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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
DRIL-QUIP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
DRIL-QUIP, INC.
[LOGO OF DRIL-QUIP 13550 HEMPSTEAD HIGHWAY
APPEARS HERE]
HOUSTON, TEXAS 77040 March 25, 1998
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders to be
held at the Houston Marriott Westside, 13210 Katy Freeway, Houston, Texas on
May 14, 1998 at 2:00 p.m. For those of you who cannot be present at this
annual meeting, we urge that you participate by indicating your choices on the
enclosed proxy and completing and returning it at your earliest convenience.
This booklet includes the notice of the meeting and the proxy statement,
which contains information about the Board and its committees and personal
information about the nominee for the Board. Other matters on which action is
expected to be taken during the meeting are also described.
It is important that your shares are represented at the meeting, whether or
not you are able to attend personally. Accordingly, please sign, date and mail
promptly the enclosed proxy in the envelope provided.
On behalf of the Board of Directors, thank you for your continued support.
/s/ Larry E. Reimert
Larry E. Reimert
Co-Chairman of the Board
/s/ Gary D. Smith
Gary D. Smith
Co-Chairman of the Board
/s/ J. Mike Walker
J. Mike Walker
Co-Chairman of the Board
DRIL-QUIP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1998
To the Stockholders of
Dril-Quip, Inc.:
The annual meeting of stockholders of Dril-Quip, Inc. (the "Company") will
be held at the Houston Marriott Westside, 13210 Katy Freeway, Houston, Texas,
on Thursday, May 14, 1998 at 2:00 p.m., Houston time, for the following
purposes:
1. To elect one director to serve for a three-year term.
2. To approve the appointment of Ernst & Young LLP as independent public
accountants of the Company for 1998.
3. To transact such other business as may properly come before the meeting
or any reconvened meeting after an adjournment thereof.
The Board of Directors has fixed March 23, 1998 as the record date for
determining stockholders of the Company entitled to notice of, and to vote at,
the meeting or any reconvened meeting after an adjournment thereof, and only
holders of Common Stock of the Company of record at the close of business on
that date will be entitled to notice of, and to vote at, that meeting or any
reconvened meeting after an adjournment.
You are cordially invited to attend the meeting in person. Even if you plan
to attend the meeting, however, you are requested to mark, sign, date and
return the accompanying proxy as soon as possible.
By Order of the Board of Directors
/s/ Gary D. Smith
Gary D. Smith
Co-Chairman of the Board and
Secretary
March 25, 1998
13550 Hempstead Highway
Houston, Texas 77040
DRIL-QUIP, INC.
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS 77040
----------------
PROXY STATEMENT
----------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Dril-Quip, Inc., a Delaware corporation (the "Company"),
of proxies from the holders of the Company's common stock, par value $.01 per
share ("Common Stock"), for use at the 1998 Annual Meeting of Stockholders
(the "Annual Meeting") to be held at the time and place and for the purposes
set forth in the accompanying notice. The approximate date on which this Proxy
Statement and the accompanying proxy will first be mailed to stockholders is
April 3, 1998. In addition to the solicitation of proxies by mail, proxies may
also be solicited by telephone, telegram or personal interview by regular
employees of the Company. The Company will pay all costs of soliciting
proxies. The Company will also reimburse brokers or other persons holding
stock in their names or in the names of their nominees for their reasonable
expenses in forwarding proxy material to beneficial owners of such stock.
All duly executed proxies received prior to the Annual Meeting will be voted
in accordance with the choices specified thereon and, in connection with any
other business that may properly come before the meeting, in the discretion of
the persons named in the proxy. AS TO ANY MATTER FOR WHICH NO CHOICE HAS BEEN
SPECIFIED IN A DULY EXECUTED PROXY, THE SHARES REPRESENTED THEREBY WILL BE
VOTED FOR THE ELECTION AS A DIRECTOR OF THE NOMINEE LISTED HEREIN, FOR
APPROVAL OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS, AND IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY IN
CONNECTION WITH ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE ANNUAL
MEETING. A stockholder giving a proxy may revoke it at any time before it is
voted at the Annual Meeting by filing with the Secretary at the Company's
executive offices a written instrument revoking it, by delivering a duly
executed proxy bearing a later date or by appearing at the Annual Meeting and
voting in person. The executive offices of the Company are located at 13550
Hempstead Highway, Houston, Texas 77040. For a period of ten days prior to the
Annual Meeting, a complete list of stockholders entitled to vote at the Annual
Meeting will be available for inspection by stockholders of record during
ordinary business hours for proper purposes at the Company's executive
offices.
RECORD DATE AND VOTING SECURITIES
As of the close of business on March 23, 1998, the record date for
determining stockholders entitled to notice of and to vote at the Annual
Meeting, the Company had outstanding and entitled to vote 17,245,000 shares of
Common Stock. Each share entitles the holder to one vote on each matter
submitted to a vote of stockholders.
