1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1997
REGISTRATION NO. 333-32191
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
NATIONAL-OILWELL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 5084 76-0475815
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Incorporation
organization) Classification Code Number) or Identification Number)
5555 San Felipe, Houston, Texas 77056, (713) 960-5100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JOEL V. STAFF ROBERT L. PHILLIPS
PRESIDENT AND CHIEF EXECUTIVE OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
NATIONAL-OILWELL, INC. DRECO ENERGY SERVICES LTD
5555 SAN FELIPE #1340 WEBER CENTRE
HOUSTON, TEXAS 77056 5555 CALGARY TRAIL SOUTH
(713) 960-5100 EDMONTON, ALBERTA, CANADA T6H 5P9
(403) 944-3900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------------
COPY TO:
DAVID R. KING, ESQ. ROBERT F. GRAY JR., ESQ.
MORGAN, LEWIS & BOCKIUS LLP FULBRIGHT & JAWORSKI L.L.P.
2000 ONE LOGAN SQUARE 1301 MCKINNEY, SUITE 5100
PHILADELPHIA, PA 19103 HOUSTON, TEXAS 77010-3095
(215) 963-5000 (713) 651-5151
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective
and certain other conditions under the Combination Agreement are met or waived.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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NATIONAL-OILWELL, INC. AND DRECO ENERGY SERVICES LTD.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
NATIONAL-OILWELL, INC.
-AND-
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND OPTIONHOLDERS
OF DRECO ENERGY SERVICES LTD.
TO BE HELD SEPTEMBER 23, 1997
-AND-
NOTICE OF PETITION
-AND-
JOINT MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT/PROSPECTUS
WITH RESPECT TO AN ARRANGEMENT INVOLVING
NATIONAL-OILWELL, INC.
-AND-
DRECO ENERGY SERVICES LTD.
AUGUST 25, 1997
3
[NATIONAL-OILWELL LOGO]
August 25, 1997
Dear National-Oilwell, Inc. Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"National-Oilwell Meeting") of National-Oilwell, Inc. ("National-Oilwell") to be
held at the Houston, Texas at 9:00 a.m.
(Houston time) on Tuesday, September 23, 1997.
At the National-Oilwell Meeting, you will be asked to (i) approve the
Combination Agreement, as amended (the "Combination Agreement"), between
National-Oilwell and Dreco Energy Services Ltd. ("Dreco") and the transactions
contemplated thereby (the "Combination") and (ii) to consider and vote upon a
recapitalization plan (the "Recapitalization Plan") pursuant to which
National-Oilwell's Amended and Restated Certificate of Incorporation will be
amended and restated to increase the number of shares of authorized Common Stock
from 40,000,000 to 75,000,000 and to designate a class of stock as Special
Voting Stock consisting of one share. Details of the Combination and the
Recapitalization Plan are contained in the Joint Management Information Circular
and Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus") being
delivered with this letter.
If the proposals contained in the Joint Proxy Statement/Prospectus are
approved by National-Oilwell's stockholders, Dreco will become a subsidiary of
National-Oilwell. Upon consummation of the Combination, two directors designated
by Dreco will become part of an expanded nine-person National-Oilwell board of
directors. National-Oilwell's board of directors has carefully considered and
has unanimously approved the terms and conditions of the Combination Agreement
and the Combination and recommends that the stockholders approve the Combination
Agreement and the Combination and the Recapitalization Plan. In reaching this
conclusion, the board considered, among other things, the opinion dated May 13,
1997 of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), an
investment banking firm engaged by National-Oilwell, that, as of such date and
based on and subject to the factors and assumptions set forth therein, the
exchange ratio set forth in the Combination Agreement is fair, from a financial
point of view, to National-Oilwell. A copy of the Merrill Lynch opinion,
including the assumptions, qualifications and other matters contained therein,
is included in the Joint Proxy Statement/Prospectus as Annex H thereto.
The respective obligations of National-Oilwell and Dreco to consummate the
Combination Agreement and the Combination are subject to, among other
conditions, the approval of the stockholders of National-Oilwell of each of the
Combination Agreement and the Combination and the Recapitalization Plan at the
National-Oilwell Meeting. If either of the proposals is not approved, neither of
the proposals will be implemented and the Combination will not be consummated,
notwithstanding that the other proposal may have been approved by the
stockholders of National-Oilwell. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE COMBINATION AGREEMENT AND THE COMBINATION AND FOR
APPROVAL AND ADOPTION OF THE RECAPITALIZATION PLAN.
IN VIEW OF THE IMPORTANCE OF THE ACTIONS TO BE TAKEN AT THE
NATIONAL-OILWELL MEETING, YOU ARE URGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS CAREFULLY, AND, REGARDLESS OF THE NUMBER OF SHARES YOU OWN,
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE
ACCOMPANYING PREPAID ENVELOPE. YOU MAY, OF COURSE, ATTEND THE NATIONAL-OILWELL
MEETING AND VOTE IN PERSON, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY
CARD.
Sincerely,
Joel V. Staff
Chairman of the Board, President and Chief Executive Officer
4
NATIONAL-OILWELL, INC.
5555 SAN FELIPE
HOUSTON, TEXAS 77056
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 23, 1997
------------------------
Notice is hereby given that a special meeting of stockholders (the
"National-Oilwell Meeting") of National-Oilwell, Inc. ("National-Oilwell") will
be held at the Houston, Texas, at 9:00
a.m. (Houston time), on Tuesday, September 23, 1997, for the following purposes:
1. To consider and vote upon a proposal to approve the Combination
Agreement dated as of May 14, 1997, as amended (the "Combination
Agreement") between National-Oilwell and Dreco Energy Services Ltd., an
Alberta corporation ("Dreco"), and the transactions contemplated thereby
(the "Combination"), as more fully described in the accompanying Joint
Management Information Circular and Proxy Statement/Prospectus (the "Joint
Proxy Statement/Prospectus");
2. To consider and vote upon a proposal to approve and adopt a
recapitalization plan (the "Recapitalization Plan") pursuant to which
National-Oilwell's Amended and Restated Certificate of Incorporation will
be amended and restated to increase the number of authorized shares of
Common Stock from 40,000,000 to 75,000,000 and to authorize a class of
Special Voting Stock consisting of one share; and
3. To transact such other business as may properly be presented to the
National-Oilwell Meeting or any adjournments thereof.
The respective obligations of National-Oilwell and Dreco to consummate the
Combination Agreement and the Combination are subject to, among other
conditions, the approval of the stockholders of National-Oilwell of the
Combination Agreement and the Combination and the Recapitalization Plan at the
National-Oilwell Meeting. If either one of the proposals is not adopted, then
neither of the proposals will be implemented and the Combination will not be
consummated, notwithstanding that the other proposal may have been approved by
the stockholders of National-Oilwell.
Only stockholders of record at the close of business on August 8, 1997,
will be entitled to notice of and to vote at the National-Oilwell Meeting and
any adjournments thereof. A list of stockholders of National-Oilwell entitled to
vote at the meeting will be available for inspection during normal business
hours for the ten days prior to the National-Oilwell Meeting at the offices of
National-Oilwell and at the time and place of the meeting.
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND SO THAT THE PRESENCE OF A
QUORUM MAY BE ASSURED. THE GIVING OF SUCH PROXY DOES NOT AFFECT YOUR RIGHT TO
VOTE IN PERSON IN THE EVENT YOU ATTEND THE MEETING. YOU MAY REVOKE YOUR PROXY AT
ANY TIME.
By Order of the Board of Directors,
Paul M. Nation
Vice President, General Counsel and Secretary
August 25, 1997
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[DRECO ENERGY SERVICES LTD. LOGO]
August 25, 1997
Dear Dreco Energy Services Ltd. ("Dreco") Shareholder and/or Dreco Optionholder:
We are pleased to invite you to attend an important meeting of shareholders
and optionholders (the "Dreco Meeting") of Dreco to be held on Tuesday,
September 23, 1997 at 9:00 a.m. (Houston time) at the
, Houston, Texas. Because of the importance
of the business of the Dreco Meeting, we would like as many of you as possible
either to attend in person, or to be represented by sending in your proxies.
The business of the Dreco Meeting includes consideration of and voting on a
combination agreement and an arrangement which, effectively, will lead to a
combination of Dreco and National-Oilwell, Inc. ("National-Oilwell").
The details of the proposed transaction are included in the attached Joint
Management Information Circular and Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus"). Also included is the form of proxy and Letter of
Transmittal to be used in connection with the exchange of shares under the
arrangement. Please review the Joint Proxy Statement/Prospectus carefully as it
has been prepared to help you make an informed decision.
If the proposed transaction is completed, Dreco shareholders will exchange
each of their Dreco Class "A" common shares for 1.2 Exchangeable Shares (a
newly-created class of shares) of Dreco, subject to the Exchange Ratio
Adjustment described in the Joint Proxy Statement/Prospectus (the "Exchange
Ratio"). Each holder of an Exchangeable Share may, either immediately or in the
future, elect to exchange each Exchangeable Share for one share of
National-Oilwell Common Stock. Each Exchangeable Share will entitle its holder
to receive dividends equivalent to any dividends paid on National-Oilwell Common
Stock and will entitle the holder to vote at meetings of the stockholders of
National-Oilwell. Holding Exchangeable Shares rather than National-Oilwell
Common Stock may appeal to Dreco's shareholders for certain United States and
Canadian tax reasons described in the Joint Proxy Statement/Prospectus.
If the proposed transaction is completed, each Dreco option will be assumed
by National-Oilwell and will be modified to become exercisable for a number of
whole shares of National-Oilwell Common Stock equal to the number of Dreco Class
"A" common shares subject to the Dreco option multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares, at an exercise price per
share equal to the exercise price per share of such Dreco option divided by the
Exchange Ratio.
After considering many different factors (which are reviewed in detail in
the Joint Proxy Statement/Prospectus) including, among other things, the oral
opinion delivered on May 13, 1997 by Credit Suisse First Boston Corporation, an
investment banking firm engaged by Dreco, which was subsequently confirmed in
writing, that, as of such date and based upon and subject to the matters set
forth therein, the Exchange Ratio was fair to the Dreco shareholders from a
financial point of view, your Board of Directors has unanimously recommended
that you vote in favor of the special resolution concerning the Plan of
Arrangement (as defined in the Joint Proxy Statement/Prospectus) and the
combination of National-Oilwell and Dreco.
We hope that you will be able to attend the Dreco Meeting. Whether or not
you are able to attend, it is still important that you be represented at the
Dreco Meeting. We urge you to complete the enclosed proxy and return it, not
later than the time specified in the Notice of Special Meeting, in the
postage-paid envelope provided. Regardless of the number of shares or options
you own, your vote is important.
Yours very truly,
Robert L. Phillips
President and Chief Executive Officer
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DRECO ENERGY SERVICES LTD.
#1340 WEBER CENTRE
5555 CALGARY TRAIL SOUTH
EDMONTON, ALBERTA, CANADA T6H 5P9
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND OPTIONHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that a special meeting (the "Dreco Meeting") of the
holders (the "Shareholders") of Class "A" common shares (the "Common Shares")
and holders (the "Optionholders") of options to acquire Common Shares (the
"Options") of Dreco Energy Services Ltd. ("Dreco") will be held at 9:00 a.m.
(Houston time) on Tuesday, September 23, 1997 at the
, Houston, Texas for the following purposes:
1. Pursuant to an order (the "Interim Order") of the Court of Queen's
Bench of Alberta dated August , 1997, to consider and, if deemed
advisable, to approve a special resolution (the "Arrangement Resolution")
approving: (i) the Combination Agreement dated as of May 14, 1997, as
amended (the "Combination Agreement") between National-Oilwell, Inc. and
Dreco, and the transactions contemplated thereby and (ii) an arrangement
(the "Arrangement") under section 186 of the Business Corporations Act
(Alberta) (the "ABCA"), all as more particularly described in the
accompanying Joint Management Information Circular and Proxy
Statement/Prospectus (the "Joint Proxy Statement/Prospectus"); and
2. To transact such further or other business as may properly come
before the Dreco Meeting or any adjournment or postponement thereof.
Specific details of the matters to be put before the Dreco Meeting are set
out in the Joint Proxy Statement/Prospectus, which forms part of this Notice.
The full text of the Arrangement Resolution is attached as Annex A to the Joint
Proxy Statement/Prospectus.
Pursuant to the Interim Order, a copy of which is attached as Annex C to
the Joint Proxy Statement/Prospectus, Shareholders and Optionholders have been
granted the right to dissent in respect of the Arrangement. If the Arrangement
becomes effective, a dissenting Shareholder or Optionholder will be entitled to
be paid the fair value of the Common Shares or Options held by such holder if
the Secretary of Dreco or the Chairman of the Dreco Meeting shall have received
from such dissenting holder at or before the Dreco Meeting a written objection
to the Arrangement Resolution and the dissenting holder shall have otherwise
complied with the provisions of section 184 of the ABCA. The dissent right is
described in the accompanying Joint Proxy Statement/Prospectus, and the full
text of section 184 of the ABCA is attached as Annex J to the Joint Proxy
Statement/Prospectus. ONLY REGISTERED SHAREHOLDERS OR OPTIONHOLDERS MAY DISSENT.
FAILURE TO STRICTLY COMPLY WITH THE REQUIREMENTS SET OUT IN SECTION 184 OF THE
ABCA MAY RESULT IN THE LOSS OF ANY RIGHT OF DISSENT.
7
Each Shareholder and Optionholder at the close of business on August 7,
1997 (the "Dreco Record Date") is entitled to notice of, and to attend and vote
at, the Dreco Meeting and any adjournment or postponement thereof, provided that
to the extent a person has transferred any Common Shares after the Dreco Record
Date and the transferee of such shares establishes that such transferee owns
such shares and demands not later than ten days before the Dreco Meeting to be
included in the list of shareholders eligible to vote at the Dreco Meeting, such
transferee will be entitled to vote such shares at the Dreco Meeting.
By Order of the Board of Directors,
Robert H. Gillard
Secretary
August 25, 1997
SHAREHOLDERS AND OPTIONHOLDERS ARE CORDIALLY INVITED TO ATTEND THE DRECO
MEETING. SHAREHOLDERS AND OPTIONHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED.
Pursuant to the Interim Order, a proxy, in order to be acted upon at the
Dreco Meeting (or any adjournment or postponement of the Dreco Meeting) must (i)
be received by Dreco at the registered office of Dreco (as set forth in the
Joint Proxy Statement/Prospectus) or by Montreal Trust Company of Canada at its
principal transfer office in Calgary, at Suite 600, 530-8th Avenue S.W.,
Calgary, Alberta, Canada T2P 3S8 not later than 11:00 a.m. (Calgary time) on the
second day preceding the Dreco Meeting (or any adjournment or postponement
thereof) or (ii) be deposited with the scrutineers for the attention of the
Chairman at the Dreco Meeting (or any adjournment or postponement thereof).
8
ACTION NO.
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF SECTION 186 OF THE BUSINESS CORPORATIONS ACT, S.A. 1981,
c. B-15, AS AMENDED (THE "ABCA") AND IN THE MATTER OF A PLAN OF ARRANGEMENT
AFFECTING AND INVOLVING DRECO ENERGY SERVICES LTD. AND THE HOLDERS (THE
"SHAREHOLDERS") OF ITS CLASS "A" COMMON SHARES (THE "COMMON SHARES"), THE
HOLDERS (THE "OPTIONHOLDERS") OF OPTIONS TO ACQUIRE THE COMMON SHARES (THE
"OPTIONS") AND THE HOLDERS OF SHAREHOLDER RIGHTS.
NOTICE OF PETITION
NOTICE IS HEREBY GIVEN that a petition (the "Petition") has been filed with
the Court of Queen's Bench of Alberta, Judicial District of Calgary (the
"Court"), by Dreco Energy Services Ltd. ("Dreco") with respect to the proposed
plan of arrangement (the "Arrangement") described above, involving Dreco, its
securityholders and National-Oilwell, Inc. ("National-Oilwell"), which
Arrangement is described in greater detail in the Joint Management Information
Circular and Proxy Statement/Prospectus of National-Oilwell and Dreco dated
August 25, 1997 accompanying this Notice of Petition.
AND NOTICE IS FURTHER GIVEN that the said Petition will be heard before the
presiding Chambers Justice at the Court House, 611-4th Street S.W., Calgary,
Alberta, Canada, on the day of September , 1997 at a.m. (Calgary time) or
as soon thereafter as counsel may be heard.
At the hearing of the Petition, Dreco intends to seek the following:
(i) a declaration that the terms and conditions of the Arrangement,
including (A) the issuance of Dreco Exchangeable Shares in exchange for
Common Shares and (B) the conversion of Dreco Options to options to acquire
National-Oilwell Common Stock, are fair to the persons affected;
(ii) an order approving the Arrangement pursuant to the provisions of
Section 186 of the ABCA;
(iii) a declaration that the Arrangement will, upon the filing of
Articles of Arrangement under the ABCA and the issuance of the Certificate
of Amendment under the ABCA, be effective under the ABCA in accordance with
its terms; and
(iv) such other further orders, declarations and directions as the
Court may deem just.
ANY SHAREHOLDER OR OPTIONHOLDER OF DRECO OR OTHER INTERESTED PARTY DESIRING
TO SUPPORT OR OPPOSE THE PETITION MAY APPEAR AT THE TIME OF HEARING IN PERSON OR
BY COUNSEL FOR THAT PURPOSE, PROVIDED SUCH SECURITYHOLDER OR OTHER INTERESTED
PARTY FILES WITH THE COURT AND SERVES UPON DRECO, ON OR BEFORE
, 1997, A NOTICE OF INTENTION TO APPEAR, TOGETHER WITH ANY EVIDENCE OR
MATERIALS WHICH ARE TO BE PRESENTED TO THE COURT, SETTING OUT SUCH
SECURITYHOLDER'S OR INTERESTED PARTY'S ADDRESS FOR SERVICE BY ORDINARY MAIL AND
INDICATING WHETHER SUCH SECURITYHOLDER OR INTERESTED PARTY INTENDS TO SUPPORT OR
OPPOSE THE PETITION OR MAKE SUBMISSIONS. SERVICE ON DRECO IS TO BE EFFECTED BY
DELIVERY TO THE SOLICITORS FOR DRECO AT THE ADDRESS SET FORTH BELOW.
AND NOTICE IS FURTHER GIVEN that, at the hearing and subject to the
foregoing, securityholders and any other interested persons will be entitled to
make representations as to, and the Court will be requested to consider, the
fairness of the Arrangement. If you do not attend, either in person or by
counsel, at that time, the Court may approve or refuse to approve the
Arrangement as presented, or may approve it subject to such terms and conditions
as the Court shall deem fit, without any further notice.
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AND NOTICE IS FURTHER GIVEN that, if issued, the order of the Court
approving the Arrangement will constitute the basis for an exemption pursuant to
Section 3(a)(10) of the United States Securities Act of 1933, as amended (the
"Securities Act"), from certain requirements under the Securities Act with
respect to the Exchangeable Shares and options to acquire National-Oilwell
Common Stock.
AND NOTICE IS FURTHER GIVEN that the Court, by an Interim Order dated
August , 1997, has given directions as to the calling and holding of the
Special Meeting of the securityholders of Dreco for the purpose of such
securityholders' voting upon the special resolution to approve the Arrangement
and, in particular, has directed that such securityholders shall have the right
to dissent under the provisions of Section 184 of the ABCA upon compliance with
the terms of the Interim Order.
AND NOTICE IS FURTHER GIVEN that a copy of the said Petition and other
documents in the proceedings will be furnished to any securityholder of Dreco or
other interested party requesting the same by the undermentioned solicitors for
Dreco upon written request delivered to such solicitors as follows:
Blake, Cassels & Graydon
3500 Bankers Hall East
855 - 2nd Street S.W.
Calgary, Alberta, Canada
T2P 4J8
Attention: Patrick C. Finnerty
DATED at the City of Edmonton, in the Province of Alberta, this day of
August, 1997.
DRECO ENERGY SERVICES LTD.
ROBERT L. PHILLIPS
President and Chief Executive Officer
10
------------------------
NATIONAL-OILWELL, INC.
PROXY STATEMENT/PROSPECTUS
UP TO 10,953,922 SHARES OF COMMON STOCK
===================================================
DRECO ENERGY SERVICES LTD.
MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT
------------------------
This Joint Proxy Statement/Prospectus relates to the proposed combination
of National-Oilwell, Inc., a Delaware corporation, and Dreco Energy Services
Ltd., an Alberta corporation, pursuant to the Combination Agreement dated as of
May 14, 1997, as amended, by and between National-Oilwell and Dreco. National-
Oilwell Stockholders and Dreco Shareholders and Dreco Optionholders are being
asked to approve the Combination Agreement and the transactions contemplated
thereby and certain other matters, all as more particularly described herein.
Pursuant to the Combination Agreement, Dreco will become a subsidiary of
National-Oilwell, holders of Dreco Common Shares will receive 1.2 Exchangeable
Shares in exchange for each of their Dreco Common Shares and Dreco Options will
be converted into options to acquire shares of National-Oilwell Common Stock on
a 1.2 to 1 basis. Exchangeable Shares are exchangeable into National-Oilwell
Common Stock on a one-for-one basis. The 1.2 to 1 Exchange Ratio, however, may
be reduced or increased based on the average closing price of a share of
National-Oilwell Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the Effective Time (from time to time referred to
herein as the "Pre-Closing Average Price").
If the Pre-Closing Average Price of a share of National-Oilwell Common
Stock is less than $36.00, then the Exchange Ratio will be increased to equal
1.2 multiplied by a fraction, the numerator of which is $36.00 and the
denominator of which is the higher of (A) $33.00 or (B) the Pre-Closing Average
Price. If the Pre-Closing Average Price of National-Oilwell Common Stock is less
than $33.00, Dreco will have the right to terminate the Combination Agreement if
National-Oilwell (after Dreco shall have exercised the right to request
National-Oilwell to do so) elects not to adjust the Exchange Ratio based on such
lesser value (See "The Transaction -- The Combination
Agreement -- Termination"). Similarly, if the Pre-Closing Average Price of
National-Oilwell Common Stock is greater than $47.25, then the Exchange Ratio
will be reduced to equal 1.2 multiplied by a fraction, the numerator of which is
$47.25 and the denominator of which is the Pre-Closing Average Price.
For Pre-Closing Average prices between $33.00 and $36.00 per share, the
Exchange Ratio will be adjusted to provide value equivalent to $43.20 (and no
less) of National-Oilwell Common Stock. If the Pre-Closing Average Price is
greater than $47.25 per share, the Exchange Ratio will be adjusted to provide
value equivalent to $56.70 (and no more) of National-Oilwell Common Stock.
Consequently, the maximum aggregate dollar amount of National-Oilwell Common
Stock that Dreco Shareholders may receive (without accounting for fractional
shares or the exercise of dissent rights) is $443,554,007, while there is no
minimum number of shares of National-Oilwell Common Stock that Dreco
Shareholders may receive. In addition, if (i) such Pre-Closing Average Price is
less than $33.00 per share, (ii) National-Oilwell elects not to adjust the
Exchange Ratio after Dreco shall have exercised its right to request
National-Oilwell to do so, and (iii) Dreco elects not to terminate the
Combination Agreement in such circumstance, Dreco shareholders will receive
National-Oilwell Common Stock with a value equivalent to less than $43.20 in
accordance with the formula described above. If National-Oilwell elects to
adjust the Exchange Ratio in such circumstance, the number of shares issued
would increase (without any maximum limit) as the Pre-Closing Average Price
decreases.
On August 8, 1997, the closing price of National-Oilwell Common Stock was
$59.4375 per share. Assuming that the Pre-Closing Average Price equals $59.4375,
the Exchange Ratio would be .9539. Based thereon, each Dreco Common Share would
become exchangeable for Exchangeable Shares having a value equivalent to $56.70
of National-Oilwell Common Stock (without accounting for fractional shares or
the exercise of dissent rights). The actual value of the consideration to be
received by, and the number of shares to be issued to, holders of Dreco Common
Shares depends on the Pre-Closing Average Price and, as a result,
11
may differ from the foregoing example. Based on $56.70 per share, the number of
Exchangeable Shares to be issued would be 7,189,956 and would have an aggregate
value of $443,554,007 of National-Oilwell Common Stock.
The following chart illustrates the application of the Exchange Ratio to
various Pre-Closing Average Prices of National-Oilwell Common Stock without
regard to fractional shares. There can be no assurances that National-Oilwell
Common Stock will trade at any of the below assumed prices. See "The
Transaction -- Procedures for Exchange by Dreco Shareholders and Dreco
Optionholders -- Dreco Shareholders."
- ------------------------------------------------------------------------------------------------------------------
NUMBER OF PRE-CLOSING AVERAGE NUMBER OF DRECO U.S. DOLLAR
DRECO PRICE OF EXCHANGEABLE EQUIVALENT VALUE
COMMON NATIONAL-OILWELL SHARES THAT WOULD OF A DRECO
SHARES HELD COMMON STOCK EXCHANGE RATIO BE ISSUED COMMON SHARE(1)
- ------------------------------------------------------------------------------------------------------------------
100 $32 1.3091 (without Exchange 131 $41.89
Ratio Adjustment)
- ------------------------------------------------------------------------------------------------------------------
100 $32 1.3500 (with Exchange 135 $43.20
Ratio Adjustment)(2)
- ------------------------------------------------------------------------------------------------------------------
100 $34 1.2706 127 $43.20
- ------------------------------------------------------------------------------------------------------------------
100 $40 1.2000 120 $48.00
- ------------------------------------------------------------------------------------------------------------------
100 $62 .9145 91 $56.70
- ------------------------------------------------------------------------------------------------------------------
(1) Assumes that the value of an Exchangeable Share is equivalent to the value
of a share of National-Oilwell Common Stock into which it is exchangeable.
No assurances can be made regarding the trading value of an Exchangeable
Share and whether it will in fact be equivalent to the trading value of a
share of National-Oilwell Common Stock.
(2) Assumes that National-Oilwell agrees to adjust the Exchange Ratio to reflect
the trading price of National-Oilwell Common Stock below $33. In such a
case, the denominator, as discussed above, would be the Pre-Closing Average
Price rather than $33. No assurances can be made that National-Oilwell would
agree to adjust the Exchange Ratio. See "Summary -- The
Transaction -- Termination Rights With Respect to Certain Exchange Ratio
Adjustments."
The Transaction will be accounted for as a pooling-of-interests under U.S.
GAAP. See "The Transaction -- Anticipated Accounting Treatment." If (i) an event
occurs prior to Closing which establishes with reasonable certainty that the
Transaction will not be treated as a pooling-of-interests or (ii) Ernst & Young
LLP (National-Oilwell's auditors) or Coopers & Lybrand (Dreco's auditors) do not
deliver their concurrence with the conclusions of National-Oilwell's management
and Dreco's management with respect to pooling matters by the Effective Date as
required by the Combination Agreement and the parties still decide to consummate
the Transaction, National-Oilwell and Dreco will resolicit stockholder approval.
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, par value $.01 per share, of National-Oilwell, in connection with
the solicitation of proxies by the board of directors of National-Oilwell for
use at the National-Oilwell Meeting to be held at 9:00 a.m. (Houston time) on
September 23, 1997 at the , Houston,
Texas, and any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Class "A" common shares, without par value, and options to purchase Class "A"
common shares of Dreco in connection with the solicitation of proxies by the
board of directors of Dreco for use at the Dreco Meeting to be held at 9:00 a.m.
(Houston time) on September 23, 1997, at the
, Houston, Texas, and any adjournment or
postponement thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to National-Oilwell Stockholders and Dreco Shareholders
and Dreco Optionholders on or about August 25, 1997.
12
All information in this Joint Proxy Statement/Prospectus relating to
National-Oilwell has been supplied by National-Oilwell and all information
relating to Dreco has been supplied by Dreco. Certain capitalized terms used in
this Joint Proxy Statement/Prospectus without definition have the meanings
ascribed thereto in the Glossary of Terms.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT
TO APPROVAL OF THE PROPOSALS AND AN INVESTMENT IN THE SECURITIES REFERRED TO
HEREIN.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, BY ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. NEITHER DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES REFERRED TO IN THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH THEREIN SINCE THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS.
NATIONAL-OILWELL IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE, UNITED STATES. ALL OF THE DIRECTORS AND EXECUTIVE OFFICERS OF
NATIONAL-OILWELL PRIOR TO THE TRANSACTION ARE, AND CERTAIN OF SUCH DIRECTORS AND
EXECUTIVE OFFICERS UPON CONSUMMATION OF THE TRANSACTION WILL BE, RESIDENTS OF
THE UNITED STATES, AND CERTAIN OF THE EXPERTS NAMED HEREIN ARE RESIDENTS OF THE
UNITED STATES. SUBSTANTIAL PORTIONS OF THE ASSETS OF NATIONAL-OILWELL AND SUCH
INDIVIDUALS AND EXPERTS ARE LOCATED OUTSIDE OF CANADA. AS A RESULT, IT MAY BE
DIFFICULT OR IMPOSSIBLE FOR PERSONS WHO BECOME SECURITYHOLDERS OF
NATIONAL-OILWELL TO EFFECT SERVICE OF PROCESS UPON SUCH PERSONS WITHIN CANADA
WITH RESPECT TO MATTERS ARISING UNDER CANADIAN SECURITIES LAWS OR TO ENFORCE
AGAINST THEM IN CANADIAN COURTS JUDGMENTS OF SUCH COURTS PREDICATED UPON THE
CIVIL LIABILITY PROVISIONS OF CANADIAN SECURITIES LAWS. DRECO SHAREHOLDERS AND
DRECO OPTIONHOLDERS SHOULD BE AWARE THAT THERE IS SOME DOUBT AS TO THE
ENFORCEABILITY IN THE UNITED STATES IN ORIGINAL ACTIONS, OR IN ACTIONS FOR
ENFORCEMENTS OF JUDGMENTS OF CANADIAN COURTS, OF CIVIL LIABILITIES PREDICATED
UPON THE CANADIAN SECURITIES LAWS. IN ADDITION, AWARDS OF PUNITIVE DAMAGES IN
ACTIONS BROUGHT IN CANADA OR ELSEWHERE MAY BE UNENFORCEABLE IN THE UNITED
STATES.
13
AVAILABLE INFORMATION
National-Oilwell and Dreco are subject to the informational requirements of
the Exchange Act, and, in accordance therewith, file reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information filed by National-Oilwell and Dreco with the SEC can be inspected at
the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the regional offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, New York, New York 10048. Copies
of such material may be obtained from the Public Reference Section of the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at
prescribed rates. National-Oilwell Common Stock is listed on the New York Stock
Exchange and reports, proxy statements and other information regarding National-
Oilwell can be inspected at the offices of the New York Stock Exchange, 22 Broad
Street, New York, New York 10006. Dreco Common Shares are listed on the Nasdaq
and reports, proxy statements and other information concerning Dreco can be
inspected at the office of the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006. The SEC maintains a web site that
contains all information filed electronically. The address of the SEC's web site
is http://www.SEC.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
UNITED STATES
The following documents heretofore filed by Dreco with the SEC are
incorporated by reference herein:
(i) Annual Report on Form 10-K for the year ended August 31, 1996;
(ii) Quarterly Report on Form 10-Q for the quarter ended November 30,
1996;
(iii) Quarterly Report on Form 10-Q for the quarter ended February 28,
1997;
(iv) Quarterly Report on Form 10-Q for the quarter ended May 31, 1997;
(v) Current Report on Form 8-K dated November 18, 1996, as amended by
Form 8-K/A Amendment No. 1 and Amendment No. 2;
(vi) Current Report on Form 8-K dated November 26, 1996;
(vii) Current Report on Form 8-K dated December 20, 1996; and
(viii) Current Report on Form 8-K dated May 23, 1997.
All documents filed by Dreco with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and before the date of the Dreco Meeting, respectively,
shall be deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in this Joint Proxy Statement/Prospectus or
in a document incorporated or deemed to be incorporated by reference in this
Joint Proxy Statement/Prospectus shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained in this Joint Proxy Statement/Prospectus or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Joint Proxy Statement/Prospectus.
DRECO UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN, OTHER THAN THE EXHIBITS TO SUCH DOCUMENTS,
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE
INFORMATION THAT THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES. WRITTEN OR
ORAL REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO DRECO, TO THE ATTENTION OF
ROBERT H. GILLARD, SECRETARY, DRECO ENERGY SERVICES LTD., #1340 WEBER CENTRE,
5555
14
CALGARY TRAIL SOUTH, EDMONTON, ALBERTA T6H 5P9, TELEPHONE NUMBER (403) 944-3912.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BY SEPTEMBER 8, 1997.
CANADA
The following documents, filed with the securities commissions or other
regulatory authorities in certain provinces of Canada, are specifically
incorporated by reference in and form an integral part of this Joint Proxy
Statement/Prospectus:
(i) the Form 10-K of Dreco dated November 15, 1996 filed as an
alternative renewal annual information form and the management's
discussion and analysis of financial condition and results of
operations for the year ended August 31, 1996 contained therein;
(ii) the consolidated comparative financial statements of Dreco for the
year ended August 31, 1996 together with the report of the auditors
thereon, which statements are included in the Form 10-K of Dreco
dated November 15, 1996;
(iii) the consolidated comparative financial statements of Dreco for the
three months ended November 30, 1996, the six months ended February
28, 1997 and the nine months ended May 31, 1997, which statements
are included in the Forms 10-Q of Dreco for the quarters ended
November 30, 1996, February 28, 1997 and May 31, 1997, respectively;
(iv) the Forms 8-K of Dreco dated November 18, 1996, as amended by Form
8-K/A Amendment No. 1 and Amendment No. 2, November 26, 1996,
December 20, 1996 and May 23, 1997, all filed as material change
reports; and
(v) the proxy statement of Dreco dated December 9, 1996 for the
meeting of the holders of Dreco Common Shares held on
January 14, 1997.
Any material change reports (excluding confidential reports), interim
financial statements and information circulars filed by Dreco with the
securities commissions or similar authorities in certain provinces of Canada
after the date of this Joint Proxy Statement/Prospectus and prior to the Dreco
Meeting shall be deemed to be incorporated by reference into this Joint Proxy
Statement/Prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement as so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
DRECO UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN, OTHER THAN THE EXHIBITS TO SUCH DOCUMENTS,
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE
INFORMATION THAT THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES. WRITTEN OR
ORAL REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO DRECO, TO THE ATTENTION OF
ROBERT H. GILLARD, SECRETARY, DRECO ENERGY SERVICES LTD., #1340 WEBER CENTRE,
5555 CALGARY TRAIL SOUTH, EDMONTON, ALBERTA T6H 5P9, TELEPHONE NUMBER (403)
944-3912. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY SEPTEMBER 8, 1997.
15
TABLE OF CONTENTS
AVAILABLE INFORMATION.......................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............
United States.............................................
Canada....................................................
TABLE OF CONTENTS........................................... i
GLOSSARY OF TERMS........................................... iv
SUMMARY..................................................... 1
RISK FACTORS................................................ 10
COMPARATIVE PER SHARE DATA.................................. 14
COMPARATIVE MARKET PRICE DATA............................... 15
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 16
National-Oilwell.......................................... 16
Dreco..................................................... 17
UNAUDITED PRO FORMA NATIONAL-OILWELL AND DRECO COMBINED
CONSOLIDATED FINANCIAL STATEMENTS......................... 18
THE MEETINGS................................................ 22
National-Oilwell.......................................... 22
Dreco..................................................... 23
THE TRANSACTION............................................. 25
Background................................................ 25
Reasons for the Transaction............................... 26
Opinions of Financial Advisors............................ 27
Opinion of Merrill Lynch............................... 27
Opinion of Credit Suisse First Boston.................. 32
Interests of Certain Persons in the Transaction........... 37
Transaction Mechanics and Description of Exchangeable
Shares................................................. 37
The Combination Agreement................................. 43
Other Agreements.......................................... 47
Termination of Rights Plan................................ 48
Court Approval of the Arrangement and Completion of the
Transaction............................................ 48
Anticipated Accounting Treatment.......................... 48
Business Combination Costs................................ 48
Procedures for Exchange by Dreco Shareholders and Dreco
Optionholders.......................................... 49
Stock Exchange Listing.................................... 49
Eligibility for Investment in Canada...................... 49
Regulatory Matters........................................ 50
Resale of Exchangeable Shares and National-Oilwell Common
Stock Received in the Transaction...................... 50
THE COMPANIES AFTER THE TRANSACTION......................... 51
The Combination -- General................................ 51
Directors and Executive Officers.......................... 52
Principal Holders of Securities........................... 54
Change of Control of National-Oilwell in 1996.......... 54
Security Ownership of Certain Beneficial Owners and
Management of National-Oilwell........................ 55
Security Ownership of Certain Beneficial Owners and
Management of Dreco................................... 57
National-Oilwell Capital Stock............................ 59
Dreco Share Capital....................................... 62
i
16
Remuneration of Directors and Executive Officers.......... 64
Compensation of Directors................................. 65
Employment Contracts...................................... 65
Compensation Committee Interlocks and Insider
Participation.......................................... 66
Certain Relationships and Related Transactions............ 66
INCOME TAX CONSIDERATIONS TO DRECO SHAREHOLDERS AND
OPTIONHOLDERS............................................. 68
Canadian Federal Income Tax Considerations to Dreco
Shareholders and Optionholders......................... 68
Dreco Shareholders Resident in Canada.................. 69
Dreco Shareholders Not Resident in Canada.............. 72
Modification of Dreco Options.......................... 73
United States Federal Income Tax Considerations to Dreco
Shareholders........................................... 74
Shareholders That Are United States Holders............ 74
Shareholders That Are Not United States Holders........ 78
NATIONAL-OILWELL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 80
BUSINESS OF NATIONAL-OILWELL................................ 84
General................................................... 84
Business Strategy......................................... 84
Products and Technology................................... 85
Distribution Services..................................... 87
Employees................................................. 88
Operating Risks and Insurance............................. 89
Governmental Regulation and Environmental Matters......... 89
Agreement with Previous Owners............................ 89
Properties................................................ 90
Legal Proceedings......................................... 90
BUSINESS OF DRECO........................................... 91
Drilling and Well Servicing Equipment..................... 91
Downhole Products......................................... 92
AUDITORS, TRANSFER AGENT AND REGISTRAR...................... 93
COMPARISON OF STOCKHOLDER RIGHTS............................ 93
Vote Required for Extraordinary Transactions.............. 93
Amendment to Governing Documents.......................... 93
Dissenters' Rights........................................ 94
Oppression Remedy......................................... 95
Derivative Action......................................... 95
Shareholder Consent in Lieu of Meeting.................... 95
Director Qualifications................................... 95
Fiduciary Duties of Directors............................. 96
Indemnification of Officers and Directors................. 96
Director Liability........................................ 97
Anti-Takeover Provisions and Interested Stockholder
Transactions........................................... 97
DISSENTING DRECO SHAREHOLDERS' AND DRECO OPTIONHOLDERS'
RIGHTS.................................................... 98
PROPOSED NATIONAL-OILWELL RECAPITALIZATION PLAN............. 100
LEGAL MATTERS............................................... 101
EXPERTS..................................................... 101
INDEX TO NATIONAL-OILWELL CONSOLIDATED FINANCIAL
STATEMENTS................................................ F-1
ii
17
ANNEX A -- Form of the Arrangement Resolution
ANNEX B -- Combination Agreement, as amended (certain exhibits are
included as Annexes D, E, F and G to this Joint Proxy
Statement/ Prospectus)
ANNEX D -- Proposed Amended and Restated Certificate of Incorporation
of National-Oilwell
ANNEX E -- Plan of Arrangement and Exchangeable Share Provisions
ANNEX F -- Form of Support Agreement
ANNEX G -- Form of Voting and Exchange Trust Agreement
ANNEX H -- Merrill Lynch, Pierce, Fenner & Smith Incorporated Fairness
Opinion
ANNEX I -- Credit Suisse First Boston Corporation Fairness Opinion
ANNEX J -- Section 184 of the ABCA
iii
18
GLOSSARY OF TERMS
Unless the context otherwise requires, the following terms shall have the
meanings set forth below when used in this Joint Proxy Statement/Prospectus.
These defined terms are not used in the financial statements attached hereto or
incorporated by reference herein.
"ABCA" means the Business Corporations Act (Alberta), as amended.
"Arrangement" means the proposed arrangement of Dreco under section 186 of
the ABCA pursuant to the Plan of Arrangement.
"Arrangement Resolution" means the special resolution of Dreco Shareholders
and Dreco Optionholders approving the Combination Agreement and the Arrangement
in the form set out in Annex A to this Joint Proxy Statement/Prospectus.
"Automatic Exchange Rights" means the rights granted to the Trustee for the
benefit of the holders of the Exchangeable Shares pursuant to the Voting and
Exchange Trust Agreement to automatically exchange with National-Oilwell the
Exchangeable Shares for shares of National-Oilwell Common Stock upon a
National-Oilwell Liquidation Event.
"Automatic Redemption Date" means the first to occur of (a) the fifth
anniversary of the Effective Date of the Arrangement, (b) the date selected by
the Dreco board of directors at a time when less than 15% of the Exchangeable
Shares issuable on the Effective Date (other than shares held by
National-Oilwell and its subsidiaries and subject to adjustment in certain
events) are outstanding, (c) the business day prior to the record date for any
meeting or vote of the shareholders of Dreco to consider any matter on which the
holders of Exchangeable Shares would be entitled to vote as shareholders of
Dreco, but excluding any meeting or vote as described in clause (d) below or (d)
the business day following the day on which the holders of Exchangeable Shares
fail to take the necessary action at a meeting or other vote of holders of
Exchangeable Shares, if and to the extent such action is required, to approve or
disapprove, as applicable, any change to, or in the rights of the holders of,
Exchangeable Shares, if the approval or disapproval, as applicable, of such
change would be required to maintain the economic and legal equivalence of the
Exchangeable Shares and the National-Oilwell Common Stock.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
"Canadian dollars" or "Cdn.$" means Canadian dollars.
"Canadian GAAP" means generally accepted accounting principles in Canada.
"Canadian Tax Act" means the Income Tax Act (Canada).
"Class A Preferred Share" means the Class A Preferred Share of Dreco.
"Closing" means the execution and delivery of the documents required to
effectuate the transactions contemplated by the Combination Agreement and the
closing of the transactions contemplated by the Combination Agreement.
"Closing Date" means September 25, 1997, or such other date as may be
determined by National-Oilwell and Dreco.
"Combination Agreement" means the Combination Agreement by and between
National-Oilwell and Dreco dated as of May 14, 1997, as amended, a copy of which
is attached hereto as Annex B.
"Court" means the Court of Queen's Bench of Alberta.
"Credit Suisse First Boston" means Credit Suisse First Boston Corporation,
exclusive financial advisor to Dreco in connection with the Transaction.
"DGCL" means the Delaware General Corporation Law, as amended.
iv
19
"Dividend Amount" means the amount of any dividends declared and unpaid and
undeclared but payable on the Exchangeable Shares.
"Dreco" means Dreco Energy Services Ltd., an Alberta corporation.
"Dreco Affiliate" means each affiliate (as such term is defined for
purposes of the pooling rules and pursuant to Rule 145 under the Securities Act)
of Dreco.
"Dreco Affiliates' Agreements" means the affiliates' agreements executed by
each Dreco Affiliate and agreed to and accepted by National-Oilwell and Dreco.
"Dreco Articles" means the Dreco articles of amalgamation as proposed to be
amended in connection with the Arrangement.
"Dreco Bylaws" means Dreco's bylaws, as amended from time to time.
"Dreco Common Shares" means the Class "A" common shares, without par value,
of Dreco.
"Dreco Insolvency Event" means the institution by Dreco of any proceeding
to be adjudicated as bankrupt or insolvent or to be dissolved or wound-up, or
Dreco's consent to the institution of bankruptcy, insolvency, dissolution or
winding-up proceedings against it, or the filing of a petition, answer or
consent seeking dissolution or winding-up under any bankruptcy, insolvency or
analogous laws, including without limitation the Companies Creditors'
Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the
failure by Dreco to contest in good faith any such proceedings commenced in
respect of Dreco within 15 days of becoming aware thereof, or Dreco's consent to
the filing of any such petition or to the appointment of a receiver, or the
making by Dreco of a general assignment for the benefit of creditors, or the
admission in writing by Dreco of its inability to pay its debts generally as
they become due, or Dreco's not being permitted, pursuant to liquidity or
solvency requirements of applicable law, to redeem any Exchangeable Shares
pursuant to a Retraction Request.
"Dreco Letter of Transmittal" means the letter delivered to Dreco
Shareholders with this Joint Proxy Statement/Prospectus, which when duly
completed and returned with a certificate for Dreco Common Shares prior to the
tenth anniversary of the Effective Date, will enable such Dreco Shareholder to
exchange such certificate for Exchangeable Shares or, if elected, for
National-Oilwell Common Stock pursuant to an election under the Exchange Put
Right.
"Dreco Meeting" means the special meeting of Dreco Shareholders and Dreco
Optionholders to be held with respect to, among other things, the approval by
Dreco Shareholders and Dreco Optionholders of the Arrangement.
"Dreco Option Plan" means the Dreco Amended and Restated 1989 Employee
Incentive Stock Option Plan.
"Dreco Optionholders" means the holders of Dreco Options.
"Dreco Options" means all outstanding options to purchase Dreco Common
Shares, including all such options granted under the Dreco Option Plan and
pursuant to certain option agreements between Dreco and its outside directors.
"Dreco Record Date" means August 7, 1997.
"Dreco Shareholders" means the holders of Dreco Common Shares.
"Effective Date" means the date shown on the certificate of arrangement
issued by the Registrar under the ABCA giving effect to the Arrangement.
"Effective Time" means 12:01 a.m. (Calgary time) on the Effective Date.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
v
20
"Exchange Put Right" means the right granted to the Trustee for the benefit
of holders of the Exchangeable Shares pursuant to the Voting and Exchange Trust
Agreement to require National-Oilwell to purchase all or any part of the
Exchangeable Shares of the holders at any time and to issue in exchange therefor
shares of National-Oilwell Common Stock, plus the Dividend Amount, if any.
"Exchange Ratio" means, subject to the Exchange Ratio Adjustment, 1.2:1,
such that each Dreco Common Share is exchanged for 1.2 Exchangeable Shares.
"Exchange Ratio Adjustment" means the adjustment to be made to the Exchange
Ratio as follows: if the average of the per share closing price on the NYSE of
shares of National-Oilwell Common Stock during the 20 consecutive trading days
ending on the fifth trading day prior to the Effective Time (the "Pre-Closing
Average Price") shall be less than $36.00 per share, the Exchange Ratio shall be
adjusted to equal 1.2 multiplied by a fraction, the numerator of which is $36.00
and the denominator of which is the higher of (A) $33.00 and (B) the Pre-Closing
Average Price. If the Pre-Closing Average Price shall be greater than $47.25 per
share, the Exchange Ratio shall be adjusted to equal 1.2 multiplied by a
fraction, the numerator of which is $47.25 and the denominator of which is the
Pre-Closing Average Price. If the Pre-Closing Average Price is less than $33.00
per share, Dreco may request that National-Oilwell adjust the Exchange Ratio to
equal 1.2 multiplied by a fraction, the numerator of which is $36.00 and the
denominator of which is the Pre-Closing Average Price. If National-Oilwell
elects not to so adjust the Exchange Ratio, Dreco will have certain rights to
terminate the Combination Agreement.
"Exchange Rights" means the Exchange Put Right, Automatic Exchange Rights
and the Optional Exchange Right.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares.
"Exchangeable Shares" means the exchangeable shares of Dreco provided for
in the Plan of Arrangement.
"Final Order" means the final order of the Court approving the Arrangement.
"FTC" means the United States Federal Trade Commission and all successors
thereto.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Interim Order" means the interim order of the Court dated August , 1997,
a copy of which is attached hereto as Annex C.
"Joint Proxy Statement" or "Joint Proxy Statement/Prospectus" means this
Joint Management Information Circular and Proxy Statement/Prospectus relating to
the Dreco Meeting and the National-Oilwell Meeting.
"Liquidation Call Right" means the right of National-Oilwell, in the event
of a proposed liquidation, dissolution or winding-up of Dreco, to purchase all
of the outstanding Exchangeable Shares from the holders thereof on the effective
date of any such liquidation, dissolution or winding-up in exchange for shares
of National-Oilwell Common Stock, plus the Dividend Amount, if any, pursuant to
the Plan of Arrangement.
"Merrill Lynch" means either Merrill Lynch & Co., financial advisor to
National-Oilwell, or Merrill Lynch, Pierce, Fenner & Smith Incorporated, the
provider of the Merrill Lynch opinion, as the context requires.
"Nasdaq" means the National Market segment of The Nasdaq Stock Market.
"National-Oilwell" means National-Oilwell, Inc., a Delaware corporation.
"National-Oilwell Affiliate" means each affiliate (as such term is defined
for purposes of the pooling rules and Rule 145 under the Securities Act) of
National-Oilwell.
vi
21
"National-Oilwell Affiliates' Agreements" means the affiliates' agreements
executed by each National-Oilwell Affiliate and agreed to and accepted by
National-Oilwell and Dreco.
"National-Oilwell Amended and Restated Certificate" means the
National-Oilwell Amended and Restated Certificate of Incorporation as proposed
to be amended and restated in connection with the Combination Agreement and
Recapitalization Plan, a copy of which is attached hereto as Annex D.
"National-Oilwell Common Stock" means the common stock, par value $.01 per
share, of National-Oilwell.
"National-Oilwell Liquidation Event" means (i) any determination by
National-Oilwell's board of directors to institute voluntary liquidation,
dissolution, or winding-up proceedings with respect to National-Oilwell or to
effect any other distribution of assets of National-Oilwell among its
stockholders for the purpose of winding up its affairs; or (ii) the earlier of
(A) receipt by National-Oilwell of notice of, and (B) National-Oilwell's
becoming aware of any threatened or instituted claim, suit or proceeding with
respect to the involuntary liquidation, dissolution or winding-up of
National-Oilwell or to effect any other distribution of assets of
National-Oilwell among its stockholders for the purpose of winding-up its
affairs.
"National-Oilwell Meeting" means the special meeting of stockholders of
National-Oilwell to be held with respect to, among other things, approval by the
National-Oilwell Stockholders of the Combination Agreement and the transactions
contemplated thereby, and the Recapitalization Plan.
"National-Oilwell Record Date" means August 8, 1997.
"National-Oilwell Stockholders" means the holders of National-Oilwell
Common Stock.
"NYSE" means the New York Stock Exchange.
"Optional Exchange Right" means the right granted to the Trustee for the
use and benefit of the holders of the Exchangeable Shares pursuant to the Voting
and Exchange Trust Agreement to require National-Oilwell to exchange
Exchangeable Shares for shares of National-Oilwell Common Stock, plus the
Dividend Amount, if any, upon the occurrence of a Dreco Insolvency Event.
"Plan of Arrangement" means the plan of arrangement proposed under section
186 of the ABCA substantially in the form attached hereto as Annex E, as
amended, modified or supplemented from time to time in accordance with its
terms.
"Pre-Closing Average Price" means the price defined under "Exchange Ratio
Adjustment" above.
"Recapitalization Plan" means National-Oilwell's recapitalization plan
pursuant to which the National-Oilwell Amended and Restated Certificate of
Incorporation will be amended and restated to increase the number of shares of
authorized Common Stock from 40,000,000 to 75,000,000 and to designate a class
of Special Voting Stock consisting of the Voting Share.
"Redemption Call Right" means the right of National-Oilwell to purchase all
of the outstanding Exchangeable Shares from the holders thereof on the date
fixed for redemption thereof in exchange for shares of National-Oilwell Common
Stock, plus the Dividend Amount, if any, pursuant to the Plan of Arrangement.
"Retraction Call Right" means the overriding right of National-Oilwell, in
the event of a proposed retraction of Exchangeable Shares by a holder thereof,
to purchase from such holder on the Retraction Date the Exchangeable Shares
tendered for redemption in exchange for shares of National-Oilwell Common Stock,
plus the Dividend Amount, if any, pursuant to the Plan of Arrangement.
"Retraction Date" means a date, determined by a holder of Exchangeable
Shares, on which such holder can effect a retraction of such Exchangeable Shares
as further set out in the Exchangeable Share Provisions and described in "The
Transaction -- Transaction Mechanics and Description of Exchangeable Shares --
Exchange and Redemption Rights."
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"Retraction Request" means a duly executed statement prepared by a holder
of Exchangeable Shares in the form of Schedule "A" to the Exchangeable Share
Provisions, or in such other form as may be acceptable to Dreco.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Support Agreement" means the support agreement to be entered into as of
the Effective Date between National-Oilwell and Dreco, substantially in the form
of Annex F hereto.
"Transaction" means the transactions contemplated by the Combination
Agreement and by the Plan of Arrangement, whereby, among other things,
National-Oilwell would become the sole shareholder of the Dreco Common Share
outstanding after giving effect to the Arrangement.
"Trustee" means Montreal Trust Company of Canada, or any successor thereto,
in any of its capacities as Trustee under the Voting and Exchange Trust
Agreement, transfer agent for the Exchangeable Shares and Canadian co-registrar
for National-Oilwell Common Stock.
"TSE" means The Toronto Stock Exchange.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. dollars" or "$" means United States dollars.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
"Voting and Exchange Trust Agreement" means the voting and exchange trust
agreement to be entered into as of the Effective Date among National-Oilwell,
Dreco and the Trustee, substantially in the form of Annex G hereto.
"Voting Rights" means the rights of the holders of Exchangeable Shares to
direct the voting of the Voting Share in accordance with the Voting and Exchange
Trust Agreement.
"Voting Share" means the one share of National-Oilwell Special Voting
Stock, par value $.01 per share, to be issued by National-Oilwell and deposited
with the Trustee pursuant to the Voting and Exchange Trust Agreement.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus. The information contained in this
summary is qualified in its entirety by and should be read in conjunction with
the more detailed information contained in this Joint Proxy Statement/Prospectus
and the documents incorporated herein by reference. Unless otherwise indicated,
capitalized terms used in this summary are defined in the Glossary of Terms or
elsewhere in this Joint Proxy Statement/Prospectus.
THE COMPANIES
National-Oilwell
National-Oilwell is a worldwide leader in the design, manufacture and sale
of machinery and equipment and in the distribution of maintenance, repair and
operating products used in oil and gas drilling and production.
National-Oilwell's principal executive offices are located at 5555 San Felipe,
Houston, Texas 77056, and its telephone number is (713) 960-5100. See "Business
of National-Oilwell."
Dreco
Dreco is a worldwide leader in the design and manufacture of oilfield
equipment for the petroleum exploration and production industry. Dreco's
principal executive offices are located at #1340 Weber Centre, 5555 Calgary
Trail South, Edmonton, Alberta, Canada T6H 5P9 and its telephone number is (403)
944-3900. See "Business of Dreco."
THE MEETINGS
DATE, TIME AND PLACE
National-Oilwell. The National-Oilwell Meeting will be held on September
23, 1997, at , Houston, Texas at 9:00 a.m.
(Houston time).
Dreco. The Dreco Meeting will be held on September 23, 1997, at the
, Houston, Texas at 9:00 a.m. (Houston time).
PURPOSES OF THE MEETINGS
National-Oilwell. The purpose of the National-Oilwell Meeting is to
consider and act upon (i) a proposal to approve the Combination Agreement and
the transactions contemplated thereby, (ii) a proposal to approve the
Recapitalization Plan and (iii) such other business as may be properly presented
to the meeting.
Dreco. The purpose of the Dreco Meeting is to consider and act upon the
Arrangement Resolution and such other business as may be properly presented to
the meeting.
RECORD DATES; HOLDERS ENTITLED TO VOTE
National-Oilwell. Only holders of record of shares of National-Oilwell
Common Stock at the close of business on August 8, 1997 are entitled to notice
of and to vote at the National-Oilwell Meeting. On such date, there were
18,161,175 shares of National-Oilwell Common Stock outstanding, each of which is
entitled to one vote on each matter to be acted upon at the National-Oilwell
Meeting.
Dreco. Only holders of record of Dreco Common Shares and Dreco Options at
the close of business on August 7, 1997, are entitled to notice of and to vote
at the Dreco Meeting, provided that to the extent a person has transferred any
Dreco Common Shares after such record date and the transferee of such shares
establishes that such transferee owns such shares and demands not later than ten
days before the Dreco Meeting to be included in the list of Dreco Shareholders
eligible to vote at the Dreco Meeting, such transferee will be entitled to vote
such shares at the Dreco Meeting. On such date, there were outstanding and
entitled to vote
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7,822,822 Dreco Common Shares and there were 538,950 Dreco Common Shares subject
to outstanding Dreco Options.
QUORUM; VOTE REQUIRED
National-Oilwell. The presence, in person or by proxy, at the
National-Oilwell Meeting of the holders of a majority of the shares of
National-Oilwell Common Stock outstanding and entitled to vote at the
National-Oilwell Meeting is necessary to constitute a quorum at the meeting. The
affirmative vote of a majority of votes cast on the proposal is required to
approve the Combination Agreement and the transactions contemplated thereby,
provided that the total votes cast on the proposal represent over 50% of the
outstanding shares of National-Oilwell Common Stock entitled to vote on the
proposal. Approval and adoption of the Recapitalization Plan requires the
affirmative vote of the holders of a majority of the shares of National-Oilwell
Common Stock outstanding and entitled to vote at the meeting.
Stockholders owning 51.14% of the National-Oilwell Common Stock as of
August 8, 1997 have agreed to vote all voting securities of National-Oilwell
over which they have voting authority in favor of the approval of the
Combination Agreement and the transactions contemplated thereby and the
Recapitalization Plan. See "The Transaction -- Other Agreements -- Stockholder
Agreements." In addition, as of August 8, 1997 the directors and executive
officers of National-Oilwell owned 10.73% of the outstanding National-Oilwell
Common Stock, all of which they intend to vote in favor of the Combination
Agreement and the transactions contemplated thereby and the Recapitalization
Plan.
The respective obligations of National-Oilwell and Dreco to consummate the
Combination Agreement are subject to, among other conditions, the approval of
the National-Oilwell Stockholders of each of the Combination Agreement and the
transactions contemplated thereby and the Recapitalization Plan at the
National-Oilwell Meeting. If either one of the proposals is not approved, then
neither of the proposals will be implemented and the Transaction will not be
consummated, notwithstanding that the other proposal may have been approved by
the National-Oilwell Stockholders.
Dreco. Pursuant to the Interim Order (i) the quorum at the Dreco Meeting
will be one Dreco Shareholder or Dreco Optionholder present in person or by
proxy and holding or representing any combination of 33 1/3% of the votes
attaching to the Dreco Common Shares and Dreco Options outstanding, directly in
the case of Dreco Common Shares and derivatively in the case of Dreco Options,
and (ii) the vote required to approve the Arrangement Resolution is 66 2/3% of
the votes actually cast (not counting for this purpose abstentions, spoiled
votes, illegible votes and/or defective votes). For these purposes each Dreco
Common Share carries one vote, and each Dreco Option carries the number of votes
equal to the number of Dreco Common Shares subject to the Dreco Option.
The Chairman of the Board and the President and Chief Executive Officer of
Dreco, who collectively owned 7.25% of the outstanding Dreco Common Shares and
the Dreco Common Shares subject to outstanding Dreco Options on August 7, 1997,
have agreed to vote all voting securities of Dreco over which they have voting
authority in favor of the Arrangement Resolution. In addition, as of August 7,
1997, the remaining directors and executive officers of Dreco owned 3.65% of
outstanding Dreco Common Shares and Dreco Common Shares subject to outstanding
Dreco Options, all of which they intend to vote in favor of the Arrangement
Resolution.
RECOMMENDATIONS OF BOARDS OF DIRECTORS
National-Oilwell. THE BOARD OF DIRECTORS OF NATIONAL-OILWELL BELIEVES THAT
THE TRANSACTION IS IN THE BEST INTERESTS OF NATIONAL-OILWELL STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT THE NATIONAL-OILWELL STOCKHOLDERS VOTE TO (I)
APPROVE THE COMBINATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
(II) APPROVE AND ADOPT THE RECAPITALIZATION PLAN.
Dreco. THE BOARD OF DIRECTORS OF DRECO BELIEVES THAT THE TRANSACTION IS IN
THE BEST INTERESTS OF DRECO SHAREHOLDERS AND DRECO OPTIONHOLDERS AND RECOMMENDS
THAT THE DRECO SHAREHOLDERS AND DRECO OPTIONHOLDERS VOTE IN FAVOR OF THE
ARRANGEMENT RESOLUTION.
For a more complete description of the meetings, see "The Meetings."
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OPINIONS OF FINANCIAL ADVISORS
Merrill Lynch has delivered its written opinion dated May 13, 1997 (the
"Merrill Lynch Opinion") to the board of directors of National-Oilwell to the
effect that, as of such date and based on and subject to the factors and
assumptions set forth therein, the Exchange Ratio was fair, from a financial
point of view, to National-Oilwell. The Merrill Lynch opinion was provided to
the board of directors of National-Oilwell for its information and is directed
only to the fairness, from a financial point of view, of the Exchange Ratio to
National-Oilwell and does not constitute a recommendation to any
National-Oilwell Stockholder as to how such stockholder should vote on the
Combination Agreement, the Transaction or the Recapitalization Plan. Merrill
Lynch thereafter confirmed as of the date of this Joint Proxy
Statement/Prospectus its May 13, 1997 opinion. The full text of the Merrill
Lynch Opinion, which sets forth assumptions made, matters considered and
limitations on the review undertaken in connection with such opinion, is
attached hereto as Annex H and is incorporated herein by reference.
