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 (Amendment No. )
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
VARCO INTERNATIONAL INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Notes:
VARCO INTERNATIONAL, INC.
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NOTICE OF 2001 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2001
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The 2001 Annual Meeting of Stockholders of Varco International, Inc., a
Delaware corporation, will be held on Thursday, May 17, 2001, at The
Doubletree Hotel, 2001 Post Oak Boulevard, Houston, Texas 77056, starting at
9:00 a.m., local time, for the following purposes:
1. To elect a board of 11 directors to serve until the next annual meeting
or until the election and qualification of their respective successors;
2. To consider and act upon a proposal to ratify the selection of Ernst &
Young LLP as the Company's independent auditors for 2001; and
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement of the meeting.
The Company's Board of Directors has fixed the close of business on March
23, 2001, as the record date for determining the Company's stockholders who
are entitled to notice of, and to vote at, the 2001 Annual Meeting of
Stockholders and any adjournment or postponement.
By Order of the Board of Directors,
/s/ James F. Marony, III
James F. Maroney, III
Vice President, Secretary and
General Counsel
Houston, Texas
April 12, 2001
PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY BY MAIL
IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN
PERSON. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU DO
ATTEND THE MEETING IN PERSON AND DESIRE TO WITHDRAW YOUR PROXY, YOU MAY DO SO
IN THE MANNER DESCRIBED IN THE ENCLOSED PROXY STATEMENT AND VOTE PERSONALLY ON
ALL MATTERS BROUGHT BEFORE THE MEETING.
VARCO INTERNATIONAL, INC.
2835 Holmes Road 743 North Eckhoff Street
Houston, Texas 77051 Orange, California 92668
2001 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2001
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PROXY STATEMENT
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SOLICITATION OF PROXIES
This proxy statement is being furnished to holders of the common stock of
Varco International, Inc., a Delaware corporation, in connection with the
solicitation by the Company's Board of Directors, of proxies for use at the
2001 Annual Meeting of Stockholders to be held on Thursday, May 17, 2001, at
The Doubletree Hotel, 2001 Post Oak Boulevard, Houston, Texas 77056, starting
at 9:00 a.m. local time, and at any adjournment or postponement of the
meeting.
On May 30, 2000, Varco International, Inc., a California corporation
("Varco"), was merged (the "Merger") into the Company (which was named
Tuboscope Inc. prior to the Merger), and the name of the Company, as the
surviving corporation in the Merger, was changed to Varco International, Inc.
In connection with the Merger, each outstanding share of Varco common stock
was converted into 0.7125 shares of the Company's common stock. Unless
otherwise indicated, all references in this Proxy Statement to "Varco" refer
to the disappearing California corporation prior to the Merger, and all
references to the "Company" refer to Tuboscope Inc. prior to the Merger and to
the surviving or combined corporation after the Merger.
All shares of the Company's common stock which are entitled to vote and are
represented at the annual meeting by properly executed proxies received at or
prior to the annual meeting, and not revoked, will be voted at the annual
meeting in accordance with the instructions specified on the proxies. If no
instructions are specified, the proxies will be voted for the election of the
11 nominees named below to the Company's board of directors and for the
ratification of the selection of Ernst & Young LLP as the Company's auditors
for 2001.
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 or place, the persons named in the
proxy will have discretion to vote on these 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:
. filing with the Secretary of the Company, at or before the voting at the
annual meeting, a written notice of revocation bearing a later date than
the proxy;
. duly executing a proxy with a later date and delivering it to the
Secretary of the Company before the voting at the annual meeting; or
. attending the annual meeting and voting in person, although attendance
at the annual meeting will not by itself constitute a revocation of a
proxy.
Any written notice of revocation or subsequent proxy should be sent to
Varco International, Inc., 2835 Holmes Road, Houston, Texas 77051, Attention:
Secretary, or hand delivered to the Company's Secretary at or before the
voting at the annual meeting.
This proxy statement and the accompanying proxy card, together with a copy
of the Company's 2000 Annual Report, is being mailed to the Company's
stockholders on or about April 17, 2001. All expenses of soliciting proxies,
including the cost of mailing this proxy statement to stockholders, will be
borne by the Company. In addition to solicitation by use of the mails, proxies
may be solicited by directors, officers and employees of the Company in person
or by telephone or other means of communication. These persons will not
receive additional compensation, but may be reimbursed for reasonable out-of-
pocket expenses in connection with this solicitation. In addition, the Company
has retained the services of Morrow & Company to assist in the solicitation of
proxies. The Company will pay $5,000, plus reimbursement of out-of-pocket
expenses, to Morrow & Company for its services. The Company will make
arrangements with brokerage houses, custodians, nominees and fiduciaries to
forward proxy solicitation materials to beneficial owners of shares held of
record by them. The Company will reimburse these brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in forwarding
the proxy materials.
OUTSTANDING SHARES AND VOTING RIGHTS
The Company's board of directors has fixed March 23, 2001, as the record
date for determining the stockholders entitled to notice of, and to vote at,
the annual meeting. Accordingly, only holders of the Company's common stock of
record on the record date will be entitled to notice of, and to vote at, the
annual meeting. As of the record date, 95,507,968 shares of the Company's
common stock, constituting all of the Company's voting stock, were outstanding
and entitled to vote, which shares were held by approximately 1,259 holders of
record. Each holder of shares of the Company's common stock on the record date
is entitled to one vote per share. Votes may be cast either in person or by a
properly executed proxy.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of the Company's common stock entitled to
vote at the annual meeting is necessary for a quorum. Shares of the common
stock represented in person or by proxy will be counted for the purpose of
determining whether a quorum is present at the annual meeting. 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.
For the election of the nominees to the board of directors, the 11 nominees
receiving the highest vote totals will be elected. Accordingly, abstentions or
broker non-votes will not affect the outcome of the election of the nominees
to the board of directors. All other matters to be voted on will be decided by
a majority vote of the shares present or represented at the meeting and
entitled to vote. On any of these matters, an abstention will have the same
effect as a negative vote. Because "broker non-votes" represent shares as to
which the beneficial owner has not empowered the broker to vote, on any of
these matters, these shares are considered not entitled to vote on such
matters, and thus broker non-votes on a matter will have no effect on the
outcome of the voting on these matters.
The board of directors recommends a vote "FOR" each of the 11 nominees and
"FOR" the ratification of the selection of Ernst & Young LLP as the Company's
independent auditors.
ELECTION OF DIRECTORS
General
Eleven directors are to be elected at the annual meeting. Directors are
elected at each annual meeting of the Company's stockholders and hold office
until their successors are duly elected and qualified at the next annual
meeting.
The Company does not anticipate that any of the nominees will become
unavailable to serve for any reason, but if that should occur before the
annual meeting, proxies will be voted for another nominee or nominees
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selected by the Company's board of directors. The Company's certificate of
incorporation requires that there be a minimum of one and a maximum of 15
directors. The authorized number of directors, as determined by a majority of
the board of directors, is currently fixed at 11.
Company Directors
Set forth below are the names and descriptions of the backgrounds of the
nominees for election as directors of the Company. Each of the nominees for
election currently serves as a director of the Company and was elected to his
present term of office pursuant to the Bylaws of the Company, became a
director as a result of the Merger, or was appointed by the board of
directors.
The directors and nominees are as follows:
Name Age Position with the Company
---- --- -------------------------
George Boyadjieff....... 62 Chairman of the Board and Chief Executive
Officer
John F. Lauletta........ 56 Director, President and Chief Operating Officer
George S. Dotson........ 60 Director
Andre R. Horn........... 72 Director
Richard A. Kertson...... 61 Director
Eric L. Mattson......... 49 Director
L.E. Simmons............ 54 Director
Douglas E. Swanson...... 62 Director
Jeffery A. Smisek....... 46 Director
Eugene R. White......... 69 Director
James D. Woods.......... 69 Director
George Boyadjieff. Mr. Boyadjieff has been Chairman of the Board and Chief
Executive Officer of the Company since the Merger. He served as a director of
Varco from 1976 until the Merger. Mr. Boyadjieff was Chief Executive Officer
of Varco from April 1991 and Chairman from May 1998. He served as President of
Varco from 1981 until February 2000 and as Chief Operating Officer from June
1979 until April 1991. Prior to his election as President of Varco, Mr.
Boyadjieff was Senior Vice President-Operations. He was first employed by
Varco in 1969.
