-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WJcEMX76b9uHZGrRSK5K+RCyiaUDivvaIZSEmMLAVg8+f2pSUs3Lg0NFH14UnGnZ KRzaIcOSzabcxtEhbH9ZtA== 0000899243-97-002321.txt : 19971205 0000899243-97-002321.hdr.sgml : 19971205 ACCESSION NUMBER: 0000899243-97-002321 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971204 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRIL-QUIP INC CENTRAL INDEX KEY: 0001042893 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 742162088 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13439 FILM NUMBER: 97732573 BUSINESS ADDRESS: STREET 1: 13550 HEMPSTEAD HIGHWAY CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7139397711 MAIL ADDRESS: STREET 1: 180 EAST FIFTH STREET CITY: HOUSTON STATE: TX ZIP: 77040 10-Q 1 FORM 10-Q ________________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q ________________________________________________________________________________ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-13439 DRIL-QUIP, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2162088 - ----------------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 13550 HEMPSTEAD HIGHWAY HOUSTON, TEXAS 77040 ________________________________________________________________________________ (Address of principal executive offices) (Zip Code) (713) 939-7711 ________________________________________________________________________________ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO X* -- -- * The registrant became subject to the reporting requirements of Section 13 on October 21, 1997. As of December 1, 1997, the number of shares outstanding of the registrant's common stock, par value $.01 per share, was 17,245,000. PART I -- FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS DRIL-QUIP, INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31, September 30, ------ 1996 1997 ----------- ------------ (In Thousands) Current assets: Cash.............................................. $ 1,361 $ 560 Trade receivables................................. 25,514 30,570 Inventories....................................... 51,571 51,905 Deferred taxes.................................... 3,739 3,997 Prepaids and other current assets................. 789 1,086 -------- -------- Total current assets......................... 82,974 88,118 Property, plant and equipment, net.................. 31,384 31,808 Other assets........................................ 419 447 -------- -------- Total assets................................. $114,777 $120,373 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable.................................. $ 14,965 $ 11,435 Current maturities of long-term debt.............. 3,537 3,484 Accrued income taxes.............................. 2,712 914 Customer prepayments.............................. 7,215 9,604 Accrued compensation.............................. 1,887 2,208 Other accrued liabilities......................... 3,134 3,710 -------- -------- Total current liabilities.................... 33,450 31,355 Long-term debt...................................... 28,999 30,655 Deferred taxes...................................... 1,446 1,127 -------- -------- Total liabilities............................ $ 63,895 $ 63,137 Stockholders' equity: Preferred stock, 10,000,000 shares authorized at $0.01 par value (none issued)................ -- -- Common stock: 50,000,000 shares authorized at $0.01 par value (14,370,000 shares issued)...................... 144 144 Additional paid-in capital........................ -- -- Retained earnings................................. 49,652 58,285 Foreign currency translation adjustment........... 1,086 (1,193) -------- -------- Total stockholders' equity................... 50,882 57,236 -------- -------- Total liabilities and stockholders' equity... $114,777 $120,373 ======== ======== The accompanying notes are an integral part of these statements. 2 DRIL-QUIP INC. CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended September 30, September 30, ------------- ------------- 1996 1997 1996 1997 ---- ---- ---- ---- (In Thousands Except Share Amounts) Revenues $27,855 $38,004 $83,201 $106,673 Cost and expenses: Cost of sales 18,666 25,468 56,267 73,193 Selling, general and administrative 3,783 4,125 11,037 11,964 Engineering and product development 1,836 2,451 5,081 6,560 ------- ------- ------- -------- 24,285 32,044 72,385 91,717 ------- ------- ------- -------- Operating income 3,570 5,960 10,816 14,956 Interest expense 652 747 1,953 2,147 ------- ------- ------- -------- Income before income taxes 2,918 5,213 8,863 12,809 Income tax provision 925 1,693 2,810 4,176 ------- ------- ------- -------- Net income $ 1,993 $ 3,520 $ 6,053 $ 8,633 ======= ======= ======= ======== Earnings per share $ 0.14 $ 0.24 $ 0.42 $ 0.60 Weighted average shares 14,370,000 14,370,000 14,370,000 14,370,000
The accompanying notes are an integral part of these statements 3 DRIL-QUIP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, ----------------- 1996 1997 ------ ------ (In Thousands) OPERATING ACTIVITIES Net income................................................ $ 6,053 $ 8,633 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 3,538 3,908 Loss (gain) on sale of equipment...................... (6) (103) Deferred income taxes................................. (991) (601) Changes in operating assets and liabilities: Trade receivables................................... (131) (5,950) Inventories......................................... (5,122) (1,846) Prepaids and other assets........................... -- (360) Trade accounts payable and accrued expenses......... (952) (1,118) ------- ------- Net cash provided by operating activities................. 