National-Oilwell Stockholders are urged to read the Merrill Lynch Opinion in its
entirety.
Credit Suisse First Boston has acted as exclusive financial advisor to
Dreco in connection with the Transaction. On May 13, 1997, Credit Suisse First
Boston delivered an oral opinion, which was subsequently confirmed in writing,
to the board of directors of Dreco that, as of such date and based upon and
subject to the matters set forth therein, the Exchange Ratio was fair to the
Dreco Shareholders from a financial point of view. Credit Suisse First Boston
thereafter confirmed its May 13, 1997 opinion by delivery of a written opinion
dated as of the date of this Joint Proxy Statement/Prospectus (the "Credit
Suisse First Boston Opinion"). The opinion of Credit Suisse First Boston
delivered on May 13, 1997 was provided to the board of directors of Dreco for
its information and is directed only to the fairness of the Exchange Ratio to
the Dreco Shareholders from a financial point of view and does not constitute a
recommendation to any Dreco Shareholder as to how such Shareholder should vote
on the Combination Agreement or the Arrangement. The full text of the Credit
Suisse First Boston Opinion, which sets forth the procedures followed,
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex I to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference. Dreco Shareholders are urged to read the
Credit Suisse First Boston Opinion in its entirety.
See "The Transaction -- Opinions of Financial Advisors."
THE TRANSACTION
REASONS FOR THE TRANSACTION
Each of National-Oilwell and Dreco believes that the Transaction will allow
the two companies to combine their resources to enhance their ability to compete
in the oilfield products and services industry. The board of directors of
National-Oilwell considered the following reasons in unanimously approving the
Transaction:
1. The anticipated business advantages resulting from the combination of
the two companies, specifically:
a) The ability of the combined companies to provide a more complete
rig package to customers. This will result through the combination of
National-Oilwell's oilfield equipment operations (which emphasize the
major machinery components of a drilling rig) and Dreco's rig
fabrication business (which emphasizes the design and construction of
derricks, masts and substructures).
b) The attractiveness to many customers of the combination of
Dreco's engineering expertise with the size and after-market support of
National-Oilwell.
c) The addition of Dreco's downhole products business as a third
business segment and the ability of the combined company to market and
deliver Dreco's line of downhole products through National-Oilwell's
extensive distribution system.
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2. The benefits to the National-Oilwell Stockholders of increasing
the number of publicly traded shares of National-Oilwell. This increase is
expected to result in corresponding increases in market capitalization,
trading volume and institutional interest in National-Oilwell's business
and securities.
3. The benefits to National-Oilwell that will result from a stronger
balance sheet and larger absolute size, such as increased access to capital
and financial markets, which National-Oilwell anticipates will lower the
future costs of equity and debt transactions.
In addition to the foregoing reasons, the board of directors of
National-Oilwell also considered the opinion of Merrill Lynch dated May 13, 1997
to the effect that, as of such date and based on and subject to the factors and
assumptions set forth therein, the Exchange Ratio was fair, from a financial
point of view, to National-Oilwell. See "The Transaction -- Opinions of
Financial Advisors -- Opinion of Merrill Lynch."
The National-Oilwell board of directors also considered as a potential
disadvantage the potential increase of National-Oilwell's reliance on revenue
from a limited number of large contracts due to Dreco's reliance on such
revenue. See "Risk Factors -- Dreco's Reliance on Significant Contracts."
The board of directors of Dreco considered the following factors in
approving the Transaction:
1. The general trend in the oilfield products and services industry
is towards fewer, larger suppliers who are able to supply a broad range of
oilfield products and services to their customers. The combined entity will
provide a broader range of products and services, which the board of
directors of Dreco believes will make it a more attractive supplier to the
industry.
2. The combined entity is expected to be less exposed to risk of a
downturn in the new rig and equipment construction segment than Dreco would
be on a stand-alone basis. The combined entity is expected to be more
diversified across the industry segments, combining National-Oilwell's
conventional product businesses with Dreco's specialized product
engineering and manufacturing businesses. The combined entity is expected
to be less subject to fluctuations in demand in any particular segment of
the oilfield products and services industry.
3. The combined entity will be significantly larger than Dreco and
will be able to compete more effectively if the industry consolidation
trend continues.
4. The Transaction can be effected on a tax deferred basis for most
Dreco Shareholders and Dreco Optionholders resident in Canada. In addition,
it is more likely than not that the Transaction can be effected on a tax
deferred basis for most Dreco Shareholders and Dreco Optionholders resident
in the United States.
5. The management of Dreco believes that trading prices of the
Exchangeable Shares would reasonably be expected to closely follow trading
prices of the shares of National-Oilwell Common Stock, resulting in holders
of Exchangeable Shares holding securities which would trade in a larger,
more liquid market than that presently existing for Dreco Common Shares.
6. The combined entity will have a stronger balance sheet and larger
absolute size than Dreco, which should result in increased access to
capital and financial markets.
7. The oral opinion of Credit Suisse First Boston, delivered to the
board of directors of Dreco on May 13, 1997 and subsequently confirmed in
writing, that, as of such date and based upon and subject to the matters
set forth therein, the Exchange Ratio was fair to the Dreco Shareholders
from a financial point of view. See "The Transaction -- Opinions of
Financial Advisors -- Opinion of Credit Suisse First Boston."
In view of the variety of factors considered in connection with their
evaluations of the Transaction, neither the National-Oilwell nor the Dreco board
of directors found it practicable to and did not quantify or otherwise assign
relative strengths to the specific factors considered. For potential risk
factors related to the Transaction considered at various times by the two
companies, see "Risk Factors."
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EXCHANGE OF DRECO COMMON SHARES AND RELATED MATTERS
Under the terms of the Arrangement, on the Effective Date, which is
currently expected to occur within two or three days after the requisite
shareholder and optionholder approval, each Dreco Common Share will be exchanged
for the number of Exchangeable Shares determined by the application of the
Exchange Ratio. A Dreco Shareholder receiving Exchangeable Shares can, at the
election of the holder in the Dreco Letter of Transmittal, exercise the Exchange
Put Right immediately and receive from National-Oilwell shares of
National-Oilwell Common Stock upon consummation of the Transaction. Thereafter,
Exchangeable Shares will be exchangeable at any time into shares of
National-Oilwell Common Stock on a one-for-one basis, through the exercise by
the holder of the Exchange Put Right or the holder's retraction right. In order
to obtain certificates for the shares issuable on an exchange, the holder will
be required to deliver to the Trustee or Dreco, as applicable, the certificates
for shares originally held, duly executed transfer documentation and the form of
the required notice for the particular exchange action, all as required in the
Exchangeable Share Provisions.
At the Effective Time, pursuant to the Combination Agreement,
National-Oilwell will assume the Dreco Option Plan and the obligations of Dreco
under the Dreco Options. Each Dreco Option will be converted into an option to
purchase that number of whole shares of National-Oilwell Common Stock determined
by multiplying the number of Dreco Common Shares subject to such Dreco Option at
the Effective Time by the Exchange Ratio, rounded down to the nearest whole
number of shares, at an exercise price per share of National-Oilwell Common
Stock equal to the exercise price per share of such Dreco Option immediately
prior to the Effective Time divided by the Exchange Ratio. The term,
exercisability, vesting schedule and all of the terms and conditions of the
Dreco Options will otherwise be unchanged.
Based on a calculation of the Exchange Ratio as 1.2 Exchangeable Shares for
each Dreco Common Share, National-Oilwell will ultimately be required to issue
approximately 9,387,386 shares of National-Oilwell Common Stock in exchange for
all Exchangeable Shares potentially resulting from the Arrangement, and a
further 646,740 shares of National-Oilwell Common Stock on exercise of currently
outstanding Dreco Options.
If the market price of National-Oilwell Common Stock remains at its recent
range, the Exchange Ratio will likely be between .9:1 and 1:1. Based on that
range of Exchange Ratios and assuming all Exchangeable Shares are subsequently
exchanged for National-Oilwell Common Stock, the former holders of Dreco Common
Shares would hold between 27.9% and 30.1% of the amount of National-Oilwell
Common Stock outstanding after such exchange. Assuming all Exchangeable Shares
are subsequently exchanged for National-Oilwell Common Stock and all Dreco
Options are subsequently exercised for National-Oilwell Common Stock, former
holders of Dreco Options would hold between 1.9% and 2.0% of the amount of
National-Oilwell Common Stock outstanding after such exchange and exercise, and
former holders of Dreco Common Shares and Dreco Options would collectively hold
between 29.3% and 31.5% of such outstanding stock.
See "The Transaction -- Transaction Mechanics and Description of
Exchangeable Shares" and "The Transaction -- Procedures For Exchange by Dreco
Shareholders and Dreco Optionholders."
TERMINATION RIGHTS WITH RESPECT TO CERTAIN EXCHANGE RATIO ADJUSTMENTS
If the Pre-Closing Average Price is below $33.00 Dreco has certain rights
to terminate the Combination Agreement if National-Oilwell, after Dreco
exercises its right to request National-Oilwell to do so, elects not to adjust
the Exchange Ratio. Any such termination decision by Dreco would be made in
accordance with the Dreco board's fiduciary duties to shareholders under
applicable law in consultation with its counsel and financial advisors and after
an appropriate review of the transaction. Given the nature of this review, the
factors considered by the Dreco board would include matters of the type
considered in connection with its initial determination to enter into the
transaction with National-Oilwell, as well as all other relevant factors. Unless
otherwise required to fulfill fiduciary duties, Dreco does not presently intend
to solicit shareholder approval of any board decision with respect to its
disclosed contractual rights in the event the Pre-Closing Average Price is below
$33.00.
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Similarly, National-Oilwell's decision with respect to adjusting the
Exchange Ratio if the Pre-Closing Average Price is below $33.00 would be made in
accordance with the National-Oilwell board's fiduciary duties to stockholders
under applicable law in consultation with its counsel and financial advisors and
after an appropriate review of the transaction. Given the nature of this review,
the factors considered by the National-Oilwell board would include matters of
the type considered in connection with its initial determination to enter into
the transaction with Dreco, as well as all other relevant factors. Unless
otherwise required to fulfill fiduciary duties, National-Oilwell does not
presently intend to solicit stockholder approval of any board decision with
respect to its disclosed contractual rights in the event the Pre-Closing Average
Price is below $33.00.
VOTING, DIVIDEND AND LIQUIDATION RIGHTS OF EXCHANGEABLE SHARES
Under the laws of Alberta and relevant federal Canadian law, the
Exchangeable Shares will be considered shares of Dreco. Nevertheless, through
the combination of the Exchangeable Share Provisions, the Support Agreement and
the Voting and Exchange Trust Agreement, the Exchangeable Shares are structured
to be the economic equivalent of National-Oilwell Common Stock, and the holders
of Exchangeable Shares will have the following principal and material rights:
(i) the right to exchange such shares for shares of National-Oilwell
Common Stock on a one-for-one basis (with an adjustment for the Dividend
Amount, if any);
(ii) the right to receive dividends, on a per share equivalent basis,
in amounts (or property in the case of non-cash dividends) which are the
same as, and which are payable at the same time as, dividends declared on
National-Oilwell Common Stock;
(iii) the right to vote, on a per share equivalent basis, at all
stockholder meetings at which shares of National-Oilwell Common Stock are
entitled to vote; and
(iv) the right to participate upon a National-Oilwell Liquidation
Event, on a pro rata basis with the holders of National-Oilwell Common
Stock in the distribution of assets of National-Oilwell, through the
mandatory exchange of Exchangeable Shares for shares of National-Oilwell
Common Stock.
The Exchangeable Shares will, in effect, have no separate economic rights
against or in Dreco and will have no separate voting rights in Dreco (other than
certain limited class rights required under the ABCA and the right to vote on
any change in the fundamental terms of the shares themselves or the related
terms in the Support Agreement and Voting and Exchange Trust Agreement. In these
cases, the voting rights are subject to automatic redemption upon the occurrence
of an Automatic Redemption Date. Shareholders will generally only be able to
obtain tax deferral for as long as they hold Exchangeable Shares, and an
automatic redemption of the Exchangeable Shares may occur at any time after the
Effective Date upon the occurrence of certain events that cause an Automatic
Redemption Date. An Automatic Redemption Date will occur no later than the fifth
anniversary of the Effective Date. See "The Companies After the
Transaction -- Dreco Share Capital" and "Income Tax Considerations to Dreco
Shareholders and Optionholders."). See "The Companies After the
Transaction -- Dreco Share Capital."
EFFECTIVE TIME OF THE TRANSACTION
It is anticipated that the Transaction will become effective after the
requisite shareholder and optionholder, Court and regulatory approvals have been
obtained and are final and all other conditions to the Transaction have been
satisfied or waived. It is presently anticipated that the Transaction will
become effective within two or three days of the requisite shareholder and
optionholder approval on or about September 25, 1997.
CONDITIONS TO THE TRANSACTION
The obligations of National-Oilwell and Dreco to consummate the Transaction
are subject to the satisfaction of certain conditions, including obtaining
requisite shareholder and optionholder, Court and regulatory approvals. See
"Anticipated Accounting Treatment" and "The Transaction -- The Combination
Agreement."
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REGULATORY REQUIREMENTS
The Transaction is subject to the premerger filing requirements of the HSR
Act, and on May 30, 1997, National-Oilwell and Dreco made premerger filings
under the HSR Act with the FTC and the Antitrust Division of the Department of
Justice. On June 17, 1997, early termination of the required waiting period
under the HSR Act was granted. In addition, National-Oilwell and Dreco have
initiated a filing under the Investment Canada Act, the Canadian statute of
general application regulating non-domestic investment in Canada. Prior approval
under this Act is required. National-Oilwell and Dreco currently anticipate that
the required approvals will be obtained not later than the first week of
September, 1997. National-Oilwell and Dreco are not aware of any other
government or regulatory approvals required for consummation of the Transaction,
other than compliance with applicable securities laws of various jurisdictions.
See "The Transaction -- Regulatory Matters."
ANTICIPATED ACCOUNTING TREATMENT
The Transaction will be accounted for as a pooling-of-interests under U.S.
GAAP. See "The Transaction -- Anticipated Accounting Treatment."
In order to ensure that the Transaction qualifies for pooling-of-interests
accounting treatment, it is a condition to each party's obligation to consummate
the Transaction that holders of more than 10% of the Dreco Common Shares shall
not have exercised their rights of dissent under the ABCA. In addition, it is a
condition to each party's obligation to consummate the Transaction that no event
shall have occurred which will establish with reasonable certainty that the
Transaction would not be treated as a pooling of interests. The consummation of
the Transaction is further conditioned upon confirmation on the Effective Date
by Ernst & Young LLP (National-Oilwell's auditors) and Coopers & Lybrand
(Dreco's auditors) of their concurrence with the conclusions of
National-Oilwell's management and Dreco's management with respect to pooling
matters.
CERTAIN RELATED AGREEMENTS
National-Oilwell Affiliates. National-Oilwell and Dreco have entered into
agreements with each of the National-Oilwell Affiliates, pursuant to which such
persons have agreed that they will not sell, transfer, encumber or otherwise
dispose of any National-Oilwell Common Stock for 30 days prior to the Effective
Date and after the Effective Date until National-Oilwell shall have publicly
released financial results that include at least 30 days of the combined
operating results of Dreco and National-Oilwell. See "The Transaction -- Other
Agreements -- Affiliates' Agreements."
Dreco Affiliates. National-Oilwell and Dreco have entered into agreements
with each of the Dreco Affiliates, pursuant to which such persons have agreed
that they will not sell, transfer, encumber or otherwise dispose of Dreco Common
Shares in the 30-day period preceding the Effective Date and Exchangeable Shares
or National-Oilwell Common Stock after the Effective Date until National-Oilwell
shall have publicly released financial results that include at least 30 days of
the combined operating results of Dreco and National-Oilwell. See "The
Transaction -- Other Agreements -- Affiliates' Agreements."
DISSENT AND APPRAISAL RIGHTS
Pursuant to the Interim Order, Dreco Shareholders and Dreco Optionholders
have certain rights to dissent and receive fair value of Dreco Common Shares or
Dreco Options they own in accordance with section 184 of the ABCA. See
"Dissenting Dreco Shareholders' and Dreco Optionholders' Rights."
TERMINATION OF RIGHTS PLAN
Pursuant to the Arrangement, all rights outstanding under the Shareholder
Rights Plan Agreement between Dreco and Montreal Trust Company of Canada dated
as of November 15, 1996 (the "Rights Plan") shall be redeemed and cancelled on
the Effective Date, and the Rights Plan shall be terminated.
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INTERESTS OF CERTAIN PERSONS
On the Effective Date, Frederick W. Pheasey and Robert L. Phillips will be
appointed to the National-Oilwell board of directors, Mr. Pheasey will be
appointed Executive Vice President of National-Oilwell and W. Douglas Frame,
currently an executive officer of Dreco, will be appointed an executive officer
of National-Oilwell. On the Effective Date, all the current directors on the
Dreco board will resign from the Dreco board, except for Frederick W. Pheasey,
and C. R. Bearden (formerly a director of National-Oilwell) and Edward C. Grimes
will be appointed to such board.
Pursuant to the Combination Agreement, National-Oilwell has agreed to
maintain all rights to indemnification existing at the time of execution of the
Combination Agreement in favor of the directors and officers of Dreco and its
subsidiaries in accordance with the charter documents and bylaws of each entity
and to the fullest extent permitted under the ABCA and to continue in effect
director and officer liability insurance for such persons for six years after
the Effective Date. See "The Transaction -- Interests of Certain Persons in the
Transaction."
In addition, on the Effective Date, National-Oilwell will assume the Dreco
Option Plan and each Dreco Option. Each Dreco Option will be modified to become
an option to purchase National-Oilwell Common Stock. See "The
Transaction -- Transaction Mechanics and Description of Exchangeable
Shares -- Dreco Options."
THE COMPANIES AFTER THE TRANSACTION
If the Transaction is consummated, National-Oilwell's board of directors
will be expanded to nine members, seven of whom will be persons who are
currently directors of National-Oilwell, and Mr. Pheasey and Mr. Phillips will
be appointed to the two additional positions.
Upon consummation of the Transaction, Joel V. Staff (currently Chairman of
the Board, President and Chief Executive Officer of National-Oilwell) will
remain Chairman of the Board, President and Chief Executive Officer of
National-Oilwell and Mr. Pheasey (currently Chairman of the Board of Dreco who
will become Executive Vice President and a director of National-Oilwell), C. R.
Bearden and Edward C. Grimes will be the directors of Dreco. After consummation
of the Transaction, National-Oilwell's headquarters will remain located at 5555
San Felipe, Houston, Texas 77056, and Dreco's headquarters will remain located
at #1340 Weber Centre, 5555 Calgary Trail South, Edmonton, Alberta, Canada T6H
5P9.
CERTAIN TAX CONSEQUENCES
The Transaction has been structured to provide the opportunity for a tax
deferral to most Dreco Shareholders in Canada who receive Exchangeable Shares
pursuant to the Arrangement. In addition, it is more likely than not that most
Dreco Shareholders in the United States who receive Exchangeable Shares pursuant
to the Arrangement will have the opportunity for a tax deferral. However, such
shareholders will generally only be able to obtain tax deferral for as long as
they hold the Exchangeable Shares, and will, except in certain limited
situations, generally recognize a gain or loss upon the exchange of their
Exchangeable Shares for shares of National-Oilwell Common Stock. There are other
conditions and limitations on qualifying for the tax deferral. See "Income Tax
Considerations to Dreco Shareholders and Optionholders." In addition, an
automatic redemption of the Exchangeable Shares may occur at any time after the
Effective Date if an Automatic Redemption Date occurs. An Automatic Redemption
Date will occur no later than the fifth anniversary of the Effective Date. See
"The Companies After the Transaction -- Dreco Share Capital." Dreco Shareholders
are urged to consult their tax advisors. The receipt of a favorable tax opinion
to the effect that the Arrangement will be generally treated for Canadian
federal income tax purposes as a reorganization of capital for those Dreco
Shareholders who hold their Dreco Common Shares as capital property for purposes
of the Canadian Tax Act is a condition to Dreco's obligation to consummate the
Transaction.
BECAUSE OF THE POTENTIALLY ADVERSE TAX CONSEQUENCES OF THE RECEIPT OF A
DEEMED DIVIDEND UPON THE REDEMPTION (INCLUDING PURSUANT TO A RETRACTION) OF AN
EXCHANGEABLE SHARE BY DRECO, HOLDERS OF EXCHANGEABLE SHARES SHOULD CONSULT WITH
THEIR OWN TAX ADVISORS CONCERNING THE POSSIBLE BENEFITS IN THEIR PARTICULAR
8
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CIRCUMSTANCES OF EXCHANGING WITH NATIONAL-OILWELL FOR NATIONAL-OILWELL COMMON
STOCK OR OTHERWISE DISPOSING OF THEIR EXCHANGEABLE SHARES.
See "Income Tax Considerations to Dreco Shareholders and Optionholders."
RISK FACTORS
For a discussion of certain considerations with respect to the business and
operations of National-Oilwell and Dreco that should be considered by a
National-Oilwell Stockholder, a Dreco Shareholder or Dreco Optionholder before
determining how to vote at the meetings, see "Risk Factors."
ACCOUNTING PRINCIPLES
The consolidated financial statements and the summary historical
consolidated financial information of National-Oilwell, the summary historical
consolidated financial information of Dreco, and the pro forma National-Oilwell
and Dreco combined consolidated financial statements contained in this Joint
Proxy Statement/Prospectus have been prepared in accordance with U.S. GAAP. See
Notes to the Dreco Consolidated Financial Statements incorporated herein for a
reconciliation of Canadian GAAP and U.S. GAAP. See "Incorporation of Certain
Documents by Reference."
COMPARATIVE MARKET PRICE DATA
On May 13, 1997, the last full trading day prior to the joint public
announcement by National-Oilwell and Dreco of the proposed Transaction, the last
reported sales price on the NYSE of National-Oilwell Common Stock was $39.13.
The last reported sales price of the Dreco Common Shares on the TSE on the same
day was Cdn. $53.00 (Cdn. $63.60 on a per share equivalent basis assuming an
Exchange Ratio of 1.2 to 1); the last reported sales price of such shares on
Nasdaq on the same day was $38.50 ($46.20 on a per share equivalent basis
assuming an Exchange Ratio of 1.2 to 1). On August 8, 1997, the last reported
sales price per share of the National-Oilwell Common Stock was $59.44, the last
reported sales price of the Dreco Common Shares on the TSE was Cdn. $75.00 and
the last reported sales price of the Dreco Common Shares on Nasdaq was $54.00.
See "Comparative Market Price Data."
On August 8, 1997, there were 18,161,175 shares of National-Oilwell Common
Stock outstanding held of record by 68 stockholders and, on August 7, 1997,
there were 7,822,822 Dreco Common Shares outstanding held of record by 1,120
shareholders.
DIVIDEND POLICIES
Historically, National-Oilwell and Dreco have not paid dividends on their
capital stock and have no present plans to pay dividends. The payment of any
future dividends on National-Oilwell Common Stock and, therefore, on
Exchangeable Shares, would depend, among other things, upon the current and
retained earnings and financial condition of National-Oilwell, and upon a
determination by its board of directors that the payment of dividends would be
desirable. In addition, National-Oilwell's current credit facility imposes
limitations on the payment of dividends.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus includes, or has incorporated into it
by reference, "forward looking statements" within the meaning of the Securities
Act and Section 21E of the Exchange Act. Such forward looking statements
include, without limitation, statements under (i) "Business of
National-Oilwell," (ii) "Business of Dreco," (iii) "National-Oilwell
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and (iv) "Risk Factors." Although National-Oilwell and Dreco
believe that the expectations reflected in such forward looking statements are
reasonable, they can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from National-Oilwell's and Dreco's expectations are disclosed in
this Joint Proxy Statement/Prospectus.
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32
RISK FACTORS
The following risk factors should be considered by National-Oilwell
Stockholders and Dreco Shareholders and Dreco Optionholders in evaluating
whether to approve the Transaction. Some of these risk factors relate directly
to the Transaction, while others are present in National-Oilwell's or Dreco's
general business environment independent of the Transaction. These risk factors
should be considered in conjunction with the other information included in this
Joint Proxy Statement/Prospectus.
Dependence on Oil and Gas Industry
National-Oilwell's and Dreco's businesses are each substantially dependent
upon the condition of the oil and gas industry and the industry's willingness to
explore for and produce oil and gas. The degree of such willingness is generally
dependent upon the prevailing view of future product prices, which are
influenced by numerous factors affecting the supply and demand for oil and gas,
including the level of drilling activity, worldwide economic activity, interest
rates and the cost of capital, the development of alternate energy sources,
environmental regulation, tax policies, political requirements of national
governments, coordination by the Organization of Petroleum Exporting Countries
("OPEC") and the cost of producing oil and gas. Any significant reduction in
demand for drilling services, in cash flows of drilling contractors or in rig
utilization rates below current levels could result in a drop in demand for
products manufactured and sold by National-Oilwell and Dreco.
Volatility of Oil and Gas Prices
Oil and gas prices and activity have been characterized by significant
volatility over the last twenty years. Since 1986, spot oil prices (West Texas
Intermediate) have ranged from a low of approximately $11 per barrel in 1986 to
a high of approximately $40 per barrel in 1991; spot gas prices (Henry Hub) have
ranged from lows below $1.00 per mcf of gas in 1992 to highs above $3.00 per mcf
in 1996. These price changes have caused numerous shifts in the strategies of
oil and gas companies and drilling contractors and their expenditure levels and
patterns, particularly with respect to decisions to purchase major capital
equipment of the type manufactured by National-Oilwell and Dreco.
No assurance can be given as to the future price levels of oil and gas or
the volatility thereof or that the future price of oil and gas will be
sufficient to support current levels of exploration and production-related
activities.
No Assurance of Successful Combination of National-Oilwell and Dreco
In evaluating the terms of the Transaction, National-Oilwell and Dreco each
analyzed their respective businesses and made certain assumptions concerning
their respective future operations. One principal assumption was that through
combination of operations, the Transaction would produce a combined company with
operating results better than those historically experienced or presently
expected to be experienced in the future by either company in the absence of the
Transaction. There can be no assurance, however, that these benefits will be
achieved or that the results of the combined operations will be improved. These
anticipated benefits of the Transaction will not be achieved unless the
companies are successfully combined in a timely manner. The process of combining
the organizations could cause the interruption of, or a loss of momentum in, the
activities of some or all of the companies' businesses, which could have an
adverse effect on their combined operations.
The success of the Transaction will be partially dependent on the
integration of the current management and operations of National-Oilwell and
Dreco. There can be no assurances that National-Oilwell and Dreco will be able
to effectively integrate management and operations or that operational or
administrative efficiencies anticipated from the Transaction can be attained.
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33
Highly Competitive Industry
The oilfield products and services industry is highly competitive. The
revenues and earnings of National-Oilwell and Dreco can each be affected by
competitive actions such as price changes, introduction of new products or
improved availability and delivery.
Over the last several years the market for oilfield services and equipment
has experienced overcapacity which has resulted in increased price competition
in many areas of National-Oilwell's and Dreco's businesses. National-Oilwell and
Dreco compete with a large number of companies, some of which may offer certain
more technologically advanced products, possess greater financial resources and
have more extensive and diversified operations than National-Oilwell and Dreco.
Potential Product Liability and Warranty Claims
Certain products of National-Oilwell and Dreco are used in potentially
hazardous drilling, completion and production applications that can cause
personal injury or loss of life, damage to property, equipment or the
environment and suspension of operations. National-Oilwell and Dreco each
maintain insurance coverage in such amounts and against such risks as each
believes to be in accordance with normal industry practice. Such insurance does
not, however, provide coverage for all liabilities (including liabilities for
certain events involving pollution), and there can be no assurance that such
insurance will be adequate to cover all losses or liabilities that may be
incurred by National-Oilwell or Dreco in its operations. Moreover, no assurance
can be given that National-Oilwell or Dreco will, in the future, be able to
maintain insurance at levels it deems adequate and at rates it considers
reasonable or that any particular types of coverage will be available.
Litigation arising from a catastrophic occurrence at a location where
National-Oilwell's or Dreco's equipment and services are used may, in the
future, result in either company being named as a defendant in product liability
or other lawsuits asserting potentially large claims.
National-Oilwell and Dreco are each parties to various legal and
administrative proceedings which have arisen from ongoing and, in the case of
National-Oilwell, disposed businesses. No assurance can be given with respect to
the outcome of these or any other pending legal and administrative proceedings
and the effect such outcomes may have on National-Oilwell or Dreco.
Impact of Governmental Regulations
Many aspects of National-Oilwell's and Dreco's operations are affected by
political developments and are subject to both domestic and foreign governmental
regulation, including those relating to oilfield operations, worker safety and
the protection of the environment. In addition, National-Oilwell and Dreco each
depend on the demand for its services from the oil and gas industry and,
therefore, are affected by any changes in taxation, price controls or other laws
and regulations that affect the oil and gas industry generally. The adoption of
laws and regulations curtailing exploration for or production of oil and gas for
economic or other policy reasons could adversely affect National-Oilwell's or
Dreco's operations. National-Oilwell and Dreco cannot determine the extent to
which their future operations and earnings may be affected by new legislation,
new regulations or changes in existing regulations.
Impact of Environmental Regulations
National-Oilwell's and Dreco's operations and those of their customers are
affected by numerous foreign, federal, state, provincial and local environmental
laws and regulations. The technical requirements of these laws and regulations
are becoming increasingly expensive, complex and stringent. These laws may
impose penalties or sanctions for damages to natural resources or threats to
public health and safety. Such laws and regulations may also expose each of
National-Oilwell and Dreco to liability for the conduct of or conditions caused
by others, or for acts of National-Oilwell and Dreco that were in compliance
with all applicable laws at the time such acts were performed. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several liability for remediation of
spills and releases of hazardous substances. In addition, both
11
34
companies may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances, as well as damage to
natural resources.
Risk of Certain Foreign Markets
Certain of National-Oilwell's and Dreco's revenues result from the sale of
products to customers for ultimate destinations in the Middle East, Africa and
other international markets and are subject to risks of instability of foreign
economies and governments. Furthermore, each of National-Oilwell's and Dreco's
sales can be affected by laws and regulations limiting exports to particular
countries. The combined operations may be subject to contradictory laws and
regulations, especially between the United States and Canada, regarding exports
to certain countries, with the result that certain export sales currently made
by Dreco may be reduced or prohibited upon completion of the Transaction.
National-Oilwell attempts to limit its exposure to foreign currency
fluctuations by limiting the amount of sales denominated in currencies other
than United States dollars, Canadian dollars and British pounds.
National-Oilwell has not engaged in and does not currently intend to engage in
any significant hedging or currency trading transactions designed to compensate
for adverse currency fluctuations among those or any other foreign currencies.
Dreco attempts to limit its exposure to foreign currency fluctuations by
requiring payment in United States or Canadian dollars, requiring payment in
currencies matching the currency in which Dreco will incur expenditures in
performing its contracts, or in certain circumstances, by entering into hedging
transactions designed to compensate for adverse currency fluctuations among
those or any other foreign currencies.
Potential Dilution to National-Oilwell Stockholders and Dreco Shareholders
The Exchange Ratio is subject to a collar and will provide Dreco's
Shareholders with 1.2 Exchangeable Shares, exchangeable for shares of
National-Oilwell Common Stock, if during the 20 consecutive trading days ending
five days before the Closing, National-Oilwell's average stock price is between
$36.00 and $47.25. See "The Transaction -- The Combination Agreement -- Exchange
Ratio Adjustment." If the average stock price is between $36.00 and $33.00, the
Exchange Ratio will be adjusted to provide Dreco Shareholders with value
equivalent to $43.20 of National-Oilwell Common Stock, thereby diluting existing
National-Oilwell Stockholders. Moreover, if the average price is below $33.00,
National-Oilwell could agree to continue to adjust the Exchange Ratio, thereby
resulting in further dilution to existing National-Oilwell Stockholders, but
would not be required to do so. If National-Oilwell does not do so, Dreco will
have certain rights to terminate the Combination Agreement. See "The
Transaction -- The Combination Agreement -- Termination." In addition, if the
average stock price is greater than $47.25 per share, the Exchange Ratio will be
adjusted to provide Dreco Shareholders with value equivalent to $56.70 of
National-Oilwell Common Stock, thereby effectively lowering the Exchange Ratio
and diluting Dreco Shareholders.
Control by Certain Stockholders
Current National-Oilwell Stockholders who collectively acquired the
predecessor partnership of National-Oilwell and owned 100 percent of the
outstanding stock of National-Oilwell prior to its initial public offering in
October 1996 collectively owned an aggregate of 13,136,630 shares of common
stock, representing 72.33% of the outstanding shares at the National-Oilwell
Record Date. After completion of the Transaction and assuming a 1.2:1 Exchange
Ratio and the exchange of all Exchangeable Shares for National-Oilwell Common
Stock, these stockholders will own 47.69% of the outstanding shares of
National-Oilwell Common Stock. As a result of such ownership, such stockholders
could collectively have the power to substantially influence the outcome of
certain matters submitted to a vote of National-Oilwell's Stockholders,
including the election of each class of the board of directors, and their
interests may not reflect the interests of other stockholders. In addition, a
decision by certain of these stockholders to sell shares will accelerate
repayment by National-Oilwell of a portion or all of the seller notes incurred
in connection with the acquisition, effective January 1, 1996, of
National-Oilwell's operations from subsidiaries of Armco Inc. and USX
Corporation. There can be no assurance that funds to repay the seller notes will
be available at such time.
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Dreco's Reliance on Significant Contracts
A significant portion of Dreco's revenue has been derived from a limited
number of large contracts. Failure to replace large contracts as they are
completed could adversely affect future revenue. In addition, dependence on a
limited number of large contracts increases the risk associated with cost
overruns in performing a specific contract, or of cancellation or failure of a
customer to make payments under such contracts.
Limitation on U.S. Net Operating Loss Carryforwards
Dreco, Inc., a United States subsidiary of Dreco, has substantial United
States federal income tax net operating loss carryforwards. The value of the
carryforwards depends on the ability of Dreco, Inc. to generate United States
federal taxable income. The use of such carryforwards may be restricted in cases
where a 50% aggregate change in the beneficial ownership of Dreco and,
indirectly, Dreco, Inc. occurs during any three-year period.
The Arrangement may result in an ownership change of Dreco and, indirectly,
Dreco, Inc. for purposes of Section 382 of the U.S. Code. In the event of such
an ownership change in Dreco and, indirectly, in Dreco, Inc., Section 382 of the
U.S. Code would impose an annual limitation on the amount of Dreco, Inc.'s
taxable income that may be offset by its net operating loss carryforwards. The
limitation is generally the amount equal to the product of the fair market value
of the equity of Dreco, Inc. immediately before such ownership change and a
percentage approximately equal to the yield on long-term, tax-exempt bonds
during the month in which the ownership change occurs.
Potentially Adverse U.S. Income Tax Consequences to Dreco Shareholders
It is more likely than not that the Arrangement will qualify as a
"reorganization" within the meaning of Section 368(a) of the U.S. Code with
respect to United States Holders (as defined under "Income Tax Considerations to
Dreco Shareholders and Optionholders -- United States Federal Income Tax
Considerations to Dreco Shareholders" on page 74) of Dreco Common Shares who
receive Exchangeable Shares pursuant to the Arrangement. There is, however, no
direct authority addressing the proper treatment of the Arrangement for United
States federal income tax purposes and, therefore, such conclusion is subject to
significant uncertainty. If the Arrangement fails to qualify as a
reorganization, a United States Holder of the Dreco Common Shares who receives
Exchangeable Shares pursuant to the Arrangement would recognize gain or loss
equal to the difference between the fair market value of the Exchangeable Shares
and such holder's tax basis in the Dreco Common Shares exchanged therefor. See
"Income Tax Considerations to Dreco Shareholders and Optionholders."
In addition, Dreco and National-Oilwell intend to treat dividends received
by a non-United States Holder with respect to the Exchangeable Shares as
dividends from Dreco rather than from National-Oilwell and as not subject to
United States withholding tax, and Dreco and National-Oilwell do not intend that
Dreco or National-Oilwell will withhold any amounts in respect of such tax from
such dividends. There is some possibility, however, that the Internal Revenue
Service may assert that United States withholding tax is payable with respect to
any dividends paid on the Exchangeable Shares to non-United States Holders. See
"Income Tax Considerations to Dreco Shareholders and Optionholders."
Adverse Tax Consequences of Automatic Redemption
The Transaction has been structured to provide the opportunity for a tax
deferral to most Dreco Shareholders in Canada who receive Exchangeable Shares
pursuant to the Arrangement. In addition, it is more likely than not that most
Dreco Shareholders in the United States who receive Exchangeable Shares pursuant
to the Arrangement will have the opportunity for a tax deferral. However, such
shareholders will generally only be able to obtain tax deferral for as long as
they hold the Exchangeable Shares, and will, except in certain limited
situations, generally recognize a gain or loss upon the exchange of their
Exchangeable Shares for shares of National-Oilwell Common Stock. An automatic
redemption of the Exchangeable Shares for shares of National-Oilwell Common
Stock may occur at any time after the Effective Date if an Automatic Redemption
Date occurs. An Automatic Redemption Date will occur no later than the fifth
anniversary of the Effective Date. See "The Companies After the
Transaction -- Dreco Share Capital" and "Income Tax Considerations to Dreco
Shareholders and Optionholders."
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COMPARATIVE PER SHARE DATA
The four columns included in the following table set forth: (1) historical
earnings per share before extraordinary loss and the historical book value per
share data of National-Oilwell Common Stock; (2) the historical earnings per
share before extraordinary loss and the historical book value per share data of
Dreco Common Shares restated in U.S. GAAP; (3) the pro forma earnings per share
before extraordinary loss and the pro forma book value per share data of
National-Oilwell Common Stock after giving effect to the proposed Transaction on
a "pooling-of-interests" basis under U.S. GAAP; and (4) the pro forma earnings
per share before extraordinary loss and the pro forma book value per share
attributable to 1.2 shares of National-Oilwell Common Stock for each Dreco
Common Share. The information presented in the table should be read in
conjunction with the unaudited pro forma financial statements and the separate
historical consolidated financial statements of National-Oilwell and Dreco and
the notes thereto contained elsewhere or incorporated by reference in this Joint
Proxy Statement/Prospectus. See "National-Oilwell and Dreco Combined Unaudited
Pro Forma Financial Information" and "Incorporation of Certain Documents by
Reference."
HISTORICAL PRO FORMA
----------------------- --------------------
NATIONAL- COMBINED
OILWELL(1) DRECO(2) (2)(3)(4) DRECO(4)
---------- ---------- --------- --------
US GAAP
EARNINGS PER SHARE BEFORE EXTRAORDINARY LOSS(5):
Six months ended June 30, (or May 31, for Dreco)
1997............................................... $0.78 $ 0.77 $0.73 $ 0.88
Year ended December 31, (or November 30, for Dreco)
1996............................................... 0.02 0.91 0.28 0.34
BOOK VALUE PER SHARE:
June 30, (or May 31, for Dreco) 1997................. 6.95 14.50 8.39 10.07
December 31, (or November 30, for Dreco) 1996........ 6.11 9.65 6.34 7.61
- ---------------
(1) National-Oilwell acquired its predecessor, a partnership, as of January 1,
1996. Accordingly, no per share data is provided for the fiscal years ended
December 31, 1995 and 1994.
(2) Because Dreco has a fiscal year that ends on August 31 and
National-Oilwell's fiscal year ends on December 31, Dreco's financial
statements have been updated by excluding from the year end numbers the
results from the first quarter of the fiscal year ending August 31 and
including in the year end numbers the results from the first quarter of the
succeeding fiscal year.
(3) National-Oilwell and Dreco expect to incur business combination costs
estimated at $8.5 million within the twelve-month period following
consummation of the Transaction, and such costs are reflected in the
Unaudited Pro Forma Combined Consolidated Balance Sheet. This charge is not
reflected in the Unaudited Pro Forma Combined Consolidated Statement of
Operations because, while the costs are directly related to the Transaction,
they are non-recurring in nature.
(4) The equivalent combined and Dreco unaudited pro forma data is calculated as
the combined unaudited pro forma earnings per share before extraordinary
loss and book value per common share multiplied by the assumed Exchange
Ratio, which is indirectly equivalent to 1.2 shares of National-Oilwell
Common Stock for each Dreco Common Share.
(5) Fully diluted earnings per share has not been presented since common stock
equivalents produced an anti-dilutive effect, had no dilutive effect or did
not result in material dilution under U.S. GAAP.
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COMPARATIVE MARKET PRICE DATA
The following table sets forth the high and low sales prices of the
National-Oilwell Common Stock, traded under the symbol "NOI" on the NYSE, and of
the Dreco Common Shares, traded under the symbol "DRE.A" on the TSE and "DREAF"
on Nasdaq, for the calendar quarters and months indicated. The quotations are as
reported in published financial sources.
NATIONAL-OILWELL(1) DRECO
-------------------- ------------------------------------
NYSE(3) TSE(2) NASDAQ(3)
-------------------- ---------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
-------- -------- ------ ------ ------ ------
1995
Quarter ended March 31................. -- -- $17.00 $10.00 $12.75 $ 6.75
Quarter ended June 30.................. -- -- 21.25 16.50 15.75 12.00
Quarter ended September 30............. -- -- 21.00 17.13 15.88 12.75
Quarter ended December 31.............. -- -- 24.00 18.13 17.75 13.00
1996
Quarter ended March 31................. -- -- $26.50 $22.00 $20.13 $15.50
Quarter ended June 30.................. -- -- 40.00 26.25 29.00 19.38
Quarter ended September 30............. -- -- 37.00 31.70 28.00 22.38
Quarter ended December 31.............. $30.50 $20.00 59.00 32.00 44.75 23.75
(beginning October 29, 1996 for
National-Oilwell)
1997
Month ended January 31................. $38.63 $29.63 $58.00 $49.00 $43.00 $36.00
Month ended February 28................ 35.13 28.00 56.75 50.00 41.00 34.75
Month ended March 31................... 38.63 28.00 49.50 43.00 36.00 31.75
Month ended April 30................... 39.63 31.63 47.25 43.50 33.88 30.38
Month ended May 31..................... 49.50 38.75 68.60 44.15 50.00 31.25
Month ended June 30.................... 57.75 48.63 74.00 68.00 53.75 49.31
Month ended July 31.................... 62.75 50.13 75.64 71.00 54.63 52.00
Month ended August 31 (through August
8)................................... 61.81 58.88 77.09 74.94 54.75 53.50
- ---------------
(1) National-Oilwell commenced trading on the NYSE on October 29, 1996.
(2) The prices set forth in the TSE columns are in Canadian Dollars.
(3) The prices set forth in the Nasdaq and NYSE columns are in U.S. Dollars.
On May 13, 1997, the last full trading day prior to the joint public
announcement by National-Oilwell and Dreco of the proposed Transaction, the last
reported sales price on the NYSE of National-Oilwell Common Stock was $39.13.
The last reported sales price of the Dreco Common Shares on the TSE on the same
day was Cdn. $53.00 (Cdn. $63.60 on a per share equivalent basis assuming an
Exchange Ratio of 1.2 to 1); the last reported sales price of such shares on
Nasdaq on the same day was $38.50 ($46.20 on a per share equivalent basis
assuming an Exchange Ratio of 1.2 to 1).
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
NATIONAL-OILWELL
The following table sets forth selected historical consolidated financial
data for National-Oilwell and its predecessor, which National-Oilwell acquired
as of January 1, 1996, for each of the five years in the period ended December
31, 1996 and for the six months ended June 30, 1997 and 1996. Such data for the
three years in the period ended December 31, 1996 has been derived from the
audited Consolidated Financial Statements of National-Oilwell and the related
notes thereto. Such data for the two years in the period ended December 31, 1993
are derived from audited financial statements that are not included herein. The
selected historical consolidated financial data for the six month periods ended
June 30, 1997 and 1996 has been derived from the unaudited consolidated
financial statements of National-Oilwell and includes, in the opinion of
National-Oilwell's management, all adjustments necessary to present fairly the
results of such periods. Such data should be read in conjunction with
"National-Oilwell Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SUCCESSOR PREDECESSOR
------------------------------ -----------------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues..................... $374,020 $294,643 $648,621 $545,803 $562,053 $627,281 $569,911
Operating income (loss)
before special items(1).... 25,556 13,406 34,708 13,781 15,208 489 (25,038)
Operating income (loss)(1)... 25,556 13,406 18,097 22,239 29,124 (8,076) (31,538)
Income (loss) before taxes
and extraordinary
loss(2).................... 23,206 6,667 6,794 19,577 24,921 (15,592) (35,387)
Income (loss) before
extraordinary loss(2)(3)... 14,386 4,000 4,245 17,640 23,880 (17,463) (35,127)
Net income (loss)(3)......... 14,386 4,000 245 17,640 23,880 (17,463) (35,127)
Income per share before
extraordinary loss(2)(4)... 0.78 0.29 0.18 -- -- -- --
Net income per share(4).... 0.78 0.29 0.02 -- -- -- --
OTHER DATA:
Depreciation and
amortization............... 2,076 1,903 3,591 3,595 6,027 10,721 12,233
Capital expenditures......... 1,684 849 3,136 4,764 3,604 1,967 4,941
BALANCE SHEET DATA:
Working capital.............. 147,988 125,580 130,070 177,365 151,810 171,632 179,407
Total assets................. 310,728 259,481 266,743 288,578 268,304 343,479 371,883
Long-term debt, less current
maturities................. 55,625 118,688 36,392 9,128 -- 69,816 56,467
Owners' equity............... 126,231 33,982 109,080 178,012 161,888 170,676 192,546
- ---------------
(1) In 1996, National-Oilwell recorded charges related to the cancellation of
management agreements and expenses related to a special incentive plan that
terminated upon the occurrence of its initial public offering of common
stock. In 1995 and 1994, National-Oilwell recorded gains from the sales of
certain non-core equipment manufacturing businesses, product lines and
assets, net of other costs. In 1993 and 1992, National-Oilwell recorded
charges primarily related to the disposal of manufacturing facilities and a
product line.
(2) In October 1996, National-Oilwell recorded an extraordinary loss of $4,000,
net of income tax benefit of $2,400, due to the write-off of deferred debt
costs.
(3) Prior to January 1, 1996, National-Oilwell was a general partnership and
therefore not subject to U.S. federal and state income taxes.
(4) Prior to 1996, National-Oilwell was a general partnership and therefore had
no shares outstanding.
16
39
DRECO
The following table sets forth selected historical consolidated financial
data for Dreco for each of the five years in the period ended August 31, 1996
and for the nine months ended May 31, 1997 and May 31, 1996 (based on U.S.
GAAP). Such data for the three years in the period ended August 31, 1996 has
been derived from the audited Consolidated Financial Statements of Dreco and the
related notes thereto, except that it is presented in accordance with U.S. GAAP.
Such data for the two years in the period ended August 31, 1993, which is also
in U.S. GAAP, is derived from audited financial statements that are not included
herein. The selected historical consolidated financial data for the nine month
periods ended May 31, 1997 and May 31, 1996 has been derived from the unaudited
consolidated financial statements of Dreco, except that it is presented in
accordance with U.S. GAAP, and includes, in the opinion of Dreco's management,
all adjustments necessary to present fairly the results of such periods. Such
data should be read in conjunction with "Dreco Management's Discussion and
Analysis of Financial Condition and Results of Operations" incorporated by
reference herein. For such data prepared in accordance with Canadian GAAP, see
"Selected Financial Data" incorporated by reference herein. See "Incorporation
of Certain Documents by Reference."
NINE MONTHS ENDED,
--------------------------- YEAR ENDED AUGUST 31,
MAY 31, MAY 31, ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------ -------- ------- ------- ------- -------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues.................. $ 86,954 $98,961 $126,335 $86,875 $79,663 $93,981 $66,397
Operating income (loss)
before special items... 10,844 8,301 11,489 10,059 (9,253) 3,133 4,963
Operating income (loss)... 10,844 8,301 11,489 10,059 (9,253) 3,133 4,963
Income (loss) before
taxes.................. 10,691 9,861 13,335 12,196 (6,709) 6,061 6,525
Net income (loss)......... 7,984 5,357 7,468 7,789 (6,682) 7,386 5,457
Net income (loss) per share.. 1.05 0.83 1.16 1.25 (1.09) 1.18 0.89
OTHER DATA:
Depreciation and
amortization........... 6,729 3,744 4,859 4,558 4,926 4,481 3,410
Capital expenditures...... 13,271 7,098 11,211 6,435 5,932 6,167 5,172
BALANCE SHEET DATA:
Working capital........... 81,513 36,811 37,203 32,992 18,292 27,725 25,594
Total assets.............. 158,035 83,996 79,677 72,355 69,323 74,047 54,592
Long-term debt, less
current maturities..... 13,643 2,701 2,704 1,987 1,440 2,857 2,579
Owners' equity............ 113,355 54,676 57,663 48,957 38,690 46,626 41,170
17
40
UNAUDITED PRO FORMA NATIONAL-OILWELL AND DRECO
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined consolidated financial
statements have been prepared assuming the Transaction is accounted for as a
pooling-of-interests under U.S. GAAP. Accordingly, such statements were prepared
as if National-Oilwell and Dreco were combined as of the beginning of each of
the periods presented.
As a result of the differing year ends of National-Oilwell and Dreco, the
balance sheet and results of operations for dissimilar year ends have been
combined. The National-Oilwell balance sheet at June 30, 1997 has been combined
with the Dreco balance sheet at May 31, 1997. National-Oilwell's results of
operations for fiscal year ended December 31, 1996 have been combined with
Dreco's results of operations for the 12 month period ended November 30, 1996.
National-Oilwell's results of operations for the six months ended June 30, 1997
and 1996 have been combined with Dreco's results of operations for the six
months ended May 31, 1997 and May 31, 1996, respectively. The Pro Forma Combined
financial data for 1995 and 1994 are the same as the Dreco historical financial
data for the 12 month periods ended November 30, 1995 and 1994 because
National-Oilwell did not exist as a corporation prior to January 1, 1996.
The following unaudited pro forma combined consolidated balance sheet as of
June 30, 1997 and the statements of operations for the six-month periods ended
June 30, 1997 and June 30, 1996 are based on the unaudited consolidated
financial statements of National-Oilwell and Dreco and include, in the opinion
of management of both companies, all adjustments necessary to present fairly the
results as of and for such periods. The following unaudited pro forma combined
consolidated statements of operations for the three years in the period ended
December 31, 1996 have been derived from, and should be read in conjunction
with, the audited Consolidated Financial Statements of National-Oilwell and
Dreco and the related notes thereto.
The unaudited pro forma combined consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
actual results of operations or financial position that would have been achieved
had the Transaction been consummated at the beginning of the period presented,
nor are they necessarily indicative of future results.
18
41
NATIONAL-OILWELL AND DRECO
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
PRO FORMA PRO FORMA
NATIONAL-OILWELL DRECO ADJUSTMENTS COMBINED
---------------- -------- ----------- ---------
(IN THOUSANDS OF U.S. DOLLARS)
ASSETS
Current assets:
Cash & cash equivalents............ $ 5,700 $ 42,191 $ (8,500)(1) $ 39,391
Receivables........................ 112,235 32,849 145,084
Unbilled revenue................... -- 17,193 17,193
Inventories........................ 135,437 17,533 152,970
Deferred taxes, net................ 3,255 -- 3,255
Prepaid & other current assets..... 3,746 885 4,631
-------- -------- -------- --------
Total current assets....... 260,373 110,651 (8,500) 362,524
Property, plant & equipment.......... 28,041 36,119 64,160
Deferred taxes, net.................. 8,159 -- (1,899)(2) 6,260
Goodwill............................. 12,916 11,265 24,181
Other assets......................... 1,239 -- 1,239
-------- -------- -------- --------
$310,728 $158,035 $(10,399) $458,364
======== ======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term $ -- $ 2,765 $ $ 2,765
debt............................
Accounts payable................... 70,903 12,814 83,717
Customer prepayments............... 14,309 8,667 22,976
Accrued compensation............... 5,827 1,027 6,854
Other accrued liabilities.......... 21,346 3,865 25,211
-------- -------- -------- --------
Total current 112,385 29,138 141,523
liabilities..............
Long-term debt....................... 55,625 13,643 69,268
Deferred tax liability............... -- 1,899 (1,899)(2) --
Insurance reserves................... 6,352 -- 6,352
Other liabilities.................... 10,135 -- 10,135
-------- -------- -------- --------
Total liabilities.......... 184,497 44,680 (1,899) 227,278
Commitments and contingencies
Stockholders' equity:
Common stock....................... 182 59,252 (59,159)(3) 275
Additional paid-in capital......... 107,609 31,603 59,159(3) 198,371
Cumulative translation 669 (5,225) (4,556)
adjustment......................
Retained earnings.................. 17,771 27,725 (8,500)(1) 36,996
-------- -------- -------- --------
126,231 113,355 (8,500) 231,086
-------- -------- -------- --------
$310,728 $158,035 $(10,399) $458,364
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited pro forma
combined consolidated financial statements.
19
42
NATIONAL-OILWELL AND DRECO
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS(4)
(IN THOUSANDS OF U.S. DOLLARS)
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
HISTORICAL HISTORICAL
------------------- -------------------
NATIONAL- PRO FORMA NATIONAL- PRO FORMA
OILWELL DRECO COMBINED OILWELL DRECO COMBINED
--------- ------- --------- --------- ------- ---------
Revenues.................................................... $374,020 $66,740 $440,760 $294,643 65,607 $360,250
Cost of revenues............................................ 315,436 45,023 360,459 254,556 53,043 307,599
-------- ------- -------- -------- ------- --------
Gross profit................................................ 58,584 21,717 80,301 40,087 12,564 52,651
Selling, general, and administrative........................ 33,028 13,227 46,255 26,681 8,704 35,385
-------- ------- -------- -------- ------- --------
Operating income............................................ 25,556 8,490 34,046 13,406 3,860 17,266
Interest and financial costs................................ (2,640) -- (2,640) (6,738) -- (6,738)
Interest income............................................. 119 570 689 320 959 1,279
Other income (expense)...................................... 171 -- 171 (321) -- (321)
-------- ------- -------- -------- ------- --------
Income before income taxes.................................. 23,206 9,060 32,266 6,667 4,819 11,486
Provision for income taxes(5)............................... 8,820 2,676 11,496 2,667 2,628 5,295
-------- ------- -------- -------- ------- --------
Net income.................................................. $ 14,386 $ 6,384 $ 20,770 $ 4,000 $ 2,191 $ 6,191
======== ======= ======== ======== ======= ========
Weighted average shares outstanding(6)...................... 18,334 8,314 28,311 13,590 6,674 21,599
======== ======= ======== ======== ======= ========
Net income per share(6)..................................... $ 0.78 $ 0.77 $ 0.73 $ 0.29 $ 0.33 $ 0.29
======== ======= ======== ======== ======= ========
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ---------------------- ----------------------
HISTORICAL HISTORICAL HISTORICAL
-------------------- ---------- ----------
NATIONAL- PRO FORMA PRO FORMA PRO FORMA
OILWELL DRECO COMBINED DRECO COMBINED DRECO COMBINED
--------- -------- --------- ---------- --------- ---------- ---------
Revenues..................................... $648,621 $113,195 $761,816 $95,402 $95,402 $76,684 $76,684
Cost of revenues............................. 557,354 84,310 641,664 70,699 70,699 56,430 56,430
-------- -------- -------- ------- ------- ------- -------
Gross profit................................. 91,267 28,885 120,152 24,703 24,703 20,254 20,254
Selling, general, and administrative......... 56,559 19,483 76,042 14,700 14,700 15,344 15,344
Special charges (income)..................... 16,611 -- 16,611 -- -- -- --
Equity loss.................................. -- -- -- -- -- 11,891 11,891
-------- -------- -------- ------- ------- ------- -------
Operating income............................. 18,097 9,402 27,499 10,003 10,033 (6,981) (6,981)
Interest and financial costs................. (12,095) (146) (12,241) (31) (31) (180) (180)
Interest income.............................. 440 859 1,299 1,153 1,153 1,112 1,112
Other income (expense)....................... 352 (191) 161 897 897 1,150 1,150
-------- -------- -------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary loss......................... 6,794 9,924 16,718 12,022 12,022 (4,899) (4,899)
Provision for income taxes(5)................ 2,549 4,022 6,571 4,198 4,198 421 421
-------- -------- -------- ------- ------- ------- -------
Income (loss) before extraordinary loss...... 4,245 5,902 10,147 7,824 7,824 (5,320) (5,320)
======== ======== ======== ======= ======= ======= =======
Weighted average shares outstanding(6)....... 14,357 6,486 22,140
======== ======== ========
Income per share before extraordinary
loss(6).................................... $ 0.18 $ 0.91 $ 0.46
======== ======== ========
The accompanying notes are an integral part of these unaudited pro forma
combined consolidated financial statements.
20
43
NATIONAL-OILWELL AND DRECO
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
(1) To record payment of estimated business combination costs of $8.5 million,
representing one-time professional and advisory fees directly related to the
Transaction, as well as severance, consolidation and other integration
costs. The one-time business combination costs are not reflected in the
Unaudited Pro Forma Combined Consolidated Statements of Operations since
they are non-recurring in nature.
(2) To reclassify deferred tax liabilities against deferred tax assets.
(3) To record the issuance of 9,380,666 shares, par value $.01, of
National-Oilwell Common Stock in exchange for all 7,817,222 shares of Dreco
Common Shares outstanding at June 30, 1997, based upon an Exchange Ratio
which is indirectly equivalent to 1.2 shares of National-Oilwell Common
Stock for each Dreco Common Share and assuming all Exchangeable Shares are
exchanged for National-Oilwell Common Stock.
(4) The Pro Forma Combined Consolidated Statements of Operations reflect no
adjustments to the historical statements of operations of National-Oilwell
and Dreco, other than reflecting Dreco's results in accordance with U.S.
GAAP, as there are no significant combination benefits assumed and no
significant adjustments would be required to conform the accounting policies
of the two companies. The Pro Forma Combined financial data for 1995 and
1994 are the same as the Dreco historical financial data because
National-Oilwell did not exist as a corporation prior to January 1, 1996.
(5) Prior to January 1, 1996, National-Oilwell was a general partnership and
therefore not subject to U.S. federal and state income taxes.
(6) The pro forma income per share data is computed on the basis of the combined
weighted average number of shares of common stock and common stock
equivalents of National-Oilwell and Dreco for each period presented based
upon an Exchange Ratio which is indirectly equivalent to 1.2 shares of
National-Oilwell Common Stock for each Dreco Common Share and assumes all
Exchangeable Shares are exchanged for National-Oilwell Common Stock.
(7) The Transaction contemplated herein may result in a limitation on the
ability of Dreco's U.S. subsidiary to utilize certain U.S. net operating
loss ("NOL") carryforwards under the change in ownership provisions of
Section 382 of the U.S. Code. The effect of any limitation would depend on a
number of factors, including future U.S. taxable income and an allocation of
the total Transaction value to the U.S. operations. Due to uncertainty
regarding realization of the NOLs, no deferred tax asset representing the
future tax benefits of the NOLs have been recorded in Dreco's historical
financial statements. Accordingly, this Transaction will not result in the
limitation of a recorded asset but could result in a limitation of the
combined company's ability to utilize the unrecorded NOLs.
21
44
THE MEETINGS
NATIONAL-OILWELL
Purpose of the Meeting. The purpose of the National-Oilwell Meeting is to
consider and act upon (i) a proposal to approve the Combination Agreement and
the transactions contemplated thereby, (ii) a proposal to approve and adopt the
Recapitalization Plan and (iii) such other business as may be properly presented
to the meeting.
Recommendation of the Board of Directors. THE BOARD OF DIRECTORS OF
NATIONAL-OILWELL BELIEVES THAT THE TRANSACTION IS IN THE BEST INTERESTS OF
NATIONAL-OILWELL STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
NATIONAL-OILWELL STOCKHOLDERS VOTE TO (I) APPROVE THE COMBINATION AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND (II) APPROVE AND ADOPT THE
RECAPITALIZATION PLAN.
Solicitation and Voting of Proxies. The accompanying proxy is solicited on
behalf of the board of directors of National-Oilwell for use at the
National-Oilwell Meeting, to be held at , Houston,
Texas, on September 23, 1997 at 9:00 a.m. (Houston time). Only holders of record
of National-Oilwell Common Stock at the close of business on August 8, 1997,
will be entitled to vote at the National-Oilwell Meeting. At the close of
business on that date, there were 18,161,175 shares of National-Oilwell Common
Stock outstanding and entitled to vote. A majority of those shares, present in
person or by proxy, will constitute a quorum for the transaction of business.
Abstentions and broker non-votes will be considered to be represented for
purposes of a quorum. This Joint Proxy Statement and the accompanying form of
proxy were first mailed to National-Oilwell Stockholders on or about August 25,
1997.
Revocability of Proxy. A stockholder who has given a proxy may revoke it
at any time before it is exercised at the National-Oilwell Meeting, by (i)
delivering to the secretary of National-Oilwell (by any means, including
facsimile) a written notice stating that the proxy is revoked, (ii) signing and
so delivering a proxy bearing a later date or (iii) attending the
National-Oilwell Meeting and voting in person (although attendance at the
National-Oilwell Meeting will not, by itself, revoke a proxy).