John F. Lauletta. Mr. Lauletta has been the President and a director of the
Company since April 1996 and Chief Operating Officer since the Merger. From
April 1996 until the Merger, Mr. Lauletta was the Chief Executive Officer of
the Company. From 1993 until April 1996, Mr. Lauletta was the President and
Chief Executive Officer of D.O.S., Ltd. From 1973 until 1993, Mr. Lauletta was
with Baker Hughes Incorporated, holding several executive positions, including
President of Exlog/TOTCO, President of Milpark Drilling Fluids and Vice
President of Baker Hughes INTEQ.
George S. Dotson. Mr. Dotson served as a director of Varco from February
1997 and became a director of the Company at the time of the Merger. He is a
director and Vice President of Helmerich & Payne, Inc. and is President of its
subsidiary, Helmerich & Payne International Drilling Co., an owner-operator of
drilling rigs, providing drilling services to both the land and offshore oil
and gas drilling industry. Mr. Dotson has held these positions since 1977. He
is a director of Atwood Oceanics, Inc.
Andre R. Horn. Mr. Horn served as a director of Varco from July 1987 and
became a director of the Company at the time of the Merger. He retired from
Joy Manufacturing Co. in 1985, where he served as a director and Chairman of
the Board. Mr. Horn was Chairman of the Board of Needham & Co., Inc.,
investment bankers, from 1985 until 1991. He is a director of REMEC, Inc.
3
Richard A. Kertson. Mr. Kertson has been a director of the Company since
August 2000. Mr. Kertson was Vice President-Finance and Chief Financial
Officer of Varco from May 1984 until his retirement in February 2000. He had
been Controller of Varco Oil Tools since January 1982 and joined Varco in
October 1975 as Director of Management Information Services.
Eric L. Mattson. Mr. Mattson has been a director of the Company since
January 1994. He has been Chief Financial Officer of Netrail, Inc., an
Internet backbone and broadband service provider, since September 1999. From
July 1993 to May 1999, Mr. Mattson served as Senior Vice President and Chief
Financial Officer of Baker Hughes Incorporated. For more than five years prior
to 1993, Mr. Mattson was Vice President and Treasurer of Baker Hughes. Baker
Hughes is a provider of products and services to the oil, gas and process
industries. Mr. Mattson also serves as a director of Rental Service
Corporation.
L.E. Simmons. Mr. Simmons has been a director of the Company since April
1996 and was Chairman of the Board from April 1996 until the Merger. Mr.
Simmons has served for more than five years as President and a director of SCF
Partners, L.P., which serves as the general partner for various investment
limited partnerships. Mr. Simmons is a director of Zions Bancorporation and
Chairman of the Board of Oil States International, Inc.
Douglas E. Swanson. Mr. Swanson has been a director of the Company since
October 1997. He has been President, Chief Executive Officer, and a director
of Oil States International, Inc. since January 2000. Mr. Swanson was the
President, Chief Executive Officer and Chairman of the Board of Cliffs
Drilling Company from 1992 to July 1999. From 1978 to 1992, Mr. Swanson was an
Executive Vice President of Cliffs Drilling Company.
Jeffery A. Smisek. Mr. Smisek has been a director of the Company since
February 1998. Mr. Smisek has been Executive Vice President, General Counsel
and Secretary of Continental Airlines since November 1996 and was previously
Senior Vice President, General Counsel and Secretary of Continental Airlines.
Eugene R. White. Mr. White served as a director of Varco from October 1990
and became a director of the Company at the time of the Merger. He is a
consultant to Amdahl Corporation, where he previously held various positions.
He served as the Vice Chairman of Amdahl Corporation from 1987 to 1994, as
Chairman of the Board from 1979 to 1987, and as Chief Executive Officer from
1979 to 1983. Mr. White was Deputy Chairman of the Board and was Amdahl's
President from 1974 to 1977. He is a director of Needham & Co.
James D. Woods. Mr. Woods served as a director of Varco from 1988 until May
1990 and from December 1990 until the Merger, when he became a director of the
Company. Mr. Woods is the Chairman Emeritus of, and a consultant to, Baker
Hughes Incorporated. He was Chief Executive Officer of Baker Hughes from April
1987 and Chairman from January 1989 until January 1998. Mr. Woods is a
director of The Kroger Co., Kaiser Aluminum Corporation and OMI Corporation.
The Company is not aware of any family relationships between any of the
foregoing nominees for director or between any nominee and any executive
officer.
The certificate of incorporation and bylaws of the Company contain
provisions eliminating or limiting the personal liability of directors for
violations of a director's fiduciary duty to the extent permitted by the
General Corporation Law of the State of Delaware. In addition, pursuant to the
merger agreement between the Company and Varco, the Company agreed to
indemnify, to the fullest extent permitted by Delaware law, each director or
former director of Varco against all liabilities or expenses in connection
with claims relating to matters that occurred prior to the closing of the
Merger.
Meetings and Committees
The Company's board of directors held seven meetings during the year ended
December 31, 2000. Each director attended at least 75% of the aggregate of the
total number of meetings of the Company's board of directors held during such
period and of the total number of meetings held during such period by all
committees of the Company's board of directors on which that director served.
4
The Company currently has standing Audit and Compliance and Compensation
Committees but does not have a nominating committee.
The current members of the Audit and Compliance Committee are Andre R. Horn
(Chairman), Eric L. Mattson and L.E. Simmons. Each of Messrs. Horn, Mattson
and Simmons is "independent" as required by the applicable listing standards
of the New York Stock Exchange. Prior to August 10, 2000, the members of the
Audit and Compliance Committee were Douglas E. Swanson and Jerome R. Baier,
who was a director of the Company until May 30, 2000. The Audit and Compliance
Committee met three times during the fiscal year ended December 31, 2000.
The Audit and Compliance Committee operates pursuant to a written charter
adopted by the board of directors on November 9, 2000, a copy of which is
attached to this proxy statement as Appendix A. In accordance with its
charter, the Committee's responsibilities include:
. recommending the selection of the Company's independent accountants to
the board of directors and approving of their fees and other significant
compensation; and
. reviewing:
. the Company's annual financial statements and quarterly results
prior to filing or distribution;
. the adequacy and effectiveness of the Company's systems of internal
accounting controls;
. the independent accountants' audit plan and engagement letter;
. the independence and performance of the Company's independent
accountants;
. material legal matters and potential conflicts of interest; and
. the Company's code of ethical conduct and its enforcement.
The members of the Company's Compensation Committee are currently James D.
Woods (Chairman), George S. Dotson, and Jeffery Smisek. Prior to August 10,
2000, the members of the Compensation Committee were Eric L. Mattson, L.E.
Simmons and Mr. Smisek. In lieu of holding a meeting during the fiscal year
ended December 31, 2000, the Compensation Committee acted by unanimous written
consent. The Compensation 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.
Board Compensation and Benefits
Each director of the Company who is neither an employee nor otherwise
subject to an agreement to provide services to the Company is entitled to
receive $30,000 per year as compensation for service on the board of
directors, plus $1,500 for each attended regular and special meeting of the
board of directors. In addition, the Chairman of the Audit Committee and the
Chairman of the Compensation Committee are each entitled to receive an
additional annual retainer in the amount of $4,500, and each member of these
Committees, including the Chairman, is entitled to receive an attendance fee
of $1,000 for each committee meeting attended in person and $500 for each
committee meeting attended telephonically.
Under the terms of the Company's Amended and Restated 1996 Equity
Participation Plan, each non-employee director is automatically granted an
initial option to purchase 4,000 shares of the Company's common stock on the
date of his election to the board of directors or on April 24, 1996 for those
non-employee directors serving at the time of initial plan adoption by the
stockholders. In addition, each non-employee director of the Company is
automatically granted options to purchase an additional 4,000 shares on the
date of each annual meeting of stockholders of the Company following the
initial grant if he continues as a non-employee director of the Company. All
options are granted at an exercise price equal to the fair market value of the
Company's common stock on the date of grant and vest at the rate of 25% per
year beginning on the first anniversary of the date of grant.
5
On May 30, 2000, options to purchase 4,000 shares of the Company's common
stock at an exercise price of $21.31 per share were granted to Messrs.
Mattson, Simmons, Swanson and Smisek upon their re-election as directors and
to Messrs. Dotson, Horn, White and Woods who became directors in connection
with the Merger. Mr. Kertson was granted an option to purchase 4,000 shares of
the Company's common stock at an exercise price of $20.00 upon his election as
a director on August 10, 2000.
Vote and Recommendation
Directors will be elected by a favorable vote of a plurality of the shares
of the Company's common stock present and entitled to vote, in person or by
proxy, at the annual meeting. Abstentions or broker non-votes as to the
election of directors will not be treated as votes cast or shares entitled to
vote with respect to such election and, thus, will not affect the election of
the nominees receiving the plurality of votes. Unless instructed to the
contrary, the shares represented by the proxies will be voted FOR the election
of the 11 nominees named above as directors. Should any nominee become
unavailable to serve, the proxies will be voted for such other person or
persons as may be designated by the board of directors.