The requirement for a quorum at the Annual Meeting is the presence in person
or by proxy of holders of a majority of the outstanding shares of Common
Stock. Proxies indicating stockholder abstentions and shares represented by
"broker nonvotes" (i.e., shares held by brokers or nominees for which
instructions have not been received from the beneficial owners or persons
entitled to vote and for which the broker or nominee does not have
discretionary power to vote on a particular matter) will be counted for
purposes of determining whether there is a quorum at the Annual Meeting. Votes
cast by proxy or in person at the Annual Meeting will be counted by the
persons appointed as election inspectors for the Annual Meeting.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the shares of Common Stock of the Company
beneficially owned directly or indirectly as of March 15, 1998 by (i) each
person who is known to the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Company's directors and named executive
officers and (iii) all executive officers and directors as a group.
AMOUNT OF
BENEFICIAL
OWNERSHIP
-------------------
NUMBER OF PERCENT
NAME OF BENEFICIAL OWNER(1) SHARES OF STOCK
--------------------------- ---------- --------
Larry E. Reimert(2)(3)............................... 3,448,500 20.0%
Gary D. Smith(3)(4).................................. 3,448,600 20.0%
J. Mike Walker(3)(5)................................. 3,448,600 20.0%
Gary W. Loveless(6).................................. 1,149,600 6.7%
James M. Alexander................................... 42,000 0.2%
Jerry M. Brooks...................................... -- --
All directors and executive officers as a group (6
persons)............................................ 11,537,300 66.9%
- --------
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. The address of each such person is 13550 Hempstead Highway,
Houston, Texas 77040.
(2) Includes 3,448,045 shares of Common Stock held by Reimert Family Partners,
Ltd., a limited partnership of which Mr. Reimert is the Managing General
Partner, and with respect to which he exercises voting and investment
power. Does not include 12,000 shares of Common Stock owned by Mr.
Reimert's spouse or the shares of Common Stock shown above as beneficially
owned by Mr. Smith and Mr. Walker, as to which Mr. Reimert disclaims
beneficial ownership.
(3) Mr. Reimert, Mr. Smith and Mr. Walker have entered into a stockholders
agreement wherein each party has agreed to vote shares of Common Stock
held by such party for election of one nominee to the Board of Directors
proposed by each of (i) Larry E. Reimert and Reimert Family Partners,
Ltd., (ii) Gary D. Smith and Four Smith's Company, Ltd. and (iii) J. Mike
Walker. The parties to the stockholders agreement may be deemed to have
formed a group pursuant to Rule 13d-5(b)(1) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
(4) Includes 3,448,045 shares of Common Stock held by Four Smith's Company,
Ltd., a limited partnership of which Mr. Smith and his wife, Gloria Jean
Smith, are the Managing General Partners, and with respect to which they
exercise voting and investment power. Mrs. Smith may also be deemed to be
the beneficial owner of such shares. Does not include the shares of Common
Stock shown above as beneficially owned by Mr. Reimert and Mr. Walker, as
to which Mr. Smith disclaims beneficial ownership.
(5) Does not include the shares of Common Stock shown above as beneficially
owned by Mr. Reimert and Mr. Smith, as to which Mr. Walker disclaims
beneficial ownership.
(6) Includes 1,149,348 shares of Common Stock held by Loveless Enterprises,
Ltd., a limited partnership of which Loveless Interests, L.L.C. is the
Managing General Partner. Mr. Loveless is the sole manager of Loveless
Interests, L.L.C., and exercises voting and investment power with respect
to such shares.
2
PROPOSAL I
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes, Class I,
Class II and Class III, with staggered terms of office, initially ending in
1998, 1999 and 2000, respectively. Thereafter, the term for each class will
expire on the date of the third annual stockholders' meeting for the election
of directors following the most recent election of directors for such class.
Each director holds office until the next annual meeting of stockholders for
the election of directors of his class and until his successor has been duly
elected and qualified.
At the Annual Meeting, one Class I director is to be elected to serve a
three-year term expiring on the date of the annual meeting of stockholders to
be held in 2001 (or until his successor is duly elected and qualified). In
accordance with the Company's Bylaws, the affirmative vote of a plurality of
the votes cast by holders entitled to vote in the election of directors at the
Annual Meeting is required for the election of the nominee as director.
Accordingly, abstentions and broker nonvotes will have no effect. The Board of
Directors has nominated Mr. James M. Alexander to serve as the Class I
Director. Mr. Alexander is currently a director of the Company.
The Board of Directors has no reason to believe that the nominee for
election as a director will not be a candidate or will be unable to serve, but
if for any reason the nominee is unavailable as a candidate or unable to serve
when election occurs, the persons designated as proxies in the enclosed proxy
card, in the absence of contrary instructions, will in their discretion vote
the proxies for the election of any of the other nominee or for a substitute
nominee, if any, selected by the Board of Directors. Management is currently
unaware of any circumstances likely to render the nominee unavailable for
election or unable to serve.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE
NOMINEE LISTED BELOW. PROPERLY DATED AND SIGNED PROXIES WILL BE SO VOTED
UNLESS AUTHORITY TO VOTE IN THE ELECTION OF DIRECTORS IS WITHHELD.