Expenses of Proxy Solicitation. The cost of soliciting proxies to be voted
at the National-Oilwell Meeting will be paid by National-Oilwell. Beacon Hill
Partners, Inc., 90 Broad Street, New York, New York has been employed to solicit
proxies by mail, telephone or personal solicitation for a fee of approximately
$3,500 plus expenses. National-Oilwell has also arranged for reimbursement, at
the rate suggested by the NYSE, to brokerage houses, nominees, custodians and
fiduciaries for the forwarding of proxy materials to the beneficial owners of
shares held of record. Proxies may also be solicited by directors, officers, and
employees of National-Oilwell, but such persons will not be specially
compensated for such services.
Voting Rights. Holders of National-Oilwell Common Stock are entitled to
one vote for each share held as of the National-Oilwell Record Date. Approval by
the National-Oilwell Stockholders of the Combination Agreement and the
transactions contemplated thereby is required by the rules of the NYSE. Such
approval requires the affirmative vote of a majority of votes cast on the
proposal, either in person or by proxy, at the National-Oilwell Meeting,
provided that the total votes cast on the proposal represent over 50% of the
outstanding shares of National-Oilwell Common Stock entitled to vote on the
proposal. Approval and adoption of the Recapitalization Plan requires the
affirmative vote of the holders of a majority of the outstanding shares of
National-Oilwell Common Stock. National-Oilwell will count abstentions in
tabulations of votes cast, and an abstention, therefore, will have the same
effect as a vote against a proposal. Under Delaware case law, broker non-votes
(shares which are present at the meeting and for which a broker or nominee has
received no instruction by the beneficial owner as to how such owner wishes the
shares to be voted) are counted for purposes of determining whether a quorum is
present at the meeting, but are not counted for purposes of determining whether
a proposal has been approved. Thus, a broker non-vote will have the same effect
as a negative vote with regard to the proposal to approve the Recapitalization
Plan. Broker non-votes will not count as shares voting "for" or "against" with
respect to approval of the Combination Agreement and the transactions
contemplated thereby and will not be considered as shares entitled to vote on
the proposal for purposes of determining whether such proposal has been
approved.
22
45
Auditors. Ernst & Young LLP, independent auditors, have served as the
independent auditors of National-Oilwell since 1987. Representatives of Ernst &
Young LLP plan to attend the National-Oilwell Meeting and will be available to
answer appropriate questions. Its representatives will also have an opportunity
to make a statement at the meeting if they so desire, although it is not
expected that any statement will be made.
Stockholder Proposals. Any National-Oilwell Stockholder who wishes to
submit a proposal for action to be included in the proxy statement and form of
proxy relating to National-Oilwell's 1998 annual meeting of stockholders is
required to submit such proposal to National-Oilwell on or before December 31,
1997.
DRECO
Purpose of the Meeting. The purpose of the Dreco Meeting is to consider
and act upon the Arrangement Resolution and such other business as may be
properly presented to the meeting.
Recommendation of the Board of Directors. THE BOARD OF DIRECTORS OF DRECO
BELIEVES THAT THE TRANSACTION IS IN THE BEST INTERESTS OF DRECO SHAREHOLDERS AND
DRECO OPTIONHOLDERS AND RECOMMENDS THAT THE DRECO SHAREHOLDERS AND DRECO
OPTIONHOLDERS VOTE IN FAVOR OF THE ARRANGEMENT RESOLUTION.
Solicitation and Voting of Proxies. The accompanying proxy is solicited
on behalf of the board of directors of Dreco for use at the Dreco Meeting. The
solicitation of proxies will be primarily by mail, but proxies may also be
solicited personally or by telephone by regular employees of Dreco without
special compensation. The cost of solicitation will be borne by Dreco. Dreco may
also pay brokers or nominees holding Dreco Common Shares in their names or in
the names of their principals for their reasonable expenses in sending
solicitation material to their principals. In addition, Dreco has engaged the
services of Beacon Hill Partners, Inc., 90 Broad Street, New York, New York, a
proxy solicitation firm, to distribute proxy solicitation materials to brokers,
banks and other nominees and to assist in the solicitation of proxies from its
shareholders for a fee of $4,500, plus mailing expenses. This Joint Proxy
Statement/Prospectus and the accompanying form of proxy were first mailed to
Dreco Shareholders and Dreco Optionholders on or about August 25, 1997.
Only holders of record of Dreco Common Shares or Dreco Options at the close
of business on the Dreco Record Date will be entitled to vote at the Dreco
Meeting, subject to the provisions of the ABCA regarding transfers of Dreco
Common Shares after the Dreco Record Date. See the "Notice of Special Meeting of
Shareholders and Optionholders" accompanying this Joint Proxy
Statement/Prospectus. At the close of business on the Dreco Record Date, there
were 7,822,822 Dreco Common Shares outstanding and 538,950 Common Shares subject
to outstanding Dreco Options.
Pursuant to the Interim Order (i) the quorum at the Dreco meeting will be
one Shareholder or Optionholder present in person or by proxy and holding or
representing any combination of 33 1/3% of the votes attaching to the Dreco
Common Shares outstanding, directly in the case of Dreco Common Shares and
derivatively in the case of Dreco Options, and (ii) the vote required to approve
the Arrangement Resolution is 66 2/3% of the votes actually cast (not counting
for this purpose abstentions, spoiled votes, illegible votes and/or defective
votes). For these purposes each Dreco Common Share carries one vote, and each
Dreco Option carries the number of votes equal to the number of Dreco Common
Shares subject to the Dreco Option.
Pursuant to the Interim Order, a proxy, in order to be acted upon at the
Dreco Meeting (or any adjournment or postponement of the Dreco Meeting) must (i)
be received by Dreco at the registered office of Dreco (as set forth in this
Joint Proxy Statement/Prospectus) or by Montreal Trust Company of Canada at its
principal transfer office in Calgary, at Suite 600, 530-8th Avenue S.W.,
Calgary, Alberta, Canada T2P 3S8 not later than 11:00 a.m. (Calgary time) on the
second day preceding the Dreco Meeting (or any adjournment or postponement
thereof) or (ii) be deposited with the scrutineers for the attention of the
Chairman at the Dreco Meeting (or any adjournment or postponement thereof).
Appointment of Proxy and Discretionary Authority. A DRECO SHAREHOLDER OR
DRECO OPTIONHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A DRECO
SHAREHOLDER OR DRECO OPTIONHOLDER), OTHER THAN PERSONS DESIGNATED IN THE
RESPECTIVE FORM OF PROXY ACCOMPANYING THIS JOINT PROXY STATE-
23
46
MENT/PROSPECTUS, AS NOMINEE TO ATTEND AND ACT FOR AND ON BEHALF OF SUCH
SHAREHOLDER OR OPTIONHOLDER AT THE DRECO MEETING AND MAY EXERCISE SUCH RIGHT BY
INSERTING THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED ON THE RESPECTIVE
FORM OF PROXY.
The Dreco Shares and Dreco Options represented by proxies at the Dreco
Meeting will be voted in accordance with the instructions of the Dreco
Shareholder or Dreco Optionholder on any ballot that may be called for and,
where the person whose proxy is solicited specifies a choice with respect to any
matter to be voted upon, his or her shares or options shall be voted in
accordance with the specifications so made.
IF A DRECO SHAREHOLDER OR DRECO OPTIONHOLDER APPOINTS A PERSON DESIGNATED
BY MANAGEMENT IN THE PROXY AS NOMINEE AND DOES NOT DIRECT THE MANAGEMENT NOMINEE
TO VOTE EITHER FOR OR AGAINST THE MATTER OR MATTERS WITH RESPECT TO WHICH AN
OPPORTUNITY TO SPECIFY HOW THE SHARES OR OPTIONS REGISTERED IN THE NAME OF SUCH
SHAREHOLDER OR OPTIONHOLDER SHALL BE VOTED, THE PROXY SHALL BE VOTED FOR SUCH
MATTER OR MATTERS PROPOSED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE FORMS OF PROXY ACCOMPANYING THIS JOINT PROXY STATEMENT/PROSPECTUS
CONFER DISCRETIONARY AUTHORITY UPON THE PROXY NOMINEES WITH RESPECT TO
AMENDMENTS OR VARIATIONS TO THE MATTERS IDENTIFIED IN THE ACCOMPANYING NOTICE OF
THE DRECO MEETING AND OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE DRECO
MEETING. Dreco management knows of no matters to come before the Dreco Meeting
other than the matters referred to in the accompanying Notice of the Dreco
Meeting. However, if any other matters which are not now known to management
should properly come before the Dreco Meeting, the Dreco Shares and Dreco
Options represented by proxies in favor of management nominees will be voted on
such matters in accordance with the best judgment of the proxy nominee.
Revocation of Proxies. Proxies given by Dreco Shareholders or Dreco
Optionholders for use at the Dreco Meeting may be revoked at any time prior to
their use. A Dreco Shareholder or Dreco Optionholder giving a proxy may revoke
the proxy (i) by instrument in writing executed by the Dreco Shareholder or
Dreco Optionholder or by his or her attorney authorized in writing, or, if the
Dreco Shareholder is a corporation, under its corporate seal by an officer or
attorney thereof duly authorized indicating the capacity under which such
officer or attorney is signing, and deposited at the registered office of Dreco
(as set forth in this Joint Proxy Statement/Prospectus) or with Montreal Trust
Company of Canada at its principal transfer office in Calgary at Suite 600,
530-8th Avenue S.W. Calgary, Alberta, Canada T2P 3S8 not later than 11:00 a.m.
(Calgary time), in each case on the second business day preceding the day of the
Dreco Meeting, or any adjournment or postponement thereof, or with the
scrutineers for the attention of the chairman of the Dreco Meeting on the day of
such Dreco Meeting or adjournment or postponement thereof, (ii) by a duly
executed and deposited proxy bearing a later date or time than the date or time
of the proxy being revoked, (iii) by voting in person at the Dreco Meeting
(although attendance at the Dreco Meeting will not in and of itself constitute a
revocation of a proxy) or (iv) in any other manner permitted by law.
Auditors. Coopers & Lybrand has served as Dreco's auditors since 1979,
although during Dreco's reorganization proceedings, Dreco's financial statements
for the fiscal years ended August 31, 1983, 1984 and 1985 were not audited.
Representatives of Coopers & Lybrand plan to attend the Dreco Meeting and will
be available to answer appropriate questions. Its representatives will also have
an opportunity to make a statement at the meeting if they so desire, although it
is not expected that any statement will be made.
Shareholder Proposals. Any Dreco Shareholder who wishes to submit a
proposal for action to be included in the proxy statement and form of proxy
relating to Dreco's 1998 annual meeting of shareholders is required to submit
such proposal to Dreco on or before August 9, 1997. If the Transaction is
consummated, National-Oilwell will be the only holder of a Dreco Common Share,
of which there will be only one authorized.
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THE TRANSACTION
BACKGROUND
In December 1996, Dreco management was approached by a major oilfield
products and services supplier concerning a possible acquisition of or business
combination with Dreco. In response to these general discussions, on January 13,
1997, the Dreco board of directors established a special committee comprised of
Messrs. Jerry E. Goldress, P. Stuart Grant, Glenn E. Taylor, Jr., and Ronald A.
Robinson. Shortly thereafter, the special committee retained Credit Suisse First
Boston as its exclusive financial advisor in connection with the discussions
with such supplier or any other party regarding a sale of, or business
combination involving, Dreco. In February 1997, such supplier advised Dreco that
it would be delayed in pursuing discussions with Dreco.
On March 11, 1997, April 3, 1997 and April 4, 1997, the Dreco board of
directors met to review strategic alternatives available to Dreco. At the April
4, 1997 meeting, the Dreco board of directors instructed Dreco management to
informally investigate, assess and make recommendations to the board of
directors respecting strategic alternatives and, pursuant to this instruction,
Dreco management held preliminary discussions with several other participants in
the oilfield products and services industry.
In early April 1997 National-Oilwell management contacted Dreco management
to arrange a preliminary meeting to discuss National-Oilwell's interest in a
combination with Dreco. On April 18, 1997, National-Oilwell management met with
representatives of Merrill Lynch to discuss a possible transaction as well as
potential exchange ratios and to establish criteria for an initial valuation and
on April 20, 1997, retained Merrill Lynch as its financial adviser in connection
with the Transaction.
On April 21, 1997, management of National-Oilwell and Dreco first met in
Edmonton, Alberta, Canada to discuss the strategic fit and other matters
regarding a possible combination based upon a stock-for-stock exchange. A series
of meetings and teleconferences involving National-Oilwell management, its
executive committee of the board of directors and Merrill Lynch representatives
resulted in a teleconference between management of the two companies on April
24, 1997 that outlined a possible transaction and structure.
Management of Dreco presented the possible transaction and structure to
members of the special committee of the Dreco board of directors and
representatives of Credit Suisse First Boston on April 25, 1997. Discussions
continued and on April 30, 1997, representatives of both companies signed a
confidentiality agreement and met, along with their respective financial
advisors, to exchange financial data and operating information. Additional
discussions and exchanges of data occurred over the next five days. During the
period from May 1 to May 9, 1997, the management of Dreco had telephone
discussions with members of the Dreco board of directors to advise them of the
status of the discussions.
On May 5, 1997, the board of directors of National-Oilwell met along with
management and Merrill Lynch representatives to consider the potential
combination and review the proposed terms and the combination effects. Prior to
the meeting, the directors received materials prepared by management and Merrill
Lynch, along with current financial statements filed by Dreco with the SEC and
other public data on Dreco. All of the directors of National-Oilwell were
present at the meeting, and they unanimously authorized management to pursue
further discussions regarding a potential combination on terms similar to those
discussed.
Negotiations continued over the following week, including discussions
between management and U.S. and Canadian counsel for both companies of various
terms of the combination.
On May 13, 1997, the board of directors of National-Oilwell met to review
the final terms of the proposed combination as set forth in the Combination
Agreement. At the meeting, Merrill Lynch rendered its oral opinion, confirmed by
subsequent written opinion dated May 13, 1997, that as of the date thereof and
based upon and subject to the factors and assumptions set forth therein, the
Exchange Ratio was fair to National-Oilwell from a financial point of view. See
"-- Opinions of Financial Advisors -- Opinion of Merrill Lynch." Each of the
National-Oilwell directors, along with members of management and outside counsel
were present at the meeting, and the directors unanimously approved the proposed
combination and the Combination Agreement.
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On May 13, 1997, the board of directors of Dreco met to review the final
terms of the proposed combination as set forth in the Combination Agreement. At
the meeting, Credit Suisse First Boston delivered its oral opinion, which was
confirmed by a written opinion dated May 13, 1997, that as of such date and
based upon and subject to the matters set forth therein, the Exchange Ratio was
fair to the Dreco Shareholders from a financial point of view. See "-- Opinions
of Financial Advisors -- Opinion of Credit Suisse First Boston." Nine of the
eleven Dreco directors, along with members of management and outside counsel
were present at the meeting, and the directors unanimously approved the proposed
combination and the Combination Agreement.
On May 14, 1997, the Combination Agreement was executed and delivered on
behalf of both companies and an announcement thereof was released to the public
prior to the opening of the respective stock exchanges.
Throughout the negotiations between the two parties, various material terms
were proposed and discussed. Initially, management of the two companies
discussed a possible combination based on a stock-for-stock exchange. During the
negotiation of the material terms, the two companies discussed potential
break-up fees for various terminations of the Combination Agreement, with
National-Oilwell requesting an option to acquire Dreco stock, and a potential
exchange ratio of one Exchangeable Share for each Dreco Common Share. The
managements ultimately reached a preliminary understanding subject to board
approval and the signing of a definitive agreement that there would be certain
break-up fees, but National-Oilwell would forego its request for an option to
purchase Dreco stock. The parties also reached a preliminary understanding that
the Exchange Ratio of Exchangeable Shares for Dreco Common Shares would be
1.2:1, subject to adjustment in certain circumstances. These terms became the
final terms when both boards of directors approved the understandings during the
night of May 13, 1997 and a definitive agreement was signed before the market
opened on May 14, 1997. See "-- The Combination Agreement -- Termination Fee"
and "-- The Combination Agreement -- Exchange Ratio Adjustment."
REASONS FOR THE TRANSACTION
Each of National-Oilwell and Dreco believes that the Transaction will allow
the two companies to combine their resources to enhance their ability to compete
in the oilfield products and services industry. The board of directors of
National-Oilwell considered the following reasons in unanimously approving the
Transaction:
1. The anticipated business advantages resulting from the combination
of the two companies, specifically:
a) The ability of the combined companies to provide a more complete
rig package to customers. This will result through the combination of
National-Oilwell's oilfield equipment operations (which emphasize the
major machinery components of a drilling rig) and Dreco's rig
fabrication business (which emphasizes the design and construction of
derricks, masts and substructures).
b) The attractiveness to many customers of the combination of
Dreco's engineering expertise with the size and after-market support of
National-Oilwell.
c) The addition of Dreco's downhole products business as a third
business segment and the ability of the combined company to market and
deliver Dreco's line of downhole products through National-Oilwell's
extensive distribution system.
2. The benefits to the National-Oilwell Stockholders of increasing
the number of publicly traded shares of National-Oilwell. This increase is
expected to result in corresponding increases in market capitalization,
trading volume and institutional interest in National-Oilwell's business
and securities.
3. The benefits to National-Oilwell that will result from a stronger
balance sheet and larger absolute size, such as increased access to capital
and financial markets, which National-Oilwell anticipates will lower the
future costs of equity and debt transactions.
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In addition to the foregoing reasons, the board of directors of
National-Oilwell also considered the opinion of Merrill Lynch dated May 13, 1997
to the effect that, as of such date and based on and subject to the factors and
assumptions set forth therein, the Exchange Ratio was fair, from a financial
point of view, to National-Oilwell. See "-- Opinions of Financial
Advisors -- Opinion of Merrill Lynch."
The National-Oilwell board of directors also considered as a potential
disadvantage the potential increase of National-Oilwell's reliance on revenue
from a limited number of large contracts due to Dreco's reliance on such
revenue. See "Risk Factors -- Dreco's Reliance on Significant Contracts."
The board of directors of Dreco considered the following factors in
approving the Transaction:
1. The general trend in the oilfield products and services industry
is towards fewer, larger suppliers who are able to supply a broad range of
oilfield products and services to their customers. The combined entity will
provide a broader range of products and services, which the board of
directors of Dreco believes will make it a more attractive supplier to the
industry.
2. The combined entity is expected to be less exposed to risk of a
downturn in the new rig and equipment construction segment than Dreco would
be on a stand-alone basis. The combined entity is expected to be more
diversified across the industry segments, combining National-Oilwell's
conventional product businesses with Dreco's specialized product
engineering and manufacturing businesses. The combined entity is expected
to be less subject to fluctuations in demand in any particular segment of
the oilfield products and services industry.
3. The combined entity will be significantly larger than Dreco and
will be able to compete more effectively if the industry consolidation
trend continues.
4. The Transaction can be effected on a tax deferred basis for most
Dreco Shareholders and Dreco Optionholders resident in Canada. In addition,
it is more likely than not that the Transaction can be effected on a tax
deferred basis for most Dreco Shareholders and Dreco Optionholders resident
in the United States.
5. The management of Dreco believes that trading prices of the
Exchangeable Shares would reasonably be expected to closely follow trading
prices of National-Oilwell Common Stock, resulting in holders of
Exchangeable Shares holding securities which would trade in a larger, more
liquid market than that presently existing for Dreco Common Shares.
6. The combined entity will have a stronger balance sheet and larger
absolute size than Dreco, which should result in increased access to
capital and financial markets.
7. The oral opinion of Credit Suisse First Boston, delivered to the
board of directors of Dreco on May 13, 1997 and subsequently confirmed in
writing, that, as of such date and based upon and subject to the matters
set forth therein, the Exchange Ratio was fair to the Dreco Shareholders
from a financial point of view. See "-- Opinions of Financial
Advisors -- Opinion of Credit Suisse First Boston."
In view of the variety of factors considered in connection with their
evaluations of the Transaction, neither the National-Oilwell nor the Dreco board
of directors found it practicable to and did not quantify or otherwise assign
relative strengths to the specific factors considered. For risk factors related
to the Transaction considered at various times by the two companies, see "Risk
Factors."
OPINIONS OF FINANCIAL ADVISORS
OPINION OF MERRILL LYNCH
In April 1997 National-Oilwell retained Merrill Lynch to act as its
financial advisor in connection with a possible business combination between
National-Oilwell and Dreco. On May 13, 1997 Merrill Lynch rendered to the
National-Oilwell board of directors its oral opinion, later confirmed in writing
(the "Merrill Lynch Opinion"), that, as of such date and based upon and subject
to the factors and assumptions set forth therein, the Exchange Ratio was fair to
National-Oilwell from a financial point of view. Merrill Lynch subsequently
confirmed as of the date hereof the Merrill Lynch Opinion. No limitations were
imposed by the board of directors of National-Oilwell upon Merrill Lynch with
respect to the investigations made or procedures followed by Merrill Lynch in
rendering the Merrill Lynch Opinion.
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THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY MERRILL LYNCH, IS ATTACHED AS ANNEX H TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. MERRILL LYNCH HAS
CONSENTED TO THE USE OF APPENDIX H, CONTAINING THE MERRILL LYNCH OPINION, IN
THIS JOINT PROXY STATEMENT/PROSPECTUS, AND TO THE REFERENCES TO MERRILL LYNCH
UNDER THE HEADINGS "SUMMARY" AND "THE TRANSACTION" IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. IN GIVING SUCH CONSENT MERRILL LYNCH DOES NOT ADMIT THAT
IT COMES WITHIN THE CATEGORY OF PERSONS WHOSE CONSENT IS REQUIRED UNDER SECTION
7 OF THE SECURITIES ACT OR THE RULES AND REGULATIONS OF THE SEC PROMULGATED
THEREUNDER, NOR DOES MERRILL LYNCH ADMIT THAT IT IS AN EXPERT WITH RESPECT TO
ANY PART OF THE REGISTRATION STATEMENT IN WHICH THIS JOINT PROXY
STATEMENT/PROSPECTUS IS INCLUDED WITHIN THE MEANING OF THE TERM "EXPERTS" AS
USED IN THE SECURITIES ACT OR THE RULES AND REGULATIONS OF THE SEC PROMULGATED
THEREUNDER. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS JOINT
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION. NATIONAL-OILWELL STOCKHOLDERS ARE URGED TO READ SUCH
OPINION IN ITS ENTIRETY. THE MERRILL LYNCH OPINION WAS PROVIDED TO THE
NATIONAL-OILWELL BOARD OF DIRECTORS FOR ITS INFORMATION AND IS DIRECTED ONLY TO
THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO TO
NATIONAL-OILWELL, DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY
NATIONAL-OILWELL TO ENGAGE IN THE TRANSACTION, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY NATIONAL-OILWELL STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE WITH RESPECT TO THE COMBINATION AGREEMENT OR ANY MATTER RELATED
THERETO.
The Exchange Ratio was determined through negotiations between
National-Oilwell and Dreco and was approved by the National-Oilwell board of
directors.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Merrill Lynch Opinion or the presentation made by
Merrill Lynch to the National-Oilwell board of directors. The preparation of a
fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. In arriving at its opinion, Merrill Lynch did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Merrill Lynch believes that its analyses must
be considered as a whole, that all factors considered as a whole, and not
individually, were material to the process underlying its opinion, and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, National-Oilwell or Dreco. Any estimates contained in the analyses
performed by Merrill Lynch are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Additionally, estimates of the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
such business or securities might actually be sold. Accordingly, such analyses
and estimates are inherently subject to substantial uncertainty. In addition, as
described above, the Merrill Lynch Opinion and Merrill Lynch's presentation to
the National-Oilwell board of directors were among several factors taken into
consideration by the National-Oilwell board of directors in making its
determination to approve the Combination Agreement. Consequently, the Merrill
Lynch analyses described below should not be viewed as determinative of the
decision of the National-Oilwell board of directors or National-Oilwell's
management with respect to the fairness of the Exchange Ratio.
In arriving at its opinion, Merrill Lynch, among other things: (i) reviewed
certain publicly available business and financial information relating to each
of National-Oilwell and Dreco which Merrill Lynch deemed to be relevant, (ii)
reviewed certain information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of
National-Oilwell and Dreco furnished to Merrill Lynch by National-Oilwell's and
Dreco's managements, as well as the amount and timing of the cost savings and
related expenses and synergies expected to result from the Transaction furnished
to Merrill Lynch by the management of National-Oilwell (the "Expected Savings
and Synergies"), (iii) conducted discussions with members of senior management
and representatives of National-Oilwell and Dreco concerning their
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51
respective businesses and prospects before and after giving effect to the
Transaction; (iv) reviewed the historical market prices and valuation multiples
for National-Oilwell Common Stock and Dreco Common Shares and compared them with
those of certain publicly traded companies which Merrill Lynch deemed to be
comparable, (v) reviewed the results of operations of National-Oilwell and Dreco
and compared them with certain companies which Merrill Lynch deemed to be
comparable, (vi) compared the financial terms of the Transaction with the
financial terms of certain other transactions which Merrill Lynch deemed to be
comparable, (vii) reviewed the potential pro forma impact of the Transaction on
the capitalization, earnings and cash flow of National-Oilwell, (viii) reviewed
drafts dated May 12, 1997 of the Combination Agreement and various related
documents and instruments (collectively, the "Documents"), and (ix) reviewed
such other financial studies and analyses and took into account such other
matters as Merrill Lynch deemed necessary.
In preparing its opinion, Merrill Lynch relied upon and assumed, without
independent verification, the accuracy and completeness of all information that
was publicly available or was supplied or otherwise made available to Merrill
Lynch by Dreco and National-Oilwell, or otherwise reviewed by Merrill Lynch, and
Merrill Lynch has not assumed any responsibility or liability therefor. Merrill
Lynch has not conducted any valuation or appraisal of any assets or liabilities
of Dreco or National-Oilwell, nor have any such valuation or appraisals been
provided to Merrill Lynch. In addition, in preparing its opinion, Merrill Lynch
did not make any physical inspections of the properties or assets of Dreco or
National-Oilwell. With respect to the financial forecasts furnished by Dreco and
National-Oilwell, Merrill Lynch assumed that such forecasts were reasonably
prepared based on assumptions reflecting the best currently available estimates
and judgements by Dreco's and National-Oilwell's managements, respectively, as
to the expected future prospects of Dreco and National-Oilwell to which such
forecasts relate. With respect to the publicly available analysts' earnings
forecasts for National-Oilwell, Dreco and other entities used by Merrill Lynch
in preparing its opinion, Merrill Lynch assumed that they were reasonably
prepared and reflected the best publicly available information. With respect to
the financial forecast information and the Expected Savings and Synergies
discussed with Merrill Lynch by National-Oilwell, Merrill Lynch assumed that
they were reasonably prepared and reflected the best currently available
estimates and judgment of National-Oilwell's management as to the expected
future financial performance of, or expenses or benefits to, National-Oilwell or
Dreco, as the case may be (including after taking into account the impact of the
Transaction) and that in all material respects they will be realized in the
amounts and times indicated thereby. Merrill Lynch expressed no opinion as to
such financial forecast information, the publicly available analysts' earnings
forecasts or the Expected Savings and Synergies or the assumptions on which they
were based. Merrill Lynch also assumed that the Transaction will constitute a
reorganization within the meaning of Section 368 of the U.S. Code, and qualify
for accounting treatment as a pooling of interests.
For purposes of rendering its opinion Merrill Lynch assumed, in all
respects material to its analysis, that the representations and warranties of
each party to the Documents contained therein are true and correct, that each
party to the Documents will perform all of the covenants and agreements required
to be performed by such party under such Documents and that all conditions to
the consummation of the Transaction will be satisfied without waiver thereof.
Merrill Lynch also assumed that all material governmental, regulatory or
other consents and approvals will be obtained in connection with the Transaction
and that in the course of obtaining any necessary governmental, regulatory or
other consents and approvals, or any amendments, modifications or waivers to any
documents to which either of National-Oilwell or Dreco is party, no restrictions
will be imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits to National-Oilwell of the
Transaction.
The Merrill Lynch Opinion is necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
such opinion. Merrill Lynch was not asked to consider, and the Merrill Lynch
Opinion does not in any manner address, the price at which shares of
National-Oilwell Common Stock will actually trade following consummation of the
Transaction.
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The following is a brief summary of the material analyses presented by
Merrill Lynch to the National-Oilwell board of directors in connection with the
rendering of the Merrill Lynch Opinion.
The valuation methodologies outlined below were used to make a
determination of Dreco's enterprise value. Dreco's debt as at February 28, 1997
was then subtracted, and cash as at February 28, 1997 was added to derive its
equity value. Such equity value was divided by the fully diluted shares
outstanding as of February 28, 1997, using the treasury stock method, to
determine Dreco's per share equity value. From the summary per share equity
value ranges determined by Merrill Lynch by the valuation methodologies, Merrill
Lynch determined a relevant per share equity value range for Dreco of $46.00 to
$55.00. Therefore, the ratio of the National-Oilwell stock price at May 12, 1997
of $39.13 to the relevant per share equity value range for Dreco determined by
Merrill Lynch of $46.00 to $55.00 was in the range of 1.18 to 1.41, compared
with the Exchange Ratio of 1.20.
Comparable Transactions Analysis. Merrill Lynch reviewed certain publicly
available information regarding fourteen selected oil services industry
transactions from January 1994 to the present. The comparable transactions and
the dates of the transactions are as follows: Baker Hughes Incorporated's
acquisition of Drilex International Inc. (pending), Tidewater Inc.'s acquisition
of Ocean Group plc (pending), Camco International Inc.'s acquisition of
Production Operators Corp. (pending), Baker Hughes Incorporated's acquisition of
Petrolite Corporation (pending), Halliburton Company's acquisition of Landmark
Graphics Corporation (October 1996), BJ Services Company's acquisition of NOWSCO
Well Service Ltd. (June 1996), Tuboscope Vetco International Corporation's
acquisition of Drexel Oilfield Services (April 1996), Tidewater Inc.'s
acquisition of Hornbeck Offshore Services, Inc. (March 1996), Weatherford
International Incorporated's acquisition of Enterra Corporation (October 1995),
BJ Services Company's acquisition of Western Company of North America (April
1995), Tidewater Inc.'s acquisition of Halliburton Compression (November 1994),
Enterra Corporation's acquisition of Total Energy Services Co. (August 1994),
Dresser Industries, Inc.'s acquisition of Wheatly TXT Corporation (August 1994)
and Dresser Industries, Inc.'s acquisition of Baroid Corporation (January 1994)
(collectively, the "Comparable Transactions").
Merrill Lynch analyzed the multiples of the Total Consideration (defined as
market value of equity at the transaction price, plus debt, less cash) and last
twelve months ("LTM") earnings before tax, depreciation and amortization
("EBITDA") for the Comparable Transactions, which produced a summary reference
multiple range of 10.0x to 12.0x. The summary reference multiple range produced
an implied per share equity value range for Dreco of $40.86 to $48.49. Merrill
Lynch also analyzed the multiples of the Equity Consideration (defined as market
value of equity at the transaction price) and then publicly available LTM net
income of the Comparable Transactions, which produced a summary reference
multiple range 25.0x to 35.0x. The summary reference multiple range produced an
implied per share equity value range for Dreco of $51.38 to $71.94. Based on the
foregoing analyses, Merrill Lynch determined a summary reference range of per
share values for Dreco of $45.00 to $55.00.
No transaction in the comparable transaction analysis was identical to
National-Oilwell's business combination with Dreco. Accordingly, analysis of the
results of this comparison is not purely mathematical; rather, it involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the comparable acquired
companies and other factors that could affect the acquisition value of such
companies and Dreco.
Comparable Public Company Analysis. Using publicly available information,
Merrill Lynch compared certain financial and operating information and projected
financial performance (reflecting a composite of research analysts' estimates)
of Dreco and National-Oilwell with (i) the following publicly traded companies
that Merrill Lynch deemed to be comparable: Camco International Inc., Energy
Ventures, Inc., Tuboscope Vetco International Corporation and Weatherford
Enterra, Inc. (the "Selected Comparables") and (ii) the following publicly
traded medium capitalized oilfield service companies: BJ Services Company, Camco
International Inc., Cooper Cameron Corporation, J. Ray McDermott S.A., Smith
International, Inc., Tidewater Inc., Varco International, Inc. and Weatherford
Enterra, Inc. (the "Mid-Cap Comparables").
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Merrill Lynch analyzed various multiples for both the Selected Comparables
and the Mid-Cap Comparables, including: (i) Market Capitalization (defined as
the market value of equity, plus debt, less cash) as a multiple of estimated
1997 EBITDA, (ii) Market Capitalization as a multiple of estimated 1998 EBITDA,
(iii) Market Value (defined as the market value of the equity) as a multiple of
estimated 1997 net income and (iv) Market Value as a multiple of calendarized
estimated 1998 net income. Such analyses produced the following summary
reference multiples ranges: (i) Market Capitalization to estimated 1997 EBITDA
of 9.0x to 11.0x, (ii) Market Capitalization to estimated 1998 EBITDA of 7.0x to
9.0x, (iii) Market Value to estimated 1997 net income of 18.0x to 21.0x and (iv)
Market Value to estimated 1998 net income of 14.0x to 16.0x.
The summary reference multiples ranges produced implied per share equity
value ranges for Dreco as follows: (i) the Market Capitalization to estimated
1997 EBITDA summary reference multiple range of 9.0x to 11.0x produced an
implied per share equity value range of $48.12 to $58.22, (ii) the Market
Capitalization to estimated 1998 EBITDA summary reference multiple range of 7.0x
to 9.0x produced an implied per share equity value range of $48.97 to $62.19,
(iii) the Market Value to estimated 1997 net income summary reference multiple
range of 18.0x to 21.0x produced an implied per share equity value range of
$54.94 to $64.10, and (iv) the Market Value to estimated 1998 net income summary
reference multiple range of 14.0x to 16.0x produced an implied per share equity
value range of $56.34 to $64.39. Based upon the foregoing analyses, Merrill
Lynch determined a summary reference range of per share equity values for Dreco
of $48.00 to $60.00.
No company utilized in the comparable company analysis was identical to
Dreco. Accordingly, an analysis of the results of this comparison is not purely
mathematical; rather, it involves complex considerations and judgements
concerning differences in historical and projected financial and operating
characteristics of the comparable companies and other factors that could affect
the value of such companies and Dreco.
Discounted Cash Flow Analysis. Using a modified discounted cash flow
methodology, Merrill Lynch calculated a range of per share values for Dreco
based on Dreco management projections adjusted after discussion with
National-Oilwell and Dreco managements. Using this methodology and a range of
discount rates from 11.0% to 13.0%, Merrill Lynch determined a summary reference
range of per share values for Dreco of $46.00 to $53.50.
Pro Forma Merger Analysis. Merrill Lynch analyzed the pro forma effect of
the Transaction on earnings per share ("EPS") of National-Oilwell during the
calendar years 1997 and 1998, after giving effect to combined cost savings from
the Transaction of $2.5 million and $7.5 million in 1997 and 1998, respectively.
This analysis indicated that the Transaction would be accretive to
National-Oilwell's projected EPS of $1.80 and $2.62 for calendar 1997 and 1998,
respectively (based on Dreco projected calendarized net income of $24.8 million
and $32.7 million for 1997 and 1998, respectively). The actual results achieved
by the combined company may vary from projected results and the variations may
be material.
Engagement of Merrill Lynch. Pursuant to a letter agreement between
National-Oilwell and Merrill Lynch, National-Oilwell has paid Merrill Lynch a
fee of $250,000, and will become obligated to pay Merrill Lynch an additional
fee of $1,750,000 payable upon the closing of the Transaction or other business
combination consummated prior to April 29, 1998. In addition, if
National-Oilwell receives or becomes entitled to any fee or reimbursement of
expenses as a result of the termination of the Documents, National-Oilwell shall
pay Merrill Lynch 15% of any such amounts less any amounts paid pursuant to the
aforementioned fees. National-Oilwell also agreed to reimburse Merrill Lynch for
its reasonable out-of-pocket expenses, including certain reasonable fees and
disbursements of its legal counsel, not to exceed $100,000. Additionally,
National-Oilwell agreed to indemnify Merrill Lynch and certain related persons
for certain liabilities related to or arising out of its engagement, including
liabilities under the federal securities laws.
National-Oilwell retained Merrill Lynch based upon Merrill Lynch's
experience and expertise. Merrill Lynch is an internationally recognized
investment banking and advisory firm. Merrill Lynch, as part of its investment
banking business, is continuously engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated underwriting,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
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Merrill Lynch has, in the past, provided financing services to National-Oilwell
and financial advisory services to one of National-Oilwell's principal
stockholders, and may continue to do so, and has received, and may receive, fees
for the rendering of such services. In particular, Merrill Lynch acted as the
lead managing underwriter in National-Oilwell's initial public offering of
shares of National-Oilwell Common Stock in October 1996. In connection with that
offering, Merrill Lynch made certain investigations of National-Oilwell and
became generally familiar with its business at such time. In the ordinary course
of its business, Merrill Lynch and its affiliates may actively trade the debt
and equity securities of National-Oilwell and Dreco (and anticipate trading
after the Transaction in the securities of National-Oilwell and Dreco) for their
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
OPINION OF CREDIT SUISSE FIRST BOSTON
Dreco retained Credit Suisse First Boston on January 15, 1997 as the
exclusive financial advisor to the special committee of the board of directors
of Dreco in connection with the possible sale of, or business combination
involving, Dreco. Credit Suisse First Boston was selected by Dreco based on
Credit Suisse First Boston's experience, expertise and familiarity with Dreco
and its business. Credit Suisse First Boston is an internationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
In connection with Credit Suisse First Boston's engagement, Dreco requested
that Credit Suisse First Boston evaluate the fairness of the Exchange Ratio from
a financial point of view. On May 13, 1997, Credit Suisse First Boston delivered
to the board of directors of Dreco an oral opinion, which was subsequently
confirmed in writing, that as of such date and based upon and subject to the
matters set forth therein, the Exchange Ratio was fair to the Dreco Shareholders
from a financial point of view. Credit Suisse First Boston subsequently
delivered to the board of directors of Dreco its written opinion dated the date
hereof that, as of such date and based upon and subject to the matters set forth
therein, the Exchange Ratio was fair to the Dreco Shareholders from a financial
point of view. No limitations were imposed by the board of directors of Dreco
upon Credit Suisse First Boston with respect to the investigations made or
procedures followed by Credit Suisse First Boston in rendering its opinions.
THE FULL TEXT OF THE CREDIT SUISSE FIRST BOSTON OPINION, WHICH SETS FORTH
THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX I TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. CREDIT SUISSE
FIRST BOSTON HAS CONSENTED TO THE INCLUSION OF THE CREDIT SUISSE FIRST BOSTON
OPINION AS ANNEX I TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND TO THE
REFERENCES MADE TO CREDIT SUISSE FIRST BOSTON, THE CREDIT SUISSE FIRST BOSTON
OPINION AND ITS OPINION DATED MAY 13, 1997 IN THE JOINT PROXY
STATEMENT/PROSPECTUS UNDER THE CAPTIONS ENTITLED "SUMMARY -- OPINIONS OF
FINANCIAL ADVISORS", "SUMMARY -- THE TRANSACTION -- REASONS FOR THE
TRANSACTION", "THE TRANSACTION -- BACKGROUND", AND "THE TRANSACTION -- OPINIONS
OF FINANCIAL ADVISORS -- OPINION OF CREDIT SUISSE FIRST BOSTON". IN GIVING SUCH
CONSENT, CREDIT SUISSE FIRST BOSTON DOES NOT ADMIT THAT IT COMES WITHIN THE
CATEGORY OF PERSONS WHOSE CONSENT IS REQUIRED UNDER, NOR DOES IT ADMIT THAT IT
IS AN "EXPERT" FOR PURPOSES OF, THE SECURITIES ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER. DRECO SHAREHOLDERS ARE URGED TO READ THE CREDIT SUISSE
FIRST BOSTON OPINION CAREFULLY IN ITS ENTIRETY. THE CREDIT SUISSE FIRST BOSTON
OPINION IS DIRECTED TO DRECO'S BOARD OF DIRECTORS AND RELATES ONLY TO THE
FAIRNESS OF THE EXCHANGE RATIO TO DRECO SHAREHOLDERS FROM A FINANCIAL POINT OF
VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY DRECO SHAREHOLDER AS TO HOW SUCH DRECO
SHAREHOLDER SHOULD VOTE AT THE DRECO MEETING. THE SUMMARY OF THE CREDIT SUISSE
FIRST BOSTON OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT THEREOF.
In arriving at its opinion, Credit Suisse First Boston reviewed certain
publicly available business and financial information relating to
National-Oilwell and Dreco, as well as the Combination Agreement, the Voting and
Exchange Trust Agreement, the Support Agreement, the Plan of Arrangement and the
appendices
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thereto. Credit Suisse First Boston also reviewed certain other information
relating to National-Oilwell and Dreco, including financial forecasts, provided
to Credit Suisse First Boston by National-Oilwell and Dreco, and met with the
managements of National-Oilwell and Dreco to discuss the businesses and
prospects of National-Oilwell and Dreco. Credit Suisse First Boston also
considered certain financial and stock market data of National-Oilwell and Dreco
and compared that data with similar data for other publicly held companies in
businesses similar to National-Oilwell and Dreco and considered the financial
terms of certain other business combinations and other transactions which have
recently been effected or were then pending. Credit Suisse First Boston also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which Credit Suisse
First Boston deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of the information provided to
or otherwise reviewed by it and relied on such information being complete and
accurate in all material respects. With respect to financial forecasts, Credit
Suisse First Boston assumed that such forecasts had been prepared on bases
reflecting the best currently available estimates and judgments of the
managements of National-Oilwell and Dreco as to the future financial performance
of National-Oilwell and Dreco. In addition, Credit Suisse First Boston did not
make an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of National-Oilwell or Dreco, nor was Credit Suisse
First Boston furnished with any such evaluations or appraisals. The Credit
Suisse First Boston Opinion was necessarily based upon information available to
Credit Suisse First Boston, and the financial, economic, market and other
conditions as they existed and could be evaluated, on the date of the Credit
Suisse First Boston Opinion. Credit Suisse First Boston did not express any
opinion as to (i) what the value of the National-Oilwell Common Stock actually
will be for purposes of any election by a Dreco Shareholder or when the
National-Oilwell Common Stock is issued to Dreco Shareholders at the election of
National-Oilwell, (ii) the prices at which the National-Oilwell Common Stock
will trade subsequent to the Transaction or (iii) the cash amount or other
consideration to be received by Dreco Shareholders upon an exchange of
Exchangeable Shares.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Credit Suisse First Boston Opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinions, Credit Suisse First Boston did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Credit Suisse First Boston believes that
its analyses must be considered as a whole, that all factors considered, as a
whole and not individually, were material to the process underlying its opinion,
and that selecting portions of its analyses, without considering all analyses,
would create a misleading or incomplete view of the processes underlying the
Credit Suisse First Boston Opinion.
In performing its analyses, Credit Suisse First Boston made numerous
assumptions with respect to Dreco, National-Oilwell, industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Dreco and
National-Oilwell. No company, transaction or business used in such analysis as a
comparison is identical to Dreco and National-Oilwell or the Transaction, nor is
an evaluation of the results of such analyses entirely mathematical; rather such
analyses involve complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the companies, business segments or
transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. The opinion of Credit Suisse
First Boston delivered to the board of directors of Dreco on May 13, 1997 and
the presentation made by Credit Suisse First Boston to the board of directors of
Dreco on that date were among several factors considered by the board of
directors of Dreco in its evaluation
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of the Transaction and should not be viewed as determinative of the views of
such board of directors or Dreco's management with respect to the Exchange Ratio
or the Transaction.
The following is a summary of the analyses performed by Credit Suisse First
Boston in connection with the preparation of its opinion dated May 13, 1997.
Credit Suisse First Boston reviewed and updated such analyses in connection with
the preparation of the Credit Suisse First Boston Opinion.
Discounted Cash Flow Analysis. Credit Suisse First Boston estimated the
present value of the future streams of after-tax free cash flows that Dreco
could produce on a standalone basis through fiscal year 2007 based on certain
operating and financial assumptions, estimates and other information regarding
the business of Dreco provided by and discussed with the management of Dreco as
to the revenue growth and operating margins of Dreco's principal business
segments (the "Dreco Base Case") and based on revised estimates of such
assumptions, estimates and other information assuming, among other things, both
lower (the "Dreco Downside Case") and higher (the "Dreco Upside Case") segment
revenue growth and margins than the Dreco Base Case. Such financial information
included, for the Dreco Base Case, estimated earnings per share of $2.74 and
$4.21 for calendar years 1997 and 1998, respectively. A range of terminal values
was calculated by applying multiples ranging from 7.0x to 8.0x to the earnings
before interest, taxes, depreciation and amortization ("EBITDA") of Dreco
projected for fiscal year 2008. The free cash flow streams and estimated
terminal values were then discounted to present value using discount rates
ranging from 13% to 14%. This analysis indicated implied reference ranges for
the enterprise value (defined by Credit Suisse First Boston as equity value plus
debt minus cash) and per share equity of Dreco of approximately $300 million to
$345 million, or approximately $39.67 to $45.04 per fully diluted Dreco Common
Share, for the Dreco Base Case, approximately $250 million to $290 million, or
approximately $33.70 to $38.47 per fully diluted Dreco Common Share, for the
Dreco Downside Case, and approximately $420 million to $490 million, or
approximately $53.99 to $62.34 per fully diluted Dreco Common Share, for the
Dreco Upside Case. Credit Suisse First Boston utilized the Dreco Base Case, the
Dreco Downside Case and the Dreco Upside Case scenarios merely as points of
reference and in no way intended to suggest parameters or forecasts as to
minimum or maximum enterprise or equity valuation ranges for Dreco.
Credit Suisse First Boston also performed a discounted cash flow analysis
of National-Oilwell based on certain operating and financial assumptions,
estimates and other information regarding the business of National-Oilwell
provided by and discussed with the managements of Dreco and National-Oilwell as
to the revenue growth and operating margins of National-Oilwell's principal
business segments (the "National-Oilwell Base Case") and based upon revised
estimates of such assumptions, estimates and other information assuming, among
other things, both lower (the "National-Oilwell Downside Case") and higher (the
"National-Oilwell Upside Case") segment revenue growth than the National-Oilwell
Base Case. Such financial information included, for the National-Oilwell Base
Case, estimated earnings per share of $1.82 and $2.56 for calendar years 1997
and 1998, respectively. A range of terminal values was calculated by applying
multiples ranging from 7.0x to 8.0x to the EBITDA of National-Oilwell projected
for fiscal year 2007. This analysis indicated implied enterprise and per share
equity reference ranges for National-Oilwell of approximately $660 million to
$770 million, or approximately $32.73 to $38.65 per fully diluted share of
National-Oilwell Common Stock, for the National-Oilwell Base Case, approximately
$560 million to $650 million, or approximately $27.36 to $32.20 per fully
diluted share of National-Oilwell Common Stock, for the National-Oilwell
Downside Case, and approximately $740 million to $860 million, or approximately
$37.04 to $43.49 per fully diluted share of National-Oilwell Common Stock, for
the National-Oilwell Upside Case. Credit Suisse First Boston utilized the
National-Oilwell Base Case, the National-Oilwell Downside Case and the
National-Oilwell Upside Case scenarios merely as points of reference and in no
way intended to suggest parameters or forecasts as to minimum or maximum
enterprise or equity valuation ranges for National-Oilwell.
Selected Companies Analysis. Credit Suisse First Boston compared certain
financial, operating and stock market data of Dreco and National-Oilwell to
corresponding data of selected publicly traded companies in the oilfield service
industry. For Dreco, such companies were Tesco Corporation, Tuboscope Vetco
International Corporation, Varco International, Inc., Camco International Inc.,
Cooper Cameron Corporation and Energy Ventures, Inc. (the "Dreco Selected
Companies"). All multiples were based on closing stock
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prices on May 9, 1997. This analysis indicated a range of multiples for the
Dreco Selected Companies of (i) enterprise value relative to calendar 1997 and
1998 EBITDA of 8.0x to 10.0x and 7.0x to 9.0x, respectively, (ii) equity value
relative to calendar 1997 and 1998 net income of 17.0x to 19.0x and 13.0x to
15.0x, respectively, and (iii) equity value relative to after-tax cash flow
(defined by Credit Suisse First Boston as net income plus depreciation) of 10.0x
to 12.0x and 9.0x to 11.0x, respectively. Credit Suisse First Boston then
calculated imputed enterprise and per share equity reference ranges for Dreco by
applying these multiples to corresponding financial data of Dreco. This analysis
implied enterprise and per share equity reference ranges for Dreco of
approximately $350 million to $400 million, or approximately $45.63 to $51.60
per fully diluted Dreco Common Share.
Credit Suisse First Boston selected Tesco Corporation, Tuboscope Vetco
International Corporation and Varco International, Inc. for comparison with
National-Oilwell (the "National-Oilwell Selected Companies"). All multiples were
based on closing stock prices on May 9, 1997. This analysis indicated a range of
multiples for the National-Oilwell Selected Companies of (i) enterprise value
relative to calendar 1997 and 1998 EBITDA of 9.0x to 11.0x and 7.0x to 9.0x,
respectively, (ii) equity value relative to calendar 1997 and 1998 net income of
18.0x to 20.0x and 14.0x to 16.0x, respectively, and (iii) equity value relative
to after-tax cash flow of 11.0x to 13.0x and 10.0x to 12.0x, respectively.
Credit Suisse First Boston then calculated imputed enterprise and per share
equity reference ranges for National-Oilwell by applying these multiples to
corresponding financial data of National-Oilwell. This analysis implied
enterprise and per share equity reference ranges for National-Oilwell of
approximately $625 million to $725 million, or approximately $30.86 to $36.23
per fully diluted share of National-Oilwell Common Stock.
Selected Acquisitions Analysis. Using publicly available information,
Credit Suisse First Boston analyzed, for purposes of evaluating Dreco, the
purchase prices and implied transaction multiples paid in the following selected
transactions (acquiror/target): Baker Hughes Incorporated/Drilex International
Inc. (pending); Energy Ventures, Inc./TA Industries; Cooper Cameron
Corporation/Ingram Cactus Co.; Weatherford Enterra, Inc./NODECO AS; Tuboscope
Vetco International Corporation/Drexel Oilfield Services; Inverness/Phoenix
L.L.C., First Reserve Corporation and management/National-Oilwell, L.P.;
Weatherford International Inc./Enterra Corporation; Dresser Industries
Inc./Wheatley TXT Corporation; Dresser Industries Inc./Baroid Corporation;
Wheatley TXT Corporation/Axelson, Inc. (Hanson plc); Halliburton Co./Smith
Directional Drilling; Baker Hughes Incorporated/Teleco Oilfield Services (Sonat
Inc.); and Cooper Industries Inc./Cameron Iron Works Inc. (collectively, the
"Dreco Selected Transactions"). All multiples were based on historical financial
information available at the time of announcement of each transaction. This
analysis indicated a range of multiples for the Dreco Selected Transactions of
enterprise value relative to latest 12 months ("LTM") sales, EBITDA and earnings
before interest and taxes ("EBIT") of 1.0x to 2.0x, 8.0x to 10.0x and 10.0x to
15.0x, respectively. Credit Suisse First Boston then calculated imputed
enterprise and per share equity reference ranges for Dreco by applying these
multiples to corresponding financial data of Dreco (pro forma for Dreco's
acquisition of Vector). This analysis resulted in implied enterprise and per
share equity reference ranges for Dreco of approximately $260 million to $320
million, or approximately $34.90 to $42.06 per fully diluted Dreco Common Share.
Using publicly available information, Credit Suisse First Boston also
analyzed, for purposes of evaluating National-Oilwell, the purchase prices and
implied transaction multiples paid in the following selected transactions in the
oilfield services industry (acquiror/target): Tuboscope Vetco International
Corporation/Drexel Oilfield Services; Inverness/Phoenix L.L.C., First Reserve
Corporation and management/National-Oilwell, L.P.; Weatherford International
Inc./Enterra Corporation; Dresser Industries Inc./Wheatley TXT Corporation; and
Wheatley TXT Corporation/Axelson, Inc. (Hanson plc) (collectively, the
"National-Oilwell Selected Transactions"). All multiples were based on
historical financial information available at the time of announcement of each
transaction. This analysis indicated a range of multiples for the
National-Oilwell Selected Transactions of enterprise value relative to LTM
sales, EBITDA and EBIT of 1.0x to 1.5x, 7.0x to 9.0x and 9.0x to 11.0x,
respectively. Credit Suisse First Boston then calculated imputed enterprise and
per share equity reference ranges for National-Oilwell by applying these
multiples to corresponding financial data of National-Oilwell. This analysis
resulted in implied enterprise and per share
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equity reference ranges for National-Oilwell of approximately $325 million to
$425 million, or approximately $14.73 to $20.10 per fully diluted share of
National-Oilwell Common Stock.
Break-up Valuation Analysis of Dreco. Credit Suisse First Boston analyzed
separately the valuation of the two primary businesses of Dreco using a
discounted cash flow analysis, a selected companies analysis and a selected
acquisition analysis. These analyses resulted in enterprise and per share equity
reference ranges for Dreco of approximately $300 million to $370 million, or
approximately $39.73 to $47.25 per fully diluted Dreco Common Share.
Aggregate Reference Ranges. On the basis of the valuation methodologies
employed in the analyses described above, Credit Suisse First Boston derived an
aggregate enterprise and per share equity reference range for Dreco of
approximately $300 million to $350 million, or approximately $40.33 to $46.29
per fully diluted Dreco Common Share, and an aggregate enterprise and per share
equity reference range for National-Oilwell of approximately $650 million to
$775 million, or approximately $32.20 to $38.92 per fully diluted share of
National-Oilwell Common Stock. Credit Suisse First Boston noted that, based on
the closing stock price of National-Oilwell on May 13, 1997 of $39.125, the
Exchange Ratio implied a per share value for Dreco of approximately $46.95
compared to the closing price of Dreco on that day of $38.50, reflecting a
premium of approximately 22%.
Exchange Ratio Analyses. Credit Suisse First Boston also conducted the
following relative valuation analyses and compared the Exchange Ratio of 1.20
with the exchange ratios implied by such analyses:
Historical Stock Trading Exchange Ratio Analysis. Credit Suisse First
Boston performed an exchange ratio analysis comparing the average closing
stock prices for Dreco and National-Oilwell during the one day, one week
and one month periods preceding May 9, 1997 and the period from National-
Oilwell's initial public offering on October 29, 1996 through May 9, 1997.
This comparison yielded an implied exchange ratio ranging from 0.8400 to
1.1336.
Discounted Cash Flow Exchange Ratio Analysis. Credit Suisse First
Boston performed an exchange ratio analysis comparing the discounted cash
flow analyses for both companies using the Dreco Base Case, which resulted
in a per share equity reference range of approximately $39.67 to $45.04 for
Dreco, and the National-Oilwell Base Case, which resulted in a per share
equity reference range of approximately $32.73 to $38.65 for
National-Oilwell. This comparison resulted in an implied exchange ratio
ranging from 1.0264 to 1.3761.
Aggregate Reference Range Exchange Ratio Analysis. Credit Suisse
First Boston performed an exchange ratio analysis comparing the aggregate
per share equity reference ranges derived from the discounted cash flow
analysis, the selected companies analysis and the selected acquisitions
analysis described above of approximately $40.33 to $46.29 for Dreco and
approximately $32.20 to $38.92 for National-Oilwell. This comparison
resulted in an implied exchange ratio ranging from 1.0362 to 1.4376.
Contribution Exchange Ratio Analysis. Using estimated calendar 1997
financial data for Dreco and National-Oilwell, Credit Suisse First Boston
performed an exchange ratio analysis comparing the relative contributions
of Dreco and National-Oilwell to the sales, EBITDA and net income of the
combined company. This analysis yielded an implied exchange ratio ranging
from 0.4915 to 1.5292.
Pro Forma Merger Analysis. Credit Suisse First Boston analyzed the
potential pro forma effect of the Transaction on earnings per share ("EPS") of
National-Oilwell and Dreco during the calendar years 1997 and 1998, without
giving effect to any synergies that could result from the Transaction. This
analysis indicated that, without giving effect to any synergies, the Transaction
could be accretive to National-Oilwell's EPS in 1997 and 1998. The actual
results achieved by the combined company may vary from projected results and the
variations may be material.
Other Factors and Analyses. In the course of preparing its opinion, Credit
Suisse First Boston performed certain other analyses and considered certain
other information and data, including, among other things, (i) the trading
characteristics of Dreco Common Shares and National-Oilwell Common Stock,
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(ii) the profile of the stockholders of National-Oilwell and Dreco and (iii)
equity research coverage of National-Oilwell and Dreco provided by securities
analysts.
Miscellaneous. Pursuant to Credit Suisse First Boston's engagement letter,
Dreco has agreed to pay Credit Suisse First Boston for its services in
connection with the Transaction an aggregate financial advisory fee of 0.75% of
the total fair market value of the consideration payable to the Dreco
Shareholders in connection with the Transaction. Dreco also has agreed to
reimburse Credit Suisse First Boston for reasonable out-of-pocket expenses
incurred by Credit Suisse First Boston in performing its services, including the
reasonable fees and expenses of legal counsel and any other advisor retained by
Credit Suisse First Boston, and to indemnify Credit Suisse First Boston and
certain related persons and entities against certain liabilities, including
liabilities under the federal securities laws, arising out of Credit Suisse
First Boston's engagement.
In the ordinary course of its business, Credit Suisse First Boston and its
affiliates may actively trade the debt and equity securities of both Dreco and
National-Oilwell for their own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Appointments of Directors and Executive Officers. On the Effective Date,
Frederick W. Pheasey and Robert L. Phillips will be appointed to the
National-Oilwell board of directors, Mr. Pheasey will be appointed as Executive
Vice President and W. Douglas Frame, currently an executive officer of Dreco,
will be appointed as an executive officer of National-Oilwell. On the Effective
Date, all the current directors of the Dreco board except Mr. Pheasey will
resign from the Dreco board, and C. R. Bearden (formerly a director of National-
Oilwell) and Edward C. Grimes will be appointed to such board.
Indemnification of Dreco Officers and Directors. Pursuant to the
Combination Agreement, National-Oilwell has agreed to maintain all rights to
indemnification existing at the time of execution of the Combination Agreement
in favor of the directors and officers of Dreco and its subsidiaries in
accordance with the charter documents and bylaws of each entity and to the
fullest extent permitted under the ABCA and to continue in effect director and
officer liability insurance for such persons for six years after the Effective
Date.
Dreco Options. In addition, on the Effective Date, National-Oilwell will
assume the Dreco Option Plan and the obligations of Dreco under each Dreco
Option. Each Dreco Option will be converted into an option to purchase
National-Oilwell Common Stock. See "-- Transaction Mechanics and Description of
Exchangeable Shares -- Dreco Options."
TRANSACTION MECHANICS AND DESCRIPTION OF EXCHANGEABLE SHARES
The following description is qualified in its entirety by reference to the
full text of the Combination Agreement, the Plan of Arrangement and Exchangeable
Share Provisions, the form of Support Agreement and the form of Voting and
Exchange Trust Agreement attached as Annexes B, E, F and G, respectively, to
this Joint Proxy Statement, which are incorporated herein by reference.
THE ARRANGEMENT
Pursuant to the terms of the Plan of Arrangement, at the Effective Time,
Dreco will undergo a reorganization of capital whereby, in summary: (i) Dreco
will amend its articles of amalgamation to authorize an unlimited number of
Exchangeable Shares and one Class A Preferred Share; (ii) Dreco will issue one
Class A Preferred Share to National-Oilwell in exchange for one share of
National-Oilwell Common Stock; (iii) each existing Dreco Common Share (other
than Dreco Common Shares held by holders who have properly exercised their
rights of dissent and are ultimately entitled to be paid fair value for their
shares) will be exchanged for 1.2 Exchangeable Shares or, at the election of the
holder pursuant to the Exchange Put Right, the equivalent number of shares of
National-Oilwell Common Stock (subject to the Exchange Ratio Adjustment); (iv)
Dreco will amend its articles of amalgamation to reduce the number of authorized
Dreco Common Shares to one; (v) the one Class A Preferred Share held by
National-Oilwell will be exchanged for
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one Dreco Common Share; and (vi) Dreco will amend its articles of amalgamation
to delete the Class A Preferred Share from its authorized share capital.
As a result, immediately following the Effective Time, Dreco's outstanding
share capital will consist of one Dreco Common Share held by National-Oilwell
and the Exchangeable Shares held by the former holders of Dreco Common Shares.
As noted above, at the Effective Time, each Dreco Common Share will
automatically be exchanged for 1.2 Exchangeable Shares, subject to the Exchange
Ratio Adjustment. Enclosed with copies of this Joint Proxy Statement/Prospectus
delivered to the registered holders of Dreco Common Shares is the Dreco Letter
of Transmittal, which, when duly completed and returned together with a
certificate for Dreco Common Shares, will enable the holder to exchange such
Dreco Common Shares for the number of Exchangeable Shares to which such holder
is entitled or, at the election of the holder pursuant to the Exchange Put
Right, the equivalent number of shares of National-Oilwell Common Stock. See
"-- Procedures for Exchange by Dreco Shareholders and Dreco Optionholders."
The Exchangeable Shares are subject to adjustment or modification in the
event of a stock split or other changes to the capital structure of
National-Oilwell so as to maintain the initial one-to-one ratio between the
Exchangeable Shares and National-Oilwell Common Stock.