The Company's board of directors recommends that you vote FOR the election
of the nominees named above.
EXECUTIVE OFFICERS OF THE COMPANY
The following persons serve as the Company's executive officers as of the
date of this proxy statement:
Name Age Position
---- --- --------
Chairman of the Board and Chief Executive
George Boyadjieff...... 62 Officer
John F. Lauletta....... 56 Director, President and Chief Operating Officer
Michael W. Sutherlin... 54 Group President, Products
Executive Vice President, Chief Financial
Joseph C. Winkler...... 49 Officer and Treasurer
James F. Maroney, III.. 50 Vice President, Secretary and General Counsel
Vice President--Human Resources and
Kenneth L. Nibling..... 50 Administration
Clay C. Williams....... 38 Vice President--Corporate Development
Set forth below are descriptions of the backgrounds of the executive
officers and their principal occupations for the past five years. For a
description of the backgrounds of Messrs. Boyadjieff and Lauletta, see
"ELECTION OF DIRECTORS."
Michael W. Sutherlin. Mr. Sutherlin has been Group President, Products of
the Company since the Merger. He was President and Chief Operating Officer of
Varco from February 2000 until the Merger. He was Vice President of Varco from
1984 until February 2000 and was President-Varco BJ from July 1998 until
February 2000. Prior thereto, Mr. Sutherlin was Vice President-Best
Operations. He was first employed by Varco in 1975.
Joseph C. Winkler. Mr. Winkler has been Executive Vice President, Chief
Financial Officer and Treasurer of the Company since April 1996. From 1993 to
April 1996, Mr. Winkler served as the Chief Financial Officer of D.O.S., Ltd.
Prior to joining D.O.S., Ltd., he was Chief Financial Officer of Baker Hughes
INTEQ and served in a similar role for various companies owned by Baker Hughes
Incorporated including Eastman/Teleco and Milpark Drilling Fluids. For ten
years prior to joining Baker Hughes, Mr. Winkler held the position of Chief
Financial Officer of an independent oil and gas producer after having spent
several years with Arthur Young & Company.
6
James F. Maroney, III. Mr. Maroney has been Vice President of the Company
since May 1991, Secretary of the Company since January 1991 and General
Counsel of the Company since November 1989. Mr. Maroney was Assistant
Secretary of the Company from December 1989 to January 1991. He 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. Mr. Nibling has been Vice President-Human Resources and
Administration of the Company 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.
Clay C. Williams. Mr. Williams has been Vice President-Corporate
Development of the Company since February 2001 and from February 1997 to June
2000. From April 1999 to June 2000 he was Vice President of Pipeline Services
for the Company. From April 1996 to February 1997, Mr. Williams was Director
of Corporate Development of the Company. From March 1996 to April 1996, Mr.
Williams was Director of Corporate Development of Drexel. Mr. Williams was an
associate at SCF Partners, L.P. from December 1993 to March 1996. From July
1992 to December 1993, Mr. Williams was a graduate student at the University
of Texas business school. Mr. Williams was a senior petrophysical engineer for
Shell Oil Company from 1985 to 1992.
The Company is not aware of any family relationships between any of the
foregoing executive officers or between any executive officer and any nominee
for election as director.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the record date, the amount and
percentage of the outstanding shares of the Company's common stock which,
according to the information furnished to the Company, are beneficially owned
by:
. each stockholder known by the Company to beneficially own 5% or more of
the outstanding shares of the Company's common stock;
. each director (each of whom is a nominee for election at the annual
meeting);
. the chief executive officer and certain other highly compensated
executive officers of the Company at the end of the last fiscal year;
and
. all executive officers and directors as a group.
7
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 under the Securities and Exchange Act of 1934 (the
"Exchange Act"), and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under this rule, beneficial
ownership includes any shares as to which the stockholder has voting power or
investment power and any shares that the stockholder has the right to acquire
within 60 days of the record date, through the exercise of any stock option,
warrant or other right. Unless otherwise indicated in the table or the
footnotes, each stockholder has sole voting and investment power, or shares
these powers with his spouse, with respect to the shares shown as beneficially
owned.
Shares Beneficially
Owned
-------------------
Percent
Beneficial Owner Shares(1) of Class
---------------- ---------- --------
Directors, Nominees and Executive Officers
George Boyadjieff......................................... 562,900 *
George S. Dotson.......................................... 29,211 *
Andre R. Horn............................................. 32,061 *
Richard A. Kertson........................................ 36,495 *
John F. Lauletta.......................................... 254,487 *
James F. Maroney, III..................................... 93,787 *
Eric L. Mattson........................................... 21,000 *
L.E. Simmons(2)........................................... 11,958,924 12.5%
Jeffery A. Smisek......................................... 13,000 *
Michael W. Sutherlin...................................... 114,158 *
Douglas E. Swanson........................................ 9,201 *
Eugene R. White........................................... 83,436 *
Joseph C. Winkler......................................... 274,893 *
James D. Woods............................................ 24,224 *
All directors and executive officers as a group (16
persons)................................................. 13,766,471 14.2%
5% Beneficial Holders
L.E. Simmons & Associates, Incorporated(3)................ 11,886,122 12.4%
6600 Chase Tower
Houston, Texas 77002
SCF-III, L.P.(4).......................................... 5,091,363 5.3%
6600 Chase Tower
Houston, Texas 77002
D.O.S. Partners, L.P.(5).................................. 4,949,966 5.2%
6600 Chase Tower
Houston, Texas 77002
Franklin Resources, Inc.(6)............................... 6,829,064 7.2%
777 Mariners Island Boulevard
San Mateo, California 94404
FMR Corp.(7).............................................. 5,265,940 5.5%
82 Devonshire Street
Boston, Massachusetts 02109
- --------
* Less than one percent of the shares of common stock outstanding on the
record date.
(1) Includes shares which may be purchased upon the exercise of stock options
which are exercisable as of the record date, or become exercisable within
60 days thereafter, for the following: Mr. Boyadjieff--390,182 shares; Mr.
Dotson--24,937 shares; Mr. Horn--22,061 shares; Mr. Lauletta--192,787
shares; Mr. Maroney--73,568 shares; Mr. Mattson--21,000 shares; Mr.
Simmons--13,000 shares; Mr. Smisek--8,000 shares; Mr. Sutherlin--54,817
shares; Mr. Swanson--8,000 shares; Mr. White--21,374 shares;
8
Mr. Winkler--173,380 shares; Mr. Woods--21,374 shares; and all directors
and executive officers as a group--1,202,430 shares.
(2) Includes 11,886,122 shares beneficially owned by L.E. Simmons &
Associates, Incorporated, of which Mr. Simmons is president, a director
and sole stockholder. (See footnote 3 below.) Mr. Simmons has shared
voting power and shared dispositive power with respect to such shares. Mr.
Simmons disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein. Also includes 55,100 shares owned by
Mr. Simmons directly, with respect to which he has sole dispositive and
voting power. The foregoing information is taken from a Schedule 13D/A,
dated January 4, 2001 and filed by Mr. Simmons.
(3) Consists of 5,091,363 shares beneficially owned by SCF-III, L.P. (see
footnote 4 below); 4,949,966 shares beneficially owned by D.O.S. Partners,
L.P. (see footnote 5 below); and 1,844,973 shares beneficially owned by
FGSI Partners, L.P. L.E. Simmons & Associates has shared dispositive power
and shared voting power with respect to all such shares. L.E. Simmons &
Associates is the general partner of SCF-II, L.P. (the general partner of
SCF-III, L.P.) and the general partner of SCF Partners, L.P. (the general
partner of D.O.S. Partners, L.P. and FGSI Partners, L.P.) The foregoing
information is taken from a Schedule 13D/A, dated January 4, 2001 and
filed by L.E. Simmons & Associates.
(4) SCF-II, L.P., the general partner of SCF-III, L.P., is also the beneficial
owner of such shares. SCF-III, L.P. and SCF-II, L.P. have shared
dispositive power and shared voting power with respect to such shares. The
foregoing information is taken from a Schedule 13D/A, dated January 4,
2001 and filed by SCF-III, L.P. and SCF-II, L.P.
(5) SCF Partners, L.P., the general partner of D.O.S. Partners, L.P., is also
the beneficial owner of such shares. D.O.S. Partners, L.P. and SCF
Partners, L.P. have shared dispositive power and shared voting power with
respect to such shares. The foregoing information is taken from a Schedule
13D/A, dated January 4, 2001 and filed by D.O.S. Partners, L.P. and SCF
Partners, L.P.
