represents and warrants to the Company as follows:
(a) Organization, Standing and Power. Each of Parent and Parent's
Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
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 Parent Material Adverse Effect (as defined below). Parent
has heretofore delivered to the Company complete and correct copies of
Parent's Certificate of Incorporation and Bylaws, Sub's Memorandum of
Association and Bye-laws and the organizational documents of each of
Parent's Significant Subsidiaries. All Subsidiaries of Parent, the
percentage of Parent's ownership of such Subsidiaries, the identity and
percentage ownership of all other persons with equity interests in such
Subsidiaries and their respective jurisdictions of incorporation or
organization are identified on Schedule 3.2(a) of the letter dated and
delivered to the Company on the date hereof (the "Parent Letter"), which
relates to this Agreement and is designated therein as being the Parent
Letter. As used in this Agreement "Parent Material Adverse Effect" or
"Parent Material Adverse Change" shall mean any effect or change that is,
individually or in the aggregate, materially adverse to the business,
operations, assets, condition (financial or otherwise) or results of
operation of Parent and its Subsidiaries taken as a whole except for
general economic changes and changes that may affect the industries of
Parent or any of its Subsidiaries generally.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of Parent consists of 35,000,000 shares of Parent Common Stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, $.01 par
value per share. At the close of business on December 14, 1995: (i)
18,546,075 shares of Parent Common Stock are issued and outstanding, and an
aggregate of 1,960,957 shares of Parent Common Stock are reserved for
issuance pursuant to Parent's Amended and Restated Stock Option Plan
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<PAGE>
for Key Employees and Parent's Stock Option Plan for Nonemployee Directors
(collectively, the "Parent Stock Option Plans") and 1,000,000 shares of
Parent Common Stock are reserved for issuance pursuant to the Redeemable
Series A Convertible Preferred Stock of Parent (ii) 100,000 shares of
Redeemable Series A Convertible Preferred Stock of Parent were issued and
outstanding; (ii) no shares of Parent Common Stock were held by Parent 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 Parent stockholders may vote ("Parent
Voting Debt") were issued or outstanding. All outstanding shares of Parent
Common Stock have been duly authorized, are validly issued, fully paid and
nonassessable and are not subject to preemptive rights, and, subject to the
approval of the Parent Share Issuance and the Charter Amendment, all shares
of Parent Common Stock issuable in the Merger will be duly authorized and
will be, when issued, validly issued, fully paid and non-assessable and
free of preemptive rights. Except as set forth on Schedule 3.2(b) of the
Parent Letter, all outstanding shares of capital stock of the Subsidiaries
of Parent are owned by Parent, or a direct or indirect wholly owned
Subsidiary of Parent, free and clear of all liens, charges, encumbrances,
claims and options of any nature. Except as set forth in this Section
3.2(b) and except for changes since December 14, 1995 resulting from the
exercise of employee stock options granted pursuant to, or from issuances
or purchases under, the Parent Stock Option Plans, or as contemplated by
this Agreement, including issuances contemplated by the Subscription
Agreement, there are outstanding: (i) no shares of capital stock, Parent
Voting Debt or other voting securities of Parent; (ii) no securities of
Parent or any Subsidiary of Parent convertible into or exchangeable for
shares of capital stock, Parent Voting Debt or other voting securities of
Parent or any Subsidiary of Parent; and (iii) no options, warrants, calls,
rights (including preemptive rights), commitments or agreements to which
Parent or any Subsidiary of Parent is a party or by which it is bound in
any case obligating Parent or any Subsidiary of Parent 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
Parent Voting Debt or other voting securities of Parent or of any
Subsidiary of Parent, or obligating Parent or any Subsidiary of Parent to
grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. Except as set forth on Schedule 3.2(b) of the
Parent Letter, there are no stockholder agreements, registration rights,
voting trusts or other similar agreements or understandings to which Parent
is a party or by which it is bound. Except as set forth on Schedule 3.2(b)
of the Parent Letter, there are no restrictions on Parent's ability to vote
the stock held by Parent or any of its Subsidiaries. As of the Closing, the
authorized capital stock of Sub will consist of 1,000 ordinary shares, par
value $0.01 per share, 100 shares of which will be validly issued, fully
paid and nonassessable and owned by Parent and the balance of which will
not be issued or outstanding.
(c) Non-Subsidiary Equity Investment. Schedule 3.2(c) of the Parent
Letter sets forth the book value of each investment by the Parent or any of
its Subsidiaries in the voting securities, partnership interests or other
equity interests of any corporation, partnership or other entity (other
than a Subsidiary of Parent) and the nature and percentage of Parent's or
its Subsidiaries' ownership interest in such investment. Except as set
forth in Schedule 3.2(c) of the Parent Letter, the voting securities,
partnership interests or other equity interests of Parent or its
Subsidiaries in such investments are owned free and clear of all liens,
charges and encumbrances.
(d) Authority; No Violations; Consents and Approvals.
(i) The Board of Directors of Parent has unanimously declared as
advisable and fair to and in the best interests of the stockholders of
Parent the Merger, an amendment to the Certificate of Incorporation of
Parent to increase the number of authorized shares of Parent Common
Stock to 60,000,000 (the "Charter Amendment") and the issuance (the
"Parent Share Issuance") of shares of Parent Common Stock in accordance
with the Merger and the Subscription Agreement and has unanimously
approved this Agreement. Parent has all requisite power and authority
to enter into this Agreement and, subject to approval of the Charter
Amendment and the Parent Share Issuance, to consummate the transactions
contemplated hereby. Upon Sub's formation, Sub will have requisite
power and authority to enter into this Agreement and to consummate the
transactions contemplated
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hereby. This Agreement and the Merger will, prior to the Closing, be
approved by Parent as the sole stockholder of Sub. The execution and
delivery of this Agreement by Parent, on behalf of itself and Sub, and
the consummation by Parent and Sub of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on
the part of Parent and Sub, subject to approval of the Charter
Amendment and the Parent Share Issuance by a majority of outstanding
Parent Common Stock entitled to vote thereon at the Parent Stockholder
Meeting and subject to certain actions with respect to Sub which Parent
will take prior to Closing. This Agreement has been duly executed and
delivered by Parent, on behalf of itself and Sub, and subject, with
respect to the consummation of the Merger, to stockholder approval of
the Charter Amendment and the Parent Share Issuance, and assuming this
Agreement constitutes the valid and binding obligation of the Company,
constitutes a valid and binding obligation of Parent and will
constitute a valid and binding obligation of Sub, in each case
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) Except as set forth on Schedule 3.2(d) of the Parent Letter, 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 result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties or assets of Parent or any of
its Subsidiaries under, any provision of (i) the Certificate of
Incorporation or Bylaws of Parent or any provision of the comparable
charter or organizational documents of any of its Subsidiaries, (ii)
any loan or credit agreement, note, bond, mortgage, or indenture
applicable to Parent or any of its Subsidiaries, (iii) any other
agreement, instrument, permit, concession, franchise or license
applicable to Parent or any of its Subsidiaries or (iv) assuming the
consents, approvals, authorizations or permits and filings or
notifications referred to in Section 3.2(d)(iii) are duly and timely
obtained or made and the approval of the Merger and the Charter
Amendment and the Parent Share Issuance by the stockholders of Parent
has been obtained, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, other
than, in the case of clause (iii), any such conflicts, violations,
defaults, rights, liens, security interests, charges or encumbrances
that, individually or in the aggregate, would not have a Parent
Material Adverse Effect, materially impair the ability of Parent 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
Governmental Entity is required by or with respect to Parent or any of
its Subsidiaries in connection with the execution and delivery of this
Agreement by Parent and Sub or the consummation by Parent and Sub of
the transactions contemplated hereby, as to which the failure to obtain
or make would have a Parent Material Adverse Effect, except for: (A)
the filing of a premerger notification report by Parent under the HSR
Act, and the expiration or termination of the applicable waiting period
with respect thereto; (B) the filing with the SEC of a proxy statement
in preliminary and definitive form relating to the meeting of Parent's
stockholders to be held in connection with the Parent Share Issuance
and the Charter Amendment 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 a certificate of
amendment with respect to the Charter Amendment with the Secretary of
State of the State of Delaware; (D) filings with, and approval of, the
Nasdaq Stock Market or the NYSE; (E) such filings and approvals as may
be required by any applicable state securities, "blue sky" or takeover
laws, or environmental laws; (F) such filings and approvals as may be
required by any foreign premerger notification,
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securities, corporate or other law, rule or regulation and (G) the
filing of the Certificate of Merger with the Registrar of Companies of
Bermuda and the appropriate filings and consents required for the
Liquidation under Bermuda law.
(e) SEC Documents. Parent has made available to the Company a true and
complete copy of each quarterly, annual or current report on Form 10-Q, 10-
K or 8-K, registration statement and definitive proxy statement filed by
Parent with the SEC since January 1, 1993 and prior to the date of this
Agreement (the "Parent SEC Documents"), which are all the documents (other
than preliminary material) that Parent was required to file with the SEC
since such date. As of their respective filing dates, the Parent 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 Parent SEC Documents,
and none of the Parent 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. As of their
respective filing dates, the financial statements of Parent included in the
Parent 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 (i) as may be indicated in the notes thereto, (ii)
in the case of the unaudited statements, such differences in presentation
or omissions as permitted by Rule 10-01 of Regulation S-X of the SEC and
(iii) the unaudited financial statements do not contain all notes required
by GAAP) and fairly presented in accordance with applicable requirements of
GAAP (subject, in the case of the unaudited statements, to normal year-end
adjustments on a basis comparable with past periods) the consolidated
financial position of Parent and its consolidated Subsidiaries as of their
respective dates and the consolidated results of operations and the
consolidated cash flows of Parent and its consolidated Subsidiaries for the
periods presented therein.
(f) Information Supplied. None of the information supplied or to be
supplied by Parent 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 Parent or Sub and included or
incorporated by reference in the Proxy Statement will, at the time of
mailing thereof or at the time of the meeting of the stockholders of Parent
or the Company 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 Parent or any of its Subsidiaries, or with respect to other
information supplied by Parent 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
Parent. The S-4 and the Proxy Statement, insofar as they relate to Parent
or its Subsidiaries or other information supplied by Parent 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.
(g) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in the Parent SEC Documents
or on Schedule 3.2(g) of the Parent Letter, or except as contemplated by
this Agreement, since September 30, 1995, Parent has, in all material
respects, conducted its business only in the ordinary course and 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 Parent's capital stock; (ii) any amendment of any material term of any
outstanding equity security of Parent or any Subsidiary; (iii) any
repurchase, redemption or other acquisition by Parent or
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any Subsidiary of any outstanding shares of capital stock or other equity
securities of, or other ownership interests in, Parent or any Subsidiary,
except as contemplated by Parent Benefit Programs (as hereinafter defined);
(iv) any material change in any method of accounting or accounting
practice, or in any tax method, principle, election or practice, by Parent
or any Subsidiary; (v) if the covenants and agreements with respect to the
Parent and its Subsidiaries set forth in Section 4.2 had been applicable to
Parent and its Subsidiaries during the period from September 30, 1995 to
the date of this Agreement, any action, transaction, commitment or failure
to act that would cause Parent or any such Subsidiary to fail to comply
with such covenants and agreements; or (vi) any other action, 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, or may reasonably be expected to have, a Parent Material Adverse
Effect, except for general economic changes and changes that may affect the
industries of Parent or any of its Subsidiaries generally.
(h) No Undisclosed Material Liabilities. Except as fully reflected or
reserved against in the financial statements included in the Parent SEC
Documents, or disclosed in the footnotes thereto, or referred to in the
Parent Letter, as of the date hereof Parent and its Subsidiaries have no
liabilities, absolute or contingent other than liabilities which,
individually or in the aggregate, are reasonably expected not to have a
Company Material Adverse Effect. Except as so reflected, reserved or
disclosed, Parent and its Subsidiaries have no commitments which,
individually or in the aggregate, are reasonably expected to have a Parent
Material Adverse Effect.
(i) Material Contracts; No Defaults. All of the material contracts of
Parent and its Subsidiaries that are required to be described in the Parent
SEC Documents or to be filed as exhibits thereto, or that would be required
to be described or filed if a Form 10-K with respect to the Parent were
required to be filed on the date hereof, have been described or filed in
the Parent SEC Documents except as disclosed on Schedule 3.2(i) of the
Parent Letter. Neither Parent, 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) in the case of Parent and its Significant
Subsidiaries, their respective charter and by-laws or comparable
organizational documents, (ii) except as disclosed in Schedule 3.2(i) of
the Parent Letter, any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation to which Parent or any of its
Subsidiaries is now a party or by which Parent 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
Parent 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 Parent
Material Adverse Effect. Schedule 3.2(i) of the Parent Letter lists each
contract containing covenants which in any way purport to limit the freedom
of Parent or any of its Subsidiaries to engage in any line of business or
engage in business in any geographic area or to compete with any person.
Except as disclosed on Schedule 3.2(i), to the knowledge of Parent, none of
the other parties to material contracts of Parent or its Subsidiaries are
in violation of or in default under (nor does there exist any condition
which upon the passage of time or the giving of notice would cause such a
violation of or default under) any contract, other than such violations or
defaults as would not have a Parent Material Adverse Effect.
(j) Compliance with Applicable Laws. Parent 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 "Parent Permits"), except where the failure so
to hold would not have a Parent Material Adverse Effect. Parent and its
Subsidiaries are in compliance with the terms of the Parent Permits, except
where the failure so to comply would not have a Parent Material Adverse
Effect. Except as disclosed or as set forth on Schedule 3.2(j), 3.2(k),
3.2(l), 3.2(m), 3.2(n) or 3.2(p) of the Parent Letter, the businesses of
Parent and its Subsidiaries are not being conducted in violation of any
law, ordinance, regulation, judgment or decree of any Governmental Entity,
except for possible violations which would not have a Parent Material
Adverse Effect. Except as set forth on Schedule 3.2(j) of the Parent
Letter, as of the date of this Agreement, no investigation or review by any
Governmental
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Entity with respect to Parent or any of its Subsidiaries is, to the best
knowledge of Parent, pending or threatened, other than those the outcome of
which would not have a Parent Material Adverse Effect.
(k) Litigation. Except as disclosed on Schedule 3.2(k) of the Parent
Letter or in the Parent SEC Documents, there is no suit, action or
proceeding pending, or, to the best knowledge of Parent, threatened against
Parent or any Subsidiary of Parent ("Parent Litigation"), that,
individually or in the aggregate with all other Parent Litigation, is
reasonably likely to have a Parent Material Adverse Effect, nor is there
any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against Parent or any Subsidiary of Parent
("Parent Order") that, individually or in the aggregate with all other
Parent Litigation, is reasonably likely to have a Parent Material Adverse
Effect or a material adverse effect on Parent's ability to perform its
obligations hereunder or consummate the transactions contemplated by this
Agreement.
(l) Taxes. Except as set forth on Schedule 3.2(l) of the Parent Letter
and except for exceptions to the following that would not, individually or
in the aggregate, have a Parent Material Adverse Effect:
(i) Each of Parent, 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 and timely (taking into
account any extensions) filed all federal, 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 (including estimated Taxes) that are due and payable (except for
(x) audit adjustments not material in the aggregate or to the extent
that liability therefor is reserved for in Parent's most recent audited
financial statements and (y) such Taxes not exceeding an aggregate of
$500,000 which are being contested in good faith in the ordinary course
of business) for which Parent 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
Parent and its Subsidiaries through the date hereof, and (D) complied
in all material respects with all applicable laws, rules and
regulations relating to the 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(l) of the Parent Letter sets forth (i) the last
taxable period through which the United States federal income Tax
Returns of Parent and any of its Subsidiaries have been examined by the
IRS or otherwise closed and (ii) any affiliated, consolidated,
combined, unitary or similar group Return in which the Parent 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 federal, state, local, foreign or other
taxing authority have been paid, fully settled or adequately provided
for in Parent's most recent audited financial statements. Except as
adequately provided for in the financial statements included in the
Parent SEC Documents, no material tax audits or other administrative
proceedings or court proceedings are presently pending with regard to
any Taxes for which Parent or any of its Subsidiaries would be liable,
and no material deficiency for any such Taxes has been proposed,
asserted or assessed pursuant to such examination against Parent or any
of its Subsidiaries by any federal, state, local, foreign or other
taxing authority with respect to any period.
(iii) Neither Parent nor any of its Subsidiaries has executed or
entered 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 Taxes for which Parent 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 federal, state, local, foreign or other tax
law that relates to the assets or operations of Parent or any of its
Subsidiaries.
(iv) Neither Parent nor any of its Subsidiaries is a party to an
agreement that provides for the payment of any amount that would
constitute a "parachute payment" within the meaning of Section 280G of
the Code.
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(v) Neither Parent 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 Parent or
any of its Subsidiaries.
(vi) Neither Parent 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.
(m) Pension and Benefit Plans; ERISA.
(i) Parent has made available to the Company true, correct, and
complete copies of each of the following which is sponsored, maintained
or contributed to by Parent or any of its Subsidiaries for the benefit
of the employees of Parent or such Subsidiary:
(1) each "employee benefit plan," as such term is defined in
Section 3(3) of ERISA, including, but not limited to, employee
benefit plans, such as foreign plans, which are not subject to the
provisions of ERISA ("Parent Plans"); and
(2) each personnel policy, stock option plan, collective
bargaining agreement, bonus plan or arrangement, incentive award
plan or arrangement, vacation policy, severance pay plan, policy or
agreement, deferred compensation agreement or arrangement, executive
compensation or supplemental income arrangement, consulting
agreement, employment agreement and each other employee benefit
plan, agreement, arrangement, program, practice or understanding
which is not described in Section 3.2(m)(i)(1) ("Parent Benefit
Programs").
(ii) Except as disclosed in Schedule 3.2(m)(ii) of the Parent Letter:
(1) Parent and its Subsidiaries do not contribute to or have an
obligation to contribute to, and have not at any time 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;
(2) Parent and its Subsidiaries have substantially performed all
material obligations, whether arising by operation of law or by
contract, required to be performed by them in connection with the
Parent Plans and the Parent Benefit Programs, and to the knowledge
of Parent there have been no material defaults or violations by any
other party to the Parent Plans or Parent Benefit Programs;
(3) All reports and disclosures relating to the Parent Plans
required to be filed with or furnished to governmental agencies,
Parent Plan participants or beneficiaries have been filed or
furnished substantially in accordance with applicable law in a
timely manner;
(4) Each Parent Plan intended to be qualified under Section 401 of
the Code satisfies the requirements of such Section and has received
a favorable determination letter from the Internal Revenue Service
regarding such qualified status and has not, since receipt of the
most recent favorable determination letter, been amended or, to the
knowledge of Parent, operated in a way which would adversely affect
such qualified status. As to any Parent Plan intended to be
qualified under Section 401 of the Code, there has been no
termination or partial termination of the Parent Plan within the
meaning of Section 411(d)(3) of the Code;
(5) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of Parent,
threatened against, or with respect to, any of the Parent Plans or
Parent Benefit Programs or their assets. To the knowledge of Parent,
there is no matter pending (other than routine qualification
determination filings) with respect to any of the Parent Plans
before the IRS, the United States Department of Labor or the PBGC;
(6) As to any Parent Plan subject to Title IV of ERISA, there has
been no event or condition which presents the material risk of a
Parent Plan termination, no accumulated
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funding deficiency, whether or not waived, within the meaning of
Section 302 of ERISA or Section 412 of the Code has been incurred,
no reportable event within the meaning of Section 4043 of ERISA (for
which the disclosure requirements of Regulation 2615.3 promulgated
by the PBGC have not been waived) has occurred, no notice of intent
to terminate the Parent Plan has been given under Section 4041(c) of
ERISA, no proceeding has been instituted under Section 4042 of ERISA
to terminate the Parent Plan, no liability to the PBGC has been
incurred;
(7) No act, omission or transaction has occurred which would
result in imposition on Parent or any of its Subsidiaries of (A)
liability for a breach of fiduciary duty under Section 409 of ERISA,
(B) a civil penalty assessed pursuant to subsections (c), (i) or (l)
of Section 502 of ERISA or (C) a tax imposed pursuant to Chapter 43
of Subtitle D of the Code;
(8) With respect to any employee benefit plan, within the meaning
of Section 3(3) of ERISA, which is not a Parent Plan but which is
sponsored, maintained or contributed to, or has been sponsored,
maintained or contributed to within six years prior to the Effective
Time, by any corporation, trade, business or entity under common
control with Parent, within the meaning of Section 414(b), (c) or
(m) of the Code or Section 4001 of ERISA ("Parent Commonly
Controlled Entity"), (A) no withdrawal liability, within the meaning
of Section 4201 of ERISA, has been incurred, which withdrawal
liability has not been satisfied, (B) no liability to the PBGC has
been incurred by any Parent Commonly Controlled Entity, which
liability has not been satisfied, (C) no 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 (D) all
contributions (including installments) to such plan required by
Section 302 of ERISA and Section 412 of the Code have been timely
made; and
(9) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (A)
require Parent or any of its Subsidiaries to make a larger
contribution to, or pay greater benefits under, any Parent Plan or
Parent Benefit Program than it otherwise would or (B) create or give
rise to any additional vested rights or service credits under any
Parent Plan or Parent Benefit Program.
(iii) Except as disclosed on Schedule 3.2(m)(iii) of the Parent
Letter, there are no severance agreements or employment agreements
between Parent or any of its Subsidiaries and any employee of Parent or
such Subsidiary. True and correct copies of all such severance and
employment agreements have been provided to the Company. Except as
disclosed on Schedule 3.2(m)(iii) of the Parent Letter, (A) neither
Parent nor any of its Subsidiaries has any consulting agreement or
arrangement with any person involving annual compensation in excess of
$100,000 except as are terminable without penalty upon one month's
notice or less, and (B) no stock or other security issued by Parent or
any of its Subsidiaries forms or has formed a material part of the
assets of any Parent Plan or Parent Benefit Program.
(n) Labor Matters.
(i) Except as set forth in Schedule 3.2(n)(i) of the Parent Letter,
as of the date of this Agreement, (1) no employees of Parent or any of
its Subsidiaries are represented by any labor organization; (2) no
labor organization or group of employees of Parent 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 Parent, there are no organizing
activities involving Parent or any of its Subsidiaries pending with any
labor organization or group of employees of Parent or any of its
Subsidiaries.
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(ii) Except as set forth on Schedule 3.2(n)(ii) of the Parent Letter,
Parent 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
Parent Material Adverse Effect.
(o) Intangible Property. Parent and its Subsidiaries possess or have
adequate rights to use all material trademarks, trade names, patents,
service marks, brand marks, brand names, computer programs, database,
industrial designs and copyrights necessary for the operation of the
businesses of each of Parent and its Subsidiaries (collectively, the
"Parent Intangible Property"), except where the failure to possess or have
adequate rights to use such properties would not reasonably be expected to
have a Parent Material Adverse Effect. Except as set forth on Schedule
3.2(o) of the Parent Letter, all of the Parent Intangible Property is owned
by Parent or its Subsidiaries free and clear of any and all liens, claims
or encumbrances, except those that are not reasonably likely to have a
Parent Material Adverse Effect, and neither Parent nor any such Subsidiary
has forfeited or otherwise relinquished any Parent Intangible Property
which forfeiture would result in a Parent Material Adverse Effect. The use
of Parent Intangible Property by Parent 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 Parent nor any of its Subsidiaries has received any notice of
any claim or otherwise knows that any of Parent 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 Parent 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 Parent Material Adverse Effect.
(p) Environmental Matters.
(i) Except as disclosed on Schedule 3.2(p) of the Parent Letter, the
operations of Parent and its Subsidiaries have been and are currently
in compliance with all Environmental Laws, except where the failure to
so comply would not reasonably be expected to have a Parent Material
Adverse Effect;
(ii) Except as disclosed on Schedule 3.2(p) of the Parent Letter,
Parent and its Subsidiaries have obtained and maintained 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 Parent Material
Adverse Effect;
(iii) Except as disclosed on Schedule 3.2(p) of the Parent Letter, as
of the date hereof Parent 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 3.2(p) of the Parent Letter,
Parent and its Subsidiaries have not received any written communication
alleging, with respect to any such party, and has no knowledge of, or
reasonable reason to suspect the existence of, the violation of or
liability under any Environmental Law, which violation or liability
would reasonably be expected to have a Parent Material Adverse Effect;
(v) Except as disclosed on Schedule 3.2(p) of the Parent Letter,
neither Parent nor any of its Subsidiaries has any contingent liability
in connection with any Release of any Hazardous Material
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including, without limitation, in connection with the exposure of any
person or property to Hazardous Material that would reasonably be
expected to lead to a Parent Material Adverse Effect;
(vi) Except as disclosed on Schedule 3.2(p) of the Parent Letter, the
operations of Parent 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, or any other
Hazardous Material are in compliance with applicable Environmental
Laws, except where the failure to so comply would not reasonably be
expected to have a Parent Material Adverse Effect; and
(vii) Except as disclosed on Schedule 3.2(p) of the Parent Letter, to
the knowledge of Parent as of the date hereof, there is not now on or
in any property of Parent 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 Parent Material Adverse Effect. None of the properties owned
or operated by Parent are restricted as to use or as to transfer of
title, or the subject of any special recorded notice, as a result of
the existence of Hazardous Substances thereon.