2,389 2,563 INVESTING ACTIVITIES Purchase of property, plant, and equipment................ (5,364) (5,210) Proceeds from sale of equipment........................... 100 192 ------- ------- Net cash used in investing activities..................... (5,264) (5,018) FINANCING ACTIVITIES Proceeds from revolving line of credit and long-term borrowings.............................................. 2,903 4,373 Principal payments on long-term debt...................... (2,279) (2,669) Dividends paid............................................ -- -- ------- ------- Net cash provided by (used in) financing activities....... 624 1,704 Effect of exchange rate changes on cash activities........ (182) (50) ------- ------- Increase (decrease) in cash............................... (2,433) (801) Cash at beginning of period............................... 2,579 1,361 ------- ------- Cash at end of period..................................... $ 146 $ 560 ======= ======= The accompanying notes are an integral part of these statements. 4 DRIL-QUIP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION Dril-Quip, Inc., a Delaware corporation (the "Company" or "Dril-Quip"), manufactures highly engineered offshore drilling and production equipment which is well suited for use in deepwater, harsh environment and severe service applications. The Company's principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, wellhead connectors and diverters for use by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. Dril-Quip also provides installation and reconditioning services and rents running tools for use in connection with the installation and retrieval of its products. The Company has three subsidiaries that manufacture and market the Company's products abroad. Dril-Quip (Europe) Limited is located in Aberdeen, Scotland, with branches in Norway, Holland, and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ Holdings PTY Ltd. is located in Perth, Australia. The consolidated financial statements included herein have been prepared by Dril-Quip and are unaudited, except for the balance sheet at December 31, 1996, which has been prepared from the audited financial statements at that date. In the opinion of management, the unaudited consolidated interim financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial position as of September 30, 1997, the results of operations for each of the three and nine- month periods ended September 30, 1997 and 1996 and the cash flows for each of the nine-month periods ended September 30, 1997 and 1996. Although management believes the unaudited interim related disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and the cash flows for the nine-month period ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company's Registration Statement on Form S-1 (Registration No. 333-33447). In October 1997, the Company completed its initial public offering of 5,750,000 shares of its common stock (the "Offering") at a public offering price of $24.00 per share. Of the 5,750,000 shares, 2,875,000 shares were sold by the Company and 2,875,000 shares were sold by certain selling stockholders of the Company. The Offering provided the Company with proceeds of approximately $63.4 million, net of expenses. Before the consummation of the Offering, the Company effected a recapitalization wherein each outstanding share of its non-voting common stock was converted into 0.95 shares of its voting common stock. Thereafter, each outstanding share of its voting common stock was converted into 15.12472 shares of voting common stock, resulting in 14,370,000 outstanding shares. Dril-Quip, Inc., a Texas corporation, was then merged (the "Merger") into Dril-Quip, Inc., a Delaware corporation, resulting in the Company's reincorporation from Texas to Delaware. The Company has authorized common stock of 50 million shares, par value $0.01 per share, and preferred stock of 10 million shares, par value $0.01 per share. In addition, prior to the consummation of the Offering, the Company adopted the Dril-Quip, Inc. 1997 Incentive Plan (the "Incentive Plan"). The Company has reserved 1,700,000 shares of Common Stock for use in connection with the Incentive Plan. Persons eligible for awards under the Incentive Plan are employees holding positions of responsibility with the Company or any subsidiaries and whose performance can have a significant effect on the success of the Company. On the date the Offering closed, Options under the Incentive Plan were granted to 5 certain employees of the Company to purchase a total of 419,250 shares of Common Stock at an exercise price per share equal to the initial public offering price per share. 2. INVENTORIES Inventories consist of the following: (Unaudited) December 31, September 30, 1996 1997 ---- ---- (In Thousands) Raw materials and supplies $15,164 $13,527 Work in progress 13,356 14,762 Finished goods and purchased supplies 23,051 23,616 ------- ------- $51,571 $51,905 ======= ======= 3. USE OF PROCEEDS The Company intends to use the proceeds from the Offering for a three-year capital expansion program to increase manufacturing capacity, improve and expand facilities and manufacture additional running tools for rental. The Company plans to expand its manufacturing capacity by approximately 90% during the three-year period 1997 through 1999, approximately two-thirds of which is expected to be completed by the end of 1998. Pending application of the proceeds for these purposes, the Company used approximately $30 million to repay its bank indebtedness in full during late October and November 1997. The balance of the proceeds will be used for working capital and excess cash is being invested in short-term investment grade securities. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected certain aspects of the Company's financial position and results of operations during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the annual consolidated financial statements included in the Company's Registration Statement on Form S-1, as amended (Registration No. 333-33447) (the "Registration Statement"), relating to the Company's initial public offering (the "Offering") and the accompanying unaudited consolidated financial statements. OVERVIEW Dril-Quip manufactures highly engineered offshore drilling and production equipment which is well suited for use in deepwater, harsh environment and severe service applications. The Company designs and manufactures subsea equipment, surface equipment and offshore rig equipment for use by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. The Company's principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, wellhead connectors and diverters. Dril-Quip also provides installation and reconditioning services and rents running tools for use in connection with the installation and retrieval of its products. The market for offshore drilling and production equipment and services is fundamentally driven by the exploration, development and production spending of oil and gas companies, particularly with respect to offshore activities worldwide. The Company has experienced increased demand for its products due to the increased drilling and production activity in offshore areas throughout the world during the last several years, particularly in deeper waters. Revenues. Dril-Quip's revenues are generated by its two operating groups: the Product Group and the Service Group. The Product Group manufactures offshore drilling and production equipment, and the Service Group provides installation and reconditioning services as well as rental running tools for installation and retrieval of its products. In 1996, the Company derived 82.1% of its revenues from the sale of its products and 17.9% of its revenues from services. Revenues from the Service Group generally correlate to revenues from product sales, because increased product sales generate increased revenues from installation services and rental running tools. Revenues have increased over the last three years principally as a result of increased sales volumes of the Company's established products and services, the introduction of new products and product enhancements and price increases for the Company's products and services. These price increases have occurred due to an increase in demand and capacity constraints experienced by the Company and its competitors. Substantially all of Dril-Quip's sales are made on a purchase order basis. Purchase orders are subject to change and/or termination at the option of the customer. In case of a change or termination, the customer is required to pay the Company for work performed and other costs necessarily incurred as a result of the change or termination. For the first nine months of 1997, one project representing 8.4% of the Company's revenues was accounted for using percentage of completion accounting. The Company expects that this percentage may increase in the future. Revenues accounted for in this manner are generally recognized on the ratio of costs incurred to the total estimated costs. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage of completion are reflected in the period when such estimates are revised. Amounts received from customers in excess of revenues recognized are classified as a current liability. The Company historically has experienced some seasonality, with revenues and operating income slightly lower during the first and third quarters compared to the second and fourth quarters. The Company's revenues are affected by its customers' capital expenditure budgeting process, which generally results in lower revenues in the first quarter and higher revenues in the fourth 7 quarter. The increase in revenues recognized using percentage of completion accounting may result in less fluctuation in revenues recognized from quarter to quarter. Foreign sales represent a significant portion of the Company's business. In the three and nine months ended September 30, 1997, the Company generated approximately two-thirds of its revenues from foreign sales. In each period, approximately two-thirds of all products sold were manufactured in the United States. Cost of Sales. The principal elements of cost of sales are labor, raw materials and manufacturing overhead. Variable costs, such as labor, raw materials, supplies and energy, generally account for approximately two-thirds of the Company's cost of sales. The Company has experienced increased labor costs over the past few years due to the limited supply of skilled workers. Fixed costs, such as the fixed portion of manufacturing overhead, constitute the remainder of the Company's cost of sales. The Company continually seeks to improve its efficiency and cost position. Cost of sales as a percentage of revenues is also influenced by the product mix sold in any particular quarter and market conditions. The Company's costs related to its foreign operations do not significantly differ from its domestic costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, compensation expense, legal expenses and other related administrative functions. Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing, as well as application engineering related to customized products. Income Tax Provision. Dril-Quip's marginal tax rate has historically been lower than the statutory rate due to benefits from its foreign sales corporation. The Company expects that its marginal tax rate will rise slightly as its income increases. 