(6) Franklin Resources, Inc., as the parent holding company for investment
advisory subsidiaries to closed-end investment companies or other managed
accounts, and Charles B. Johnson and Rupert H. Johnson, Jr., principal
shareholders of Franklin Resources, are the beneficial owners of 6,829,064
shares. Franklin Advisors, Inc., an investment advisory subsidiary of
Franklin Resources, is the beneficial owner of 6,381,553 of such shares
with respect to which it has sole voting and dispositive power. Franklin
Management, Inc., also an investment advisory subsidiary of Franklin
Resources, has sole dispositive power with respect to 447,711 shares.
Franklin Small Cap Growth Fund I, a registered investment company, has an
interest in more than 5% of the Company's common stock. The foregoing
information is taken from a Schedule 13G, dated February 9, 2001 and filed
by Franklin Resources, Inc.
(7) FMR Corp. is the beneficial owner of 5,265,940 shares with respect to
which it has sole dispositive power and with respect to 506,476 shares of
which it has sole voting power. All of such shares are also deemed to be
beneficially owned by Edward C. Johnson 3d, Chairman of FMR Corp., and
Abigail P. Johnson, a director and stockholder of FMR Corp. Fidelity
Management & Research Company, a wholly-owned subsidiary of FMR Corp., is
the beneficial owner of 4,759,464 shares held by various registered
investment companies with respect to which Mr. Johnson and FMR Corp. have
sole dispositive power but no voting power. Fidelity Management Trust
Company, a wholly-owned subsidiary of FMR Corp. and a bank, is the
beneficial owner of 506,476 shares over which Mr. Johnson and FMR Corp.
have sole dispositive power and sole voting power. The foregoing
information is taken from a Schedule 13G, dated February 14, 2001 and
filed by FMR Corp.
9
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years indicated of those persons, referred to in this Proxy Statement
as "named executive officers," who were either:
. the chief executive officer of the Company;
. one of the other four most highly compensated executive officers of the
Company whose annual salary and bonus exceeded $100,000; or
. up to two other executive officers who would have qualified under the
categories listed above but for the fact that the individual was not
serving as an executive officer of the Company at the end of the 2000
fiscal year.
Summary Compensation Table
Long-Term
Annual Compensation(1) Compensation Awards
----------------------- ---------------------
Restricted Securities All Other
Name and Principal Stock Underlying Annual
Position Year Salary(2) Bonus(3) Awards(4) Options Compensation(5)
------------------ ---- --------- -------- ---------- ---------- ---------------
George Boyadjieff(6).... 2000 $327,928 $359,600(3) $ 0 0 $ 9,554
Chairman and Chief
Executive Officer
John F. Lauletta(7)..... 2000 387,600 405,200 0 0 12,040
President and Chief 1999 370,000 0 0 366,942 11,098
Operating
Officer 1998 376,046 0 332,028 43,680 11,783
Michael W.
Sutherlin(8)........... 2000 175,378 123,600(3) 0 0 9,544
Group President,
Products
Joseph C. Winkler....... 2000 222,100 185,760 0 0 6,593
Executive Vice
President, 1999 212,000 0 0 168,198 6,360
Chief Financial Officer
and 1998 214,334 0 0 19,814 6,150
Treasurer
James F. Maroney, III... 2000 170,000 106,440 0 0 5,053
Vice President,
Secretary and 1999 162,000 0 0 81,771 4,860
General Counsel 1998 164,958 0 0 10,318 4,738
- --------
(1) Perquisites are excluded as their aggregate value did not exceed the
lesser of $50,000 or the 10% of total annual salary and bonus for any
named executive officer.
(2) Includes amounts deferred by the named executive officers under the
Company's 401(k) Thrift Savings Plan and Non-Qualified Deferred
Compensation Plan.
(3) Bonuses were paid in the first quarter of the subsequent year for services
rendered in the year indicated. For Messrs. Boyadjieff and Sutherlin the
bonuses for 2000 consisted of cash bonuses and awards of common stock of
the Company, valued at fair market value on January 29, 2001.
(4) Awards shown represent the value of the restricted stock units granted
pursuant to the Company's Stock Ownership Program, employing the fair
market value of the Company's common stock on the date of grant (i.e.,
$23.00 on January 2, 1998). All outstanding restricted stock units became
100% vested upon completion of the Merger.
(5) Includes: (i) matching contributions by the Company under the Company's
401(k) Thrift Savings Plan or 401(k) Profit Sharing Plan in 2000 in the
amount of $9,554 for Mr. Boyadjieff; in 2000, 1999, and 1998 in the
amounts of $1,761, $1,726, and $1,764, respectively, for Mr. Lauletta; in
2000 in the amount of $9,554 for Mr. Sutherlin; in 2000, 1999, and 1998 in
the amounts of $1,820, $1,590, and $2000, respectively, for
10
Mr. Winkler; and in 2,000, 1999, and 1998 in the amounts of $4,648, $4,455,
and $4,535, respectively, for Mr. Maroney and (ii) matching contributions
by the Company under the Company's Non-Qualified Deferred Compensation Plan
in 2000, 1999, and 1998 in the amounts of $10,279, $9,336, and $10,019,
respectively, for Mr. Lauletta; in 2000, 1999, and 1998 in the amounts of
$4,773, $4,770 and $4,150, respectively, for Mr. Winkler; and in 2000,
1999, and 1998 in the amounts of $405, $405, and $203, respectively, for
Mr. Maroney. Messrs. Boyadjieff and Sutherlin are participants in the Varco
Supplemental Executive Retirement Plan (the "Supplemental Plan"), which
provides for retirement, death and disability benefits and was assumed by
the Company in connection with the Merger. The Supplemental Plan provides
for a total benefit equal to 40% of the aggregate of a participant's
highest five calendar years of base salary (the "normal retirement
benefit"), which vests at the rate of 10% per year of service, is fully
vested upon death, and is prorated in the event of early retirement but not
disability. The normal retirement benefit is payable in 120 equal monthly
installments commencing upon the earlier of retirement or death, or in the
case of disability or early retirement, generally at age 65. Under the
change in control provisions of the Supplemental Plan, all unvested
benefits became fully vested upon consummation of the Merger. The
Supplemental Plan is unfunded.
(6) Mr. Boyadjieff became Chairman and Chief Executive Officer of the Company
on May 30, 2000, upon consummation of the Merger. Compensation paid by
Varco (including stock options) to Mr. Boyadjieff for services rendered to
Varco prior to the Merger is not included in the table.
(7) Mr. Lauletta was President and Chief Executive Officer of the Company
prior to the consummation of the Merger on May 30, 2000.
(8) Mr. Sutherlin became Group President, Products of the Company on May 30,
2000, upon consummation of the Merger. Compensation paid by Varco
(including stock options) to Mr. Sutherlin for services rendered to Varco
prior to the Merger is not included in the table.
There were no stock options granted by the Company to the named executive
officers during fiscal 2000.
The following table sets forth certain information with respect to options
exercised during fiscal 2000 and exercisable and unexercisable options held by
the named executive officers as of December 31, 2000.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Shares Options at Fiscal Year End Fiscal Year End(2)
Acquired Value ---------------------------- -------------------------
Name on Exercise Realized(1) Exercisable Unexercisable(3) Exercisable Unexercisable
- ---- ----------- ---------- ----------- ---------------- ----------- -------------
George Boyadjieff....... 0 $ 0 344,269 170,295 $5,081,298 $1,316,736
John F. Lauletta........ 312,197 4,464,334 259,729 0 2,817,319 0
Michael W. Sutherlin.... 0 0 40,544 46,494 510,897 344,482
Joseph C. Winkler....... 76,450 1,178,053 183,380 0 2,279,107 0
James F. Maroney, III... 0 0 143,568 0 1,881,760 0
- --------
(1) Determined by calculating the spread between the market value of the
Company's common stock on the date of exercise and the exercise price of
the options.
(2) Based on the closing sales price of the Company's common stock ($21.75) on
the New York Stock Exchange on December 29, 2000, minus the exercise price
of the option, multiplied by the number of shares to which the option
relates.
(3) All options held by the Messrs. Lauletta, Maroney and Winkler at the time
of the Merger became fully exercisable upon completion of the Merger.
11
Management Agreements
Severance Plans. The Company has two severance plans which are intended to
provide financial security to its senior management and to match similar plans
adopted by competitors in the Company's industry. These plans are designed to
retain and to motivate key employees of the Company. One of the severance
plans, the "standard severance plan," pertains to involuntary terminations and
the other severance plan, the "change in control severance plan," pertains to
terminations following a change in control. Each of the named executive
officers and certain other members of the Company's senior management
(currently numbering a total of 18) participate in both the standard and the
change in control severance plans.