With respect to Sections 3.2(p)(ii), (iii) and (iv), Parent will
disclose in writing to the Company all changes to such information
occurring subsequent to the date hereof and prior to the Closing Date.
(viii) Parent has made available to the Company for review all
written reports of environmental audits and assessments prepared for
Parent or any of its Subsidiaries within the last three years by third
party consultants or internal environmental, safety or health personnel
which are in the possession or control of Parent and which relate to
the assets or operations of Parent or any of its Subsidiaries.
(q) Opinion of Financial Advisor. Parent has received the opinion of CS
First Boston Corporation (a copy of which has been delivered to the
Company) to the effect that, as of the date hereof, the consideration to be
paid by the Parent in the Merger is fair to Parent from a financial point
of view.
(r) Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Parent Common Stock is the only vote of the
holders of any class or series of Parent capital stock necessary to approve
the Charter Amendment, the Parent Share Issuance, this Agreement and the
transactions contemplated hereby.
(s) Insurance. Parent has delivered to the Company an insurance schedule
of Parent'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. Parent maintains
insurance coverage reasonably adequate for the operation of the business of
Parent 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 Schedule 3.2(t) of the Parent Letter,
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 Parent.
(u) Tax Matters. As of the date hereof, the representations set forth in
the numbered paragraphs of the form of Certificate of Parent included as
Schedule 3.2(u) of the Parent Letter are true and correct, assuming for
purposes of this representation and warranty that the Merger and the
Liquidation referred to in such form had been consummated on the date
hereof.
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(v) Interim Operations of Sub. Sub will be formed by Parent solely for
the purpose of engaging in the transactions contemplated hereby, will
engage in no other business or activities, will incur no other obligations
or liabilities, will have no other assets and will conduct its operations
only as contemplated hereby.
(w) Title. Except as disclosed in the Parent Financial Statements or on
Schedule 3.2(w) of the Parent Letter, the Parent and each of its
Subsidiaries have good and indefeasible title to all real property and good
title to all personal property owned by them, in each case free and clear
of all liens, pledges or encumbrances securing money borrowed, the deferred
purchase price of property in excess of $300,000 or capital leases and free
and clear of all other liens, pledges, encumbrances or defects that could
affect the value or use thereof except for any such other liens, pledges,
encumbrances or defects that would not have a Parent Material Adverse
Effect.
(x) Books and Records. The Parent and its Subsidiaries (i) make and keep
accurate books and records and (ii) maintain internal accounting controls
which provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are recorded
as necessary to permit preparation of their financial statements and to
maintain accountability for their assets, (C) access to their assets is
permitted only in accordance with management's authorization and (D) the
reported accountability for their assets is compared with existing assets
at reasonable intervals.
(y) Certain Payments. Neither the Parent not any of its Subsidiaries, nor
any director, officer, agent, employee or other person associated with or
acting on behalf of the Parent or any of its Subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic governmental official
or employee from corporate funds; violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977; nor made any
illegal bribe, rebate, payoff, influence payment, kickback or other
unlawful payment.
(z) Transactions with Related Parties. Except as set forth in Schedule
3.2(z) of the Parent Letter or in the Parent SEC Documents, there are no
agreements, contracts or other arrangements between (i) Parent or any of
its Subsidiaries, on the one hand, and (ii) any Related Person of Parent,
on the other hand. Except as set forth in Schedule 3.2(z) of the Parent
Letter, after the Closing Date no Related Person of Parent and no present
officer or director of any Related Person of Parent has any interest in any
property (real or personal, tangible or intangible) or contract used in or
pertaining to the business of the Parent and its Subsidiaries (or the
Surviving Corporation and its Subsidiaries) and no Related Person of Parent
has any direct or indirect ownership interest (excluding immaterial passive
investments) in any person (other than through Parent or any of its
Subsidiaries) with which Parent or any of its Subsidiaries competes in any
material respect or has a material business relationship. Other than those
services described in the Parent SEC Documents, Schedule 3.2(z) of the
Parent Letter sets forth as of the date of this Agreement a description of
all services provided by any Related Person of Parent to Parent and any of
its Subsidiaries.
ARTICLE IV
Covenants Relating to Conduct of Business
4.1 Conduct of Business by the Company Pending the Merger. During the period
from the date of this Agreement and continuing until the Effective Time, the
Company agrees as to itself and its Subsidiaries that (except as expressly
contemplated or permitted by this Agreement, or to the extent that Parent shall
otherwise consent in writing):
(a) Ordinary Course. Except as provided on Schedule 4.1(a) of the Company
Letter, each of the Company and its Subsidiaries shall carry on its
businesses only in the usual, regular and ordinary course
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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) of
the Company Letter, the Company 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 the Company to the Company or another Subsidiary of the
Company and except for cash dividends or distributions paid on or with
respect to the capital stock or partnership interests of a Subsidiary of
the Company; (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 the Company 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, as contemplated by any existing employee
benefit plan or pursuant to the terms of any existing agreements with
employees of the Company and its Subsidiaries upon the termination of
employment of any such employee.
(c) Issuance of Securities. Except as provided on Schedule 4.1(c) of the
Company Letter, the Company 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 Company Common Stock upon the exercise of stock
options granted under the Company Stock Option Plans 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 Company Stock Option
Plans; and (ii) issuances by a wholly owned Subsidiary of its capital stock
to its parent.
(d) Governing Documents. Except as contemplated hereby or in connection
herewith, the Company shall not amend or propose to amend its Memorandum of
Association or Bye-laws.
(e) No Acquisitions. Other than acquisitions listed on Schedule 4.1(e) of
the Company Letter or acquisitions as to which the aggregate purchase price
is not in excess of $3,000,000, the Company 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) of the Company Letter; (ii) as may
be necessary or required by law to consummate the transactions contemplated
hereby; or (iii) dispositions of inventory in the ordinary course of
business consistent with past practice and dispositions of other assets
that are not material, individually or in the aggregate, to the Company and
its Subsidiaries taken as a whole, the Company 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.
Notwithstanding the foregoing, none of the Company nor its Subsidiaries
shall sell, lease, encumber or otherwise dispose of, or agree to dispose
of, any of its assets to any Related Person other than in the ordinary
course of business on an arms length basis.
(g) No Dissolution, Etc. Except as otherwise permitted or contemplated by
this Agreement, the Company shall not authorize, recommend, propose or
announce an intention to adopt a plan of complete or partial liquidation or
dissolution of the Company or any of its Significant Subsidiaries.
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(h) Certain Employee Matters. Except as set forth on Schedule 4.1(h) of
the Company Letter, the Company 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 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 Company Benefit Programs or
Company Plans as in effect on the date hereof to any such 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
such director, officer or key employee; or (iv) become obligated under any
new Company Benefit Program or Company Plan, which was not in existence or
approved by the Board of Directors of the Company 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.
(i) Indebtedness; Leases; Capital Expenditures. Except as set forth on
Schedule 4.1(i) of the Company Letter, the Company shall not, nor shall the
Company permit any of its Subsidiaries to, (i) incur any indebtedness for
borrowed money (except for working capital under the Company'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 the Company or any of
its Subsidiaries in connection with any indebtedness thereof, except for
those securing purchase money indebtedness or (iii) commit to aggregate
capital expenditures in excess of $1,000,000 outside the capital budget, as
amended and approved by the Company prior to the date hereof and set forth
on Schedule 4.1(i) of the Company Letter.
(j) No Solicitation. From and after the date hereof, the Company will
not, and will not authorize or permit any of its officers, directors,
employees, agents and other representatives or those of any of its
Subsidiaries (collectively, "Company Representatives") to, directly or
indirectly, solicit or initiate any prospective buyer or the making of any
proposal that constitutes, or may reasonably be expected to lead to, a
Company Acquisition Proposal (as defined herein) from any person; provided,
however, that, notwithstanding any other provision of this Agreement, (i)
the Company may engage in discussions or negotiations with a third party
who (without any solicitation or initiation, directly or indirectly, by or
with the Company or any Company Representatives after the date of this
Agreement) seeks to initiate such discussions or negotiations and may
furnish such third party information concerning the Company and its
business, properties and assets, (ii) the Company's Board of Directors may
take and disclose to the Company's stockholders a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act and (iii) following
receipt of a Company Acquisition Proposal that is financially superior to
the Merger and reasonably capable of being financed (as determined in each
case in good faith by the Company's Board of Directors after consultation
with the Company's financial advisors), the Board of Directors of the
Company may withdraw, modify or not make its recommendation referred to in
Section 5.5, but in each case referred to in the foregoing clauses (i)
through (iii) only to the extent that the Board of Directors of the Company
shall conclude in good faith that such action is necessary in order for the
Board of Directors of the Company to act in a manner that is consistent
with its fiduciary obligations under applicable law. The Company shall
immediately cease and cause to be terminated any existing solicitation,
initiation, encouragement, activity, discussion or negotiation with any
parties conducted heretofore by the Company or any Company Representatives
with respect to any Company Acquisition Proposal existing on the date
hereof. The Company will promptly notify Parent of any such requests for
such information or the receipt of any Company Acquisition Proposal,
including the identity of the person or group engaging in such discussions
or negotiations, requesting such information or making such Company
Acquisition Proposal, and (unless the Board of Directors of the Company
concludes such disclosure is inconsistent with its fiduciary obligations
under applicable law) the material terms and
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conditions of any Company Acquisition Proposal. As used in this Agreement,
"Company Acquisition Proposal" shall mean any proposal or offer, other than
a proposal or offer by Parent or any of its affiliates, for a tender or
exchange offer, a merger, consolidation or other business combination
involving the Company or any Significant Subsidiary of the Company or any
proposal to acquire in any manner a substantial equity interest in, or
substantially all of the assets of, the Company or any of its Significant
Subsidiaries.
4.2 Conduct of Business by Parent Pending the Merger. During the period from
the date of this Agreement and continuing until the Effective Time, Parent
agrees as to itself and its Subsidiaries that (except as expressly contemplated
or permitted by this Agreement, or to the extent that the Company shall
otherwise consent in writing):
(a) Ordinary Course. Except as provided on Schedule 4.2(a) of the Parent
Letter, each of Parent and its Subsidiaries shall carry on its businesses
only 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 4.2(b) of
the Parent Letter, Parent 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 Parent to Parent or another Subsidiary of Parent and except
for cash dividends or distributions paid on or with respect to the capital
stock or partnership interests of a Subsidiary of Parent; (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 Parent 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 or pursuant to the
terms of any existing agreements with employees of Parent and its
Subsidiaries upon the termination of employment of any such employee.
(c) Issuance of Securities. Except as provided on Schedule 4.2(c) of the
Parent Letter, Parent 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 Parent Common Stock upon the exercise of stock
options granted under Parent Stock Option Plans 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 Parent Stock Option Plans; and (ii)
issuances by a wholly owned Subsidiary of its capital stock to its parent.
(d) Governing Documents. Except as contemplated hereby or in connection
herewith, Parent shall not amend or propose to amend its Certificate of
Incorporation or Bylaws.
(e) No Acquisitions. Other than acquisitions listed on Schedule 4.2(e) of
the Parent Letter or acquisitions as to which the aggregate purchase price
is not in excess of $3,000,000, Parent 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 4.2(f) of the Parent Letter; (ii) as may be
necessary or required by law to consummate the transactions
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contemplated hereby; or (iii) dispositions of inventory in the ordinary
course of business consistent with past practice and disposition of other
assets that are not material, individually or in the aggregate, to Parent
and its Subsidiaries taken as a whole, Parent 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.
Notwithstanding the foregoing, none of Parent nor its Subsidiaries shall
sell, lease, encumber or otherwise dispose of, any of its assets to any
Related Person other than in the ordinary course of business on an arms
length basis.
(g) No Dissolution, Etc. Except as otherwise permitted or contemplated by
this Agreement, Parent shall not authorize, recommend, propose or announce
an intention to adopt a plan of complete or partial liquidation or
dissolution of Parent or any of its Significant Subsidiaries.
(h) Certain Employee Matters. Except as set forth on Schedule 4.2(h) of
the Parent Letter, Parent 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 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 Parent Benefit Programs or Parent Plans
as in effect on the date hereof to any such 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 such director,
officer or key employee; or (iv) become obligated under any new Parent
Benefit Program or Parent Plan, which was not in existence or approved by
the Board of Directors of Parent 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.
(i) Indebtedness; Leases; Capital Expenditures. Except as set forth on
Schedule 4.2(i) of the Parent Letter, Parent shall not, nor shall Parent
permit any of its Subsidiaries to, (i) incur any indebtedness for borrowed
money (except for working capital under Parent'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 Parent or any of its
Subsidiaries in connection with any indebtedness thereof, except for those
securing purchase money indebtedness or (iii) commit to aggregate capital
expenditures in excess of $1,000,000 outside the capital budget, as amended
and approved by Parent prior to the date hereof and set forth on Schedule
4.2(i) of the Parent Letter.
(j) No Solicitation. From and after the date hereof, Parent will not, and
will not authorize or permit any of its officers, directors, employees,
agents and other representatives or those of any of its Subsidiaries
(collectively, "Parent Representatives") to, directly or indirectly,
solicit or initiate any prospective buyer or the making of any proposal
that constitutes, or may reasonably be expected to lead to, a Parent
Acquisition Proposal (as defined herein) from any person; provided,
however, that, notwithstanding any other provision of this Agreement, (i)
Parent may engage in discussions or negotiations with a third party who
(without any solicitation or initiation, directly or indirectly, by or with
Parent or any Parent Representatives after the date of this Agreement)
seeks to initiate such discussions or negotiations and may furnish such
third party information concerning Parent and its business, properties and
assets, (ii) Parent's Board of Directors may take and disclose to Parent's
stockholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act and (iii) following receipt of a Parent Acquisition Proposal
that is financially superior to the Merger and reasonably capable of being
financed (as determined in each case in good faith by Parent's Board of
Directors after consultation with Parent's financial advisors), the Board
of Directors of Parent may withdraw, modify or not make its recommendation
referred to in Section 5.5 or terminate this Agreement in accordance with
Section 7.1(b), but in each case referred to in the foregoing clauses (i)
through (iii) only to the extent that the
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Board of Directors of Parent shall conclude in good faith that such action
is necessary in order for the Board of Directors of Parent to act in a
manner that is consistent with its fiduciary obligations under applicable
law. Parent shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by Parent or any Parent
Representatives with respect to any Parent Acquisition Proposal existing on
the date hereof. Parent will promptly notify the Company of any such
requests for such information or the receipt of any Parent Acquisition
Proposal, including the identity of the person or group engaging in such
discussions or negotiations, requesting such information or making such
Parent Acquisition Proposal, and (unless the Board of Directors of Parent
concludes such disclosure is inconsistent with its fiduciary obligations
under applicable law) the material terms and conditions of any Parent
Acquisition Proposal. As used in this Agreement, "Parent Acquisition
Proposal" shall mean any proposal or offer, other than a proposal or offer
by the Company or any of its affiliates, for a tender or exchange offer, a
merger, consolidation or other business combination involving Parent or any
Significant Subsidiary of Parent or any proposal to acquire in any manner a
substantial equity interest in, or substantially all of the assets of,
Parent or any of its Significant Subsidiaries.
ARTICLE V
Additional Agreements
5.1 Preparation of S-4 and the Proxy Statement. Parent shall promptly prepare
and file with the SEC the Proxy Statement and the S-4, in which the Proxy
Statement will be included as a prospectus. Parent shall use its reasonable
best efforts to have the S-4 declared effective under the Securities Act as
promptly as practicable after such filing. Parent shall use its reasonable best
efforts to cause the Proxy Statement to be mailed to stockholders of Parent at
the earliest practicable date. Parent shall use its reasonable best efforts to
obtain all necessary state securities laws or "blue sky" permits, approvals and
registrations in connection with the issuance of Parent Common Stock in the
Merger and upon the exercise of the Company Stock Options (as defined herein)
and the Company shall furnish all information concerning the Company and the
holders of the Company Common Stock, including financial statements required by
Form S-4 and the proxy rules under the Exchange Act as may be reasonably
requested in connection with obtaining such permits, approvals and
registrations.
5.2 Letter of the Company's Accountants. The Company shall use its reasonable
best efforts to cause to be delivered to Parent a letter of KPMG Peat Marwick
LLP, the Company's independent public accountants, and Ernst & Young LLP,
Sweco's independent public accountants, each dated a date within two business
days before the date on which the S-4 shall become effective and addressed to
Parent and the individuals listed on Exhibit C-1, in form and substance
reasonably satisfactory to Parent 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 Parent's Accountants. Parent shall use its reasonable best
efforts to cause a letter of Ernst & Young LLP, Parent's independent public
accountants, dated a date within two business days before the date on which the
S-4 shall become effective, in form and substance reasonably satisfactory to
Parent and the Company and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 to be delivered and addressed to such persons and
entities as is customary for similar letters.
5.4 Access to Information. Upon reasonable notice, the Company and Parent
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 Time, to all its properties, books, contracts, commitments and
records and, during such period, each of the Company and Parent shall (and
shall cause each of their respective Subsidiaries to) furnish promptly to the
other (a) a copy of each quarterly, annual or current report on Form 10-Q, 10-K
or 8-K, schedule, registration
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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,
excluding, however, information covered by confidentiality agreements with
third parties. Each of the Company and Parent 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
dated as of October 24, 1995 between Parent and Drexel Oilfield Services Inc.
(the "Confidentiality Agreement") shall apply with respect to information
furnished thereunder or hereunder and any other activities contemplated
thereby.
5.5 Stockholders Meetings. The Company and Parent shall each call a meeting
of its stockholders (respectively, the "Company Stockholder Meeting" and the
"Parent Stockholder Meeting" and, collectively, the "Stockholder Meetings") to
be held as promptly as practicable after the date hereof for the purpose of
voting upon this Agreement and the Merger (in the case of the Company) and the
Parent Share Issuance and the Charter Amendment (in the case of Parent).
Subject only to the proviso of the first sentence of Section 4.1(j), the
Company will, through its Board of Directors, recommend to its stockholders
approval of such matters and not rescind such recommendation and shall use its
reasonable best efforts to obtain approval and adoption of this Agreement and
the Merger by its stockholders. Subject only to the proviso of the first
sentence of Section 4.2(j), Parent will, through its Board of Directors,
recommend to its stockholders approval of such matters and not rescind such
recommendation and shall use its reasonable best efforts to obtain approval and
adoption of the Parent Share Issuance and the Charter Amendment by its
stockholders. The Company and Parent shall coordinate and cooperate with
respect to the timing of such meetings and shall use their reasonable best
efforts to hold such meetings on the same day.
5.6 Legal Conditions to Merger. Each of the Company, Parent and Sub will take
all reasonable actions necessary to comply promptly with all legal requirements
that may be imposed on such party with respect to the Merger (including,
without limitation, furnishing all information required under the HSR Act and
in connection with approvals of or filings with any other Governmental Entity)
and will promptly cooperate with and furnish information to each other in
connection with any such requirements imposed upon any of them or any of their
Subsidiaries in connection with the Merger. Each of the Company, Parent and Sub
will, and will cause its Subsidiaries to, take all actions necessary to obtain
(and will cooperate with each other in obtaining) any consent, acquiescence,
authorization, order or approval of, or any exemption or nonopposition by, any
Governmental Entity, court or other person or entity, including without
limitation, any necessary parties to that certain Secured Credit Agreement
dated June 30, 1994 among Parent, certain Subsidiaries of Parent and ABN AMRO
Bank, N.V., as agent ("Parent's Credit Facility") and to that certain
$37,000,000 Amended and Restated Revolving and Term Credit Agreement by and
among Drexel Holdings, Inc. and Texas Commerce Bank NA (the "Company's Credit
Facility") required to be obtained or made by the Company, Parent or any of
their Subsidiaries in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement, including complying with any
requests or orders made by the Justice Department or the Federal Trade
Commission in connection with the Merger.
5.7 Agreements of Others. Prior to the Effective Time, the Company shall
cause to be prepared and delivered to Parent a list identifying all persons
who, at the time of the Company Stockholder Meeting, may be deemed to be
"affiliates" of the Company as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act (the "Affiliates"). The Company shall use its
reasonable best efforts to cause each person who is identified as an Affiliate
in such list to deliver to Parent, at or prior to the Effective Time, a written
agreement, in a form mutually agreeable to the Company and Parent whereby each
such person acknowledges that such person is subject to the provisions of Rule
145(d) promulgated under the Securities Act.
5.8 Listing. Parent shall use its reasonable best efforts to cause the shares
of Parent Common Stock to be issued in the Merger, the shares of Parent Common
Stock issuable upon exercise of the Warrants and the shares of Parent Common
Stock issuable upon exercise of the Company Stock Options and issuable under
the Company Stock Option Plans to be approved for trading on the Nasdaq Stock
Market or the New York Stock Exchange, Inc. (the "NYSE"), subject to official
notice of issuance, prior to the Closing Date.
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5.9 Board of Directors and Officers at the Effective Time. Parent shall take
all necessary action so that as of the Effective Time the directors of Parent
shall only be those individuals identified as directors on Exhibit C-1 hereto
and the officers of Parent shall only be those individuals identified as
officers on Exhibit C-2 hereto, except to the extent any such individual is
unwilling or unable to serve in such capacity. Parent represents and warrants
to the Company that it has received irrevocable letters of resignation
effective as of the Effective Time from all of the current directors of Parent
other than individuals identified as directors on Exhibit C-1 hereto. If prior
to the Effective Time an individual identified on Exhibits C-1 or C-2 hereto as
a director or officer is unwilling or unable to serve in such capacity, then
the directors of Parent specified on Exhibit C-1 that are willing and able to
serve shall fill any vacancies promptly after the Effective Time.
5.10 Stock Options; Reservation and Registration of Shares. (a) At the
Effective Time, each outstanding option to purchase the Company Common Stock
and any stock appreciation rights related thereto that have been granted
pursuant to the Company Stock Option Plans (a " Company Stock Option"), whether
vested or unvested, shall be assumed by Parent. Each such option shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Company Stock Option, a number of shares of Parent
Common Stock equal to the number of shares of Company Common Stock purchasable
pursuant to such Company Stock Option multiplied by the Stock Option Exchange
Ratio (as hereinafter defined), at a price per share equal to the per-share
exercise price for the shares of Company Common Stock purchasable pursuant to
such Company Stock Option divided by the Stock Option 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 Parent Common Stock that may be purchased
upon exercise of such Company Stock Option shall not include any fractional
share and, upon exercise of such Company Stock Option, a cash payment shall be
made for any fractional share based upon the closing price of a share of Parent
Common Stock on the Nasdaq Stock Market or, if then traded on an exchange, such
exchange, on the last trading day of the calendar month immediately preceding
the date of exercise. "Stock Option Exchange Ratio" shall mean initially .4372,
which amount shall be increased as of the date that Escrowed Shares are
distributed pursuant to the Escrow Agreement by (i) the product of .0273
multiplied by (ii) the quotient of the number of Escrowed Shares distributed to
former holders of Company Common Stock divided by the aggregate number of
Escrowed Shares. Notwithstanding the foregoing, (i) if a Company Stock Option
is exercised prior to the date that Escrowed Shares are distributed pursuant to
the Escrow Agreement, upon such date appropriate adjustments shall be made so
that such optionee will be in the same position with respect to Parent Common
Stock as if the Stock Option Exchange Ratio on the date of such exercise had
been the adjusted Stock Option Exchange Ratio as of such date and (ii) the
Company may elect prior to the Effective Time to cancel for cash consideration
the Sweco Options in accordance with their terms.
(b) Subject to the approval of the Charter Amendment, Parent shall take all
corporate action necessary to reserve for issuance a sufficient number of
shares of Parent Common Stock for delivery upon exercise of the Company Stock
Options. As soon as practicable after the Effective Time, Parent 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 Parent Common Stock
subject to the Company 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 the Company Stock Options remain outstanding.