8 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of revenues: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1996 1997 1996 1997 ---- ---- ---- ---- Revenues: Product Group.............................. 81.1% 85.8% 81.1% 85.7% Service Group.............................. 18.9% 14.2% 18.9% 14.3% ------ ------ ------ ------ Total................................... 100.0% 100.0% 100.0% 100.0% Cost of sales................................ 67.0% 67.0% 67.6% 68.6% Selling, general and administrative expenses. 13.6% 10.9% 13.3% 11.2% Engineering and product development expenses. 6.6% 6.4% 6.1% 6.2% ------ ------ ------ ------ Operating income............................. 12.8% 15.7% 13.0% 14.0% Interest expense............................. 2.3% 2.0% 2.3% 2.0% ------ ------ ------ ------ Income before income taxes................... 10.5% 13.7% 10.7% 12.0% Income tax provision......................... 3.3% 4.4% 3.4% 3.9% ------ ------ ------ ------ Net income................................... 7.2% 9.3% 7.3% 8.1% ====== ====== ====== ====== THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 Revenues. Revenues increased by $10.1 million, or 36%, to $38.0 million in the three months ended September 30, 1997 from $27.9 million in the three months ended September 30, 1996. This increase was mainly due to increased revenues of $4.1 million in the European area, increased domestic sales in the United States area of $2.6 million and increased sales of $1.6 million in the Asia-Pacific area. These increases were primarily due to strong market demand, along with increased manufacturing capacity, price increases and an increase in project related sales of new products. Cost of Sales. Cost of sales increased $6.8 million, or 36%, to $25.5 million for the three months ended September 30, 1997 from $18.7 million for the same period in 1996. As a percentage of revenues, cost of sales was 67% in 1996 and 1997. Selling, General and Administrative Expenses. In the three months ended September 30, 1997, selling, general and administrative expenses increased by $342,000, or 9%, to $4.1 million from $3.8 million in the 1996 period. The increase was due to an increased number of personnel to support higher sales volumes and increased labor costs. Selling, general and administrative expenses decreased as a percent of revenues from 14% to 11%. Engineering and Product Development Expenses. In the three months ended September 30, 1997, engineering and product development expenses increased by $615,000, or 33%, to $2.5 million from $1.8 million in the same period in 1996. The increase primarily reflects an increased number of personnel and, to a lesser extent, increased development testing related to new products. Interest Expense. Interest expense for the three months ended September 30, 1997 was approximately $747,000, an increase of $95,000 as compared to the corresponding period in the prior year. This increase was due to an increase in the Company's outstanding debt during the third quarter of 1997 as compared to the same period in 1996. Net Income. Net income increased by approximately $1.5 million, or 76%, from $2.0 million in the three months ended September 30, 1996 to $3.5 million for the same period in 1997 for the reasons set forth above. 9 NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues. Revenues increased by $23.5 million, or 28%, to $106.7 million in the nine months ended September 30, 1997 from $83.2 million in the nine months ended September 30, 1996. Domestic sales increases in the United States area accounted for $8.9 million, or approximately 38%, of the increase, while sales in the European area accounted for $8.5 million, or approximately 36%, of the increase. These increases were primarily due to strong market demand, along with increased manufacturing capacity, price increases and an increase in project related sales of new products. Cost of Sales. Cost of sales increased $16.9 million, or 30%, to $73.2 million for the nine months ended September 30, 1997 from $56.3 million for the same period in 1996. As a percentage of revenues, cost of sales increased from 68% in 1996 to 69% in 1997. This increase in cost of sales as a percentage of revenues was primarily due to sales of new products, which tend initially to have lower margins, and higher labor costs, which was partially offset by improved pricing. Selling, General and Administrative Expenses. In the first nine months of 1997, selling, general and administrative expenses increased by $927,000, or 8%, to $12.0 million from $11.0 million in the 1996 period. The increase was due to an increased number of personnel to support higher sales volumes and increased labor costs. Selling, general and administrative expenses decreased as a percent of revenues from 13 % to 11%. Engineering and Product Development Expenses. In the first nine months of 1997, engineering and product development expenses increased by $1.5 million, or 29%, to $6.6 million from $5.1 million in the same period in 1996. The increase primarily reflects an increased number of personnel and, to a lesser extent, increased development testing related to new products. Interest Expense. Interest expense for the nine months ended September 30, 1997 was approximately $2.1 million, an increase of $194,000 as compared to the corresponding period in the prior year. This increase was primarily due to an increase in the Company's outstanding debt during the nine months ended September 30, 1997 as compared to the same period in 1996. Net Income. Net income increased by approximately $2.6 million, or 43%, from $6.1 million in the first nine months in 1996 to $8.6 million for the same period in 1997 for the reasons set forth above. LIQUIDITY AND CAPITAL RESOURCES The