The severance plans are implemented by Executive Agreements with the
participants, which were either entered into by the Company or assumed by the
Company as a result of the Merger. Prior to the Merger, Varco entered into
Executive Agreements with its executive officers which have substantially the
same terms as those entered into by the Company except as noted below.
Standard Severance Plan. The standard severance plan provides participants
with severance compensation and benefits following the involuntary termination
of their employment with the Company, other than for cause, which is limited
to events such as conviction of a felony involving moral turpitude, dishonesty
or breach of trust, commission of theft, fraud, embezzlement or
misappropriation, serious dereliction of duty, and unauthorized disclosure of
confidential information. Upon an involuntary termination, other than for
cause, a participant would be entitled to the following standard severance
benefits:
. base salary for a period ranging from one to two years, depending upon
the particular participant, payable on a regular payroll basis;
. a cash bonus ranging from 40% to 60% of the participant's annual base
salary, which is pro-rated to the date of termination for certain
participants, payable in installments with base salary;
. payment of any awards earned under the Company's Value Plan through the
last completed quarter prior to termination (not included in the
Executive Agreements with former Varco employee-participants); and
. full vesting of all restricted stock awards under the Company's stock
plans (not included in the Executive Agreements with former Varco
employee-participants).
If a terminated participant is re-employed during the severance payment
period at a salary greater than or equal to what the participant received at
the Company, the participant would receive 50% of full severance pay for the
remainder of the severance period. If the terminated participant is re-
employed during the severance pay-out period at a salary less than what the
participant received at the Company, the participant would receive the
difference in actual salary for the remainder of the severance period, plus
50% of the aggregate severance pay remaining that would have been paid
throughout the severance period.
For each of the named executive officers, the terms of their payout
periods, their bonus percentages, and whether their bonuses are pro-rated
under the standard severance plan are as follows:
Payout Bonus Proration
Name Period % of Bonus
---- --------- ----- ---------
George Boyadjieff.................................. 2 years 60% No
John F. Lauletta................................... 2 years 60% No
Michael W. Sutherlin............................... 2 years 60% No
Joseph C. Winkler.................................. 18 months 50% No
James F. Maroney, III.............................. 1 year 40% Yes
Change in Control Severance Plan. The change in control severance plan
provides enhanced benefits in the case of a change in control of the Company
(and prior to the Merger, Varco) and are available if, within two years of the
change in control, the participant is terminated other than for cause or if
the participant terminates
12
his employment for good reason. Under the agreements, a "good reason" includes
failure to re-elect an officer to any corporate office or a reduction in the
officer's authority or responsibility, which the officer determines has
detrimentally and materially affected the terms of his employment, a material
reduction in compensation or benefits, and relocation to an office more than
50 miles away. Upon a qualifying termination following a change in control,
the participants are entitled to change in control severance benefits,
including the following:
. base salary for a period ranging from 18 months to three years,
depending upon the particular participant, payable on a regular payroll
basis;
. a cash bonus for the salary payout period ranging from 40% to 60% of
base salary, depending upon the particular participant, payable in
installments with base salary;
. full vesting of all accrued benefits under the Company's pension, profit
sharing, 401(k) and similar plans (not included in the Executive
Agreements with former Varco employee-participants);
. continued participation in the Company's medical and dental health
benefits and disability coverage or equivalent coverage during the
payout period, subject to reduction to the extent that the participant
receives similar benefits from another employer;
. full vesting of all outstanding and unvested restricted stock awards
under the Company's stock plans (not included in the Executive
Agreements with former Varco employee-participants);
. the gross-up of certain payments, subject to excise taxes under the
Internal Revenue Code as "parachute payments," so that the participant
receives the same amount he would have received had there been no
applicable excise taxes;
. full vesting as of the date of termination of all bonus awards under the
Company's Value Plan; and
. an extended option exercise period.
For each of the named executive officers, the terms of their payout periods
and their bonus percentages under the change in control severance plan are as
follows:
Name Payout Period Bonus %
---- ------------- -------
George Boyadjieff...................................... 3 years 60%
John F. Lauletta....................................... 3 years 60%
Michael W. Sutherlin................................... 3 years 60%
Joseph C. Winkler...................................... 2 years 50%
James F. Maroney, III.................................. 18 months 40%
The Executive Agreement with Mr. Sutherlin also provides for a retention
bonus in the amount of $600,000, payable to Mr. Sutherlin if he does not
exercise his right to terminate his employment for good reason for a period of
12 months following the Merger. If after Mr. Sutherlin receives his retention
bonus, he terminates his employment for good reason within the two-year period
following the Merger, his retention bonus would be offset against his
severance pay and bonus.
In addition to the benefits set forth above, upon any transaction that
constitutes a change in control, all of the unvested stock options and
restricted stock awards held by a participant in the plans become immediately
vested, except that the Executive Agreements with the Varco employee-
participants exclude the Merger as a change in control for purposes of the
vesting of stock options.
Additional Benefits. Under both the standard and change in control
severance plans, a participant is entitled to receive upon a qualifying
termination, full medical, dental and automobile benefits throughout the pay-
out period and outplacement services of up to 15% of base salary.
The Merger. The Merger constituted a change in control with respect to both
the Company and Varco, and the benefits outlined above for the change in
control severance plan are currently available to a participant whose
13
employment is terminated other than for cause or who terminates his employment
for good reason within two years following the Merger. As a result of the
Merger, unvested options and restricted stock units became vested for the
following named executive officers as follows: John F. Lauletta, 352,344
options and 65,329 restricted stock units; Joseph C. Winkler, 163,856 options
and 47,920 restricted stock units; and James F. Maroney, III, 76,124 options
and 21,084 restricted stock units.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Company's board of directors is pleased
to present its annual report which is intended to update stockholders on the
development of the Company's executive compensation program. This report
summarizes the responsibilities of the Compensation Committee, the
compensation policy and objectives that guide the development and
administration of the executive compensation program, each component of the
program, and the basis on which the compensation for the chief executive
officer, corporate officers and other key executives was determined for the
calendar year ended December 31, 2000.
During the 2000 fiscal year up to August 10, 2000, the members of the
Compensation Committee were Eric L. Mattson (Chairman), L.E. Simmons and
Jeffery A. Smisek. The Compensation Committee's responsibilities are to
oversee the development and administration of the total compensation program
for corporate officers and key executives, and administer the executive
incentive and stock plans. In lieu of holding a meeting during the fiscal year
up to August 10, 2000, the Compensation Committee acted by unanimous written
consent. In June 1997, the Compensation Committee retained J.E. Stone &
Associates, an executive compensation and benefits consulting firm, to
undertake a comprehensive review and restructuring of the executive
compensation program following the merger of the Company and D.O.S., Ltd.
Throughout 1997 and 1998, the Compensation Committee implemented the initial
recommendations made by HCC Employee Benefits (formerly J.E. Stone &
Associates). In January 1999, HCC presented to the Compensation Committee a
report, which included compensation studies from various executive
compensation consulting firms, and made further recommendations concerning
refining the compensation packages awarded to the Company's executives and
management, particularly in light of the retrenchment in the oil industry. The
Compensation Committee implemented additional recommendations of HCC in 1999.
In June 2000, following the Tuboscope/Varco merger and based on a report
prepared by HCC Employee Benefits, the Compensation Committee approved salary
increases for members of the Tuboscope senior management team, who had not
received merit increases in salary since July 1998.
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. The Compensation Committee reviews and determines
the compensation of the executive officers of the Company based on a
compensation program that reflects the following themes:
. A compensation program that stresses the Company's annual financial
performance and increase in value.
. A compensation program that strengthens the relationship between pay and
performance by providing variable, at-risk compensation based on
predetermined objective performance measures.
. A compensation program that will attract, motivate and retain high
quality employees who will enable the Company to achieve its strategic
and financial performance goals.
. An annual incentive plan that supports a performance-oriented
environment with superior performance resulting in total annual
compensation above competitive levels.
. A long-term incentive plan that is designed to require executive
officers and certain senior management to own significant portions of
the Company's stock and reward executive officers for the long-term
strategic management of the Company and the enhancement of stockholder
value.