5.11 Indemnification; Directors' and Officers' Insurance. (a) From and after
the Effective Time, Parent 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 the Parent or the Company or any of their Subsidiaries or an
employee of the Parent or the Company or any of their Subsidiaries who acts as
a fiduciary under any of the Parent Benefit Programs, the Parent Plans, the
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Company Benefit Programs or the Company 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 the Parent or the Company or any of their
Subsidiaries 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 fullest extent permitted under applicable law (and Parent 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 fullest 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, Parent and the Surviving Corporation and Parent 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) the Parent and
the Surviving Corporation will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that neither the Parent 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 the Parent 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. The
Company, Parent and 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 the
Memorandum of Association or Bye-laws or in the indemnification agreements
previously provided by Parent to the Company) 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, if Parent maintains
directors' and officers' liability insurance with respect to matters arising
after the Effective Time, then Parent shall cause to be maintained in effect
the current policies of directors' and officers' liability insurance maintained
by the Company and its Subsidiaries or other policies of comparable coverage
and amounts with respect to matters arising before the Effective Time covering
the Indemnified Parties, provided that Parent shall not be required to pay an
annual premium for such insurance to the extent Parent's Board of Directors
considers such premium unreasonable provided that, in such case, Parent shall
purchase as much coverage, if any, as Parent's Board of Directors determines
may be reasonably purchased.
5.12 Registration Rights. At the Closing, the Company agrees to execute and
deliver the Registration Rights Agreement in the form of Exhibit D hereto.
5.13 Public Announcements. Parent and Sub, on the one hand, and the Company,
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.
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5.14 Other Actions. Except as contemplated by this Agreement, neither Parent
nor the Company 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. Upon the terms and subject to the conditions set forth
in this Agreement, each of the parties hereto agrees to use its reasonable best
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 other parties in doing, all things
necessary, proper or advisable, to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement.
5.15 Advice of Changes; SEC Filings. Parent and the Company 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 Parent Material
Adverse Effect or Company Material Adverse Effect. The Company and Parent 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.
5.16 Reorganization. It is the intention of Parent and the Company that the
Merger and the Liquidation collectively will qualify as a reorganization
described in Section 368(a) of the Code (and any comparable provisions of
applicable state or local law). Neither Parent nor the Company (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 and the
Liquidation collectively not to be so treated. The parties will characterize
the Merger and the Liquidation collectively as such a reorganization for
purposes of all Returns and other filings.
5.17 Change of Control. Parent and the Company agree that the transactions
contemplated by this Agreement shall constitute a "Change of Control" as
defined in the executive employment agreements of Parent listed on Schedule
5.17 of the Parent Letter. Parent represents and warrants to the Company that
true and complete copies of such executive employment agreements have been
delivered to the Company prior to the date hereof under cover letter
specifically identifying such agreements as those listed on Schedule 5.17.
5.18 Certain Tax Agreements. At or before the Closing, the Company will (i)
provide to Parent copies of one or more duly executed statements described in
Treasury Regulation Section 1.897-2(h)(1), which are issued by each of the
Company's directly owned Subsidiaries that is organized in the United States or
is organized outside the United States for which an election under Section
897(i) of the Code is in effect and which are dated not more than 30 days
before the Closing Date, certifying that the stock of each such Subsidiary is
not a United States real property interest and (ii) cause any such Subsidiary
to provide to the IRS a duly executed notice described in Treasury Regulation
Section 1.897-2(h)(2).
5.19 Formation of Sub. Parent agrees to promptly cause Sub to be formed and
to ratify and approve this Agreement. Parent agrees to be responsible for, and
to cause Sub to comply with, Sub's obligations hereunder.
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) 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 the Company Common Stock entitled to vote
thereon at the Company Stockholder Meeting, and the Parent Share Issuance
and the Charter Amendment shall have been approved by the holders of a
majority of the outstanding shares of Parent Common Stock entitled to vote
thereon at the Parent Stockholder Meeting.
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(b) Listing. The shares of Parent Common Stock issuable to the Company
stockholders pursuant to this Agreement, the shares of Parent Common Stock
issuable upon the exercise of the Warrants issuable in the Merger and such
other shares of Parent Common Stock required to be reserved for issuance in
connection with the Merger shall have been authorized for trading on the
Nasdaq Stock Market or, 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 and from any
necessary parties to Parent's Credit Facility and the Company's Credit
Facility in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby by the
Company, Parent 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 Parent
Material Adverse Effect (assuming the Merger and the Liquidation have taken
place) or to materially adversely affect the consummation of the Merger or
the Liquidation.
(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.
(f) Subscription Agreement. SCF-III, L.P. shall have complied with its
obligations under the Subscription Agreement.
(g) Escrow Agreement. The Escrow Agreement shall have been executed and
delivered in accordance with Section 2.4
6.2 Conditions of Obligations of Parent and Sub. The obligations of Parent
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 Parent and
Sub.
(a) Representations and Warranties. Each of the representations and
warranties of the Company set forth in this Agreement shall be true and
correct as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date except for such
failures to be so true and correct (without giving effect to the individual
materiality thresholds otherwise contained in Section 3.1 hereof) which
would not, individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect or which were provided by, or in
accordance with, this Agreement.
(b) Performance of Obligations of the Company. The Company 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.
(c) Letters from the Company Affiliates. Parent 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) Tax Opinion. Parent shall have received an opinion, reasonably
satisfactory to Parent, dated on or about the date that is two days prior
to the date the Proxy Statement is first mailed to stockholders of the
Parent and a copy of which will be furnished to the Company, of Baker &
Botts, L.L.P., counsel to Parent, to the effect that, if the Merger and the
Liquidation are consummated in accordance with the terms of this Agreement,
the Merger and the Liquidation will be collectively treated as a
reorganization
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within the meaning of Section 368(a) of the Code, Parent and the Company
will each be a party to that reorganization within the meaning of Section
368(b) of the Code and no gain or loss will be recognized for United States
federal income tax purposes by Parent, Sub or the Company as a result of
the Merger and the Liquidation, which opinion shall have been confirmed at
the Closing. In rendering such opinion, such counsel may receive and rely
upon representations of fact and covenants of the Company and Parent
identical to those contained in the Certificates included as Schedule
3.1(v) of the Company Letter and Schedule 3.2(u) of the Parent Letter,
respectively.
(e) Fairness Opinion. The opinion described in Section 3.2(q) shall not
have been withdrawn.
6.3 Conditions of Obligations of the Company. The obligation of the Company
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 the
Company:
(a) Representations and Warranties. Each of the representations and
warranties of Parent and Sub set forth in this Agreement shall be true and
correct as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date except for such
failures to be so true and correct which (without giving effect to the
individual materiality thresholds otherwise contained in Section 3.2
hereof) would not, individually or in the aggregate, reasonably be expected
to have a Parent Material Adverse Effect or which were provided by or in
accordance with this Agreement.
(b) Performance of Obligations of Parent and Sub. Parent 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. The Company shall have received an opinion, reasonably
satisfactory to the Company, dated on or about the date that is two days
prior to the date the Proxy Statement is first mailed to stockholders of
the Company and a copy of which will be furnished to Parent, of Vinson &
Elkins L.L.P. counsel to the Company, to the effect that, if the Merger and
the Liquidation are consummated in accordance with the terms of this
Agreement, the Merger and the Liquidation will be collectively treated as a
reorganization within the meaning of Section 368(a) of the Code, each of
Parent and the Company will be a party to that reorganization within the
meaning of Section 368(b) of the Code and no gain or loss will be
recognized for United States federal income tax purposes by a stockholder
of the Company as a result of the Merger and the Liquidation upon the
conversion of shares of the Company Common Stock into shares of Parent
Common Stock except with respect to (i) cash, if any, received in lieu of
fractional shares of Parent Common Stock, (ii) a stockholder in special
circumstances, such as a stockholder who acquired shares of Company Common
Stock through exercise of employee stock options or otherwise as
compensation for employment, or (iii) a stockholder who failed to comply
with certain filing requirements, which opinion shall have been confirmed
at the Closing. In rendering such opinion, such counsel may receive and
rely upon representations of fact and covenants of the Company and Parent
identical to those contained in the Certificates included as Schedule
3.1(v) of the Company Letter and Schedule 3.2(u) of the Parent Letter,
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 the Company or Parent:
(a) by mutual written consent of the Company and Parent, or by mutual
action of their respective Boards of Directors;
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(b) by either the Company or Parent if (i) the Merger shall not have been
consummated by June 30, 1996 (provided that the right to terminate this
Agreement under this clause (i) shall not be available to any party whose
breach of any representation or warranty or 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; (iii) the stockholders of the Parent shall not
approve the Parent Share Issuance or the Charter Amendment at the Parent
Stockholder Meeting or at any adjournment thereof; or (iv) in the exercise
of its good faith judgment as to its fiduciary duties to its stockholders
imposed by law, as advised by outside counsel, the Board of Directors of
Parent determines that such termination is required by reason of a Parent
Acquisition Proposal having been made, provided that Parent may not
terminate this Agreement pursuant to this clause (iv) unless five business
days shall have elapsed after delivery to the Company of a written
notification of Parent's intention to terminate this Agreement and during
such five business-day period Parent shall have fully cooperated with the
Company; including, without limitation, informing the Company of the terms
and conditions of such Parent Acquisition Proposal and the identity of the
person or group making such Parent Acquisition Proposal, with the intent of
enabling the Company to agree to a modification of the terms and conditions
of this Agreement so that the transactions contemplated hereby may be
effected;
(c) by Parent if (i) the Company 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 the Company at or prior to
such date of termination (provided such breach has not been cured within 30
days following receipt by the Company of written notice from Parent of such
breach and is existing at the time of termination of this Agreement); (ii)
any representation or warranty of the Company 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 the Company of
written notice from Parent of such breach and is existing at the time of
termination of this Agreement) or on and as of the Effective Time as if
made on and as of the Effective Time (except to the extent it relates to a
particular date), except for such failures to be so true and correct
(without giving effect to the individual materiality thresholds otherwise
contained in Section 3.1 hereof) which would not individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect
or which were provided by, or in accordance with, this Agreement; or
(d) by the Company if (i) Parent 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 Parent of written notice from the Company of such
breach and is existing at the time of termination of this Agreement); (ii)
any representation or warranty of Parent 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 Parent of written
notice from the Company of such breach and is existing at the time of
termination of this Agreement) or on and as of the Effective Time as if
made on and as of the Effective Time (except to the extent it relates to a
particular date), except for such failures to be so true and correct
(without giving effect to the individual materiality thresholds otherwise
contained in Section 3.2 hereof) which would not individually or in the
aggregate, reasonably be expected to have a Parent Material Adverse Effect
or which were provided by, or in accordance with, this Agreement or (iii)
the Board of Directors of Parent withdraws, modifies or changes its
recommendation of this Agreement, the Merger, the Parent Share Issuance or
the Charter Amendment in a manner adverse to the Company or shall have
resolved to do any of the foregoing.
7.2 Effect of Termination. (a) In the event of termination of this Agreement
by either the Company or Parent as provided in Section 7.1, this Agreement
shall forthwith become void and there shall be no liability
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or obligation on the part of Parent, Sub or the Company except (i) with respect
to this Section 7.2, the second and third sentences of Section 5.4 and Section
8.1, and (ii) and such termination shall not relieve any party hereto for any
intentional breach prior to such termination by a party hereto of any of its
representations or warranties or of any of its covenants or agreements set
forth in this Agreement.
(b) If Parent or the Company terminates this Agreement pursuant to Section
7.1(b)(iv), Parent shall on the business day next succeeding such termination
pay the Company a fee of $4,000,000 in cash by wire transfer of immediately
available funds to an account designated by the Company.
(c) If the Company terminates this Agreement pursuant to Section 7.1(d)(iii)
and if the Company is not in material breach of this Agreement at the time of
such termination and the condition specified in Section 6.2(a) would have been
satisfied if the Closing would have occurred at the time of such termination,
then if a Parent Acquisition Proposal was outstanding at the time the Parent's
Board of Directors withdrew, changed or modified its recommendation Parent
shall on the business day next succeeding such termination pay the Company a
fee of $4,000,000 in cash by wire transfer of immediately available funds to an
account designated by the Company.
(d) If Parent or the Company terminates this Agreement pursuant to Section
7.1(b)(iii) and if the Company is not in material breach of this Agreement at
the time of such termination and the condition specified in Section 6.2(a)
would have been satisfied if the Closing would have occurred at the time of
such termination, then (i) if after the date of this Agreement and on or prior
to the Company Stockholder Meeting, any person or group (within the meaning of
Section 13(d)(3) of the Exchange Act) became the beneficial owner of 33% or
more of the outstanding Parent Common Stock, Parent shall on the business day
next succeeding such termination pay the Company a fee of $4,000,000 in cash by
wire transfer of immediately available funds to an account designated by the
Company and (ii) if no fee is paid pursuant to clause (i) of this Section
7.3(d) and if a Parent Acquisition Proposal had been publicly disclosed at or
prior to the time of the Parent Stockholder Meeting and if after the Parent
Stockholder Meeting, Parent consummates a Parent Acquisition Proposal within
one year following such termination, then Parent shall on the business day next
succeeding the consummation of such Parent Acquisition Proposal pay the Company
a fee of $4,000,000 in cash by wire transfer of immediately available funds to
an account designated by the Company.
(e) If this Agreement is terminated by Company or Parent pursuant to Section
7.1(b)(iii) or 7.1(b)(iv) or by the Company pursuant to Section 7.1(d)(iii), if
no fee is payable to the Company pursuant to Sections 7.2(b), (c) or (d), and
if the Company is not in material breach of this Agreement at the time of such
termination, then Parent shall on the business day next succeeding such
termination pay the Company $1,000,000 in cash by wire transfer of immediately
available funds to an account designated by the Company as a partial
reimbursement of out-of-pocket expenses incurred by the Company in connection
with the transactions contemplated by this Agreement.
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 the Company or Parent, 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.
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ARTICLE VIII
General Provisions
8.1 Payment of Expenses. Except as provided in Section 7.2 and the Escrow
Agreement, 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.
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 as provided in the Escrow Agreement and except for the agreements
contained in Article II, Sections 5.10 through 5.12 and Article VIII, the
agreements delivered pursuant to Section 5.7 and the representations, covenants
and agreements contained in Sections 5.16 and 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, 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:
i(a) if to Parent or Sub, to:
Tuboscope Vetco International Corporation
2835 Holmes Road
Houston, TX 77051
Telecopy: 713-799-5183
Attn: General Counsel
with a copy to:
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626-1918
Telecopy: 714-755-8290
Attn: Patrick Seaver
and (b) if to the Company, to:
D.O.S. Ltd.
2800 N. Frazier
P.O. Box 2327
Conroe, TX 77305
Telecopy: 409-756-8102
Attn: John F. Lauletta
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, TX 77002
Telecopy: 713-758-2346
Attn: Joe Dilg
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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 of the Company that are qualified by the phrase "to the knowledge of
the Company" or phrases with similar wording shall be interpreted to refer to
the actual knowledge of the individuals set forth on Schedule 8.4 of the
Company Letter. Any representations and warranties of Parent that are qualified
by the phrase "to the knowledge of Parent" or phrases with similar wording
shall be interpreted to refer to the actual knowledge of the individuals set
forth on Schedule 8.4 of the Parent Letter.
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
with respect to the subject matter hereto and (b) except as provided in
Sections 5.7, 5.11, 5.16 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. Except to the extent that the laws of Bermuda or the State
of Delaware are mandatorily applicable to the Merger or the internal affairs of
any of the parties, this Agreement shall be governed and construed in
accordance with the laws of the State of Texas, without giving effect to the
principles of conflicts of law thereof.
8.8 Severability. 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 as if the
parties mutually agreed under Section 7.1(a).
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. 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.
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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.
PARENT: TUBOSCOPE VETCO INTERNATIONAL CORPORATION
/s/ Martin R. Reid
By:___________________________________________
Martin R. Reid
Name:_________________________________________
Chairman of the Board
Title:________________________________________
SUB: GROW ACQUISITION LIMITED
(a Bermuda corporation to be formed by
Tuboscope Vetco International Corporation)
By: Tuboscope Vetco International Corporation
/s/ Martin R. Reid
By:___________________________________________
Martin R. Reid
Name:_________________________________________
Chairman of the Board
Title:________________________________________
THE COMPANY: D.O.S. LTD.
/s/ John F. Lauletta
By:___________________________________________
John F. Lauletta
Name:_________________________________________
President and Chief Executive Officer
Title:________________________________________
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APPENDIX B
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement") made and entered into as of
January 3, 1996, by and among SCF-III, L.P., a Delaware limited partnership
(the "Purchaser"), TUBOSCOPE VETCO INTERNATIONAL CORPORATION, a Delaware
corporation ("Parent") and, solely for purposes of Section 8.13 hereof, D.O.S.
Ltd., a Bermuda corporation (the "Company").
W I T N E S S E T H:
WHEREAS, D.O.S. Ltd. is to be merged with a wholly-owned subsidiary ("Sub")
of Parent (the "Merger") pursuant to an Agreement and Plan of Merger dated of
even date herewith among Parent, Sub and D.O.S. Ltd. (the "Merger Agreement");
WHEREAS, the Board of Directors of Parent has determined that it is in the
best interests of Parent and its shareholders to raise additional capital in
connection with the Merger;
WHEREAS, Purchaser will acquire, on the terms and subject to the conditions
set forth herein, 4,200,000 shares (the "Shares") of Parent's Common Stock, par
value $.01 per share (the "Common Stock") and warrants to purchase 2,533,000
shares of Common Stock (the "Warrants"), (the Shares and the Warrants are
collectively referred to herein as the "Securities") in exchange for aggregate
consideration of $31,000,000.00.
NOW, THEREFORE, in consideration of and subject to the mutual agreements,
terms and conditions herein contained, the parties hereto agree as follows:
ARTICLE V
Definitions
Capitalized terms used herein without definitions shall have the meanings
assigned to such terms in the Merger Agreement.
ARTICLE VI
Sale of Securities
6.1 Purchase Price. At the Closing, Parent will issue, sell, transfer, convey
and deliver to the Purchaser (i) the Shares as evidenced by the delivery of a
certificate or certificates evidencing the Shares in good delivery form and
(ii) the Warrants as evidenced by the delivery of the Warrant Certificates in
the form set forth on Appendix I, and Purchaser will purchase the Securities
subject to the terms and conditions set forth herein in exchange for an
aggregate of $31,000,000.00 in cash, payable at the Closing by wire transfer to
an account designated in writing by Parent at least five days prior to the
Closing Date.
6.1 Closing. The closing of the sale and purchase of the Securities shall
take place at the Closing on the Closing Date. Immediately prior to the filing
of the Certificate of Merger with the Registrar of Companies of Bermuda and
subject to the terms and conditions set forth herein, Purchaser shall wire
transfer funds in accordance with Section 2.1 and the purchase of the
Securities by Purchaser shall be deemed to be made as of the Effective Time.
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ARTICLE VII
Representations and Warranties
of Parent
Parent warrants and represents to the Purchaser as follows:
7.1 Organization. Parent is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware with corporate
power and authority to own, operate and lease its properties and to carry on
its business as now conducted.
7.2 Authorization, Execution and Enforceability. Parent has full power and
authority to enter into this Agreement and the capacity and authority to make
the representations, warranties, covenants and agreements herein. The
execution, delivery and performance by Parent of this Agreement have been duly
and validly authorized and are within the corporate powers of Parent. This
Agreement has been duly executed and delivered by Parent and constitutes its
valid and binding agreement, 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. The Shares to be issued and sold by Parent to the
Purchaser hereunder, as of the Closing will be duly and validly authorized and,
when issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable. When executed by
Parent and delivered in accordance with their terms, the Warrants will
constitute valid and binding obligations of Parent, enforceable in accordance
with their terms. The shares of Common Stock reserved for issuance upon
exercise of the Warrants will be as of the Closing duly authorized and reserved
for such purpose, and, if and when the Warrants are exercised in accordance
with the rights provided for therein, such shares will be validly issued, fully
paid and non-assessable, and the issuance of such shares will not be subject to
any preemptive or similar rights.
7.3 Capital Structure as of Closing Date. The representations and warranties
set forth in Section 3.2(b) of the Merger Agreement will be true and correct as
of the Closing Date except to the extent such representations and warranties
speak as of an earlier date.
7.4 Consents and Approvals; No Violations.
(a) No consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department, commission, agency
or other instrumentality or any other person or entity is required to
authorize, or is otherwise required in connection with, the execution and
delivery of this Agreement by Parent or its performance of the terms
hereof, including without limitation, the issuance and sale of the Shares
and the Warrants, or the validity or enforceability hereof or thereof
against Parent as to which the failure to obtain or make would have a
Parent Material Adverse Effect or would materially adversely affect the
consummation of the transactions contemplated hereby except for the filing
of a notification report by Parent and the Purchaser 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 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 result in the
creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Parent or any of its Subsidiaries under, any
provision of (i) the Certificate of Incorporation or Bylaws of Parent or
any provision of the comparable charter or organizational documents of any
of its Subsidiaries, (ii) any loan or credit agreement, note, bond,
mortgage, or indenture applicable to Parent or any of its Subsidiaries,
(iii) any other agreement, instrument, permit, concession, franchise or
license applicable to Parent or any of its Subsidiaries or (iv) assuming
the consents,
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approvals, authorizations or permits and filings or notifications referred
to in Section 5.2 are duly and timely obtained or made and the approval of
the Merger and the Charter Amendment and the Parent Share Issuance by the
stockholders of Parent has been obtained, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or any of
its Subsidiaries or any of their respective properties or assets, other
than, in the case of clause (iii), any such conflicts, violations,
defaults, rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, would not have a Parent Material Adverse
Effect, materially impair the ability of Parent to perform its obligations
hereunder or prevent the consummation of any of the transactions
contemplated hereby.
7.5 Registration Statement on Form S-4. The S-4 will comply in all material
respects with the requirements of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended, (as applicable) and the rules
and regulations of the Securities and Exchange Commission thereunder applicable
to the S-4 and neither the S-4, as of its effective date, or the Proxy
Statement, as of the Effective Time, will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (in each case, excluding for such purposes
information relating to the Company and its Subsidiaries).
ARTICLE VIII
Representations and Warranties of the Purchaser
The Purchaser represents and warrants to Parent as follows:
8.1 Organization, Authorization, Execution and Enforceability. The Purchaser
is a limited partnership duly organized, validly existing and in good standing
under the laws of the State of Delaware with power and authority to own,
operate and lease its properties and to carry on its business as now conducted,
and the Purchaser is duly qualified to do business and is in good standing as a
foreign partnership in each jurisdiction with a character of its properties or
the nature of its business makes such qualification necessary. Purchaser has
full power and authority to enter into this Agreement and the capability and
authority to make the representations, warranties, covenants and agreements
herein. The execution, delivery and performance by the Purchaser of this
Agreement have been duly and validly authorized and are within the powers of
the Purchaser. This Agreement has been duly executed and delivered by the
Purchaser and constitutes its valid and binding agreement, 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.
8.2 Consents and Approvals. No consent, action, approval or authorization of,
or registration, declaration or filing with, any governmental department,
commission, agency or other instrumentality or any other person or entity is
required to authorize, or is otherwise required in connection with, the
execution and delivery of this Agreement by the Purchaser or its performance of
the terms hereof, including without limitation, the purchase of the Shares and
the Warrants, or the validity or enforceability hereof or thereof against the
Purchaser as to which the failure to obtain or make would have a Parent
Material Adverse Effect or would materially adversely affect the consummation
of the transactions contemplated hereby except for the filing of a notification
report by Parent and the Purchaser under the HSR Act, and the expiration or
termination of the applicable waiting periods with respect thereto.
8.3 Purchaser is an "accredited investor" as defined in Rule 501 of
Regulation D promulgated pursuant to the Securities Act of 1933, as amended.
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ARTICLE VIII
Covenants of Parent
Parent further agrees, except as set forth in or contemplated by this
Agreement or as otherwise approved by the Purchaser in writing, that:
9.1 Registration of Securities. At the Closing, Parent will enter into a
Registration Rights Agreement with the Purchaser relating to the Shares in the
form set forth on Appendix II. Parent will use its reasonable best efforts to
register the Shares, the Warrants, and the shares issuable pursuant to exercise
of the Warrants pursuant to the S-4.
9.2 Obtaining Consents. Parent will use its reasonable best efforts to
obtain, and to assist the Purchaser in obtaining, all consents, resignations,
authorizations and approvals and making all filings necessary for the
consummation of the transactions contemplated by this Agreement required under
(a) the Securities Act of 1933, as amended, (b) the HSR Act and (c) any other
applicable law or regulation. Parent and the Purchaser shall request early
termination of the waiting period under the HSR Act with respect to the
transactions contemplated herein.
9.3 Satisfaction of Closing Conditions. Parent shall use its reasonable best
efforts to satisfy the conditions to Closing set forth in Article VII relating
to Parent in an expeditious manner.
9.4 Delivery of Documents at Closing. At the Closing, subject to satisfaction
of the conditions set forth in Article VII, Parent shall execute and deliver to
the Purchaser all documents required to be delivered pursuant to Section 7.1.