primary liquidity needs of the Company are to fund capital expenditures, to fund payments of principal and interest on indebtedness and to fund working capital. Historically, the Company's principal sources of funds have been cash flow from operations and bank indebtedness. Net cash provided by operating activities was $2.4 million and $2.6 million for the nine months ended September 30, 1996 and 1997, respectively. Improvements in cash flow from operating activities are principally the result of improved operating results, offset by increased working capital requirements attributable to increases in accounts receivable and inventory due to increased sales. Capital expenditures by the Company were $5.4 million and $5.2 million for the nine months ended September 30, 1996 and 1997, respectively. Principal payments on long-term debt were $2.3 million and $2.7 million for the nine months ended September 30, 1996 and 1997, respectively. At September 30, 1997, the Company's credit facilities with Bank One, Texas, National Association ("Bank One") were provided through a Credit Agreement dated March 30, 1994, as amended (the "Bank One Credit Facilities"). As of September 30, 1997, $30.1 million was outstanding under the Bank One Credit Facilities, bearing interest at an 10 average rate of 8.85%. The Company repaid a portion of this indebtedness prior to receiving the proceeds of the Offering. At October 30, 1997, the Company had repaid the indebtedness outstanding under the Bank One Credit Facilities in full, and these facilities were terminated. In addition, at September 30, 1997, the Company had three outstanding term loans with the Bank of Scotland. At September 30, 1997, $700,000, $500,000 and $1.6 million were outstanding under these term loans, respectively. Subsequent to completion of the Offering, the Company repaid the indebtedness outstanding under these term loans in full. In October 1997, the Offering provided the Company with proceeds of approximately $63.4 million, net of expenses. The Company intends to use the proceeds from the Offering for a three-year capital expansion program to increase manufacturing capacity, improve and expand facilities and manufacture additional running tools for rental. The Company plans to expand its manufacturing capacity by approximately 90% during the three-year period 1997 through 1999, approximately two-thirds of which is expected to be completed by the end of 1998. Pending application of the proceeds for these purposes, the Company used approximately $30 million to repay its bank indebtedness in full during late October and November 1997. The balance of the proceeds will be used for working capital and excess cash is being invested in short-term investment grade securities. CURRENCY RISK Through its subsidiaries, the Company conducts a portion of business in currencies other than the United States dollar, principally the British pound sterling and the Norwegian kroner. The Company generally attempts to minimize its currency exchange risk by seeking international contracts payable in local currency in amounts equal to the Company's estimated operating costs payable in local currency and in U.S. dollars for the balance of the contract and by contractual purchase price adjustments based on an exchange rate formula related to U.S. dollars. Because of this strategy, the Company has not experienced significant transaction gains or losses associated with changes in currency exchange rates. The Company also has significant investments in countries other than the United States, principally its manufacturing operations in Aberdeen, Scotland and, to a lesser extent, Singapore. The functional currency of these foreign operations is the local currency and, accordingly, financial statement assets and liabilities are translated at current exchange rates. Resulting translation adjustments are reflected as a separate component of stockholders' equity and have no current effect on earnings or cash flow. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, which establishes alternative methods of accounting and disclosure for employee stock-based compensation arrangements. The Company intends to account for anticipated stock options using the intrinsic value method of accounting which, based on the expected stock option plan design, will not result in the recognition of compensation expense as the anticipated exercise price of the options will equal or exceed the fair market value of the stock on the date of grant. The Company will provide pro forma disclosure of net income and earnings per share in the notes to the consolidated financial statements as if the fair value based method of accounting had been applied. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, which establishes standards for computing and presenting earnings per share ("EPS"). The Company intends to adopt this standard in December 1997 and reflect EPS computations under SFAS No. 128 in its annual report for 1997. The effects on EPS resulting from SFAS No. 128 are expected to be insignificant. 11 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Use of Proceeds. The Company's Registration Statement on Form S-1 (Registration No. 333-33447), as amended, with respect to the initial public offering of shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), was declared effective by the Securities and Exchange Commission on October 21, 1997. The offering commenced on October 22, 1997, and has since terminated, resulting in (i) the sale by the Company of 2,875,000 shares of Common Stock on October 28, 1997 and (ii) the sale by certain selling stockholders of the Company of 2,875,000 shares of Common Stock on October 28, 1997. The shares sold constitute all of the shares of Common Stock covered by the Registration Statement. The managing underwriters for the Offering were Morgan Stanley & Co. Incorporated and Donaldson, Lufkin and Jenrette Securities Corporation. The aggregate price to the public for the shares sold in the Offering was $138 million. The expenses incurred by the Company with respect to the Offering were as follows: Underwriting Discounts and Commissions Paid by the Company..... $4,830,000 Other expenses................................................. 