EXCHANGE AND REDEMPTION RIGHTS
Under the Voting and Exchange Trust Agreement, National-Oilwell will grant
the Exchange Rights, including the Exchange Put Right, to the Trustee for the
benefit of the holders of the Exchangeable Shares. Pursuant to the Exchangeable
Share Provisions, the holders of Exchangeable Shares will have the right to
retract (i.e., require Dreco to redeem), any or all of their Exchangeable
Shares. Different Canadian federal income tax consequences to a holder of
Exchangeable Shares and to Dreco may arise depending upon whether the relevant
exchange or redemption is ultimately effected by National-Oilwell or Dreco. See
"Income Tax Considerations to Dreco Shareholders."
Exchange Put Right. Holders of the Exchangeable Shares will be entitled at
any time at or following the Effective Time to require National-Oilwell to
exchange all or any part of the Exchangeable Shares owned by such holders and to
receive an equivalent number of shares of National-Oilwell Common Stock plus the
Dividend Amount, if any. The Exchange Put Right may be exercised at any time by
notice in writing (which may be in the form of the panel, if any, on the
certificates for Exchangeable Shares or by completing the Dreco Letter of
Transmittal) given by the holder to and received by the Trustee and accompanied
by presentation and surrender of the certificates representing such Exchangeable
Shares, together with such other documents that may be required to effect a
transfer of Exchangeable Shares as provided in the Exchangeable Share
Provisions, at the principal transfer offices in Calgary, Alberta and Toronto,
Ontario of the Trustee and at such other places as may be determined from time
to time. An exchange pursuant to this right will be completed not later than the
close of business on the third business day following receipt by the Trustee of
the notice, the certificates and such other required documents.
Different Canadian federal income tax consequences to a holder of
Exchangeable Shares may arise depending upon whether the relevant exchange or
redemption is ultimately effected by National-Oilwell or Dreco. The Exchange Put
Right allows holders to acquire shares of National-Oilwell Common Stock directly
from National-Oilwell through an exchange at any time (with settlement to occur
within three business days) and thereby to control the tax consequences of
receiving National-Oilwell Common Stock. Pursuant to their retraction rights,
holders of Exchangeable Shares may request Dreco to redeem their shares for
National-Oilwell Common Stock and thereby give National-Oilwell the option to
effect the exchange itself. However, National-Oilwell may forego the option to
exchange pursuant to a Retraction Request, thereby forcing the holder to accept
a redemption. See "-- Retraction Rights."
Retraction Rights. Holders of the Exchangeable Shares will be entitled at
any time following the Effective Time to require Dreco to retract (i.e., require
Dreco to redeem) any or all such Exchangeable Shares owned by such holders and
to receive an equivalent number of shares of National-Oilwell Common
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Stock plus the Dividend Amount, if any. Holders of the Exchangeable Shares may
effect such retraction by presenting the appropriate share certificates to Dreco
or the Trustee representing the number of Exchangeable Shares the holder desires
to retract together with a duly executed Retraction Request specifying the
number of Exchangeable Shares the holder wishes to retract and the Retraction
Date (which shall not be less than five nor more than ten business days after
the date on which Dreco receives the Retraction Request from the holder), and
such other documents as may be required to effect the retraction of the
Exchangeable Shares.
Upon receipt of the Exchangeable Shares, the Retraction Request and other
required documentation from the holder thereof, Dreco must immediately notify
National-Oilwell of such Retraction Request. National-Oilwell will thereafter
have two business days in which to exercise its Retraction Call Right. In the
event National-Oilwell determines not to exercise its Retraction Call Right and
provided that the Retraction Request is not revoked in accordance with the
Exchangeable Share Provisions, Dreco is obligated to deliver to the holder not
later than the Retraction Date the number of shares of National-Oilwell Common
Stock equal to the number of Exchangeable Shares submitted by the holder for
retraction, plus the Dividend Amount, if any. National-Oilwell will be obligated
to provide such shares of National-Oilwell Common Stock to Dreco to comply with
the Retraction Request.
Automatic Redemption. Subject to applicable law and the Redemption Call
Rights of National-Oilwell described below, on an Automatic Redemption Date,
Dreco will redeem all but not less than all of the then outstanding Exchangeable
Shares in exchange for an equal number of shares of National-Oilwell Common
Stock, plus the Dividend Amount, if any. Notwithstanding any proposed redemption
of the Exchangeable Shares, National-Oilwell will, pursuant to Redemption Call
Rights, have the overriding right to purchase on an Automatic Redemption Date
all but not less than all of the outstanding Exchangeable Shares in exchange for
one share of National-Oilwell Common Stock for each such Exchangeable Share,
plus the Dividend Amount, if any. An Automatic Redemption Date is the first to
occur of (a) the fifth anniversary of the Effective Date of the Arrangement, (b)
the date selected by the Dreco board of directors at a time when less than 15%
of the Exchangeable Shares issuable on the Effective Date (other than shares
held by National-Oilwell and its subsidiaries and subject to adjustment in
certain events) are outstanding, (c) the business day prior to the record date
for any meeting or vote of the shareholders of Dreco to consider any matter on
which the holders of Exchangeable Shares would be entitled to vote as
shareholders of Dreco, but excluding any meeting or vote as described in clause
(d) below or (d) the business day following the day on which the holders of
Exchangeable Shares fail to take the necessary action at a meeting or other vote
of the holders of Exchangeable Shares, if and to the extent such action is
required, to approve or disapprove, as applicable, any change to, or in the
rights of the holders of, Exchangeable Shares, if the approval or disapproval,
as applicable, of such change would be required to maintain the economic and
legal equivalence of the Exchangeable Shares and the National-Oilwell Common
Stock. At least 45 days before an Automatic Redemption Date or before a possible
Automatic Redemption Date which may result from a failure of the holders of
Exchangeable Shares to take necessary action as described in clause (d) above,
Dreco shall provide the registered holders of Exchangeable Shares with written
notice of the proposed redemption of the Exchangeable Shares by Dreco. In the
case of any notice given in connection with a possible Automatic Redemption
Date, such notice will be given contingently and will be withdrawn if the
contingency does not occur.
Optional Exchange Right. Subject to National-Oilwell's Liquidation Call
Right described below, upon the occurrence and during the continuance of a Dreco
Insolvency Event, a holder of Exchangeable Shares will be entitled to instruct
the Trustee to exercise the Optional Exchange Right with respect to any or all
of the Exchangeable Shares held by such holder, thereby requiring
National-Oilwell to purchase such Exchangeable Shares from the holder.
Immediately upon the occurrence of a Dreco Insolvency Event or any event which
may with the passage of time or the giving of notice, become a Dreco Insolvency
Event, Dreco and National-Oilwell will give written notice thereof to the
Trustee. As soon as practicable thereafter, the Trustee will notify each holder
of Exchangeable Shares of such event or potential event and will advise the
holder of its rights with respect to the Optional Exchange Right.
The consideration for each Exchangeable Share to be acquired under the
Optional Exchange Right will be one share of National-Oilwell Common Stock plus
the Dividend Amount, if any.
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If, as a result of liquidity or solvency provisions of applicable law,
Dreco is unable to redeem all of the Exchangeable Shares tendered for retraction
by a holder in accordance with the Exchangeable Share Provisions as described
under "Retraction Rights" above, the holder will be deemed to have exercised the
Optional Exchange Right with respect to the unredeemed Exchangeable Shares, and
National-Oilwell will be required to purchase such shares from the holder in the
manner set forth above under "Retraction Rights."
Automatic Exchange Right. In the event of a National-Oilwell Liquidation
Event, National-Oilwell will be required to acquire each outstanding
Exchangeable Share by exchanging one share of National-Oilwell Common Stock for
each such Exchangeable Share, plus the Dividend Amount, if any.
CALL RIGHTS
In the circumstances described below, National-Oilwell will have certain
overriding rights to acquire Exchangeable Shares from holders thereof by
delivering one share of National-Oilwell Common Stock for each Exchangeable
Share acquired, plus the Dividend Amount, if any. Different Canadian federal
income tax consequences to a holder of Exchangeable Shares may arise depending
upon whether the Call Rights are exercised by National-Oilwell or whether the
relevant Exchangeable Shares are redeemed by Dreco pursuant to the Exchangeable
Share Provisions. See "Income Tax Considerations to Dreco Shareholders."
Retraction Call Right. Pursuant to the Exchangeable Share Provisions, a
holder requesting Dreco to redeem the Exchangeable Shares will be deemed to
offer such shares to National-Oilwell, and National-Oilwell will have an
overriding Retraction Call Right to acquire all but not less than all of the
Exchangeable Shares that the holder has requested Dreco to redeem in exchange
for one share of National-Oilwell Common Stock in exchange for each Exchangeable
Share, plus the Dividend Amount, if any. See "-- Exchange and Redemption
Rights -- Retraction Rights."
Liquidation Call Right. Pursuant to the Plan of Arrangement,
National-Oilwell will be granted an overriding Liquidation Call Right, in the
event of and notwithstanding a proposed liquidation, dissolution or winding-up
of Dreco or any other distribution of the assets of Dreco among its shareholders
for the purpose of winding-up its affairs, to acquire all but not less than all
of the Exchangeable Shares then outstanding in exchange for National-Oilwell
Common Stock, plus the Dividend Amount, if any. Upon the exercise by
National-Oilwell of the Liquidation Call Right, the holders of the Exchangeable
Shares will be obligated to transfer such shares to National-Oilwell. The
acquisition by National-Oilwell of all of the outstanding Exchangeable Shares
upon the exercise of the Liquidation Call Right will occur on the effective date
of the voluntary or involuntary liquidation, dissolution or winding-up of Dreco.
Redemption Call Right. Pursuant to the Plan of Arrangement,
National-Oilwell will be granted an overriding Redemption Call Right,
notwithstanding the proposed automatic redemption of the Exchangeable Shares by
Dreco pursuant to the Exchangeable Share Provisions, to acquire on an Automatic
Redemption Date all but not less than all of the Exchangeable Shares then
outstanding in exchange for National-Oilwell Common Stock, plus the Dividend
Amount, if any, and, upon the exercise by National-Oilwell of the Redemption
Call Right, the holders of the Exchangeable Shares will be obligated to transfer
such shares to National-Oilwell.
Effect of Call Right Exercise. If National-Oilwell exercises one or more
of its Call Rights, it will directly issue National-Oilwell Common Stock to
holders of Exchangeable Shares and will become the holder of such Exchangeable
Shares. National-Oilwell will not be entitled to exercise any voting rights
attached to the Exchangeable Shares it so acquires. If National-Oilwell declines
to exercise its Call Rights when applicable, it will be required, pursuant to
the Support Agreement, to issue National-Oilwell Common Stock as Dreco directs,
including to Dreco, which will, in turn, transfer such stock to the holders of
Exchangeable Shares in consideration for the return and cancellation of such
Exchangeable Shares. In the event National-Oilwell does not exercise its Call
Rights when applicable and instead delivers shares of National-Oilwell Common
Stock as Dreco directs, including to Dreco in accordance with the Support
Agreement, the economic result for holders of the Exchangeable Shares would be
the same, while the Canadian tax consequences would be substantially different;
see "Income Tax Considerations to Dreco Shareholders -- Canadian Federal Income
Tax Considerations to Dreco Shareholders." However, Na-
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tional-Oilwell anticipates that it will exercise its Call Rights, when
available, and currently foresees no circumstances under which it would not
exercise its Call Rights. In addition, National-Oilwell does not anticipate any
restriction or limitation on the number of Exchangeable Shares it would acquire
upon exercise of Call Rights.
VOTING, DIVIDEND AND LIQUIDATION RIGHTS OF HOLDERS OF EXCHANGEABLE SHARES
On the Effective Date, National-Oilwell, Dreco and the Trustee will enter
into the Voting and Exchange Trust Agreement in the form attached hereto as
Annex G. Under the Voting and Exchange Trust Agreement, National-Oilwell will
issue the Voting Share to the Trustee for the benefit of the holders (other than
National-Oilwell and its subsidiaries) of the Exchangeable Shares. The Voting
Share will carry a number of votes, exercisable at any meeting at which
National-Oilwell Stockholders are entitled to vote or with respect to any
consent sought from the National-Oilwell Stockholders, equal to the number of
outstanding Exchangeable Shares (other than shares held by National-Oilwell and
its subsidiaries).
Each holder of an Exchangeable Share (other than National-Oilwell and its
subsidiaries) on the record date for any meeting at which National-Oilwell
Stockholders are entitled to vote will be entitled to instruct the Trustee to
exercise one of the votes attached to the Voting Share for each Exchangeable
Share. The Trustee will exercise each vote attached to the Voting Share only as
directed by the relevant holder and, in the absence of instructions from a
holder as to voting, will not exercise such votes. A holder may, upon
instructing the Trustee, obtain a proxy from the Trustee entitling the holder to
vote directly at the relevant meeting the votes attached to the Voting Share to
which the holder is entitled.
The Trustee will send to the holders of the Exchangeable Shares the notice
of each meeting at which the National-Oilwell Stockholders are entitled to vote,
together with the related meeting materials and a statement as to the manner in
which the holder may instruct the Trustee to exercise the votes attached to the
Voting Share, at the same time as National-Oilwell sends such notice and
materials to National-Oilwell Stockholders. The Trustee will also send to the
holders copies of all proxy and information statements and other related
materials sent by National-Oilwell to National-Oilwell Stockholders at the same
time as such materials are sent to the National-Oilwell Stockholders. To the
extent such materials are provided to the Trustee by National-Oilwell, the
Trustee will also send to the holders all materials sent by third parties to
National-Oilwell Stockholders, including dissident proxy and information
circulars and tender and exchange offer circulars, as soon as possible after
such materials are first sent to National-Oilwell Stockholders.
All rights of a holder of Exchangeable Shares to exercise votes attached to
the Voting Share will cease upon the exchange of all such holder's Exchangeable
Shares for shares of National-Oilwell Common Stock.
Holders of Exchangeable Shares shall be entitled to receive, and the board
of directors of Dreco shall, on each date on which the National-Oilwell board of
directors declares a dividend on National-Oilwell Common Stock, declare a
dividend (i) in the case of a cash dividend declared on the National-Oilwell
Common Stock, in an amount in cash for each Exchangeable Share equal to the cash
dividend declared on each share of National-Oilwell Common Stock, (ii) in the
case of a stock dividend declared on the National-Oilwell Common Stock to be
paid in National-Oilwell Common Stock, in such number of Exchangeable Shares for
each Exchangeable Share as is equal to the number of shares of National-Oilwell
Common Stock to be paid on each share of National-Oilwell Common Stock or (iii)
in the case of a dividend declared on the National-Oilwell Common Stock in
property other than cash or National-Oilwell Common Stock, in such type and
amount of property declared as a dividend on each share of National-Oilwell
Common Stock.
Upon the occurrence of a Dreco Insolvency Event, holders of the
Exchangeable Shares will have preferential rights to receive from Dreco one
share of National-Oilwell Common Stock for each Exchangeable Share they hold,
plus the Dividend Amount, if any. In the event of a proposed Dreco Insolvency
Event, pursuant to the Liquidation Call Right National-Oilwell will have the
right to purchase all of the outstanding Exchangeable Shares from the holders
thereof at the effective time of any such liquidation, dissolution, or winding
up in exchange for one share of National-Oilwell Common Stock for each such
Exchangeable Share, plus the Dividend Amount, if any.
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Upon the occurrence of a National-Oilwell Liquidation Event, in order for
the holders of the Exchangeable Shares to participate on a pro rata basis with
the holders of National-Oilwell Common Stock, each holder of Exchangeable Shares
will automatically have the right pursuant to the Automatic Exchange Right to
receive in exchange therefor an equivalent number of shares of National-Oilwell
Common Stock, plus the Dividend Amount, if any. For a description of certain
National-Oilwell obligations with respect to the voting, dividend and
liquidation rights of the holders of Exchangeable Shares, see "-- Support
Agreement."
SUPPORT AGREEMENT
The following description is qualified in its entirety by reference to the
full text of the Support Agreement attached as Annex F to this Joint Proxy
Statement.
The Support Agreement provides that National-Oilwell: (i) will not declare
or pay dividends on the National-Oilwell Common Stock unless Dreco is able to
and simultaneously pays an equivalent dividend on the Exchangeable Shares; (ii)
will cause Dreco to declare and pay an equivalent dividend on the Exchangeable
Shares simultaneously with National-Oilwell's declaration and payment of
dividends on the National-Oilwell Common Stock; (iii) will advise Dreco in
advance of the declaration of any dividend on the National-Oilwell Common Stock
and ensure that the declaration date, record date and payment date for dividends
on the Exchangeable Shares are the same as that for the National-Oilwell Common
Stock; and (iv) will take all actions and do all things necessary to ensure that
Dreco is able to provide to the holders of the Exchangeable Shares the
equivalent number of shares of National-Oilwell Common Stock in the event of a
liquidation, dissolution, or winding-up of Dreco, a Retraction Request by a
holder of Exchangeable Shares or a redemption of Exchangeable Shares of Dreco.
The Support Agreement also provides that, without the prior approval of
Dreco and the holders of the Exchangeable Shares, National-Oilwell will not
distribute additional shares of National-Oilwell Common Stock or rights to
subscribe therefor, evidences of indebtedness or assets to all or substantially
all of the holders of shares of National-Oilwell Common Stock, or change the
National-Oilwell Common Stock unless the same or an economically equivalent
distribution on or change to the Exchangeable Shares (or in the rights of the
holders thereof) is made simultaneously. An Automatic Redemption Date (see
"Exchange and Redemption Rights -- Automatic Redemption") will occur if the
holders of Exchangeable Shares fail to approve, if required, any such
economically equivalent change. The Support Agreement also provides that in the
event of any tender offer, share exchange offer, issuer bid, take-over bid or
similar transaction affecting the National-Oilwell Common Stock,
National-Oilwell will take all necessary and desirable action to enable holders
of the Exchangeable Shares to participate in such transaction on an equivalent
basis as the holders of National-Oilwell Common Stock.
In addition, so long as there remain outstanding any Exchangeable Shares
not owned by National-Oilwell or any entity controlled by National-Oilwell,
National-Oilwell will remain the beneficial owner, directly or indirectly, of
all outstanding Dreco Common Shares and of at least 50.1% of all other
securities of Dreco entitled to voting rights generally for the election of
directors other than the Exchangeable Shares.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the Exchangeable Shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that the board of directors of each of National-Oilwell and Dreco
is of the opinion that such amendments are not prejudicial to the interests of
the holders of the Exchangeable Shares), the Support Agreement may not be
amended without the approval of the holders of the Exchangeable Shares.
Under the Support Agreement, National-Oilwell will not exercise any voting
rights attached to the Exchangeable Shares owned by it or any entity controlled
by it on any matter considered at meetings of holders of Exchangeable Shares.
In order for National-Oilwell to perform its obligations in accordance with
the Support Agreement, Dreco must notify National-Oilwell of the occurrence of
certain events, such as the liquidation, dissolution or winding-up of Dreco, and
Dreco's receipt of a Retraction Request from a holder of Exchangeable Shares.
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NATIONAL-OILWELL'S AMENDED AND RESTATED CERTIFICATE
National-Oilwell's Amended and Restated Certificate, to be filed with the
Secretary of State of Delaware on the Effective Date, incorporates the terms of
the proposed amendments, which increase the authorized shares of
National-Oilwell Common Stock from 40,000,000 to 75,000,000 and authorize one
share of Special Voting Stock. See "Proposed National-Oilwell Recapitalization
Plan."
DRECO OPTIONS
At the Effective Time, pursuant to the Combination Agreement,
National-Oilwell will assume the Dreco Option Plan and the obligations of Dreco
under each Dreco Option. Each Dreco Option will be converted as follows: each
Dreco Option will be converted into an option exercisable for a number of whole
shares of National-Oilwell Common Stock equal to the number of Dreco Common
Shares subject to the Dreco Option at the Effective Time multiplied by the
Exchange Ratio, rounded down to the nearest whole number of shares, at an
exercise price per share of National-Oilwell Common Stock equal to the exercise
price per share of such Dreco Option immediately prior to the Effective Time
divided by the Exchange Ratio.
DELIVERY OF NATIONAL-OILWELL COMMON STOCK
Pursuant to the Support Agreement and the Voting and Exchange Trust
Agreement, National-Oilwell will ensure that all shares of National-Oilwell
Common Stock to be delivered by it under the Support Agreement or on the
exercise of the Exchange Rights under the Voting and Exchange Trust Agreement
are duly registered, qualified or approved under applicable Canadian and United
States securities laws, if required, so that such shares may be freely traded by
the holder thereof (other than any restriction on transfer by reason of a holder
being a "control person" of National-Oilwell for purposes of Canadian securities
law or an "affiliate" of National-Oilwell for purposes of United States
securities law). In addition, National-Oilwell will take all actions necessary
to cause all such shares of National-Oilwell Common Stock to be listed or quoted
for trading on all stock exchanges or quotation systems on which outstanding
shares of National-Oilwell Common Stock are then listed or quoted for trading.
The shares of National-Oilwell Common Stock to be issued upon exercise of
currently outstanding Dreco Options are registered on the Registration Statement
on Form S-4 of which this Joint Proxy Statement/ Prospectus is a part.
National-Oilwell intends to cause the shares of National-Oilwell Common Stock to
be issued upon exercise of Dreco Options not yet issued under the Dreco Option
Plan to be registered on Form S-8 promulgated by the SEC, and will use its best
efforts to maintain the effectiveness of such registration statement for so long
as such options remain outstanding.
THE COMBINATION AGREEMENT
The following description is qualified in its entirety by reference to the
full text of the Combination Agreement attached as Annex B to this Joint Proxy
Statement.
Exchange Ratio Adjustment. Under the Combination Agreement, the basic
Exchange Ratio (1.2 Exchangeable Shares or, indirectly, shares of
National-Oilwell Common Stock for each Dreco Common Share) is subject to the
Exchange Ratio Adjustment. The Exchange Ratio Adjustment would come into effect
if the Pre-Closing Average Price of National-Oilwell Common Stock on the NYSE
for the 20 consecutive trading days ending on the fifth trading day prior to the
Effective Date is less than $36.00 per share or greater than $47.25 per share.
If the calculated price is less than $36.00 per share, the Exchange Ratio is
adjusted to provide value equivalent to $43.20 (and no less) of National-Oilwell
Common Stock, and, if greater than $47.25 per share, adjusted to provide value
equivalent to $56.70 (and no more) of National-Oilwell Common Stock. If such
Pre-Closing Average Price is less than $33.00 per share, and National-Oilwell
elects not to adjust the Exchange Ratio after Dreco shall have exercised its
right to request National-Oilwell to do so, Dreco shall have certain rights to
terminate the Combination Agreement. See "-- Termination."
Representations, Warranties and Covenants. The Combination Agreement
contains certain customary representations and warranties of each of Dreco and
National-Oilwell relating to, among other things, their respective organization,
capital structures, qualifications, operations, financial condition,
intellectual property rights, compliance with necessary regulatory or
governmental authorities and other matters, including their
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authority to enter into the Combination Agreement and to consummate the
Transaction. Pursuant to the Combination Agreement, each party has covenanted
that, until the earlier of the termination of the Combination Agreement or the
Effective Time, it will maintain its business, it will not take certain actions
outside the ordinary course without the other's consent and it will use its
commercially reasonable efforts to consummate the Transaction. The parties have
also agreed to advise each other of material changes and to provide the other
with interim financial information. Further, the parties have agreed to apply
for and use their reasonable best efforts to obtain all regulatory and other
consents and approvals required for the consummation of the transactions
contemplated by the Combination Agreement, to use their reasonable best efforts
to effect the transactions contemplated by the Combination Agreement, including
the preparation and mailing of this Joint Proxy Statement, and to provide the
other party and its counsel with such information as they may reasonably
request. National-Oilwell has also agreed that all rights to indemnification
under the charter documents and bylaws of Dreco and its subsidiaries for
directors and officers of Dreco will survive the Arrangement and remain in full
force and effect. In addition, National-Oilwell has agreed to use its reasonable
best efforts to list the National-Oilwell Common Stock issued upon exchange of
the Exchangeable Shares on the NYSE and, with the cooperation and assistance of
Dreco, to list the Exchangeable Shares on a mutually acceptable Canadian stock
exchange.
The Combination Agreement also provides that until the earlier of the
Effective Time or the termination of the Combination Agreement, without the
prior written consent of National-Oilwell, Dreco and its subsidiaries will not,
and they will not authorize or permit any of their officers, directors,
employees, financial advisors, representatives and agents ("Representatives"),
to directly or indirectly, solicit, initiate or encourage (including by way of
furnishing information) or take any other action to facilitate any inquiries or
the making of any proposal which constitutes or may reasonably be expected to
lead to an Acquisition Proposal (as defined below) from any person, or engage in
any discussion or negotiations relating thereto or accept any Acquisition
Proposal. Notwithstanding the foregoing, Dreco may (i) at any time prior to the
time Dreco Shareholders have voted to approve the Plan of Arrangement and the
other transactions contemplated thereby, engage in discussions or negotiations
with a third party who (without any solicitation, initiation or encouragement,
directly or indirectly, by Dreco or its subsidiaries or any of their
Representatives described above) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning Dreco and
its business, properties and assets, if, and only to the extent that, (A) the
third party has first made an Acquisition Proposal that is financially superior
to the transactions contemplated by the Combination Agreement and the third
party has demonstrated that the funds or other consideration necessary are
reasonably likely to be available, as determined in good faith by Dreco's board
of directors after receiving the written advice of its financial advisors (a
"Superior Proposal") and Dreco's board of directors shall conclude in good
faith, after considering applicable law and receiving the written advice of
outside counsel, that such action is necessary for the board of directors to act
in a manner consistent with its fiduciary duties under applicable law and (B)
prior to furnishing such information to or entering into discussions with such
person or entity, Dreco provides prompt notice to National-Oilwell to the effect
that it is furnishing information or entering into discussions or negotiations
with such person or entity and receives from such person or entity an executed
confidentiality agreement in reasonably customary form; (ii) comply with certain
rules relating to tender or exchange offers under the Exchange Act and similar
rules under Canadian securities laws relating to the provision of directors'
circulars, and make appropriate disclosure with respect thereto to Dreco's
Shareholders; and (iii) accept a Superior Proposal from a third party if, prior
to such acceptance, Dreco terminates the Combination Agreement in accordance
with certain terms of the Agreement. See "--Termination." Dreco has agreed to
immediately cease and terminate any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any parties conducted by
Dreco or any of its subsidiaries or representatives with respect to an
Acquisition Proposal before the execution of the Combination Agreement. Dreco
shall notify National-Oilwell orally and in writing of any inquiries, offers or
proposals with respect to an Acquisition Proposal (including without limitation
the terms and conditions of any such proposal, the identity of the person making
it and all other information reasonably requested by National-Oilwell), within
24 hours of the receipt thereof, shall keep National-Oilwell informed of the
status and details of any such inquiry, offer or proposal and answer
National-Oilwell's questions with respect thereto, and shall give
National-Oilwell five days' advance notice of any agreement to be entered into
with, or any information to
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be supplied to, any person making such inquiry, offer or proposal. As used
herein, "Acquisition Proposal" shall mean a proposal or offer (other than by
National-Oilwell) to acquire beneficial ownership (as defined under Rule 13(d)
of the Exchange Act) of all or a material portion of the assets of, or any
material equity interest in, Dreco or its material subsidiaries pursuant to a
merger, consolidation or other business combination, by means of a sale of
shares of capital stock, sale of assets, tender offer or exchange offer or
similar transaction involving Dreco or its material subsidiaries including
without limitation any single or multi-step transaction or series of related
transactions which is structured to permit such third party to acquire
beneficial ownership or any material portion of the assets of, or any material
portion of the equity interest in, Dreco or its material subsidiaries (other
than the transactions contemplated by the Combination Agreement), provided
however, in no event shall an underwritten public or private sale of Dreco
Common Shares (aggregating less than 50% of the currently issued and outstanding
Dreco Common Shares), which is not made in connection with a merger,
consolidation or other business combination, be deemed to be an Acquisition
Proposal.
Conditions to Closing. The Combination Agreement provides that the
respective obligations of each party to complete the Transaction are subject to
the satisfaction or waiver before the Effective Date of the following
conditions: (i) the parties shall have received all written consents,
assignments, waivers, authorizations or other certificates necessary to provide
for the continuation in full force and effect of all their material contracts
and leases for them to consummate the transactions contemplated in the
Combination Agreement, except when the failure to receive such consents or other
certificates would not have a material adverse effect on either party; (ii) the
Combination Agreement, the Arrangement and other transactions contemplated by
the Combination Agreement shall have been approved and adopted by the required
vote of the holders of Dreco Common Shares and Dreco Options in accordance with
applicable law and the Dreco Articles and Dreco Bylaws, and Dreco shall not have
received on or prior to the Effective Time notice from the holders of more than
10% of the issued and outstanding Dreco Common Shares of their intention to
exercise any rights of dissent; (iii) the issuance of National-Oilwell Common
Stock from time to time upon the exchange of the Exchangeable Shares and other
proposals contemplated by the Combination Agreement shall have been approved by
the National-Oilwell Stockholders in accordance with the rules of the NYSE,
applicable law and National-Oilwell's Amended and Restated Certificate of
Incorporation and bylaws; (iv) no order shall have been entered and remain in
effect in any action or proceeding before any governmental entity that would
prevent or make illegal the consummation of the Arrangement; (v) with respect to
the consummation of the Transaction and the transactions contemplated by the
Combination Agreement, among other things (a) all regulatory orders and
approvals that are legally required shall have been obtained, (b) all waiting
periods required under the law shall have expired, and (c) National-Oilwell and
Dreco shall each have filed all notices and information required under Canadian
law; (vi) the Arrangement shall have received the allowance or approval or
deemed allowance or approval by the responsible Minister under the Investment
Canada Act in respect of the Arrangement, to the extent such allowance or
approval is required; (vii) any Registration Statement required under the
Securities Act to register the National-Oilwell Common Stock to be issued in
exchange for Exchangeable Shares shall have been declared effective on or before
the mailing to the stockholders of National-Oilwell and Dreco of the Joint Proxy
Statement/Prospectus and, if a shelf Registration Statement is required by the
SEC, the shelf Registration Statement shall have been declared effective under
the Securities Act on or before the Effective Date, and in both cases at their
effective dates and on the Closing Date, the Registration Statements shall not
be the subject of any stop-order or proceedings seeking a stop-order, and this
Joint Proxy Statement/Prospectus shall on the Closing Date not be subject to any
similar proceedings commenced or threatened by the SEC or the applicable
Canadian provincial securities commissions or regulatory authorities; (viii) the
no action request, relating to the exemption from registration of the
Exchangeable Shares to be issued to Dreco's shareholders, shall have received a
favorable response from the SEC; (ix) the National-Oilwell Common Stock to be
issued from time to time after the Effective Time upon exchange of the
Exchangeable Shares shall have been approved for listing on the NYSE and the
Exchangeable Shares shall be listed on a reasonably acceptable Canadian stock
exchange; (x) the representations and warranties of the parties shall be true
and correct as though made at and as of the Effective Time, unless the failure
to be true and correct would not have a material adverse effect on the relevant
party; (xi) the parties shall have performed in all material respects all
agreements and covenants to be performed by them under the Combination
Agreement; (xii) the parties shall have received legal opinions
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dated as of the Effective Date in the form and substance reasonably satisfactory
to the parties; (xiii) the parties' boards of directors shall have received
confirmation of the respective fairness opinions as of the date this Joint Proxy
Statement/Prospectus was first mailed to the parties' shareholders which shall
not have subsequently been withdrawn; (xiv) the parties shall have received
opinions from accountants to each party to the effect that the Transaction will
qualify for pooling-of-interest accounting treatment under U.S. GAAP; (xv) the
parties shall have furnished copies to each other of all affiliates agreements
referred to in the Combination Agreement; (xvi) Dreco shall have given a binding
notice of redemption or termination of its rights under its Rights Plan, and
shall have taken any other action required under its rights agreement and
applicable law such that the only right at the Effective Time and thereafter of
the holders of rights shall be to receive the redemption price for each right so
held (a condition precedent to National-Oilwell's obligations only); (xvii)
Dreco shall have received a favorable tax opinion to the effect that the
Arrangement will be generally treated for Canadian federal income tax purposes
as a reorganization of capital for those Dreco Shareholders who hold their Dreco
Common Shares as capital property for purposes of the Canadian Tax Act (a
condition precedent to Dreco's obligations only).
Each condition to closing may be waived by either or both parties, as
appropriate, except for conditions to closing that relate to approvals required
by applicable law. At the time of any such waiver, the companies will evaluate
whether the waiver materially changes the Transaction. If the waiver does effect
a material change, the consent of shareholders and optionholders of either or
both companies will be resolicited, as appropriate.
Termination. The Combination Agreement may be terminated by mutual
agreement of the parties at any time prior to the Effective Time. Also, either
party may terminate the Combination Agreement prior to the Effective Time if:
(i) there has been a breach of any representation, warranty, covenant or
agreement contained in the Combination Agreement on the part of the other party,
and such breach has not been cured within 15 business days after notice thereof;
(ii) all conditions for closing the Transaction have not been satisfied or
waived by October 31, 1997 (other than as a result of a breach by the
terminating party); (iii) any required approval of the Dreco Shareholders and
Dreco Optionholders or the National-Oilwell Stockholders shall not have been
obtained; (iv) any final and non-appealable order shall have been entered in any
action or proceeding before any governmental entity that prohibits or renders
illegal the consummation of the Transaction; (v) the board of directors of the
other party or any committee of such board of directors (A) withdraws or
modifies in any adverse manner its approval or recommendation of the Combination
Agreement, the Arrangement and the other transactions contemplated in the
Combination Agreement, (B) within ten days after the other party's request shall
fail to reaffirm such approval or recommendation, or (C) resolves to take any of
the actions specified in (A) and (B) above (a "Board Withdrawal"); or (vi)
National-Oilwell shall have approved, or agreed to or announced any agreement to
effect, any transaction that would result in any person who is not currently a
National-Oilwell Stockholder acquiring beneficial ownership of more than 50% of
the issued and outstanding capital stock of National-Oilwell (a "Change of
Control Transaction"). In addition, National-Oilwell shall have the right to
terminate the Combination Agreement if the Dreco board of directors or any
committee thereof shall approve or recommend any Acquisition Proposal, other
than with National-Oilwell or an affiliate thereof. In addition, Dreco shall
have the right to terminate the Combination Agreement (i) prior to the approval
of the Combination Agreement and the Arrangement by Dreco Shareholders, upon
five days' written notice to National-Oilwell, if, as a result of a Superior
Proposal by a party other than National-Oilwell or its affiliates, Dreco's board
of directors, after receiving written advice of outside counsel and after giving
National-Oilwell at least five days to amend, and giving effect to all
concessions made by National-Oilwell in agreeing to amend, the Combination
Agreement to provide for terms substantially similar to those of the Superior
Proposal, determines in good faith that their fiduciary obligations under
applicable law require that such Superior Proposal be accepted; and (ii) in the
event the Pre-Closing Average Price is less than $33.00 per share and
National-Oilwell, after Dreco shall have exercised its right to request
National-Oilwell to do so, elects not to adjust the Exchange Ratio. All
decisions to terminate the agreement will be made in accordance with the
respective board's and management's fiduciary duties to shareholders under
applicable law.
Upon termination of the Combination Agreement in accordance with the terms
thereof, neither party nor their respective officers or directors shall have any
further liability under the agreement except with respect to
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the termination fees described below, but the Confidentiality Agreement dated
April 30, 1997 shall survive any such termination and neither party shall be
released from any liability arising from the wilful breach by such party of any
of its representations, warranties or agreements contained in the agreement.
Termination Fee. If Dreco terminates the Combination Agreement because
there has been a breach of any representation, warranty, covenant or agreement
contained in the Combination Agreement by National-Oilwell, and such breach has
not been cured within 15 business days after notice or if either party
terminates the Combination Agreement because the required approval of the
National-Oilwell Stockholders has not been obtained, then National-Oilwell shall
pay Dreco a cash termination fee of $2,500,000 at the time of termination. If
National-Oilwell terminates the Combination Agreement because there has been a
breach of any representation, warranty, covenant or agreement contained in the
Combination Agreement by Dreco or if either party terminates because the
required approval of the Dreco Shareholders and Dreco Optionholders has not been
obtained, then Dreco shall pay National-Oilwell a cash termination fee of
$2,500,000 at the time of such termination and an additional cash termination
fee of $9,500,000 if, within 12 months of such termination, Dreco enters into a
definitive agreement with respect to an Acquisition Proposal (other than with
National-Oilwell or its affiliates), or announces an Acquisition Proposal within
such 12 month period and enters into a definitive agreement in respect of such
Acquisition Proposal within 18 months of such termination. If National-Oilwell
terminates the Combination Agreement because of a Dreco Board Withdrawal or if
Dreco terminates pursuant to its determination to accept a Superior Proposal as
described above, then Dreco shall pay National-Oilwell a cash termination fee of
$12,000,000 at the time of such termination. If Dreco terminates the Combination
Agreement because of a National-Oilwell Board Withdrawal or if National-Oilwell
terminates in the event National-Oilwell shall have approved, or agreed to or
announced any agreement to effect, any Change of Control Transaction, then
National-Oilwell shall pay Dreco a cash termination fee of $12,000,000 at the
time of such termination. See "-- Termination."
OTHER AGREEMENTS
Affiliates' Agreements. National-Oilwell and Dreco have entered into the
National-Oilwell Affiliates' Agreements with each of the National-Oilwell
Affiliates, pursuant to which such persons have agreed that they will not sell,
transfer, encumber or otherwise dispose of any National-Oilwell Common Stock for
30 days prior to the Effective Date and after the Effective Date until
National-Oilwell shall have publicly released financial statements that include
at least 30 days of combined operating results of National-Oilwell and Dreco.
National-Oilwell and Dreco have also entered into the Dreco Affiliates'
Agreements with each of the Dreco Affiliates, pursuant to which such persons
have agreed that they will not sell, transfer, encumber or otherwise dispose of
any Dreco Common Shares in the 30 day period preceding the Effective Date and
that they will not sell, transfer or encumber or otherwise dispose of any
Exchangeable Shares or National-Oilwell Common Stock after the Effective Date
until National-Oilwell shall have publicly released financial statements that
include at least 30 days of combined operating results of National-Oilwell and
Dreco.
In addition, the Dreco Affiliates have agreed that they will not sell,
pledge or otherwise dispose of any Exchangeable Shares or National-Oilwell
Common Stock, respectively, unless: (i) such transaction is permitted pursuant
to the provisions of Rule 145 under the Securities Act; (ii) a registration
statement covering the transaction shall have been filed with the SEC and made
effective under the Securities Act; or (iii) such transaction is permitted under
an exemption from registration under the Securities Act.
Stockholder Agreements. Stockholders owning 51.14% of National-Oilwell
Common Stock as of August 8, 1997 have agreed to vote all voting securities of
National-Oilwell over which they have voting authority in favor of the
Combination Agreement and the transactions contemplated thereby and the
Recapitalization Plan. Dreco Shareholders who collectively owned 7.25% of the
outstanding Dreco Common Shares and Dreco Common Shares subject to Dreco Options
as of August 7, 1997, have agreed to vote all Dreco voting securities over which
they have voting authority in favor of the Arrangement Resolution.
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TERMINATION OF RIGHTS PLAN
Pursuant to the Arrangement, all rights outstanding under the Rights Plan
shall be redeemed and cancelled on the Effective Date, and the Rights Plan shall
be terminated.
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE TRANSACTION
An arrangement of a corporation under the ABCA requires approval by both
the Court and the securityholders of the subject corporation. Prior to the
mailing of this Joint Proxy Statement/Prospectus, Dreco obtained the Interim
Order providing for the calling and holding of the Dreco Meeting and other
procedural matters. A copy of the Interim Order is attached hereto as Annex C.
The Notice of Petition for the Final Order appears at the front of this Joint
Proxy Statement/Prospectus.
Subject to the approval of the Arrangement by the Dreco Shareholders and
Dreco Optionholders at the Dreco Meeting, the hearing in respect of the Final
Order is scheduled to take place on the date and at the time set forth in the
Notice of Petition for the Final Order, in the Court at the Court House, 611-4th
Street, S.W., Calgary, Alberta, Canada. All Dreco Shareholders and Dreco
Optionholders who wish to participate or be represented or to present evidence
or arguments at that hearing must serve and file a notice of appearance as set
out in the Notice of Petition for the Final Order and satisfy any other
requirements. At the hearing of the application in respect of the Final Order,
it is anticipated that the Court will consider, among other things, the fairness
and reasonableness of the Arrangement, including specifically (i) the exchange
of Dreco Common Shares for Exchangeable Shares and (ii) the conversion of Dreco
Options into options to purchase National-Oilwell Common Stock. The Court may
approve the Arrangement as proposed or require amendments or refuse to approve
the Arrangement.
The Final Order will constitute the basis for an exemption from the
registration requirements of the Securities Act for the issuance of Exchangeable
Shares and the conversion of Dreco Options into options to purchase
National-Oilwell Common Stock.
Assuming the Final Order is granted and the other conditions to the
Combination Agreement are satisfied or waived, it is anticipated that the
following will occur substantially simultaneously: Articles of Arrangement will
be filed with the Registrar under the ABCA to give effect to the Arrangement,
the Support Agreement and the Voting and Exchange Trust Agreement will be
executed and delivered, and the various other documents necessary to consummate
the transactions contemplated under the Combination Agreement will be executed
and delivered. Subject to the foregoing, it is presently anticipated that the
Effective Date will occur within two or three days after the requisite
shareholder and optionholder approval on or about September 25, 1997.
ANTICIPATED ACCOUNTING TREATMENT
The Arrangement is anticipated to be accounted for using the
pooling-of-interests method of accounting under U.S. GAAP. Under the
pooling-of-interests method of accounting, the assets, liabilities and
shareholders' equity and the operating results of Dreco and National-Oilwell
will be carried forward by National-Oilwell at their recorded amounts, and there
is no recognition of additional goodwill relating to either National-Oilwell or
Dreco in connection with the Transaction.
National-Oilwell and Dreco have entered into affiliates' agreements with
each Dreco Affiliate and National-Oilwell Affiliate. See "-- Other
Agreements -- Affiliates' Agreements." Such agreements relate to, among other
things, the ability of National-Oilwell to account for the Transaction as a
pooling-of-interests under U.S. GAAP.
BUSINESS COMBINATION COSTS
National-Oilwell and Dreco expect to incur non-recurring business
combination costs estimated at $8.5 million, primarily related to professional
and advisory fees related to the Transaction, as well as severance,
consolidation and other integration costs associated with the combination.
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PROCEDURES FOR EXCHANGE BY DRECO SHAREHOLDERS AND DRECO OPTIONHOLDERS
Dreco Shareholders. Enclosed with copies of this Joint Proxy Statement
delivered to the registered holders of Dreco Common Shares is a Dreco Letter of
Transmittal which, when duly completed and returned together with a certificate
for Dreco Common Shares, shall enable each Dreco Shareholder to exchange such
Dreco Common Shares for that number of (i) Exchangeable Shares equal to the
number of Dreco Common Shares held by such shareholder multiplied by the
Exchange Ratio or (ii) at the election of the holder in the Dreco Letter of
Transmittal, indirectly for the same number of shares of National-Oilwell Common
Stock pursuant to an election under the Exchange Put Right. See "-- Transaction
Mechanics and Description of Exchangeable Shares."
No certificates representing fractional Exchangeable Shares will be issued.
In lieu of fractional Exchangeable Shares, each holder of a Dreco Common Share
who would otherwise be entitled to receive a fraction of an Exchangeable Share
shall be paid by Dreco an amount of cash (rounded to the nearest whole cent in
U.S. dollars) equal to the product of (i) such fraction, multiplied by (ii) the
average closing price of the National-Oilwell Common Stock on the NYSE for the
ten trading days ended on the last trading date prior to the Effective Date.
Any use of the mails to transmit a certificate for Dreco Common Shares and
a related Dreco Letter of Transmittal is at the risk of the Dreco Shareholder.
If these documents are mailed, it is recommended that registered mail, with
return receipt requested, properly insured, be used.
If the Arrangement proceeds and the Transaction is completed, certificates
representing the appropriate number of Exchangeable Shares or shares of
National-Oilwell Common Stock issuable to a former holder of Dreco Common Shares
who has complied with the procedures set out above, together with a U.S. dollar
check in the amount, if any, payable in lieu of fractional Exchangeable Shares
or National-Oilwell Common Stock will, as soon as practicable after the later of
the Effective Date and the date of receipt of a certificate for Dreco Common
Shares and a related Dreco Letter of Transmittal, be (i) forwarded to the holder
at the address specified in the Dreco Letter of Transmittal by first class mail
or (ii) made available at one of the offices of the Trustee designated for that
purpose in the Dreco Letter of Transmittal for pickup by the holder.
If the Arrangement does not proceed, all certificates representing Dreco
Common Shares transmitted with a related Dreco Letter of Transmittal will be
returned to Dreco Shareholders.
Where a certificate for Dreco Common Shares has been destroyed, lost or
mislaid, the registered holder of that certificate should immediately contact
Montreal Trust Company of Canada, the transfer agent of the Dreco Common Shares,
regarding the issuance of a replacement certificate upon the holder's satisfying
such requirements as may be imposed by Dreco in connection with issuance of the
replacement certificate.
Dreco Optionholders. Each outstanding Dreco Option will be assumed by
National-Oilwell and will be automatically converted at the Effective Date to
become an option to purchase shares of National-Oilwell Common Stock in
accordance with the terms of the Arrangement. Promptly after the Effective Time,
National-Oilwell will notify each Dreco Optionholder of such conversion and the
particulars thereof.
STOCK EXCHANGE LISTING
The TSE has conditionally approved the listing and posting for trading of
the Exchangeable Shares on the Effective Date, subject to compliance with its
usual requirements. National-Oilwell will apply for and expects to obtain from
the NYSE approval for listing on a when issued basis of the shares of
National-Oilwell Common Stock to be issued from time to time in exchange for
Exchangeable Shares and upon future exercise of the Dreco Options.
ELIGIBILITY FOR INVESTMENT IN CANADA
Exchangeable Shares. The Exchangeable Shares, provided they are listed on
a prescribed stock exchange in Canada (which currently includes the TSE): (i)
will not be foreign property under the Canadian Tax Act for trusts governed by
registered pension plans, registered retirement savings plans, registered
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retirement income funds and deferred profit sharing plans or for certain other
tax-exempt persons; and (ii) will be qualified investments under the Canadian
Tax Act for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans.
National-Oilwell has indicated that it intends to use its best efforts to
cause Dreco to maintain the listing of the Exchangeable Shares on the TSE. In
certain other circumstances, the Exchangeable Shares will be qualified
investments even if the shares are not listed.
Voting Rights and Exchange Rights. The Voting Rights and the Exchange
Rights will not be qualified investments and will be foreign property under the
Canadian Tax Act. However, as indicated under "Income Tax Considerations to
Dreco Shareholders -- Canadian Federal Income Tax Considerations to Dreco
Shareholders -- Shareholders Resident in Canada," Dreco is of the view that the
fair market value of these rights is nominal.
National-Oilwell Common Stock. The National-Oilwell Common Stock will be a
qualified investment under the Canadian Tax Act for trusts governed by
registered retirement savings plans, registered retirement income funds and
deferred profit sharing plans provided such shares remain listed on the NYSE or
another prescribed stock exchange. The National-Oilwell Common Stock will be
foreign property under the Canadian Tax Act.
REGULATORY MATTERS
The Transaction is subject to the premerger filing requirements of the HSR
Act, and on May 30, 1997, National-Oilwell and Dreco made premerger filings
under the HSR Act with the FTC and the Antitrust Division of the Department of
Justice. On June 17, 1997, early termination of the required waiting period
under the HSR Act was granted. In addition, National-Oilwell and Dreco have
initiated a filing under the Investment Canada Act, the Canadian statute of
general application regulating non-domestic investment in Canada. Prior approval
under this Act is required. National-Oilwell and Dreco currently anticipate that
the required approvals will be obtained not later than the first week of
September, 1997. National-Oilwell and Dreco are not aware of any other
government or regulatory approvals required for consummation of the Transaction,
other than compliance with applicable securities laws of various jurisdictions.
RESALE OF EXCHANGEABLE SHARES AND NATIONAL-OILWELL COMMON STOCK RECEIVED IN THE
TRANSACTION
United States. The issuance of Exchangeable Shares to holders of Dreco
Common Shares will not be registered under the Securities Act. Such shares will
be issued in reliance upon the exemption available pursuant to Section 3(a)(10)
of the Securities Act. Section 3(a)(10) exempts securities issued in exchange
for one or more outstanding securities from the general requirement of
registration where the terms and conditions of the issuance and exchange of such
securities have been approved by any court of competent jurisdiction, after a
hearing upon the fairness of the terms and conditions of the issuance and
exchange at which all persons to whom such securities will be issued have the
right to appear. The Court is authorized to conduct a hearing to determine the
fairness of the terms and conditions of the Arrangement, including the proposed
issuance of securities in exchange for other outstanding securities. Subject to
the approval of the Arrangement by the Dreco Shareholders and Dreco
Optionholders, a hearing on the fairness of the Arrangement will be held on the
date specified in the Notice of Petition for the Final Order. See "-- Court
Approval of the Arrangement and Completion of the Transaction." National-Oilwell
and Dreco have received confirmation from the SEC confirming that the staff of
the SEC will not recommend any enforcement action to the SEC if Dreco issues the
Exchangeable Shares in exchange for the Dreco Common Shares and the Dreco
Options are assumed by National-Oilwell and converted into options to purchase
National-Oilwell Common Stock in reliance upon such exemption. National-Oilwell
has registered under the Securities Act the shares of National-Oilwell Common
Stock to be issued upon exchange of the Exchangeable Shares and
National-Oilwell's obligations relating to the Exchangeable Shares with the SEC
on a Registration Statement on Form S-4 of which the Joint Proxy
Statement/Prospectus is a part.
The Exchangeable Shares and the shares of National-Oilwell Common Stock
issued upon exchange of the Exchangeable Shares will be freely transferable
under U.S. federal securities laws, except that Exchange-
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able Shares and the shares of National-Oilwell Common Stock issued upon exchange
of the Exchangeable Shares received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of Dreco prior to the
Transaction may be resold by them only in transactions permitted by the resale
provisions of Rule 145(d)(1), (2), or (3) promulgated under the Securities Act
or as otherwise permitted under the Securities Act. Rule 145(d)(1) generally
provides that "affiliates" of either Dreco or National-Oilwell may not sell
securities of National-Oilwell received in the Arrangement unless such sale is
effected pursuant to an effective registration statement or pursuant to the
volume, current public information, manner of sale and timing limitations of
Rule 144. These limitations generally require that any sales made by an
affiliate in any three-month period shall not exceed the greater of 1% of the
outstanding shares of the securities being sold or the average weekly trading
volume over the four calendar weeks preceding the placement of the sell order
and that such sales be made in unsolicited, open market "brokers transactions."
Rules 145(d)(2) and (3) generally provide that the foregoing limitations lapse
for non-affiliates of National-Oilwell after a period of one or two years,
respectively, depending upon whether certain currently available information
continues to be available with respect to National-Oilwell. Persons who may be
deemed to be affiliates of an issuer generally include individuals or entities
that control, are controlled by, or are under common control with, such issuer
and may include certain officers and directors of such issuer as well as
principal shareholders of such issuer.
Dreco and National-Oilwell have entered into affiliates' agreements with
each of the Dreco Affiliates restricting the transfer of the Exchangeable Shares
and the underlying shares of National-Oilwell Common Stock for the period
required by the requirements for pooling-of-interests accounting treatment (see
"-- Anticipated Accounting Treatment") and restricting the sale, pledge or other
disposal of Exchangeable Shares and National-Oilwell Common Stock. See "-- Other
Agreements -- Affiliates' Agreements."
Canada. National-Oilwell and Dreco have applied for and expect to receive
rulings or orders of certain provincial securities regulatory authorities in
Canada to permit the issuance to Dreco Shareholders of the Exchangeable Shares
and to permit resale of the Exchangeable Shares in such provinces without
restriction by a shareholder other than a "control person," provided that no
unusual effort is made to prepare the market for any such resale or to create a
demand for the securities which are the subject of any such resale and no
extraordinary commission or consideration is paid in respect thereof. Applicable
Canadian securities legislation provides a rebuttable presumption that a person
or company is a control person in relation to an issuer where the person or
company alone or in combination with others holds more than 20% of the
outstanding voting securities of the issuer. Dreco has also applied for certain
exemptions from statutory financial and other reporting requirements in such
provinces on the condition that National-Oilwell file with the securities
commissions of such provinces copies of certain of its reports filed with the
SEC and that holders of Exchangeable Shares receive certain materials that are
sent to holders of National-Oilwell Common Stock.
National-Oilwell and Dreco have also applied for rulings or orders of
certain provincial securities regulatory authorities in Canada to permit the
issuance of National-Oilwell Common Stock to holders of Exchangeable Shares, and
to permit the resale of National-Oilwell Common Stock by such holders without
the requirement of filing a prospectus.
THE COMPANIES AFTER THE TRANSACTION
THE COMBINATION -- GENERAL
Upon completion of the Transaction, the parent company of the combined
entity will be National-Oilwell, which will continue to be a corporation
governed by the DGCL with its principal executive office located at 5555 San
Felipe, Houston, Texas 77056 (telephone number (713) 960-5100). National-Oilwell
will own the sole authorized and outstanding Dreco Common Share. After the
Effective Time, Dreco will continue to be a corporation governed by the ABCA
with its principal executive office located at #1340 Weber Centre, 5555 Calgary
Trail South, Edmonton, Alberta, Canada T6H 5P9 (telephone number (403)
944-3900).
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DIRECTORS AND EXECUTIVE OFFICERS
If the Transaction is consummated, National-Oilwell's board of directors
will be expanded to nine members, seven of whom will be persons who are
currently directors of National-Oilwell, including Messrs. Staff, Bull, Comis,
Dresher, Dunwoody, Macaulay and Rothstein, and Messrs. Pheasey and Phillips will
be appointed to the additional two positions. In addition, Mr. Pheasey will be
appointed as Executive Vice President of National-Oilwell and W. Douglas Frame,
currently an executive officer of Dreco, will be appointed as an executive
officer of National-Oilwell. On the Effective Date, all the current directors on
the Dreco board will resign from the Dreco board, except for Mr. Pheasey, and C.
R. Bearden and Edward C. Grimes will be appointed to such board.
Set forth below is certain information regarding each of the persons who
are expected to serve as directors and executive officers of National-Oilwell
after consummation of the Transaction. The National-Oilwell Amended and Restated
Certificate classifies the board of directors into three classes having
staggered terms of three years each. The number of directors is fixed from time
to time by resolution of the board of directors and consists of not less than
three directors. The board of directors is currently set at eight members,
although seven are currently serving due to the resignation on May 12, 1997 of
C. R. Bearden. Upon consummation of the Transaction, the board of directors will
be set at nine members. Executive officers of National-Oilwell are elected
annually by the board of directors to serve in their respective capacities until
their successors are duly elected and qualified or until their earlier
resignation or removal. The periods shown for service as an employee of
National-Oilwell include service as an employee of its predecessor partnership.
DIRECTOR'S
TERM
NAME AGE POSITION WITH THE COMPANY EXPIRING
---- --- ------------------------- ----------
Joel V. Staff(1)................ 53 Chairman of the Board, President and Chief 1999
Executive Officer
James J. Fasnacht............... 42 Vice President and Group President, --
Distribution Services
W. Douglas Frame................ 54 Vice President -- Downhole Tools --
Jerry N. Gauche................. 49 Vice President -- Organizational --
Effectiveness
Steven W. Krablin............... 47 Vice President and Chief Financial Officer --
Lynn L. Leigh................... 72 Senior Vice President -- Marketing --
Gail M. McGee................... 50 Vice President and Chief Information Officer --
Merrill A. Miller, Jr. ......... 46 Vice President and Group President, Products --
and Technology
Paul M. Nation.................. 42 Vice President, Secretary and General Counsel --
Frederick W. Pheasey............ 54 Executive Vice President and Director 1998
Howard I. Bull(2)(3)............ 57 Director 1998
James C. Comis III.............. 33 Director 1998
James T. Dresher(2)(3).......... 78 Director 2000
W. McComb Dunwoody(1)........... 52 Director 1999
William E. Macaulay(1).......... 51 Director 1999
Robert L. Phillips.............. 46 Director 2000
Bruce M. Rothstein.............. 45 Director 2000
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Joel V. Staff has served as the President and Chief Executive Officer of
National-Oilwell since July 1993 and Chairman of the Board since January 1996.
Prior to joining National-Oilwell, Mr. Staff served as a Senior Vice President
of Baker Hughes Incorporated, a worldwide diversified oil services company, from
October 1983 to May 1993. Mr. Staff serves as a director of Destec Energy Inc.,
an independent power company.
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James J. Fasnacht has served as Vice President since November 1993, as
Group President, Distribution Services since April 1997, as General Manager of
Pumping Systems from November 1993 to April 1997, as Human Resources Manager
from 1991 to November 1993 and in various other capacities since joining
National-Oilwell in 1979.
W. Douglas Frame will serve as Vice President -- Downhole Tools beginning
upon consummation of the Transaction. Prior to the Transaction, Mr. Frame, who
joined Dreco in 1978, is currently primarily responsible for Dreco's downhole
products marketing operations. He has been a director of Dreco since its
inception in 1980.
Jerry N. Gauche has served as Vice President -- Organizational
Effectiveness since joining National-Oilwell in January 1994. Prior thereto, Mr.
Gauche was employed by BP Exploration, Inc., an oil and gas exploration and
production company, where he served as General Manager of Central Services from
January 1990 to September 1992 and Director of Public Affairs and Executive
Coordination from May 1988 to December 1989. From October 1992 to January 1994,
Mr. Gauche was self-employed managing his personal investments.
Steven W. Krablin has served as Vice President and Chief Financial Officer
since January 1996. Mr. Krablin served in various capacities including Vice
President-Finance and Chief Financial Officer of Enterra Corporation, an
NYSE-listed, international oilfield service company, from November 1986 to
January 1996.
Lynn L. Leigh has served as Senior Vice President -- Marketing since
October 1993. Prior to joining National-Oilwell, Mr. Leigh served as the
President and Chief Executive Officer of Hydril Company, a manufacturer of
oilfield drilling equipment, from January 1992 to July 1993. Prior thereto, he
provided consulting and project management support services to Grasso Oilfield
Services, Inc. from March 1989 to December 1991 and served as President of Unit
Rig and Equipment Company from November 1987 to February 1989. From July 1993 to
October 1993, Mr. Leigh was self-employed managing his personal investments.
Gail M. McGee joined National-Oilwell on June 9, 1997 as Vice President and
Chief Information Officer. From May 1996 to March 1997, Ms. McGee was Chief
Information Officer of J.D. Power and Associates, a survey firm. From February
1994 to May 1996, she served as Vice President of Wells Fargo Bank. From January
1988 to February 1994, Ms. McGee was Vice President, Department Head of
Productivity and Organizational Readiness at Chemical Bank.
Merrill A. Miller, Jr. has served as Vice President since July 1996, as
Group President, Products and Technology since April 1997, as General Manager of
Drilling Systems from July 1996 to April 1997 and as Vice President of
Marketing, Drilling Systems from February 1996 to July 1996. Prior thereto, Mr.
Miller was President of Anadarko Drilling Company, a drilling contractor, from
January 1995 to February 1996. From May 1980 to January 1995, Mr. Miller served
in various capacities including Vice President/U.S. Operations of Helmerich &
Payne International Drilling Co., a drilling contractor.
Paul M. Nation has served as Vice President since 1994 and as Secretary and
General Counsel of National-Oilwell since 1987.
Frederick W. Pheasey will serve as Executive Vice President and a director
of National-Oilwell upon consummation of the Transaction. He was a co-founder of
Dreco and has been employed by Dreco and its predecessors since 1972. He has
been a director of Dreco since 1980.
Howard I. Bull has served as a Director of National-Oilwell since January
1996. Mr. Bull was President, Chief Executive Officer and a director of Dal-Tile
International, Inc., which is the largest manufacturer and distributor of tile
in North America, from April 1994 until his retirement in June 1997. Prior to
joining Dal-Tile International, Inc., Mr. Bull spent 10 years with Baker Hughes
Incorporated, a worldwide diversified oil services company, where he became
Chief Executive Officer for Baker Hughes Drilling Equipment Company.
Additionally, he served at York International Corporation, a worldwide
manufacturer and distributor of air conditioner and refrigeration equipment, as
President of its Applied Systems Division and Air Conditioning
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Business Group. Mr. Bull also serves as a director of Marine Drilling Companies,
Inc., an offshore drilling contractor.
James C. Comis III has served as a Director of National-Oilwell since
January 1996. He is a Managing Director of Inverness Management LLC. Through
Inverness Management LLC and its affiliates, Mr. Comis has been engaged in
sponsoring and investing in private equity transactions since 1990.
Additionally, Mr. Comis has served as Managing Director of Inverness/Phoenix LLC
since 1994.
James T. Dresher has served as a Director of National-Oilwell since January
1996. Mr. Dresher has been Chairman/Chief Executive Officer and principal owner
of Unidata, Inc., a Denver-based software company, since December 1991 and has
been Chairman and owner of Glenangus, a residential real estate development
company, since 1972. In addition, he served as Chairman/CEO of York
International Corporation, a worldwide manufacturer and distributor of air
conditioner and refrigeration equipment, from 1988 to 1993. Prior thereto, Mr.