9.5 No Amendment of Merger Agreement. Parent shall not amend, alter or modify
the Merger Agreement without the written consent of Purchaser, which consent
shall not be unreasonably withheld; provided, however, that this Section 5.5
shall not be construed to limit the ability of Parent to waive any of the
conditions set forth in Section 6.2 of the Merger Agreement.
ARTICLE X
Covenants of the Purchaser
The Purchaser further agrees, except as set forth in or contemplated by this
Agreement or as otherwise approved by Parent in writing, as follows:
10.1 Obtaining Consents. The Purchaser will use its reasonable best efforts
to obtain, and to assist Parent in obtaining, all consents, authorizations and
approvals and making all filings necessary for the consummation of the
transactions contemplated by this Agreement required under (a) the Securities
Act of 1933, as amended, (b) the HSR Act and (c) any other applicable law or
regulation. Parent and the Purchaser shall request early termination of the
waiting period under the HSR Act with respect to the transactions contemplated
herein.
10.2 Satisfaction of Closing Conditions. The Purchaser shall use its
reasonable best efforts to satisfy the conditions to Closing set forth in
Article VII relating to the Purchaser in an expeditious manner.
10.3 Delivery of Documents at Closing. At the Closing, subject to
satisfaction of the conditions set forth in Article VII, the Purchaser shall
execute and deliver to Parent the documents contemplated to be delivered
pursuant to Section 7.2.
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ARTICLE XI
Conditions to the Closing;
Termination, Amendment and Waiver
11.1 Conditions to Obligation of the Purchaser. The obligation of the
Purchaser to effect the transactions contemplated by this Agreement is subject
to the following conditions:
(a) Representations and Warranties of Parent to be True. Except as
contemplated by this Agreement, (i) the representations and warranties of
Parent hereunder shall be made again at the Closing and shall be true in
all material respects as of the Closing Date except to the extent such
representations and warranties speak as of an earlier date, (ii) Parent
shall have performed (or caused to have been performed) in all respects all
covenants required of it (and its subsidiaries) by this Agreement as of the
Closing and (iii) Parent shall have furnished the Purchaser at the Closing
with a certificate of the President of Parent to such effect.
(b) Third Party Consents and Approvals. Parent shall have made all
filings with, and obtained all required consents, approvals, permits and
authorizations in connection with the execution and delivery of this
Agreement and the transactions contemplated hereby from any governmental
entity except where the failure to obtain such consents, approvals, permits
and authorizations would not be reasonably likely to result in a Parent
Material Adverse Effect (assuming the transactions contemplated by this
Agreement have taken place) or to materially adversely affect the
consummation of the transactions contemplated hereby. The waiting period
applicable to the consummation of the transactions contemplated hereby
under the HSR Act shall have expired or been terminated.
(c) Stock and Warrant Certificates. Parent shall have delivered to the
Purchaser at the Closing one or more stock certificates representing the
Shares in good delivery form and certificates representing the Warrants in
the form set forth on Appendix I.
(d) Conditions Precedent to Merger. All of the conditions precedent to
the consummation of the Merger as set forth in Sections 6.1 (other than
Section 6.1(f)) and 6.3 of the Merger Agreement shall have been satisfied
as of the Closing Date; and all conditions precedent set forth in Section
6.2 of the Merger Agreement shall have been satisfied or waived by Parent
as of the Closing Date.
11.2 Conditions to Obligations of Parent. In addition to the satisfaction of
the conditions referred to in subparagraph (b) of Section 7.1 hereof, the
obligations of Parent to effect the transactions contemplated by this Agreement
shall be subject to the following conditions:
(a) Representations and Warranties of the Purchaser to Be True. Except as
contemplated in this Agreement, (i) the representations and warranties of
the Purchaser hereunder shall be made again at the Closing and shall be
true in all material respects as of the Closing Date except to the extent
such representations and warranties speak as of an earlier date, (ii) the
Purchaser shall have performed in all material respects all covenants
required of it by this Agreement as of the Closing Date and (iii) the
Purchaser shall have furnished Parent at the Closing with a certificate of
one of its authorized representatives to such effect.
(b) Payment of Purchase Price. The Purchaser shall have paid the purchase
price for the Securities to be paid at the Closing as specified in Section
1.1 hereof.
(c) Conditions Precedent to Merger. All of the conditions precedent to
the consummation of the Merger as set forth in Sections 6.1 (other than
6.1(f)), 6.2 and 6.3 of the Merger Agreement shall have been satisfied, or
waived by a party having the right to waive such condition under the Merger
Agreement, as of the Closing Date.
11.3 Termination of Agreement. Anything herein to the contrary
notwithstanding, this Agreement and the transactions contemplated herein may be
terminated at any time before the Closing as follows:
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(a) Mutual Consent. By the mutual consent of Parent and the Purchaser.
(b) Expiration Date. By Parent or the Purchaser if the Closing shall not
have occurred by June 30, 1996.
(c) Termination of Merger Agreement. By Parent or the Purchaser if the
Merger Agreement shall have been terminated.
11.4 Effect of Termination and Failure of Conditions. In the event of
termination of this Agreement as provided in Section 6.3, or of the failure of
a condition resulting in the Purchaser, or Parent not performing its or their
obligations hereunder pursuant to the terms of Section 7.1 or 7.2, as the case
may be, this Agreement shall forthwith become void and there shall be no
liability on the part of any party hereto with respect thereto except that
nothing herein shall relieve any party from liability for any breach hereof.
ARTICLE XII
Miscellaneous
12.1 Headings. The descriptive headings of the several Articles and Sections
of this Agreement are inserted for convenience only and do not constitute a
part of the Agreement.
12.2 Entire Agreement. This Agreement, the documents to be executed
hereunder, and the exhibits attached hereto constitute the entire agreement
between the parties hereto pertaining to the subject matter hereof and
supersede all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties pertaining to the subject matter
hereof.
12.3 Waiver. At any time prior to the Closing, any party hereto may (a)
extend the time for the performance of any of the obligations or other acts of
any other party hereto or (b) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid if
set forth in an instrument in writing signed on behalf of such party. The
consummation of the transactions contemplated hereby shall not be deemed a
waiver of the right any party may have hereunder with respect to any other
party's representations, warranties, covenants or agreements contained in or
related to this Agreement being incorrect, untrue or breached.
12.4 Amendment. This Agreement may not be amended except by an instrument in
writing signed by each of the parties hereto. No supplement, alteration or
modification of this Agreement shall be binding unless executed in writing by
the parties hereto.
12.5 Further Actions. Each party shall execute and deliver such other
certificates, agreements and other documents and take such other actions as may
reasonably be requested by the other parties in order to consummate or
implement the transactions contemplated by this Agreement.
12.6 Assignment. Except as otherwise expressly provided herein, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of Parent and the Purchaser. Parent may
not assign or delegate any of its rights or duties hereunder, without the prior
written consent of the Purchaser. Purchaser may not assign or delegate any of
its rights or duties hereunder without the prior written consent of Parent,
which consent shall not be unreasonably withheld; but in any event Purchaser
shall remain responsible for any assignee's performance. Any assignment or
delegation made without such consent shall be void.
12.7 Independent Covenants. The covenants contained herein are independent
and separate, and in the event that any provision contained herein is declared
invalid or illegal, the other provisions hereof shall not be affected or
impaired thereby and shall remain valid and enforceable.
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12.8 Remedies and Certain Rights. In the event of a breach or threatened
breach by any party hereto of the provisions of this Agreement, any other party
hereto shall be entitled to specific performance. The parties agree that, from
and after the Closing, regardless of whether the Shares and the Warrants have
been registered under the Securities Act of 1933, as amended, if Parent
breaches a representation made in Section 3.5, then Purchaser shall be entitled
to and shall have under this Agreement all rights, remedies and recourse
against Parent that Purchaser would have had if Purchaser had acquired the
Securities pursuant to the S-4, had relied upon such S-4 to make its investment
decision and had not entered into this Agreement (i.e. Purchaser shall have
contractual rights hereunder that are equivalent to the rights that a purchaser
of securities pursuant to a registration statement would have); it being
acknowledged that Purchaser is entering into this Agreement in reliance upon
the expected actions of persons and entities assuming the representations in
Section 3.5 will be true.
12.9 Governing Law. This Agreement and the other documents delivered pursuant
hereto and the legal relations between the parties shall be governed and
construed in accordance with the laws of the State of Delaware, without giving
effect to principles of conflict of laws.
12.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but
all of which together shall constitute one and the same instrument.
12.11 Withholding or Granting of Consent. Except as otherwise provided in
this Agreement, each party hereto may, with respect to any consent or approval
that it is entitled to grant pursuant to this Agreement or any other document
or instrument or agreement delivered or entered into pursuant hereto, grant or
withhold such consent or approval in its sole and uncontrolled discretion, with
or without cause, and subject to such conditions as it shall deem appropriate.
12.12 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.
if to Tuboscope Vetco International:
Tuboscope Vetco International Corporation
2835 Holmes Road
Houston, TX 77051
Telecopy: 713-799-5183
Attn: General Counsel
with a copy to:
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626
Telecopy: 714-755-8290
Attn: Patrick Seaver
if to SCF-III, L.P.
c/o SCF Partners
6600 Texas Commerce Tower
Houston, TX 77002
Attn: L.E. Simmons
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if to D.O.S. Ltd.
D.O.S. Ltd.
2800 N. Frazier
P.O. Box 2327
Conroe, TX 77305
Telecopy: 409-756-8102
Attn: John F. Lauletta
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, TX 77002
Telecopy: 713-758-2346
Attn: Joe Dilg
12.13 Payment of Fees by the Company. If the Merger Agreement is terminated
and if the Company receives a fee pursuant to Section 7.2(b), (c) or (d) of the
Merger Agreement, then the Company shall pay Purchaser a fee of $1,000,000 in
cash, promptly after the Company's receipt of such fee, by wire transfer of
immediately available funds to an account designated by Purchaser. If the
Merger Agreement is terminated and if the Company receives a fee pursuant to
Section 7.2(e) of the Merger Agreement, then the Company shall pay Purchaser a
fee of $250,000 in cash, promptly after the Company's receipt of such fee, by
wire transfer of immediately available funds to an account designated by
Purchaser.
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as
of the date first above written.
SCF-III, L.P.
SCF-II, L.P., its general partner
By___________________________________
By: L.E. Simmons & Associates,
Incorporated,
its general partner
/s/ L. E. Simmons
By: _________________________________
Name: L. E. Simmons
Title: President
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
/s/ Martin R. Reid
By: _________________________________
Name: Martin R. Reid
Title: Chairman of the Board
Solely for purposes of Section 8.13:
D.O.S. Ltd.
/s/ John F. Lauletta
By: _________________________________
Name: John F. Lauletta
Title: President and Chief
Executive Officer
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Appendix I
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
EXPIRING DECEMBER 31, 2000
NO. 1 2,533,000 SHARES
BY THIS WARRANT (this "Warrant"), Tuboscope Vetco International Corporation,
a Delaware corporation (the "Company"), certifies that, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
SCF III, L.P., a Delaware limited partnership (along with its registered
assigns, the "Holder"), is entitled to subscribe for and purchase from the
Company, subject to the terms and conditions set forth herein, at any time or
from time to time prior to 5:00 p.m. (Houston, Texas time) on December 31, 2000
(the "Expiration Date") 2,533,000 (subject to adjustment as set forth herein)
fully paid and non-assessable shares (the "Shares") of the Company's Common
Stock, $0.01 par value per share (the "Common Stock"), at a price equal to the
exercise price per share, initially $10.00 (subject to adjustment as set forth
herein) per share (the "Exercise Price").
1. Exercise of Warrant; Company Office. This Warrant may be exercised at any
time or from time to time prior to the Expiration Date as to the entire number
or any lesser number of whole shares of Common Stock, by the surrender of this
Warrant to the Company at its office at 2835 Holmes Road Houston, Texas 77051,
or such other place as is designated in writing by the Company pursuant to this
Section 1, together with (a) a duly executed election in substantially the form
of Exhibit A attached hereto and made a part hereof for all purposes, and (b) a
wire transfer or a certified or bank cashier's check payable to the order of
the Company in an amount equal to the Exercise Price multiplied by the number
of shares of Common Stock covered by such election. Notwithstanding the
foregoing sentence, at any time that the Current Market Price (as hereinafter
defined) is greater than the Exercise Price, the Holder may, at its option,
exercise this Warrant at any time or from time to time prior to the Expiration
Date as to the entire number or any lesser number of whole shares of Common
Stock, by the surrender of this Warrant to the Company at the location
designated in the foregoing sentence together with a duly executed election in
substantially the form of Exhibit A attached hereto and made a part hereof for
all purposes and, in return therefor, the Company shall deliver to the Holder
that certain number of shares of Common Stock that is determined by dividing
(aa) the product of (1) the number of shares of Common Stock covered by such
election and (2) the difference between the Current Market Price at the date of
such exercise and the Exercise Price in effect on the date of such exercise by
(bb) the Current Market Price at the date of such exercise. For so long as this
Warrant is outstanding, the Company shall continue to maintain an office in the
State of Texas where notices, presentations and demands in respect of this
Warrant may be made upon it and shall notify the Holder in writing at least 15
days before changing the location of any such office.
2. Stock Ownership; Stock Certificates; Partial Exercise. Upon each exercise
of this Warrant, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise as of the close of business
on the day this Warrant is exercised, notwithstanding that the stock transfer
books of the Company shall then be closed or certificates representing such
shares shall not then have been actually delivered to the Holder. As soon as
possible after each such exercise of this Warrant, the Company shall issue and
deliver to the Holder a certificate or certificates for the shares issuable
upon such exercise issued in such denominations as may be specified by Holder
and registered in the name of the Holder or, subject to Section 9, such other
name or names as shall be designated in the Holder's election to exercise. If
this Warrant should be exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, execute and deliver a new Warrant
evidencing the right of the Holder to purchase the balance of the shares
subject to purchase hereunder on the terms and conditions set forth herein
(including all changes and adjustments that have occurred hereunder). The
Company will, at the time of each exercise of this Warrant, upon the request of
the Holder hereof, acknowledge in writing its continuing obligation to afford
to such Holder all rights to
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which such Holder shall continue to be entitled after such exercise in
accordance with the terms of this Warrant; provided, however, that if the
Holder of this Warrant shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford such rights to
such Holder.
3. Company Records; Transfer or Assignment of Warrant; Exchange of Warrant.
Any warrants issued in connection herewith or in substitution herefor, upon
complete or partial transfer, assignment or exercise (the "Warrants") shall be
numbered and shall be registered in the warrant register of the Company (the
"Warrant Register") as they are issued. The Company shall treat the registered
holder of any Warrant on the Warrant Register as the owner in fact thereof for
all purposes, except that if the Warrant is properly transferred or assigned
and notice of such transfer or assignment is given to the Company, the Company
shall treat the transferee or assignee as the owner thereof for all purposes
(or, if such transfer or assignment is properly made in blank, the Company
shall treat the bearer of this Warrant as the owner thereof for all purposes).
The Warrant shall be transferred by the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall be
produced if requested by the Company in its reasonable discretion. The Company
shall immediately register all assignments and transfers in the Warrant
Register and, upon any registration of assignment or transfer, the Company
shall deliver a new Warrant or Warrants to the person or entity entitled
thereto on the terms and conditions set forth herein (including all changes and
adjustments that have occurred hereunder). A Warrant, if properly transferred
or assigned, may be exercised by a subsequent Holder without having a new
Warrant issued. The Warrants may be exchanged at the option of the Holder
thereof for another Warrant, or other Warrants, of different denominations and
representing in the aggregate the right to purchase the same number of shares
of Common Stock on the terms and conditions set forth herein (including all
changes and adjustments that have occurred hereunder) upon surrender to the
Company or its duly authorized agent. All provisions of this Section 3 shall be
subject to Section 9.
4. Reserved Stock. The Company shall reserve and keep available at all times
solely for the purpose of providing for the exercise of this Warrant the
maximum number of shares of Common Stock as to which this Warrant may then be
exercised. All such shares shall be duly authorized and free of preemptive
rights and, when issued upon such exercise, shall be validly issued, fully paid
and non-assessable.
5. Certain Adjustments.
(a) Number of Shares; Exercise Price. The number of shares of Common Stock
which the Holder of this Warrant shall be entitled to receive upon each
exercise hereof shall be determined by multiplying the number of shares of
Common Stock which would otherwise (but for the provisions of this Section 5)
be issuable upon such exercise, as designated by the Holder hereof, by a
fraction of which (a) the numerator is $10.00 and (b) the denominator is the
Exercise Price in effect on the date of such exercise. The Exercise Price shall
be adjusted and readjusted from time to time as provided in this Section 5 and,
as so adjusted or readjusted, shall remain in effect until a further adjustment
or readjustment thereof is required by this Section 5.
(b) Issuance of Additional Shares of Common Stock or Certain Convertible
Securities. If on or after the date hereof the Company shall issue any Common
Stock other than Excluded Stock (as hereinafter defined) without consideration
or for a consideration per share less than the Current Market Price in effect
immediately prior to such issuance, the Exercise Price in effect immediately
prior to each such issuance shall immediately (except as otherwise expressly
provided below) be reduced to the price determined by dividing (1) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issuance multiplied by the Current Market Price in
effect immediately prior to such issuance and (B) the consideration, if any,
received by the Company upon such issuance, by (2) the total number of shares
of Common Stock outstanding immediately after such issuance.
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For the purposes of any adjustment of the Exercise Price pursuant to this
Section 5(b), the following provisions shall be applicable:
(A) Cash. In the case of the issuance of Common Stock for cash, the
amount of the consideration received by the Company shall be deemed to be
the amount of the cash proceeds received by the Company for such Common
Stock before deducting therefrom any discounts, commissions, taxes or other
expenses allowed, paid or incurred by the Company for any underwriting or
otherwise in connection with the issuance and sale thereof.
(B) Consideration Other Than Cash. In the case of the issuance of Common
Stock (otherwise than upon the conversion of shares of capital stock or
other securities of the Company) for a consideration in whole or in part
other than cash, including securities acquired in exchange therefor (other
than securities of the Company that by their terms are exchangeable for
such Common Stock), the consideration other than cash shall be deemed to be
the fair value thereof as determined in good faith by the Board of
Directors of the Company and irrespective of any accounting treatment;
provided, that such fair value as determined by the Board of Directors
shall not exceed the aggregate Current Market Price of the shares of Common
Stock being issued as of the date on which the Board of Directors
authorizes the issuance of such shares.
(C) Options and Convertible Securities. In the case of the issuance of
(i) options, warrants or other rights to purchase or acquire Common Stock
(whether or not at the time exercisable), (ii) securities by their terms
convertible into or exchangeable for Common Stock (whether or not at the
time so convertible or exchangeable) or (iii) options, warrants or rights
to purchase such convertible or exchangeable securities (whether or not at
the time exercisable), other than in each case Excluded Stock:
(1) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options, warrants or other rights to
purchase or acquire Common Stock shall be deemed to have been issued at
the time such options, warrants or rights were issued and for a
consideration equal to the consideration (determined in the manner
provided in subclauses (A) and (B) above), if any, received by the
Company upon the issuance of such options, warrants or rights plus the
minimum purchase price provided in such options, warrants or rights for
the Common Stock covered thereby;
(2) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities, or upon the exercise of options, warrants
or other rights to purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof, shall be
deemed to have been issued at the time such securities were issued or
such options, warrants, or rights were issued and for a consideration
equal to the consideration, if any, received by the Company for any
such securities and related options, warrants or rights (excluding any
cash received on account of accrued interest or accrued dividends),
plus the additional consideration (determined in the manner provided in
subclauses (A) and (B) above), if any, to be received by the Company
upon the conversion or exchange of such securities, or upon the
exercise of any related options, warrants or rights to purchase or
acquire such convertible or exchangeable securities and the subsequent
conversion or exchange thereof;
(3) on any change in the number of shares of Common Stock deliverable
upon exercise of any such options, warrants or rights or conversion or
exchange of such convertible or exchangeable securities or any change
in the consideration to be received by the Company upon such exercise,
conversion or exchange, including, but not limited to, a change
resulting from the anti-dilution provisions thereof, the Exercise Price
as then in effect shall forthwith be readjusted to such Exercise Price
as would have been obtained had an adjustment been made upon the
issuance of such options, warrants or rights not exercised prior to
such change, or of such convertible or exchangeable securities not
converted or exchanged prior to such change, upon the basis of such
change;
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(4) on the expiration or cancellation of any such options, warrants
or rights or the termination of the right to convert or exchange such
convertible or exchangeable securities, if the Exercise Price shall
have been adjusted upon the issuance thereof, the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been
obtained had an adjustment been made upon the issuance of such options,
warrants, rights or such convertible or exchangeable securities on the
basis of the issuance of only the number of shares of Common Stock
actually issued upon the exercise of such options, warrants or rights,
or upon the conversion or exchange of such convertible or exchangeable
securities; and
(5) if the Exercise Price shall have been adjusted upon the issuance
of any such options, warrants, rights or convertible or exchangeable
securities, no further adjustment of the Exercise Price shall be made
for the actual issuance of Common Stock upon the exercise, conversion
or exchange thereof.
(D) Excluded Stock. "Excluded Stock" shall mean (1) shares of Common
Stock issued by the Company as a stock dividend payable in shares of Common
Stock, or upon any subdivision or split-up of the outstanding shares of
Common Stock for which an adjustment to the Exercise Price is made pursuant
to Section 5(c), (2) options to acquire Common Stock and shares of Common
Stock issued or to be issued from time to time to directors, officers,
employees, consultants, advisors, independent contractors and agents of the
Company pursuant to stock option plans or other employee benefit plans
approved of by the Board of Directors, or an authorized committee thereof,
of the Company, (3) the shares of Common Stock issued or issuable upon
conversion of the Redeemable Series A Convertible Preferred Stock of the
Company outstanding on December 31, 1995, (4) the shares of Common Stock
issued or issuable upon exercise of the Warrants and (5) shares of Common
Stock issued by the Company pursuant to an underwritten public offering of
Common Stock or pursuant to a public tender or exchange offer.
(c) Stock Dividends, Subdivisions, Reclassifications or Combinations. If the
Company shall (i) declare a dividend or make a distribution on its Common Stock
in shares of its Common Stock, (ii) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares, or (iii) combine or
reclassify the outstanding Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder of this
Warrant who exercises this Warrant after such date shall be entitled to receive
the number of shares of Common Stock which he would have owned or been entitled
to receive had this Warrant been exercised immediately prior to such date.
Successive adjustments in the Exercise Price shall be made whenever any event
specified above shall occur.
(d) Other Distributions. In case the Company shall fix a record date for the
making of a distribution to all holders of shares of its Common Stock (i) of
shares of any class other than its Common Stock or (ii) of evidences of
indebtedness of the Company or any subsidiary or (iii) of other assets,
including cash, (excluding dividends or distributions referred to in Section
5(c) above and excluding any cash dividend or cash distribution if the per
share amount when combined with the per share amount of all cash dividends and
distributions paid by the Company on Common Stock during the 365-day period
ending on such record date (as adjusted to appropriately reflect any of the
events referred to in Section 5(c) or in this Section 5(d) and excluding cash
dividends or distributions for which an adjustment to the Exercise Price was
previously made pursuant to this Section 5(d)), does not exceed 10% of the
Current Market Price on such record date) or (iv) of rights or warrants
(excluding those referred to in Section 5(b) above), in each case the Exercise
Price in effect immediately prior thereto shall be reduced immediately
thereafter to the price determined by dividing (1) an amount equal to the
difference resulting from (x) the number of shares of Common Stock outstanding
on such record date multiplied by the Current Market Price on such record date,
less (y) the fair market value (as determined in good faith by the Board of
Directors) of said shares or evidences of indebtedness or assets or rights or
warrants to be so distributed, by (2) the number of shares of Common Stock
outstanding on such record date. Such adjustment shall be made successively
whenever such a record date is fixed. In the
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event that such distribution is not so made, the Exercise Price then in effect
shall be readjusted, effective as of the date when the Board of Directors
determines not to distribute such shares, evidence of indebtedness, assets,
rights or warrants, as the case may be, to the Exercise Price which would then
be in effect if such record date had not been fixed.