800,000 ---------- Total.......................................................... $5,630,000 ========== The amount of other expenses set forth above is a reasonable estimate of such amount. None of such payments were direct or indirect payments to directors or officers of the Company or their associates, to persons owning 10% or more of any class of equity securities of the Company or to affiliates of the Company. The net proceeds to the Company from the Offering were $63.4 million. As of November 28, 1997, the Company had used such net proceeds as follows: (i) to repay $30 million of indebtedness outstanding under the Company's credit facilities and term loans, which constitutes repayment of such facilities in full, (ii) $400,000 for the purchase of machinery and equipment and (iii) $33 million in temporary investments. None of such payments were direct or indirect payments to directors or officers of the Company or their associates, to persons owning 10% or more of any class of equity securities of the Company or to affiliates of the Company. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On September 19, 1997, prior to the closing of the Offering, the sole stockholder of the Company (i) approved the Company's incentive plan and (ii) approved the Company's restated certificate of incorporation, among other things. 12 ITEM 5. OTHER INFORMATION. Forward Looking Statements. The statements contained in all parts of this document, including, but not limited to, those relating to the Company's scheduled, budgeted and other future capital expenditures, use of Offering proceeds, working capital requirements, the availability of expected sources of liquidity to implement its business strategy, and any other statements regarding future operations, financial results, business plans and cash needs and other statements that are not historical facts are forward looking statements. When used in this document, the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expressions are intended to be among the statements that identify forward looking statements. Such statements may involve risks and uncertainties, including but not limited to, those relating to the volatility of oil and natural gas prices and cyclicality of the oil and gas industry, the Company's international operations, operating risks, the Company's dependence on key employees, the Company's dependence on skilled machinists and technical personnel, the Company's reliance on product development and possible technological obsolescence, control by certain stockholders, the potential impact of governmental regulation and environmental matters, competition, reliance on significant customers and other factors detailed in the Registration Statement and the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibit Number Description - -------------- ----------- *2.1 -- Agreement and Plan of Merger by and Between Dril-Quip, Inc., a Texas corporation, and Dril-Quip, Inc., a Delaware corporation (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *3.1 -- Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333- 33447)). *3.2 -- Bylaws of the Company (Incorporated herein by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). 3.3 -- Certificate of Designations for Series A Junior Participating Preferred Stock. *4.1 -- Form of certificate representing Common Stock (Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *4.2 -- Registration Rights Agreement among Dril-Quip, Inc. and certain stockholders (Incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *4.3 -- Rights Agreement between Dril-Quip, Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent (Incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.1 -- Credit Agreement between Bank One Texas, National Association and Dril-Quip, Inc., dated March 30, 1994 (Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.2 -- First Amendment to Credit Agreement between Dril-Quip, Inc. and Bank One Texas, National Association, dated December 20, 1994 (Incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). 13 *10.3 -- Second Amendment to Credit Agreement between Dril-Quip, Inc. and Bank One Texas, National Association, dated December 13, 1995 (Incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.4 -- Third Amendment to Credit Agreement between Dril-Quip, Inc. and Bank One Texas, National Association, dated February 14, 1997 (Incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.5 -- Credit Agreement between Bank One Texas, National Association, and Dril-Quip (Europe) Ltd., dated March 30, 1994 (Incorporated herein by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.6 -- First Amendment to Credit Agreement between Dril-Quip (Europe) Ltd. and Bank One Texas, National Association, dated December 20, 1994 (Incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.7 -- Second Amendment to Credit Agreement between Dril-Quip (Europe) Ltd. and Bank One Texas, National Association, dated December 13, 1995 (Incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333- 33447)). *10.8 -- Third Amendment to Credit Agreement between Dril-Quip (Europe) Ltd. and Bank One Texas, National Association, dated February 14, 1997 (Incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.9 -- Loan Agreement between Dril-Quip (Europe) Ltd. and the Bank of Scotland, dated June 7, 1996 (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.10 -- Loan Agreement between Dril-Quip (Europe) Ltd. and the Bank of Scotland, dated September 19, 1994 (Incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *10.11 -- Loan Agreement between Dril-Quip (Europe) Ltd. and the Bank of Scotland, dated December 12, 1991 (Incorporated herein by reference to Exhibit 10.11 to the Company's Registration Statement on Form S- 1 (Registration No. 333-33447)). *10.12 -- Form of Employment Agreement between Dril-Quip, Inc. and each of Messrs. Reimert, Smith and Walker (Incorporated herein by reference to Exhibit 10.12 to the Company's Registration Statement on Form S- 1 (Registration No. 333-33447)). *10.13 -- Dril-Quip, Inc. 1997 Incentive Plan (Incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). 27.1 -- Financial Data Schedule. _________________ * Incorporated herein by reference as indicated. Reports on Form 8-K -------------------- None 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DRIL-QUIP, INC. Date: December 4, 1997 /s/ Larry E. Reimert ---------------------------- Principal Financial Officer and Duly Authorized Signatory 15 EX-3.3 2 EXHIBIT 3.3 CERTIFICATE OF DESIGNATIONS of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of DRIL-QUIP, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware DRIL-QUIP, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Certificate of Incorporation of the said Corporation, the said Board of Directors on October 17, 1997 adopted the following resolution creating a series of 500,000 shares of Preferred Stock designated as "Series A Junior Participating Preferred Stock": RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Certificate of Incorporation, a series of Preferred Stock, par value $.01 per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows: SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. Designation and Amount. There shall be a series of Preferred Stock that shall be designated as "Series A Junior Participating Preferred Stock," and the number of shares constituting such series shall be 500,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to less than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. -1- 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in preference to the holders of shares of any class or series of stock of the Corporation ranking junior to the Series A Junior Participating Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) the Adjustment Number (as defined below) times the aggregate per share amount of all cash dividends, and the Adjustment Number times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. The "Adjustment Number" shall initially be 100. In the event the Corporation shall at any time after October 17, 1997 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless -2- the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to a number of votes equal to the Adjustment Number on all matters submitted to a vote of the stockholders of the Corporation. (B) Except as otherwise provided herein, in the Certificate of Incorporation or by law, the holders of shares of Series A Junior Participating Preferred Stock, the holders of shares of any other class or series entitled to vote with the Common Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") that shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, (1) the number of Directors shall be increased by two, effective as of the time of election of such Directors as herein provided, and (2) the holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) upon which these or like voting rights have been conferred and are exercisable (the "Voting Preferred Stock") with dividends in arrears in an amount equal to six quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect such two Directors. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to -3- subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that such voting right shall not be exercised unless the holders of at least one- third in number of the shares of Voting Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Voting Preferred Stock of such voting right. (iii) Unless the holders of Voting Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent of the total number of shares of Voting Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Voting Preferred Stock, which meeting shall thereupon be called by the Chairman of the Board, the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Voting Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each holder of record of Voting Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or, in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent of the total number of shares of Voting Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, after the holders of Voting Preferred Stock shall have exercised their right to elect Directors voting as a class, (x) the Directors so elected by the holders of Voting Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class or classes of stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class or classes of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Voting Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Voting Preferred Stock as a class shall terminate and (z) the number of Directors shall be such number as may be provided for in the Certificate of Incorporation or By- Laws irrespective of any increase made pursuant to the provisions of paragraph (C) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Certificate of Incorporation or By- Laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. -4- (D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) redeem or purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Junior Participating Preferred Stock, or to all such holders and the holders of any such shares ranking on a parity therewith, upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired -5- and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to any conditions and restrictions on issuance set forth herein. 