The following sets forth information concerning the nominee for election as
director at the Annual Meeting, including such nominee's age as of March 15,
1998, position with the Company, if any, and business experience during the
past five years.
James M. Alexander, age 46, has been a Class I director of the Company since
completion of its public offering in October 1997, and is a member of the
Audit Committee and the Compensation Committee of the Board of Directors.
Since December 1996, he has served as the Vice President, Chief Financial
Officer and Secretary of Spinnaker Exploration Company, L.L.C. From November
1995 to December 1996, Mr. Alexander was President of Alexander Consulting,
Inc. He was the Senior Vice President and Chief Financial Officer of Enron
Global Power & Pipelines L.L.C. from November 1994 to June 1995, and served as
its President from June until November 1995. Prior to that time, Mr. Alexander
was President of Alexander Corporate Financial Consulting, Inc. from June 1992
to November 1994. Mr. Alexander holds a BA from Yale College and an MBA from
Harvard University.
INFORMATION CONCERNING CLASS II AND CLASS III DIRECTORS
The following sets forth information concerning the Class II and Class III
directors of the Company whose present terms of office will expire at the 1999
and 2000 annual meetings of stockholders, respectively, including each
director's age as of March 15, 1998, position with the Company, if any, and
business experience during the past five years.
Class II
J. Mike Walker, age 54, is Co-Chairman of the Board and Co-Chief Executive
Officer with principal responsibility for manufacturing, purchasing and
facilities. He has been the Director--Manufacturing, Purchasing and
Facilities, as well as a member of the Board of Directors, since the Company's
inception in 1981. Prior to
3
that, he served as the Director of Engineering, Manager of Engineering and
Manager of Research and Development with Vetco Offshore, Inc. Mr. Walker holds
a BSME degree from Texas A&M University, a MSME degree from the University of
Texas at Austin and a Ph.D. in mechanical engineering from Texas A&M
University. Mr. Walker's current term as a director of the Company expires in
1999.
Gary W. Loveless, age 55, has been a director since the Company's inception
in 1981, and is a member of the Audit Committee and the Compensation Committee
of the Board of Directors. From 1986 to 1997, he held various positions with
Great Western Resources Corporation, most recently as Chief Executive Officer
and Director. In 1997, Great Western Resources Corporation was purchased by
Forcenegy Inc., and Mr. Loveless served as Vice President/Onshore Exploration
and Production of Forcenegy Inc. until October 1997. Mr. Loveless currently
serves as President of Casey Kay Company, an oil and gas exploration and
production company. He holds a BSME from Texas A&M University and an MSME from
the University of Texas at Austin. Mr. Loveless's current term as a director
of the Company expires in 1999.
Class III
Larry E. Reimert, age 50, is Co-Chairman of the Board and Co-Chief Executive
Officer with principal responsibility for engineering, product development and
finance. He has been the Director--Engineering, Product Development and
Finance, as well as a member of the Board of Directors, since the Company's
inception in 1981. Prior to that, he worked for Vetco Offshore, Inc. in
various capacities, including Vice President of Technical Operations, Vice
President of Engineering and Manager of Engineering. Mr. Reimert holds a BSME
degree from the University of Houston and a MBA degree from Pepperdine
University. Mr. Reimert's current term as a director of the Company expires in
2000.
Gary D. Smith, age 55, is Co-Chairman of the Board and Co-Chief Executive
Officer with principal responsibility for sales, service, training and
administration. He has been the Director--Sales, Service, Training and
Administration, as well as a member of the Board of Directors, since the
Company's inception in 1981. Prior to that, he worked for Vetco Offshore, Inc.
in various capacities, including General Manager and Vice President of Sales
and Services. Mr. Smith's current term as a director of the Company expires in
2000.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors has established an Audit Committee and a Compensation
Committee as standing committees of the Board of Directors. The Board does not
have a standing nominating committee or other committee performing a similar
function. The members of the Audit Committee and the Compensation Committee of
the Board of Directors indicated in the above summaries are not employees of
the Company. The Audit Committee of the Board will recommend the appointment
of independent public accountants to conduct audits of the Company's financial
statements and review with the independent accountants the plan and results of
the auditing engagement. The Audit Committee will also review the scope and
results of procedures for internal auditing of the Company and the adequacy of
the Company's system of internal accounting controls. The Compensation
Committee will approve, or in some cases may recommend to the Board,
remuneration arrangements and compensation plans involving the Company's
directors and executive officers, including any revisions to the employment
agreements of the Co-Chairmen of the Board. The Compensation Committee will
also act on the granting of stock options to executive officers under the
Company's 1997 Incentive Plan (the "Incentive Plan") (except for formula
grants pursuant to the employment agreements of the Co-Chairmen of the Board)
and with respect to certain matters arising under each of the Co-Chairmen of
the Board's employment agreements.