Dresher served as a director, Chief Financial Officer and Executive Vice
President of Baker International Corporation, a worldwide diversified oil
services company.
W. McComb Dunwoody has served as a Director of National-Oilwell since
January 1996. He is a Managing Director of Inverness Management LLC. Through
Inverness Management LLC and its affiliates, Mr. Dunwoody has been engaged in
sponsoring and investing in private equity transactions since 1981.
Additionally, Mr. Dunwoody has served as President and Chief Executive Officer
of Inverness/Phoenix LLC since 1994 and has been Chief Executive Officer of The
Inverness Group Incorporated since 1981.
William E. Macaulay has served as a Director of National-Oilwell since
January 1996. He has been the President and Chief Executive Officer of First
Reserve Corporation, a corporate manager of private investments focusing on the
energy and energy-related sectors, since 1983. Mr. Macaulay serves as a director
of Weatherford Enterra, Inc., an oilfield service company, Maverick Tube
Corporation, a manufacturer of steel pipe and casing, TransMontaigne Oil
Company, an oil products distribution and refining company, Hugoton Energy
Corporation, an independent oil and gas exploration and production company, Cal
Dive International, Inc., a provider of subsea services in the Gulf of Mexico,
Phoenix Energy Services, Inc., a diversified energy service company, Anker Coal
Group, Inc., a producer and marketer of coal, James River Coal Corporation, a
coal producer, Domain Energy Corporation, an oil and gas exploration company and
Entech Industries, Inc., a manufacturer of high-end valves used principally in
sub-sea gathering systems.
Robert L. Phillips will become a director of National-Oilwell upon
consummation of the Transaction. Mr. Phillips has been President and Chief
Executive Officer of Dreco since April 1, 1994. Prior thereto, Mr. Phillips had
been a partner in the law firm of Blake, Cassels & Graydon, in Calgary, Alberta,
since February 1990 and Secretary of Dreco from February 1990 to March 1994. He
has been a director of Dreco since 1981.
Bruce M. Rothstein has served as a Director of National-Oilwell since May
1996. Mr. Rothstein is a Managing Director of First Reserve Corporation, which
he joined in 1991. Prior to joining First Reserve, he served as Treasurer and
Chief Accounting Officer of Computer Factory, Inc. Mr. Rothstein serves as a
director of Anker Coal Group, Inc., a producer and marketer of coal and Entech
Industries, Inc., a manufacturer of high-end valves used principally in sub-sea
gathering systems.
PRINCIPAL HOLDERS OF SECURITIES
Change of Control of National-Oilwell in 1996
In April 1987, Armco Inc., an Ohio corporation ("Armco") and USX
Corporation, a Delaware corporation ("USX"), formed National-Oilwell, a Delaware
partnership (the "Partnership"), to consolidate the oilfield equipment
manufacturing and distribution operations of Armco and USX. The Partnership was
owned 50% each by Armco and USX. In 1995 the management team of the Partnership,
together with an investor group led by Inverness/Phoenix LLC and First Reserve
Corporation, entered into an agreement to acquire the Partnership (the
"Acquisition") from Armco and USX for a consideration of $180 million, which
Acquisition was completed in January 1996. The purchase price and related
expenses were funded by new equity, existing Partnership cash, a new credit
facility and a subordinated note provided by GE Capital
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Corporation ("GE Capital") and promissory notes to Armco and USX totaling $20
million. The new equity was provided by Inverness/Phoenix LLC, First Reserve
Corporation, GE Capital and each of the then executive officers of the Company,
other than Mr. Miller. Following the Acquisition, 100 percent of the outstanding
stock of National-Oilwell was held by Inverness/Phoenix LLC through investment
partnerships of which it is the managing general partner ("the Inverness
Investors"), First Reserve Corporation through investment partnerships of which
it is the managing general partner (the "First Reserve Investors"), GE Capital
and the executive officers of the Company (GE Capital, the Inverness Investors,
the First Reserve Investors and the executive officers of the Company are
collectively referred to as the "Investor Group"). On October 29, 1996,
National-Oilwell became a publicly-traded company through the issuance of
4,600,000 shares of its common stock in an initial public offering. Immediately
following the public offering, the Investor Group owned an aggregate of
13,249,483 shares, or 74.23%, of National-Oilwell Common Stock. As of July 8,
1997, the Investor Group owned an aggregate of 13,136,630 shares, or 72.33%, of
the outstanding National-Oilwell Common Stock.
Security Ownership of Certain Beneficial Owners and Management of
National-Oilwell
The following table sets forth certain information with respect to shares
of National-Oilwell Common Stock beneficially owned by each director of
National-Oilwell, by each of the current executive officers who were named in
the Summary Compensation Table in National-Oilwell's Proxy Statement for its
1997 Annual Meeting, by each person who at August 8, 1997 was known by
National-Oilwell to be the beneficial owner of more than 5% of the outstanding
National-Oilwell Common Stock and by all current directors and officers of
National-Oilwell as a group and also sets forth such information pro forma
assuming that the Transaction had been consummated as of August 8, 1997,
(assuming a 1.2 to 1 Exchange Ratio and assuming all holders of Dreco Common
Shares elect to receive National-Oilwell Common Stock in exchange for their
Dreco Common Shares). This information has been provided by each of the
directors and officers as of August 8, 1997, at the request of National-Oilwell.
There are no shares subject to stock options granted under the Amended and
Restated National-Oilwell, Inc. Stock Award and Long-Term Incentive Plan (the
"Stock Plan") that are exercisable within 60 days of August 8, 1997.
SHARES PERCENT PERCENT
BENEFICIALLY OF CLASS OF CLASS
NAME OF INDIVIDUAL OR IDENTITY OF GROUP OWNED OUTSTANDING(1) AFTER TRANSACTION(2)
--------------------------------------- ------------ -------------- --------------------
5% HOLDERS
Inverness/Phoenix LLC............................ 5,101,800(3) 28.09% 18.52%
660 Steamboat Road
Greenwich, CT 06830
First Reserve Corporation........................ 4,185,247(4) 23.05 15.19
475 Steamboat Road
Greenwich, CT 06830
General Electric Capital Corporation............. 1,593,902(5) 8.78 5.79
260 Long Ridge Road
Stamford, CT 06927
DIRECTORS AND OFFICERS
Howard I. Bull................................... 0(6) * *
James C. Comis................................... 5,101,800(7) 28.09 18.52
James T. Dresher................................. 0(6) * *
W. McComb Dunwoody............................... 5,101,800(7) 28.09 18.52
William E. Macaulay.............................. 4,185,247(8) 23.05 15.19
Bruce M. Rothstein............................... 0 * *
Joel V. Staff.................................... 891,989(9) 4.91 3.24
Steven W. Krablin................................ 171,275 * *
Lynn L. Leigh.................................... 154,295 * *
Merrill A. Miller................................ 94,127 * *
All current directors and officers as a group (14
persons)....................................... 11,235,984 61.87 40.79
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- ---------------
* Denotes ownership of less than one percent of the class outstanding.
(1) At August 8, 1997, there were 18,161,175 shares of National-Oilwell Common
Stock outstanding.
(2) Based on 27,548,561 shares of National-Oilwell Common Stock outstanding.
(3) As reflected in Schedule 13G filed with the SEC on February 14, 1997.
Represents shares beneficially owned as of December 31, 1996 by the
following partnerships of which, in each case, Inverness/Phoenix LLC is the
managing general partner: DPI Oil Service Partners Limited
Partnership -- 4,725,281; and DPI Partners II -- 376,519. Inverness/Phoenix
LLC, in its role as managing general partner of the partnerships, has the
power to cause each partnership to dispose of or to vote shares held by each
partnership. Messrs. Comis and Dunwoody, each of whom is a director of
National-Oilwell, serve on the investment committee of Inverness/Phoenix
LLC, which committee has sole power to vote and dispose of that company's
investments. See footnote (6) for the ownership interests of Messrs. Bull
and Dresher, each of whom is a director of National-Oilwell, in DPI Oil
Service Partners Limited Partnership.
(4) As reflected in Schedule 13G filed with the SEC on February 14, 1997.
Represents shares beneficially owned as of December 31, 1996 by the
following limited partnerships of which, in each case, First Reserve
Corporation is the managing general partner: First Reserve Fund V, Limited
Partnership -- 167,415; First Reserve Fund VI, Limited
Partnership -- 3,850,417; and First Reserve Fund V-2, Limited
Partnership -- 167,415. First Reserve Corporation, in its role as managing
partner of the partnerships, has the power to cause each partnership to
dispose of or to vote shares held by each partnership. Mr. Macaulay and John
A. Hill, another First Reserve Corporation stockholder, may be deemed to
share beneficial ownership of the shares owned by First Reserve Corporation
as a result of Messrs. Macaulay's and Hill's ownership of common stock of
First Reserve Corporation. Both Messrs. Macaulay and Hill disclaim
beneficial ownership of all such shares.
(5) As reflected in Schedule 13G filed with the SEC on February 13, 1997.
General Electric Capital Corporation has sole voting and investment power
over the shares.
(6) Messrs. Bull and Dresher have a 5.714% and 4.082% interest, respectively, in
DPI Partners I, a general partnership which holds a limited partnership
interest in DPI Oil Service Partners Limited Partnership. Additionally,
Messrs. Bull and Dresher each hold a limited partnership interest in DPI Oil
Service Partners Limited Partnership, which holds 4,725,281 shares of
National-Oilwell's Common Stock. The interests of Mr. Bull, Mr. Dresher and
DPI Partners I in DPI Oil Service Partners Limited Partnership, after the
return of the original investment plus interest, are approximately 1.3%,
3.3% and 20.0%, respectively. Messrs Bull and Dresher each disclaim
beneficial ownership of all such shares.
(7) This figure equals all shares beneficially owned by Inverness/Phoenix LLC of
which Messrs. Comis and Dunwoody are principals.
(8) This figure equals all shares beneficially owned by First Reserve
Corporation of which Mr. Macaulay is President. Mr. Macaulay disclaims
beneficial ownership of all such shares.
(9) Includes 528,814 shares owned by the trusts created by that certain Trust
Agreement dated April 12, 1989 by and among Joel V. Staff and Mary Martha
Staff, as Trustors, and Richard Staff, as Trustee. Joel Staff does not vote
nor exercise investment power over and disclaims beneficial ownership of
these shares.
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Security Ownership of Certain Beneficial Owners and Management of Dreco
The following table sets forth certain information with respect to Dreco
Common Shares beneficially owned by each director of Dreco, by each of the
current executive officers who were named in the Summary Compensation Table in
Dreco's Proxy Statement for its 1997 Annual Meeting, by each person who at
August 7, 1997 was known by Dreco to be the beneficial owner of more than 5% of
the outstanding Dreco Common Shares and by all current directors and officers of
Dreco as a group and also sets forth such information with respect to shares of
National-Oilwell Common Stock assuming that the Transaction had been consummated
as of August 7, 1997 (assuming a 1.2 to 1 Exchange Ratio and assuming all
Exchangeable Shares are exchanged for shares of National-Oilwell Common Stock).
This information has been provided by each of the directors and officers as of
August 7, 1997, at the request of Dreco. The number of shares beneficially owned
includes shares subject to options exercisable within 60 days of August 7, 1997.
PERCENT
SHARES PERCENT OF CLASS
BENEFICIALLY OF CLASS AFTER
NAME OF INDIVIDUAL OR IDENTITY OF GROUP OWNED OUTSTANDING(1) TRANSACTION(2)
--------------------------------------- ------------ -------------- --------------
5% HOLDERS
- ----------
Neuberger & Berman................................... 570,025(3) 7.3% 5.0%(4)
605 Third Avenue
New York, New York 10158-3698
Metropolitan Life Insurance.......................... 563,900(5) 7.2 2.5
One Madison Avenue
New York, New York 10010
State Street Research and Management Co.............. 563,900(6) 7.2 2.5
One Financial Center
Boston, Massachusetts 02111-2621
Fidelity Management & Research Co.................... 416,700(7) 5.3 2.7(8)
82 Devonshire Street
Boston, Massachusetts 02109
Frederick W. Pheasey................................. 398,849(9) 5.1 1.7
#1340 Weber Centre
5555 Calgary Trail
Edmonton, Alberta, Canada T6H 5P9
DIRECTORS AND OFFICERS
- ----------------------
Frederick W. Pheasey................................. 398,849(9) 5.1 1.7
Robert L. Phillips................................... 207,750(10) 2.6 *
Ronald S. Sorokan.................................... 65,963(11)(12) * *
P. Stuart Grant...................................... 60,000(13) * *
W. Douglas Frame..................................... 18,200(11) * *
Franklin L. Kobie.................................... 28,000(14) * *
Glenn E. Taylor, Jr.................................. 27,500(11) * *
James E. Chenault, Jr................................ 26,000(13) * *
Ronald A. Robinson................................... 25,125(13) * *
Jerry E. Goldress.................................... 25,000(13) * *
Christopher J. Robb.................................. 21,000(14) * *
All directors and officers as a group (15 persons)... 912,008(15) 11.1% 3.9%
- ---------------
* less than 1%
(1) At August 7, 1997, there were 7,822,822 Common Shares outstanding.
(2) Based on 27,548,561 shares of National-Oilwell Common Stock outstanding.
(3) As reflected in Schedule 13G filed with the SEC on February 10, 1997.
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(4) Includes 700,300 shares of National-Oilwell Common Stock owned prior to
consummation of the Transaction as reflected in Schedule 13F filed with the
SEC for the quarter ended March 31, 1997.
(5) As reflected in Schedule 13G filed with the SEC on February 5, 1997.
(6) As reflected in Schedule 13G filed with the SEC on February 13, 1997.
(7) As reflected in Schedule 13G filed with the SEC on February 14, 1997.
(8) Includes 240,900 shares of National-Oilwell Common Stock owned prior to
consummation of the Transaction as reflected in Schedule 13F filed with the
SEC for the quarter ended March 31, 1997.
(9) Includes 35,388 Dreco Common Shares that are pledged to a financial
institution.
(10) Includes 200,000 Dreco Common Shares that may be acquired upon exercise of
an option and 1,250 Dreco Common Shares beneficially owned by Mr. Phillips'
wife, in respect of which shares Mr. Phillips has disclaimed any beneficial
ownership.
(11) Includes 15,000 Dreco Common Shares that may be acquired upon exercise of
options.
(12) Includes 30,000 Dreco Common Shares that are pledged to a financial
institution.
(13) Includes 25,000 Dreco Common Shares that may be acquired upon exercise of
options.
(14) Includes 20,000 Dreco Common Shares that may be acquired upon exercise of
options.
(15) Includes 393,600 Dreco Common Shares that may be acquired upon exercise of
options.
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NATIONAL-OILWELL CAPITAL STOCK
In the event of the consummation of the Transaction, which requires the
adoption by the National-Oilwell Stockholders of the National-Oilwell Amended
and Restated Certificate, the capital stock of National-Oilwell will be as
summarized below. Such summary is qualified in its entirety by reference to the
National-Oilwell Amended and Restated Certificate which is attached as Annex D
hereto.
The National-Oilwell Amended and Restated Certificate of Incorporation
currently authorizes 40,000,000 shares of National-Oilwell Common Stock and
10,000,000 shares of National-Oilwell Preferred Stock. If the National-Oilwell
Amended and Restated Certificate is approved at the National-Oilwell Meeting,
the National-Oilwell Amended and Restated Certificate will authorize 75,000,000
shares of National-Oilwell Common Stock, one share of Special Voting Stock and
10,000,000 shares of National-Oilwell Preferred Stock.
COMMON STOCK
There were 18,161,175 shares of National-Oilwell Common Stock outstanding
as of August 8, 1997. The holders of National-Oilwell Common Stock are entitled
to one vote per share on all matters voted on by the stockholders, including the
election of directors. Holders of National-Oilwell Common Stock are not entitled
to cumulate their votes in elections of directors. Common stockholders have no
preemptive rights or other rights to subscribe for additional shares. Holders of
National-Oilwell Common Stock have an equal and ratable right to receive
dividends when, as and if declared by the board of directors out of funds
legally available therefor subject only to any payment requirements or other
restrictions imposed by any series of Preferred Stock that may be issued in the
future. See "Summary -- Dividend Policies."
The transfer agent and registrar for the National-Oilwell Common Stock is
American Stock Transfer & Trust Company.
NATIONAL-OILWELL SPECIAL VOTING STOCK
A single share of National-Oilwell Special Voting Stock will be authorized
for issuance and a single share will be outstanding having a par value of $.01
per share. Except as otherwise required by law or the National-Oilwell Amended
and Restated Certificate, the Voting Share will possess a number of votes equal
to the number of outstanding Exchangeable Shares from time to time not owned by
National-Oilwell or any entity controlled by National-Oilwell for the election
of directors and on all other matters submitted to a vote of stockholders of
National-Oilwell. The holders of National-Oilwell Common Stock and the holder of
the Voting Share will vote together as a single class on all matters. In the
event of a National-Oilwell Liquidation Event, all outstanding Exchangeable
Shares will automatically be exchanged for shares of National-Oilwell Common
Stock, and the holder of the Voting Share will not be entitled to receive any
assets of National-Oilwell available for distribution to its stockholders. The
holder of the Voting Share will not be entitled to receive dividends. Pursuant
to the Combination Agreement, the Voting Share will be issued to the Trustee
appointed under the Voting and Exchange Trust Agreement. At such time as the
Voting Share has no votes attached to it because there are no Exchangeable
Shares outstanding not owned by National-Oilwell or an entity controlled by
National-Oilwell, the Voting Share will be canceled.
PREFERRED STOCK
The board of directors of National-Oilwell, without any action by the
National-Oilwell Stockholders, is authorized to issue up to 10,000,000 shares of
Preferred Stock, in one or more series and to determine the voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and in liquidation and the conversion and other rights of each such
series. There are no shares of Preferred Stock outstanding. See "Certain
Anti-Takeover and Other Provisions -- Preferred Stock."
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CERTAIN ANTI-TAKEOVER AND OTHER PROVISIONS
The National-Oilwell Amended and Restated Certificate (from time to time
referred to herein as the "Charter") and the Bylaws of National-Oilwell contain
provisions that could have an anti-takeover effect. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors of National-Oilwell and in the policies
formulated by the board of directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of
National-Oilwell. The provisions are designed to reduce the vulnerability of
National-Oilwell to an unsolicited proposal for a takeover of National-Oilwell
that does not contemplate the acquisition of all of its outstanding shares or an
unsolicited proposal for the restructuring or sale of all or part of
National-Oilwell. The provisions are also intended to discourage certain tactics
that may be used in proxy fights. The board of directors believes that, as a
general rule, such takeover proposals would not be in the best interest of
National-Oilwell and its stockholders. Set forth below is a description of such
provisions in the Charter and the Bylaws. The description of such provisions set
forth below discloses, in the opinion of National-Oilwell's management, all
material elements of such provisions, is intended only as a summary and is
qualified in its entirety by reference to the pertinent sections of the Charter,
attached as Annex D hereto, and the Bylaws, a form of which was filed as an
exhibit to the Registration Statement filed with the SEC in connection with
National-Oilwell's initial public offering. The board of directors has no
current plans to formulate or effect additional measures that could have an
anti-takeover effect.
Classified Board of Directors. The classification of directors has the
effect of making it more difficult for stockholders to change the composition of
the board of directors. At least two annual meetings of stockholders generally
will be required to effect a change in a majority of the board of directors.
Such a delay may help ensure that National-Oilwell's directors, if confronted by
a stockholder attempting to force a proxy contest, a tender or exchange offer or
an extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interests of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the board of directors
would be beneficial to National-Oilwell and its stockholders and whether a
majority of National-Oilwell Stockholders believes that such a change would be
desirable. Pursuant to the Charter, the provisions relating to the
classification of directors may only be amended by the affirmative vote of
eighty percent of the then outstanding shares of capital stock entitled to vote
thereon.
Removal of Directors Only for Cause. Pursuant to the Charter, directors
can be removed from office only for cause by the affirmative vote of eighty
percent of the then outstanding shares of capital stock entitled to vote
thereon, other than at the expiration of their term of office. Vacancies on the
board of directors may be filled only by the remaining directors and not by the
stockholders.
Number of Directors. The Charter provides that the entire board of
directors will consist of not less than three members, the exact number to be
set from time to time by resolution of the board of directors. Accordingly, the
board of directors, and not the stockholders, has the authority to determine the
number of directors and could delay any stockholder from obtaining majority
representation on the board of directors by enlarging the board of directors and
filling the new vacancies with its own nominees until the next stockholder
election.
No Written Consent of Stockholders. The Charter also provides that any
action required or permitted to be taken by the stockholders of National-Oilwell
must be taken at a duly called annual or special meeting of stockholders and may
not be taken by written consent. In addition, special meetings may only be
called by (i) the Chairman of the Board, (ii) the President or (iii) the board
of directors pursuant to a resolution adopted by a majority of the
then-authorized number of directors.
Charter and Bylaws. The Charter provides that the board of directors, by a
majority vote, may adopt, alter, amend or repeal provisions of the Bylaws.
Business Combinations under Delaware Law. National-Oilwell is subject to
section 203 of the DGCL, which prohibits certain transactions between a Delaware
corporation and an interested stockholder, which is
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defined as a person who, together with any affiliates and/or associates of such
person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock, unless (i) the business combination or the
transaction which resulted in the stockholder becoming an interested stockholder
is approved by the corporation's board of directors prior to the date the
interested stockholder acquired shares, (ii) the interested stockholder acquired
at least 85% of the voting stock of the corporation in the transaction in which
it became an interested stockholder or (iii) the business combination is
approved by a majority of the board of directors and by the affirmative vote of
two-thirds of the votes entitled to be cast by disinterested stockholders at an
annual or special meeting.
Preferred Stock. The Charter authorizes the board of directors of
National-Oilwell, without any action by the stockholders of National-Oilwell, to
issue up to 10,000,000 shares of Preferred Stock, in one or more series and to
determine the voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and in liquidation and the
conversion and other rights of each such series. Because the terms of the
preferred stock may be fixed by the board of directors of National-Oilwell
without stockholder action, the preferred stock could be issued quickly with
terms designed to make more difficult a proposed takeover of National-Oilwell or
the removal of its management, thus affecting the market price of the
National-Oilwell Common Stock and preventing stockholders from obtaining any
premium offered by the potential buyer. The board of directors will make any
determination to issue such shares based on its judgment as to the best
interests of National-Oilwell and its stockholders.
Liability of Officers and Directors -- Indemnification. Delaware law
authorizes corporations to limit or eliminate the personal liability of officers
and directors to corporations and their stockholders for monetary damages for
breach of officers' and directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, officers and directors
must exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
officers and directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting gross negligence in the exercise
of their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Charter
limits the liability of officers and directors of National-Oilwell to
National-Oilwell or its stockholders to the fullest extent permitted by Delaware
law. Specifically, officers and directors of National-Oilwell will not be
personally liable for monetary damages for breach of an officer's or director's
fiduciary duty in such capacity, except for liability (i) for any breach of the
officers' or directors' duty of loyalty to National-Oilwell or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the DGCL or (iv) for any transaction from which the officer or director
derived an improper personal benefit.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against officers and directors,
and may discourage or deter stockholders or management from bringing a lawsuit
against officers and directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefitted National-Oilwell
and its stockholders. Both National-Oilwell's Charter and Bylaws provide
indemnification to National-Oilwell's officers and directors and certain other
persons with respect to certain matters to the maximum extent allowed by
Delaware law as it exists now or may hereafter be amended. These provisions do
not alter the liability of officers and directors under the United States
federal securities laws and do not affect the right to sue (nor to recover
monetary damages) under federal securities laws for violations thereof.
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DRECO SHARE CAPITAL
On the completion of the Arrangement, the share capital of Dreco will be as
summarized below. Such summary is qualified in its entirety by reference to the
Plan of Arrangement and the Exchangeable Share Provisions which are attached as
Annex E hereto.
DRECO COMMON SHARE
The holder of the Dreco Common Share will be entitled to receive notice of
and to attend all meetings of the shareholders of Dreco and will be entitled to
one vote on all matters submitted to a vote of the holder of the Dreco Common
Share. The holder of the Dreco Common Share will also be entitled to receive
such dividends as may be declared by the Dreco board of directors out of funds
legally available therefor and, upon any liquidation, dissolution or winding-up
of Dreco, subject to the prior rights of the holders of the Exchangeable Shares
and any other shares ranking senior to the Dreco Common Share, to receive
ratably the remaining property and assets of Dreco. Upon consummation of the
Transaction, Dreco shall not, without the approval of the board of directors and
of the holder of the Dreco Common Share, issue any further Exchangeable Shares
or other shares, except as specifically required under the Exchangeable Share
Provisions.
EXCHANGEABLE SHARES
Ranking of Exchangeable Shares of Dreco. The Exchangeable Shares will rank
prior to the Dreco Common Share and any other shares ranking junior to the
Exchangeable Shares with respect to the payment of dividends and the
distribution of assets in the event of liquidation, dissolution or winding-up of
Dreco.
Dividends. Holders of Exchangeable Shares will be entitled to receive
dividends equivalent to dividends paid from time to time by National-Oilwell on
shares of National-Oilwell Common Stock. The declaration date, record date and
payment date for dividends on the Exchangeable Shares will be the same as that
for the corresponding dividends on the National-Oilwell Common Stock.
Certain Restrictions. Without the approval of the holders of the
Exchangeable Shares other than National-Oilwell, Dreco will not: (i) pay any
dividend on the Dreco Common Share, or any other shares ranking junior to the
Exchangeable Shares, other than stock dividends payable in such other shares
ranking junior to the Exchangeable Shares; (ii) redeem, purchase or make any
capital distribution in respect of the Dreco Common Share or any other shares
ranking junior to the Exchangeable Shares; (iii) redeem or purchase any other
shares of Dreco ranking equally with the Exchangeable Shares with respect to the
payment of dividends or on any liquidation distribution; or (iv) amend the Dreco
Articles or Dreco Bylaws, in either case in any manner that would affect the
rights of the holders of the Exchangeable Shares. The restrictions in (i), (ii)
and (iii) above will not apply at any time when the dividends on the outstanding
Exchangeable Shares corresponding to dividends declared on the National-Oilwell
Common Stock have been declared and paid in full. If a vote of the holders of
Exchangeable Shares is called for such approval and the holders of Exchangeable
Shares vote in favor, an Automatic Redemption Date will occur. See "The
Transaction -- Transaction Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights -- Automatic Redemption."
Liquidation. In the event of a Dreco Insolvency Event, a holder of
Exchangeable Shares will be entitled to receive for each Exchangeable Share one
share of National-Oilwell Common Stock, plus the Dividend Amount, if any. See
"The Transaction -- Transaction Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights -- Optional Exchange Right."
Exchange Put Right. Holders of the Exchangeable Shares will be entitled at
any time following the Effective Time to require National-Oilwell to exchange
all or any part of the Exchangeable Shares owned by them and to receive an
equivalent number of shares of National-Oilwell Common Stock plus the Dividend
Amount, if any. See "The Transaction -- Transaction Mechanics and Description of
Exchangeable Shares -- Exchange and Redemption Rights -- Exchange Put Right."
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Retraction of Exchangeable Shares by Holders. A holder of Exchangeable
Shares will be entitled at any time to require Dreco to retract (i.e. require
Dreco to redeem) any or all of the Exchangeable Shares held by such holder by
delivering to the holder one share of National-Oilwell Common Stock for each
Exchangeable Share plus the Dividend Amount, if any, which shall be delivered to
the retracting holder on the Retraction Date specified by the holder (which
shall not be less than five nor more than ten business days after the date on
which Dreco receives the Retraction Request from the holder). See "The
Transaction -- Transaction Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights -- Retraction Rights." This right is
subject to National-Oilwell's Retraction Call Right. See "The Transaction --
Transaction Mechanics and Description of Exchangeable Shares -- Call
Rights -- Retraction Call Right."
If, as a result of liquidity or solvency provisions of applicable law,
Dreco is not permitted to redeem all Exchangeable Shares tendered by a
retracting holder, Dreco will redeem only those Exchangeable Shares tendered by
the holder (rounded down to a whole number of shares) as would not be contrary
to such provisions of applicable law. This right is subject to
National-Oilwell's Liquidation Call Right. See "The Transaction -- Transaction
Mechanics and Description of Exchangeable Shares -- Call Rights -- Liquidation
Call Right." The holder of any Exchangeable Shares not redeemed by Dreco will be
deemed to have required National-Oilwell to purchase such unretracted shares in
exchange for National-Oilwell Common Stock, plus the Dividend Amount, if any.
See "The Transaction -- Transaction Mechanics and Description of Exchangeable
Shares -- Exchange and Redemption Rights."
Automatic Redemption of Exchangeable Shares. On an Automatic Redemption
Date, Dreco will redeem all but not less than all of the then outstanding
Exchangeable Shares by delivering to the holder one share of National-Oilwell
Common Stock for each Exchangeable Share, plus the Dividend Amount, if any. At
least 45 days prior to the Automatic Redemption Date described above or before a
possible Automatic Redemption Date which may result from a failure of the
holders of Exchangeable Shares to take necessary action as described in clause
(d) of the definition of Automatic Redemption Date, Dreco shall provide the
registered holders of the Exchangeable Shares with written notice of the
proposed redemption of the Exchangeable Shares of Dreco. This right is subject
to National-Oilwell's Redemption Call Right. In the case of any notice given in
connection with a possible Automatic Redemption Date, such notice will be given
contingently and will be withdrawn if the contingency does not occur. See "The
Transaction -- Mechanics and Description of Exchangeable Shares -- Call
Rights -- Redemption Call Right."
Voting Rights. Under the ABCA, holders of Exchangeable Shares have
separate class voting rights on any change in the fundamental terms of these
shares, which rights mirror those provided under the Exchangeable Share
Provisions as described in the next paragraph. In addition, the holders of
Exchangeable Shares have the right to vote on any change in the related terms in
the Support Agreement and the Voting and Exchange Trust Agreement. If the
holders fail to take necessary action to approve or disapprove, as applicable, a
change in the terms of the Exchangeable Shares or the related terms in the
Support Agreement and the Voting and Exchange Trust Agreement, if such approval
or disapproval, as applicable, would be required to maintain the economic and
legal equivalence of the Exchangeable Shares and the National-Oilwell Common
Stock, Dreco will automatically be required to redeem the Exchangeable Shares as
described above. Additionally, under the ABCA, the holders of Exchangeable
Shares have the right to vote on certain fundamental changes in Dreco, including
an amalgamation, a continuance or reincorporation in another jurisdiction, a
sale, lease or exchange of all or substantially all of the assets of Dreco out
of the ordinary course of business, a plan of arrangement and a voluntary
dissolution. If the Dreco board of directors proposes such a fundamental change,
Dreco will automatically be required to redeem the Exchangeable Shares prior to
the record date for the required shareholder vote as described above.
Amendment and Approval. The rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares may be changed only with the
approval of the holders thereof other than National-Oilwell. Any such approval
or any other approval or consent to be given by the holders of the Exchangeable
Shares will be sufficiently given if given in accordance with applicable law and
subject to a minimum requirement that such approval or consent be evidenced by a
resolution passed by not less than two-thirds of the votes cast thereon (other
than shares beneficially owned by National-Oilwell or entities controlled by
National-Oilwell) at a meeting of the holders of Exchangeable Shares duly called
and held at which holders of at least 50% of
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the then outstanding Exchangeable Shares are present or represented by proxy. In
the event that no such quorum is present at such meeting within one-half hour
after the time appointed therefor, then the meeting will be adjourned to such
place and time not less than 10 days later as may be determined at the original
meeting by the chairman of the meeting, and holders of Exchangeable Shares
present or represented by proxy at the adjourned meeting may transact the
business for which the meeting was originally called. At the adjourned meeting,
a resolution passed by the affirmative vote of not less than two-thirds of the
votes cast thereon will constitute the approval or consent of the holders of the
Exchangeable Shares.
Actions of Dreco under Support Agreement. Under the Exchangeable Share
Provisions, Dreco will agree to take all such actions and do all such things as
are necessary or advisable to perform and comply with its obligations under, and
to ensure the performance and compliance by National-Oilwell with its
obligations under, the Support Agreement.
REMUNERATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth for the years ended December 31, 1995 and
1996 the compensation paid by National-Oilwell to its Chief Executive Officer
and four other most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ----------------------- ---------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) ($)(1) SARS(#) ($)(2) ($)(3)
------------------ ---- --------- -------- ------------ ---------- ---------- --------- ------------
Joel V. Staff............. 1996 291,352 186,983 -- 2,567 -- 1,675,423 14,512
Chairman, President 1995 275,016 -- -- -- -- -- 11,011
and CEO
C.R. Bearden(4)........... 1996 234,808 124,278 -- 1,711 -- 1,116,949 17,559(5)
Executive V.P. 1995 215,625 -- -- -- -- -- 7,962
President -- Distribution
Services
Lynn L. Leigh............. 1996 195,000 103,209 -- -- -- 1,256,846(6) 9,242
Sr. Vice President 1995 195,000 -- -- -- -- -- 7,810
Steven W. Krablin......... 1996 144,231 76,338 -- 856 -- 558,474 --
Vice President 1995 -- -- -- -- -- -- --
and CFO
Merrill A. Miller......... 1996 135,577 71,758 -- 856 -- 558,474 --
Vice President 1995 -- -- -- -- -- -- --
General Manager --
Drilling Systems
- ---------------
(1) The number and value at December 31, 1996 of restricted stockholdings for
the named executive officers are: Mr. Staff -- 282,414 shares, $8,683,974;
Mr. Bearden -- 188,254 shares, $5,788,639; Mr. Krablin -- 94,127 shares,
$2,894,320; and Mr. Miller -- 94,127 shares, $2,894,320. Provided that the
executive officer has been continuously employed by National-Oilwell until
the lapse date, forfeiture restrictions on the restricted stock will lapse
in 20% increments annually beginning on January 17, 1997.
(2) Represents total amounts accrued to the named individuals except for Mr.
Leigh with respect to payments under National-Oilwell's Value Appreciation
and Incentive Plan B, which provided for certain executive officers of
National-Oilwell to qualify for an award upon the occurrence of certain
events, including an initial public offering. Distributions under this plan
will be made in cash and stock until January 17, 2001. Cash distributions
made under the plan as of December 31, 1996 are as follows: Mr.
Staff -- $209,474; Mr. Bearden -- $139,650; Mr. Krablin -- $69,825; and Mr.
Miller -- $69,825. No stock distributions have been made under the plan to
date.
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(3) These amounts include:
(a) National-Oilwell's cash contributions for 1996 under the
National-Oilwell Retirement and Thrift Plan, a defined contribution
plan, on behalf of Mr. Staff, $7,113; Mr. Bearden, $7,103; and Mr.
Leigh $7,113.
(b) National-Oilwell's cash contributions for 1996 under the
National-Oilwell Supplemental Savings Plan, a defined contribution
plan, on behalf of Mr. Staff, $7,399; Mr. Bearden, $3,194; and Mr.
Leigh, $2,129.
(4) Mr. Bearden resigned as an officer and director of National-Oilwell
effective May 12, 1997.
(5) Includes a premium of $7,262 for a term life insurance policy paid by
National-Oilwell.
(6) Represents total amount accrued to Mr. Leigh under National-Oilwell's Value
Appreciation and Incentive Plan A, which provided for certain key employees
of National-Oilwell to qualify for an award upon the occurrence of certain
events, including an initial public offering. Distributions under this plan
will be made in cash and stock until January 17, 1999. At December 13, 1996,
Mr. Leigh had received a cash distribution under this plan in the amount of
$418,949 and had received no stock distribution.
For information regarding compensation paid to executive officers of Dreco
in 1996, including Messrs. Frame and Pheasey, who will become executive officers
of National-Oilwell upon consummation of the Transaction, see the 1996 Notice of
Annual Meeting and Proxy Statement of Dreco, the relevant portions of which are
incorporated by reference into the Dreco Annual Report on Form 10-K for the year
ended August 31, 1996.
COMPENSATION OF DIRECTORS
Directors who are full-time employees of National-Oilwell do not receive a
retainer or fees for service on the board of directors or on committees of the
board. Members of the board of directors who are not full-time employees of
National-Oilwell receive an annual fee of $15,000, a fee of $1,000 for
attendance at each meeting of the board of directors and at each meeting of its
committees or any special committee established by the board, and a fee of
$1,000 per day for any special assignments. The chairmen of the audit and
compensation committees receive a fee of $1,250 for attendance at each meeting
of the committee they chair. In addition, directors of the Company (including
directors who are not full-time employees of National-Oilwell) are eligible for
grants of stock options, other than incentive stock options, and other awards
under the Stock Plan. On March 21, 1997, each non-employee director of
National-Oilwell was granted a non-qualified stock option to purchase 2,000
shares of National-Oilwell's Common Stock. The option exercise price per share
is equal to the fair market value of a share of National-Oilwell Common Stock on
the date of grant, the options vest in three equal annual installments beginning
on the first anniversary of the date of grant and the options have a term of
five years from the date of grant. The specific terms of compensation to be paid
to non-employee directors of National-Oilwell after consummation of the
Transaction have not yet been determined, although they are expected to be
consistent with the compensation paid to non-employee directors of
National-Oilwell in 1996.
EMPLOYMENT CONTRACTS
Effective as of January 1, 1996, National-Oilwell entered into an
employment agreement with each of the named executive officers, except for Mr.
Miller, whose employment agreement was effective as of February 5, 1996. Each of
the agreements provides for a base salary, participation in the National-Oilwell
Employee Incentive Plan (the "Incentive Plan") and employee benefits as
generally provided to all employees. The agreements provided for the following
base salaries for 1996: Mr. Staff -- $300,000; Mr. Bearden -- $240,000; Mr.
Leigh -- $195,000; Mr. Krablin -- $150,000 and Mr. Miller -- $150,000. The
agreements have a continuing term of two years in the case of Mr. Staff and one
year for each of the other executive officers. National-Oilwell is not obligated
to pay any amounts pursuant to the employment agreements upon (i) voluntary
termination; (ii) termination for cause (as defined); (iii) death; (iv)
long-term disability; or (v) employee's refusal to accept comparable employment
with a successor corporation. If the employment
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relationship is terminated by the Company for any other reason, or by the
employee due to an uncorrected material breach of the employment agreement by
National-Oilwell for any other reason, the employee is entitled to receive his
base salary and current year targeted bonus amount under the Incentive Plan
either as a lump sum payment or over the one-year term, or two-year term in the
case of Mr. Staff, as determined by the employment agreement under the
circumstances. During the period of employment and for a period after
termination of two years for Mr. Staff and one year for each of the other
executive officers, the employees are generally prohibited from competing or
assisting others to compete in its existing or recent business, or inducing any
other employee to terminate employment with National-Oilwell.
Upon termination, other than for cause, participants in National-Oilwell's
Value Incentive Plans A and B, including each of the named executive officers,
are entitled to any amounts accrued on their behalf for which they have not yet
received a distribution. Each of the named executive officers other than Mr.
Leigh is a recipient of a restricted stock award under the Stock Plan. Under the
terms of the Restricted Stock Agreements pursuant to which the restricted stock
awards were issued, any restricted stock must be resold to National-Oilwell for
$0.01 per share if the recipient's employment with National-Oilwell is
terminated for any reason prior to the lapse of the forfeiture restrictions. The
forfeiture restrictions lapse each year beginning January 17, 1997, on 20% of
the total number of shares of restricted stock awarded to each participant and
in their entirety upon a participant's disability, death or involuntary
termination of employment without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee of National-Oilwell are Howard I.
Bull and James T. Dresher. From August 1996 through March 20, 1997, the members
of the compensation committee were Howard I. Bull and William E. Macaulay. Mr.
Macaulay is the president of First Reserve Corporation. National-Oilwell paid
First Reserve Corporation a transaction fee of $1.2 million in 1996 in
connection with the acquisition of the predecessor partnership of
National-Oilwell. National-Oilwell and First Reserve Corporation are parties to
a Deferred Fee Agreement, under which National-Oilwell will pay First Reserve
Corporation an aggregate amount of $225,000. Joel V. Staff, an executive officer
of National-Oilwell, also served on the compensation committee from January 1996
through August 1996, prior to National-Oilwell's initial public offering.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fee Agreements. In connection with the acquisition of its predecessor
partnership, National-Oilwell and the holders of all of National-Oilwell's
outstanding stock entered into a Stockholders Agreement dated January 16, 1996,
as subsequently amended (the "Stockholders Agreement"). The Stockholders
Agreement provided for, among other things, management of National-Oilwell,
voting of shares, election of directors and restrictions on transfer of shares,
which provisions were automatically terminated upon completion of the initial
public offering. In addition, the Stockholders Agreement provides the Inverness
Investors and the First Reserve Investors the right on four occasions to require
National-Oilwell to register all or part of their registerable shares under the
Securities Act and further provides all parties to the Stockholders Agreement
with piggyback registration rights on any offering by National-Oilwell of any of
its securities to the public except a registration on Forms S-4 or S-8.
National-Oilwell and Inverness/Phoenix LLC entered into a five-year
Management Services Agreement on January 16, 1996, under which Inverness/Phoenix
LLC performed management services as directed by National-Oilwell's board of
directors. The Management Services Agreement provided that Inverness/Phoenix LLC
receive fees of $1 million per year, payable quarterly commencing in January
1996, and a transaction fee in connection with each acquisition or disposition
by National-Oilwell of an existing business of 1% of the aggregate transaction
value of each such transaction. In addition, First Reserve Corporation was to be
paid a transaction fee in connection with certain acquisitions. The Management
Services Agreement was canceled and replaced with a Deferred Fee Agreement
between National-Oilwell, Inverness/Phoenix LLC and First Reserve Corporation
immediately prior to the initial public offering. Under the terms of the
Deferred Fee Agreement, no future services would be performed for
National-Oilwell, and the prior contractual payments would be settled by
Inverness/Phoenix LLC being paid $250,000 in advance quarterly beginning on the
first
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day of the calendar quarter following the initial public offering through
December 31, 1999. In addition, Inverness/Phoenix LLC and First Reserve
Corporation will be paid fees aggregating $1,050,000 and $225,000, respectively,
on the first date and to the extent such payments would not be an event of
default under National-Oilwell's promissory notes to Armco and USX, which notes
provide that an event of default will occur if aggregate management or similar
fees in excess of $1 million or acquisition, divestiture or similar transaction
fees in excess of 1% of the aggregate value of any such transaction are paid to
Inverness/Phoenix LLC or First Reserve Corporation. All amounts remaining unpaid
under the Deferred Fee Agreement as of January 1, 2000, shall be considered as a
management or similar fee and shall be payable quarterly in advance in the
aggregate amount of $250,000 (proportionally to Inverness/Phoenix LLC and First
Reserve Corporation) beginning on January 1, 2000, until the remaining unpaid
portion has been paid. Upon completion of the Transaction, the $1,050,000 and
$225,000 payments described above will be paid in full. Quarterly payments of
$250,000 to Inverness/Phoenix LLC will continue through December 31, 1999.
For their assistance in the acquisition of the predecessor partnership in
January 1996, National-Oilwell paid Inverness/Phoenix LLC and First Reserve
Corporation transaction fees of $1.8 million and $1.2 million, respectively. In
connection with the acquisition of the predecessor partnership, GE Capital
provided a new credit facility, a subordinated note, equity capital and received
transaction fees totaling $4.7 million.
Management Notes. In connection with the acquisition of the predecessor
partnership in January 1996, four of National-Oilwell's executive officers
issued promissory notes to National-Oilwell in the following amounts: C.R.
Bearden -- $100,000; James J. Fasnacht -- $150,000; Lynn L. Leigh -- $49,999;
and Paul M. Nation -- $199,999. Each of the notes provided for interest until
maturity at 1.5% above the prime interest rate, payable annually, and the
principal was due on January 15, 2001, unless extended at the option of
National-Oilwell. In accordance with their terms, each of the notes was prepaid
immediately prior to the initial public offering.
Certain Business Relationships. During 1996, National-Oilwell, in the
ordinary course of business, purchased products referred to as "oil country
tubular goods" for amounts totaling approximately $36 million from Maverick Tube
Corporation, a company that has provided a significant volume of goods to
National-Oilwell for a number of years. Mr. Macaulay, a director of
National-Oilwell, is on the board of directors of Maverick Tube Corporation.
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INCOME TAX CONSIDERATIONS TO DRECO SHAREHOLDERS AND OPTIONHOLDERS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS TO DRECO SHAREHOLDERS AND
OPTIONHOLDERS
In the opinion of Blake, Cassels & Graydon, Canadian counsel for Dreco, the
following are the principal Canadian federal income tax considerations under the
Canadian Tax Act generally applicable to Dreco Shareholders who, for purposes of
the Canadian Tax Act, hold their Dreco Common Shares and will hold their
Exchangeable Shares and National-Oilwell Common Stock as capital property, deal
at arm's length with Dreco and National-Oilwell and are not, and will at all
relevant times not be, affiliated with Dreco or National-Oilwell. The following
does not apply to a Dreco Shareholder with respect to whom National-Oilwell is
or will be a foreign affiliate within the meaning of the Canadian Tax Act or who
holds more than 10% of the Dreco Common Shares.
Shares will generally be considered to be capital property to a shareholder
unless held in the course of carrying on a business, in an adventure in the
nature of trade or as "mark-to-market" property for purposes of the Canadian Tax
Act. Dreco Shareholders should consult their own tax advisors regarding whether,
as a matter of fact, they hold their Dreco Common Shares and will hold their
Exchangeable Shares and National-Oilwell Common Stock as capital property for
the purposes of the Canadian Tax Act. Dreco Shareholders who are resident in
Canada and whose Dreco Common Shares or Exchangeable Shares might not otherwise
qualify as capital property may be entitled to obtain such qualification by
making the irrevocable election provided by subsection 39(4) of the Canadian Tax
Act. Dreco Shareholders who do not hold their shares as capital property should
consult their own tax advisors regarding their particular circumstances and, in
the case of certain "financial institutions" (as defined in the Canadian Tax
Act), the potential application to them of the special "mark-to-market" rules in
the Canadian Tax Act.
This opinion is based on the current provisions of the Canadian Tax Act,
the regulations thereunder, the Canada-United States Income Tax Convention,
1980, as amended (the "Tax Treaty"), and counsel's understanding of the current
administrative practices published by Revenue Canada, Customs, Excise and
Taxation ("Revenue Canada"). This opinion takes into account specific proposals
to amend the Canadian Tax Act and regulations publicly announced by the Minister
of Finance prior to the date hereof (the "Tax Proposals") and assumes that all
Tax Proposals will be enacted in their present form. However, no assurances can
be given that the Tax Proposals will be enacted in the form presented, or at
all. Except for the foregoing, this opinion does not take into account or
anticipate any changes in law, whether by judicial, administrative or
legislative action or decision, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. No
advance income tax ruling has been obtained from Revenue Canada to confirm the
tax consequences of any of the transactions described herein.
THIS OPINION IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
DRECO SHAREHOLDER. DRECO SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED HEREIN IN THEIR
PARTICULAR CIRCUMSTANCES.
In computing a Dreco Shareholder's liability for tax under the Canadian Tax
Act, any cash amounts received by the Dreco Shareholder in U.S. dollars must be
converted into the Canadian dollar equivalent, and the amount of any non-cash
consideration received by the Dreco Shareholder must be expressed in Canadian
dollars, generally determined by reference to the fair market value at the time
such consideration is received.
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DRECO SHAREHOLDERS RESIDENT IN CANADA
The following is applicable to Dreco Shareholders who, for purposes of the
Canadian Tax Act, are resident or deemed to be resident in Canada.
Exchange of Dreco Common Shares for Exchangeable Shares. This section
applies to a Dreco Shareholder who participates in the Arrangement and exchanges
all of the Dreco Common Shares that are owned by such holder at the Effective
Time for Exchangeable Shares.
Provided that, at the Effective Time, the aggregate adjusted cost base of
the Dreco Common Shares of a shareholder exceeds the sum of (i) any cash
received in respect of a fractional Exchangeable Share and (ii) the fair market
value of the ancillary benefits and rights acquired by such holder in connection
with the exchange and net of any reasonable costs of disposition, such holder
will not realize a capital gain for purposes of the Canadian Tax Act as a
consequence of the exchange. To the extent that such sum, net of any reasonable
costs of disposition, exceeds the aggregate adjusted cost base of such holder's
Dreco Common Shares, such holder will realize a capital gain for purposes of the
Canadian Tax Act. The taxation of capital gains is described below under
"-- Taxation of Capital Gain or Capital Loss" in respect of a redemption or
exchange of Exchangeable Shares.
Dreco Shareholders who participate in the Arrangement will initially
receive Exchangeable Shares and ancillary benefits and rights. A shareholder
will be deemed to have acquired
(i) the Exchangeable Shares for a cost equal to the amount, if any, by
which the adjusted cost base to such holder of the Dreco Common Shares
exceeds the sum of (A) the fair market value of the ancillary benefits
and rights in respect of the shareholder's Exchangeable Shares and (B)
any cash received by the holder in lieu of a fractional Exchangeable
Share; and
(ii) the ancillary benefits and rights in respect of the shareholder's
Exchangeable Shares for a cost equal to their fair market value.
For these purposes, a holder of Dreco Common Shares will be required to
determine the fair market value of the ancillary benefits and rights on a
reasonable basis for purposes of the Canadian Tax Act. Dreco is of the view and
has advised counsel that the ancillary benefits and rights have only nominal
value. On this basis, a holder of Dreco Common Shares should not realize a
capital gain on the exchange of Dreco Common Shares for Exchangeable Shares.
Such determinations of value are not binding on Revenue Canada, however, and
counsel can express no opinion on matters of factual determination such as
valuations.
Call Rights. Dreco is of the view and has advised counsel that the
Liquidation Call Right, the Redemption Call Right and the Retraction Call Right
have nominal value and that accordingly, no amount should be allocated to the
Call Rights. On this basis, no Dreco Shareholder should realize a gain at the
time that any of such rights are granted to National-Oilwell. Such
determinations of value are not binding on Revenue Canada, however, and counsel
can express no opinion on matters of factual determination such as valuations.
Dividends.
(i) Dividends on Exchangeable Shares
In the case of a Dreco Shareholder who is an individual, dividends received
or deemed to be received on the Exchangeable Shares will be included in
computing the Dreco Shareholder's income and will be subject to the gross-up and
dividend tax credit rules normally applicable to taxable dividends received from
taxable Canadian corporations.
Subject to the discussion below as to the denial of the dividend deduction,
in the case of a Dreco Shareholder that is a corporation, other than a
"specified financial institution" as defined in the Canadian Tax Act, dividends
received or deemed to be received on the Exchangeable Shares will be included in
computing the corporation's income and will normally be deductible in computing
its taxable income. A Dreco Shareholder that is a "private corporation" (as
defined in the Canadian Tax Act) or any other corporation
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resident in Canada and controlled or deemed to be controlled directly or
indirectly in any manner whatsoever by or for the benefit of an individual
(other than a trust) or a related group of individuals (other than trusts) may
be liable under Part IV of the Canadian Tax Act to pay a refundable tax of
33 1/3% on dividends received or deemed to be received on the Exchangeable
Shares to the extent that such dividends are deductible in computing the
shareholder's taxable income.
A corporation is a specified financial institution for purposes of the
Canadian Tax Act if it is a bank, a trust company, a credit union, an insurance
corporation or a corporation whose principal business is the lending of money to
persons with whom the corporation is dealing at arm's length or the purchasing
of debt obligations issued by such persons or a combination thereof, and
corporations controlled by one or more of such entities or related to or deemed
to be related to such entities.
In the case of a Dreco Shareholder that is a specified financial
institution, such a dividend will be deductible in computing its taxable income
only if either:
(i) the specified financial institution did not acquire the Exchangeable
Shares in the ordinary course of the business carried on by such
institution; or
(ii) at the time of the receipt of the dividend by the specified financial
institution, the Exchangeable Shares are listed on a prescribed stock
exchange in Canada (which currently includes the TSE) and the
specified financial institution, either alone or together with persons
with whom it does not deal at arm's length, does not receive (and is
not deemed to receive) dividends in respect of more than 10% of the
issued and outstanding Exchangeable Shares.
If National-Oilwell or any other person with whom National-Oilwell does not
deal at arm's length is a specified financial institution under the Canadian Tax
Act at a point in time that a dividend is paid on an Exchangeable Share, then,
subject to the exemption described below, dividends received or deemed to be
received by a Dreco Shareholder that is a corporation will not be deductible in
computing taxable income, but will be fully includable in computing income under
Part I of the Canadian Tax Act.
This denial of the dividend deduction for a corporate shareholder will not
in any event apply if, at the time a dividend is received or deemed to be
received, the Exchangeable Shares are listed on a prescribed stock exchange in
Canada (which currently includes the TSE), National-Oilwell controls Dreco, and
the recipient (together with persons with whom the recipient does not deal at
arm's length or any partnership or trust of which the recipient or person is a
member or beneficiary, respectively) does not receive (and is not deemed to
receive) dividends in respect of more than 10% of the issued and outstanding
Exchangeable Shares.
A Dreco Shareholder that is a "Canadian-controlled private corporation" (as
defined in the Canadian Tax Act) may be liable to pay an additional refundable
tax of 6 2/3% on dividends or deemed dividends that are not deductible in
computing taxable income.
The Exchangeable Shares will be "taxable preferred shares" and "short-term
preferred shares" for purposes of the Canadian Tax Act. Accordingly, Dreco will
be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax Act on dividends
paid or deemed to be paid on the Exchangeable Shares and will be entitled to
deduct an amount equal to 9/4 of the tax payable in computing its taxable income
under Part I of the Canadian Tax Act. Dividends received or deemed to be
received on the Exchangeable Shares will not be subject to the 10% tax under
Part IV.1 of the Canadian Tax Act applicable to certain corporations.
(ii) Dividends on National-Oilwell Common Stock
Dividends on National-Oilwell Common Stock will be included in the
recipient's income for the purposes of Canadian Tax Act. Such dividends received
by an individual Dreco Shareholder will not be subject to the gross-up and
dividend tax credit rules in the Canadian Tax Act. A corporation that is a
shareholder will include such dividends in computing its income and generally
will not be entitled to deduct the amount of such dividends in computing its
taxable income. A Dreco Shareholder that is a Canadian-controlled private
corporation may be liable to pay an additional refundable tax of 6 2/3% on such
dividends. United States
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non-resident withholding tax on such dividends will be eligible for foreign tax
credit or deduction treatment where applicable under the Canadian Tax Act.
Redemption or Exchange of Exchangeable Shares. On the redemption
(including a retraction) of an Exchangeable Share by Dreco, the holder of an
Exchangeable Share will be deemed to have received a dividend equal to the
amount, if any, by which the redemption proceeds (the fair market value at the
time of the National-Oilwell Common Stock received by the shareholder from Dreco
on the redemption plus the Dividend Amount, if any) exceeds the paid-up capital
(for purposes of the Canadian Tax Act) at that time of the Exchangeable Share so
redeemed. The amount of any such deemed dividend will be subject to the tax
treatment accorded to dividends described above under "-- Dividends -- Dividends
on Exchangeable Shares." On the redemption, the holder of an Exchangeable Share
will also be considered to have disposed of the Exchangeable Share for proceeds
of disposition equal to the redemption proceeds less the amount of any such
deemed dividend. A holder will in general realize a capital loss (or a capital
gain) equal to the amount by which the adjusted cost base to the holder of the
Exchangeable Share and any reasonable costs of disposition exceeds (or is less
than) such proceeds of disposition. See "-- Taxation of Capital Gain or Capital
Loss" below. In the case of a shareholder that is a corporation, in some
circumstances the amount of any such deemed dividend may be treated as proceeds
of disposition and not as a dividend.
On the exchange of an Exchangeable Share by the holder thereof with
National-Oilwell for National-Oilwell Common Stock, the holder will in general
realize a capital gain (or a capital loss) equal to the amount by which the
proceeds of disposition for the Exchangeable Share, net of any reasonable costs
of disposition, exceed (or are less than) the adjusted cost base to the holder
of the Exchangeable Share. For these purposes, the proceeds of disposition will
be the fair market value of a share of National-Oilwell Common Stock at the time
of the exchange plus the Dividend Amount, if any, received by the holder as part
of the exchange consideration. See "-- Taxation of Capital Gain or Capital Loss"
below.
BECAUSE OF THE POTENTIALLY ADVERSE TAX CONSEQUENCES OF THE RECEIPT OF A
DEEMED DIVIDEND UPON THE REDEMPTION (INCLUDING A RETRACTION) OF AN EXCHANGEABLE
SHARE BY DRECO, HOLDERS OF EXCHANGEABLE SHARES SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS CONCERNING THE POSSIBLE BENEFITS IN THEIR PARTICULAR CIRCUMSTANCES OF
EXCHANGING WITH NATIONAL-OILWELL FOR NATIONAL-OILWELL COMMON STOCK OR OTHERWISE
DISPOSING OF THEIR EXCHANGEABLE SHARES.
Taxation of Capital Gain or Capital Loss. Three-quarters of any capital
gain (the "taxable capital gain") realized on a retraction, redemption, exchange
or other disposition of Exchangeable Shares or disposition of National-Oilwell
Common Stock will be included in the Dreco Shareholder's income for the year of
disposition. Three-quarters of any capital loss so realized (the "allowable
capital loss") may be deducted by the holder against taxable capital gains for
the year of disposition. Any excess of allowable capital losses over taxable
capital gains of the Dreco Shareholder for the year of disposition may be
carried back up to three taxation years or forward indefinitely and deducted
against net taxable capital gains in those other years.
Capital gains realized by an individual or trust, other than certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act. A Dreco Shareholder that is a Canadian-controlled private corporation
may be liable to pay an additional refundable tax of 6 2/3% on taxable capital
gains.
If the holder of an Exchangeable Share is a corporation, the amount of any
capital loss arising from a disposition or deemed disposition of an Exchangeable
Share may be reduced by the amount of dividends received or deemed to have been
received by it on such share or on the Dreco Common Shares previously owned by
such holder, to the extent and under circumstances prescribed by the Canadian
Tax Act. Similar rules may apply where a corporation is a member of a
partnership or a beneficiary of a trust that owns Exchangeable Shares or where a
trust or partnership of which a corporation is a beneficiary or a member is a
member of a partnership or a beneficiary of a trust that owns Exchangeable
Shares.
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Acquisition and Disposition of National-Oilwell Common Stock. The cost of
National-Oilwell Common Stock received on the redemption (including a
retraction) or exchange of an Exchangeable Share will be equal to the fair
market value of National-Oilwell Common Stock at the time of such event.
A disposition or deemed disposition of National-Oilwell Common Stock by a
holder will generally result in a capital gain (or capital loss) equal to the
amount by which the proceeds of disposition, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
National-Oilwell Common Stock.
Foreign Property Information Reporting. A holder of National-Oilwell
Common Stock who is a "specified Canadian entity" for a taxation year or fiscal
period and whose total cost amount of "specified foreign property," including
such shares, at any time in the year or fiscal period exceeds Canadian $100,000
will be required to file an information return for the year or period disclosing
prescribed information, including the holder's cost amount, any dividends
received in the year and any gains or losses realized in the year in respect of
such property. A specified Canadian entity means a taxpayer resident in Canada
in the year, other than a person exempt from tax under Part I of the Canadian
Tax Act, a non-resident-owned investment corporation, a mutual fund corporation,
a mutual fund trust and certain other trusts, corporations and partnerships.
Dissenting Shareholders. A dissenting Dreco Shareholder will be considered
to have realized a deemed dividend and capital gain (or capital loss) based on
proceeds equal to the fair value of the Dreco Common Shares held by such holder
determined as of the appropriate date, computed as generally described above in
the case of a redemption (including a retraction) of an Exchangeable Share by
Dreco for National-Oilwell Common Stock under "-- Redemption or Exchange of
Exchangeable Shares." The amount of any such deemed dividend received by an
individual will be included in computing the individual's income and will be
subject to the gross-up and dividend tax credit rules normally applicable to
taxable dividends received from taxable Canadian corporations. The amount of any
such deemed dividend received by a corporation (except to the extent that it may
in some circumstances be treated as proceeds of disposition and not as a
dividend) will be included in computing its income, will normally be deductible
in computing its taxable income and may be subject to tax under Part IV of the
Canadian Tax Act if received by a private corporation and certain other
corporations as described under "-- Dividends -- Dividends on Exchangeable
Shares" above. Dissenting Dreco Shareholders should consult their own tax
advisors in respect of the treatment of such deemed dividends. Additional income
tax considerations may be relevant to dissenting Dreco Shareholders who fail to
perfect or withdraw their claims pursuant to the right of dissent.
Foreign Property. Provided that they are listed on a prescribed stock
exchange in Canada (which currently includes the TSE), the Exchangeable Shares
will not be foreign property under the Canadian Tax Act for trusts governed by
registered pension plans, registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans or for certain other
tax-exempt persons. The Voting Rights and the Exchange Rights will be foreign
property under the Canadian Tax Act. However, as indicated above, Dreco is of
the view that the fair market value of these rights is nominal. National-Oilwell
Common Stock will be foreign property under the Canadian Tax Act.
Qualified Investments. Provided that they are listed on a prescribed stock
exchange in Canada (which currently includes the TSE), the Exchangeable Shares
will be qualified investments under the Canadian Tax Act for trusts governed by
registered retirement saving plans, registered retirement income funds and
deferred profit sharing plans. In certain other circumstances, such shares may
also be qualified investments. National-Oilwell Common Stock will be a qualified
investment under the Canadian Tax Act for such plans as long as such shares
remain listed on the NYSE (or are listed on certain other prescribed exchanges).