(e) Other Dilutive Events. In case any event shall occur as to which the
provisions of this Section 5 are not strictly applicable but the failure to
make any adjustment relating thereto would not fairly protect the purchase
rights represented by this Warrant in accordance with the essential intent and
principles of this Section 5, then, in each such case, the Company shall
immediately make all adjustments necessary to preserve, without dilution, the
purchase rights represented by this Warrant on a basis consistent with the
intent and principles established in this Section 5 and shall also immediately
appoint a firm of independent certified public accountants of recognized
national standing (which may be the regular auditors of the Company if they
satisfy such standard), which shall give their opinion that such adjustment, if
any, preserves, without dilution, the purchase rights represented by this
Warrant on a basis consistent with the intent and principles established in
this Section 5. Upon receipt of such opinion, the Company will immediately
deliver a copy thereof to the Holder of this Warrant. The Company shall not, by
amendment of its certificate of incorporation or through any consolidation,
merger, reorganization, transfer of assets, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, and will at all times in
good faith assist in carrying out all of such terms and in the taking of all
such actions as may be necessary or appropriate in order to protect the rights
of the Holder of this Warrant against dilution or other impairment. Without
limiting the generality of the foregoing, the Company (i) will not permit the
par value of any shares of stock receivable upon the exercise of this Warrant
to exceed the amount payable therefor upon such exercise, (ii) will take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of stock on the
exercise of the Warrants from time to time outstanding, and (iii) will not take
any action which results in any adjustment of the Exercise Price if the total
number of shares of Common Stock issuable after such action upon the exercise
of all of the Warrants would exceed the total number of shares of Common Stock
then authorized by the Company's certificate of incorporation and available for
the purpose of issuance upon such exercise.
(f) Size of Adjustment; Rounding. No adjustment in the Exercise Price shall
be required unless such adjustment would require an increase or decrease of at
least one cent ($.01) in such price; provided, however, that any adjustment
which is thereby not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
5 shall be made to the nearest cent or to the nearest one-hundredth of a Share,
as the case may be.
(g) Notice. Whenever there shall be an adjustment as provided in this Section
5, the Company shall promptly cause written notice thereof to be sent to the
Holder, which notice shall be accompanied by an officer's certificate setting
forth the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof.
However, the failure by the Company to satisfy its obligations under this
Section 5(g) shall not in any manner affect or alter the rights of the Holder
under this Warrant.
(h) Fractional Shares. The Company shall not be required to issue fractions
of shares of Common Stock or other capital stock of the Company upon the
exercise of Warrants. If any fraction of a share would be issuable upon the
exercise of any Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
Current Market Price of such share of Common Stock on the date of exercise of
the Warrant.
(i) Current Market Price. The Current Market Price at any date shall mean, in
the event the Common Stock is publicly traded, the average of the daily closing
prices per share of Common Stock for 30 consecutive trading days ending 3
trading days before such date (as adjusted for any stock dividend, other
dividend for which an adjustment to the Exercise Price would be required
pursuant to Section 5(d), split, combination or
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reclassification that took effect during such 30 trading day period). The
closing price for each day shall be the last reported sale price regular way
or, in case no such reported sale takes place on such day, the average of the
last closing bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading, or if not listed or admitted to trading on any national securities
exchange, the closing sale price for such day reported by NASDAQ, if the Common
Stock is traded over-the-counter and quoted in the National Market System, or
if the Common Stock is so traded, but not so quoted, the average of the closing
reported bid and asked prices of the Common Stock as reported by NASDAQ or any
comparable system or, if the Common Stock is not listed on NASDAQ or any
comparable system, the average of the closing bid and asked prices as furnished
by two members of the National Association of Securities Dealers, Inc. selected
from time to time by the Company for that purpose. If the Common Stock is not
traded in such manner that the quotations referred to above are available for
the period required hereunder, the Current Market Price per share of Common
Stock shall be deemed to be the fair value per share of Common Stock as
determined by the Board of Directors of the Company in good faith and
irrespective of any accounting treatment.
(j) Treasury Stock. For the purposes of this Section 5, the sale or other
disposition of any Common Stock theretofore held in the Company's treasury
shall be deemed to be an issue thereof.
(k) Valid Issuance. All shares of Common Stock which may be issued upon the
exercise of this Warrant will upon issuance by the Company be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof, and the Company shall take no action
which will cause a contrary result (including, without limitation, any action
which would cause the Exercise Price to be less than the par value, if any, of
the Common Stock).
6. Certain Corporate Events or Actions.
(a) Consolidation, Merger, Etc. In case of any consolidation with or merger
of the Company with or into another corporation or other entity (except for a
merger or consolidation in which the Company is the continuing corporation
other than as a subsidiary of another corporation or other entity), or in case
of any sale, lease or conveyance to another corporation or other entity of the
assets of the Company as an entirety or substantially as an entirety, such
successor, purchasing, leasing or receiving corporation or other entity, as the
case may be, shall, prior to and as a condition to the occurrence of such
event, (i) execute with the Holder an agreement providing that the Holder shall
have the right thereafter to receive upon exercise of this Warrant the kind and
amount of shares of stock and other securities, property, cash or any
combination thereof receivable upon such consolidation, merger, sale, lease or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease or conveyance (provided that, if the holders of shares have
the right to make an election with respect to the kind or amount of securities,
cash or other property receivable upon consummation of such event, then the
kind and amount of securities, cash or other consideration receivable to the
Holder upon consummation of such event shall be deemed to be the kind and
amount so receivable per share by a plurality of the shares held by holders of
such shares making such an election) and (ii) make effective provision in its
certificate of incorporation or otherwise, if needed, in order to effect such
agreement. Such agreement shall provide for adjustments which shall be
equivalent to the adjustments in Section 5 and shall contain provisions
equivalent to this Section 6.
(b) Reclassification, Etc. In case of any reclassification or change of the
shares of Common Stock issuable upon exercise of this Warrant or in case of any
consolidation or merger of another corporation or other entity with or into the
Company in which the Company is the continuing corporation (other than as a
subsidiary of another corporation or other entity) and in which there is a
reclassification or change (including a change to the right to receive cash or
other property) of the shares of Common Stock, the Holder shall have the right
thereafter to receive upon exercise of this Warrant the kind and amount of
shares of stock and other securities, property, cash or any combination thereof
receivable upon such reclassification, change, consolidation or
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merger by a holder of the number of shares of Common Stock into which this
Warrant would have been exercisable immediately prior to such reclassification,
change, consolidation or merger (provided that, if the holders of shares have
the right to make an election with respect to the kind or amount of securities,
cash or other property receivable upon consummation of such event, then the
kind and amount of securities, cash or other consideration receivable to the
Holder upon consummation of such event shall be deemed to be the kind and
amount so receivable per share by a plurality of the shares held by holders of
such shares making such an election). Thereafter, appropriate provision (as
determined by the Board of Directors of the Company in good faith) shall be
made for adjustments which shall be equivalent to the adjustments in Section 5.
This Section 6(b) shall be applicable to successive reclassifications, changes,
consolidations or mergers.
7. Certain Notices. In case at any time the Company shall propose or have
knowledge of any proposal:
(a) to pay any dividend or make any distribution on shares of Common Stock or
to fix a record date for the making of any such dividend or distribution to
holders of Common Stock; or
(b) to take, or fix a record date for, any action that would result in any
adjustment to the Exercise Price pursuant to Section 5; or
(c) to effect any reclassification or change of outstanding shares of Common
Stock, or consolidation or merger, or sale, lease or conveyance of property, of
the type addressed in Section 6; or
(d) to effect any voluntary or involuntary liquidation, dissolution or
winding-up of the Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof to the Holder at least 30 days prior to the date on which (i)
the books of the Company shall close, or a record date shall be set, for any
such action described in Section 7(a) or (b) or (ii) such reclassification,
change, consolidation, merger, sale, lease, conveyance, liquidation,
dissolution or winding-up shall be effective, as the case may be.
8. Expenses. The Company shall pay all costs, fees, taxes (other than any
federal or state income or stock transfer taxes) and expenses payable in
connection with the preparation, issuance and delivery from time to time of
Warrants and of shares of Common Stock or other securities issued upon the
exercise of Warrants.
9. Restrictions on Transfer. The Holder, by its acceptance hereof, represents
and warrants that it is acquiring the Warrants and any Common Stock issued upon
the exercise of this Warrant for investment purposes, for its own account, and
not with an intent to sell or distribute the Warrants or any such Common Stock
except in compliance with applicable United States federal and state securities
law. Neither this Warrant nor any of the Common Stock issued upon the exercise
of this Warrant, nor any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or disposed of, in
whole or in part, except in compliance with applicable United States federal
and state securities laws and the terms and conditions hereof. The provisions
of this Section 9 shall be binding upon all subsequent holders of this Warrant,
if any. This Warrant and the shares of Common Stock or other securities issued
upon exercise of this Warrant shall be subject to a stop-transfer order (except
with respect to a transfer by SCF III, L.P. of this Warrant or such shares to
its partners who are "accredited investors" within the meaning of Rule 501 of
the Rules and Regulations under the Securities Act of 1933, as amended, (the
"Securities Act")) and the certificate or certificates evidencing any such
shares or securities shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED OR OTHERWISE
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO THE
CORPORATION OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION STATING THAT SUCH SALE, ASSIGNMENT OR TRANSFER IS EXEMPT FROM
REGISTRATION UNDER SUCH ACT AND LAWS."
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10. Registration of Common Stock; Listing. If any shares of Common Stock
required to be reserved for purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal
or state law before such shares may be issued upon exercise, the Company will,
at its expense and as expeditiously as possible, cause such shares to be duly
registered or approved, as the case may be. At any such time as Common Stock is
listed for trading, the Company will, at its expense, obtain promptly and
maintain the approval of all securities exchanges (including, for this purpose,
NASDAQ) on which the Common Stock is listed for trading for an additional
listing, upon official notice of issuance, of the shares of Common Stock
issuable upon exercise of the then outstanding Warrants and maintain the
listing of such shares after their issuance.
11. Availability of Information. The Company will comply with the reporting
requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (or, if the Company is not required to so
comply pursuant to the Exchange Act, it will make publicly available the
information specified by Rule 144(c)(2) under the Securities Act) and will
comply with all other public information reporting requirements of the
Securities and Exchange Commission (the "Commission") (including Rule 144
promulgated by the Commission under the Securities Act) from time to time in
effect and relating to the availability of an exemption from the Securities Act
for the sale of any restricted securities (as defined in the Securities Act) or
the sale of securities by affiliates (as defined in the Securities Act). The
Company will also cooperate with each holder of any restricted securities in
supplying such information as may be necessary for such holder to complete and
file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of any restricted securities or the sale of
securities by affiliates. The Company will furnish to each Holder of a Warrant,
promptly upon their becoming available, copies of all financial statements,
reports, notices and proxy statements sent or made available generally by the
Company to its stockholders, and copies of all regular and periodic reports and
all registration statements and prospectuses filed by the Company with any
securities exchange or with the Commission.
12. Loss, Theft, Etc. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction or mutilation of any Warrant and upon surrender
and cancellation of any Warrant if mutilated, the Company shall execute and
deliver to the Holder thereof a new Warrant in the form and substance of the
lost, stolen, destroyed or mutilated Warrant (including all changes and
adjustments that have occurred hereunder). In the event a bond for security
therefor is required, the cost of such bond shall be paid by the Holder.
13. No Rights or Liabilities as a Stockholder. Nothing contained in this
Warrant shall be construed as conferring upon the Holder hereof any rights as a
stockholder of the Company or as imposing any obligation upon such Holder to
purchase any securities or as imposing any liability upon such Holder as a
stockholder of the Company, whether such obligation or liability is asserted by
the Company or by creditors of the Company at law or in equity.
14. Governing Law. This Warrant shall be governed by and construed in
accordance with the internal laws of the State of Delaware.
15. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that, to the extent permitted by
applicable law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
16. Notices. All notices and other communications provided for herein shall
be delivered or mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed (a) if to any Holder of any Warrant, to
the address of such Holder as set forth in the Warrant Register or to such
other address as such Holder has notified the Company of in writing or (b) if
to the Company, to the address set forth in Section 1 or to such other address
as the Company has notified such Holder of pursuant to Section 1 and this
Section
B-16
<PAGE>
16; provided, however, that the exercise of any Warrant shall be effective in
the manner provided in Section 1. All notices given pursuant to this Warrant
shall be deemed to be effective upon receipt thereof by the party to whom such
notice is addressed.
17. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. Any provision of this Warrant which shall be prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the Company waives any provision of law which shall render
any provision hereof prohibited or unenforceable in any respect. The section
and paragraph headings used in this Warrant are inserted for convenience only
and shall not be used for any interpretive purpose.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and its corporate seal to be impressed hereon and attested by its Secretary or
an Assistant Secretary.
Dated: , 1996 TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
[Corporate Seal]
By: _________________________________
Attest:
Secretary
B-17
<PAGE>
EXHIBIT A TO WARRANT
To: TUBOSCOPE VETCO INTERNATIONAL CORPORATION
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to subscribe for
shares of Common Stock covered by the within Warrant [and tenders
payment herewith in the amount of $ ] [and tenders no payment
herewith with respect to such shares of Common Stock covered by the within
Warrant and thus requests shares of Common Stock (the quotient of (i)
shares covered by this exercise multiplied by $ ) (the Current Market Price
at the date of this exercise minus the Exercise Price), divided by $ (the
Current Market Price at the date of this exercise)] in accordance with the
terms thereof, and requests that certificates for such shares in the following
denominations be issued in the name of, and delivered to, the person[s] at the
following address[es]:
Denominations: _________________________________________________________
(Print Address[es] and Social Security Number[s] or
Employer Identification Number[s] as applicable)
and, if said number of shares shall not be all the shares covered by the within
Warrant, that a new Warrant for the balance remaining of the shares covered by
the within Warrant be registered in the name of, and delivered to, the
undersigned at the address stated below:
Date: , Name: _______________________________
(Print)
(Signature)
Address: ____________________________
B-18
<PAGE>
APPENDIX C
ESCROW AGREEMENT
This Escrow Agreement, dated as of , 1996, between
Tuboscope Vetco International Corporation, a Delaware corporation ("Parent"),
D.O.S. Ltd., a Bermuda corporation (the "Company"),
("Stockholders Representative") and ,
("Escrow Agent");
W I T N E S S E T H :
WHEREAS, Parent, Grow Acquisition Limited ("Sub") and the Company have
entered into an Agreement and Plan of Merger dated as of January , 1996,
(the "Merger Agreement"), which provides, among other things, for the merger
(the "Merger") of Sub with the Company, with the result that the surviving
corporation (the "Surviving Corporation") will become a wholly owned subsidiary
of Parent; and
WHEREAS, the parties hereto desire, pursuant to Article II of the Merger
Agreement, to set aside a portion of the consideration to be paid to the
holders of ordinary shares, $.10 par value, of the Company (the "Company Common
Stock") in connection with the Merger, for the purpose of providing Parent with
a limited remedy in the event of a breach by the Company of certain
representations and warranties made in the Merger Agreement;
WHEREAS, Escrow Agent has agreed to hold the Escrowed Shares (as hereinafter
defined) in accordance with the terms and provisions contained herein;
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration, the parties hereto hereby agree as follows:
1. Definitions. Except as hereinafter defined, capitalized terms used in this
Escrow Agreement will have the meanings assigned to such terms in the Merger
Agreement.
(a) "Breach" shall mean a breach by the Company of a representation or
warranty of the Company set forth in the Merger Agreement as of the date of
the Merger Agreement (except to the extent such representation or warranty
speaks of an earlier date); provided, however that such a Breach shall be
deemed not to be a Breach to the extent that (i) the Company has notified
Parent in writing prior to the Closing of such Breach or (ii) an executive
officer of Parent prior to the Closing is shown by clear and convincing
evidence to have had actual knowledge of such Breach prior to the Closing.
(b) "Claim" shall mean a claim for Damages incurred by Parent as a result
of one or more Breaches.
(c) "Claim Expiration Time" shall mean 5:00 p.m. C.S.T. on the fifteenth
business day following the delivery to the Board of Directors of Parent of
audited financial statements of the Company and its Subsidiaries as of and
for the period ending on March 31, 1996 (or as of any later date).
(d) "Damages" shall mean any loss, liability, claim, damage, expense,
whether or not involving a third-party claim, net of any insurance proceeds
or payments from any other responsible person or entity and net of any tax
savings as a result of the incurrence of such Damages.
(e) "Threshold Amount" shall mean the dollar amount of Damages, the loss
of which would result in a Company Material Adverse Effect.
(f) "Stockholders" means the holders of shares of Company Common Stock
immediately before the Effective Time, excluding any holders of Dissenting
Shares.
2. Appointment of Escrow Agent. Parent and the Company hereby designate and
appoint as Escrow Agent for the purposes set forth
herein and the Escrow Agent hereby accepts such appointment on the terms herein
provided.
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<PAGE>
3. Deposit of Escrowed Shares. Promptly after the Effective Time, Parent
shall deliver to the Escrow Agent one or more certificates in the name of the
Escrow Agent representing the Escrowed Shares and cash in lieu of any
fractional shares.
4. Maintenance of Escrow.
(a) The Escrow Agent shall hold the Escrowed Shares in escrow, and shall
maintain and disburse the Escrowed Shares, pursuant to this Escrow
Agreement.
(b) All dividends and other distributions of money, securities or other
property made by Parent with respect to the Escrowed Shares while such
shares are held by the Escrow Agent, shall be paid or delivered to the
Stockholders pro rata in accordance with their respective ownership of
Company Common Stock immediately prior to the Effective Time, at the same
time such dividends or other distributions are paid or delivered to other
holders of Parent Common Stock; provided, however, that there shall be paid
or delivered to the Escrow Agent at such time all shares of Parent Common
Stock issuable as a result of any stock dividend or stock split with
respect to the Escrowed Shares. The Escrowed Shares and such additional
shares of Parent Common Stock are collectively referred to in this Escrow
Agreement as the "Escrow Funds."
5. Parent's Right to Assert Claim to Escrow Funds. Parent shall have the
right to make one Claim on or prior to the Claim Expiration Time by delivering
a written notice of such Claim to the Stockholders Representative and the
Escrow Agent prior to such time. Subject to the other provisions herein, Parent
shall have the right to receive a portion or all of the Escrow Funds only if
the Damages for such Claim (determined without giving effect to the individual
materiality thresholds contained in Section 3.1 of the Merger Agreement when
evaluating the Damages resulting from a Breach, but without duplication for the
same Damages resulting from more than one Breach) exceed the Threshold Amount
and then only in the amount by which such Damages exceed $1,000,000. If Parent
asserts a Claim, such Claim shall state with particularity all Breaches
asserted, including sufficient facts relating thereto so that the Stockholders
Representative may reasonably evaluate such Claim, the aggregate Damages
incurred by Parent, Parent's estimate of the Threshold Amount and the amount
(the "Parent Net Claim") that equals (i) the aggregate amount of such Damages,
less (ii) $1,000,000, rounded to the nearest amount evenly divisible by $7.00.
Notwithstanding anything to the contrary herein, Parent shall in no event be
entitled to receive pursuant to this Agreement, more than the then available
Escrow Funds. The parties agree that the $1,000,000 deductible set forth above
was a negotiated risk sharing provision and does not and was not intended to,
reflect either party's understanding or agreement as to the level of Damages
necessary to exceed the Threshold Amount or constitute a Company Material
Adverse Effect.
6. Determination of Valid Parent Net Claim; Final Instruction. For purposes
of this Escrow Agreement, a "Final Instruction" shall mean a written notice
given to the Escrow Agent directing the disbursement of the amount of the
Parent Net Claim, and shall be signed both by Parent and by the Stockholders
Representative except as otherwise provided below in clause (b) or (d). A Final
Instruction shall be delivered to the Escrow Agent under the following
circumstances, and accompanied by the indicated documentation:
(a) If the Stockholders Representative disputes either the validity,
amount or calculation of the Threshold Amount or the Parent Net Claim, the
Stockholders Representative shall give written notice of such dispute to
Parent, with a copy to the Escrow Agent, within 20 business days after the
delivery of notice of the Claim by Parent. In such circumstances, no Final
Instruction may be given to the Escrow Agent except as provided in (c) or
(d) below.
(b) If the Stockholders Representative fails to respond to the Claim
within 20 business days after the delivery to the Stockholders
Representative and the Escrow Agent of the Notice of the Claim, or if the
Stockholders Representative notifies the Escrow Agent that there is no
dispute with respect to the Parent Net Claim, Parent shall have the right
to deliver to the Escrow Agent a Final Instruction, signed only by Parent,
with respect to the Parent Net Claim.
C-2
<PAGE>
(c) If the Stockholders Representative and Parent reach an agreement with
respect to the proper determination of the Threshold Amount or the Parent
Net Claim, the Stockholders Representative and Parent shall give to the
Escrow Agent a Final Instruction, signed by both the Stockholders
Representative and Parent, with respect to the Parent Net Claim.
(d) If an arbitration order pursuant to Section 22 hereof, is entered
with respect to the Parent Net Claim, either the Stockholders
Representative or Parent shall have the right to deliver to the Escrow
Agent a Final Instruction with respect to the Parent Net Claim based on and
in compliance with such order, signed only by the Stockholders
Representative or by Parent, as the case may be, and accompanied by a copy
of such order.
Upon receipt of a Final Instruction in accordance with this Section, the
Escrow Agent shall disburse to Parent from the Escrow Funds such number of
shares of Parent Common Stock as shall equal the Parent Net Claim based on the
valuation procedures set forth in Section 8 herein and shall distribute the
remaining Escrow Funds in accordance with Section 7 below.
7. Distribution of Escrow Funds. If Parent fails to make a Claim on or prior
to the Claim Expiration Time in accordance with Section 5, then as promptly as
practicable thereafter the Escrow Agent shall deliver the Escrowed Shares and
all other Escrow Funds to the Stockholders pro rata in accordance with their
respective ownership of Company Common Stock immediately prior to the Effective
Time. If Parent timely makes a Claim, then upon the Escrow Agent's receipt of a
Final Instruction, the Escrow Agent shall deliver such portion of the Escrow
Funds to Parent as set forth in such Final Instruction and then shall deliver
any remaining Escrowed Shares and any other remaining Escrow Funds, on a pro
rata basis, to the Stockholders.
8. Valuation of Escrowed Shares; Fractional Shares. For purposes of
determining the number of Escrowed Shares to be disbursed from the Escrow Fund
under this Escrow Agreement with respect to the Parent Net Claim, each share of
Parent Common Stock shall be valued at $7.00 per share (subject to appropriate
adjustment for any stock split, stock dividend, reverse stock split or similar
event with respect to Parent Common Stock effected after the Effective Time),
regardless of the then market value of such shares. No certificates or scrip
representing fractional shares of Parent Common Stock shall be issued pursuant
to this Agreement. In lieu of any fractional share of Parent Common Stock, each
Stockholder who would otherwise have been entitled to a fraction of a share of
Parent Common Stock hereunder shall be paid an amount in cash (without
interest) equal to the value of such fraction of a share based upon an assumed
value of $7.00 per share (subject to appropriate adjustment for any stock
split, stock dividend, reverse stock split or similar event with respect to
Parent Common Stock effected after the Effective Time). Parent agrees to pay to
Escrow Agent such amounts as are necessary to pay such cash in lieu of
fractional shares and the Escrow Agent shall transfer and deliver such shares
to Parent with respect to which cash is so paid as a result of the distribution
to the Stockholders.
9. Reliance by Escrow Agent; Liability of Escrow Agent. The Escrow Agent
shall be protected in acting upon any written notice, request, waiver, consent,
certificate, receipt, authorization or other paper or document that the Escrow
Agent believes to be genuine and what it purports to be. The Escrow Agent may
confer with its own corporate or outside legal counsel in the event of any
dispute or question as to the construction of any of the provisions hereof, or
its duties hereunder, and shall incur no liability and shall be fully protected
in acting in accordance with the written opinions of such counsel. The duties
of the Escrow Agent hereunder will be limited to the observance of the express
provisions of this Escrow Agreement. The Escrow Agent will not be subject to,
or be obliged to recognize, any other agreement between the parties hereto or
directions or instructions not specifically set forth as provided for herein.
The Escrow Agent will not make any payment or disbursement from or out of the
Escrow Fund that is not expressly authorized pursuant to this Escrow Agreement.
The Escrow Agent may rely upon and act upon any instrument received by it
pursuant to the provisions of this Escrow Agreement that it reasonably believes
to be genuine and in conformity with the requirements of this Escrow Agreement.
The Escrow Agent undertakes to use the same degree of care and skill in
performing its services hereunder as an ordinary prudent person would do or use
C-3
<PAGE>
under the circumstances in the conduct of his or her own affairs. The Escrow
Agent will not be liable for any action taken or not taken by it under the
terms hereof in the absence of breach of its obligations hereunder or gross
negligence or willful misconduct on its part.
10. Indemnification of Escrow Agent. Parent will indemnify and hold the
Escrow Agent harmless from and against any and all losses, costs, damages or
expenses (including, but not limited to, reasonable attorneys' fees) it may
sustain by reason of its service as Escrow Agent hereunder, and except such
losses, costs, damages or expenses (including, but not limited to, reasonable
attorneys' fees) incurred by reason of such acts or omissions for which the
Escrow Agent is liable or responsible under the last sentence of Section 9
hereof.