14
Section 162(m) of the Internal Revenue Code of 1986, as amended, currently
imposes a $1 million limitation on the deductibility of certain compensation
paid to the Company's five highest paid executives. Excluded from the
limitation is compensation that is "performance based." For compensation to be
performance based, it must meet certain criteria, including being based on
predetermined objective standards approved by stockholders. The Compensation
Committee intends to design the Company's compensation to conform to
Section 162(m) of the Code 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." Although the
Compensation Committee takes the requirements of Section 162(m) into account
in designing executive compensation, there may be circumstances when it is
appropriate to pay compensation to the Company's five highest paid executives
that does not qualify as "performance based compensation" and thus is not
deductible by the Company for federal income tax purposes. Any cash
compensation payable under the Company's Annual Incentive Compensation Plan or
the Value Plan currently does not qualify as "performance based compensation"
as defined by Section 162(m) of the Code. The Company's Amended and Restated
1996 Equity Participation Plan includes provisions establishing the criteria
by which awards, including cash bonuses, may be paid to qualify such payments
as "performance-based" compensation as defined by Section 162(m) of the
Internal Revenue Code.
Executive Compensation Components
On an annual basis the Compensation Committee, in conjunction with
executive management, assesses the effectiveness of the overall program and
compares the compensation levels of its executives and the performance of the
Company to the compensation received by executives and the performance of
similar companies. For 2000, using a report proposed by an executive
compensation consulting firm, the primary market comparisons were made to a
broad group of oilfield manufacturing and service companies, adjusted for size
and job responsibilities. Data sources include industry survey groups,
national survey databases, proxy disclosures and general trend data, which are
updated annually.
The following is a discussion of the principal components of the executive
compensation program for fiscal 2000, each of which is intended to serve the
Company's overall compensation philosophy.
Base Salary. The base salary program targets the median of the primary
comparison group. Each executive's salary is reviewed individually on an
annual basis. Salary adjustments are based on the individual's experience and
background, performance during the prior year, the general movement of
salaries in the marketplace, and the Company's financial position. Due to
these factors, an executive's base salary may be above or below the primary
comparison group median at any point in time. Overall, the base salaries of
the corporate officers and key executives were established in 2000 on the
basis of the 55th percentile of the primary comparison group.
Performance Incentive Compensation. The Compensation Committee administers
management incentive plans for executive officers and senior operations, sales
and staff managers. The goal of the management incentive plans is to reward
participants in proportion to the performance of the Company and/or the
business unit/region for which they have a direct impact. Each of the plans
rewards participants according to predetermined objective performance
standards.
. Annual Incentive Compensation Plan. The Company's Annual Incentive
Compensation Plan (which was adopted by the Compensation Committee in
1997) rewards eligible employees for achievement of objective measurable
financial performance of the Company as a whole, and, in certain
circumstances, on a business unit or regional or divisional basis. The
Annual Incentive Compensation Plan is available to executive officers
and senior management team members. The level of award is a variable of
the targeted performance of the Company or the business or regional unit
compared to the actual performance of the Company or the business or
regional unit. The performance measurements for all participants in 2000
were the Company's EBITDA (earnings before interest, taxes, depreciation
and amortization) and the Company's earnings before taxes. The resulting
performance incentive award is a percentage of the participant's base
salary, depending on the level of the employee and how close to target
the Company, unit or division performed. For the fiscal year ended
December 31, 2000, the
15
Company overachieved its corporate EBITDA performance target and bonuses
were paid to the participants of the plan.
. Intermediate Term Value Plan for Senior Management. The Company's Value
Plan (adopted in 1997) is an incentive award program based on the
intermediate term performance of the Company. This program is designed
to encourage and reward sustained growth of profits over the
intermediate term that are reflected in stockholder returns. Members of
the senior management team (currently totaling 10 members) are eligible
for awards under the Value Plan, with an opportunity to earn up to 1.25
times base salary at the beginning of the performance period. The
initial performance period commenced January 1, 1997 and ended on
December 31, 1999, and new three-year performance periods commences each
January 1 thereafter. The amount of the performance award is determined
at the end of the three year performance period based on the Company's
actual three year cumulative earnings per share compared to targeted
cumulative earnings per share and the Company's total stockholder return
ranking as compared to the peer companies' stockholder return during the
performance period. The initial peer group of the companies used for
comparison of stockholder return includes five comparable oil service
companies of similar size. No pay outs have been made under this plan to
date.
Long-Term Incentive Compensation. The primary purpose of the Company's long-
term incentive compensation is to encourage and facilitate personal stock
ownership by the executive officers and thus strengthen their personal
commitments to the Company and provide a longer-term perspective in their
managerial responsibilities. This component of an executive officer's
compensation directly links the officer's interests with those of the Company's
other stockholders. In addition, long-term incentives encourage management to
focus on the long-term development and prosperity of the Company in addition to
annual operating profits. The Company's primary forms of long-term incentive
compensation are stock options and the Stock Ownership Program.
. Stock Option Awards. The goal of the stock option program is to
provide a compensation program that is competitive within the
industry while directly linking a significant portion of the
executive's compensation to the enhancement of stockholder value. The
ultimate value of any stock option is based solely on the increase in
value of the shares over the grant price. Accordingly, stock options
have value only if the stock price appreciates from the date of
grant. This at-risk component of compensation focuses executives on
the creation of stockholder value over the long-term and encourages
equity ownership in the Company. The Company grants stock options to
its key executives based on competitive multiples of the optionee's
base salary. Senior executives typically receive a higher multiple
and, as a result, have a greater portion of their total compensation
linked to increases in stockholder value. In determining the
appropriate grant multiples, the Company compares itself to publicly
traded oilfield manufacturing and service companies of comparable
size and targets awards between the market median and 75th
percentile. Senior executives and managers are eligible to receive
stock options annually with other key managers becoming eligible on a
discretionary basis. Eligibility for an award does not ensure receipt
of a stock option award. Options are granted at the then current
market price and generally vest over a three year period with one-
third of the options granted vesting each year.
In January 1999, the Compensation Committee discussed that the
retrenchment in the oil industry and the low price of crude oil have
led to less than expected financial performance by the Company and a
significant decrease in value of long-term incentives for the senior
management team. Due to the Company's failure to meet targeted
financial performance, no member of the senior management team earned
an annual bonus for 1999 and, in addition, the Compensation Committee
decided against giving any salary increases. In order to reward
individual performance of the members of the senior management team
and to provide further incentives to enhance stockholder value, on
January 27, 1999, the Compensation Committee granted stock options to
each member of the senior management team at three times the normal
annual grant level for 1999. No options were granted by the Company
to any member of the senior management team
16
in 2000. The 1999 stock options' vesting schedule is that which would
apply as if the grants were made over a three year period (i.e.,
1999, 2000 and 2001). All outstanding stock options held by certain
executive officers of the Company vested upon completion of the
Tuboscope/Varco merger.
. Officer Stock Ownership Requirements. In 1997, the Compensation
Committee established a Stock Ownership Program that requires members
of the Company's senior management team to achieve and maintain
specific levels of ownership of the Company's common stock. The
Compensation Committee adopted minimum ownership goals equal to 300%
of base salary for the Chief Executive Officer, 200% of base salary
for the Executive Vice President, and 100% of base salary for all
other members of the senior management team. Currently all 10 members
of the senior management team participate in the program.
Participants were given the option of choosing between achieving the
minimum ownership goal or a higher target ownership goal with a
matching award by the Company. The targeted goals were 500%, 400% and
300% of base salary for the Chief Executive Officer, Executive Vice
President and other participants, respectively. Those participants
who chose the higher target ownership goal received a matching award
from the Company of restricted stock units in an amount equal to the
shares of the Company's common stock owned by such participant as of
such date, but not to exceed 100% of the target ownership goal. As a
result, the Company issued an aggregate of 327,891 restricted stock
units on June 30, 1997 and 14,436 restricted stock units on January
2, 1998 under the Company's 1996 Equity Participation Plan. All
outstanding restricted stock units held by certain executive officers
of the Company vested upon completion of the Tuboscope/Varco merger.
Compensation of the Chief Executive Officer. At the time the Compensation
Committee initially determined executive compensation for the year 2000, John
Lauletta was Chief Executive Officer, and his base salary was continued at his
1999 level of $370,000. At the time of the Tuboscope/Varco merger, Mr.
Lauletta became Chief Operating Officer of the Company and, based on the
factors discussed above under "Base Salary," including a review of market pay
trends performed in June 2000 by HCC Employee Benefits, Mr. Lauletta's base
salary was increased to $405,200 in July 2000, which represented his first
salary increase since 1998. At the time of the Tuboscope/Varco merger, George
Boyadjieff became the Chief Executive Officer of the Company, and, based upon
the same factors, it was determined to continue Mr. Boyadjieff at his pre-
merger base salary of $580,000. Based on the Company's overachieving its
fiscal 2000 financial performance target, Mr. Lauletta received an Annual
Incentive Compensation Plan award of $405,200. Based on comparable incentive
compensation arrangements implemented by Varco prior to the merger, Mr.