During 1997, the Board of Directors held one meeting and acted by unanimous
written consent three times. The members of the Audit Committee and the
Compensation Committee were appointed effective upon the closing of the
Company's initial public offering on October 28, 1997, and therefore did not
meet in 1997. During 1997, all members of the Board of Directors attended at
least 75% of the total of all Board meetings.
4
DIRECTOR COMPENSATION
Each director who is not an employee of the Company receives an annual fee
of $35,000, plus a fee of $1,000 for attendance at each Board of Directors
meeting and $1,000 for each committee meeting (unless held on the same day as
a Board of Directors meeting). All directors are reimbursed for their out-of-
pocket expenses and other expenses incurred in attending meetings of the Board
or committees thereof and for other expenses incurred in their capacity as
directors. In addition, Mr. Alexander received $85,000 in 1997 in remuneration
for certain consulting services. See "--Certain Transactions."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Securities and Exchange
Commission (the "SEC") and the New York Stock Exchange initial reports of
ownership and reports of changes in ownership of Common Stock. Officers,
directors and greater than 10% stockholders are required by SEC regulation to
furnish the Company with copies of all such forms they file. Based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
all its directors and executive officers during 1997 complied on a timely
basis with all applicable filing requirements under Section 16(a) of the
Exchange Act, except that Mr. Larry E. Reimert failed to report one
transaction on a Form 4. Mr. Reimert reported that transaction on a Form 5,
which was timely filed.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth information
regarding the compensation of each of the Company's three Co-Chairmen of the
Board and the other executive officer of the Company (together with the Co-
Chairmen, the "named officers") for services rendered in all capacities during
1996 and 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL
COMPENSATION(1) SECURITIES
----------------- UNDERLYING
NAME AND PRINCIPAL OPTIONS/SARS ALL OTHER
POSITION YEAR SALARY BONUS (SHARES) COMPENSATION(2)
------------------ ---- -------- -------- ------------ ---------------
Larry E. Reimert.......... 1997 $426,923 $250,000 43,750 $ 3,000
Co-Chairman of the Board 1996 413,462 200,000 -- 3,000
and Co-Chief Executive
Officer
Gary D. Smith............. 1997 $426,923 $250,000 43,750 $143,817
Co-Chairman of the Board 1996 413,462 200,000 -- 3,000
and Co-Chief Executive
Officer
J. Mike Walker............ 1997 $426,923 $250,000 43,750 $178,313
Co-Chairman of the Board 1996 413,462 200,000 -- 3,000
and Co-Chief Executive
Officer
Jerry M. Brooks........... 1997 $116,808 $ 20,000 15,000 $ 4,670
Chief Accounting Officer 1996 107,566 15,000 -- 2,151
- --------
(1) Excludes perquisites and other benefits because the aggregate amounts
thereof do not exceed the lesser of $50,000 or 10% of the total of annual
salary and bonus reported for any named officer.
(2) Amounts shown under All Other Compensation include (i) amounts contributed
or accrued under the Company's 401(k) Plan and (ii) amounts paid in lieu
of accumulated vacation through 1997 ($140,817 for Mr. Smith; $175,313 for
Mr. Walker; and $2,288 for Mr. Brooks).
5
Option Grants. The following table sets forth certain information on grants
of stock options during 1997 to the named officers reflected in the Summary
Compensation Table.
STOCK OPTIONS GRANTED IN 1997
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR
OPTIONS GRANTED GRANTED TO PRICE OPTION TERM(3)
IN 1997 EMPLOYEES (PER EXPIRATION -----------------
(SHARES)(1) IN 1997 SHARE)(2) DATE 5%($) 10%($)
--------------- ---------- --------- ---------- ------- ---------
Larry E. Reimert........ 43,750 10.4% $24.00 10/28/07 660,339 1,673,430
Gary D. Smith........... 43,750 10.4% $24.00 10/28/07 660,339 1,673,430
J. Mike Walker.......... 43,750 10.4% $24.00 10/28/07 660,339 1,673,430
Jerry M. Brooks......... 15,000 3.6% $24.00 10/28/07 226,402 573,747
- --------
(1) All the above options were granted pursuant to the Company's Incentive
Plan on October 28, 1997 (the date of the closing of the Company's initial
public offering), and all the above options become exercisable in 25%
increments on each of the first, second, third and fourth anniversaries of
the date of grant.
(2) The exercise price of the options granted is equal to the initial public
offering price of the Company's Common Stock on the date of grant.
(3) The potential realizable value through the expiration date of options has
been determined on the basis of the per share market price at the time the
options were granted, compounded annually over 10 years, net of the
exercise price. These values have been determined based upon assumed rates
of appreciation and are not intended to forecast the possible future
appreciation, if any, of the price or value of the Company's Common Stock.