11. Release of Stockholders Representative; Successor Stockholders
Representative. In consideration of (and any successor)
acting as the Stockholders Representative hereunder on behalf of all
Stockholders, each such Stockholder, by accepting shares of Parent Common Stock
in respect of such Stockholder's shares of Company Common Stock and by becoming
a beneficiary of this Escrow Agreement, releases the Stockholder Representative
from liability for any action taken or not taken by the Stockholders
Representative under the terms hereof in the absence of the Stockholders
Representative's gross negligence or willful misconduct. If
ceases to act as the Stockholders Representative for any reason or
or his representative shall notify Parent and the Escrow Agent
of the Stockholders Representative intent to resign as Stockholders
Representative, then Stockholders entitled to receive a majority of the
Escrowed Shares hereunder (assuming no Claim is made) may by written notice to
the Parent and Escrow Agent appoint a successor Stockholders Representative. If
no such successor is appointed within 30 days, then Parent shall appoint an
independent third party as successor.
12. Fees and Expenses of the Escrow Agent. All fees of the Escrow Agent for
its services hereunder, together with any expenses reasonably incurred by the
Escrow Agent in connection with this Escrow Agreement, shall be paid by Parent.
13. Resignation of Escrow Agent. The Escrow Agent may resign from its duties
hereunder by giving each of the parties hereto not less than 60 days prior
written notice of the effective date of such resignation (which effective date
shall be at least 60 days after the date such notice is given). The parties
hereto intend that a substitute Escrow Agent will be appointed by Parent to
fulfill the duties of the Escrow Agent hereunder for the remaining term of this
Escrow Agreement in the event of the Escrow Agent's resignation. If on or
before the effective date of such resignation, a substitute Escrow Agent has
not been appointed, the Escrow Agent will thereupon deposit the Escrow Funds
into the registry of a court of competent jurisdiction.
14. Designees for Instructions. Parent, may, by notice to the Escrow Agent,
designate one or more persons who will execute notices and from whom the Escrow
Agent may take instructions hereunder. Such designations may be changed from
time to time upon notice to the Escrow Agent from Parent. The Escrow Agent will
be entitled to rely conclusively on any notices or instructions from any person
so designated by Parent.
15. Voting of Escrowed Shares. With respect to any matter on which the
Escrowed Shares or any other shares of Parent Common Stock in the Escrow Fund
are entitled to vote, the Escrow Agent shall seek voting instructions from the
Stockholders. With respect to Stockholders who timely provide such instruction,
the Escrow Agent shall vote the Escrowed Shares that would be distributed to
such Stockholders (assuming no Claim is made) in accordance with the
instructions received by such Stockholders, but shall not otherwise vote such
shares.
16. Notices. Any notices, consents, demands, requests, approvals and other
communications to be given under this Escrow Agreement by any party to any
other party shall be in writing and shall be either (a) personally delivered,
(b) mailed by registered or certified mail, postage prepaid with return receipt
requested, (c) delivered by overnight express delivery service or same-day
local courier service, or (d) delivered by facsimile transmission, to the
address set forth below, or to such other address as may be designated by such
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<PAGE>
party from time to time in accordance with this Section. Notices delivered
personally, by overnight express delivery service or by local courier service
shall be deemed given as of actual receipt. Mailed notices shall be deemed
given three business days after mailing. Notices delivered by facsimile
transmission shall be deemed given upon receipt by the sender of the
transmission confirmation.
(a) If to Parent or, after the Effective Time, the Company:
-------------------------------------
-------------------------------------
-------------------------------------
with a copy to:
(b) If to the Escrow Agent:
-------------------------------------
-------------------------------------
-------------------------------------
(c) If to the Stockholder Representative,
-------------------------------------
-------------------------------------
-------------------------------------
with a copy to:
-------------------------------------
-------------------------------------
-------------------------------------
17. Binding Effect. This Escrow Agreement will be binding upon and inure to
the benefit of the parties hereto and their permitted assigns. The rights of
any person or entity to receive Escrowed Shares hereunder shall not be
transferable except by operation of law.
18. Amendment and Termination. This Escrow Agreement may be amended by and
upon written notice to the Escrow Agent given jointly by Parent and the
Stockholders Representative, but the duties and responsibilities of the Escrow
Agent may not be increased without its written consent. This Escrow Agreement
will terminate on the date on which all the Escrow Funds have been distributed.
19. Applicable Law. This Escrow Agreement will be governed by and construed
in accordance with the laws of the State of Texas, without giving effect to
conflicts of law principles.
20. Counterparts. This Escrow Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute but one and the same instrument.
21. Captions and Paragraph Headings. Captions and paragraph headings used
herein are for convenience only and are not part of this Escrow Agreement and
will not be used in construing it.
22. Arbitration. Any and all claims, demands, causes of action, disputes,
controversies and other matters in question arising out of or relating to this
Escrow Agreement, the alleged breach thereof, or in any way relating to the
subject matter of this Agreement, including without limitation the validity of
Claims, the calculation of Damages, and the determination of and the actual
dollar amount of the Threshold Amount ("Disputes"), even though some or all of
such Disputes allegedly are extra contractual in nature, whether such Disputes
sound in contract, tort or otherwise, at law or in equity, under state or
federal law, whether
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<PAGE>
provided by statute or the common law, for damages or any other relief, shall
be resolved and decided exclusively by binding arbitration pursuant to the
Federal Arbitration Act in accordance with the Commercial Arbitration Rules
then in effect with the American Arbitration Association. The arbitration
proceeding shall be conducted in Houston, Texas. The arbitration shall be
before a panel of three arbitrators. Parent and the Stockholders Representative
shall each select one arbitrator and the two arbitrators so selected shall
select the third arbitrator. The arbitrators are authorized to issue subpoenas
for depositions and other discovery mechanisms, as well as trial subpoenas, in
accordance with the Federal Rules of Civil Procedure. Any party may initiate a
proceeding in the appropriate United States District Court to enforce this
provision. This agreement to arbitrate shall be enforceable in either federal
or state court. Judgment upon any award rendered in any such arbitration
proceeding may be entered by any federal or state court having jurisdiction.
The enforcement of this agreement to arbitrate and all procedural aspects of
this agreement to arbitrate, including the construction and interpretation of
this agreement to arbitrate, the scope of the arbitrable issues, allegations of
waiver, delay or defenses to arbitrability, and the rules governing the conduct
of the arbitration, shall be governed by and construed pursuant to the Federal
Arbitration Act. The arbitrators shall have no authority to award punitive
damages (including, without limitation, any exemplary damages, treble damages
or any other penalty or punitive type of damages), under any circumstances
regardless of whether such damages in excess of such amount may be available
under applicable law or otherwise, the parties hereto hereby waiving their
right, if any, to recover such damages in excess of such amount in connection
with any Disputes. The costs of the arbitration and attorney's fees shall be
paid by Parent, but the arbitrators shall have the right to increase the Parent
Net Claim by any or all of such costs, including amounts paid by the Parent
pursuant to Section 24 hereof, as they deem equitable.
23. Action by Parent. All actions to be taken by Parent hereunder shall be
taken by, or pursuant to authority granted by a committee of the Board of
Directors of Parent comprised of one or more members who were not prior to the
Effective Time affiliated with the Company or affiliates of the Company and who
are not Stockholders.
24. Stockholders Representative's Expenses. Parent shall pay all invoices
submitted by the Stockholders Representative with respect to all reasonable
out-of-pocket expenses incurred by Stockholders Representative in the
performance of his duties hereunder, including fees and expenses of counsel, or
if Stockholders Representative has paid such expenses, then to reimburse
Stockholders Representative within 30 days of the submission of a written
request for reimbursement.
25. Conduct of Audit. Parent agrees to use all reasonable efforts to cause
the Claim Expiration Time to occur as soon as practicable.
26. Tax Reporting. Unless otherwise required by Treasury Regulations issued
in the future, the parties will treat the Escrowed Shares and any other shares
of Parent Common Stock deposited with the Escrow Agent hereunder for purposes
of Section 468B(g) of the Internal Revenue Code of 1986, as amended, and for
all other income tax purposes as being owned by the Stockholders during the
period such shares are held in Escrow, and therefore any income earned on such
shares during such period will be allocated and reported to the Stockholders as
such income is earned. The parties will make any elections or filings required
to characterize such shares in a manner consistent with the preceding sentence.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to
be executed by their respective officers hereunto duly authorized, as of the
day and year first above written.
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
D.O.S. Ltd.
By: _________________________________
Name: _______________________________
Title: ______________________________
STOCKHOLDERS REPRESENTATIVE
_____________________________________
Name: _______________________________
ESCROW AGENT
By: _________________________________
Name: _______________________________
Title: ______________________________
C-7
<PAGE>
APPENDIX D
CS FIRST BOSTON
Harry C. Pinson CS First Boston Corporation
Managing Director 3030 Texas Commerce Tower
Houston, TX 77002-3003
March 22, 1996 Telephone 713 220 6706
Tuboscope Vetco International Corporation
Board of Directors
2835 Holmes Road
Houston, Texas 77O51
Dear Sirs:
You have asked us to advise you with respect to the fairness to Tuboscope
Vetco International Corporation (the "Acquiror") from a financial point of
view of the consideration to be paid and received by the Acquiror pursuant to
the terms of the Acquisition Agreement, dated as of January 3, 1996 (the
"Acquisition Agreement"), among Drexel Oilfield Services, Ltd. (the
"Company"), the Acquiror and ABC Sub (the "Sub"). The Acquisition Agreement
provides for the merger (the "Merger") of the Company with the Sub pursuant to
which the Company will become a wholly owned subsidiary of the Acquiror and
each outstanding share of common stock, par value $0.10 per share, of the
Company will be converted into 0.4372 shares of common stock, par value $0.01
per share, of the Acquiror ("Acquiror Common Stock"), and the right to receive
up to 0.0273 additional shares of Acquiror Common Stock from escrow.
Simultaneously with the Merger, SCF-III, L.P. will purchase 4,200,000 shares
of Acquiror Common Stock and warrants to purchase 2,533,000 shares of Acquiror
Common Stock at an exercise price of $10.00 per share expiring December 31,
2000, for $31,000,000 (the "Securities Purchase") and Baker Hughes
Incorporated will exchange its 100,000 shares of redeemable Series A
Convertible Preferred Stock of the Acquiror for 1,500,000 shares of Acquiror
Common Stock and warrants to purchase 1,250,000 shares of Acquiror Common
Stock at an exercise price of $10.00 per share expiring December 31, 2000 (the
"Exchange"). The Merger, the Securities Purchase and the Exchange are all
elements of the total transaction and are referred to herein as the
"Transaction."
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Acquiror,
as well as the Acquisition Agreement. We have also reviewed certain other
information, including financial forecasts, provided to us by the Company and
the Acquiror, and have met with the Company's and the Acquiror's management~s
to discuss the business and prospects of the Company and the Acquiror, both
individually and as a combined entity.
We have also considered certain financial data of the Company and the
Acquiror, and we have compared that data with similar data for publicly held
companies in businesses similar to those of the Company and the Acquiror and
we have considered the financial terms of certain other business combinations
and other transactions which have recently been effected. We also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant under the
circumstances.
In connection with our review, we have not assumed responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the Company's and the Acquiror's managements as to the future
financial performance of the Company and the Acquiror. In addition, we have
not made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or
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the Acquiror, nor have we been furnished with any such evaluations or
appraisals. We have also assumed, with your consent, that the Transaction would
be treated as a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended. our opinion is necessarily based
upon financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof.
We were not requested to, and did not, solicit third party indications of
interest in acquiring all or any part of the Acquiror. We agree that if we are
approached by a third party with an unsolicited inquiry into a business
combination with or acquisition of the Acquiror, we will advise you of any such
proposal and, if requested, assist you in evaluating such proposal. We are not
expressing any opinion as to what the value of the securities of the Acquiror
actually will be when issued to the Company's stockholders pursuant to the
Merger or the prices at which such securities will trade subsequent to the
Merger.
We have acted as financial advisor to the Acquiror in connection with the
Transaction and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of the Transaction. We will also
receive a fee for rendering this opinion.
In the ordinary course of our business, CS First Boston and its affiliates
may actively trade the debt and equity securities of the Acquiror 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.
It is understood that this letter is for the information of the Board of
Directors of the Acquiror in connection with its consideration of the
Transaction and is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other document
used in connection with the offering or sale of securities, nor shall this
letter be used for any other purposes, without CS First Boston's prior written
consent, which will not be unreasonably withheld. We understand that this
letter will be reprinted in its entirety in the proxy statement sent to the
stockholders of the Acquiror and the Company in connection with the Transaction
and that we will have the opportunity to review and comment on all descriptions
thereof in such proxy statement prior to the filing with the Securities and
Exchange Commission and prior to its dissemination to stockholders.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be paid and received by the Acquiror in the
Transaction is fair to the Acquiror from a financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
/s/ Harry C. Pinson
By: _________________________________
Harry C. Pinson
Managing Director
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APPENDIX E
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION OF
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
Tuboscope Vetco International Corporation, a corporation organized and
existing under and by the virtue of the General Corporation Law of the State of
Delaware Does Hereby Certify:
First: That the Board of Directors of Tuboscope Vetco International
Corporation duly adopted a resolution setting forth a proposed amendment to the
Restated Certificate of Incorporation of said corporation declaring said
amendment to be advisable and further declaring that such amendment be
submitted to the stockholders of said corporation for consideration thereof.
The resolution setting forth the proposed amendment is as follows:
Resolved, that the Restated Certificate of Incorporation of the Company
is hereby amended by striking out the first paragraph of Article "Fourth"
thereof and substituting in lieu of said paragraph the following new
paragraph:
"The Company shall be authorized to issue two classes of shares
of stock to be designated respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the Company
shall have authority to issue is 65,000,000. The total
authorized number of shares of Common Stock shall be 60,000,000
and each such share shall have a par value of $.01. The total
authorized number of shares of Preferred Stock shall be
5,000,000 and each such share shall have a par value of $.01."
Second: That thereafter, pursuant to resolution of its Board of Directors and
upon the vote of its stockholders at the 1996 Annual Stockholders' Meeting, the
necessary number of shares as required by statute and the Restated Certificate
of Incorporation were voted in favor of the amendment.
Third: That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
In Witness Whereof, Tuboscope Vetco International Corporation has caused this
certificate to be signed by Martin R. Reid, its Chairman of the Board, and
attested by James F. Maroney, III, its Vice President, Secretary and General
Counsel, this th day of April 1996.
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
By: _________________________________
Martin R. Reid,
Chairman of the Board
Attest:
By: _________________________________
James F. Maroney, III
Vice President, Secretary
and General Counsel
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APPENDIX F
THE 1996 EQUITY PARTICIPATION PLAN
OF
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
TUBOSCOPE VETCO INTERNATIONAL CORPORATION, a Delaware corporation, has
adopted The 1996 Equity Participation Plan of Tuboscope Vetco International
Corporation (the "Plan"), effective April 23, 1996, for the benefit of its
eligible employees, consultants and directors. The Plan consists of two plans,
one for the benefit of key Employees (as such term is defined below) and
consultants and one for the benefit of Independent Directors (as such term is
defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock
and/or rights which recognize such growth, development and financial
success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and
financial success of the Company.
ARTICLE I
Definitions
1.1 General. Wherever the following terms are used in this Plan they shall
have the meaning specified below, unless the context clearly indicates
otherwise.
1.2 Award Limit. "Award Limit" shall mean one hundred thousand (100,000)
shares of Common Stock.
1.3 Board. "Board" shall mean the Board of Directors of the Company.
1.4 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.5 Committee. "Committee" shall mean the Compensation Committee of the
Board, or a subcommittee of the Board, appointed as provided in Section 9.1.
1.6 Common Stock. "Common Stock" shall mean the common stock of the Company,
par value $0.01 per share, and any equity security of the Company issued or
authorized to be issued in the future, but excluding any warrants, options or
other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
1.7 Company. "Company" shall mean Tuboscope Vetco International Corporation,
a Delaware corporation.
1.8 Corporate Transaction. "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to
change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
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(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity but
in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred to a person or person different from those who held such
securities immediately prior to such merger.
1.9 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under
Article VII of this Plan.
1.10 Director. "Director" shall mean a member of the Board.
1.11 Dividend Equivalent. "Dividend Equivalent" shall mean a right to receive
the equivalent value (in cash or Common Stock) of dividends paid on Common
Stock, awarded under Article VII of this Plan.
1.12 Employee. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.13 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.14 Fair Market Value. "Fair Market Value" of a share of Common Stock as of
a given date shall be (i) the closing price of a share of Common Stock on the
principal exchange on which shares of Common Stock are then trading, if any (or
as reported on any composite index which includes such principal exchange), on
the trading day previous to such date, or if shares were not traded on the
trading day previous to such date, then on the next preceding date on which a
trade occurred, or (ii) if Common Stock is not traded on an exchange but is
quoted on Nasdaq or a successor quotation system, the mean between the closing
representative bid and asked prices for the Common Stock on the trading day
previous to such date as reported by Nasdaq or such successor quotation system;
or (iii) if Common Stock is not publicly traded on an exchange and not quoted
on Nasdaq or a successor quotation system, the Fair Market Value of a share of
Common Stock as established by the Committee (or the Board, in the case of
Options granted to Independent Directors) acting in good faith.
1.15 Grantee. "Grantee" shall mean an Employee or consultant granted a
Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation
Right, or an award of Deferred Stock, under this Plan.
1.16 Incentive Stock Option. "Incentive Stock Option" shall mean an option
which conforms to the applicable provisions of Section 422 of the Code and
which is designated as an Incentive Stock Option by the Committee.
1.17 Independent Director. "Independent Director" shall mean a member of the
Board who is not an Employee of the Company.
1.18 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean an
Option which is not designated as an Incentive Stock Option by the Committee.
1.19 Option. "Option" shall mean a stock option granted under Article III of
this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
provided, however, that Options granted to Independent Directors and
consultants shall be Non-Qualified Stock Options.
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1.20 Optionee. "Optionee" shall mean an Employee, consultant or Independent
Director granted an Option under this Plan.
1.21 Performance Award. "Performance Award" shall mean a cash bonus, stock
bonus or other performance or incentive award that is paid in cash, Common
Stock or a combination of both, awarded under Article VII of this Plan.
1.22 Plan. "Plan" shall mean The 1996 Equity Participation Plan of Tuboscope
Vetco International Corporation.
1.23 QDRO. "QDRO" shall mean a qualified domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder.
1.24 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded
under Article VI of this Plan.
1.25 Restricted Stockholder. "Restricted Stockholder" shall mean an Employee
or consultant granted an award of Restricted Stock under Article VI of this
Plan.
1.26 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
1.27 Stock Appreciation Right. "Stock Appreciation Right" shall mean a stock
appreciation right granted under Article VIII of this Plan.
1.28 Stock Payment. "Stock Payment" shall mean (i) a payment in the form of
shares of Common Stock, or (ii) an option or other right to purchase shares of
Common Stock, as part of a deferred compensation arrangement, made in lieu of
all or any portion of the compensation, including without limitation, salary,
bonuses and commissions, that would otherwise become payable to a key Employee
or consultant in cash, awarded under Article VII of this Plan.
1.29 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken chain
of corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing 50
percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
1.30 Termination of Consultancy. "Termination of Consultancy" shall mean the
time when the engagement of Optionee, Grantee or Restricted Stockholder as a
consultant to the Company or a Subsidiary is terminated for any reason, with or
without cause, including without limitation, by resignation, discharge, death
or retirement; but excluding terminations where there is a simultaneous
commencement of employment with the Company or any Subsidiary. The Committee,
in its absolute discretion, shall determine the effect of all matters and
questions relating to Termination of Consultancy, including, but not by way of
limitation, the question of whether a Termination of Consultancy resulted from
a discharge for good cause, and all questions of whether particular leaves of
absence constitute Terminations of Consultancy. Notwithstanding any other
provision of this Plan, the Company or any Subsidiary has an absolute and
unrestricted right to terminate a consultant's service at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
1.31 Termination of Directorship. "Termination of Directorship" shall mean
the time when an Optionee who is an Independent Director ceases to be a
Director for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death or retirement. The Board, in its
sole and absolute discretion, shall determine the effect of all matters and
questions relating to Termination of Directorship with respect to Independent
Directors.
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1.32 Termination of Employment. "Termination of Employment" shall mean the
time when the employee-employer relationship between the Optionee, Grantee or
Restricted Stockholder and the Company or any Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, a
termination by resignation, discharge, death, disability or retirement; but
excluding (i) terminations where there is a simultaneous reemployment or
continuing employment of an Optionee, Grantee or Restricted Stockholder by the
Company or any Subsidiary, (ii) at the discretion of the Committee,
terminations which result in a temporary severance of the employee-employer
relationship, and (iii) at the discretion of the Committee, terminations which
are followed by the simultaneous establishment of a consulting relationship by
the Company or a Subsidiary with the former employee. The Committee, in its
absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Employment, including, but not by way of limitation,
the question of whether a Termination of Employment resulted from a discharge
for good cause, and all questions of whether particular leaves of absence
constitute Terminations of Employment; provided, however, that, with respect to
Incentive Stock Options, a leave of absence, change in status from an employee
to an independent contractor or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that, such leave of absence, change in status or other change interrupts
employment for the purposes of Section 422(a)(2) of the Code and the then
applicable regulations and revenue rulings under said Section. Notwithstanding
any other provision of this Plan, the Company or any Subsidiary has an absolute
and unrestricted right to terminate an Employee's employment at any time for
any reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
ARTICLE II
Shares Subject to Plan
2.1 Shares Subject to Plan.
(a) The shares of stock subject to Options, awards of Restricted Stock,
Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially shares
of the Company's Common Stock, par value $0.01 per share. The aggregate number
of such shares which may be issued upon exercise of such options or rights or
upon any such awards under the Plan shall not exceed one million two hundred
thousand (1,200,000). The shares of Common Stock issuable upon exercise of such
options or rights or upon any such awards may be either previously authorized
but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to options, rights or
other awards granted under the Plan to any individual in any calendar year
shall not exceed the Award Limit. To the extent required by Section 162(m) of
the Code, shares subject to Options which are cancelled continue to be counted
against the Award Limit and if, after grant of an Option, the price of shares
subject to such Option is reduced, the transaction is treated as a cancellation
of the Option and a grant of a new Option and both the Option deemed to be
canceled and the Option deemed to be granted are counted against the Award
Limit. Furthermore, to the extent required by Section 162(m) of the Code, if,
after grant of a Stock Appreciation Right, the base amount on which stock
appreciation is calculated is reduced to reflect a reduction in the Fair Market
Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.
2.2 Add-back Options and Other Rights. If any Option, or other right to
acquire shares of Common Stock under any other award under this Plan, expires
or is cancelled without having been fully exercised or is exercised in whole or
in part for cash as permitted by this Plan, the number of shares subject to
such Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1.
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Shares of Common Stock which are delivered by the Optionee or Grantee or
withheld by the Company upon the exercise of any Option or other award under
this Plan in payment of the exercise price thereof may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1. If any
share of Restricted Stock is forfeited by the Grantee or repurchased by the
Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
ARTICLE III
Granting of Options
3.1 Eligibility. Any Employee or consultant selected by the Committee
pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 3.4(d).
3.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing Subsidiary unless such Incentive Stock Option conforms to
the applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock Option shall
be granted unless such Option, when granted, qualifies as an "incentive stock
option" under Section 422 of the Code. No Incentive Stock Option shall be
granted to any person who is not an Employee.
3.4 Granting of Options
(a) The Committee shall from time to time, in its absolute discretion, and
subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from among the
key Employees or consultants (including Employees or consultants who have
previously received Options or other awards under this Plan) such of them
as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to the selected key Employees or
consultants;
(iii) Determine whether such Options are to be Incentive Stock Options or
Non-Qualified Stock Options and whether such Options are to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code; and
(iv) Determine the terms and conditions of such Options, consistent with
this Plan; provided, however, that the terms and conditions of Options
intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall include, but not be limited to, such
terms and conditions as may be necessary to meet the applicable provisions
of Section 162(m) of the Code.
(b) Upon the selection of a key Employee or consultant to be granted an
Option, the Committee shall instruct the Secretary of the Company to issue the
Option and may impose such conditions on the grant of the Option as it deems
appropriate. Without limiting the generality of the preceding sentence, the
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options, awards of Restricted Stock or Deferred Stock, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or
other rights which have been previously granted to him under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender,
may have an option price lower (or higher) than the exercise price of such
surrendered Option or
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other award, may cover the same (or a lesser or greater) number of shares as
such surrendered Option or other award, may contain such other terms as the
Committee deems appropriate, and shall be exercisable in accordance with its
terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be modified by the
Committee to disqualify such option from treatment as an "incentive stock
option" under Section 422 of the Code.