The Voting Rights and the Exchange Rights will not be qualified investments
under the Canadian Tax Act. However, as indicated above, Dreco is of the view
that the fair market value of these rights is nominal.
DRECO SHAREHOLDERS NOT RESIDENT IN CANADA
The following is applicable to holders of Dreco Common Shares who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time during which they
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have held Dreco Common Shares or will hold Exchangeable Shares or
National-Oilwell Common Stock and to whom such shares are not "taxable Canadian
property" (as defined in the Canadian Tax Act) and who do not use or hold and
are not deemed to use or hold such shares in connection with carrying on a
business in Canada.
Generally, Dreco Common Shares, Exchangeable Shares and National-Oilwell
Common Stock will not be taxable Canadian property provided that such shares are
listed on a prescribed stock exchange (which currently includes the TSE and
NYSE), the holder does not use or hold, and is not deemed to use or hold, such
shares in connection with carrying on a business in Canada and the holder,
persons with whom the holder does not deal at arm's length, or the holder and
such persons, has not owned (or had under option) 25% or more of the issued
shares of any class or series of the capital stock of Dreco or National-Oilwell
at any time within five years preceding the date of disposition. Dreco has
applied for the listing of the Exchangeable Shares on the TSE, and
National-Oilwell has indicated that it intends to use its best efforts to cause
Dreco to maintain such listing. National-Oilwell has indicated that it will
maintain the listing of National-Oilwell Common Stock on the NYSE.
A holder of Dreco Common Shares will not be subject to tax under the
Canadian Tax Act on the exchange of Dreco Common Shares for Exchangeable Shares,
on the exchange of an Exchangeable Share for National-Oilwell Common Stock
(except to the extent the exchange takes place by way of a redemption of an
Exchangeable Share) or on the sale or other disposition of an Exchangeable Share
or National-Oilwell Common Stock. A holder whose Exchangeable Shares are
redeemed (either under Dreco's redemption right or pursuant to the holder's
retraction rights) will be deemed to receive a dividend as described above for
shareholders resident in Canada under "-- Shareholders Resident in
Canada -- Redemption or Exchange of Exchangeable Shares." The amount of such
deemed dividend will be subject to the tax treatment accorded to dividends
described below.
Dividends paid or deemed to be paid on the Exchangeable Shares are subject
to non-resident withholding tax under the Canadian Tax Act at the rate of 25%,
although such rate may be reduced under the provisions of an applicable income
tax treaty. Under the Tax Treaty, the rate is generally reduced to 15% in
respect of dividends paid to a person who is the beneficial owner and who is
resident in the United States for purposes of the Tax Treaty.
A dissenting Dreco Shareholder will be considered to have realized a deemed
dividend computed as generally described above in the case of shareholders
resident in Canada. See "-- Shareholders Resident in Canada -- Dissenting
Shareholders" above. The amount of any such deemed dividend will be subject to
the tax treatment accorded to dividends described immediately above. Additional
income tax considerations may be relevant to dissenting Dreco Shareholders who
fail to perfect or withdraw their claims pursuant to the right of dissent.
MODIFICATION OF DRECO OPTIONS
In the opinion of Blake, Cassels & Graydon, the following is applicable to
holders of Dreco Options under which Dreco has agreed to issue Dreco Common
Shares and which holders (i) participate in the Arrangement, (ii) are (for the
purposes of the Canadian Tax Act) resident or deemed to be resident in Canada,
(iii) were employees of Dreco (or of a corporation with which Dreco did not deal
at arm's length) at the time of receipt of such Dreco Options, (iv) received
such Dreco Options from Dreco by reason of employment and (v) were, at all
relevant times, dealing at arm's length with Dreco and National-Oilwell.
Provided that National-Oilwell does not deal at arm's length with Dreco at
the time of the modification of the Dreco Options under the Arrangement and the
holder receives no consideration for a Dreco Option other than the modified
option, the holder of a Dreco Option will be deemed not to have disposed of the
Dreco Option, and the modified option will be deemed to be the same option as,
and a continuation of, the Dreco Option. Provided that the National-Oilwell
Common Stock constitutes prescribed shares under section 6204 of the regulations
under the Canadian Tax Act at all relevant times, the same Canadian federal
income tax considerations will apply on the disposition or exercise of a
modified option as would have applied on the
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disposition or exercise of the Dreco Option prior to the Arrangement. Generally,
common shares will be prescribed shares under section 6204 of the regulations.
Holders of Dreco Options who exercise their rights of dissent, or who are
not resident and are not deemed to be resident in Canada, should consult their
own tax advisors concerning the income tax considerations relevant to them.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS TO DRECO SHAREHOLDERS
SHAREHOLDERS THAT ARE UNITED STATES HOLDERS
The following is a summary of the material United States federal income tax
considerations generally applicable to Dreco Shareholders that are "United
States persons," as defined for United States federal income tax purposes, and
that hold Dreco Common Shares as capital assets ("United States Holders"),
arising from and relating to the Arrangement, including the receipt and
ownership of Exchangeable Shares and National-Oilwell Common Stock. For United
States federal income tax purposes, "United States persons" are United States
citizens or residents, corporations or partnerships organized under the laws of
the United States or any state thereof, estates subject to United States federal
income tax on their income regardless of source and trusts subject to the
primary supervision of a court within the United States and control of a United
States fiduciary as described in Section 7701(a)(30) of the U.S. Code.
This summary is based on United States federal income tax law in effect as
of the date hereof. No statutory, judicial, or administrative authority exists
which directly addresses certain of the United States federal income tax
consequences of the issuance and ownership of instruments and rights comparable
to the Exchangeable Shares, the Voting Rights, the Exchange Rights and the Call
Rights. Consequently (as discussed more fully below), some aspects of the United
States federal income tax treatment of the Arrangement, including the receipt
and ownership of Exchangeable Shares and the exchange of Exchangeable Shares for
shares of National-Oilwell Common Stock, are not certain. No advance income tax
ruling has been sought or obtained from the United States Internal Revenue
Service ("IRS") regarding the United States federal income tax consequences of
any of the transactions described herein.
This summary does not address aspects of United States taxation other than
United States federal income taxation, nor does it address all aspects of United
States federal income taxation that may be applicable to particular United
States Holders, including, without limitation, holders of Dreco Options and
holders of Dreco Common Shares acquired as a result of the exercise of employee
stock options and United States Holders that own, or have owned during a
five-year lookback period, 10% or more of the voting power of the voting stock
of Dreco. In addition, this summary does not address the United States state or
local tax consequences or the foreign tax consequences of the Arrangement or the
receipt and ownership of the Exchangeable Shares or shares of National-Oilwell
Common Stock.
UNITED STATES HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN
TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF
EXCHANGEABLE SHARES, VOTING RIGHTS, EXCHANGE RIGHTS AND SHARES OF
NATIONAL-OILWELL COMMON STOCK.
Characterization of the Arrangement for United States Federal Income Tax
Purposes. Fulbright & Jaworski L.L.P., United States counsel to Dreco ("U.S.
Counsel"), has delivered its opinion to Dreco, which opinion is attached as an
exhibit to the Registration Statement on Form S-4 of which this Joint Proxy
Statement/Prospectus is a part, that, although there is no direct authority
addressing the proper treatment of the Arrangement for United States federal
income tax purposes and, therefore, the treatment of the Arrangement is not free
from doubt, it is more likely than not that the Arrangement will qualify as a
"reorganization" within the meaning of Section 368(a) of the U.S. Code with
respect to United States Holders of Dreco Common Shares who receive Exchangeable
Shares pursuant to the Arrangement. Because there is no direct authority
addressing the proper treatment of the Arrangement for United States federal
income tax purposes, the treatment of the Arrangement for United States federal
income tax purposes is subject to significant uncertainty. Accordingly, there
can be no assurance that the IRS would not challenge the status of the
Arrangement as a reorganization or that, if challenged, a court would not agree
with the IRS.
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The foregoing opinion is subject to certain customary assumptions,
qualifications and similar matters, as set forth therein.
The following is a summary of the federal income tax consequences of the
Arrangement and is not part of the Opinion of Fulbright & Jaworski L.L.P.
Receipt of Exchangeable Shares. Assuming the Arrangement qualifies as a
reorganization under Section 368(a) of the Code, the following federal income
tax consequences should occur: (i) except as otherwise provided below, a United
States Holder of Dreco Common Shares who receives Exchangeable Shares pursuant
to the Arrangement should not recognize any gain or loss with respect to the
receipt of such shares; (ii) except as provided below, the aggregate basis of
the Exchangeable Shares received pursuant to the Arrangement by a United States
Holder of Dreco Common Shares should equal such holder's aggregate tax basis in
the shares of Dreco Common Shares surrendered pursuant to the Arrangement
reduced by the tax basis allocated to fractional share interests for which cash
is received; (iii) the holding period of the Exchangeable Shares received by a
United States Holder of Dreco Common Shares pursuant to the Arrangement should
include the holding period of the Dreco Common Shares surrendered in exchange
therefor; and (iv) cash payments in lieu of a fractional Exchangeable Share will
be treated as if a fractional Exchangeable Share had been received in the
Arrangement and then redeemed by Dreco. Such redemption should qualify as a
distribution in full payment in exchange for the fractional share rather than a
distribution of a dividend. Accordingly, a Dreco Shareholder receiving cash in
lieu of a fractional share will recognize capital gain or loss upon such payment
equal to the difference, if any, between such shareholder's tax basis in the
fractional share (as described in clause (ii) above) and the amount of cash
received. Such gain or loss will be capital gain or loss if the Dreco Common
Share is held as a capital asset at the Effective Time.
If the Arrangement fails to qualify as a reorganization, a United States
Holder of the Dreco Common Shares who receives Exchangeable Shares pursuant to
the Arrangement would recognize gain or loss equal to the difference between the
fair market value of the Exchangeable Shares and such holder's tax basis in the
Dreco Common Shares exchanged therefor.
Although the value of the Voting Rights and Exchange Rights received and
any Call Rights deemed to be conveyed by Dreco Shareholders who receive
Exchangeable Shares pursuant to the Arrangement is uncertain, Dreco believes
that such Voting Rights, Exchange Rights and Call Rights will have only nominal
value and, therefore, that their receipt or conveyance, as the case may be, will
not result in any material United States federal income tax consequences.
Further, the exchange of certain of the Call Rights for the Voting Rights and
Exchange Rights may not be taxable to United States Holders because United
States Holders and National-Oilwell may be deemed to have granted purchase
options to each other, which grants would not generally be treated as taxable
events for United States federal income tax purposes. It is possible, however,
that the Voting Rights, Exchange Rights and Call Rights have greater than
nominal value and that the transfer or receipt of such rights is taxable. In
such event, the receipt of the Voting Rights and Exchange Rights and the
conveyance of certain of the Call Rights could generate taxable gain or loss.
If the Voting Rights and Exchange Rights have greater than nominal value
and such rights are deemed to have been transferred by Dreco rather than
National-Oilwell in redemption of Dreco Common Shares, a United States Holder
would recognize dividend income equal to the value of such rights to the extent
of the current and accumulated earnings and profits of Dreco (as determined
under United States federal income tax principles) unless such deemed redemption
is either "not essentially equivalent to a dividend" or "substantially
disproportionate," as such terms are defined in Section 302(b) of the U.S. Code.
If the deemed redemption is "substantially disproportionate" or "not essentially
equivalent to a dividend," any gain recognized by a United States Holder would
be capital gain. The tax basis of the Exchangeable Shares received pursuant to
the Arrangement will not include the tax basis of any Dreco Common Shares deemed
to have been redeemed by Dreco. United States Holders should consult their tax
advisors with respect to the potential tax consequences of the receipt of the
Voting Rights and Exchange Rights pursuant to the Arrangement.
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Requirement of Notice Filing. Any United States Holder that receives the
Exchangeable Shares in exchange for Dreco Common Shares will be required to file
a notice with the IRS on or before the last date for filing a United States
federal income tax return for the holder's taxable year in which the Arrangement
occurs. The notice must contain certain information specifically enumerated in
the United States Treasury regulations, and United States Holders are advised to
consult their tax advisors for assistance in preparing such notice.
If a United States Holder required to give notice as described above fails
to give such notice, and if the United States Holder further fails to establish
reasonable cause for the failure, then the Commissioner of IRS (the
"Commissioner") will be required to determine, based on all the facts and
circumstances, whether the exchange of Dreco Common Shares for Exchangeable
Shares is eligible for nonrecognition treatment. In making this determination,
the Commissioner may conclude (i) that the exchange is eligible for
nonrecognition treatment, despite such noncompliance, (ii) that the exchange is
eligible for nonrecognition treatment, provided that certain other conditions
imposed by the United States Treasury regulations are satisfied, or (iii) that
the exchange is not eligible for nonrecognition treatment and that any gain
realized will be recognized and such recognized gain will be taken into account
for purposes of increasing the tax basis of the Exchangeable Shares received
pursuant to the Arrangement. Nevertheless, the failure of any one United States
Holder to satisfy such requirements should not bar other United States Holders
that do satisfy such requirements from receiving nonrecognition treatment with
respect to the exchange of their Dreco Common Shares for Exchangeable Shares
pursuant to the Arrangement.
Receipt of National-Oilwell Common Stock. A United States Holder of Dreco
Common Shares who elects to receive National-Oilwell Common Stock pursuant to
the Arrangement generally will recognize gain or loss on the receipt of the
shares of National-Oilwell Common Stock as if such National-Oilwell Common Stock
were received in exchange for such Dreco Common Shares. Such gain or loss will
be equal to the difference between the fair market value of the shares of
National-Oilwell Common Stock at the time of the exchange and the United States
Holder's tax basis in the Dreco Common Shares exchanged therefor. The gain or
loss should be capital gain or loss. Capital gain or loss will be long-term
capital gain or loss if the Dreco Common Shares have been held for more than one
year at the time of the exchange. Gain recognized on the exchange of Dreco
Common Shares for shares of National-Oilwell Common Stock generally will be
treated as United States source gain. The United States Holder will take as such
holder's tax basis in the shares of National-Oilwell Common Stock the fair
market value of the shares of National-Oilwell Common Stock received by the
United States Holder in the exchange, and such holder's holding period will
begin on the day after such exchange.
Exchange of Exchangeable Shares. It is anticipated that (subject to
certain exceptions described below) a United States Holder that exchanges the
Exchangeable Shares for shares of National-Oilwell Common Stock (including an
exchange upon the occurrence of an Automatic Redemption Date) generally will
recognize gain or loss on the receipt of the shares of National-Oilwell Common
Stock in exchange for such Exchangeable Shares. Such gain or loss will be equal
to the difference between the fair market value of the shares of
National-Oilwell Common Stock at the time of the exchange and the United States
Holder's tax basis in the Exchangeable Shares exchanged therefor. The gain or
loss will be capital gain or loss, except that, with respect to any Dividend
Amount, ordinary income may be recognized by the holder thereof. Capital gain or
loss will be long-term capital gain or loss if the Exchangeable Shares (together
with the previously held Dreco Common Shares) have been held for more than one
year at the time of the exchange. Gain recognized on the exchange of
Exchangeable Shares for shares of National-Oilwell Common Stock generally will
be treated as United States source gain. The United States Holder will take as
such holder's tax basis in the shares of National-Oilwell Common Stock the fair
market value of the shares of National-Oilwell Common Stock received by the
United States Holder in the exchange, and such holder's holding period will
begin on the day after such exchange.
In view of the likelihood of the recognition of gain or loss upon the
exchange of the Exchangeable Shares for shares of National-Oilwell Common Stock,
United States Holders may wish to consider delaying such exchange until such
time as they intend to dispose of the shares of National-Oilwell Common Stock
receivable in exchange for their Exchangeable Shares or (as discussed below)
until such time as National-
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Oilwell will own at least 80% of all of the then issued and outstanding
Exchangeable Shares either at the time of or as a result of the exchange.
Under certain limited circumstances, the exchange by a United States Holder
of Exchangeable Shares for shares of National-Oilwell Common Stock may be
characterized as a tax-free exchange. First, an exchange of Exchangeable Shares
for shares of National-Oilwell Common Stock generally may be characterized as a
tax-free exchange if, at the time of such exchange, (i) at least 80% of the then
outstanding Exchangeable Shares are held by National-Oilwell and (ii) in such
exchange, National-Oilwell, rather than Dreco, acquires the Exchangeable Shares
in exchange for shares of National-Oilwell Common Stock pursuant to the exercise
of its Call Rights. In any case, the exchange would not be tax free unless
certain other requirements are satisfied, which, in turn, will depend upon facts
and circumstances existing at the time of the exchange and cannot be accurately
predicted as of the date hereof. If such exchange did qualify as a tax-free
exchange, a United States Holder's tax basis in the shares of National-Oilwell
Common Stock received would be equal to such holder's tax basis in the
Exchangeable Shares exchanged therefor. The holding period of the shares of
National-Oilwell Common Stock received by such United States Holder should
include the holding period of the Exchangeable Shares exchanged therefor, which
in turn, should include the holding period of the Dreco Common Shares exchanged
pursuant to the Plan of Arrangement, provided that such Dreco Common Shares and
Exchangeable Shares have been held as capital assets immediately prior to the
Arrangement and the subsequent exchange, respectively.
Distributions on the Exchangeable Shares. Although such treatment is not
free from doubt, Dreco and National-Oilwell intend to treat dividends, if any,
paid on the Exchangeable Shares as dividends from Dreco, rather than from
National-Oilwell. The following discussion assumes that such dividends will be
treated as dividends from Dreco. A United States Holder of Exchangeable Shares
generally will be required to include in gross income as ordinary income
dividends paid on the Exchangeable Shares to the extent paid out of the earnings
and profits of Dreco, as determined under United States federal income tax
principles. Such dividends generally will be treated as foreign source passive
income for foreign tax credit limitation purposes. Under the current Tax Treaty,
such distributions will be subject to Canadian withholding tax at a rate of 15%.
Subject to certain limitations of United States federal income tax law, a United
States Holder generally should be entitled to credit such withholding tax
against such holder's United States federal income tax liability or to deduct
such tax in computing United States taxable income.
Dissenters. A United States Holder who exercises such holder's right to
dissent from the Arrangement will recognize gain or loss on the exchange of such
holder's Dreco Common Shares for cash in an amount equal to the difference
between the amount of cash received and such holder's basis in the Dreco Common
Shares. Such gain or loss will be capital gain or loss if the Dreco Common
Shares were held as capital assets at the Effective Time of the Arrangement and
will be long-term capital gain or loss if the Dreco Common Shares have been held
for more than one year at the Effective Time.
Passive Foreign Investment Company Considerations. For United States
federal income tax purposes, Dreco generally will be classified as a passive
foreign investment company (a "PFIC") for any taxable year during which either
(i) 75% or more of its gross income is passive income (as defined for United
States federal income tax purposes) or (ii) on average for such taxable year,
50% or more of its assets (by value) produce or are held for the production of
passive income. For purposes of applying the foregoing tests, the assets and
gross income of corporations with respect to which Dreco owns at least 25% of
the stock (by value) will be attributed to Dreco.
While there can be no assurance with respect to the classification of Dreco
as a PFIC, Dreco believes that it did not constitute a PFIC during its taxable
years ending prior to consummation of the Arrangement. At the present time,
Dreco and National-Oilwell intend to endeavor to cause Dreco to avoid PFIC
status in the future, although there can be no assurance that they will be able
to do so or that their intent will not change.
For purposes of applying the 50% asset test following the Arrangement,
Dreco's assets must be measured by their adjusted tax bases (as calculated in
order to compute earnings and profits for United States federal income tax
purposes) instead of by value, subject to certain adjustments. As a result, it
is possible that Dreco will be a PFIC for taxable years ending after the
Arrangement even though less than 50% of Dreco's assets
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(measured by the fair market value of such assets) constitute passive assets.
After the Arrangement, Dreco intends to monitor its status regularly, and
promptly following the end of each taxable year Dreco will notify United States
Holders of Exchangeable Shares if it believes that Dreco was a PFIC for that
taxable year.
Although the matter is not free from doubt, if Dreco were a PFIC at any
time during a particular United States Holder's holding period for its Dreco
Common Shares, and the United States Holder had not made an election to treat
Dreco as a qualified electing fund (a "QEF") under Section 1295 of the U.S. Code
(a "QEF Election"), then such United States Holder might be required to
recognize gain upon the exchange of its Dreco Common Shares for Exchangeable
Shares. In the event that gain recognition were so required, the amount of such
gain would be equal to the excess of the fair market value of the Dreco Common
Shares over their adjusted tax bases. Further, in such event, any exchange of
Exchangeable Shares for shares of National-Oilwell Common Stock would be taxable
under the rules described below.
If Dreco is a PFIC following the Arrangement during a United States
Holder's holding period for such holder's Exchangeable Shares, and the United
States Holder does not make a QEF Election, then (i) the United States Holder
would be required to allocate income recognized upon receiving certain excess
dividends with respect to, and gain recognized upon the disposition of, such
United States Holder's Exchangeable Shares (including upon the exchange of
Exchangeable Shares for shares of National-Oilwell Common Stock) ratably over
the United States Holder's holding period for such Exchangeable Shares, (ii) the
amount allocated to each year other than (x) the year of the excess dividend
payment or disposition of the Exchangeable Shares or (y) any year prior to the
beginning of the first taxable year of Dreco for which it was a PFIC, would be
subject to tax at the highest rate applicable to individuals or corporations, as
the case may be, for the taxable year to which such income is allocated, and an
interest charge would be imposed upon the resulting tax attributable to each
such year (which charge would accrue from the due date of the return for the
taxable year to which such tax was allocated), and (iii) amounts allocated to
periods described in (x) and (y) will be taxable to the United States Holder as
ordinary income.
If the United States Holder makes a QEF Election, then the United States
Holder generally will be currently taxable on such holder's pro rata share of
Dreco's ordinary earnings and net capital gains (at ordinary income and capital
gains rates respectively) for each taxable year of Dreco in which Dreco is
classified as a PFIC, even if no dividend distributions are received by such
United States Holder, unless such United States Holder makes an election to
defer such taxes. If Dreco believes that it was a PFIC for a taxable year, it
will provide United States Holders of Exchangeable Shares with information
sufficient to allow eligible holders to make a QEF Election and report and pay
any current or deferred taxes due with respect to their pro rata shares of
Dreco's ordinary earnings and profits and net capital gains for such taxable
year. United States Holders should consult their tax advisors concerning the
merits and mechanics of making a QEF Election and other relevant tax
considerations if Dreco is a PFIC for any taxable year.
The foregoing summary of the possible application of the PFIC rules to
Dreco and the United States Holders of Dreco Common Shares is only a summary of
certain material aspects of those rules. Because the United States federal tax
consequences to a United States Holder of Dreco Common Shares under the PFIC
provisions are significant, United States Holders of Dreco Common Shares are
urged to discuss those consequences with their tax advisors.
SHAREHOLDERS THAT ARE NOT UNITED STATES HOLDERS
The following summary is applicable to holders of Dreco Common Shares that
are not United States Holders ("non-United States Holders").
A non-United States Holder generally will not be subject to United States
federal income tax on gain (if any) recognized on the receipt of the
Exchangeable Shares or shares of National-Oilwell Common Stock, on the sale or
exchange of the Dreco Common Shares or the Exchangeable Shares, or on the sale
or exchange of shares of National-Oilwell Common Stock, unless (i) such gain is
attributable to an office or fixed place of business and is effectively
connected with a trade or business of the non-United States Holder in the United
States, or, if a tax treaty applies, is attributable to a permanent
establishment maintained by the non-United States Holder in the United States,
or (ii) the non-United States Holder is an individual who holds the Dreco
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Common Shares, the Exchangeable Shares or the National-Oilwell Common Stock, as
the case may be, as capital assets and is present in the United States for 183
days or more in the taxable year of disposition, and certain other conditions
are satisfied.
Dreco and National-Oilwell intend to treat dividends, if any, received by a
non-United States Holder with respect to the Exchangeable Shares as dividends
from Dreco rather than from National-Oilwell and as not subject to United States
withholding tax, and Dreco and National-Oilwell do not intend that Dreco or
National-Oilwell will withhold any amounts in respect of such tax from such
dividends. There is some possibility, however, that the IRS may assert that
United States withholding tax is payable with respect to any dividends paid on
the Exchangeable Shares to non-United States Holders. In such case, a non-United
States Holder of Exchangeable Shares could be subject to United States
withholding tax at a rate of 30%, which rate may be reduced by an applicable
income tax treaty in effect between the United States and the non-United States
Holder's country of residence (generally 15% on dividends paid to residents of
Canada under the Tax Treaty).
Dividends received by non-United States Holders with respect to the
National-Oilwell Common Stock generally will be subject to United States
withholding tax at a rate of 30%, which rate may be subject to reduction by an
applicable income tax treaty (generally 15% on dividends paid to residents of
Canada under the Tax Treaty).
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NATIONAL-OILWELL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
National-Oilwell is a worldwide leader in the design, manufacture and sale
of machinery and equipment and in the distribution of maintenance, repair and
operating ("MRO") products used in oil and gas drilling and production.
National-Oilwell's revenues are directly related to the level of worldwide oil
and gas drilling and production activities and the profitability and cash flow
of oil and gas companies and drilling contractors, which in turn are affected by
current and anticipated prices of oil and gas.
During 1996, National-Oilwell completed two significant capital
transactions. First, in January 1996, National-Oilwell acquired the operations
of its predecessor partnership, resulting in the incurrence of significant
amounts of debt and related interest expense. Second, on October 29, 1996,
National-Oilwell sold 4.6 million shares of its common stock through an initial
public offering (the "IPO"). Net proceeds from the IPO of approximately $72
million were used to repay debt incurred in connection with the acquisition.
During the second quarter of 1997, the Company completed the acquisition of
the drilling controls business of Ross Hills Control and its affiliate for $19
million in cash, and purchased 100% of the common stock of PEP, Inc. in exchange
for 400,000 shares of National-Oilwell common stock. The transactions did not
have a material effect on the Company's historical financial statements.
On May 14, 1997, the Company signed a definitive agreement to acquire 100%
of the common stock of Dreco Energy Services Ltd. in a pooling of interests
transaction. Subject to adjustments in the Exchange Ratio, the Company will
issue common stock valued at approximately $440 million. The transaction is
subject to various conditions, including stockholder approval of both companies.
Closing of the transaction is anticipated during the third quarter.
RESULTS OF OPERATIONS
The following table and the financial information in the discussion of the
Products and Technology and Distribution Services segments provide certain
information that segregates the results of operations of previously sold product
lines and businesses in order to focus on ongoing operations (in millions):
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------- --------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
Revenues
Products and Technology..................... $109.5 $ 81.0 $181.6 $146.5 $187.9
Distribution Services....................... 294.4 237.3 518.7 432.3 415.7
Eliminations................................ (29.9) (23.7) (51.7) (33.0) (60.0)
------ ------ ------ ------ ------
Ongoing Operations....................... 374.0 294.6 648.6 545.8 543.6
Disposed Businesses......................... -- -- -- -- 18.5
------ ------ ------ ------ ------
Total............................... $374.0 $294.6 $648.6 $545.8 $562.1
====== ====== ====== ====== ======
Operating Income
Products and Technology..................... $ 16.5 $ 8.1 $ 21.3 $ 7.2 $ 7.0
Distribution Services....................... 11.4 7.3 17.5 9.4 9.0
Corporate................................... (2.3) (2.0) (4.1) (2.9) (2.9)
------ ------ ------ ------ ------
Ongoing Operations....................... 25.6 13.4 34.7 13.7 13.1
Disposed Businesses......................... -- -- -- -- 2.1
Special Charges (Credits)................... -- -- 16.6 (8.5) (13.9)
------ ------ ------ ------ ------
Total............................... $ 25.6 $ 13.4 $ 18.1 $ 22.2 $ 29.1
====== ====== ====== ====== ======
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Products and Technology
The Products and Technology segment designs and manufactures a large line
of proprietary products, including drawworks, mud pumps, power swivels,
electrical control systems and reciprocating pumps. A substantial installed base
of these products results in a recurring replacement parts and maintenance
business. Drilling pump expendable products are sold for maintenance of
National-Oilwell's and other manufacturers' equipment. Sales of new capital
equipment can result in large fluctuations in volume between periods depending
on the size and timing of the shipment of orders.
Products and Technology revenues increased $28.5 million (35%) in the first
half of 1997 as compared to 1996 due primarily to the inclusion of $6.8 million
of revenues generated by companies acquired during the second quarter of 1997
and an increase in demand for drilling capital equipment and spare parts, fluid
end expendable parts, and reciprocating pumps and associated parts. Operating
income for the Products and Technology segment increased $8.4 million in the
first half of 1997 as compared to the prior year, representing 29% of the
revenue increase. Approximately $1.2 million of the increase in operating income
is attributable to revenues from the companies acquired in the second quarter,
with the balance resulting from the higher revenues generated by an
industry-wide increase in worldwide demand for a broad range of the type of
products sold by the Products and Technology segment. As revenues have increased
without the need to add significant amounts of overhead, operating income as a
percentage of revenues has risen.
Revenues during 1996 increased $35.1 million (24%) over 1995 due to an
increase in all areas, including new and refurbished drilling and production
equipment, spare parts and expendable products. Revenues in 1995 were down $41.4
million (22%) from 1994, in large part due to the absence of $33 million in
revenues associated with an international rig package that was sold in 1994.
Operating income for the Products and Technology segment increased $14.1
million in 1996 as compared to the prior year as a result of higher revenues,
product mix and the consolidation in late 1995 of National-Oilwell's United
Kingdom manufacturing facility into its Houston location, thereby achieving
lower costs and a more efficient manufacturing process. Operating income
increased slightly in 1995 in spite of the revenue decline primarily as a result
of the consolidation of facilities and other cost reduction initiatives.
Distribution Services
Distribution Services revenues result primarily from the sale of MRO
products from National-Oilwell's network of distribution service centers and
from the sale of well casing and production tubing. These products are purchased
from numerous manufacturers and vendors, including National-Oilwell's Products
and Technology segment. While National-Oilwell has increased revenues and
improved its operating income by entering into alliances and outsourcing
arrangements, improvements in operating results remain primarily dependent on
attaining increased volumes of activity through its distribution service centers
while controlling the fixed costs associated with numerous points of sale.
Revenues during the first six months of 1997 increased $57.1 million (24%)
over the comparable 1996 period as MRO products and tubular products sales
reflected gains of $25 million and $15 million, respectively. Business with
alliance customers caused a substantial portion of this growth. Operating income
increased $4.1 million during the first six months of 1997 compared to the same
period in 1996 due to the higher revenues generated by demand for products
offered by this segment, primarily from improved oilfield industry conditions
throughout North America. As a result of National-Oilwell's leveraging its
existing distribution service center capacity, National-Oilwell has experienced
an increase in operating income as a percentage of revenues. A portion of the
increased margin from the higher revenue levels was offset by higher operating
costs associated with the addition in the second half of 1996 of operating and
administrative personnel in order to better manage assets and in anticipation of
future revenue growth that was achieved in the first half of 1997.
Revenues in 1996 increased by $86.4 million (20%) over 1995 due to an
overall increase in market activity, including a $31.2 million increase in
tubular products sales and a $36.4 million increase in MRO
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products sales. Distribution Services' revenues in 1995 were ahead of the 1994
level by $16.6 million (4%) due to improved general market conditions in North
America.
Operating income increased $8.1 million during 1996 as compared to the same
period in 1995 due to the higher revenue levels, and represented 9.4% of the
revenue increase. Operating income increased in 1995 as compared to 1994 by only
$0.4 million due to a change in product mix, as revenues from lower margin
tubular products increased as a percentage of segment revenues.
Corporate
Corporate charges represent the unallocated portion of centralized and
executive management costs. These costs were $2.9 million in each of 1995 and
1994. Corporate costs were up $1.2 million during 1996, with $0.9 million of the
increase due to the expense of the management fee paid pursuant to the
Management Services Agreement prior to its termination in connection with the
initial public offering. Even though this agreement has terminated, corporate
costs in 1997 are estimated to remain between $4-5 million due to increased
costs required of a public company and due to anticipated merger and acquisition
efforts.
Special Charges (Income)
During 1996, National-Oilwell incurred certain one-time expenses in
connection with its initial public offering of common stock, as follows: (i) the
Management Services Agreement was terminated at a cost of $4.4 million ($2.8
million after tax) and will be paid in quarterly installments of $250,000
through March 31, 2001, subject to certain accelerating events; and (ii)
expenses and payout under National-Oilwell's Value Appreciation Plans. The Value
Appreciation Plans resulted in National-Oilwell recording an expense of $12.2
million ($7.6 million after tax), making a cash payment of $2.9 million at the
time of closing and incurring an obligation to make future annual cash payments
of $.7 million for five years beginning January 17, 1997 and future issuances of
340,926 shares of Common Stock valued at $5.8 million.
During 1995, National-Oilwell recorded a gain of $8.5 million from the sale
of a non-oilfield centrifugal pump and switch valve product line and from the
sale of excess property and equipment of closed manufacturing facilities in the
United Kingdom and Canada. A net gain of $13.9 million was recorded in 1994 from
the sales of several production equipment product lines offset in part by costs
associated with the closure of the United Kingdom facility.
Interest Expense
Interest expense increased substantially during 1996 due to debt incurred
in connection with the acquisition of the predecessor partnership. As a
substantial portion of the debt was repaid with proceeds from the IPO, interest
expense is expected to decline to less than $5 million in 1997 at current debt
levels. Interest expense had declined in 1995 as compared to 1994 due to
reductions in debt made possible by operating profits and proceeds from the
dispositions of various businesses, product lines and assets that generated over
$75 million in cash.
Income Taxes
Due to its partnership status, National-Oilwell was not subject to U.S.
federal or state income taxes prior to 1996 and accordingly the tax provision
during such periods relates to foreign income taxes as computed under Statement
of Financial Accounting Standards ("SFAS") No. 109. Beginning in 1996,
National-Oilwell is subject to U.S. federal and state taxes and recorded a
combined U.S. federal, state and foreign tax rate of 38% for 1996. The combined
rate in 1997 is also expected to approximate this same level, subject to
variation based on the levels of income generated in each taxing jurisdiction.
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Extraordinary Loss
In connection with the IPO, the previous credit facility was replaced by a
new credit facility, resulting in the write-off of $6.4 million ($4.0 million
after tax) in deferred financing costs related to the replaced agreement.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, National-Oilwell had working capital of $148 million, an
increase of $18 million from December 31, 1996. Accounts receivable increased by
$5.7 million, net of acquisitions, during the first six months of 1997 as
revenues increased in the second quarter of 1997. Inventories increased $11.5
million, net of acquisitions, during this period due to specific inventory build
programs and in response to increasing demand for oilfield equipment and
supplies.
National-Oilwell's business has not required large expenditures for capital
equipment in recent years. Total capital expenditures were $1.7 million during
the first six months of 1997 and have averaged $3.8 million per year over the
last three years. Enhancements to information and inventory control systems
represent a large portion of these capital expenditures. Total capital
expenditures of as much as $6 million are anticipated in 1997 to meet
National-Oilwell's operating needs, including further enhancements to
National-Oilwell's information systems. National-Oilwell believes it has
sufficient existing manufacturing capacity to meet current and anticipated
demand over the next twelve months for its products and services. Any
significantly greater increases in demand for oilfield equipment products, to
the extent qualified subcontracting and outsourcing are not available, could
result in additional increases in capital expenditures.
National-Oilwell believes that cash generated from operations and amounts
available under its revolving credit facility will be sufficient to fund
operations, working capital needs, capital expenditure requirements and
financing obligations. National-Oilwell also believes any significant increase
in capital expenditures caused by any need to increase manufacturing capacity
can be funded from operations or through debt financing.
National-Oilwell intends to pursue acquisition candidates, but the timing,
size or success of any acquisition effort and the related potential capital
commitments cannot be predicted. National-Oilwell expects to fund future
acquisitions primarily through cash flow from operations and borrowings,
including the unborrowed portion of its revolving credit facility and/or
issuances of additional equity. There can be no assurance that additional
financing for acquisitions will be available at terms acceptable to
National-Oilwell.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share. SFAS No. 128 is effective for
financial statements for periods ending after December 15, 1997, and earlier
adoption is not permitted. Initial adoption of this standard is not expected to
have a material impact on National-Oilwell's financial position or results of
operations.
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BUSINESS OF NATIONAL-OILWELL
GENERAL
National-Oilwell is a worldwide leader in the design, manufacture and sale
of machinery and equipment and in the distribution of MRO products used in oil
and gas drilling and production. National-Oilwell's machinery and equipment
include drawworks, mud pumps and power swivels, which are the major mechanical
components of rigs used to drill oil and gas wells. Many of these components are
designed specifically for applications in offshore, extended reach and deep land
drilling. National-Oilwell distributes products and provides services from a
network of approximately 115 service centers and from its Houston headquarters.
Further segment financial information is in National-Oilwell Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
Footnote 13 of the Notes to Consolidated Financial Statements.
National-Oilwell's business is dependent on and affected by the level of
worldwide oil and gas drilling and production activity, aging of the worldwide
rig fleet which was generally constructed prior to 1982 and the profitability
and cash flow of oil and gas companies and drilling contractors. Drilling
activity has recently increased in the offshore and deeper land markets, both of
which are particularly well served by the drilling machinery and equipment
manufactured by National-Oilwell. As of December 31, 1996, the worldwide
offshore mobile drilling rig utilization rate was over 90% and the number of
active U.S. land rigs had increased approximately 14% compared to December 31,
1995. As drilling activity has increased, National-Oilwell has experienced
increased demand for its manufactured products and distribution services as
existing rigs are upgraded, refurbished and repaired, new rigs are constructed
and expendable parts are used.
In April 1987, Armco Inc. and USX Corporation formed a partnership to
consolidate their respective oilfield equipment manufacturing and distribution
operations. Prior to such consolidation, each of the separate business
operations had been a leader in the oilfield equipment and distribution
businesses since the late 1800's. Beginning in 1993, a new executive and
operating team was assembled to manage the partnership's business, enhance its
operating performance and build a platform for growth by focusing on markets in
which its product lines are market leaders and which are believed by management
to provide the most significant growth potential. As part of that strategy, the
partnership disposed of certain of its non-core equipment manufacturing
businesses and product lines and reengineered its distribution business. In
January 1996, the new management team and an investor group purchased the
business of the partnership and incorporated National-Oilwell, Inc. as a
Delaware corporation. In October 1996, National-Oilwell sold 4,600,000 shares of
its common stock in an initial public offering and listed its shares on the New
York Stock Exchange.
BUSINESS STRATEGY
National-Oilwell's current business strategy is to enhance its leading
market positions and operating performance by:
Leveraging Its Market Leading Installed Base. National-Oilwell believes
its market leading installed base presents substantial opportunities to capture
a significant portion of any increased level of expenditures by its customers
for the construction of new drilling rigs and equipment as well as the upgrade
and refurbishment of existing drilling rigs and equipment.
Capitalizing on Increasing Demand for Higher Horsepower Drilling
Machinery. National-Oilwell believes the advanced age of the existing fleet of
drilling rigs, coupled with increasing drilling activity involving greater water
depths and extended reach, ultimately will increase the demand for new drilling
rig construction and the upgrading and capacity enhancement of existing rigs.
National-Oilwell's higher horsepower drawworks, mud pumps and power swivels
provide, in many cases, the largest capacities currently available in the
industry.
Building on Distribution Strengths. National-Oilwell has developed and
implemented integrated information and process systems that enhance procurement,
inventory management and logistics activities. National-Oilwell has regionally
centralized its procurement, inventory and logistics operations in order to gain
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cost and inventory utilization efficiencies while retaining responsiveness to
local markets. In addition, the strategic integration of National-Oilwell's
distribution expertise, extensive distribution network and growing base of
customer alliances provides an increased opportunity for cost effective
marketing of National-Oilwell's manufactured equipment.
Capitalizing on Alliance/Outsourcing Trends. As a result of efficiency
initiatives, oil and gas companies and drilling contractors are frequently
seeking alliances with suppliers, manufacturers and service providers, or
outsourcing their procurement, inventory management and logistics requirements
for equipment and supplies in order to achieve cost and capital improvements.
National-Oilwell believes that it is well-positioned to provide these services
as a result of National-Oilwell's (i) large and geographically diverse network
of distribution service centers in major oil and gas producing areas, (ii)
purchasing leverage due to the volume of products sold, (iii) breadth of
available product lines and (iv) information systems that offer customers
enhanced online and onsite services.
PRODUCTS AND TECHNOLOGY
National-Oilwell designs, manufactures and sells land drilling rigs and the
major mechanical components for both land and offshore rigs used to drill oil
and gas wells. Many of these components are designed specifically for
applications in offshore, extended reach and deep land drilling. This equipment
is installed on new drilling rigs and used in the upgrade, refurbishment and
repair of existing drilling rigs. A significant portion of National-Oilwell's
business includes the sale of replacement parts for its own manufactured
machinery and equipment. National-Oilwell estimates that approximately 65% of
the mobile offshore rig fleet and the majority of the world's larger land rigs
(2,000 horsepower and greater) manufactured in the last twenty years utilize
drawworks, mud pumps and other drilling machinery components manufactured by
National-Oilwell. In addition, National-Oilwell also manufactures and sells
centrifugal and reciprocating pumps used in oilfield and industrial
applications.
Products
National-Oilwell's line of drilling machinery and equipment includes
drawworks, mud pumps, power swivels (also known as "top drives"), traveling
equipment and rotary tables. This machinery constitutes the majority of the
components involved in the primary functions of the drilling of oil and gas
wells which consist of pumping fluids and hoisting, supporting and rotating the
drill string. National-Oilwell also manufactures and sells a wide variety of
fluid-end accessories for all major manufacturers' pumps under its Mission-Fluid
King trade name. Fluid-end accessories are expendables consumed on reciprocating
mud pumps during the drilling process and include replacement parts such as
liners, valves, seats, pistons, piston rods and packing accessories. These
products are typically replaced at regular intervals and are essential to
drilling operations.
National-Oilwell also designs and manufactures centrifugal and
reciprocating pumps and pumping systems, as well as a wide variety of fluid-end
accessories and expendable pump parts for oil and gas drilling and oil
production and transfer. Mission-Fluid King centrifugal pumps are utilized in
various oil and gas drilling applications including drilling, mud mixing, low
pressure fluid transport and charging reciprocating pumps. Reciprocating pumps
are used in a variety of artificial lift, oil transfer and industrial
applications. National-Oilwell estimates that over 20,000 reciprocating pumps
manufactured by National-Oilwell have been installed throughout the world. A
sizable aftermarket for repair parts for these pumps exists, and
National-Oilwell also provides fluid-end expendables under the Mission-Fluid
King name to this market. Most of the pumps sold are incorporated into systems
(which generally consist of a reciprocating pump, a power source, piping,
valves, meters and other fabricated parts installed on a skid) thereby providing
National-Oilwell with an opportunity to offer the customer a complete turnkey
package. National-Oilwell also sells reciprocating pumps to the refining,
petrochemical, mining and steel industries.
Marketing of Company Products
Substantially all of National-Oilwell's drilling machinery, equipment and
spare parts sales and a large portion of National-Oilwell's pumps and parts are
sold through National-Oilwell's direct sales force and
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through National-Oilwell's distribution service centers. National-Oilwell also
markets its pumps and parts through distribution networks not owned by
National-Oilwell. Sales to foreign state-owned oil companies are typically made
in conjunction with agent or representative arrangements. During 1996,
management estimates that approximately half of the Products and Technology
revenues was from products sold for delivery to destinations located outside
North America.
National-Oilwell believes it is able to leverage its position as a
manufacturer of market-leading oilfield products by marketing those products
through National-Oilwell's distribution services business. During 1996,
approximately 28% of oilfield equipment revenues was from products sold through
National-Oilwell's established network of distribution service centers.
Management believes that National-Oilwell has an advantage over its competitors
in the oilfield equipment markets by virtue of its extensive distribution
network making such products readily available from numerous locations.
Competition
The oilfield equipment industry is highly competitive and
National-Oilwell's revenues and earnings can be affected by price changes,
introduction of new products and improved availability and delivery. Over the
last several years the market for oilfield equipment experienced excess capacity
in some products provided by National-Oilwell, which resulted in increased price
competition in certain areas of National-Oilwell's business. National-Oilwell
competes with a large number of companies, some of which may offer certain more
technologically advanced products or possess greater financial resources than
National-Oilwell. Competition for drilling systems and machinery comes from
Continental Emsco Company, Maritime Hydraulics U.S. Inc., Varco International,
Inc. and Dreco. The principal competitors with National-Oilwell's Mission-Fluid
King product line are Harrisburg/Woolley, Inc. and Southwest Oilfield Products,
Inc. Competition for National-Oilwell's reciprocating pumps comes primarily from
Wheatley-Gaso Inc. and Gardner Denver Machinery Inc.
Manufacturing and Backlog
Sales of National-Oilwell's products are made on the basis of written
orders and oral commitments. National-Oilwell estimates that the value of its
orders for new oilfield equipment (excluding spare parts orders) was
approximately $21 million as of December 31, 1996 as compared to orders of $3
million as of December 31, 1995. As of June 30, 1997, the backlog had increased
to $84 million as compared to $15.7 million at June 30, 1996. Essentially all of
the current backlog will be shipped within the next twelve months.
National-Oilwell's principal manufacturing facilities are located in
Houston, Texas and McAlester, Oklahoma. National-Oilwell also outsources the
manufacture of parts or purchases components in finished form from qualified
subcontractors. National-Oilwell's manufacturing operations require a variety of
components, parts and raw materials which National-Oilwell purchases from
multiple commercial sources. National-Oilwell has not experienced and does not
expect any significant delays in obtaining deliveries of essential components,
parts and raw materials.
Engineering
National-Oilwell maintains a staff of engineers and technicians to (i)
design and test new products, components and systems for use in drilling and
pumping applications, (ii) enhance the capabilities of existing products and
(iii) assist National-Oilwell's sales organization and customers with special
projects. National-Oilwell's product engineering efforts focus on developing
technology to improve the economics and safety of drilling and pumping
processes. National-Oilwell has recently developed a 750-ton capacity power
swivel to complement its lower capacity models. National-Oilwell has also
introduced a 4,000 horsepower drawworks to increase customer efficiencies when
drilling at extended depths and during horizontal drilling. A disc brake system
for drawworks has been developed which can be operated remotely and provides
higher braking torque capabilities than previous systems. The disc brake system
is available for new equipment or can be adapted to upgrade drawworks previously
sold by National-Oilwell.
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Patents and Trademarks
National-Oilwell owns or has a license to use a number of patents covering
a variety of products. Although in the aggregate these patents are of
importance, National-Oilwell does not consider any single patent to be of a
critical or essential nature. In general, National-Oilwell depends on
technological capabilities, manufacturing quality control and application of its
expertise rather than patented technology in the conduct of its business.
National-Oilwell enjoys significant product name-brand recognition, principally
through its National-Oilwell(R), National(R), Oilwell(R), and Mission-Fluid King
trade names.
Recent Acquisitions
On April 25, 1997, National-Oilwell purchased the drilling controls
business of Ross Hill Controls and its affiliate, Hill Graham Controls Limited,
leading companies in the manufacture, sale and service of innovative electrical
control systems used in conjunction with drilling operations. These products are
closely associated with and complementary to other components used in connection
with the drilling process and allow National-Oilwell to offer a more complete
rig package.
On May 15, 1997, National-Oilwell purchased 100% of the common stock of
PEP, Inc., a manufacturer of petroleum expendable pump products that are similar
to those manufactured by National-Oilwell. This acquisition provides a broader
line of products as well as additional manufacturing capacity.
DISTRIBUTION SERVICES
National-Oilwell provides distribution services through its network of
distribution service centers located near major drilling and production activity
worldwide, but principally in the United States and Canada. These distribution
service centers have historically stocked and sold a variety of expendable items
for oilfield applications and spare parts for National-Oilwell equipment. As oil
and gas companies and drilling contractors have refocused on their core
competencies and emphasized efficiency initiatives to reduce costs and capital
requirements, National-Oilwell's distribution services have expanded to offer
outsourcing and alliance arrangements that include comprehensive procurement,
inventory management and logistics support.
National-Oilwell is able to leverage its position as a leading provider of
distribution services by marketing products it manufactures. During 1996,
approximately $52 million of National-Oilwell's distribution services revenues
resulted from the sale of National-Oilwell's products. Management believes that
National-Oilwell has a competitive advantage in the distribution services
business by virtue of its ability to distribute market-leading products
manufactured by its Products and Technology business.
PRODUCTS AND MARKETING
Maintenance, Repair and Operating Supplies and Equipment. The MRO supplies
and equipment stocked by National-Oilwell's distribution service centers vary by
location. Each distribution point generally offers a large line of oilfield
products including valves, fittings, flanges, spare parts for oilfield equipment
and miscellaneous expendable items. Most drilling contractors and oil and gas
companies typically buy such supplies and equipment pursuant to non-exclusive
contracts, which normally specify a discount from National-Oilwell's list price
for each product or product category for a one-year period. National-Oilwell has
approximately 1,300 active contracts for MRO supplies and equipment with
customers primarily located in North America.
National-Oilwell markets and distributes its products and services through
several channels, including its network of oilfield distribution service
centers, a direct sales force and sales representatives and agents.
National-Oilwell's distribution services network includes approximately 115
facilities located throughout the major oil and gas producing regions of the
United States and Canada. In addition, National-Oilwell has international
distribution service points in seven locations in the United Kingdom, South
America and the Pacific Rim. National-Oilwell's distribution services customers
are primarily major and large independent oil companies and drilling
contractors, but sales are also made to hundreds of smaller customers. Due to
the nature of its distribution services business, National-Oilwell does not
maintain a backlog for such operations.
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As a result of efficiency initiatives that are taking place in the oil and
gas industry, drilling contractors and oil and gas companies are more frequently
seeking strategic alliances and outsourcing their procurement and inventory
management requirements. These strategic alliances constitute a growing
percentage of National-Oilwell's business and differ from standard agreements
for MRO supplies and equipment in that National-Oilwell becomes the customer's
primary supplier of those items. In certain cases, National-Oilwell has assumed
responsibility for procurement, inventory management and product delivery for
the customer, in some cases by working directly out of the customer's
facilities.
Oil Country Tubular Goods. National-Oilwell's tubular business is focused
on the procurement, inventory management and delivery of oil country tubular
goods manufactured by third parties. Tubular goods primarily consist of well
casing and production tubing used in the drilling, completion and production of
oil and gas wells. Well casing is used to line the walls of a wellbore to
provide structural support. Production tubing provides the conduit through which
the oil or gas will be brought to the surface upon completion of the well.
Historically, sales of tubular goods have been concentrated in North America,
although National-Oilwell makes occasional sales for shipment to foreign
destinations. Substantially all of National-Oilwell's sales of tubular goods are
made through National-Oilwell's direct sales force.
In response to customer demands for improved efficiency in tubular
procurement and distribution, National-Oilwell has developed strategic alliances
with certain of its customers. These strategic alliances enable National-Oilwell
to more efficiently source tubular goods for its customers, while decreasing the
capital and personnel requirements of the customer. These alliance relationships
currently constitute a majority of National-Oilwell's tubular sales. Since
alliances provide additional consistency and predictability to the procurement
process, National-Oilwell has also benefited from improved utilization of its
assets and from an increase in the turnover rate of its tubular inventory.
COMPETITION
The oilfield distribution services business is highly competitive.
National-Oilwell's revenues and earnings can be affected by competitive actions
such as price changes, improved delivery and other actions by competitors. In
addition, there are few barriers to entry for competitors in the distribution
services business. National-Oilwell's principal competitors include Continental
Emsco Company, Wilson Supply Company, Red Man Pipe & Supply Co. and McJunkin
Corporation in the United States and CE Franklin Ltd. and DOSCO Supply in the
Canadian market. National-Oilwell also competes with numerous regional or local
oilfield supply stores in both of these markets and in international markets.
SUPPLIERS
National-Oilwell obtains MRO products from a number of suppliers.
National-Oilwell does not believe that any one supplier of MRO products is
material to National-Oilwell. For the year ended December 31, 1996,
National-Oilwell purchased approximately 32% of its tubular requirements
pursuant to a distribution agreement with the U.S. Steel Group of USX
Corporation, and its remaining requirements from various suppliers.
National-Oilwell is not obligated to purchase any minimum amount of tubular
goods under the agreement with the U.S. Steel Group or any other distribution
agreement. National-Oilwell has not experienced and does not foresee
experiencing a shortage in MRO products or tubular goods sold by National-
Oilwell although order lead times for tubular goods have increased over the last
six months due to higher demand for these products.
EMPLOYEES
As of August 1, 1997, National-Oilwell had a total of 1,900 employees, of
whom 1,500 were salaried and 400 were paid on an hourly basis. Of
National-Oilwell's workforce, 390 of the employees are employed by
National-Oilwell's foreign subsidiaries and are located outside the United
States. National-Oilwell considers its relationship with its employees to be
good.
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OPERATING RISKS AND INSURANCE
National-Oilwell's operations are subject to the usual hazards inherent in
manufacturing products and providing services for the oil and gas industry.
These hazards can cause personal injury and loss of life, business
interruptions, property and equipment damage and pollution or environmental
damage. National-Oilwell maintains comprehensive insurance covering its assets
and operations at levels which management believes to be appropriate and in
accordance with industry practice. No assurance can be given that insurance
coverage will be adequate in all circumstances or against all hazards, or that
National-Oilwell will be able to maintain adequate insurance coverage in the
future at commercially reasonable rates or on acceptable terms.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
National-Oilwell's operations are subject to regulation by federal, state
and local authorities in the United States and regulatory authorities with
jurisdiction over its foreign operations. Environmental laws and regulations
have changed substantially and rapidly over the last 20 years, placing more
restrictions and limitations on activities that may impact the environment, such
as emissions of pollutants, generation and disposal of wastes and use and
handling of chemical substances. Although compliance with various governmental
laws and regulations has not materially adversely affected National-Oilwell's
financial condition or results of operations, no assurance can be given that
compliance with such laws or regulations will not have a material adverse impact
on National-Oilwell's business in the future.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability, without regard to fault or the legality of the
original conduct, on certain classes of persons with respect to the release of a
hazardous substance into the environment. These persons include the owner and
operator of the disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances found at
such site. National-Oilwell currently owns or leases, and has in the past owned
or leased, numerous properties that for many years have been used for the
manufacture and storage of products and equipment containing or requiring oil
and/or hazardous substances. Although National-Oilwell has utilized operating
and disposal practices that it believes were standard in the industry at the
time, hydrocarbons or other wastes may have been disposed of or released on or
under the properties owned or leased by National-Oilwell or on or under other
locations where such wastes have been taken for disposal. In addition, many of
these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes were not under
National-Oilwell's control. These properties and the wastes disposed thereon may
be subject to CERCLA, the Resource Conservation and Recovery Act and analogous
state laws. Under such laws, National-Oilwell would be required to remove or
remediate previously disposed wastes (including groundwater contamination) or to
perform remedial operations to prevent future contamination.
AGREEMENT WITH PREVIOUS OWNERS
The Purchase Agreement entered into in connection with the acquisition of
the National-Oilwell's predecessor partnership provides that National-Oilwell
will be responsible for (i) all of the liabilities, including environmental
costs, disclosed and undisclosed, created after April 1, 1987 with respect to
the business operations of the predecessor partnership as they were being
conducted on the closing date, (ii) disclosed liabilities created after April 1,
1987 with respect to operations of the partnership discontinued or sold prior to
the closing date ("Discontinued Operations"), (iii) disclosed liabilities for
environmental costs for conditions in existence as of April 1, 1987 ("Pre-1987
Environmental Costs"), (iv) fifty percent of the first $8.0 million of the
aggregate of undisclosed Pre-1987 Environmental Costs and undisclosed
liabilities related to Discontinued Operations and (v) taxes other than United
States federal income taxes. While there can be no assurance as to undisclosed
liabilities, National-Oilwell's financial statements reflect reserves that
management currently considers appropriate for potential future liabilities
under the agreement.
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PROPERTIES
National-Oilwell owned or leased 125 facilities worldwide as of August 1,
1997, including the following principal manufacturing and administrative
facilities:
APPROXIMATE
BUILDING SPACE
LOCATION (SQUARE FEET) DESCRIPTION STATUS
-------- -------------- ----------- ------
Houston, Texas........... 217,000 Manufactures drilling machinery and equipment Leased
Houston, Texas........... 173,000 Manufactures electrical control systems Owned
McAlester, Oklahoma...... 117,000 Manufactures pumps and expendable parts Owned
Houston, Texas........... 116,000 Administrative Offices Leased
Odessa, Texas............ 40,000 Manufactures pump expendable parts Owned
The manufacturing facilities listed above are used in National-Oilwell's
oilfield equipment business. National-Oilwell also has five satellite repair and
manufacturing facilities that refurbish and manufacture new equipment and parts.
These facilities are located in Houston, Texas; Odessa, Texas; New Iberia,
Louisiana; Aberdeen, Scotland and Singapore. National-Oilwell believes that the
capacity of its manufacturing and repair facilities is adequate to meet demand
for the foreseeable future. National-Oilwell owns or leases approximately 115
distribution service centers worldwide to operate its Distribution Services
business. No individual facility is significant to the Distribution Services
business. National-Oilwell also leases space at a number of tubular storage
locations for use in its tubular goods distribution business.
LEGAL PROCEEDINGS
There are pending or threatened against National-Oilwell various claims,
lawsuits and administrative proceedings, all arising from the ordinary course of
business, with respect to commercial, product liability and employee matters.
Although no assurance can be given with respect to the outcome of these or any
other pending legal and administrative proceedings and the effect such outcomes
may have on National-Oilwell, management believes that any ultimate liability
resulting from the outcome of such proceedings will not have a material adverse
effect on National-Oilwell's consolidated financial statements.
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BUSINESS OF DRECO
Dreco is engaged in the design and manufacture of oilfield equipment for
the worldwide petroleum exploration and production industry. Dreco operates in
two principal business segments: (i) drilling and well servicing equipment and
(ii) downhole products.
DRILLING AND WELL SERVICING EQUIPMENT
Dreco designs, manufactures and markets products used in the original
construction, modernization, repair and support of land and offshore drilling
and well servicing rigs under its DRECO(R) and KREMCO(R) trade names. Drilling
and well servicing equipment products manufactured by Dreco include masts,
derricks, traveling blocks, mud systems, and major drilling machinery, including
drawworks, mud pumps and rotaries.
Drilling and Well Servicing Rigs. Dreco designs, assembles and markets
drilling and well servicing rigs utilizing several of Dreco's proprietary
products as well as components manufactured by others. Dreco has increasingly
focused on providing rig designs to satisfy functional requirements relating to
harsh or specialized environments, strict regulatory requirements and providing
increased mechanization of drilling rig operations. Such products include North
Slope of Alaska and Arctic drilling and well servicing rigs, highly mobile
drilling and well servicing rigs for jungle and desert use, modular well
servicing rigs for offshore platforms and modular drilling facilities for North
Sea platforms. In addition, Dreco has continued its focus on providing
conventional designs of its products to customers in countries where the oil and
gas drilling industry is being developed, expanded or modernized.
Dreco has designed, manufactured and marketed modular drilling facilities
to be installed on offshore platforms in the North Sea. The designs meet very
strict governmental regulations and customer requirements relating to safety,
work environment and operating conditions. The designs include increased
automation of drilling rig operations and other design improvements to
facilitate the removal of workers from the mechanical area of the drilling
floor.
Dreco manufactures both self-propelled and trailer mounted well servicing
rigs designed for operation at well depths ranging from 4,500 feet to 20,000
feet. Well servicing rigs are usually furnished with engine, drawworks, mast and
various accessories. In addition to manufacturing conventional well servicing
rigs, Dreco has designed and manufactured well servicing rigs which utilize
coiled tubing in the well servicing process.
Dreco has also designed and manufactured components suitable for use in
coiled tubing systems. Components include coiled tubing injectors, reels, power
units, nitrogen pumping units, masts and casing jacks.
Many of Dreco's competitors supply only a portion of the components or
services required in connection with the construction of a drilling or well
servicing rig. Dreco believes that its ability to provide design, engineering,
procurement and construction services on a turnkey basis provides it with a
competitive advantage.
Drilling and Well Servicing Rig Components. Dreco manufactures masts,
derricks and substructures for use on fixed and mobile offshore platforms and on
land that are suitable for drilling to maximum depths ranging from 3,500 feet to
more than 30,000 feet. Masts and derricks are steel structures used to support
the raising and lowering of drill pipe and casing. Substructures are rig floors
and support structures that accommodate the mast or derrick, drawworks, rotary
table and power transmission system, and provide the working floor space and
floor height required to drill or service a well. Drawworks manufactured by
Dreco range in size from 200 to 4,000 input horsepower and are suitable for
drilling to maximum depths ranging from 3,000 feet to more than 30,000 feet. A
drawworks is essentially a large winch used to raise and lower drill pipe. Dreco
also manufactures mud pumps, swivels, crown blocks, traveling blocks, wireline
anchors, and other related components. Well servicing rig components
manufactured include blowout preventers, high pressure well kill pumps, well
servicing rig masts, substructures and equipment carriers. In addition Dreco
provides assembly and final fitting services for well servicing rigs.
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Dreco also modernizes and repairs land and offshore rigs and rig
components, including performing upgrades such as installing top drive drilling
systems manufactured by others. Top drive installations are made primarily on
offshore rigs and entail performing a stress analysis on the mast or derrick,
manufacturing and installing guide rails in the mast or derrick, manufacturing
an extension for the mast or derrick when required, fitting the top drive unit,
and connecting the utilities for its operation.