Option Exercises and 1997 Year-End Option Values. The following table sets
forth certain information with respect to unexercised options to purchase
Common Stock granted in 1997 to the named officers and held by them at
December 31, 1997. None of the named officers exercised options in 1997.
YEAR-END 1997 OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
----------- ---------------- ----------- ----------------
Larry E. Reimert..... -- 43,750 -- $486,719
Gary D. Smith........ -- 43,750 -- $486,719
J. Mike Walker....... -- 43,750 -- $486,719
Jerry M. Brooks...... -- 15,000 -- $166,875
- --------
(1) The excess, if any, of the market value of Common Stock at December 31,
1997 ($35.125) over the option exercise price.
(2) All of these options become immediately exercisable upon a change in
control of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Reimert, Smith and Walker. The following summary of these agreements does not
purport to be complete and is qualified by reference to them. Each of these
agreements provides for an annual base salary beginning on the date of the
Company's initial public offering in an amount not less than $350,000, and
entitles the employee to participate in all of the Company's incentive,
savings, retirement and welfare benefit plans in which other executive
officers of the Company participate. Each agreement also provides for an
annual performance bonus for each 12-month period
6
ending on September 30 (commencing with the 12-month period ending September
30, 1998) equal to up to 120% of the executive's annual base salary, with the
precise amount of the bonus determined based on specific Company performance
goals. The performance goals, which are equally weighted, are based on (i) the
Company's annual earnings before interest and taxes ("EBIT") measured against
the Company's annual budget or plan, and (ii) the Company's annual return on
capital (defined as EBIT divided by total assets less current liabilities)
compared to a peer group of companies. In addition, each agreement provides
that the employee will receive an annual grant of a number of options under
the Company's Incentive Plan equal to the employee's base salary multiplied by
three and divided by the market price of the Common Stock on the grant date.
Each agreement provides that the employee's compensation, including his annual
base salary, annual performance bonus and annual grant of options, shall be
reviewed at least annually by the Compensation Committee and shall be subject
to increase at any time and from time to time on a basis determined by the
Compensation Committee, in the exercise of its sole discretion.
Each of the employment agreements has an initial five-year term, provided
that at the end of the second year of such initial term and on every
anniversary thereafter, the term will be automatically extended for one year,
such that the remaining term of the agreement shall never be less than three
years. Each agreement is subject to the right of the Company and the employee
to terminate the employee's employment at any time. Each agreement provides
that, upon termination of employment because of death or disability, or if
employment is terminated by the Company for any reason (except under certain
limited circumstances defined as "for cause" in the agreement), or if
employment is terminated by the employee subsequent to a change of control (as
defined) or with good reason (as defined), the employee will generally be
entitled to (i) a lump sum cash payment equal to the employee's base salary
through the date of termination, together with any deferred compensation
previously awarded and any accrued vacation time, (ii) a lump sum cash payment
equal to the annual base salary that would have been paid to the employee
beginning on the date of termination and ending on the latest possible date of
termination of the employment in accordance with the agreement, (iii) a lump
sum cash payment equal to the annual bonus calculated in accordance with the
agreement for the remaining employment period (assuming for such purpose that
the annual bonus payable for each applicable period during the remaining
employment period would equal the highest annual bonus paid during the last
three years prior to the date of termination), (iv) immediate vesting of any
stock options or restricted stock previously granted to such employee and
outstanding as of the time immediately prior to the date of his termination,
or a cash payment in lieu thereof, and (v) continued participation in medical,
dental and life insurance coverage until the employee receives equivalent
coverage and benefits under other plans of a subsequent employer or the later
of the death of the employee, the death of the employee's spouse and the
youngest child of the employee reaching age 21. The Company will also pay the
employee any such amount as may be necessary to hold the employee harmless
from the consequences of any resulting excise or other similar purpose tax
relating to "parachute payments" under the Internal Revenue Code of 1986, as
amended.
Each agreement also provides that, during the term of the agreement and
after termination thereof, the employee shall not divulge any of the Company's
confidential information, knowledge or data. In addition, each agreement
requires the employee to disclose and assign to the Company any and all
conceptions and ideas for inventions, improvements and valuable discoveries
made by the employee which pertain primarily to the material business
activities of the Company. Each agreement also provides that, in the event
that the agreement is terminated for cause or the employee voluntarily resigns
(other than following a change of control or for good reason), for one year
thereafter the employee will not within any country with respect to which he
has devoted substantial attention to the material business interests of the
Company, (i) accept employment or render services to a competitor of the
Company or (ii) enter into or take part in business that would be competitive
with the Company.