(d) During the term of the Plan, (i) a person who is an Independent Director
as of the effective date of this Plan automatically shall be granted an option
to purchase four thousand (4,000) shares of Common Stock (subject to adjustment
as provided in Section 10.3) on the date of each annual meeting of stockholders
at which the Independent Director is reelected to the Board, and (ii) a person
who is initially elected or appointed to the Board and is at the time of
election or appointment an Independent Director automatically shall be granted
(A) an option to purchase four thousand (4,000) shares of Common Stock (subject
to adjustment as provided in Section 10.3) on the date of such initial election
or appointment and (B) an option to purchase four thousand (4,000) shares of
Common Stock (subject to adjustment as provided in Section 10.3) on the date of
each annual meeting of stockholders after such initial election or appointment
at which the Independent Director is reelected to the Board. Members of the
Board who are employees of the Company who subsequently retire from the Company
and remain on the Board will not receive an initial Option grant pursuant to
clause (ii)(A) of the preceding sentence, but to the extent that they are
otherwise eligible, will receive, after retirement from the Company, Options as
described in the clause (ii)(B) of the preceding sentence. All of the foregoing
Option grants authorized by this Section 3.4(d) are subject to stockholder
approval of the Plan.
ARTICLE IV
Terms of Options
4.1 Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall determine, consistent with this Plan. Stock Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each Option
shall be set by the Committee; provided, however, that such price shall be no
less than the par value of a share of Common Stock and (i) in the case of
Incentive Stock Options and Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(c) of the Code, such price shall
not be less than 100% of the Fair Market Value of a share of Common Stock on
the date the Option is granted; (ii) in the case of Incentive Stock Options
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary such price shall not be less than 110%
of the Fair Market Value of a share of Common Stock on the date the Option is
granted; and (iii) in the case of Options granted to Independent Directors,
such price shall equal 100% of the Fair Market Value of a share of Common Stock
on the date the Option is granted.
4.3 Option Term. The term of an Option shall be set by the Committee in its
discretion; provided, however, that, (i) in the case of Options granted to
Independent Directors, the term shall be (10) years from the date the Option is
granted, without variation or acceleration hereunder, and (ii) in the case of
Incentive Stock Options, the term shall not be more than ten (10) years from
the date the Incentive Stock Option is granted, or five (5) years from such
date if the Incentive Stock Option is granted to an individual then owning
(within
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the meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary. Except
as limited by requirements of Section 422 of the Code and regulations and
rulings thereunder applicable to Incentive Stock Options, the Committee may
extend the term of any outstanding Option in connection with any Termination of
Employment or Termination of Consultancy of the Optionee, or amend any other
term or condition of such Option relating to such a termination.
4.4 Option Vesting
(a) The period during which the right to exercise an Option in whole or in
part vests in the Optionee shall be set by the Committee and the Committee may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that, unless the
Committee otherwise provides in the terms of the Option, no Option shall be
exercisable by any Optionee who is then subject to Section 16 of the Exchange
Act within the period ending six months and one day after the date the Option
is granted; and provided, further, that Options granted to Independent
Directors shall become exercisable in cumulative annual installments of 25% on
each of the first, second, third and fourth anniversaries of the date of Option
grant, without variation or acceleration hereunder except as provided in
Section 10.3(c). At any time after grant of an Option, the Committee may, in
its sole and absolute discretion and subject to whatever terms and conditions
it selects, accelerate the period during which an Option vests (except an
Option granted to an Independent Director).
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to employees or
consultants either in the Stock Option Agreement or by action of the Committee
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with respect
to which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the Code) are exercisable for the
first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value
of stock shall be determined as of the time the Option with respect to such
stock is granted.
4.5 Consideration. In consideration of the granting of an Option, the
Optionee shall agree, in the written Stock Option Agreement, to remain in the
employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year (or
such shorter period as may be fixed in the Stock Option Agreement or by action
of the Committee following grant of the Option) after the Option is granted (or
until the next annual meeting of stockholders of the Company, in the case of an
Independent Director). Nothing in this Plan or in any Stock Option Agreement
hereunder shall confer upon any Optionee any right to continue in the employ
of, or as a consultant for, the Company or any Subsidiary, or as a director of
the Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Optionee at any time for any reason whatsoever, with or without good cause.
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ARTICLE V
Exercise of Options
5.1 Partial Exercise. An exercisable Option may be exercised in whole or in
part. However, an Option shall not be exercisable with respect to fractional
shares and the Committee (or the Board, in the case of Options granted to
Independent Directors) may require that, by the terms of the Option, a partial
exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option shall be
deemed exercised upon delivery of all of the following to the Secretary of the
Company or his office:
(a) A written notice complying with the applicable rules established by
the Committee or the Board stating that the Option, or a portion thereof,
is exercised. The notice shall be signed by the Optionee or other person
then entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee or the Board, in
its absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act of 1933, as amended,
and any other federal or state securities laws or regulations. The
Committee or Board may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates and
issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to Section
10.1 by any person or persons other than the Optionee, appropriate proof of
the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares with
respect to which the Option, or portion thereof, is exercised. However, the
Committee (or the Board, in the case of Options granted to Independent
Directors), may in its discretion (i) allow a delay in payment up to thirty
(30) days from the date the Option, or portion thereof, is exercised; (ii)
allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof; (iii)
subject to the timing requirements of Section 5.3, allow payment, in whole
or in part, through the surrender of shares of Common Stock then issuable
upon exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iv) allow payment, in whole or in part, through
the delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the delivery
of a full recourse promissory note bearing interest (at no less than such
rate as shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Committee or the Board,
or (vi) allow payment through any combination of the consideration provided
in the foregoing subparagraphs (ii), (iii), (iv) and (v). In the case of a
promissory note, the Committee (or the Board, in the case of Options
granted to Independent Directors) may also prescribe the form of such note
and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited
by law.
5.3 Certain Timing Requirements. At the discretion of the Committee (or
Board, in the case of Options granted to Independent Directors), shares of
Common Stock issuable to the Optionee upon exercise of the Option may be used
to satisfy the Option exercise price or the tax withholding consequences of
such exercise, in the case of persons subject to Section 16 of the Exchange
Act, only (i) during the period beginning on the third business day following
the date of release of the quarterly or annual summary statement of sales and
earnings of the Company and ending on the twelfth business day following such
date or (ii) pursuant to an irrevocable written election by the Optionee to use
shares of Common Stock issuable to the Optionee upon
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exercise of the Option to pay all or part of the Option price or the
withholding taxes made at least six months prior to the payment of such Option
price or withholding taxes.
5.4 Conditions to Issuance of Stock Certificates. The Company shall not be
required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its absolute
discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee or Board shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise of
the Option as the Committee or Board may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares, including
payment of any applicable withholding tax.
5.5 Rights as Stockholders. The holders of Options shall not be, nor have any
of the rights or privileges of, stockholders of the Company in respect of any
shares purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
holders.
5.6 Ownership and Transfer Restrictions. The Committee (or Board, in the case
of Options granted to Independent Directors), in its absolute discretion, may
impose such restrictions on the ownership and transferability of the shares
purchasable upon the exercise of an Option as it deems appropriate. Any such
restriction shall be set forth in the respective Stock Option Agreement and may
be referred to on the certificates evidencing such shares. The Committee may
require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting such Option to such Employee or (ii)
one year after the transfer of such shares to such Employee. The Committee (or
the Board, in the case of Options granted to Independent Directors) may direct
that the certificates evidencing shares acquired by exercise of an Option refer
to such requirement to give prompt notice of disposition.
5.7 Limitations on Exercise of Options Granted to Independent Directors. No
Option granted to an Independent Director may be exercised to any extent by
anyone after the first to occur of the following events:
(a) the expiration of twelve (12) months from the date of the Optionee's
death;
(b) the expiration of twelve (12) months from the date of the Optionee's
Termination of Directorship by reason of his permanent and total disability
(within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the Optionee's
Termination of Directorship for any reason other than such Optionee's death
or his permanent and total disability, unless the Optionee dies within said
three-month period;
(d) a Corporate Transaction; provided, however, that any Option granted
or deemed regranted within six months of such Corporate Transaction shall
remain exercisable until the expiration of six months and one day from the
later of the date such Option was granted or the date such Option was
deemed regranted; or
(e) The expiration of ten years from the date the Option was granted.
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ARTICLE VI
Award of Restricted Stock
6.1 Award of Restricted Stock
(a) The Committee shall from time to time, in its absolute discretion:
(i) Select from among the key Employees or consultants (including
Employees or consultants who have previously received other awards under
this Plan) such of them as in its opinion should be awarded Restricted
Stock; and
(ii) Determine the purchase price, if any, and other terms and conditions
applicable to such Restricted Stock, consistent with this Plan.
(b) The Committee shall establish the purchase price, if any, and form of
payment for Restricted Stock; provided, however, that such purchase price shall
be no less than the par value of the Common Stock to be purchased. In all
cases, legal consideration shall be required for each issuance of Restricted
Stock.
(c) Upon the selection of a key Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
6.2 Restricted Stock Agreement. Restricted Stock shall be issued only
pursuant to a written Restricted Stock Agreement, which shall be executed by
the selected key Employee or consultant and an authorized officer of the
Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with this Plan.
6.3 Consideration. As consideration for the issuance of Restricted Stock, in
addition to payment of any purchase price, the Restricted Stockholder shall
agree, in the written Restricted Stock Agreement, to remain in the employ of,
or to consult for, the Company or any Subsidiary for a period of at least one
year after the Restricted Stock is issued (or such shorter period as may be
fixed in the Restricted Stock Agreement or by action of the Committee following
grant of the Restricted Stock). Nothing in this Plan or in any Restricted Stock
Agreement hereunder shall confer on any Restricted Stockholder any right to
continue in the employ of, or as a consultant for, the Company or any
Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Restricted Stockholder at any time for any reason whatsoever, with or
without good cause.
6.4 Rights as Stockholders. Upon delivery of the shares of Restricted Stock
to the escrow holder pursuant to Section 6.7, the Restricted Stockholder shall
have, unless otherwise provided by the Committee, all the rights of a
stockholder with respect to said shares, subject to the restrictions in his
Restricted Stock Agreement, including the right to receive all dividends and
other distributions paid or made with respect to the shares; provided, however,
that in the discretion of the Committee, any extraordinary distributions with
respect to the Common Stock shall be subject to the restrictions set forth in
Section 6.5.
6.5 Restriction. All shares of Restricted Stock issued under this Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide,
which restrictions may include, without limitation, restrictions concerning
voting rights and transferability and restrictions based on duration of
employment with the Company, Company performance and individual performance;
provided, however, that, unless the Committee otherwise provides in the terms
of the Restricted Stock Agreement, no share of Restricted Stock granted to a
person subject to Section 16 of the Exchange Act shall be sold, assigned or
otherwise transferred until at least six months have elapsed from (but
excluding) the date on which the Restricted Stock was issued, and provided,
further, that by action taken after the Restricted Stock is issued, the
Committee may, on such
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terms and conditions as it may determine to be appropriate, remove any or all
of the restrictions imposed by the terms of the Restricted Stock Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire. Unless provided otherwise by the Committee, if no
consideration was paid by the Restricted Stockholder upon issuance, a
Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon
Termination of Employment or, if applicable, upon Termination of Consultancy
with the Company.
6.6 Repurchase of Restricted Stock. The Committee shall provide in the terms
of each individual Restricted Stock Agreement that the Company shall have the
right to repurchase from the Restricted Stockholder the Restricted Stock then
subject to restrictions under the Restricted Stock Agreement immediately upon a
Termination of Employment or, if applicable, upon a Termination of Consultancy
between the Restricted Stockholder and the Company, at a cash price per share
equal to the price paid by the Restricted Stockholder for such Restricted
Stock; provided, however, that provision may be made that no such right of
repurchase shall exist in the event of a Termination of Employment or
Termination of Consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.
6.7 Escrow. The Secretary of the Company or such other escrow holder as the
Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
6.8 Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Restricted Stock Agreements, which legend
or legends shall make appropriate reference to the conditions imposed thereby.
ARTICLE VII
Performance Awards, Dividend Equivalents,
Deferred Stock, Stock Payments
7.1 Performance Awards. Any key Employee or consultant selected by the
Committee may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits
or other measure of the value of Common Stock or other specific performance
criteria determined appropriate by the Committee, in each case on a specified
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee or
consultant.
7.2 Dividend Equivalents. Any key Employee or consultant selected by the
Committee may be granted Dividend Equivalents based on the dividends declared
on Common Stock, to be credited as of dividend payment dates, during the period
between the date an Option, Stock Appreciation Right, Deferred Stock or
Performance Award is granted, and the date such Option, Stock Appreciation
Right, Deferred Stock or Performance Award is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
cash or additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee.
7.3 Stock Payments. Any key Employee or consultant selected by the Committee
may receive Stock Payments in the manner determined from time to time by the
Committee. The number of shares shall be determined by the Committee and may be
based upon the Fair Market Value, book value, net profits or other
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measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
7.4 Deferred Stock. Any key Employee or consultant selected by the Committee
may be granted an award of Deferred Stock in the manner determined from time to
time by the Committee. The number of shares of Deferred Stock shall be
determined by the Committee and may be linked to the market value, book value,
net profits or other measure of the value of Common Stock or other specific
performance criteria determined to be appropriate by the Committee, in each
case on a specified date or dates or over any period or periods determined by
the Committee. Common Stock underlying a Deferred Stock award will not be
issued until the Deferred Stock award has vested, pursuant to a vesting
schedule or performance criteria set by the Committee. Unless otherwise
provided by the Committee, a Grantee of Deferred Stock shall have no rights as
a Company stockholder with respect to such Deferred Stock until such time as
the award has vested and the Common Stock underlying the award has been issued.
7.5 Performance Award Agreement, Dividend Equivalent Agreement, Deferred
Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by
a written agreement, which shall be executed by the Grantee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with this Plan.
7.6 Term. The term of a Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment shall be set by the Committee in its
discretion.
7.7 Exercise Upon Termination of Employment. A Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment is exercisable or
payable only while the Grantee is an Employee or consultant; provided that the
Committee may determine that the Performance Award, Dividend Equivalent, award
of Deferred Stock and/or Stock Payment may be exercised or paid subsequent to
Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
7.8 Payment on Exercise. Payment of the amount determined under Section 7.1
or 7.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Committee. To the extent any payment under this Article VII
is effected in Common Stock, it shall be made subject to satisfaction of all
provisions of Section 5.4.
7.9 Consideration. In consideration of the granting of a Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee
shall agree, in a written agreement, to remain in the employ of, or to consult
for, the Company or any Subsidiary for a period of at least one year after such
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment is granted (or such shorter period as may be fixed in such agreement or
by action of the Committee following such grant). Nothing in this Plan or in
any agreement hereunder shall confer on any Grantee any right to continue in
the employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at
any time for any reason whatsoever, with or without good cause.
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ARTICLE VIII
Stock Appreciation Rights
8.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right may be
granted to any key Employee or consultant selected by the Committee. A Stock
Appreciation Right may be granted (i) in connection and simultaneously with the
grant of an Option, (ii) with respect to a previously granted Option, or (iii)
independent of an Option. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with this Plan as the Committee shall
impose and shall be evidenced by a written Stock Appreciation Right Agreement,
which shall be executed by the Grantee and an authorized officer of the
Company. The Committee, in its discretion, may determine whether a Stock
Appreciation Right is to qualify as performance-based compensation as described
in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements
evidencing Stock Appreciation Rights intended to so qualify shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
section 162(m) of the Code. Without limiting the generality of the foregoing,
the Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition of the grant of a Stock Appreciation Right to an
Employee or consultant that the Employee or consultant surrender for
cancellation some or all of the unexercised Options, awards of Restricted Stock
or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, or other rights which have been previously
granted to him under this Plan or otherwise. A Stock Appreciation Right, the
grant of which is conditioned upon such surrender, may have an exercise price
lower (or higher) than the exercise price of the surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as such
surrendered Option or other award, may contain such other terms as the
Committee deems appropriate, and shall be exercisable in accordance with its
terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
8.2 Coupled Stock Appreciation Rights
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number of
shares subject to the simultaneously or previously granted Option to which it
is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to exercise
the Option pursuant to this Plan) to surrender to the Company unexercised a
portion of the Option to which the CSAR relates (to the extent then exercisable
pursuant to its terms) and to receive from the Company in exchange therefor an
amount determined by multiplying the difference obtained by subtracting the
Option exercise price from the Fair Market Value of a share of Common Stock on
the date of exercise of the CSAR by the number of shares of Common Stock with
respect to which the CSAR shall have been exercised, subject to any limitations
the Committee may impose.
8.3 Independent Stock Appreciation Rights
(a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated to
any Option and shall have a term set by the Committee. An ISAR shall be
exercisable in such installments as the Committee may determine. An ISAR shall
cover such number of shares of Common Stock as the Committee may determine;
provided, however, that unless the Committee otherwise provides in the terms of
the ISAR, no ISAR granted to a person subject to Section 16 of the Exchange Act
shall be exercisable until at least six months have elapsed from (but
excluding) the date on which the Option was granted. The exercise price per
share of Common Stock subject to each ISAR shall be set by the Committee. An
ISAR is exercisable only while the Grantee is an Employee or consultant;
provided that the Committee may determine that the ISAR may be exercised
subsequent to Termination of Employment or Termination of Consultancy without
cause, or
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following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to exercise
the ISAR pursuant to this Plan) to exercise all or a specified portion of the
ISAR (to the extent then exercisable pursuant to its terms) and to receive from
the Company an amount determined by multiplying the difference obtained by
subtracting the exercise price per share of the ISAR from the Fair Market Value
of a share of Common Stock on the date of exercise of the ISAR by the number of
shares of Common Stock with respect to which the ISAR shall have been
exercised, subject to any limitations the Committee may impose.
8.4 Payment and Limitations on Exercise
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b) above
shall be in cash, in Common Stock (based on its Fair Market Value as of the
date the Stock Appreciation Right is exercised) or a combination of both, as
determined by the Committee. To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of Section 5.4
hereinabove pertaining to Options.
(b) Grantees of Stock Appreciation Rights who are subject to Section 16 of
the Exchange Act may, in the discretion of the Board or Committee, be required
to comply with any timing or other restrictions under Rule 16b-3 applicable to
the settlement or exercise of a Stock Appreciation Right.
8.5 Consideration. In consideration of the granting of a Stock Appreciation
Right, the Grantee shall agree, in the written Stock Appreciation Right
Agreement, to remain in the employ of, or to consult for, the Company or any
Subsidiary for a period of at least one year after the Stock Appreciation Right
is granted (or such shorter period as may be fixed in the Stock Appreciation
Right Agreement or by action of the Committee following grant of the Restricted
Stock.) Nothing in this Plan or in any Stock Appreciation Right Agreement
hereunder shall confer on any Grantee any right to continue in the employ of,
or as a consultant for, the Company or any Subsidiary or shall interfere with
or restrict in any way the rights of the Company and any Subsidiary, which are
hereby expressly reserved, to discharge any Grantee at any time for any reason
whatsoever, with or without good cause.
ARTICLE IX
Administration
9.1 Compensation Committee. The Compensation Committee (or another committee
or a subcommittee of the Board assuming the functions of the Committee under
this Plan) shall consist of two or more Independent Directors appointed by and
holding office at the pleasure of the Board, each of whom is both a
"disinterested person" as defined by Rule 16b-3 and an "outside director" for
purposes of Section 162(m) of the Code. Appointment of Committee members shall
be effective upon acceptance of appointment. Committee members may resign at
any time by delivering written notice to the Board. Vacancies in the Committee
may be filled by the Board.
9.2 Duties and Powers of Committee. It shall be the duty of the Committee to
conduct the general administration of this Plan in accordance with its
provisions. The Committee shall have the power to interpret this Plan and the
agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to Options granted
to Independent Directors. Any such grant or award under this Plan need not be
the same with respect to each Optionee, Grantee or Restricted Stockholder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the
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Code. In its absolute discretion, the Board may at any time and from time to
time exercise any and all rights and duties of the Committee under this Plan
except with respect to matters which under Rule 16b-3 or Section 162(m) of the
Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee.
9.3 Majority Rule; Unanimous Written Consent. The Committee shall act by a
majority of its members in attendance at a meeting at which a quorum is present
or by a memorandum or other written instrument signed by all members of the
Committee.
9.4 Compensation; Professional Assistance; Good Faith Actions. Members of the
Committee shall receive such compensation for their services as members as may
be determined by the Board. All expenses and liabilities which members of the
Committee incur in connection with the administration of this Plan shall be
borne by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
ARTICLE X
Miscellaneous Provisions
10.1 Not Transferable. Options, Restricted Stock awards, Deferred Stock
awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments under this Plan may not be sold, pledged, assigned, or
transferred in any manner other than by will or the laws of descent and
distribution or pursuant to a QDRO, unless and until such rights or awards have
been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the
Optionee, Grantee or Restricted Stockholder or his successors in interest or
shall be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect,
except to the extent that such disposition is permitted by the preceding
sentence.
During the lifetime of the Optionee or Grantee, only he may exercise an
Option or other right or award (or any portion thereof) granted to him under
the Plan unless it has been disposed of pursuant to a QDRO. After the death of
the Optionee or Grantee, any exercisable portion of an Option or other right or
award may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement or other agreement, be exercised
by his personal representative or by any person empowered to do so under the
deceased Optionee's or Grantee's will or under the then applicable laws of
descent and distribution.
10.2 Amendment, Suspension or Termination of this Plan. This Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board or the Committee. However, without
approval of the Company's stockholders given within twelve months before
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or after the action by the Committee, no action of the Committee may, except as
provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the
Award Limit, and no action of the Committee may be taken that would otherwise
require stockholder approval as a matter of applicable law, regulation or rule.
Notwithstanding the foregoing, except as permitted by the applicable exemptive
conditions of Rule 16b-3, the provisions of this Plan relating to formula
Option grants to Independent Directors, including the amount, price and timing
thereof, shall not be amended more than once in any six-month period other than
to comport with changes in the Code, the Employee Retirement Income Security
Act, or the respective rules thereunder. No amendment, suspension or
termination of this Plan shall, without the consent of the holder of Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, alter or impair
any rights or obligations under any Options, Restricted Stock awards, Deferred
Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments theretofore granted or awarded, unless the award
itself otherwise expressly so provides. No Options, Restricted Stock, Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments may be granted or awarded during any period of suspension or
after termination of this Plan, and in no event may any Incentive Stock Option
be granted under this Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by the
Board; or
(b) The expiration of ten years from the date the Plan is approved by the
Company's stockholders under Section 10.4.
10.3 Changes in Common Stock or Assets of the Company; Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 10.3(e), in the event that the Committee determines
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits
or potential benefits intended to be made available under the Plan or with
respect to an Option, Restricted Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent, Deferred Stock award or Stock Payment,
then the Committee (or the Board, in the case of Options granted to Independent
Directors) shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other securities or
property) with respect to which Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted
under the Plan, or which may be granted as Restricted Stock or Deferred
Stock (including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be issued
and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other securities
or property) subject to outstanding Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the
number and kind of shares of outstanding Restricted Stock or Deferred
Stock, and
(iii) the grant or exercise price with respect to any Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment.
(b) Subject to Section 10.3(e), in the event of any corporate transaction or
other event described in Section 10.3(a) which results in shares of Common
Stock being exchanged for or converted into cash,
F-16
<PAGE>
securities (including securities of another corporation) or other property, the
Committee will have the right to terminate this Plan as of the date of the
event or transaction, in which case all options, rights and other awards
granted under this Plan shall become the right to receive such cash, securities
or other property, net of any applicable exercise price.
(c) Subject to Sections 10.3(c)(vii) and 10.3(e), in the event of any
corporate transaction or other event described in Section 10.3(a) or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its discretion is hereby authorized to take any one
or more of the following actions whenever the Committee (or the Board, in the
case of Options granted to Independent Directors) determines that such action
is appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to any option, right or other award under this Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations
or principles:
(i) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee (or the Board, in the case of Options granted to
Independent Directors) may provide, either automatically or upon the
optionee's request, for either the purchase of any such Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or
any Restricted Stock or Deferred Stock for an amount of cash equal to the
amount that could have been attained upon the exercise of such option,
right or award or realization of the optionee's rights had such option,
right or award been currently exercisable or payable or the replacement of
such option, right or award with other rights or property selected by the
Committee (or the Board, in the case of Options granted to Independent
Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee (or the Board, in
the case of Options granted to Independent Directors) may provide, either
by the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event, that, for a specified period of time prior to such transaction or
event, such option, right or award shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section
4.4 or (ii) the provisions of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted
Stock or Deferred Stock;
(iv) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee (or the Board, in the case of Options granted to
Independent Directors) may provide, either by the terms of such Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock or by action taken prior to
the occurrence of such transaction or event, that upon such event, such
option, right or award be assumed by the successor corporation, or a parent
or subsidiary thereof, or shall be substituted for by similar options,
rights or awards covering the stock of the successor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and prices; and
(v) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee (or the Board, in the case of Options granted to
Independent Directors) may make adjustments in the number and type of
shares of Common Stock (or other securities or property) subject to
outstanding Options, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents, or Stock Payments,
F-17
<PAGE>
and in the number and kind of outstanding Restricted Stock or Deferred
Stock and/or in the terms and conditions of (including the grant or
exercise price), and the criteria included in, outstanding options, rights
and awards and options, rights and awards which may be granted in the
future.