Drilling and Well Servicing Support Equipment. Dreco manufactures pedestal
cranes principally for use on offshore drilling platforms under its Dreco
KingPost Crane name. The pedestal crane is used to lift and lower rig
components, equipment, materials and supplies on and off an offshore platform.
DOWNHOLE PRODUCTS
Dreco designs and manufactures drilling motors for sale and for rent under
its TRUDRIL(R) and VECTOR trade names and specialized drilling tools for sale
and for rent under its GRIFFITH(R) trade name. Specialized drilling tools and
drilling motors rented by Dreco are those that are not economical for a customer
to own or maintain because of the broad range of equipment required for the
diverse hole size and depths encountered in drilling for oil and gas.
Specialized drilling tools and drilling motors sold by Dreco are those that
generally require infrequent service, are disposable or are sold in countries
where Dreco does not provide repair and maintenance services.
Drilling Motors. Dreco's TRUDRIL(R) and VECTOR drilling motors are devices
placed between the drill string and the drill bit to cause the bit to rotate
without necessarily rotating the drill string. Drilling motors are used for
horizontal and other directional drilling, extended reach deviated hole drilling
and performance drilling. Dreco's drilling motors are used primarily in
horizontal drilling in which a drilling motor is an essential component of a
horizontal drilling system.
Dreco often rents its drilling motors, retaining control over the servicing
and maintenance function so as to preserve their operating reliability. Dreco's
drilling motors are rented or sold with patented adjustable housing that permits
the field adjustment of the angle of drilling trajectory. Dreco's drilling
motors employ a sealed oilbath lower bearing assembly that utilizes a sealing
and pressure balancing arrangement to reduce average repair and maintenance
costs.
Dreco is continuing to enhance and broaden the range of its TRUDRIL(R) and
VECTOR drilling motors by, among other things, widening the size range offered,
reducing the initial cost and ongoing repair and maintenance cost of the
drilling motors, and developing alternative designs of motor bearing assembly
sealing systems and speed reduction systems.
Drilling Jars, Shock Tools and Other Downhole Products. Dreco manufactures
hydraulic-mechanical and mechanical drilling jars and shock tools. Drilling jars
are used to assist in releasing a drill string that may become stuck in a well
bore. A shock tool is a downhole shock absorber placed low in the drill string,
often directly above the drill bit when rotary drilling in formations that are
hard and abrasive. Shock tools are devices intended to extend bit life, reduce
drill string failures, and reduce damage to the drilling rig.
Dreco also manufactures and sells or rents fishing jars, drilling and
fishing jar accelerators, drilling and fishing bumper subs, reamers,
stabilizers, combination reamer stabilizers, kelly and tubing safety valves and
drill string inside blowout preventers.
Downhole Products Support Equipment. Dreco manufactures tools to
facilitate the servicing of downhole tools, including tool support devices,
tools to make up and break out threaded connections, and tools to test the
operability of its downhole products.
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AUDITORS, TRANSFER AGENT AND REGISTRAR
The independent chartered accountants of Dreco are Coopers & Lybrand,
Edmonton. The independent auditors of National-Oilwell are Ernst & Young LLP,
Houston. In the event that the Transaction receives the approval of Dreco
Shareholders and the Court and is completed, the board of directors of
National-Oilwell will consider the appointment of one independent auditor for
the merged business.
The transfer agents for Dreco Common Shares are The Bank of New York and
Montreal Trust Company of Canada. Concurrently with the Closing, The Bank of New
York will resign and Montreal Trust Company of Canada will be appointed as
transfer agent and registrar for the Exchangeable Shares. Montreal Trust Company
of Canada will also be Trustee under the Voting and Exchange Trust Agreement and
Canadian co-registrar for the National-Oilwell Common Stock.
COMPARISON OF STOCKHOLDER RIGHTS
In the event that the Transaction is consummated, holders of Dreco Common
Shares will, upon the Effective Time, have their Dreco Common Shares exchanged
for Exchangeable Shares. They will have certain rights to exchange or retract
these shares for an equivalent number of shares of National-Oilwell Common
Stock. National-Oilwell is a corporation organized under the DGCL. While the
rights and privileges of shareholders of an Alberta corporation are, in many
instances, comparable to those of stockholders of a Delaware corporation, there
are certain differences. These differences arise from differences between
Delaware and Alberta law, between the DGCL and ABCA and between the
National-Oilwell Amended and Restated Certificate and National-Oilwell Bylaws
and the Dreco Articles and Dreco Bylaws. For a description of the respective
rights of the holders of National-Oilwell Common Stock and Dreco Common Shares,
see "The Companies After the Transaction -- National-Oilwell Capital Stock" and
"The Companies After the Transaction -- Description of Dreco Share Capital."
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation, except
that, unless required by its certificate of incorporation, (a) no authorizing
stockholder vote is required of a corporation surviving a merger if (i) such
corporation's certificate of incorporation is not amended by the merger, (ii)
each share of stock of such corporation will be an identical share of the
surviving corporation after the merger, and (iii) the number of shares to be
issued in the merger does not exceed 20% of such corporation's outstanding
common stock immediately prior to the effective date of the merger; and (b) no
authorizing stockholder vote is required of a corporation to authorize a merger
with or into a single direct or indirect wholly-owned subsidiary of such
corporation (provided certain other limited circumstances apply). The
National-Oilwell Amended and Restated Certificate does not require a greater
percentage vote for such actions. Stockholder approval is also not required
under the DGCL for mergers or consolidations in which a parent corporation
merges or consolidates with a subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock.
Under the ABCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances, and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders, present in person or by proxy, at the meeting. In certain
cases, a special resolution to approve an extraordinary corporate action is also
required to be approved separately by the holders of a class or series of
shares.
AMENDMENT TO GOVERNING DOCUMENTS
The DGCL requires a vote of the corporation's board of directors followed
by the affirmative vote of a majority of the outstanding stock entitled to vote
for any amendment to the certificate of incorporation, unless
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a greater level of approval is required by the certificate of incorporation. The
National-Oilwell Amended and Restated Certificate requires a greater level of
approval for an amendment thereto in certain circumstances. Additionally, if an
amendment would have the effect of increasing or decreasing the aggregate number
of authorized shares of a particular class or series of stock, increasing or
decreasing the par value of the shares of such class or series or altering the
powers, preferences or special rights of a particular class or series of stock,
the class or series shall be given the power to vote as a class notwithstanding
the absence of any specifically enumerated power in the certificate of
incorporation. The DGCL also states that the power to adopt, amend or repeal the
by-laws of a corporation shall be in the stockholders entitled to vote, provided
that the corporation in its certificate of incorporation may also confer such
power on the corporation's board of directors. National-Oilwell's Amended and
Restated Certificate confers such power on its board of directors.
Under the ABCA, any amendment to the articles generally requires approval
by special resolution, which is a resolution passed by a majority of not less
than two-thirds of the votes cast by shareholders entitled to vote on the
resolution. The ABCA provides that unless the articles, by-laws or any unanimous
shareholders agreement otherwise provide, the directors may, by resolution,
make, amend or repeal any by-laws that regulate the business or affairs of a
corporation. Where the directors make, amend or repeal a by-law, they are
required under the ABCA to submit the by-law, amendment or repeal to the
shareholders at the next meeting of shareholders, and the shareholders may
confirm, reject or amend the by-law, amendment or repeal by an ordinary
resolution, which is a resolution passed by a majority of the votes cast by
shareholders entitled to vote on the resolution.
DISSENTERS' RIGHTS
Under the DGCL, holders of shares of any class or series have the right, in
certain circumstances, to dissent from a merger or consolidation by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares, as determined by agreement with the corporation or
by an independent appraiser appointed by a court in an action timely brought by
the corporation or the dissenters. The DGCL grants dissenters' appraisal rights
only in the case of mergers or consolidations and not in the case of a sale or
transfer of assets or a purchase of assets for stock regardless of the number of
shares being issued. Further, no appraisal rights are available for shares of
any class or series listed on a national securities exchange or designated as a
national market system security on Nasdaq or held of record by more than 2,000
stockholders, unless the agreement of merger or consolidation converts such
shares into anything other than (i) stock of the surviving corporation, (ii)
stock of another corporation which is either listed on a national securities
exchange or designated as a national market system security on Nasdaq or held of
record by more than 2,000 stockholders, (iii) cash in lieu of fractional shares,
or (iv) some combination of the above.
The ABCA provides that shareholders of an Alberta corporation entitled to
vote on certain matters are entitled to exercise dissent rights and to be paid
the fair market value of their shares in connection therewith. The ABCA does not
distinguish for this purpose between listed and unlisted shares. Such matters
include (i) any amalgamation with another corporation (other than with certain
affiliated corporations); (ii) an amendment to the corporation's articles to
add, change or remove any provisions restricting or constraining the issue or
transfer of shares of that class; (iii) an amendment to the corporation's
articles to add, change or remove any restrictions on the business or businesses
that the corporation may carry on; (iv) a continuance under the laws of another
jurisdiction; (v) a sale, lease or exchange of all or substantially all the
property of the corporation other than in the ordinary course of business; (vi)
a court order permitting a shareholder to dissent in connection with an
application to the court for an order approving an arrangement proposed by the
corporation; or (vii) certain amendments to the articles of a corporation which
require a separate class or series vote, provided that a shareholder is not
entitled to dissent if an amendment to the articles is effected by a court order
approving a reorganization or if an amendment to the articles is effected by a
court order made in connection with an action for an oppression remedy. Under
the ABCA, a shareholder may, in addition to exercising dissent rights, seek an
oppression remedy for any act or omission of a corporation or any of its
affiliates which is oppressive, unfairly prejudicial to or that unfairly
disregards a shareholder's interest.
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OPPRESSION REMEDY
The ABCA provides an oppression remedy that enables the court to make any
order, both interim and final, to rectify the matters complained of, if the
court is satisfied upon application by a complainant (as defined below) that:
(i) any act or omission of the corporation or an affiliate effects a result;
(ii) the business or affairs of the corporation or an affiliate are or have been
carried on or conducted in a manner; or (iii) the powers of the directors of the
corporation or of an affiliate are or have been exercised in a manner that is
oppressive or unfairly prejudicial to or that unfairly disregards the interests
of any security holder, creditor, director or officer. A complainant includes:
(i) a present or former registered holder or beneficial owner of securities of a
corporation or any of its affiliates; (ii) a present or former director or
officer of the corporation or any of its affiliates; and (iii) any other person
who, in the discretion of the court, is a proper person to make such
application.
Because of the breadth of the conduct which can be complained of and the
scope of the court's remedial powers, the oppression remedy is very flexible and
is sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the ABCA, it
is not necessary to prove that the directors of a corporation acted in bad faith
in order to seek an oppression remedy. Furthermore, the court may order the
corporation to pay the interim expenses of a complainant seeking an oppression
remedy, but the complainant may be held accountable for such interim costs on
final disposition of the complaint. The DGCL does not provide for a similar
remedy.
DERIVATIVE ACTION
Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, the corporation. The DGCL provides that a
stockholder must aver in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
Under the ABCA, a complainant may apply to the court for leave to bring an
action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such body corporate or any
subsidiary is a party, for the purpose of prosecuting, defending or
discontinuing the action on behalf of the body corporate or subsidiary. Under
the ABCA, no action may be brought and no intervention in an action may be made
unless the complainant has given reasonable notice to the directors of the
corporation or its subsidiary of the complainant's intention to apply to the
court and the court is satisfied that (i) the directors of the corporation or
its subsidiary will not bring, diligently prosecute or defend or discontinue the
action; (ii) the complainant is acting in good faith; and (iii) it appears to be
in the interests of the corporation or its subsidiary that the action be
brought, prosecuted, defended or discontinued.
Under the ABCA, the court in a derivative action may make any order it
thinks fit. Additionally, under the ABCA, a court may order a corporation or its
subsidiary to pay the complainant's reasonable legal fees.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted.
However, the National-Oilwell Amended and Restated Certificate expressly
prohibits action by written consent. Under the ABCA, shareholder action without
a meeting may only be taken by written resolution signed by all shareholders who
would be entitled to vote thereon at a meeting.
DIRECTOR QUALIFICATIONS
At least half of the directors of an ABCA corporation generally must be
resident Canadians. The ABCA also requires that a corporation whose securities
are publicly traded must have not fewer than three directors,
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at least two of whom are not officers or employees of the corporation or any of
its affiliates. The DGCL does not have comparable requirements.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations incorporated or organized under the DGCL have
fiduciary obligations to the corporation and its stockholders. Pursuant to these
fiduciary obligations, the directors must act in accordance with the so-called
duties of "due care" and "loyalty." Under the DGCL, the duty of care requires
that the directors act in an informed and deliberative manner and inform
themselves, prior to making a business decision, of all material information
reasonably available to them. The duty of loyalty is the duty to act in good
faith in a manner which the directors reasonably believe to be in the best
interests of the stockholders. It requires that there be no conflict between
duty and self-interest.
Under the ABCA, the duty of care requires that the directors exercise the
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances, and the duty of loyalty requires directors of an
Alberta corporation to act honestly and in good faith with a view to the best
interests of the corporation.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The DGCL provides that a corporation may indemnify its present and former
directors, officers, employees and agents (each, an "indemnitee") against all
reasonable expenses (including attorneys' fees) and, except in actions initiated
by or in the right of the corporation, against all judgments, fines and amounts
paid in settlement in actions brought against them, if such individual acted in
good faith and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The corporation shall indemnify an indemnitee to the extent that he or she is
successful on the merits or otherwise in the defense of any claim, issue or
matter associated with an action. The National-Oilwell Amended and Restated
Certificate provides for indemnification of directors and officers to the
fullest extent authorized by the DGCL.
The DGCL allows for the advance payment of an indemnitee's expenses prior
to the final disposition of an action, provided that the indemnitee undertakes
to repay any such amount advanced if it is later determined that the indemnitee
is not entitled to indemnification with regard to the action for which the
expenses were advanced. Neither the ABCA nor the Dreco Bylaws expressly provides
for such advance payment.
Under the ABCA, except in respect of an action by or on behalf of a
corporation or a body corporate to procure a judgment in its favor, a
corporation may indemnify a director or officer, a former director or officer or
a person who acts or acted at the corporation's request as a director or officer
of a body corporate of which the corporation is or was a shareholder or
creditor, and his or her heirs and legal representatives (an "Indemnifiable
Person"), against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to which
he or she is made a party by reason of being or having been a director or
officer of such corporation or such body corporate, if: (i) he or she acted
honestly and in good faith with a view to the best interests of such
corporation; and (ii) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. An Indemnifiable
Person is entitled to such indemnity from the corporation if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding, fulfilled the conditions set out in (i) and (ii) above and is fairly
and reasonably entitled to indemnity. A corporation may, with the approval of a
court, also indemnify an Indemnifiable Person in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in its favor,
to which such person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate against all costs,
charges and expenses reasonably incurred by him or her in connection with the
action, if he or she fulfills the
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conditions set out in (i) and (ii) above. The Dreco Bylaws provide for
indemnification of directors and officers to the fullest extent authorized by
the ABCA.
DIRECTOR LIABILITY
The DGCL provides that the charter of a corporation may include a provision
which limits or eliminates the liability of directors to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided such liability does not arise from certain proscribed conduct,
including acts or omissions not in good faith or which involve intentional
misconduct or breach of the duty of loyalty. The National-Oilwell Amended and
Restated Certificate contains a provision limiting the liability of its
directors to the fullest extent permitted by the DGCL. The ABCA does not permit
any such limitation of a director's liability.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
National-Oilwell is subject to section 203 of the DGCL, which prohibits
certain transactions between a Delaware corporation and an interested
stockholder, which is defined as a person who, together with any affiliates
and/or associates of such person, beneficially owns, directly or indirectly, 15%
or more of the outstanding voting shares of a Delaware corporation. This
provision prohibits certain business combinations (defined broadly to include
mergers, consolidations, sales or other dispositions of assets having an
aggregate value in excess of 10% of the consolidated assets of the corporation,
and certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation) between an interested
stockholder and a corporation for a period of three years after the date the
interested stockholder acquired its stock, unless (i) the business combination
or the transaction which resulted in the stockholder becoming an interested
stockholder is approved by the corporation's board of directors prior to the
date the interested stockholder acquired shares, (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the transaction
in which it became an interested stockholder or (iii) the business combination
is approved by a majority of the board of directors and by the affirmative vote
of two-thirds of the votes entitled to be cast by disinterested stockholders at
an annual or special meeting.
The ABCA does not contain a comparable provision with respect to business
combinations. However, policies of certain Canadian securities regulatory
authorities, including Policy 9.1 of the Ontario Securities Commission ("Policy
9.1"), contain requirements in connection with related party transactions. A
related party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the case
may be, a related party by any means in any one or any combination of
transactions. "Related party" is defined in Policy 9.1 and includes directors,
senior officers and holders of at least 10% of the voting securities of the
issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject to
certain exceptions, the preparation of a formal valuation of the subject matter
of the related party transaction and any non-cash consideration offered therefor
and the inclusion of a summary of the valuation in the proxy material. Policy
9.1 also requires, subject to certain exceptions, that the minority shareholders
of the issuer separately approve the transaction, by either a simple majority or
two-thirds of the votes cast, depending on the circumstances.
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DISSENTING DRECO SHAREHOLDERS' AND DRECO OPTIONHOLDERS' RIGHTS
UNDER THE DGCL, NATIONAL-OILWELL STOCKHOLDERS WILL NOT HAVE APPRAISAL OR
DISSENTER'S RIGHTS RELATING TO THE TRANSACTION.
THE FOLLOWING DESCRIPTION OF THE RIGHTS OF DISSENTING DRECO SHAREHOLDERS
AND DRECO OPTIONHOLDERS IS NOT A COMPREHENSIVE STATEMENT OF PROCEDURES TO BE
FOLLOWED BY A DISSENTING DRECO SHAREHOLDER OR DRECO OPTIONHOLDER WHO SEEKS
PAYMENT OF THE FAIR VALUE OF HIS DRECO COMMON SHARES OR DRECO OPTIONS AND IS
QUALIFIED IN ITS ENTIRETY BY THE REFERENCE TO THE FULL TEXT OF THE INTERIM ORDER
AND SECTION 184 OF THE ABCA WHICH ARE ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS ANNEXES C AND J, RESPECTIVELY. A SHAREHOLDER OR
OPTIONHOLDER WHO INTENDS TO EXERCISE HIS RIGHT OF DISSENT AND APPRAISAL SHOULD
CAREFULLY CONSIDER AND COMPLY WITH THE PROVISIONS OF THAT SECTION, AS MODIFIED
BY THE INTERIM ORDER AND SHOULD SEEK HIS OWN LEGAL ADVICE. FAILURE TO COMPLY
WITH THE PROVISIONS OF THAT SECTION, AS MODIFIED BY THE INTERIM ORDER AND TO
ADHERE TO THE PROCEDURES ESTABLISHED THEREIN MAY RESULT IN THE LOSS OF ALL
RIGHTS THEREUNDER.
The Court hearing the application for the Final Order has the discretion to
alter the rights of dissent described herein based on the evidence presented at
such hearing.
Under the Interim Order, a Dreco Shareholder or Dreco Optionholder is
entitled, in addition to any other right he may have, to dissent and to be paid
by Dreco the fair value of the Dreco Common Shares or Dreco Options held by him
in respect of which he dissents, determined as of the close of business on the
last business day before the day on which the resolution from which he dissents
was adopted. A Dreco Shareholder or Dreco Optionholder may dissent only with
respect to all of the Dreco Shares or Dreco Options held by him or on behalf of
any one beneficial owner and registered in the dissenting Dreco Shareholder's or
Dreco Optionholder's name. The demand for appraisal must be executed by or for
the holder of record, fully and correctly, as such holder's name appears on the
holder's share certificates or options. If the shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, the demand
should be made in that capacity, and if the shares are owned of record by more
than one person, as in a joint tenancy or a tenancy in common, the demand should
be made by or for all owners of record. An authorized agent, including one or
more joint owners, may execute the demand for appraisal for a holder of record;
however, such agent must identify the record owner or owners and expressly
identify the record owner or owners, and expressly disclose in such demand that
the agent is acting as agent for the record owner or owners.
PERSONS WHO ARE BENEFICIAL OWNERS OF DRECO COMMON SHARES REGISTERED IN THE
NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO DISSENT,
SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS ENTITLED TO
DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS DRECO COMMON SHARES AS
NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DISSENT, MUST EXERCISE
DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE SHARES
HELD FOR SUCH BENEFICIAL OWNERS. IN SUCH CASE, THE WRITTEN OBJECTION SHOULD SET
FORTH THE NUMBER OF DRECO COMMON SHARES COVERED BY IT.
A dissenting Dreco Shareholder or Dreco Optionholder must send to Dreco a
written objection to the Arrangement Resolution, which written objection must be
received by the Secretary of Dreco at Dreco Energy Energy Services Ltd., #1340
Weber Centre, 5555 Calgary Trail, Edmonton, Alberta, Canada T6H 5P9, or the
Chairman of the Dreco Meeting at or before the commencement of the Dreco
Meeting, and the dissenting Dreco Shareholder or Dreco Optionholder must not
have voted, in person or by proxy, in favor of the Arrangement Resolution. An
application may be made to the Court to fix the fair value of the dissenting
Dreco Shareholder's Dreco Common Shares or Dreco Optionholder's Dreco Options
after the Effective Date. If an application to the Court is made by either Dreco
or a dissenting Dreco Shareholder or Dreco
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Optionholder, Dreco must, unless the Court otherwise orders, send to each
dissenting Dreco Shareholder or Dreco Optionholder a written offer to pay him an
amount considered by the board of directors to be the fair value of the Dreco
Common Shares or Dreco Options. The offer, unless the Court otherwise orders,
will be sent to each dissenting Dreco Shareholder or Dreco Optionholder at least
10 days before the date on which the application is returnable, if Dreco is the
applicant, or within 10 days after Dreco is served with notice of the
application, if a Dreco Shareholder or Dreco Optionholder is the applicant. The
offer will be made on the same terms to each dissenting Dreco Shareholder or
Dreco Optionholder and will be accompanied by a statement showing how the fair
value was determined. Failure to vote against the Arrangement Resolution does
not constitute a waiver of dissent rights.
A dissenting Dreco Shareholder or Dreco Optionholder may make an agreement
with Dreco for the purchase of his Dreco Common Shares or Dreco Options in the
amount of Dreco's offer (or otherwise) at any time before the Court pronounces
an order fixing the fair value of the Dreco Common Shares or Dreco Options. A
dissenting Dreco Shareholder or Dreco Optionholder is not required to give
security for costs in respect of an application and, except in special
circumstances, will not be required to pay the costs of the application or
appraisal. On the application, the Court will make an order fixing the fair
value of the Dreco Common Shares of all dissenting Dreco Shareholders or Dreco
Optionholders who are parties to the application, giving judgment in that amount
against Dreco and in favor of each of those dissenting Dreco Shareholders or
Dreco Optionholders and fixing the time within which Dreco must pay that amount
payable to the dissenting Dreco Shareholders or Optionholders. The Court may in
its discretion allow a reasonable rate of interest on the amount payable to each
dissenting Dreco Shareholder or Dreco Optionholder calculated from the date on
which the Dreco Shareholder or Dreco Optionholder ceases to have any rights as a
Dreco Shareholder or Dreco Optionholder until the date of payment.
On the Arrangement becoming effective, or upon the making of an agreement
between Dreco and the dissenting Dreco Shareholder or Dreco Optionholder as to
the payment to be made by Dreco to the dissenting Dreco Shareholder or Dreco
Optionholder, or upon the pronouncement of a Court order, whichever first
occurs, the dissenting Dreco Shareholder or Dreco Optionholder will cease to
have any rights as a Dreco Shareholder or Dreco Optionholder other than the
right to be paid the fair value of the Dreco Common Shares or Dreco Options in
the amount agreed to between Dreco and the dissenting Dreco Shareholder or Dreco
Optionholder or in the amount of the judgment, as the case may be. Until one of
these events occurs, the Dreco Shareholder or Dreco Optionholder may withdraw
his dissent, or Dreco may rescind the Arrangement Resolution and in either
event, the dissent and appraisal proceedings in respect of that Dreco
Shareholder or Dreco Optionholder will be discontinued.
THE COMBINATION AGREEMENT PROVIDES THAT IT IS A MUTUAL CONDITION TO THE
OBLIGATIONS OF DRECO AND NATIONAL-OILWELL TO COMPLETE THE ARRANGEMENT THAT
HOLDERS OF NOT MORE THAN 10% OF THE ISSUED AND OUTSTANDING DRECO COMMON SHARES
EXERCISE THEIR RIGHT OF DISSENT AS DESCRIBED ABOVE.
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PROPOSED NATIONAL-OILWELL RECAPITALIZATION PLAN
The proposed Recapitalization Plan, if approved and adopted by
National-Oilwell Stockholders, would result in amendments to the
National-Oilwell Amended and Restated Certificate of Incorporation which would
increase the authorized shares of National-Oilwell Common Stock from 40,000,000
to 75,000,000 and designate a class of stock as Special Voting Stock consisting
of one share. Approval by the National-Oilwell Stockholders of the
Recapitalization Plan is a condition to the closing of the Transaction, and
without such approval, the Combination Agreement cannot be consummated. A copy
of the National-Oilwell Amended and Restated Certificate, which includes the
amendments described above, is attached hereto as Annex D, and the following
discussion is qualified in its entirety by reference to such annex.
The National-Oilwell Amended and Restated Certificate currently authorizes
40,000,000 shares of National-Oilwell Common Stock and 10,000,000 shares of
National-Oilwell Preferred Stock. If the Recapitalization Plan is approved and
adopted at the National-Oilwell Meeting, the National-Oilwell Amended and
Restated Certificate will authorize (i) 75,000,000 shares of National-Oilwell
Common Stock, (ii) one share of Special Voting Stock, and (iii) 10,000,000
shares of National-Oilwell Preferred Stock. The effective date, if any, of the
Recapitalization Plan is expected to occur on the date of the closing of the
Transaction. See "The Companies After the Transaction -- National-Oilwell
Capital Stock."
The National-Oilwell board of directors has approved the Recapitalization
Plan, including the authorization of the Special Voting Stock, in order to
establish a mechanism through which the holders of Exchangeable Shares may
exercise the voting rights attached to such shares. Although the Exchangeable
Shares will be considered shares of Dreco under the laws of Alberta and any
relevant federal Canadian law, the Exchangeable Shares are structured to have
the same economic and voting rights as the National-Oilwell Common Stock, and at
the option of the holder will be exchangeable at any time on a one-for-one basis
for National-Oilwell Common Stock. See "The Transaction -- Transaction Mechanics
and Description of Exchangeable Shares." The use of Exchangeable Shares is
intended to allow shareholders of Dreco to receive the transaction consideration
on a "tax-deferred" basis. See "Income Tax Considerations to Dreco Shareholders
and Optionholders."
The board of directors of National-Oilwell believes that the proposed
increase in the number of authorized shares of National-Oilwell Common Stock is
in the best interests of National-Oilwell. Although National-Oilwell has no
present agreement or commitments for the issuance of any of the additional
shares that would be authorized, the board of directors believes it is advisable
to authorize an adequate number of shares for, among other things, possible
issuance in connection with future financing activities and existing or future
stock-based employee benefit or other plans, possible future stock splits, the
possible acquisition of other companies and properties, and other proper
corporate purposes. The additional shares of National-Oilwell Common Stock could
be used for any proper corporate purpose without delay or further stockholder
approval, except as may be required by applicable law. The voting and ownership
rights of National-Oilwell's Stockholders, earnings per share and book value per
share may be diluted by any issuances of additional National-Oilwell Common
Stock. Stockholders will not have preemptive rights to subscribe for shares of
National-Oilwell Common Stock unless National-Oilwell grants such rights at the
time of issue. Although the board of directors has no present intention of doing
so, it could issue shares of National-Oilwell Common Stock which could,
depending on the circumstances, make more difficult or discourage an unfriendly
attempt to obtain control of National-Oilwell by means of a merger, tender
offer, proxy contest or otherwise. National-Oilwell is not aware of any present
effort by any person or entity to obtain control of National-Oilwell.
THE BOARD OF DIRECTORS OF NATIONAL-OILWELL RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE RECAPITALIZATION PLAN.
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LEGAL MATTERS
Certain legal matters in connection with the Transaction will be passed
upon, on behalf of Dreco, by Fulbright & Jaworski L.L.P. (certain United States
tax and other matters), Houston, Texas, and Blake, Cassels & Graydon (certain
Canadian tax matters), Calgary, Alberta, and, on behalf of National-Oilwell, by
Morgan, Lewis & Bockius LLP (validity of National-Oilwell shares to be issued
and general corporate matters), Philadelphia, Pennsylvania and Stikeman, Elliott
(the legality of certain National-Oilwell obligations arising under the Support
Agreement and the Voting and Exchange Trust Agreement resulting from the
Transaction), Toronto, Ontario.
EXPERTS
The consolidated financial statements of National-Oilwell at December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996 appearing in this Joint Proxy Statement/Prospectus have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Dreco at August 31, 1996 and 1995,
and for each of the three years in the period ended August 31, 1996 incorporated
by reference in this Joint Proxy Statement/Prospectus have been audited by
Coopers & Lybrand, chartered accountants, as set forth in their reports thereon
incorporated herein, and are incorporated in reliance upon the authority of said
firm as experts in accounting and auditing. See "Incorporation of Certain
Documents by Reference."
By Order of the Board of Directors of National-Oilwell, Inc.
Paul M. Nation
Vice President, General Counsel and Secretary
August 25, 1997
APPROVAL OF JOINT PROXY STATEMENT/PROSPECTUS BY DRECO ENERGY SERVICES LTD. BOARD
OF DIRECTORS
The contents of this Joint Management Information Circular and Proxy
Statement/Prospectus and the sending thereof to the Dreco Shareholders and Dreco
Optionholders have been approved by the Dreco board of directors. Insofar as it
relates to Dreco, the foregoing contains no untrue statement of a material fact
and does not omit to state a material fact that is required to be stated or that
is necessary to make a statement not misleading in the light of the
circumstances in which it was made.
Robert L. Phillips James E. Devaney
President and Chief Executive Officer Vice-President Finance, Chief Financial
Officer and Treasurer
August 25, 1997
Edmonton, Alberta
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INDEX TO NATIONAL-OILWELL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of June 30, 1997, December
31, 1996 and 1995......................................... F-3
Consolidated Statements of Operations for the Six Months
Ended June 30, 1997 and June 30, 1996 and for the Three
Years in the Period Ended December 31, 1996............... F-4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and June 30, 1996 and for the Three
Years in the Period Ended December 31, 1996............... F-5
Consolidated Statements of Owners' Equity for the Six Months
Ended June 30, 1997 and for the Three Years in the Period
Ended December 31, 1996................................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
125
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
National-Oilwell, Inc.
We have audited the accompanying consolidated balance sheets of
National-Oilwell, Inc. (as defined in Note 1) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, owners' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
National-Oilwell, Inc. (as defined in Note 1) at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
July 25, 1997
F-2
126
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
=
Successor Predecessor
--------------------------- ------------
June 30, December 31, December 31,
1997 1996 1995
ASSETS ----------- ------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents............. $ 5,700 $ 4,315 $ 65,452
Receivables, less allowance of $2,463,
$2,760 and $4,015.................. 112,235 102,858 74,986
Inventories........................... 135,437 115,479 120,686
Deferred taxes........................ 3,255 4,028 --
Prepaid and other current assets...... 3,746 6,710 4,543
-------- -------- --------
Total current assets.......... 260,373 233,390 265,667
Property, plant and equipment, net...... 28,041 18,680 18,877
Deferred taxes.......................... 8,159 6,847 1,450
Goodwill................................ 12,916 6,327 --
Deferred financing costs................ 1,045 1,166 1,089
Other assets............................ 194 333 1,495
-------- -------- --------
$310,728 $266,743 $288,578
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable...................... $ 70,903 $ 77,935 $ 66,665
Customer prepayments.................. 14,309 5,126 7,500
Accrued compensation.................. 5,827 7,839 3,071
Other accrued liabilities............. 21,346 12,420 11,066
-------- -------- --------
Total current liabilities..... 112,385 103,320 88,302
Long-term debt.......................... 55,625 36,392 9,128
Insurance reserves...................... 6,352 6,599 6,201
Other liabilities....................... 10,135 11,352 6,935
-------- -------- --------
184,497 157,663 110,566
Commitments and contingencies
Owners' equity:
Common stock -- par value $.01;
17,857,698 and 18,161,175 shares
issued and outstanding at December
31, 1996 and June 30, 1997,
respectively....................... 182 179 --
Additional paid-in capital............ 107,609 107,497 --
Partners' capital..................... -- -- 185,506
Cumulative translation adjustment..... 669 1,159 (7,494)
Retained earnings..................... 17,771 245 --
-------- -------- --------
126,231 109,080 178,012
-------- -------- --------
$310,728 $266,743 $288,578
======== ======== ========
The accompanying notes are an integral part of these statements.
F-3
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NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUCCESSOR PREDECESSOR
------------------------------ -------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
Revenues................................ $374,020 $294,643 $648,621 $545,803 $562,053
Cost of revenues........................ 315,486 254,556 557,354 474,791 482,423
-------- -------- -------- -------- --------
Gross profit............................ 58,584 40,087 91,267 71,012 79,630
Selling, general and administrative..... 33,028 26,681 56,559 57,231 64,422
Special charges (income)................ -- -- 16,611 (8,458) (13,916)
-------- -------- -------- -------- --------
Operating income........................ 25,556 13,406 18,097 22,239 29,124
Interest and financial costs............ (2,640) (6,738) (12,095) (2,358) (5,777)
Interest income......................... 119 320 440 1,097 1,046
Other income (expense).................. 171 (321) 352 (1,401) 528
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary loss.................... 23,206 6,667 6,794 19,577 24,921
Provision for income taxes.............. 8,820 2,667 2,549 1,937 1,041
-------- -------- -------- -------- --------
Income before extraordinary loss........ 14,386 4,000 4,245 17,640 23,880
Extraordinary loss net of income tax
benefit of $2,400..................... -- -- (4,000) -- --
-------- -------- -------- -------- --------
Net income.............................. $ 14,386 $ 4,000 $ 245 $ 17,640 $ 23,880
======== ======== ======== ======== ========
Weighted average shares outstanding..... 18,334 13,590 14,357
======== ======== ========
Income per share:
Before extraordinary loss............. $ 0.78 $ 0.29 $ 0.18
Extraordinary loss.................... -- -- (0.16)
-------- -------- --------
Net income............................ $ 0.78 $ 0.29 $ 0.02
======== ======== ========
The accompanying notes are an integral part of these statements.
F-4
128
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SUCCESSOR PREDECESSOR
------------------------------ -------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -------------------------------
1997 1996 1996 1995 1994
------- -------- --------- ------- ---------
(UNAUDITED)
Cash flow from operating activities:
Net income............................................ $14,386 $ 4,000 $ 245 $17,640 $ 23,880
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 2,076 1,903 3,591 3,595 6,027
Provision for losses on receivables................ 180 304 405 2,855 545
Provision for deferred income taxes................ (993) 705 (2,411) 509 909
Gain on sale of assets............................. (98) (192) (490) (662) (910)
Foreign currency transaction (gain) loss........... 252 (57) (157) 1,170 54
Special charges (income)........................... -- -- 16,611 (8,458) (13,916)
Extraordinary loss................................. -- -- 6,400 -- --
Changes in assets and liabilities, net of Acquisition:
Decrease (increase) in receivables................. (5,657) (8,795) (25,146) 24,583 491
Decrease (increase) in inventories................. (11,547) (5,804) 628 2,205 12,483
Decrease (increase) in prepaids and other current
assets........................................... 2,985 (1,046) (677) (4,730) 4,287
Increase (decrease) in accounts payable............ (10,146) 582 10,927 6,959 7,614
Increase (decrease) in other assets/liabilities,
net.............................................. 11,451 (2,152) (11,210) (3,996) (3,913)
------- -------- --------- ------- ---------
Net cash provided (used) by operating
activities.................................. 2,889 (10,552) (1,284) 41,670 37,551
------- -------- --------- ------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment............ (1,684) (849) (3,136) (4,764) (3,604)
Proceeds from sale of assets.......................... 157 272 573 6,865 1,731
Proceeds from disposition of businesses............... -- -- -- 6,944 69,821
Acquisition of business, net of cash acquired......... (19,000) -- -- -- --
Acquisition of predecessor company, net of cash
acquired........................................... -- (106,248) (106,248) -- --
Other................................................. -- (350) (350) (218) 251
------- -------- --------- ------- ---------
Net cash provided (used) by investing
activities.................................. (20,527) (107,175) (109,161) 8,827 68,199
------- -------- --------- ------- ---------
Cash flow from financing activities:
Proceeds from revolving lines of credit, net.......... 19,109 -- -- -- --
Borrowings (payments) on long-term debt............... -- (11,318) (96,114) 9,128 (69,842)
Proceeds from issuance of common stock................ -- 30,179 107,676 -- --
Acquisition debt proceeds............................. -- 103,378 103,378 -- --
Principal payments under capital lease obligations.... -- -- -- -- (911)
Cash distribution to partners......................... -- -- -- (1,918) (31,000)
------- -------- --------- ------- ---------
Net cash provided (used) by financing
activities.................................. 19,109 122,239 114,940 7,210 (101,753)
------- -------- --------- ------- ---------
Effect of exchange rate losses on cash.................. (86) -- (180) (1,673) (595)
------- -------- --------- ------- ---------
Increase in cash and equivalents........................ 1,385 4,512 4,315 56,034 3,402
Cash and cash equivalents, beginning of period.......... 4,315 -- -- 9,418 6,016
------- -------- --------- ------- ---------
Cash and cash equivalents, end of period................ $ 5,700 $ 4,512 $ 4,315 $65,452 $ 9,418
======= ======== ========= ======= =========
The accompanying notes are an integral part of these statements.
F-5
129
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL CUMULATIVE
COMMON PAID-IN PARTNERS' TRANSLATION RETAINED
STOCK CAPITAL CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ---------- --------- ----------- -------- ---------
Predecessor:
BALANCE AT DECEMBER 31, 1993...... $ 176,904 $ (6,228) $ 170,676
Net income..................... 23,880 23,880
Translation adjustment......... (1,668) (1,668)
Distribution................... (31,000) (31,000)
--------- -------- ---------
BALANCE AT DECEMBER 31, 1994...... 169,784 (7,896) 161,888
Net income..................... 17,640 17,640
Translation adjustment......... 402 402
Distribution................... (1,918) (1,918)
--------- -------- ---------
BALANCE AT DECEMBER 31, 1995...... 185,506 (7,494) 178,012
Successor:
Issuance of 17,857,698
shares....................... $179 $107,497 107,676
Elimination of partners'
interests.................... (185,506) 7,494 (178,012)
Net income..................... $ 245 245
Translation adjustment......... 1,159 1,159
---- -------- --------- -------- ------- ---------
BALANCE AT DECEMBER 31, 1996...... 179 107,497 -- 1,159 245 109,080
Issuance of 416,430 shares..... 4 3,140 3,144
Forfeiture of 112,953 shares of
stock........................ (1) 1 --
Income tax benefit related to
stock plans.................. 111 111
Net income..................... 14,386 14,386
Translation adjustment......... (490) -- (490)
---- -------- --------- -------- ------- ---------
BALANCE AT JUNE 30, 1997
(Unaudited).................... $182 $107,609 $ -- $ 669 $17,771 $ 126,231
==== ======== ========= ======== ======= =========
The accompanying notes are an integral part of these statements.
F-6
130
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
National-Oilwell, Inc. was formed to acquire National-Oilwell, a general
partnership between National Supply Company, Inc., a subsidiary of Armco Inc.,
and Oilwell, Inc., a subsidiary of USX Corporation, and subsidiaries, (the
"Partnership"). The consolidated financial information of the Partnership, as
predecessor, has been included with the consolidated financial information of
National-Oilwell, Inc. and subsidiaries for purposes of comparability.
References herein to National-Oilwell, Inc. (the "Company") refer to the
Partnership for periods prior to January 1, 1996 and to National-Oilwell, Inc.
and subsidiaries for subsequent periods. Effective as of January 1, 1996,
National Oilwell, Inc. acquired the Partnership (the "Acquisition") for a
purchase price of $180 million, which approximated book value. The transaction
was accounted for under the purchase method of accounting and accordingly all
assets and liabilities of the Partnership were recorded at their fair values
resulting in only minimal basis adjustments. The purchase price and related
expenses were financed by new equity, existing cash, a new credit facility
consisting of a revolving credit line totaling $120 million and term debt of $30
million, a $5 million subordinated note and seller notes of $20 million.
Approximately $67 million of the revolving credit line was utilized to
consummate the transaction. A summary of the transaction is as follows (in
thousands):
Fair value of assets acquired, other than cash............ $242,268
Cash paid to acquire Partnership.......................... 106,248
Purchase price financed by seller notes................... 20,000
--------
Liabilities assumed............................. $116,020
========
On October 29, 1996, the Company sold 4.6 million shares of its common
stock through an initial public offering (the "IPO"). Net proceeds of
approximately $72 million were used to repay debt incurred in connection with
the Acquisition, including the outstanding balance of approximately $24 million
in term loans under the existing credit facility, the $5 million subordinated
note and $43 million of the revolving credit facility.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end. Actual results could differ from those
estimates.
In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial position as of
June 30, 1997, and the results of operations and cash flows for each of the
six-month periods ended June 30, 1997 and 1996. Although management believes the
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 six-month period ended June 30,
1997 are not necessarily indicative of the results to be expected for the full
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
F-7
131
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables and debt instruments. Cash equivalents
include only those investments having a maturity of three months or less at the
time of purchase. The carrying values of these financial instruments approximate
their respective fair values.
Inventories
Inventories consist of oilfield products and oil country tubular goods,
manufactured equipment and spare parts for manufactured equipment. Inventories
are stated at the lower of cost or market using the first-in, first-out or
average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
improvements which extend the lives of property and equipment are capitalized
while minor replacements, maintenance and repairs are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations. Depreciation is provided using
the straight-line method over the estimated useful lives of individual items.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the
five-year life of the related debt security and accumulated amortization was
$40,000 at December 31, 1996. Goodwill is amortized on a straight-line basis
over its estimated life of 40 years. Accumulated amortization was $162,000 at
December 31, 1996.
Foreign Currency
The functional currency for the Company's Canadian, United Kingdom and
Australian subsidiaries is the local currency. The cumulative effects of
translating the balance sheet accounts from the functional currency into the
U.S. dollar at current exchange rates are included in cumulative foreign
currency translation adjustments. The U.S. dollar is used as the functional
currency for the Singapore and Venezuelan subsidiaries. For all operations,
gains or losses from remeasuring foreign currency transactions into the
functional currency are included in income.
Revenue Recognition
Revenue from the sale of products is recognized upon passage of title to
the customer.
Income Taxes
The Company provides for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax
reporting basis of assets and liabilities.
Concentration of Credit Risk
The Company grants credit to its customers which operate primarily in the
oil and gas industry. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not
F-8
132
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
require collateral. Receivables are generally due within 30 days. The Company
maintains reserves for potential losses and such losses have historically been
within management's expectations.
Long-Lived Assets
Effective January 1, 1996, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was adopted
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and estimated future
undiscounted cash flows indicate the carrying value of those assets may not be
recoverable. The adoption did not have a material effect on the financial
statements.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," and elected to continue to use the intrinsic
value method in accounting for its stock-based employee compensation plans.
Net Income Per Share
Average shares outstanding is the weighted average of issued shares of
common stock outstanding for the entire year, 340,926 shares of common stock
deemed to be outstanding for the entire year pursuant to the Value Appreciation
Plans discussed in Note 8 and 4.6 million common shares issued on October 29,
1996 in connection with the initial public offering. Earnings per share for
periods prior to 1996 are not relevant due to the Partnership status.
3. INVENTORIES
Inventories consist of (in thousands):
JUNE 30, DECEMBER 31,
----------- -------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
Raw materials and supplies.......................... $ 11,053 $ 9,510 $ 11,528
Work in process..................................... 11,665 6,141 4,842
Finished goods and purchased products............... 112,719 99,828 104,316
-------- -------- --------
$135,437 $115,479 $120,686
======== ======== ========
Foreign inventories represent approximately 20% of total inventories.
4. STATEMENTS OF CASH FLOWS
The following information is provided to supplement the Statements of Cash
Flows (in thousands):
JUNE 30, DECEMBER 31,
--------------- ------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(UNAUDITED)
Cash paid during the period for:
Interest and financial costs............ $1,059 $4,251 $8,673 $1,548 $3,774
Income taxes............................ 5,150 1,509 3,300 332 557
F-9
133
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of (in thousands):
DECEMBER 31,
ESTIMATED JUNE 30, ------------------
USEFUL LIVES 1997 1996 1995
------------ ----------- ------- --------
(UNAUDITED)
Land and improvements.................... 2-20 Years $ 2,971 $ 2,057 $ 2,509
Buildings................................ 5-31 Years 8,394 5,587 10,404
Machinery and equipment.................. 5-12 Years 12,949 7,761 31,139
Computer and office equipment............ 3-10 Years 10,980 6,866 19,079
------- ------- --------
35,294 22,271 63,131
Less accumulated depreciation.......... (7,253) (3,591) (44,254)
------- ------- --------
$28,041 $18,680 $ 18,877
======= ======= ========
6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
DECEMBER 31,
JUNE 30, -----------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
Revolving credit facilities........................... $33,825 $16,392 $ 9,128
Seller notes.......................................... 21,800 20,000 --
------- ------- -------
$55,625 $36,392 $ 9,128
======= ======= =======
Credit Agreement
The Company entered into a new five-year Senior Secured Revolving Credit
Facility (the "Credit Facility") effective as of the closing of the IPO. The
Credit Facility provides for a $120 million revolving loan, of which $25 million
may be used for letters of credit. Outstanding letters of credit at December 31,
1996 totaled $12 million. The Credit Facility is subject to a borrowing base
limitation of various percentages of eligible inventory, accounts receivable and
the book value of certain fixed assets. The Credit Facility is secured by
substantially all of the Company's assets and contains certain financial
covenants and ratios as well as a limitation on dividends. The interest rate on
the Credit Facility is prime plus .75% or LIBOR plus 2.00% (9.00% and 7.53% at
December 31, 1996). A commitment fee of 0.375% is charged on the unused portion.
Borrowing availability was approximately $86 million at December 31, 1996.
Seller Notes
The Company owes $10 million to each of the two sellers in connection with
the Acquisition. The notes are subordinate to other existing debt and bear
interest at the rate of 9%. At its option, the Company may defer payment of
interest due prior to January 16, 2003. On January 16, 1997, the Company elected
to defer payment of $1.8 million in interest expense recorded in 1996. One-half
of the sum of the principal and any deferred interest is payable on January 16,
2004, and the balance is payable on January 16, 2005. The notes are subject to
full or partial prepayment in certain events, including the sale of significant
assets by the Company or the subsequent sale of Company stock by stockholders
who acquired their interests at the time of the Acquisition. There are no
scheduled maturities of long-term debt prior to the $16,392,000 payable in
October 2001.
F-10
134
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PENSION PLANS
The Company and its consolidated subsidiaries have several pension plans
covering substantially all of its employees. Defined-contribution pension plans
cover most of the U.S. and Canadian employees and are based on years of service
and a percentage of current earnings. For the years ended December 31, 1996,
1995 and 1994, pension expense for defined-contribution plans was $1.6 million,
$1.5 million and $1.9 million, respectively, and the funding is current.
The Company's subsidiary in the United Kingdom has a defined-benefit
pension plan whose participants are primarily retired and terminated employees
who are no longer accruing benefits. The pension plan assets are invested
primarily in equity securities, United Kingdom government securities, overseas
bonds and cash deposits. The plan assets at fair market value were $36.8 million
at December 31, 1996 and $32.1 million at December 31, 1995. The projected
benefit obligation was $25.8 million at December 31, 1996 and $23.1 million at
December 31, 1995. Net periodic pension cost or benefit has been insignificant
during the last three years.
8. COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings and storage facilities, vehicles and
data processing equipment under operating leases extending through various dates
up to the year 2004. Rent expense for years ended December 31, 1996, 1995 and
1994 was $9.3 million, $9.7 million and $8.7 million, respectively. The
Company's minimum rental commitments for operating leases at December 31, 1996
were as follows: 1997 -- $4.9 million; 1998 -- $3.9 million; 1999 -- $1.8
million; 2000 -- $1.2 million; 2001 -- $1.1 million; thereafter -- $6.4 million.
The Company is involved in various claims, regulatory agency audits and
pending or threatened legal actions involving a variety of matters. The total
liability on these matters at December 31, 1996 cannot be determined; however,
in the opinion of management, any ultimate liability, to the extent not
otherwise provided for, should not materially affect the financial position,
liquidity or results of operations of the Company.
The Company's business is affected both directly and indirectly by
governmental laws and regulations relating to the oilfield service industry in
general, as well as by environmental and safety regulations that specifically
apply to the Company's business. Laws and regulations protecting the environment
have generally become more expansive and stringent in recent years and the
Company believes the trend will continue. Although the Company has not incurred
material costs in connection with its compliance with such laws, there can be no
assurance that other developments, such as stricter environmental laws,
regulations and enforcement policies thereunder, could not result in additional,
presently unquantifiable, costs or liabilities to the Company.
9. COMMON STOCK
The Company has authorized 40 million shares, $.01 par value, common stock.
The Company has also authorized 10 million shares of $.01 par value preferred
stock, none of which is issued or outstanding.
Pursuant to the Company's Stock Award and Long-Term Incentive Plan, 941,303
shares of restricted common stock were purchased by executive officers. These
shares are subject to restriction on transferability and are not entitled to
participate in dividends or distributions. Restrictions lapse annually regarding
20% of these shares beginning on January 17, 1997 or in their entirety upon the
occurrence of (i) a merger or consolidation of the Company into another company,
(ii) a sale of all or substantially all the assets of the Company, or (iii) a
sale of all the common stock of the Company. Restrictions also lapse in their
entirety upon a participant's disability, death or involuntary termination of
employment without cause. On August 28, 1996, the Company's board of directors
approved, subject to stockholder approval, the amendment and
F-11
135
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restatement of the plan to authorize the issuance of up to 1,000,000 additional
shares of common stock pursuant to awards made thereunder, all of which remained
available for issuance as of December 31, 1996.
In January 1996, the Company established Value Appreciation Plans (the
"Plans") intended to reward participants for enhancing the value of the
Company's common stock. The IPO represented a triggering event under these
Plans. Based upon the offering price of $17.00, the Plans resulted in a one-time
charge before taxes of $12.2 million ($7.6 million after tax). The Company paid
$2.9 million of this amount in cash at the time of the IPO, $3.5 million in cash
will be paid in five annual installments beginning January 17, 1997 and 340,926
shares of common stock will be issued. One-half of the shares of common stock
will be issued one year after the IPO and the remaining one-half on January 17,
1999, subject to earlier issuance to terminated employees in certain
circumstances.
On March 21, 1997, options to purchase 142,097 shares of the Company's
common stock were granted to 54 employees of the Company, and options to
purchase another 12,000 shares of the Company's common stock were granted to six
non-employee directors, all at the exercise price of $31.875 per share, the
Company's closing price on the New York Stock Exchange on the date of grant.
Each of the options vest in equal installments over a three year period. At the
Company's annual meeting on May 14, 1997, the Stockholders approved the amended
and restated option plan.
On May 12, 1997, an executive officer of the Company resigned and 112,953
shares of restricted stock were repurchased by the Company pursuant to the
restricted stock agreement granted under the Company's Stock Award and Long-Term
Incentive Plan. In accordance with the plan, these forfeited shares may be
reawarded in the future.
10. INCOME TAXES
Prior to 1996, the Company was a partnership for U.S. federal tax purposes
and provided for foreign taxes but did not provide for U.S. federal or state
taxes on its income.
The domestic and foreign components of income before income taxes and
extraordinary loss were as follows (in thousands):
JUNE 30,
----------------
1997 1996 1996 1995 1994
------- ------ ------- ------- -------
(UNAUDITED)
Domestic............................. $17,524 $4,702 $(1,530) $14,194 $22,840
Foreign.............................. 5,682 1,965 8,324 5,383 2,081
------- ------ ------- ------- -------
$23,206 $6,667 $ 6,794 $19,577 $24,921
======= ====== ======= ======= =======
F-12
136
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for income taxes before extraordinary loss
consisted of (in thousands):
JUNE 30,
---------------
1997 1996 1996 1995 1994
------ ------ ------- ------ ------
(UNAUDITED)
Current:
Federal............................... $7,109 $1,090 $ 3,841 $ -- $ --
State................................. 594 99 307 -- --
Foreign............................... 1,656 773 812 1,428 132
------ ------ ------- ------ ------
9,359 1,962 4,960 1,428 132
------ ------ ------- ------ ------
Deferred:
Federal............................... (942) 507 (3,898) -- --
State................................. (208) 112 (864) -- --
Foreign............................... 611 86 2,351 509 909
------ ------ ------- ------ ------
(539) 705 (2,411) 509 909
------ ------ ------- ------ ------
$8,820 $2,667 $ 2,549 $1,937 $1,041
====== ====== ======= ====== ======
Additionally, in 1996, the Company recorded a current tax benefit of $2.4
million related to the extraordinary loss of $6.4 million.
The difference between the effective tax rate reflected in the provision
for income taxes and the U.S. federal statutory rate was as follows (in
thousands):
JUNE 30,
---------------
1997 1996 1996 1995 1994
------ ------ ------ ------- -------
(UNAUDITED)
Federal income tax at statutory rate... $8,122 $2,333 $2,378 $ 6,852 $ 8,722
Foreign income tax rate differential... 262 26 90 184 368
Untaxed U.S. partnership income........ -- -- -- (4,968) (7,994)
Nondeductible expenses................. 494 341 321 398 293
Unutilized foreign operating loss...... -- -- -- 1,037 278
Change in deferred tax valuation
allowance............................ -- -- (462) (1,577) (809)
Other.................................. (58) (33) 222 11 183
------ ------ ------ ------- -------
$8,820 $2,667 $2,549 $ 1,937 $ 1,041
====== ====== ====== ======= =======
F-13
137
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows (in thousands):
DECEMBER 31,
JUNE 30, --------------------------------
1997 1996 1995 1994
----------- -------- -------- --------
(UNAUDITED)
Deferred tax assets:
Book over tax depreciation.......... $ 287 $ 232 $ 1,153 $ 1,729
Compensation liabilities............ 4,653 4,945 -- --
Insurance reserves.................. 4,625 4,626 -- --
Other accrued liabilities........... 4,164 3,305 1,205 2,887
Net operating loss carryforwards.... 7,615 7,615 6,780 7,268
Other............................... 4,726 4,454 1,070 508
-------- -------- -------- --------
26,070 25,177 10,208 12,392
Valuation allowance for deferred tax
assets........................... (12,815) (12,815) (8,310) (9,887)
-------- -------- -------- --------
13,255 12,362 1,898 2,505
-------- -------- -------- --------
Deferred tax liabilities:
Tax over book depreciation.......... 1,142 1,376 448 346
Other............................... 699 111 -- 200
-------- -------- -------- --------
1,841 1,487 448 546
-------- -------- -------- --------
Net deferred tax assets..... $ 11,414 $ 10,875 $ 1,450 $ 1,959
======== ======== ======== ========
In connection with the Acquisition, the Company adjusted its deferred tax
assets and liabilities as of January 1, 1996 resulting in an increase to
deferred tax assets of $13.7 million and related valuation allowance of $5.0
million. The increase in the valuation allowance at January 1, 1996 was related
to the Company's estimate of restated deferred tax assets that may not be
realized. Any future decrease in the valuation allowance recorded at January 1,
1996 will reduce goodwill. The deferred tax valuation allowance, after
considering the effect of the above increase, decreased $462,000 and $1.6
million for the periods ending December 31, 1996 and December 31, 1995,
respectively. The decrease in the valuation allowance in 1995 is related to the
realization of foreign net operating losses that were previously deferred. The
Company's deferred tax assets are expected to be realized principally through
future earnings.
Undistributed earnings of the Company's foreign subsidiaries amounted to
$14.3 million and $9.1 million at December 31, 1996 and December 31, 1995,
respectively. Those earnings are considered to be permanently reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been made.
Distribution of these earnings in the form of dividends or otherwise would
result in both U.S. federal taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable in various foreign countries.
Determination of the amount of unrecognized deferred U.S. income tax liability
is not practicable; however, unrecognized foreign tax credit carryforwards would
be available to reduce some portion of the U.S. liability. Withholding taxes of
approximately $1.4 million would be payable upon remittance of all previously
unremitted earnings at December 31, 1996.
11. SPECIAL CHARGES (INCOME) AND EXTRAORDINARY LOSS
Special charges (income) consist of the following (in thousands):
1996 1995 1994
------- ------- --------
IPO related expenses................................. $16,611 $ -- $ --
Sale of product lines and assets..................... -- (8,458) (15,648)
Employee terminations and other costs................ -- -- 1,732
------- ------- --------
Total...................................... $16,611 $(8,458) $(13,916)
======= ======= ========
F-14
138
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IPO Related Expenses. In connection with the IPO, the Company incurred
certain one-time expenses. The Management Services Agreement was terminated at a
cost of $4.4 million ($2.8 million after tax). The Company's Value Appreciation
Plans were triggered, resulting in awards to certain executives and key
employees totaling $12.2 million ($7.6 million after tax) as discussed in Note
8. Also in connection with the IPO, the existing credit facility was replaced,
resulting in the write-off of $6.4 million ($4.0 million after tax) of deferred
financing costs related to the existing agreement which has been reflected in
the accompanying statement of operations as an extraordinary loss.
Sale of Product Lines and Assets. During the second quarter of 1995 the
Company completed the sale of the Wilson-Snyder centrifugal pump and switch
valve product line. Proceeds of approximately $6.9 million from that sale
resulted in a gain of $5.5 million. In addition, the Company recorded a net gain
of approximately $3.0 million related to the final closure of a facility in the
United Kingdom and the sale of related property and equipment.
During 1994, the Company completed the sales of certain production
equipment product lines not considered part of its core businesses resulting in
a gain of $15.6 million. Proceeds received in 1994 totaled $41.0 million and
were used to reduce debt.
Employee Terminations and Other Costs. In conjunction with the announced
shutdown of a manufacturing facility in the United Kingdom, the Company expensed
approximately $3.2 million in 1994 relating to employee termination benefits.
These benefits were paid in the fourth quarter of 1994 and in 1995. The
consolidation of the Company's Houston, Texas manufacturing operations resulted
in lease termination and other costs of $600,000 which were paid in 1994. The
company also reversed $2.1 million in excess accruals made in prior years for
potential demolition and environment cleanup regarding a sold manufacturing
facility.
12. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into a five-year
Management Services Agreement with the Company's largest stockholder,
Inverness/Phoenix LLC, whereby the Company would pay $1 million per year for
senior management assistance and other services as agreed. The agreement also
provided that the Inverness/Phoenix LLC received 1% of the aggregate transaction
value in connection with each acquisition or disposition completed during the
five-year period and that First Reserve Corporation, the Company's second
largest stockholder, receive certain fees in connection with specific
acquisitions. In connection with the IPO, this agreement was terminated pursuant
to a Deferred Fee Agreement and is payable in quarterly installments of $250,000
through March 31, 2001, subject to acceleration if an acquisition transaction
occurs and payment does not effect the seller notes. Cash payments aggregating
$330,000 will be made to Inverness/Phoenix LLC and First Reserve Corporation due
to the acquisitions completed on April 25, 1997 and May 15, 1997. An additional
payment of $945,000 will be made if the acquisition of Dreco is completed and no
additional accelerated payments will occur in the future. Quarterly payments of
$250,000 will continue to be made through December 31, 1999.
The Company paid transaction fees of $1.8 million to the Inverness Group,
Inc. and $1.2 million to First Reserve Corporation in connection with the
Acquisition. Fees of $4.7 million were also paid to General Electric Capital
Corporation in connection with the provision of the Credit Agreements entered
into in connection with the Acquisition.
13. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations consist of the Products and Technology segment and
the Distribution Services segment. The Products and Technology segment designs
and manufactures a variety of oilfield equipment for use in oil and gas
drilling, completion and production activities. The Distribution Services
segment distributes an extensive line of oilfield supplies, oilfield equipment
and tubular products. The Disposed Businesses
F-15
139
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information includes the results of operations disposed of in prior years.
Intersegment sales and transfers are accounted for at commercial prices.
No single customer accounted for 10% or more of consolidated revenues
during the year ended December 31, 1996 and December 31, 1994. For the year
ended December 31, 1995, one major oil company accounted for 12.5% of
consolidated revenues.