CERTAIN TRANSACTIONS
Registration Rights Agreement
In connection with its initial public offering, the Company entered into a
registration rights agreement among the Company and Messrs. Reimert, Smith,
Walker, Loveless, Reimert Family Partners, Ltd., Four Smith's Company, Ltd.
and Loveless Enterprises, Ltd. (the "Registration Rights Agreement"). The
Registration Rights
7
Agreement provides for registration rights pursuant to which, upon the request
of any of Messrs. Reimert, Smith and Walker (the "Requesting Holders"), the
Company will file a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), to register the Common Stock subject to the
agreement ("Registrable Securities") held by such Requesting Holders and any
other stockholders who are parties to the Registration Rights Agreement and
who desire to sell Registrable Securities pursuant to such registration
statement, subject to a maximum of two requests by each of Messrs. Reimert,
Smith and Walker or their successors and assigns. The first such request may
not be made until after 180 days following the closing of the initial public
offering. In addition, subject to certain conditions and limitations, the
Registration Rights Agreement provides that Messrs. Reimert, Smith, Walker and
Loveless may participate in any registration by the Company (including any
registration resulting from any exercise of a demand right under the
Registration Rights Agreement) of any of its equity securities in an
underwritten offering. The registration rights covered by the Registration
Rights Agreement generally are transferable to transferees (whether by
assignment or by death of the holder) of the Registrable Securities covered
thereby. The Registration Rights Agreement generally terminates when all
Registrable Securities have been (i) distributed to the public pursuant to a
registration statement covering such securities that has been declared
effective under the Securities Act, or (ii) may be distributed to the public
in accordance with the provisions of Rule 144(k) (or any similar provision
then in force) under the Securities Act.
Stockholders Agreement
Messrs. Reimert, Smith, Walker, Reimert Family Partners, Ltd. and Four
Smith's Company, Ltd. are parties to a stockholders agreement (the
"Stockholders Agreement") pursuant to which each party has agreed to vote the
shares of Common Stock held by such party to elect to the Company's Board of
Directors one designee of Mr. Reimert and Reimert Family Partners, Ltd. (the
"Reimert Stockholders"), one designee of Mr. Smith and Four Smith's Company,
Ltd. (the "Smith Stockholders") and one designee of Mr. Walker. The rights
under the Stockholders Agreement are transferable to any heir or legal
representative of Messrs. Reimert, Smith or Walker who acquires Common Stock
upon the death of such stockholder and who agrees to be bound by the
provisions of such Agreement. In the event the Reimert Stockholders,
collectively, the Smith Stockholders, collectively, or Mr. Walker (or their
permitted transferees as described in the preceding sentence), own less than
10% of the total number of issued and outstanding shares of Common Stock of
the Company, the rights and obligations of such person under the Stockholders
Agreement are terminated.
Consulting Services
In 1997, the Company paid Mr. Alexander fees totalling $85,000 for certain
consulting services rendered to the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board are Messrs. Alexander
and Loveless, each of whom is a nonemployee director. Prior to completion of
the Company's initial public offering, matters with respect to the
compensation of executive officers of the Company were determined by the
members of the Board of Directors as a whole. Messrs. Reimert, Smith and
Walker, who were members of the Board of Directors, participated in
deliberations concerning compensation.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee was appointed in October 1997, effective upon the
Company's initial public offering, and did not participate in deliberations
regarding executive compensation for 1997. Prior to the closing of the
Company's initial public offering, executive compensation was determined by
the Board of Directors as a whole. Beginning in 1998, the Compensation
Committee will approve, or in some cases may recommend to the Board,
remuneration arrangements and compensation plans involving the Company's
directors and executive officers, including any revisions to the employment
agreements of the Co-Chairmen of the Board. The Compensation Committee will
also act on the granting of stock options to executive officers under the
Company's Incentive Plan (except for formula grants pursuant to the employment
agreements of the Co-Chairmen of the Board), and will review annually and
approve certain matters relating to each of the Co-Chairmen of the Board's
employment agreements.
8
There are three basic components to the compensation of the Company's
executives: base pay; annual incentive compensation in the form of a cash
bonus; and long-term equity-based compensation. Executive compensation for
1997 was determined by the Board of Directors as a whole. Factors taken into
account in determining compensation were the executive's responsibilities,
experience, leadership, potential future contributions and demonstrated
individual performance. Long-term equity-based compensation was provided in
the form of stock options, which are tied directly to stockholder return.
Stock options align the interests of the Company's executives with those of
its stockholders by encouraging executives to enhance the value of the
Company, and hence, the price of the Common Stock and each stockholder's
return.
Prior to the Company's initial public offering, the stockholders and the
Board of Directors approved the Company's Incentive Plan. The objectives of
the Incentive Plan are to (i) attract and retain key employees, (ii) encourage
a sense of proprietorship of these persons in the Company and (iii) stimulate
the active interest of these persons in the development and financial success
of the Company.