(vi) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee may provide either by the terms of a Restricted
Stock award or Deferred Stock award or by action taken prior to the
occurrence of such event that, for a specified period of time prior to such
event, the restricitons imposed under a Restricted Stock Agreement or a
Deferred Stock Agreement upon some or all shares of Restricted Stock or
Deferred Stock may be terminated, and, in the case of Restricted Stock,
some or all shares of such Restricted Stock may cease to be subject to
repurchase under Section 6.6 after such event.
(vii) None of the foregoing discretionary terms of this Section 10.3(c)
shall be permitted with respect to Options granted under Section 3.4(d) to
Independent Directors to the extent that such discretion would be
inconsistent with the requirements of Rule 16b-3. In the event of a
Corporate Transaction, to the extent that the Board does not have the
ability under Rule 16b-3 to take or to refrain from taking the
discretionary actions set forth above, each Option granted to an
Independent Director shall be exercisable as to all shares covered thereby
during the five days immediately preceding the consummation of such
Corporate Transaction and subject to such consummation, notwithstanding
anything to the contrary in (i) Section 4.4 or (ii) the vesting schedule of
such option, and except as provided in Section 5.7(d), Options granted to
an Independent Director cannot be exercised following such event.
(d) Subject to Section 10.3(e) and 10.8, the Committee (or the Board, in the
case of Options granted to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock agreement or certificate, as it may deem
equitable and in the best interests of the Company.
(e) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 10.3 or in
any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would violate Section 16 or the exemptive
conditions of Rule 16b-3. The number of shares of Common Stock subject to any
option, right or award shall always be rounded to the next whole number.
10.4 Approval of Plan by Stockholders. This Plan will be submitted for the
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of this Plan. Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted and
Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval, provided that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and
such Restricted Stock or Deferred Stock shall not vest prior to the time when
this Plan is approved by the stockholders, and provided further that if such
approval has not been obtained at the end of said twelve-month period, all
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments previously granted and all Restricted Stock or Deferred Stock
previously awarded under this Plan shall thereupon be cancelled and become null
and void.
10.5 Tax Withholding. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Optionee, Grantee or
Restricted Stockholder of any sums required by federal, state or local tax law
to be withheld with respect to the issuance, vesting or exercise of any Option,
Restricted Stock, Deferred Stock, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment. Subject to the timing requirements of
Section 5.3, the Committee (or the Board, in the case of Options granted to
Independent Directors) may in its discretion and in satisfaction of the
foregoing
F-18
<PAGE>
requirement allow such Optionee, Grantee or Restricted Stockholder to elect to
have the Company withhold shares of Common Stock otherwise issuable under such
Option or afterward (or allow the return of shares of Common Stock) having a
Fair Market Value equal to the sums required to be withheld.
10.6 Loans. The Committee may, in its discretion, extend one or more loans to
key Employees in connection with the exercise or receipt of an Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.
10.7 Forfeiture Provisions. Pursuant to its general authority to determine
the terms and conditions applicable to awards under the Plan, the Committee (or
the Board, in the case of Options granted to Independent Directors) shall have
the right (to the extent consistent with the requirements of Rule 16b-3) to
provide, in the terms of Options or other awards made under the Plan, or to
require the recipient to agree by separate written instrument, that (i) any
proceeds, gains or other economic benefit actually or constructively received
by the recipient upon any receipt or exercise of the award, or upon the receipt
or resale of any Common Stock underlying such award, must be paid to the
Company, and (ii) the award shall terminate and any unexercised portion of such
award (whether or not vested) shall be forfeited, if (a) a Termination of
Employment, Termination of Consultancy or Termination of Directorship occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the award, or (b) the recipient at any time, or during a
specified time period, engages in any activity in competition with the Company,
or which is inimical, contrary or harmful to the interests of the Company, as
further defined by the Committee (or the Board, as applicable).
10.8 Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of this Plan, this Plan, and
any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to any
individual who is then subject to Section 16 of the Exchange Act, shall be
subject to any additional limitations set forth in any applicable exemptive
rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-
3 of the Exchange Act) that are requirements for the application of such
exemptive rule. To the extent permitted by applicable law, the Plan, Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents, Stock
Payments, Restricted Stock and Deferred Stock granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of this Plan,
any Option or Stock Appreciation Right intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall be subject
to any additional limitations set forth in Section 162(m) of the Code
(including any amendment to Section 162(m) of the Code) or any regulations or
rulings issued thereunder that are requirements for qualification as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
10.9 Effect of Plan Upon Options and Compensation Plans. The adoption of this
Plan shall not affect any other compensation or incentive plans in effect for
the Company or any Subsidiary. Nothing in this Plan shall be construed to limit
the right of the Company (i) to establish any other forms of incentives or
compensation for Employees, Directors or Consultants of the Company or any
Subsidiary or (ii) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
10.10 Compliance with Laws. This Plan, the granting and vesting of Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan and
the issuance and delivery of shares of Common Stock and the payment of
F-19
<PAGE>
money under this Plan or under Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or
Deferred Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. To the extent permitted by applicable law, the
Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments
granted or awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
10.11 Titles. Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this Plan.
10.12 Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
California without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of Tuboscope Vetco International Corporation on , 1996.
Executed on this day of , 1996.
_____________________________________
James F. Maroney, III
Vice President, Secretary
and General Counsel
F-20
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Statutory Provisions
Section 102(b)(7) of the DGCL enables a corporation in its certificate of
incorporation to eliminate or limit the personal liability of members of its
board of directors to the corporation or its stockholders for monetary damages
for violations of a director's fiduciary duty of care. Such a provision would
have no effect on the availability of equitable remedies, such as an injunction
or rescission, for breach of fiduciary duty. In addition, no such provision may
eliminate or limit the liability of a director for breaching his duty of
loyalty, failing to act in good faith, engaging in intentional misconduct or
knowingly violating a law, paying an unlawful dividend or approving an illegal
stock repurchase, or obtaining an improper personal benefit.
Section 145 of the DGCL empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. No indemnification shall be made in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Additionally, a corporation is
required to indemnify its directors and officers against expenses to the extent
that such directors or officers have been successful on the merits or otherwise
in any action, suit or proceeding or in defense of any claim, issue or matter
therein.
Indemnification can be made by the corporation only upon a determination that
indemnification is proper in the circumstances because the party seeking
indemnification has met the applicable standard of conduct as set forth in the
DGCL. The indemnification provided by the DGCL shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors, or
otherwise. A corporation also has the power to purchase and maintain insurance
on behalf of any person, whether or not the corporation would have the power to
indemnify him against such liability. The indemnification provided by the DGCL
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
The Tuboscope Certificate of Incorporation and Tuboscope Bylaws
The Tuboscope Certificate of Incorporation limits the directors' liability
for monetary damages to Tuboscope and its stockholders for breaches of
fiduciary duty except under the circumstances outlined in Section 102(b)(7) of
the DGCL as described above under "--Statutory Provisions."
The Tuboscope Bylaws extend indemnification rights to the fullest extent
authorized by the DGCL to directors and officers involved in any action, suit
or proceeding where the basis of such involvement is such persons' alleged
action in an official capacity or in another capacity while serving as a
director or officer of Tuboscope. The Tuboscope Bylaws also permit Tuboscope to
maintain insurance to protect itself and any of its directors, officers,
employees or agents against any expense, liability or loss incurred as a result
of any action, suit or proceeding whether or not Tuboscope would have the power
to indemnify such person under the DGCL.
II-1
<PAGE>
ITEM 21. EXHIBITS.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 3, 1996, between Sub,
Drexel and Tuboscope (incorporated by reference from the registrant's
Current Report on Form 8-K filed on January 16, 1996).
5 Opinion of Latham & Watkins.
8.1 Opinion of Baker & Botts, L.L.P. regarding certain tax matters.
8.2 Opinion of Vinson & Elkins L.L.P. regarding certain tax matters.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG Peat Marwick LLP.
99.1 Tuboscope Vetco International Corporation Form of Proxy.
99.2 Consent of L. E. Simmons.
99.3 Consent of John F. Lauletta.
99.4 Consent of J. S. Dickson Leach.
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) to file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be deemed
to be a new registration statement related to the securities offered
therein, and the offering of such securities at that time will be deemed to
be the initial bona fide offering thereof.
(3) to remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) 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 will be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering thereof.
(c)(1) 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 any
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer
II-2
<PAGE>
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.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph 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 will be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will 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 to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 the 20th day of March, 1996.
TUBOSCOPE VETCO INTERNATIONAL
CORPORATION
/s/ James F. Maroney, III
By___________________________________
James F. Maroney, III
Vice President, General Counsel
and Secretary
Each person whose signature appears below hereby constitutes and appoints
James F. Maroney, III and Ronald L. Koons, or any one of them, his attorneys-
in-fact and agents, each with full powers of substitution and resubstitution
for him in any and all capacities, to sign any or all amendments or post-
effective amendments to this Registration Statement, and to file the same, with
exhibits thereto and other documents in connection therewith or in connection
with the registration of the Common Stock under the Securities and Exchange Act
of 1934, as amended, with the Securities and Exchange Commission, granting unto
each of such attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary in connection with
such matters and hereby ratifying and confirming all that each of such
attorneys-in-fact and agents or his substitutes may do or cause to be done by
virtue hereof.
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.
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Martin R. Reid Chairman of the Board March 20, 1996
____________________________________
Martin R. Reid
/s/ William V. Larkin, Jr. President, Chief Executive March 20, 1996
____________________________________ Officer and Director
William V. Larkin, Jr.
/s/ Ronald L. Koons Executive Vice President, March 20, 1996
____________________________________ Chief Financial Officer and
Ronald L. Koons Treasurer (Principal
Financial Officer)
/s/ Jerome L. Baier Director March 20, 1996
____________________________________
Jerome L. Baier
/s/ Martin G. Hubbard Director March 20, 1996
____________________________________
Martin G. Hubbard
/s/ Eric L. Mattson Director March 20, 1996
____________________________________
Eric L. Mattson
/s/ Timothy M. Pennington Director March 20, 1996
____________________________________
Timothy M. Pennington
/s/ Patrick T. Seaver Director March 20, 1996
____________________________________
Patrick T. Seaver
/s/ James J. Shelton Director March 20, 1996
____________________________________
James J. Shelton
/s/ Frederick J. Warren Director March 20, 1996
____________________________________
Frederick J. Warren
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
5 Opinion of Latham & Watkins.
8.1 Opinion of Baker & Botts, L.L.P. regarding certain tax matters.
8.2 Opinion of Vinson & Elkins L.L.P. regarding certain tax matters.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG Peat Marwick LLP.
99.1 Tuboscope Vetco International Corporation Form of Proxy.
99.2 Consent of L. E. Simmons.
99.3 Consent of John F. Lauletta.
99.4 Consent of J. S. Dickson Leach.
</TABLE>
<PAGE>
EXHIBIT 5
[LETTERHEAD OF LATHAM & WATKINS]
March 21, 1996
Tuboscope Vetco International Corporation
2835 Holmes Road
Houston, Texas 77051
Re:Registration Statement on Form S-4
16,709,105 Shares of Common Stock
----------------------------------
Ladies and Gentlemen:
In connection with the registration of 16,709,105 shares of common stock, par
value $.01 per share (the "Shares") of Tuboscope Vetco International
Corporation, a Delaware corporation (the "Company"), under the Securities Act
of 1933, as amended (the "Act"), by the Company on Form S-4 (the "Registration
Statement") filed with the Securities and Exchange Commission (the
"Commission") on March 21, 1996, you have requested our opinion with respect to
the matters set forth below.
In our capacity as your counsel in connection with such registration, we are
familiar with the proceedings taken and proposed to be taken by the Company in
connection with the authorization, issuance and sale of the Shares, and for the
purposes of this opinion, have assumed such proceedings will be timely
completed in the manner presently proposed. In addition, we have made such
legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
to authentic original documents of all documents submitted to us as copies.
<PAGE>
[LATHAM & WATKINS]
Tuboscope Vetco International Corporation
March 21, 1996
Page 2
We are opining herein as to the effect on the subject transaction only of the
General Corporation Law of the State of Delaware, and we express no opinion
with respect to the applicability thereto, or the effect thereon, of the laws
of any other jurisdiction or as to any matters of municipal law or the laws of
any other local agencies within the state.
Subject to the foregoing, it is our opinion that the Shares have been duly
authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm contained under the heading "Legal
Matters."
Very truly yours,
LATHAM & WATKINS
<PAGE>
[LETTERHEAD OF BAKER & BOTTS, L.L.P.]
EXHIBIT 8.1
06232.0101 March 20, 1996
Tuboscope Vetco International Corporation
2835 Holmes Road
Houston, Texas 77051
Gentlemen:
We are acting as counsel to Tuboscope Vetco International Corporation
("Parent"), a Delaware corporation, in connection with the proposed merger (the
"Merger") of Grow Acquisition Limited ("Sub"), a Bermuda corporation which is a
direct, wholly owned subsidiary of Parent, with and into D.O.S. Ltd. (the
"Company"), a Bermuda corporation, and the subsequent liquidation (the
"Liquidation," and, together with the Merger, the "Transaction") of the Company
into Parent, pursuant to an Agreement and Plan of Merger dated as of January 3,
1996 among Parent, Sub, and the Company (the "Merger Agreement").
The following opinion is based on our review of the Merger Agreement, the
Registration Statement on Form S-4 of Parent, including the form of
Prospectus/Proxy Statement with respect to the Merger, to be filed with the
Securities and Exchange Commission on or about March 20, 1996 (the
"Registration Statement"), and such other materials and documents as we have
deemed appropriate. In rendering our opinion, we have assumed that the
Transaction will be consummated as described in the Merger Agreement and the
Registration Statement, that the facts, representations, and warranties set
forth in the Merger Agreement and the Registration Statement are accurate, and
that the covenants, conditions, and obligations set forth in the Merger
Agreement have been and will be fulfilled. We have also relied on and assumed
the accuracy and fulfillment of the representations and covenants contained in
certificates that have been provided to us by the Company and by you.
On the basis of the foregoing, we are of the opinion, based on existing law
and regulations, as follows:
1. The Transaction will be treated as a reorganization under section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). If
immediately after the Transaction the stockholders of the Company are not
in control (within the meaning of section 368(a)(2)(H) of the Code) of
Parent, the Transaction will be treated as a reorganization within the
meaning of section 368(a)(1)(C) of the Code.
<PAGE>
2. Each of Parent and the Company will be a party to such reorganization
within the meaning of section 368(b) of the Code.
3. No gain or loss will be recognized for United States federal income
tax purposes by Parent, Sub, or the Company pursuant to the Transaction.
4. The discussion set forth in the form of Proxy Statement/Prospectus
included in the Registration Statement under the caption "Certain United
States Federal Income Tax Consequences," insofar as it relates to matters
of law and legal conclusions, and based on the assumptions and subject to
the qualifications set forth therein and herein, is an accurate summary of
the material United States federal income tax consequences of the
Transaction to Parent, the Company, and their respective stockholders.
We hereby consent to the use of our name under the captions "Certain United
States Federal Income Tax Consequences" and "Legal Matters" in the form of
Proxy Statement/Prospectus included in the Registration Statement and to the
filing of this opinion with the Securities and Exchange Commission as an
exhibit to the Registration Statement. In giving such consent, we do not admit
that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
BAKER & BOTTS, L.L.P.
/s/ Stuart F. Schaffer
By___________________________________
Stuart F. Schaffer
<PAGE>
[LETTERHEAD OF VINSON & ELKINS L.L.P.]
EXHIBIT 8.2
March 21, 1996
D.O.S. Ltd.
6829 Flintlock
Houston, Texas 77240
Ladies and Gentlemen:
We are acting as counsel to D.O.S. Ltd. (the "Company"), a Bermuda
corporation, in connection with the proposed merger of Grow Acquisition Limited
("Sub"), a Bermuda corporation and wholly owned subsidiary of Tuboscope Vetco
International Corporation ("Parent"), a Delaware corporation, with and into the
Company (the "Merger") and the subsequent liquidation ("Liquidation") of the
Company into Parent (the Merger and Liquidation are referred to collectively
herein as the "Transaction"). Our opinion is based upon (i) the Agreement and
Plan of Merger, dated as of January 3, 1996, by and among Parent, Sub and the
Company (the "Merger Agreement"), (ii) the facts set forth in the Proxy
Statement/Prospectus relating to the Transaction to be filed with the
Securities and Exchange Commission on or about March 21, 1996 (the "Proxy
Statement/Prospectus"), and (iii) the representations made by the Company and
Parent as to the existence of certain facts. Our opinion is expressly
conditioned upon the initial and continuing accuracy of all of such facts,
documents and representations.
Based upon the foregoing, and on existing authorities and rulings policies of
the Internal Revenue Service as applied to those facts and representations, and
conditioned upon our understanding that the transactions comtemplated by the
Merger Agreement will be carried out strictly in accordance with the terms of
the Merger Agreement and that there are no other relevant agreements,
arrangements, or understandings among any of Parent, Sub, the Company or the
stockholders of the Company other than those described or referenced in the
Merger Agreement or the Proxy Statement/Prospectus, it is our opinion that:
1.The transaction will be treated as a reorganization within the meaning of
section 368(a) of the Code.
2.Each of Parent and the Company will be a party to that reorganization
within the meaning of section 368(b) of the Code.
3.No gain or loss will be recognized for federal income tax purposes by a
stockholder of the Company as a result of the Transaction upon the
conversion of shares of common stock of the Company ("Company Common
Stock") into shares of common stock of Parent ("Parent Common Stock")
except with respect to cash, if any, received in lieu of fractional shares
of Parent Common Stock.
4.The conclusions of law, and the summary of our opinion, with respect to
federal income tax matters set forth in the Proxy Statement/Prospectus
under the heading "Certain United States Federal Income Tax Consequences"
are accurate and complete in all material respects.
We hereby consent to the use of our name in the Proxy Statement/Prospectus
and to the filing of this letter as an exhibit to the registration statement
which includes the Proxy Statement/Prospectus. In giving this consent, however,
we do not hereby admit that we are within the category of persons whose consent
is required under Section 7 of the Securities Act of 1933 and the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 33-00000) and related Prospectus of
Tuboscope Vetco International Corporation for the registration of 16,709,105
shares of its common stock and to the incorporation by reference therein of our
report dated February 20, 1996, with respect to the consolidated financial
statements and schedules of Tuboscope Vetco International Corporation included
in its Annual Report (Form 10-K) for the year ended December 31, 1995, filed
with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Houston, Texas
March 19, 1996
<PAGE>
EXHIBIT 23.2
AUDITORS' CONSENT
The Board of Directors
DOS Ltd.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus. Our report refers to a
change in accounting for income taxes to comply with Financial Accounting
Standards 109 "Accounting for Income Taxes" in 1994.
KPMG Peat Marwick LLP
Fort Worth, Texas
March 20, 1996
<PAGE>
EXHIBIT 99.1
<PAGE>
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 24, 1996
The undersigned hereby appoints Ronald L. Koons and James F. Maroney, III,
and each of them, as proxies, each with the power to appoint his substitute,
and hereby authorizes either of them to act and to vote at the annual meeting
of stockholders of Tuboscope Vetco International Corporation ("Tuboscope") to
be held on April 24, 1996, and at any adjournments thereof, as indicated upon
all matters referred to on this proxy card and described in the Proxy
Statement/Prospectus for the meeting, and, in their discretion, upon any other
matters which may properly come before the meeting.
1. Adoption and approval of the Agreement and Plan of Merger dated as of
January 3, 1996, as amended, between Tuboscope, Grow Acquisition Limited, a
Bermuda corporation and wholly owned subsidiary of Tuboscope ("Sub"), and
D.O.S., Ltd., a Bermuda corporation ("Drexel"), providing for the merger of Sub
with and into Drexel.
[_] FOR [_] AGAINST [_] ABSTAIN
2. Approval of the sale by Tuboscope to SCF-III, L.P., a Delaware limited
partnership and an affiliate of a stockholder of Drexel ("SCF"), of 4,200,000
shares of common stock, par value $.01 per share, of Tuboscope ("Tuboscope
Common Stock") and warrants to purchase, subject to adjustment under certain
circumstances, an aggregate of 2,533,000 shares of Tuboscope Common Stock at an
exercise price of $10 per share expiring on December 31, 2000, for an aggregate
purchase price of $31,000,000, pursuant to the Subscription Agreement dated as
of January 3, 1996 between Tuboscope and SCF.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approval of an amendment to Tuboscope's Certificate of Incorporation to
increase the number of authorized shares of Tuboscope Common Stock from
35,000,000 to 60,000,000.
[_] FOR [_] AGAINST [_] ABSTAIN
THE APPROVAL OF EACH OF PROPOSALS 1, 2 AND 3 IS CONDITIONED UPON THE APPROVAL
OF ALL OF PROPOSALS 1, 2 AND 3. ACCORDINGLY, A VOTE AGAINST ANY ONE OR MORE OF
PROPOSALS 1, 2 AND 3 WILL HAVE THE SAME EFFECT AS A VOTE AGAINST ALL OF
PROPOSALS 1, 2 AND 3.
(Continued and to be signed on reverse side)
<PAGE>
4. Elect members of the Board of Directors of Tuboscope.
[_] FOR ALL nominees listed [_] WITHHOLD AUTHORITY to vote
below (except as marked to for all nominees listed
the contrary). below.
Martin R. Reid, William V. Larkin, Jerome R. Baier, Martin G.
Hubbard, Eric L. Mattson, Timothy M. Pennington III, Patrick
T. Seaver, James J. Shelton and Frederick J. Warren
(Instruction: To WITHHOLD AUTHORITY to vote for any individual
nominees, draw a line through (or otherwise strike out) the
nominee's name in the list above.
5. Approval of the 1996 Equity Participation Plan of Tuboscope.
[_] FOR [_] AGAINST [_] ABSTAIN
Shares represented by all properly executed proxies will be voted in
accordance with instructions appearing on this proxy card and in the discretion
of the proxy holders as to any other matter that may properly come before the
meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE VOTED FOR
PROPOSALS 1, 2, 3, 4 AND 5.
Dated: ________________, 1996 (SEAL)
(Signature)
(SEAL)
(Signature)
Please sign as name(s) appears on
this proxy card, and date this proxy
card. If a joint account, each joint
owner must sign. If signing for a
corporation or partnership as agent,
attorney or fiduciary, indicate the
capacity in which you are signing.
<PAGE>
EXHIBIT 99.2
Tuboscope Vetco International Company
2835 Holmes Road
Houston, Texas 77051
Gentlemen:
The undersigned hereby consents to be named as a person about to become a
director in the Proxy Statement/Prospectus of Tuboscope Vetco International
Corporation included in the Registration Statement on Form S-4 to be filed by
Tuboscope Vetco International Corporation all in accordance with Rule 438
promulgated under the Securities Act of 1933, as amended.
/s/ L. E. Simmons
-------------------------------------
L. E. Simmons
<PAGE>
EXHIBIT 99.3
Tuboscope Vetco International Company
2835 Holmes Road
Houston, Texas 77051
Gentlemen:
The undersigned hereby consents to be named as a person about to become a
director in the Proxy Statement/Prospectus of Tuboscope Vetco International
Corporation included in the Registration Statement on Form S-4 to be filed by
Tuboscope Vetco International Corporation all in accordance with Rule 438
promulgated under the Securities Act of 1933, as amended.
/s/ John F. Lauletta
-------------------------------------
John F. Lauletta
<PAGE>
EXHIBIT 99.4
Tuboscope Vetco International Company
2835 Holmes Road
Houston, Texas 77051
Gentlemen:
The undersigned hereby consents to be named as a person about to become a
director in the Proxy Statement/Prospectus of Tuboscope Vetco International
Corporation included in the Registration Statement on Form S-4 to be filed by
Tuboscope Vetco International Corporation all in accordance with Rule 438
promulgated under the Securities Act of 1933, as amended.
/s/ J. S. Dickson Leach
-------------------------------------
J. S. Dickson Leach