Boyadjieff received an incentive award of $359,600, one-third of which was
paid in common stock. During 2000, Mr. Lauletta did not receive a grant of
stock options due to the grant of three-times his normal option grant level
awarded in 1999. No stock options were granted by the Company to Mr.
Boyadjieff in fiscal 2000 following the Tuboscope/Varco merger.
COMPENSATION COMMITTEE
Eric L. Mattson
L.E. Simmons
Jeffery A. Smisek
Dated: April 12, 2001
17
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are James D. Woods, George S.
Dotson and Jeffery A. Smisek, who were elected on August 10, 2000. From
January 1 until August 10, 2000, Eric L. Mattson, L.E. Simmons and Mr. Smisek
were the members of the Compensation Committee. None of such persons is an
officer or employee of the Company or any of its subsidiaries.
During 2000, no executive officer of the Company served as a director or
member of the Compensation Committee (or other committee serving an equivalent
function) of any other entity, one of whose executive officers served as a
director or member of the Compensation Committee of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. These persons are required by regulations
promulgated by the Securities and Exchange Commission to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of copies of such
reports received by it or written representations from certain reporting
persons that no other reports were required, during the year ended December
31, 2000, all of the Company's directors and executive officers and persons
who own more than 10% of the outstanding shares of the Company's common stock
have complied with the reporting requirements of Section 16(a), except that
(1) each of Mr. Kertson and FGSI Partners, L.P. was late filing an initial
statement of beneficial ownership; (2) L.E. Simmons was late filing three
reports reporting six, eight and seven transactions in 1998, 1999, and 2000,
respectively; (3) each of Messrs. Lauletta, Maroney, Nibling, and Swanson was
late filing one report reporting one transaction, and (4) each of L.E. Simmons
& Associates, Incorporated, SCF Partners, L.P. and FGSI Partners, L.P.,
affiliated companies of Mr. Simmons, was late filing one report reporting one
transaction in 1997 that had previously been reported by Mr. Simmons.
18
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in the
cumulative total stockholder return on the Company's common stock against the
cumulative total return of a peer index of 75 oil service companies prepared
by Simmons & Company International, an independent third party, known as the
"SCI Upstream Index," and the Standard & Poor's 500 Stock Index, each for the
period from December 31, 1995, to December 31, 2000.
The graph assumes $100 invested in the Company's common stock, the SCI
Upstream Index and the Standard & Poor's 500 Stock Index on December 31, 1995
and the reinvestment of all dividends.
[PERFORMANCE GRAPH APPEARS HERE]
SCI COMPANY
UPSTREAM COMMON
Measurement Period S&P 500 INDEX STOCK
- --------------------- ------- -------- -------
Measurement Pt-12/31/95 $100 $100 $100
06/30/1996 110 124 196
12/31/1996 123 159 273
06/30/1997 148 199 350
12/31/1997 163 240 424
06/30/1998 192 188 348
12/31/1998 210 99 143
06/30/1999 236 135 241
12/31/1999 254 139 279
06/30/2000 253 211 410
12/31/2000 231 237 383
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, the Company sold goods and services to Oil States
International, Inc. and Sooner, Inc., which became a wholly-owned subsidiary
of Oil States in February 2001, for the aggregate amount of approximately $1.1
million and purchased goods and services from Oil States and Sooner in the
aggregate amount of approximately $0.5 million. SCF III, L.P. beneficially
owns approximately 45.2% of the outstanding shares of Oil States and, as of
the record date, beneficially owned approximately 5.3% of the shares of the
Company. SCF-IV, L.P. beneficially owns approximately 17.9% of the outstanding
shares of Oil States. L.E. Simmons, a director of the Company, may be deemed
to beneficially own the securities held by SCF-III, L.P. and SCF-IV, L.P. and
is the Chairman of the Board of Oil States. Douglas E. Swanson, who is also a
director of the Company, is President, Chief Executive Officer and a director
of Oil States and owns less than 1% of the outstanding shares of Oil States.
19
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Ernst & Young LLP has been the Company's independent auditors since 1988,
and the board of directors desires to continue to engage the services of this
firm for the fiscal year ending December 31, 2001. Accordingly, the board of
directors, upon the recommendation of the Audit and Compliance Committee, has
reappointed Ernst & Young LLP to audit the Company's and its subsidiaries'
financial statements for fiscal 2001 and to report on these financial
statements. The Company's stockholders are being asked to vote upon
ratification of this selection. If the Company's stockholders do not ratify
the selection, the board of directors and the Audit and Compliance Committee
will reconsider the selection.
Representatives of Ernst & Young LLP are expected to be present at the
annual meeting and will have the opportunity to make statements if they so
desire and to respond to appropriate questions from the Company's
stockholders.
Audit Fees
Audit services performed by Ernst & Young LLP during the Company's 2000
fiscal year consisted of the examination of the Company's financial statements
and services related to filings with the Securities and Exchange Commission.
Audit fees billed to the Company by Ernst & Young LLP for the audit of the
Company's annual financial statements for fiscal 2000 included in the
Company's Annual Report on Form 10-K totaled $475,000.
Financial Information Systems Design and Implementation Fees
The Company did not engage Ernst & Young LLP to provide advice to the
Company regarding financial information systems design and implementation
during fiscal 2000.
All Other Fees
All other fees billed to the Company by Ernst & Young LLP for services
rendered in fiscal 2000 totaled $786,000 and were primarily for statutory
audits of subsidiaries required by local law, audit related fees incurred in
connection with mergers, and tax services fees for tax compliance and tax
consulting.
The Audit and Compliance Committee has reviewed the non-audit services
provided by Ernst & Young LLP and determined that the provision of these
services during fiscal 2000 is compatible with maintaining Ernst & Young LLP's
independence.
Vote Required for Ratification of the Selection of the Independent Auditors
The affirmative vote of a majority of the shares represented and entitled
to vote at the annual meeting is required for ratification of the selection of
Ernst & Young LLP as the Company's independent auditors for fiscal 2001.
Broker non-votes as to the ratification of the selection of Ernst & Young LLP
as the Company's independent auditors will not be treated as shares entitled
to vote with respect to ratification and, thus, will not affect the vote on
ratification. Abstentions, however, will have the same effect as votes against
the proposal. Unless instructed to the contrary, the shares represented by the
proxies will be voted FOR ratification of the selection of Ernst & Young LLP
as the Company's independent auditors.
The board of directors recommends a vote FOR ratification of the selection
of Ernst & Young LLP as the Company's independent auditors for fiscal 2001.
20
REPORT OF AUDIT AND COMPLIANCE COMMITTEE
The Audit and Compliance Committee is composed of independent directors and
operates under a written charter adopted by the board of directors. The
current members of the Committee are Andre R. Horn (Chairman), Eric L. Mattson
and L.E. Simmons.
Management has the primary responsibility for the Company's financial
statements and the reporting process, including the system of internal
control. Ernst & Young, LLP, the independent accountants for the Company, are
responsible for performing an independent audit of the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and to issue a report thereon. The Committee's responsibility is to monitor
these processes.
In this context, the Committee has met and held discussions with management
and the independent accountants. Management represented to the Committee that
the Company's consolidated financial statements were prepared in accordance
with generally accepted accounting principles, and the Committee has reviewed
and discussed the consolidated financial statements with management and the
independent accountants. The Committee's discussions with the independent
accountants included the matters required to be discussed by Statement on
Auditing Standards No. 61, "Communication with Audit Committees."
The independent accountants provided to the Committee the written
disclosures and letter required by Independence Standards Board Standard No.
1, "Independence Discussions with Audit Committees," and the Committee
discussed with the independent accountants the accountants' independence from
management and the Company.
The Committee discussed with the Company's internal auditors and the
independent accountants the overall scope and plans for their audits. The
Committee meet with the internal auditors and independent accounts, with and
without management present, and discussed the results of their examinations,
their evaluations of the Company's internal controls, and the overall quality
of the Company's financial reporting. The Committee held three meetings during
fiscal 2000.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the board of directors that the audited financial statements be
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2000, for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Andre R. Horn
Eric L. Mattson
L.E. Simmons
Dated: April 12, 2001
21
STOCKHOLDER PROPOSALS
It is currently contemplated that the Company's 2002 Annual Meeting of
Stockholders will be held on or about May 16, 2002. In the event that a
stockholder desires to have a proposal considered for presentation at the 2002
Annual Meeting of Stockholders, and inclusion in the proxy statement and form
of proxy used in connection with such meeting, the proposal must be forwarded
in writing to the Secretary of the Company so that it is received no later
than December 13, 2001. Any such proposal must comply with the requirements of
Rule 14a-8 promulgated under the Exchange Act.