Awards to employees under the Incentive Plan may be made in the form of (i)
stock options, (ii) rights to receive a payment, in cash or Common Stock,
equal to the excess of the fair market value or other specified value of a
number of shares of Common Stock on the date the right is exercised over a
specified strike price, (iii) grants of restricted or unrestricted Common
Stock or units denominated in Common Stock, (iv) grants denominated in cash
and (v) grants denominated in cash, Common Stock or units denominated in
Common Stock or any other property which are made subject to the attainment of
one or more performance goals ("Performance Awards"). Performance Awards may
include more than one performance goal, and a performance goal may be based on
one or more business criteria applicable to the grantee, the Company as a
whole or one or more of the Company's business units and may include one or
more of the following: increased revenues, net income, stock price, market
share, earnings per share, return on equity or assets or decrease in costs.
Contemporaneous with the initial public offering, the Company granted
options to purchase an aggregate of 146,250 shares of Common stock to
executive officers of the Company, including grants made to the Co-Chairmen of
the Board pursuant to their employment agreements.
The Company may periodically grant new options or other long-term equity-
based incentives to provide continuing incentive for future performance. In
making the decision to grant additional options, the Compensation Committee
would expect to consider factors such as the size of previous grants and the
number of options held. In addition, the Compensation Committee may consider
factors including that executive's current ownership stake in the Company, the
degree to which increasing that ownership stake would provide the executive
with additional incentives for future performance, the likelihood that the
grant of those options would encourage the executive to remain with the
Company and the value of the executive's service to the Company.
Each of the Company's Co-Chairmen of the Board is compensated pursuant to an
employment agreement which was entered into prior to the closing of the
Company's initial public offering and therefore prior to the formation of the
Compensation Committee. Such employment agreements were approved by the Board
of Directors as a whole, at a time when the Company's Board consisted of the
Co-Chairmen of the Board and Mr. Loveless. See "--Employment Agreements" for a
description of such agreements. Each of the agreements includes compensation
in the form of base salary, annual bonus and annual option grants. The annual
bonus and option grants payable pursuant to such agreements are determined by
formulas that are tied to the Company's performance and stockholder return.
Under the employment agreements, for bonus years beginning in 1998, the amount
of the executive's annual bonus is determined by reference to (i) the
Company's performance (measured in terms of EBIT) compared to the Company's
annual budget and (ii) the Company's annual return on capital compared to that
of an industry peer group. In accordance with the employment agreements, both
the Company's annual budget and the industry peer group will be approved
annually by the Compensation Committee.
In accordance with the employment agreements, the Compensation Committee has
approved the Company's 1998 budget and industry peers for the purposes of
calculating the bonuses for the 1998 bonus year for the Co-Chairmen of the
Board. In addition to an annual bonus, each such executive receives an annual
grant of options that is based upon a formula tied to the Company's stock
price. Beginning in 1998, the Compensation Committee
9
will review annually the amount of the base salary, annual bonus and annual
option grants for each of the Co-Chairmen of the Board, and may increase (but
not decrease) such amounts on a basis determined by the Compensation Committee
in its sole discretion. For the 1997 bonus year, each of the Co-Chairmen of
the Board received a bonus of $250,000 in accordance with their employment
agreements. In addition to their annual compensation, each of the Co-Chairmen
of the Board is a significant stockholder of the Company, which provides
effective long-term performance incentive tied directly to stockholder return.
The Compensation Committee
James M. Alexander
Gary W. Loveless
SECTION 162(M) OF THE INTERNAL REVENUE CODE.
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
limits (to $1 million per covered executive) the deductibility for federal
income tax purposes of annual compensation paid to a company's chief executive
officer and each of its other four most highly compensated executed officers.
All options granted under the Company's Incentive Plan in fiscal year 1997
will qualify for an exemption from the application of Section 162(m) of the
Code, thereby preserving the deductibility for federal income tax purposes of
compensation that may be attributable to the exercise of such options.
PERFORMANCE GRAPH
The following performance graph compares the cumulative total stockholder
return on the Common Stock to the cumulative total return on the Standard &
Poor's 500 Stock Index and the Standard & Poor's Oil Well Equipment and
Service Industry Group over the period from October 22, 1997, the date of the
Company's initial public offering, to December 31, 1997. The graph assumes
that $100 was invested on October 22, 1997 in the Common Stock at its initial
public offering price of $24.00 per share and in each of the other two indices
and the reinvestment of all dividends, if any.
[PERFORMANCE GRAPH APPEARS HERE]
S&P Oil
Well Equip.
Measurement Period The Company S&P 500 & Serv. Group
--------------------- ----------- ------- -------------
10/22/97 $100.00 $100.00 $100.00
12/31/97 $146.00 $100.00 $ 89.50
The graph is presented in accordance with SEC requirements. Stockholders are
cautioned against drawing any conclusions from the data contained therein, as
past results are not necessarily indicative of future financial performance.
10
PROPOSAL II
APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of its Audit Committee, has
approved and recommends the approval of the appointment of Ernst & Young LLP
as independent public accountants to conduct an audit of the Company's
financial statements for the year 1998. This firm has acted as independent
public accountants for the Company for many years.