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) the Adjustment Number. Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall, subject to the prior rights of all other series of Preferred Stock, if any, ranking prior thereto, receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Series A Junior Participating Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, that rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6, but the sale, lease or conveyance of all or substantially all the Corporation's assets shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6. 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination, share exchange or other transaction in which the shares of -6- Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. 8. Redemption. (A) The Corporation, at its option, may redeem shares of the Series A Junior Participating Preferred Stock in whole at any time and in part from time to time, at a redemption price equal to the Adjustment Number times the current per share market price (as such term is hereinafter defined) of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. The "current per share market price" on any date shall be deemed to be the average of the closing price per share of such Common Stock for the ten consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Common Stock is determined during a period following the announcement of (A) a dividend or distribution on the Common Stock other than a regular quarterly cash dividend or (B) any subdivision, combination or reclassification of such Common Stock and the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, shall not have occurred prior to the commencement of such ten Trading Day period, then, and in each such case, the current per share market price shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sales price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange but sales price information is reported for such security, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other self-regulatory organization or registered securities information processor (as such terms are used under the Securities Exchange Act of 1934, as amended) that then reports information concerning the Common Stock, or, if sales price information is not so reported, the average of the high bid and low asked prices in the over-the-counter market on such day, as reported by NASDAQ or such other entity, or, if on any such date the Common Stock is not quoted by any such entity, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Corporation. If on any such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Corporation shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business, or, if the Common Stock is not listed or admitted to trading on any national securities exchange but is quoted by NASDAQ, a day on which -7- NASDAQ reports trades, or, if the Common Stock is not so quoted, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. (B) In the event that fewer than all the outstanding shares of the Series A Junior Participating Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method that may be determined by the Board of Directors in its sole discretion to be equitable. (C) Notice of any such redemption shall be given by mailing to the holders of the shares of Series A Junior Participating Preferred Stock to be redeemed a notice of such redemption, first class postage prepaid, not later than the fifteenth day and not earlier than the sixtieth day before the date fixed for redemption, at their last address as the same shall appear upon the books of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the close of business on such redemption date. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder received such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of Series A Junior Participating Preferred Stock shall not affect the validity of the proceedings for the redemption of any other shares of Series A Junior Participating Preferred Stock that are to be redeemed. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the redemption price. If fewer than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (D) The shares of Series A Junior Participating Preferred Stock shall not be subject to the operation of any purchase, retirement or sinking fund. 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise, and shall rank senior to the Common Stock as to such matters. 10. Amendment. At any time that any shares of Series A Junior Participating Preferred Stock are outstanding, the Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the -8- affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. IN WITNESS WHEREOF, the undersigned has executed this Certificate and does affirm the foregoing as true this 17th day of October, 1997. /s/ Larry E. Reimert --------------------------- Co-Chairman of the Board -9- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-31-1996 SEP-30-1997 1,361 560 0 0 25,514 30,570 0 0 51,571 51,905 82,974 88,118 60,720 63,995 (29,336) (32,187) 114,777 120,373 33,450 31,355 0 0 0 0 0 0 144 144 50,738 57,092 114,777 120,373 115,864 106,673 115,864 106,673 77,863 73,193 99,865 91,717 0 0 0 0 2,647 2,147 13,352 12,809 4,234 4,176 9,118 8,633 0 0 0 0 0 0 9,118 8,633 .63 .60 .63 .60
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