If a stockholder, rather than including a proposal in the Company's proxy
statement as discussed above, commences his or her own proxy solicitation for
the 2002 Annual Meeting of Stockholders or seeks to nominate a candidate for
election or propose business for consideration at such meeting, the Company
must receive notice of such proposal on or before March 3, 2002. If the notice
is not received by March 3, 2002 it will be considered untimely under Rule
14a-4(c)(1) of the Commission's proxy rules, and the Company will have
discretionary voting authority under proxies solicited for the 2002 Annual
Meeting of Stockholders with respect to such proposal, if presented at the
meeting.
Proposals and notices should be directed to the attention of the Secretary,
Varco International, Inc., 2835 Holmes Road, Houston, Texas 77051.
OTHER MATTERS
As of the date of this proxy statement, 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 of the
meeting, it is intended that the proxies will be voted on any such matters in
accordance with the best judgment and in the discretion of the proxy holders.
By Order of the Board of Directors,
/s/ James F. Marony, III
James F. Maroney, III
Vice President, Secretary and
General Counsel
April 12, 2001
22
Appendix A
VARCO INTERNATIONAL, INC.
Charter of the Audit Committee of the Board of Directors
I. Audit Committee Purpose
The Audit Committee is appointed by the Board of Directors to assist the
Board in fulfilling its oversight responsibilities.
II. Audit Committee Organization
The Audit Committee shall be comprised of three or more independent non-
employee directors; Members will be appointed annually by the Board, which
will also designate the Chairman of the Committee. All members of the
Committee shall have a basic understanding of finance and accounting and shall
be able to read and understand financial statements, and one member shall have
accounting or related financial management expertise.
The Committee shall meet at least three times annually, and may hold such
meetings as it deems appropriate. The Chief Financial Officer shall prepare an
agenda in advance of each meeting and have it approved by the Chairman.
At each regular meeting the Committee shall meet as a group and then
separately, with the Independent Accountants, the Chief Financial Officer and
the Senior Internal Auditor to discuss current matters relevant to the charter
of the Committee.
III. Audit Committee Responsibilities and Duties
A. Review Procedures
The Committee responsibilities shall be to oversee and review the Company's
reporting and accounting practices and to consult with the Company's
independent accountants, internal auditors and management with respect
thereto. In particular the Committee shall:
1. Review the Company's annual financial statements and the results of
the annual audit prior to filing or distribution. This review should
include discussing with management and independent accountant's significant
issues or changes regarding accounting principles, practices, and judgments
and the independent accountant's evaluation of the quality of the Company's
accounting principles.
2. Review the adequacy and effectiveness of the Company's system of
internal accounting controls, and consult with the independent accountants
regarding their evaluation of weaknesses in such controls and
recommendations for improvements and the status of prior recommendations
and any management letters issued by them. Discuss significant financial
risks and the steps management has taken to monitor, control and report
each exposure.
3. Review, or designate the Chairman of the Committee to review, with
financial management and the independent accountants the Company's
quarterly financial results prior to the filing of the quarterly financial
statements, any significant matters identified as a result of the
independent accountants interim procedures and any item required to be
communicated by them in accordance with SAS 61.
4. Review the independent accountants' audit plan and engagement letter.
Discuss the scope, procedures and timing of the audit, reliance upon
management, and internal audit. Review the scope of any other services to
be performed by the independent accountants.
5. Review the independence and performance of the independent
accountants and discuss with the independent accountants all relationships
they have with the Company that could impair their independence.
A-1
6. Approve the fees and other significant compensation to be paid to the
independent accountants.
7. Recommend to the Board the retention or replacement of the
independent accountants, which firm shall be ultimately accountable to the
Board of Directors through the Committee.
8. Review the list of reports prepared by the internal audit department.
Discuss significant findings, management response and follow-up.
9. Review the appointment, performance and replacement of the senior
internal audit executive. Review the budget, plan, changes in plan,
activities, and qualifications of the internal audit department.
10. Review with the Company's counsel and management material legal
matters, including legal proceedings, compliance with laws and regulations,
inquiries received from regulators and government agencies, other material
contingent liabilities, as well as review a summary of directors and
officers related party transactions and potential conflicts of interest.
11. Review with the Company's counsel the Company's code of ethical
conduct and its enforcement by management.
12. Review periodically the adequacy and succession planning of the
Company's accounting and financial personnel.
13. Review and consider any other matter relative to the audit of the
Company's accounts and preparation of its financial statements and reports
that the Committee, in its discretion, deems appropriate.
14. Review the adequacy of this charter on an annual basis. Submit the
Charter to the Board of Directors for approval and publish it in accordance
with SEC regulations.
B. Other
1. The Committee may rely on the findings and opinions of the
independent accountants with respect of the above and any other matters
relating to the preparation, completeness and accuracy of the financial
statements.
2. The independent accountants, the Chief Financial Officer, the
Company's Counsel, and the Senior Internal Auditor shall have free access
to the Audit Committee or its Chairman without first clearing with any
other officer of the Company.
A-2
Please mark [X]
your votes as
indicated in
this sample
FOR AGAINST ABSTAIN
1. Elect members of the FOR ALL nominees WITHHOLD 2. To ratify the selection of Ernst & [ ] [ ] [ ]
Varco board of listed below (except AUTHORITY to Young LLP as Varco's independent
directors as marked to the vote for all auditors for the fiscal year ending
contrary) nominees listed below December 31, 2001.
[ ] [ ] 3. In the discretion of the persons acting as proxies, on such
other matters as may properly come before the Annual Meeting
or any adjustment(s) thereof.
Nominees: George Boyadjieff, George S. Dotson, Andre R. Horn, I plan to attend the meeting [ ]
Richard A. Kertson, John F. Lauletta, Eric L. Mattson,
L. E. Simmons, Jeffery A. Smisek, Douglas E. Swanson, Eugene R.
White, James D. Woods
Instruction: To withhold authority for any nominee, draw a line Please disregard if you have previously provided
through (or otherwise strike out) the nominee's name in the list your consent decision.
above.
By checking the box to the right, I consent to
future delivery of annual reports, proxy
statements, prospectuses and other materials [ ]
____ and shareholder communications electronically
| via the Internet at a webpage which will be
disclosed to me. I understand that the Company
may no longer distribute printed materials to
me from any future stockholder meeting until
such consent is revoked. I understand that I
may revoke my consent at any time by contacting
the Company's transfer agent, Mellon Investor
Services LLC, 85 Challenger Road, Ridgefield
Park, NJ 07660 and that costs normally associated
with electronic delivery, such as usage and
telephone chairman as well as any costs I may
incur in printing documents, will be my
responsibility.
Signature Signature Date
------------------------------------------- ------------------------------------------- ------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Your telephone or Internet vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
- --------------------------------------- ---------------------------------------- ---------------------------------------
Internet Telephone Mail
http://www.proxyvoting.com/VRC 1-800-840-1208
Use the Internet to vote your Use any touch-tone telephone to Mark, sign and date
proxy. Have your proxy card in vote your proxy. Have your proxy your proxy card
hand when you access the web OR card in hand when you call. You will OR and
site. You will be prompted to be prompted to enter your control return it in the
enter your control number, number, located in the box below, enclosed postage-paid
located in the box below, to and then follow the directions given. envelope.
create and submit an electronic
ballot.
- --------------------------------------- --------------------------------------- ---------------------------------------
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.
You can view the Annual Report and Proxy Statement
on the internet at:www.varco.com
http://www.varco.com
Varco International, Inc.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
VARCO INTERNATIONAL, INC. FOR THE 2001 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2001
The undersigned, revoking previous proxies relating to these shares, hereby
acknowledges receipt of the notice and the proxy statement relating to the 2001
Annual Meeting of Stockholders of Varco International, Inc., and hereby appoints
Joseph C. Winkler and James F. Maroney, III, and each of them, as its true and
lawful agents and proxies, each with the power to appoint his substitute, and
hereby authorizes either of them to act and to vote the shares the undersigned
is entitled to vote at the 2001 Annual Meeting of Stockholders of Varco
International, Inc.to be held on May 17, 2001, and at any adjournments or
postponements thereof, as indicated, upon all matters referred to on this proxy
card and described in the proxy statement for the Annual Meeting, and, in their
discretion, upon any other matters which may properly come before the meeting.
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
and 2.
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FOLD AND DETACH HERE