Representatives of Ernst & Young LLP will attend the Annual Meeting and will
be available to respond to questions which may be asked by stockholders. Such
representatives will also have an opportunity to make a statement at the
meeting if they desire to do so.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS. In accordance with the Company's Bylaws, approval of the
appointment of independent public accountants will require the affirmative
vote of a majority of the shares of Common Stock voted on the proposal.
Accordingly, abstentions and broker nonvotes applicable to shares present at
the meeting will not be included in the tabulation of votes cast on this
matter.
OTHER BUSINESS
Management does not intend to bring any business before the meeting other
than the matters referred to in the accompanying notice. If, however, any
other matters properly come before the meeting, it is intended that the
persons named in the accompanying proxy will vote pursuant to discretionary
authority granted in the proxy in accordance with their best judgment on such
matters. The discretionary authority includes matters that the Board of
Directors does not know are to be presented at the meeting by others.
ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS FOR 1999 MEETING
In order to be included in the Company's proxy material for its 1999 annual
meeting of stockholders, eligible proposals of stockholders intended to be
presented at the annual meeting must be received by the Company on or before
December 3, 1998 (directed to the Secretary of the Company at the address
indicated on the first page of this Proxy Statement).
ADVANCE NOTICE REQUIRED FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
The Bylaws of the Company require timely advance written notice of
stockholder nominations of director candidates and of any other proposals to
be presented at an annual meeting of stockholders. In the case of director
nominations by stockholders, the Bylaws require that 90 days' advance written
notice be delivered to the Company's Secretary at the Company's executive
offices and set forth for each person whom the stockholder proposes to
nominate for election or re-election as a director, (a) the name, age,
business address and residence address of such person, (b) the principal
occupation or employment of such person, (c) the number of shares of each
class of capital stock of the Company beneficially owned by such person and
(d) the written consent of such person to having such person's name placed in
nomination at the meeting and to serve as of a director if elected. The
stockholder giving the notice must also include the name and address, as they
appear on the Company's books, of such stockholder and the number of shares of
each class of voting stock of the Company that are then beneficially owned by
such stockholder.
In the case of other proposals by stockholders at an annual meeting, the
Bylaws require that 90 days' advance written notice be delivered to the
Company's Secretary at the Company's executive offices and set forth (a) a
description of each proposal desired to be brought before the annual meeting
and the reasons for conducting
11
such business at the annual meeting, (b) the name and address, as they appear
on the Company's books, of the stockholder proposing such business and any
other stockholders known by such stockholder to be supporting such proposal,
(c) the class and number of shares of the Company's stock that are
beneficially owned by the stockholder on the date of such notice, (d) any
financial interest of the stockholder in such proposal and (e) a
representation that the stockholder intends to appear in person or by proxy at
the meeting to bring the proposed business before the annual meeting. A copy
of the Bylaws of the Company setting forth the requirements for the nomination
of director candidates by stockholders and the requirements for proposals by
stockholders may be obtained from the Company's Corporate Secretary at the
address indicated on the first page of this Proxy Statement.
ANNUAL REPORT
The Annual Report to Stockholders, which includes financial statements of
the Company for the year ended December 31, 1997, has been mailed to all
stockholders. The Annual Report is not a part of the proxy solicitation
material.
By Order of the Board of Directors
/s/ Gary D. Smith
Gary D. Smith
Co-Chairman of the Board and
Secretary
March 25, 1998
12
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DRIL-QUIP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
MAY 14, 1998
The undersigned hereby appoints Larry E. Reimert, Gary D. Smith and J. Mike
Walker, jointly and severally, proxies, with full power of substitution and
with discretionary authority, to vote all shares of Common Stock which the
undersigned is entitled to vote at the Annual Meeting of Stockholders of Dril-
Quip, Inc. (the "Company") to be held on Thursday, May 14, 1998, at Houston
Marriott Westside, 13210 Katy Freeway, Houston, Texas, at 2:00 p.m., or at any
adjournment thereof, hereby revoking any proxy heretofore given.
The undersigned hereby acknowledges receipt of the Notice of, and Proxy
Statement for, the aforesaid Annual Meeting.
1. ELECTION OF DIRECTOR, NOMINEE:
James M. Alexander as director
[_] FOR [_] WITHHELD
2. APPROVAL OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998
[_] FOR [_] AGAINST [_] ABSTAIN
3. With discretionary authority as to such other matters as may properly come
before the meeting.
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THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IN THE ABSENCE OF SPECIFIC DIRECTIONS TO THE CONTRARY, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE DIRECTOR NAMED ABOVE AND FOR THE APPROVAL OF
ERNST & YOUNG LLP AS THE COMPANY'S ACCOUNTANTS FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1998.
Date:_____________________________, 1998
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(Signature)
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(Signature)
Sign exactly as name appears hereon.
(Joint owners should each sign. When
signing as attorney, executor, officer,
administrator, trustee, or guardian,
please give full title as such.)
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
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