Summarized financial information is as follows (in thousands):
Business Segments
PRODUCTS AND DISTRIBUTION DISPOSED
TECHNOLOGY(1) SERVICES CORPORATE(2) ELIMINATION BUSINESS(3) TOTAL
------------- ------------ ------------ ----------- ----------- --------
1996
Revenues from:
Unaffiliated customers................ $129,936 $518,685 $ -- $ -- $ -- $648,621
Intersegment sales.................... 51,732 -- -- (51,732) -- --
-------- -------- -------- -------- ------- --------
Total revenues................ 181,668 518,685 -- (51,732) -- 648,621
-------- -------- -------- -------- ------- --------
Operating income (loss)................. 21,283 17,483 (20,669) -- -- 18,097
Capital expenditures.................... 2,055 1,050 31 -- -- 3,136
Depreciation and amortization........... 1,886 1,650 55 -- -- 3,591
Identifiable assets..................... 91,168 154,985 23,378 (2,788) -- 266,743
1995
Revenues from:
Unaffiliated customers................ $113,511 $432,292 $ -- $ -- $ -- $545,803
Intersegment sales.................... 33,006 -- -- (33,006) -- --
-------- -------- -------- -------- ------- --------
Total revenues................ 146,517 432,292 -- (33,006) -- 545,803
-------- -------- -------- -------- ------- --------
Operating income (loss)................. 10,443 9,435 (2,866) -- 5,227 22,239
Capital expenditures.................... 3,540 1,157 67 -- -- 4,764
Depreciation and amortization........... 1,899 1,662 34 -- -- 3,595
Identifiable assets..................... 93,287 128,321 69,761 (2,791) -- 288,578
1994
Revenues from:
Unaffiliated customers................ $127,854 $415,722 $ -- $ -- $18,477 $562,053
Intersegment sales.................... 60,041 -- -- (60,041) -- --
-------- -------- -------- -------- ------- --------
Total revenues................ 187,895 415,722 -- (60,041) 18,477 562,053
-------- -------- -------- -------- ------- --------
Operating income (loss)................. 5,314 9,036 (2,898) -- 17,672 29,124
Capital expenditures.................... 1,690 1,832 44 -- 38 3,604
Depreciation and amortization........... 1,922 2,564 8 -- 1,533 6,027
Identifiable assets..................... 99,298 162,170 12,150 (5,314) -- 268,304
- ---------------
(1) Operating income (loss) of the Products and Technology segment includes
special charges (income) of $(3,231) and $1,732 for 1995 and 1994,
respectively.
(2) Operating income (loss) of Corporate includes special charges (income) of
$16,611 for 1996. Corporate identifiable assets in 1995 included $65.5
million of cash and cash equivalents.
(3) Operating income (loss) of the disposed businesses includes special charges
(income) of $(5,227) and $(15,648) for 1995 and 1994, respectively.
Operating results prior to the disposal date for the business sold in 1995
were immaterial.
F-16
140
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic Areas:
UNITED UNITED
STATES CANADA KINGDOM OTHER ELIMINATION TOTAL
-------- ------- ------- -------- ----------- --------
1996
Revenues from:
Unaffiliated customers.... $521,277 $76,137 $26,957 $ 24,250 $ -- $648,621
Interarea sales........... 29,099 245 1,912 504 (31,760) --
-------- ------- ------- -------- -------- --------
Total revenues.... 550,376 76,382 28,869 24,754 (31,760) 648,621
Operating income............ 11,975 1,386 1,926 2,810 -- 18,097
Export sales of U.S......... -- 1,845 3,815 90,183 -- 95,843
Identifiable assets......... 200,751 28,503 19,541 17,948 -- 266,743
1995
Revenues from:
Unaffiliated customers.... $430,671 59,390 $35,776 $ 19,966 $ -- $545,803
Interarea sales........... 34,416 878 16,285 233 (51,812) --
-------- ------- ------- -------- -------- --------
Total revenues.... 465,087 60,268 52,061 20,199 (51,812) 545,803
Operating income (loss)..... 18,707 2,003 (1,383) 2,912 -- 22,239
Export sales of U.S......... -- 1,700 1,539 80,075 -- 83,314
Identifiable assets......... 228,817 23,851 17,789 18,121 -- 288,578
1994
Revenues from:
Unaffiliated customers.... $442,555 $73,052 $29,708 $ 16,738 $ -- $562,053
Interarea sales........... 26,144 579 9,726 106 (36,555) --
-------- ------- ------- -------- -------- --------
Total revenues.... 468,699 73,631 39,434 16,844 (36,555) 562,053
Operating income (loss)..... 27,166 1,872 (314) 400 -- 29,124
Export sales of U.S......... -- 1,436 635 102,265 -- 104,336
Identifiable assets......... 188,634 34,567 32,136 14,967 -- 268,304
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results were as follows (in thousands, except per
share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- --------
1996
Revenues.......................... $141,144 $153,499 $173,499 $180,479 $648,621
Gross profit...................... 18,294 21,793 24,675 26,505 91,267
Special charges (income).......... -- -- -- 16,611 16,611
Income (loss) before taxes........ 2,081 4,586 7,341 (7,214) 6,794
Income before extraordinary
loss............................ 1,434 2,566 4,756 (4,511) 4,245
Extraordinary loss, net of income
tax benefit of $2,400........... -- -- -- (4,000) (4,000)
Net income........................ 1,434 2,566 4,756 (8,511) 245
Income per share before
extraordinary loss.............. 0.10 0.19 0.35 (0.27) 0.18
Net income per share.............. 0.10 0.19 0.35 (0.51) 0.02
1995
Revenues.......................... $135,935 $130,508 $133,641 $145,719 $545,803
Gross profit...................... 15,067 19,820 17,484 18,641 71,012
Special charges (income).......... (706) (6,794) 113 (1,071) (8,458)
Income before taxes............... 2,952 7,630 5,423 3,572 19,577
Net income........................ 2,616 6,762 4,981 3,281 17,640
F-17
141
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. ACQUISITIONS
On April 25, 1997, the Company purchased the drilling controls business of
Ross Hill Controls and its affiliate, Hill Graham Controls Limited for $19
million in cash. This business involves the manufacture, sale and service of
electrical control systems used in conjunction with drilling operations. The
transaction will be accounted for under the purchase method of accounting and
did not have a material effect on the Company's financial statements.
On May 15, 1997, the Company purchased 100% of the common stock of PEP,
Inc., a manufacturer of petroleum expendable pump products. The Company issued
400,000 shares of common stock to fund the transaction which will be recorded in
accordance with the pooling of interests method of accounting. The transaction
did not have a material effect on the Company's historical financial statements
and financial statements prior to April 1, 1997 have not been restated.
On May 14, 1997, the Company entered into a definitive agreement with Dreco
Energy Services Ltd. to combine the two companies. The terms of the agreement
provide for the exchange of 100% of the Dreco common shares for Dreco
exchangeable shares, which can be converted into National-Oilwell common shares,
in a pooling of interests transaction that is expected to be tax free to both
companies. The merger has been approved by the boards of directors of both
companies and is subject to various conditions, including approvals by the
shareholders of both companies and regulatory approvals in both the United
States and Canada.
F-18
142
ANNEX A
143
ANNEX A
FORM OF ARRANGEMENT RESOLUTION
RESOLUTION FOR CONSIDERATION AT THE SPECIAL MEETING
OF SHAREHOLDERS AND OPTIONHOLDERS
OF
DRECO ENERGY SERVICES LTD.
(THE "CORPORATION")
BE IT RESOLVED THAT:
1. The Combination Agreement and plan of arrangement involving the Corporation
and National-Oilwell dated as of May 14, 1997, as amended, the full text of
which is set out as Annex B to the Joint Proxy Statement/Prospectus of the
Corporation and National-Oilwell dated August 25, 1997 (the "Joint Proxy
Statement"/Prospectus) (as the same may be or may have been amended and
presented to this meeting), and the transactions contemplated thereby, are
hereby approved and adopted;
2. The arrangement (the "Arrangement") under section 186 of the Business
Corporations Act (Alberta) (the "ABCA"), involving the Corporation and
National-Oilwell, Inc. ("National-Oilwell"), which has been presented to this
meeting (as the same may be modified or amended) is hereby authorized,
approved and adopted;
3. Notwithstanding the passing of this resolution by the Dreco Shareholders and
Dreco Optionholders (each as defined in the Joint Proxy Statement/Prospectus)
or the approval of the Court of Queen's Bench of Alberta, the board of
directors of the Corporation, without further notice to or approval of the
Dreco Shareholders and Dreco Optionholders, may decide not to proceed with
the Arrangement or may revoke this resolution at any time prior to the
Arrangement becoming effective pursuant to the provisions of the ABCA;
4. Any two directors or officers of the Corporation are hereby authorized and
directed for and on behalf of the Corporation to execute or cause to be
executed, under corporate seal or otherwise, and to deliver or cause to be
delivered all such documents, agreements and instruments and to do or cause
to be done all such other acts and things as such directors or officers of
the Corporation shall determine to be necessary or desirable in order to
carry out the intent of the foregoing paragraphs of this resolution and the
matters authorized thereby, such determination to be conclusively evidenced
by the execution and delivery of such document, agreement or instrument or
the doing of any such act or thing.
A-1
144
ANNEX B
145
COMBINATION AGREEMENT
BY AND BETWEEN
NATIONAL-OILWELL, INC.
AND
DRECO ENERGY SERVICES LTD.
DATED AS OF MAY 14, 1997
(AS AMENDED)
B-1
146
TABLE OF CONTENTS
PAGE
----
ARTICLE I -- GENERAL.................................................... B-4
1.1 Plan of Arrangement......................................... B-4
1.2 Adjustments to Exchange Ratio............................... B-6
1.3 Dissenting Shares........................................... B-6
1.4 Other Effects of the Arrangement............................ B-7
1.5 Restated NOI Charter........................................ B-7
1.6 Joint Proxy Statement; Registration Statement............... B-7
1.7 Material Adverse Effect..................................... B-8
1.8 Currency.................................................... B-8
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF DRECO................... B-8
2.1 Organization and Standing................................... B-8
2.2 Agreement Authorized and its Effect on Other Obligations.... B-8
2.3 Governmental Consents....................................... B-9
2.4 Capitalization.............................................. B-9
Securities Reports and Financial Statements, Books and
2.5 Records..................................................... B-10
2.6 Liabilities................................................. B-11
2.7 Information Supplied........................................ B-11
2.8 No Defaults................................................. B-11
2.9 Litigation; Investigations.................................. B-11
2.10 Absence of Certain Changes and Events....................... B-11
2.11 Additional Dreco Information................................ B-12
2.12 Certain Agreements.......................................... B-12
2.13 Employee Benefit Plans...................................... B-12
2.14 Intellectual Property....................................... B-13
2.15 Title to Properties......................................... B-13
2.16 Environmental Matters....................................... B-14
2.17 Compliance With Other Laws.................................. B-14
2.18 Taxes....................................................... B-15
2.19 Vote Required............................................... B-15
2.20 Pooling Matters............................................. B-15
2.21 Brokers and Finders......................................... B-15
2.22 Disclosure.................................................. B-15
2.23 Fairness and Pooling Opinions............................... B-15
2.24 Restrictions on Business Activities......................... B-15
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF NOI.................... B-16
3.1 Organization and Standing................................... B-16
3.2 Agreement Authorized and its Effect on Other Obligations.... B-16
3.3 Governmental Consents....................................... B-16
3.4 Capitalization.............................................. B-17
3.5 Securities Reports and Financial Statements................. B-17
3.6 Liabilities................................................. B-18
3.7 Information Supplied........................................ B-18
3.8 No Defaults................................................. B-18
3.9 Litigation; Investigations.................................. B-18
3.10 Absence of Certain Changes and Events....................... B-18
3.11 Additional NOI Information.................................. B-19
3.12 Certain Agreements.......................................... B-19
3.13 Employee Benefit Plans...................................... B-19
3.14 Intellectual Property....................................... B-20
B-2
147
PAGE
----
3.15 Title to Properties......................................... B-20
3.16 Environmental Matters....................................... B-21
3.17 Compliance With Other Laws.................................. B-21
3.18 Taxes....................................................... B-21
3.19 Vote Required............................................... B-22
3.20 Pooling Matters............................................. B-22
3.21 Brokers and Finders......................................... B-22
3.22 Disclosure.................................................. B-22
3.23 Fairness and Pooling Opinions............................... B-22
3.24 Restrictions on Business Activities......................... B-22
ARTICLE IV -- OBLIGATIONS PENDING EFFECTIVE DATE........................ B-22
4.1 Agreements of NOI and Dreco................................. B-22
4.2 Additional Agreements of Dreco.............................. B-23
4.3 Additional Agreements of NOI................................ B-25
4.4 Public Announcements........................................ B-26
4.5 Comfort Letters............................................. B-26
4.6 Board of Directors.......................................... B-27
ARTICLE V -- CONDITIONS PRECEDENT TO OBLIGATIONS........................ B-27
5.1 Conditions Precedent to Obligations of Each Party........... B-27
5.2 Conditions Precedent to Obligations of Dreco................ B-28
5.3 Conditions Precedent to Obligations of NOI.................. B-29
ARTICLE VI -- TERMINATION............................................... B-30
6.1 Termination................................................. B-31
6.2 Notice of Termination....................................... B-31
6.3 Effect of Termination....................................... B-31
6.4 Termination Fee............................................. B-31
ARTICLE VII -- ADDITIONAL AGREEMENTS.................................... B-32
7.1 Meetings.................................................... B-32
7.2 The Closing................................................. B-32
7.3 Ancillary Documents/Reservation of Shares................... B-32
7.4 Conversion of Options....................................... B-32
7.5 Indemnification and Related Matters......................... B-33
7.6 Affiliate Agreements........................................ B-34
ARTICLE VIII -- MISCELLANEOUS........................................... B-34
8.1 No Survival of Representations and Warranties............... B-34
8.2 Notices..................................................... B-34
8.3 Interpretation.............................................. B-34
8.4 Severability................................................ B-34
8.5 Counterparts................................................ B-34
8.6 Miscellaneous............................................... B-35
8.7 Governing Law............................................... B-35
8.8 Amendment and Waivers....................................... B-35
8.9 Expenses.................................................... B-35
B-3
148
COMBINATION AGREEMENT
THIS COMBINATION AGREEMENT (as amended, this "Agreement") is entered into
as of May 14, 1997, by and between National-Oilwell, Inc., a Delaware
corporation ("NOI"), and Dreco Energy Services Ltd., an Alberta corporation
("Dreco").
RECITALS
WHEREAS, the respective boards of directors of NOI and Dreco each deem it
advisable and in the best interests of their respective stockholders to combine
their respective businesses by NOI acquiring shares in the capital stock of
Dreco pursuant to this Agreement and the Plan of Arrangement (as hereinafter
defined).
WHEREAS, in furtherance of such acquisition, the respective boards of
directors of NOI and Dreco have approved the transactions contemplated by this
Agreement, the board of directors of Dreco has agreed to submit the Plan of
Arrangement and the other transactions contemplated hereby to its shareholders
and optionholders (together, "securityholders") and the Court of Queen's Bench
of Alberta (the "Court") for approval, and the board of directors of NOI has
agreed to submit the Restated NOI Charter (as hereinafter defined) and the other
transactions contemplated hereby to its stockholders for approval.
WHEREAS, the respective boards of directors of NOI and Dreco have approved
and adopted this Agreement and the Plan of Arrangement as a plan of
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"), and as a reorganization of capital of Dreco under Section
86 of the Income Tax Act (Canada) (the "ITA") for those Dreco shareholders who
hold Dreco Common Shares (as hereinafter defined), on capital account.
WHEREAS, it is intended that the transactions contemplated hereby will be
treated as a "pooling of interests" for accounting purposes.
WHEREAS, to induce NOI to enter into this Agreement, contemporaneously
herewith Frederick W. Pheasey and Robert L. Phillips, owners of approximately
5.2% of the issued and outstanding Dreco Common Shares, have entered into an
agreement (the "Dreco Stockholders Agreement") pursuant to which they have
agreed to support the Plan of Arrangement and the other transactions
contemplated hereby.
WHEREAS, to induce Dreco to enter into this Agreement, contemporaneously
herewith DPI Oil Service Partners Limited Partnership, DPI Partners II, First
Reserve Fund VI, Limited Partnership, First Reserve Fund V-2, Limited
Partnership and First Reserve Fund V, Limited Partnership, owners of
approximately 52% of the issued and outstanding NOI Common Stock (as hereinafter
defined), have entered into an agreement (the "NOI Stockholders Agreement")
pursuant to which they have agreed to support the Plan of Arrangement and the
other transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
GENERAL
1.1 Plan of Arrangement. As promptly as practicable, Dreco will apply to
the Court pursuant to Part 15 of the Business Corporations Act (Alberta) (the
"ABCA") for an interim order in form and substance reasonably satisfactory to
NOI (the "Interim Order") providing for, among other things, the calling and
holding of the Dreco Shareholders Meeting (as hereinafter defined) for the
purpose of considering and, if deemed advisable, approving the arrangement (the
"Arrangement") under Part 15 of the ABCA and pursuant to this Agreement and the
Plan of Arrangement substantially in the form of Exhibit A (the "Plan of
Arrangement"). If the Dreco securityholders approve the Arrangement, thereafter
Dreco will take the necessary steps to submit the Arrangement to the Court and
apply for a final order of the Court approving the Arrangement in such fashion
as the Court may direct (the "Final Order"). At 12:01 a.m. (the "Effective
Time") on the date (the "Effective Date") shown on the certificate of
arrangement issued by the Registrar
B-4
149
under the ABCA giving effect to the Arrangement, the reorganization of capital
and other transactions set out in clauses (a) through (k), inclusive, of Section
2.1 of the Plan of Arrangement shall occur and shall be deemed to occur in the
following order without any further act or formality.
1.2 Adjustments to Exchange Ratio. (a) The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
NOI Common Stock or Dreco Common Shares), reorganization, recapitalization or
other like change with respect to NOI Common Stock or Dreco Common Shares
occurring after the date hereof and prior to the Effective Time.
(b) The Exchange Ratio shall also be adjusted pursuant to the following:
(i) if the average of the per share closing price on the New York
Stock Exchange (the "NYSE") of shares of NOI Common Stock (as reported in
the NYSE composite transactions) during the 20 consecutive trading days
ending on the fifth trading day prior to the Effective Time (the
"Pre-Closing Average Price") shall be less than $36.00 per share, the
Exchange Ratio shall be adjusted to equal 1.2 multiplied by a fraction, the
numerator of which is $36.00 and the denominator of which is the higher of
(A) $33.00 and (B) the Pre-Closing Average Price; and
(ii) if the Pre-Closing Average Price shall be greater than $47.25 per
share, the Exchange Ratio shall be adjusted to equal 1.2 multiplied by a
fraction, the numerator of which is $47.25 and the denominator of which is
the Pre-Closing Average Price;
provided, however, that Dreco shall have the right to terminate this Agreement
in accordance with Section 6.1(k) in the event the Pre-Closing Average Price is
less than $33.00 per share and NOI, after Dreco shall have exercised its right
to request NOI to do so, elects not to adjust the Exchange Ratio to equal 1.2
multiplied by a fraction, the numerator of which is $36.00, and the denominator
of which is the Pre-Closing Average Price.
1.3 Dissenting Shares. Holders of Dreco Common Shares may exercise rights
of dissent with respect to such shares in connection with the Arrangement
pursuant to and in the manner set forth in Section 184 of the ABCA and Section
3.1 of the Plan of Arrangement (such holders referred to as "Dissenters" or as
"Dissenting Shareholders" when referring exclusively to Dreco Shareholders).
Dreco shall give NOI (i) prompt notice of any written demands of a right of
dissent, withdrawals of such demands, and any other instruments served pursuant
to the ABCA and received by Dreco and (ii) the opportunity to participate in all
negotiations and proceedings with respect to such rights. Without the prior
written consent of NOI, except as required by applicable law, Dreco shall not
make any payment with respect to any such rights or offer to settle or settle
any such rights.
1.4 Other Effects of the Arrangement. At the Effective Time: (a) the
directors of Dreco will be C. R. Bearden, Edward C. Grimes and Frederick W.
Pheasey; (b) the officers of Dreco will be as designated by the board of
directors of Dreco prior to the Effective Time, subject to later removal and
appointment of other officers; (c) each Dreco Common Share and each Dreco Option
outstanding immediately prior to the Effective Time will be exchanged as
provided in Section 1.1; and (d) the Arrangement will, from and after the
Effective Time, have all of the effects provided by applicable law, including
the ABCA.
1.5 Restated NOI Charter. Prior to the Closing, NOI shall have restated
its Certificate of Incorporation as set forth in Exhibit B (the "Restated NOI
Charter").
1.6 Joint Proxy Statement; Registration Statement.
(a) As promptly as practicable after execution of this Agreement, NOI and
Dreco shall prepare and file with the United States Securities and Exchange
Commission (the "SEC") a preliminary joint management information circular and
proxy statement (the "Joint Proxy Statement"), together with any other documents
required by the Securities Act of 1933, as amended (the "Securities Act"), or
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
connection with the Arrangement and the other transactions contemplated hereby.
The Joint Proxy Statement shall constitute (i) the management information
circular of Dreco with respect to the meeting of securityholders of Dreco
relating to the Arrangement and the approval of
B-5
150
certain matters in connection therewith (the "Dreco Shareholders Meeting") and
(ii) the proxy statement of NOI with respect to the meeting of stockholders of
NOI with respect to the issuance of NOI Common Stock from time to time upon
exchange of the Exchangeable Shares and certain other matters (including the
approval of the Restated NOI Charter) relating to the agreements of NOI
contained herein (the "NOI Stockholders Meeting"). As promptly as practicable
after the preliminary Joint Proxy Statement is cleared by the SEC, NOI and Dreco
shall cause the Joint Proxy Statement to be mailed to each company's respective
securityholders entitled to vote, as the case may be. If NOI determines on the
advice of its outside counsel that it is necessary to file a registration
statement (the "Registration Statement") in order to register the NOI Common
Stock to be issued from time to time after the Effective Time upon exchange of
the Exchangeable Shares, then NOI shall file the Registration Statement with the
SEC and, if necessary, maintain the effectiveness of such registration for the
period that such Exchangeable Shares remain outstanding and NOI and Dreco shall
use their best efforts to cause the Registration Statement to become effective
prior to the mailing of the Joint Proxy Statement. Notwithstanding anything
herein to the contrary, NOI shall be under no obligation to file the
Registration Statement if it shall have determined on the advice of its outside
counsel that the issuance of shares of NOI Common Stock upon exchange of the
Exchangeable Shares after the Effective Time is exempt from the registration
requirements of Section 5 of the Securities Act by virtue of Section 3(a)(9)
and/or 3(a)(10) thereof. In connection with such determination, NOI and Dreco
shall prepare and file with the SEC a request for no action (the "No Action
Request") seeking to confirm the availability of such an exemption.
(b) Each party shall promptly furnish to the other party all information
concerning such party and its securityholders as may be reasonably required in
connection with any action contemplated by this Section 1.6. The Joint Proxy
Statement and, if required, the Registration Statement, shall comply in all
material respects with all applicable requirements of law. Each of NOI and Dreco
will notify the other promptly of the receipt of any comments from the SEC and
of any request by the SEC for amendments or supplements to the Joint Proxy
Statement or the Registration Statement, if required, or for additional
information, and will supply the other with copies of all correspondence with
the SEC with respect to the Joint Proxy Statement or the Registration Statement,
if required. Whenever any event occurs which should be set forth in an amendment
or supplement to the Joint Proxy Statement or the Registration Statement, if
required, NOI or Dreco, as the case may be, shall promptly inform the other of
such occurrence and cooperate in filing with the SEC, and/or mailing to
securityholders entitled to vote of NOI and Dreco, as may be applicable, such
amendment or supplement.
(c) NOI and Dreco shall take any action required to be taken under any
applicable provincial or state securities laws (including "blue sky" laws) in
connection with the issuance of the NOI Common Stock and the Arrangement;
provided, however, that with respect to the blue sky and Canadian provincial
qualifications, neither NOI nor Dreco shall be required to register or qualify
as a foreign corporation or reporting issuer where any such entity is not now so
registered or qualified except as to matters and transactions arising solely
from the offer and sale of the NOI Common Stock or the issuance of the
Exchangeable Shares.
1.7 Material Adverse Effect. In this Agreement, the term "Material Adverse
Effect" used with respect to any party means any event, change or effect that is
materially adverse to the financial condition, properties or business of such
party and its subsidiaries, taken as a whole; provided, that a Material Adverse
Effect shall not include any decline in backlog between the date hereof and the
Effective Date resulting from a failure to receive new orders or any adverse
effect resulting from changes in general economic conditions or conditions
generally affecting the industries in which NOI or Dreco operate.
1.8 Currency. Unless otherwise specified, all references in this Agreement
to "dollars" or "$" shall mean United States dollars.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF DRECO
Except as set forth in a letter dated the date of this Agreement and
delivered by Dreco to NOI concurrently herewith (the "Dreco Disclosure Letter"),
Dreco hereby represents and warrants to, and agrees with, NOI that:
2.1 Organization and Standing. Dreco and each body corporate, partnership,
joint venture, association or other business entity of which more than 50% of
the total voting power of shares of stock or units of ownership or beneficial
interest entitled to vote in the election of directors (or members of a
comparable governing body) is owned or controlled, directly or indirectly, by
Dreco (the "Dreco Subsidiaries"), is an entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
organization, has full requisite power and authority to carry on its business as
it is currently conducted, and to own, lease and operate the properties
currently owned, leased and operated by it, and is duly qualified or licensed to
do business and is in good standing as a foreign corporation or organization
authorized to do business in all jurisdictions in which the character of the
properties owned or leased or the nature of the business conducted by it would
make such qualification or licensing necessary, except where the failure to be
so qualified or licensed would not have a Material Adverse Effect on Dreco. The
Dreco Disclosure Letter sets forth a complete list of the Dreco Subsidiaries,
the percentage of each subsidiary's outstanding capital stock or other ownership
interest owned by Dreco or another Dreco Subsidiary (and a description of any
lien, charge, mortgage, security interest, option, preferential purchase right
or other right or interest of any other person (collectively, an "Encumbrance")
on such stock or other ownership interest) and a complete list of each
jurisdiction in which each of Dreco and the Dreco Subsidiaries is duly qualified
and in good standing to do business.
2.2 Agreement Authorized and its Effect on Other Obligations. (a) Dreco
has all requisite corporate power and authority to enter into this Agreement and
to perform its obligations hereunder and, subject to approval of Dreco's
securityholders and the Court as provided in this Agreement, to consummate the
Arrangement and the other transactions contemplated by this Agreement. The
execution and delivery of this Agreement by Dreco and, subject to approval of
Dreco's securityholders and the Court as provided in this Agreement, the
consummation by Dreco of the Arrangement and the other transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Dreco. This Agreement has been duly executed and delivered by Dreco and is
the valid and binding obligation of Dreco, enforceable in accordance with its
terms, except that such enforceability may be subject to (i) bankruptcy,
insolvency, reorganization or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles, and that the consummation of the Arrangement is subject to approval
of Dreco's securityholders and the Court as provided in this Agreement.
(b) Neither the execution, delivery or performance of this Agreement or the
Arrangement by Dreco, nor the consummation of the transactions contemplated
hereby or thereby by Dreco nor compliance with the provisions hereof or thereof
by Dreco will: (i) conflict with, or result in any violations of, the articles
of amalgamation or bylaws of Dreco or any equivalent document of any of the
Dreco Subsidiaries, or (ii) result in any breach of or cause a default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, amendment, cancellation or acceleration of any obligation contained
in, or the loss of any material benefit under, or result in the creation of any
Encumbrance upon any of the material properties or assets of Dreco or any of the
Dreco Subsidiaries under, any term, condition or provision of any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Dreco
or any of the Dreco Subsidiaries or their respective properties or assets, other
than any such breaches, defaults, losses, or encumbrances which, individually or
in the aggregate, would not have a Material Adverse Effect on Dreco.
2.3 Governmental Consents. No consent, approval, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission or other governmental authority or instrumentality,
domestic or foreign (each a "Governmental Entity"), is required to be obtained
by Dreco or any of the Dreco Subsidiaries in connection with the execution and
delivery of this Agreement or the Plan of
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Arrangement or the consummation of the transactions contemplated hereby or
thereby, except for: (i) the filing with the applicable Canadian provincial
securities commissions or regulatory authorities (the "Commissions") and the
Court and the mailing to securityholders of Dreco of the Joint Proxy Statement
relating to the Dreco Shareholders Meeting, (ii) the furnishing to the SEC of
such reports and information under the Exchange Act and the rules and
regulations promulgated by the SEC thereunder, as may be required in connection
with this Agreement and the transactions contemplated hereby (the "SEC
Filings"); (iii) approval by the Court of the Arrangement and the filings of the
articles of arrangement and other required arrangement or other documents as
required by the ABCA; (iv) such filings, authorizations, orders and approvals as
may be required under state "control share acquisition," "anti-takeover" or
other similar statutes, any other applicable federal, provincial or state
securities laws and the rules of the Nasdaq Stock Market (the "NASDAQ") or The
Toronto Stock Exchange ("TSE"); (v) such filings and notifications as may be
necessary under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (vi) such notices and filings as may be necessary under
the Investment Canada Act and under the Competition Act (Canada); and (vii)
where the failure to obtain such consents, approvals, etc., would not prevent or
delay the consummation of the Arrangement or otherwise prevent Dreco from
performing its obligations under this Agreement and would not reasonably be
expected to have a Material Adverse Effect on Dreco.
2.4 Capitalization. (a) The authorized capital stock of Dreco consists of
50,000,000 Dreco class "A" common shares, no par value ("Dreco Common Shares",
which term shall include for all purposes of this Agreement the related Dreco
Common Share purchase rights issued or issuable under that certain Shareholder
Rights Plan Agreement dated as of November 15, 1996 (the "Rights Agreement"),
between Dreco and Montreal Trust Company of Canada, as Rights Agent). As of May
13, 1997, 7,817,222 Dreco Common Shares were issued and outstanding and no Dreco
Common Shares were held by Dreco in its treasury. As of May 13, 1997, an
aggregate of 547,550 Dreco Common Shares were reserved for issuance pursuant to
outstanding Dreco Options granted under the Dreco Option Plan or pursuant to
private stock option arrangements, and Dreco has reserved for issuance under the
Rights Agreement the number of Dreco Common Shares required to be issued upon
the exercise of the rights provided by the Rights Agreement in accordance with
the terms and conditions thereof. Prior to the date hereof, 411,200 of the Dreco
Options have vested in accordance with their terms and 136,350 remain unvested.
The consummation of the transactions contemplated by this Agreement will not
accelerate the vesting of any unvested Dreco Options. No Dreco Preferred Shares
are issued or outstanding. All of the issued and outstanding Dreco Common Shares
have been duly authorized and validly issued, are fully paid and non-assessable,
were not issued in violation of the terms of any agreement or other
understanding binding upon Dreco and were issued in compliance with all
applicable charter documents of Dreco and all applicable federal, provincial and
foreign securities laws, rules and regulations. There are, and have been, no
preemptive rights with respect to the issuance of the Dreco Common Shares or any
other capital stock of Dreco.
(b) There are no outstanding subscriptions, options, warrants, convertible
securities, calls, commitments, agreements or rights (contingent or otherwise)
of any character to purchase or otherwise acquire from Dreco any shares of, or
any securities convertible into, the capital stock of Dreco.
(c) Dreco will waive the application of the Rights Agreement with respect
to the Plan of Arrangement and the other transactions contemplated hereby and,
except in connection with the acceptance of a Superior Proposal pursuant to
Sections 4.2(n) and 6.1(i), Dreco will not waive, terminate or otherwise render
the Rights Agreement inoperative with respect to any other Acquisition
Transaction (as hereinafter defined). At the time of Closing, the Rights
Agreement will have been terminated and no persons or entities shall have any
rights thereunder.
2.5 Securities Reports and Financial Statements, Books and Records. (a)
Dreco has filed all forms, reports and documents with the Commissions required
to be filed by it pursuant to relevant Canadian securities statutes,
regulations, policies and rules (collectively, the "Dreco Canadian Securities
Reports"), all of which have complied in all material respects with all
applicable requirements of such statutes, regulations, policies and rules. None
of the Dreco Canadian Securities Reports, at the time filed or as subsequently
amended, contained any untrue statement of a material fact or omitted to state a
material fact required to be
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stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Dreco contained in the Dreco Canadian Securities Reports
complied in all material respects with the then applicable accounting
requirements and the published rules and regulations of the relevant Canadian
securities statutes with respect thereto, were prepared in accordance with
Canadian generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may have been indicated in the notes
thereto or, in the case of unaudited statements, as permitted by applicable
laws, rules or regulations) and fairly present (subject, in the case of the
unaudited statements, to normal, year-end audit adjustments) the consolidated
financial position of Dreco and its consolidated Dreco Subsidiaries as at the
respective dates thereof and the consolidated results of their operations and
cash flows for the respective periods then ended.
(b) Dreco has filed all forms, reports and documents with the SEC required
to be filed by it pursuant to relevant United States securities statutes,
regulations, policies and rules (collectively, the "Dreco United States
Securities Reports"; and together with the Dreco Canadian Securities Reports,
the "Dreco Securities Reports"), all of which have complied in all material
respects with all applicable requirements of such statutes, regulations,
policies and rules. None of the Dreco United States Securities Reports, at the
time filed or as subsequently amended, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Dreco contained in the Dreco United States Securities Reports
complied in all material respects with the then applicable accounting
requirements and the published rules and regulations of the relevant United
States securities statutes with respect thereto, were prepared in accordance
with Canadian generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may have been indicated in the
notes thereto or, in the case of unaudited statements, as permitted by
applicable laws, rules or regulations) and fairly present (subject, in the case
of the unaudited statements, to normal, year-end audit adjustments) the
consolidated financial position of Dreco and its consolidated Dreco Subsidiaries
as at the respective dates thereof and the consolidated results of their
operations and cash flows for the respective periods then ended.
(c) There has been no change in Dreco's accounting policies or the methods
of making accounting estimates or changes in estimates that are material to such
financial statements, except as described in the notes thereto.
(d) The books, records and accounts of Dreco and the Dreco Subsidiaries (i)
have been maintained in accordance with good business practices on a basis
consistent with prior years, (ii) are stated in reasonable detail and accurately
and fairly reflect in all material respects the transactions and dispositions of
the assets of Dreco and the Dreco Subsidiaries and (iii) accurately and fairly
reflect in all material respects the basis for the Dreco financial statements.
Dreco has devised and maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (iv) transactions are executed
in accordance with management's general or specific authorization; and (v)
transactions are recorded as necessary (A) to permit preparation of financial
statements in conformity with Canadian and United States generally accepted
accounting principles or any other criteria applicable to such statements and
(B) to maintain accountability for assets.
2.6 Liabilities. Neither Dreco nor any Dreco Subsidiary has any material
liabilities or obligations, either accrued, absolute, contingent or otherwise,
or has any knowledge of any potential material liabilities or obligations, other
than those disclosed in the Dreco Securities Reports or incurred in the ordinary
course of business since August 31, 1996.
2.7 Information Supplied. None of the information supplied or to be
supplied by Dreco for inclusion or incorporation by reference in the Joint Proxy
Statement (and, if filed, the Registration Statement) will, at the time the
Joint Proxy Statement is mailed to the securityholders of Dreco and at the time
of the Dreco Shareholders Meeting (and, if filed, at the time the Registration
Statement is declared effective), contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading.
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2.8 No Defaults. Neither Dreco nor any Dreco Subsidiary is, or has
received notice that it would be with the passage of time, in default or
violation of any term, condition or provision of (a) its charter documents or
bylaws; (b) any judgment, decree or order applicable to it; or (c) any loan or
credit agreement, note, bond, mortgage, indenture, contract, agreement, lease,
license or other instrument to which Dreco or any Dreco Subsidiary is now a
party or by which it or any of its properties or assets may be bound, except in
the case of item (c) for defaults and violations which, individually or in the
aggregate, would not have a Material Adverse Effect on Dreco.
2.9 Litigation; Investigations. There is no claim, action, suit or
proceeding pending, or to the knowledge of Dreco threatened against Dreco or any
of the Dreco Subsidiaries, which would, if adversely determined, individually or
in the aggregate, have a Material Adverse Effect on Dreco, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against Dreco or any of the Dreco Subsidiaries having, or
which, insofar as reasonably can be foreseen, in the future could have, any such
effect. There is no investigation pending, or to the knowledge of Dreco
threatened, against Dreco or any of the Dreco Subsidiaries before any
Governmental Entity.
2.10 Absence of Certain Changes and Events. Other than as a result of the
transactions contemplated by this Agreement, since August 31, 1996, there has
not been:
(a) Any material adverse change in the financial condition,
operations, assets, liabilities or business of Dreco and the Dreco
Subsidiaries, taken as a whole;
(b) Any material damage, destruction, or loss to the business or
properties of Dreco and the Dreco Subsidiaries, taken as a whole, not
covered by insurance;
(c) Any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of Dreco, or any direct or
indirect redemption, purchase or any other acquisition by Dreco of any such
stock;
(d) Any change in the capital stock or in the number of shares or
classes of Dreco's authorized or outstanding capital stock as described in
Section 2.4 (other than as a result of exercises of Dreco Options
outstanding as of August 31, 1996);
(e) Any material labor dispute or charge of unfair labor practice
(other than routine individual grievances), any activity or proceeding by a
labor union or, to the knowledge of Dreco, by a representative thereof to
organize any employees of Dreco or any Dreco Subsidiary or any campaign
being conducted to solicit authorization from employees to be represented
by such labor union;
(f) Any other event or condition known to Dreco particularly
pertaining to and adversely affecting the operations, assets or business of
Dreco or any of the Dreco Subsidiaries (other than events or conditions
which are of a general or industry-wide nature and of general public
knowledge) which would constitute a Material Adverse Effect on Dreco; or
(g) Any material cancellation of backlog that has not been replaced by
new orders.
2.11 Additional Dreco Information. The Dreco Disclosure Letter contains
true, complete and correct lists of the following items with respect to Dreco
and each of the Dreco Subsidiaries, and Dreco has furnished or made available to
NOI true, complete and correct copies of all documents referred to in such
lists:
(a) Each parcel of real property owned, or subject to a contract of
purchase and sale, with a fair market value in excess of $1,000,000, with a
description of the nature and amount of any Encumbrance thereon, and each
parcel of real property leased, or subject to a lease commitment, with
annual rental payments in excess of $250,000;
(b) All material insurance policies or bonds currently maintained,
including those covering properties, buildings, machinery, equipment,
fixtures, employees and operations, as well as a listing of any premiums,
audit adjustments or retroactive adjustments due or pending on such
policies or any predecessor policies;
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(c) All contracts which involve, or may involve, aggregate payments by
any party thereto of $1,000,000 or more, which are to be performed in whole
or in part after the Effective Time;
(d) All material bonus, incentive compensation, deferred compensation,
profit-sharing, retirement, pension, welfare, group insurance, death
benefit, or other fringe benefit plans, arrangements or trust agreements;
(e) Any collective bargaining agreements with any labor union or other
representative of employees, including all amendments and supplements, and
all employment and consulting agreements;
(f) All material patents, trademarks, copyrights and other
intellectual property rights owned, licensed or used and all applications
therefor;
(g) All material trade names and fictitious names used or held,
whether and where such names are registered and where used;
(h) All material long-term and short-term promissory notes,
installment contracts, loan agreements, credit agreements, operating and
finance leases, and any other agreements relating thereto or with respect
to collateral securing the same; and
(i) All material indebtedness, liabilities and commitments of third
parties (other than Dreco Subsidiaries) and as to which it is a guarantor,
endorser, co-maker, surety or accommodation maker, or is contingently
liable therefor (excluding liabilities as an endorser of checks and the
like in the ordinary course of business) or has otherwise provided any form
of financial assistance and all letters of credit, whether stand-by or
documentary, issued by any third party.
2.12 Certain Agreements. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (a)
result in any payment (including severance, unemployment compensation, parachute
payment, bonus or otherwise) becoming due to any director, employee or
independent contractor of Dreco or any of the Dreco Subsidiaries (as defined in
Section 2.13) under any Dreco Plan (as hereinafter defined) or otherwise, (b)
materially increase any benefits otherwise payable under any Dreco Plan or
otherwise or (c) result in the acceleration of the time of payment or vesting of
any such benefits.
2.13 Employee Benefit Plans. For purposes of Section 2.12 and this Section
2.13, Dreco Subsidiaries shall include any enterprise which, with Dreco, forms
or formed a controlled group of corporations, a group of trades or business
under common control or an affiliated service group, within the meaning of
Section 414(b), (c) or (m) of the Code. All employee benefits plans covering
active, former or retired employees of Dreco and the Dreco Subsidiaries are
listed in the Dreco Disclosure Letter (the "Dreco Plans"). Dreco has made
available to NOI true, complete and correct copies of each Dreco Plan, any
related trust agreement, annuity or insurance contract or other funding vehicle,
if any, and summary plan descriptions and other descriptive materials furnished
to participants of the plans, and each plan's most recent annual reports filed
with the Internal Revenue Service, including exhibits and related financial
reports, if any, and: (a) each Dreco Plan has been maintained and administered
in material compliance with its terms and is, to the extent required by
applicable law or contract, fully funded without having any deficit or unfunded
actuarial liability; (b) all required employer contributions under any such
plans have been made and the applicable funds have been funded in accordance
with the terms thereof and no past service funding liabilities exist thereunder;
(c) each Dreco Plan that is required or intended to be qualified under
applicable law or registered or approved by a governmental agency or authority
has been so qualified, registered or approved by the appropriate governmental
agency or authority, and nothing has occurred since the date of the last
qualification, registration or approval to adversely affect, or cause, the
appropriate governmental agency or authority to revoke such qualification,
registration or approval; (d) to the extent applicable, the Dreco Plans comply,
in all material respects, with the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), the Code and any other
applicable tax act and other laws, and any Dreco Plan intended to be qualified
under Section 401(a) of the Code has been determined by the Internal Revenue
Service to be so qualified and nothing has occurred to cause the loss of such
qualified status; (e) no Dreco Plan is covered by Title IV of ERISA or Section
412 of the Code; (f) there are no pending or anticipated material claims against
or otherwise involving any of the Dreco Plans and no suit, action or other
litigation (excluding claims for
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benefits incurred in the ordinary course of Dreco Plan activities) has been
brought against or with respect to any Dreco Plan; (g) all material
contributions, reserves or premium payments required to be made as of the date
hereof to the Dreco Plans have been made or provided for; (h) neither Dreco nor
any Dreco Subsidiary has incurred or reasonably expects to incur any liability
under subtitle C or D of Title IV of ERISA with respect to any "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by Dreco, any Dreco Subsidiary or any entity which is considered one
employer with Dreco under Section 4001 of ERISA; (i) neither Dreco nor any Dreco
Subsidiary has incurred or reasonably expects to incur any withdrawal liability
under Subtitle E of Title IV of ERISA with respect to any "multiemployer plan",
within the meaning of Section 4001(a)(3) of ERISA; and (j) neither Dreco nor any
Dreco Subsidiary has any obligations for retiree health and life benefits under
any Dreco Plan, except as set forth on the Dreco Disclosure Letter and there are
no restrictions on the rights of Dreco or any of the Dreco Subsidiaries to amend
or terminate any such Dreco Plan without incurring any liability thereunder.
2.14 Intellectual Property. Dreco or the Dreco Subsidiaries own or possess
licenses to use all patents, patent applications, trademarks and service marks
(including registrations and applications therefor), trade names, copyrights and
written know-how, trade secrets and all other similar proprietary data and the
goodwill associated therewith (collectively, the "Dreco Intellectual Property")
that are either material to the business of Dreco or any Dreco Subsidiary or
that are necessary for the manufacture, use, license or sale of any services or
products manufactured, used, licensed or sold by Dreco and the Dreco
Subsidiaries. The Dreco Intellectual Property is owned or licensed by Dreco or
the Dreco Subsidiaries free and clear of any Encumbrance other than such
Encumbrances as are listed in the Dreco Disclosure Letter. Except in the
ordinary course of business, neither Dreco nor any of the Dreco Subsidiaries has
granted to any other person any license to use any Dreco Intellectual Property.
Neither Dreco nor any of the Dreco Subsidiaries has received any notice of
infringement, misappropriation or conflict with, the intellectual property
rights of others in connection with the use by Dreco and the Dreco Subsidiaries
of the Dreco Intellectual Property.
2.15 Title to Properties. Except for goods and other property sold, used
or otherwise disposed of since August 31, 1996 in the ordinary course of
business for fair value, Dreco has good and indefeasible title to all its
properties, interests in properties and assets, real and personal, reflected in
its August 31, 1996 financial statements, free and clear of any Encumbrance,
except (a) Encumbrances reflected in the balance sheet of Dreco as of August 31,
1996, (b) liens for current taxes not yet due and payable and (c) such
imperfections of title, easements and Encumbrances, if any, as are not
substantial in character, amount or extent and do not and will not materially
detract from the value, or interfere with the present use, of the property
subject thereto or affected thereby, or otherwise materially impair business
operations. All leases pursuant to which Dreco or any Dreco Subsidiary leases
(whether as lessee or lessor) any real or personal property are in good
standing, valid, and effective; and there is not, under any such leases, any
existing or prospective default or event of default or event which with notice
or lapse of time, or both, would constitute a default by Dreco or any Dreco
Subsidiary and in respect to which Dreco or a Dreco Subsidiary has not taken
adequate steps to prevent a default from occurring. The buildings and premises
of Dreco and each of the Dreco Subsidiaries that are used in its business are in
good operating condition and repair, subject only to ordinary wear and tear. All
major items of operating equipment of Dreco and the Dreco Subsidiaries are in
good operating condition and in a state of reasonable maintenance and repair,
ordinary wear and tear excepted, and are free from any known defects except as
may be repaired by routine maintenance and such minor defects as do not
substantially interfere with the continued use thereof in the conduct of normal
operations.
2.16 Environmental Matters. (a) There are no environmental conditions or
circumstances, such as the presence or release of any hazardous substance, on
any property presently or, to the knowledge of Dreco, previously owned or leased
by Dreco or any of the Dreco Subsidiaries that could reasonably be expected to
result in a Material Adverse Effect on Dreco;
(b) Dreco and the Dreco Subsidiaries have in full force and effect all
material environmental permits, licenses, approvals and other authorizations
required to conduct their operations and are operating in material compliance
thereunder;
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(c) Dreco's and the Dreco Subsidiaries' operations and the use of their
assets do not violate any applicable United States or Canadian or other federal,
provincial, state or local law, statute, ordinance, rule, regulation, order or
notice requirement pertaining to (i) the condition or protection of air,
groundwater, surface water, soil, or other environmental media, (ii) the
environment, including natural resources or any activity which affects the
environment or (iii) the regulation of any pollutants, contaminants, waste or
other substances (whether or not hazardous or toxic), including the
Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 1609 et seq.) the Clean Water Act (33 U.S.C. 1251 et seq.), the Clean
Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (17
U.S.C. Section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 201
and Section 300f et seq.), the Rivers and Harbors Act (33 U.S.C. Section 401 et
seq.), the Oil Pollution Act (33 U.S.C. Section 2701 et seq.) and analogous
Canadian, foreign, provincial, state and local provisions, as any of the
foregoing may have been amended or supplemented from time to time (collectively
the "Applicable Environmental Laws"), except for violations which, either singly
or in the aggregate, would not result in a Material Adverse Effect on Dreco;
(d) To the knowledge of Dreco, none of the operations or assets of Dreco or
any Dreco Subsidiary has ever been conducted or used by Dreco or any Dreco
Subsidiary in such a manner as to constitute a violation of any of the
Applicable Environmental Laws, except for violations which, either singly or in
the aggregate, would not result in a Material Adverse Effect on Dreco;
(e) No written notice has been served on Dreco or any Dreco Subsidiary from
any entity, governmental agency or individual regarding any existing, pending or
threatened investigation or inquiry related to alleged violations under any
Applicable Environmental Laws, or regarding any claims for remedial obligations
or contribution under any Applicable Environmental Laws, other than any of the
foregoing which, either singly or in the aggregate, would not result in a
Material Adverse Effect on Dreco; and
(f) Dreco does not know of any reason that would preclude it or NOI from
renewing or obtaining a reissuance of the material permits, licenses or other
authorizations required pursuant to any Applicable Environmental Laws to operate
and use any of Dreco's or the Dreco Subsidiaries' assets for their current
purposes and uses.
2.17 Compliance With Other Laws. Neither Dreco nor any Dreco Subsidiary is
in violation of or in default with respect to, or in alleged violation of or
alleged default with respect to any other applicable law or any applicable rule
or regulation, or any writ or decree of any court or any governmental
commission, board, bureau, agency or instrumentality, or delinquent with respect
to any report required to be filed with any Governmental Entity, except for
violations and delinquencies which, either singly or in the aggregate, do not
and are not expected to result in a Material Adverse Effect on Dreco.
2.18 Taxes. Except with respect to failures which, in the aggregate, would
not result in a Material Adverse Effect on Dreco, proper and accurate federal,
provincial, state and local income, capital, withholding, value added, sales,
use, franchise, gross revenue, turnover, excise, payroll, property, employment,
customs duties and any and all other tax returns, reports, and estimates have
been filed with appropriate governmental agencies, domestic and foreign, by
Dreco and each of the Dreco Subsidiaries for each period for which any returns,
reports, or estimates were due (taking into account any extensions of time to
file before the date hereof); all taxes shown by such returns to be payable and
any other taxes due and payable have been paid other than those being contested
in good faith by Dreco or a Dreco Subsidiary; and the tax provision reflected in
Dreco's financial statements is adequate, in accordance with Canadian or United
States (as the case may be) generally accepted accounting principles, to cover
liabilities of Dreco and the Dreco Subsidiaries for all taxes, including any
interest, penalties and additions to taxes of any character whatsoever
applicable to Dreco and the Dreco Subsidiaries or their assets or businesses. No
waiver of any statute of limitations executed by Dreco or a Dreco Subsidiary
with respect to any tax is in effect for any period. Dreco has not received any
notice of reassessment from Revenue Canada. There are no tax liens on any assets
of Dreco or the Dreco Subsidiaries except for taxes not yet currently due and
those which could not reasonably be expected to result in a Material Adverse
Effect on Dreco.
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2.19 Vote Required. Except as may be provided in the Interim Order, at the
Dreco Shareholders Meeting at which a quorum is present, the affirmative vote of
two-thirds of the votes actually cast by all Dreco securityholders present is
required to approve this Agreement, the Arrangement and the consummation of the
transactions contemplated hereby. For these purposes, each Dreco Common Share
carries one vote, and each Dreco Option carries the number of votes equal to the
number of Dreco Common Shares subject to the Dreco Option.
2.20 Pooling Matters. Neither Dreco nor any of its affiliates has taken or
agreed to take any action that, without giving effect to any action taken or
agreed to be taken by NOI or any of its affiliates, would prevent NOI from
accounting for the business combination to be effected by the Arrangement as a
pooling of interests.
2.21 Brokers and Finders. Other than Credit Suisse First Boston
Corporation, none of Dreco or any of the Dreco Subsidiaries nor any of their
respective directors, officers or employees has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or similar payments in connection with the transactions contemplated
by this Agreement. The Dreco Disclosure Letter includes a copy of Dreco's
engagement letter or contract with Credit Suisse First Boston Corporation or, if
there is no engagement letter or contract, a description of all material terms
of Dreco's engagement arrangement with such firm.
2.22 Disclosure. No representation or warranty made by Dreco in this
Agreement or the Dreco Disclosure Letter, nor any document, written information,
statement, financial statement, certificate or Exhibit prepared and furnished or
to be prepared and furnished by Dreco or its representatives pursuant hereto or
in connection with the transactions contemplated hereby, when taken together,
contains or contained (as of the date made) any untrue statement of a material
fact when made, or omits or omitted (as of the date made) to state a material
fact necessary to make the statements or facts contained herein or therein not
misleading in light of the circumstances under which they were made.
2.23 Fairness and Pooling Opinions. Dreco's board of directors has
received written opinions (a) from Credit Suisse First Boston Corporation that
the Exchange Ratio is fair to Dreco's securityholders from a financial point of
view (the "Dreco Fairness Opinion") and (b) from Coopers & Lybrand that, in
accordance with United States generally accepted accounting principles and
applicable rules and regulations of the SEC, after May 1997, Dreco will be a
poolable entity (the "Dreco Pooling Opinion").
2.24 Restrictions on Business Activities. There is no material agreement,
judgment, injunction, order or court decree binding upon Dreco or any Dreco
Subsidiary that has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Dreco or any Dreco
Subsidiary, any acquisition of property by Dreco or any Dreco Subsidiary or the
conduct of any business by Dreco or any Dreco Subsidiary.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NOI
Except as set forth in a letter dated the date of this Agreement and
delivered by NOI to Dreco concurrently herewith (the "NOI Disclosure Letter"),
NOI hereby represents and warrants to, and agrees with, Dreco that:
3.1 Organization and Standing. NOI and each body corporate, partnership,
joint venture, association or other business entity of which more than 50% of
the total voting power of shares of stock or units of ownership or beneficial
interest entitled to vote in the election of directors (or members of a
comparable governing body) is owned or controlled, directly or indirectly, by
NOI (the "NOI Subsidiaries"), is an entity duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization, has full requisite power and authority to carry on its business as
it is currently conducted, and to own, lease and operate the properties
currently owned, leased and operated by it, and is duly qualified or licensed to
do business and is in good standing as a foreign corporation or organization
authorized to do business in all
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jurisdictions in which the character of the properties owned or leased or the
nature of the business conducted by it would make such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not have a Material Adverse Effect on NOI. The NOI Disclosure Letter sets
forth a complete list of the NOI Subsidiaries, the percentage of each
subsidiary's outstanding capital stock or other ownership interest owned by NOI
or another NOI Subsidiary (and a description of any Encumbrance on such stock or
other ownership interest) and a complete list of each jurisdiction in which each
of NOI and the NOI Subsidiaries is duly qualified and in good standing to do
business.
3.2 Agreement Authorized and its Effect on Other Obligations. (a) NOI has
all requisite corporate power and authority to enter into this Agreement and to
perform its obligations hereunder and, subject to approval of NOI's stockholders
as provided in this Agreement, to consummate the Arrangement and the other
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by NOI and, subject to approval of NOI's stockholders as provided in
this Agreement, the consummation by NOI of the Arrangement and the other
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of NOI. This Agreement has been duly executed and
delivered by NOI and is the valid and binding obligation of NOI, enforceable in
accordance with its terms, except that such enforceability may be subject to (i)
bankruptcy, insolvency, reorganization or other similar laws affecting or
relating to enforcement of creditors' rights generally and (ii) general
equitable principles, and that the consummation of the Arrangement is subject to
approval of NOI's stockholders as provided in this Agreement.
(b) Neither the execution, delivery or performance of this Agreement or the
Arrangement by NOI, nor the consummation of the transactions contemplated hereby
or thereby by NOI nor compliance with the provisions hereof or thereof by NOI
will: (i) conflict with, or result in any violations of, the Certificate of
Incorporation or bylaws of NOI or any equivalent document of any of the NOI
Subsidiaries, or (ii) result in any breach of or cause a default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, amendment, cancellation or acceleration of any obligation contained
in, or the loss of any material benefit under, or result in the creation of any
Encumbrance upon any of the material properties or assets of NOI or any of the
NOI Subsidiaries under, any term, condition or provision of any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to NOI or
any of the NOI Subsidiaries or their respective properties or assets, other than
any such breaches, defaults, losses, or encumbrances which, individually or in
the aggregate, would not have a Material Adverse Effect on NOI.
3.3 Governmental Consents. No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity, is
required to be obtained by NOI or any of the NOI Subsidiaries in connection with
the execution and delivery of this Agreement or the Plan of Arrangement or the
consummation of the transactions contemplated hereby or thereby, except for: (i)
the filing with the Commissions and the mailing to stockholders of NOI of the
Joint Proxy Statement relating to the NOI Stockholders Meeting, (ii) the
furnishing to the SEC of the SEC Filings; (iii) approval by the Court of the
Arrangement and the filings of the articles of arrangement and other required
arrangement or other documents as required by the ABCA; (iv) such filings,
authorizations, orders and approvals as may be required under state "control
share acquisition," "anti-takeover" or other similar statutes, any other
applicable federal, provincial or state securities laws and the rules of the
NYSE; (v) such filings and notifications as may be necessary under the HSR Act;
(vi) such notices and filings as may be necessary under the Investment Canada
Act and under the Competition Act (Canada); and (vii) where the failure to
obtain such consents, approvals, etc., would not prevent or delay the
consummation of the Arrangement or otherwise prevent NOI from performing its
obligations under this Agreement and would not reasonably be expected to have a
Material Adverse Effect on NOI.
3.4 Capitalization. (a) The authorized capital stock of NOI consists of
40,000,000 common shares, $.01 par value ("NOI Common Stock") and 10,000,000
shares of preferred stock, par value $.01 per share ("NOI Preferred Stock"). As
of May 10, 1997, 17,874,128 shares of NOI Common Stock were issued and
outstanding and no NOI Common Shares were held by NOI in its treasury. As of May
10, 1997, 141,548 shares of NOI Common Stock were reserved for issuance upon the
exercise of stock options then outstanding under NOI's stock option plans,
858,452 shares of NOI Common Stock were reserved for future issuance of
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options under NOI's stock option plans, and 316,281 shares of NOI Common Stock
were reserved for issuance under NOI's value appreciation plans. No shares of
NOI Preferred Stock are issued or outstanding. All of the issued and outstanding
NOI Common Stock have been duly authorized and validly issued, are fully paid
and nonassessable, were not issued in violation of the terms of any agreement or
other understanding binding upon NOI and were issued in compliance with all
applicable charter documents of NOI and all applicable federal, state and
foreign securities laws, rules and regulations. There are, and have been, no
preemptive rights with respect to the issuance of the NOI Common Stock or any
other capital stock of NOI.
(b) There are no outstanding subscriptions, options, warrants, convertible
securities, calls, commitments, agreements or rights (contingent or otherwise)
of any character to purchase or otherwise acquire from NOI any shares of, or any
securities convertible into, the capital stock of NOI.
3.5 Securities Reports and Financial Statements. (a) NOI has filed all
forms, reports and documents required to be filed by it by the SEC or pursuant
to relevant United States securities statutes, regulations, policies and rules
(collectively, the "NOI Securities Reports"), all of which have complied in all
material respects with all applicable requirements of such statutes,
regulations, policies and rules. None of the NOI Securities Reports, at the time
filed or as subsequently amended, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of NOI contained in the NOI Securities Reports complied in all
material respects with the then applicable accounting requirements and the
published rules and regulations of the relevant United States securities
statutes with respect thereto, were prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may have been indicated in the notes thereto or,
in the case of unaudited statements, as permitted by applicable laws, rules or
regulations) and fairly present (subject, in the case of the unaudited
statements, to normal, year-end audit adjustments) the consolidated financial
position of NOI and its consolidated NOI Subsidiaries as at the respective dates
thereof and the consolidated results of their operations and cash flows for the
respective periods then ended. There has been no change in NOI's accounting
policies or the methods of making accounting estimates or changes in estimates
that are material to such financial statements, except as described in the notes
thereto.
(b) The books, records and accounts of NOI and the NOI Subsidiaries (i)
have been maintained in accordance with good business practices on a basis
consistent with prior years, (ii) are stated in reasonable detail and accurately
and fairly reflect in all material respects the transactions and dispositions of
the assets of NOI and the NOI Subsidiaries and (iii) accurately and fairly
reflect in all material respects the basis for the NOI financial statements. NOI
has devised and maintains a system of internal accounting controls sufficient to
provide reasonable assurances that (iv) transactions are executed in accordance
with management's general or specific authorization; and (v) transactions are
recorded as necessary (A) to permit preparation of financial statements in
conformity with United States generally accepted accounting principles or any
other criteria applicable to such statements and (B) to maintain accountability
for assets.
3.6 Liabilities. Neither NOI nor any NOI Subsidiary has any material
liabilities or obligations, either accrued, absolute, contingent or otherwise,
or has any knowledge of any potential material liabilities or obligations, other
than those disclosed in the NOI Securities Reports or incurred in the ordinary
course of business since December 31, 1996.
3.7 Information Supplied. None of the information supplied or to be
supplied by NOI for inclusion or incorporation by reference in the Joint Proxy
Statement (and, if filed, the Registration Statement) will, at the time the
Joint Proxy Statement is mailed to the shareholders of NOI and at the time of
the NOI Stockholders Meeting (and, if filed, at the time the Registration
Statement is declared effective), contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Joint Proxy Statement will comply as to
form in all material respects with the provisions of the ABCA and applicable
United States and Canadian securities laws and the rules and regulations
promulgated thereunder.
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3.8 No Defaults. Neither NOI nor any NOI Subsidiary is, or has received
notice that it would be with the passage of time, in default or violation of any
term, condition or provision of (a) its charter documents or bylaws; (b) any
judgment, decree or order applicable to it; or (c) any loan or credit agreement,
note, bond, mortgage, indenture, contract, agreement, lease, license or other
instrument to which NOI or any NOI Subsidiary is now a party or by which it or
any of its properties or assets may be bound, except in the case of item (c) for
defaults and violations which, individually or in the aggregate, would not have
a Material Adverse Effect on NOI.
3.9 Litigation; Investigations. There is no claim, action, suit or
proceeding pending, or to the knowledge of NOI threatened against NOI or any of
the NOI Subsidiaries, which would, if adversely determined, individually or in
the aggregate, have a Material Adverse Effect on NOI, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against NOI or any of the NOI Subsidiaries having, or which, insofar
as reasonably can be foreseen, in the future could have, any such effect. There
is no investigation pending, or to the knowledge of NOI threatened, against NOI
or any of the NOI Subsidiaries before any Governmental Entity.
3.10 Absence of Certain Changes and Events. Other than as a result of the
transactions contemplated by this Agreement, since December 31, 1996, there has
not been:
(a) Any material adverse change in the financial condition,
operations, assets, liabilities or business of NOI and the NOI
Subsidiaries, taken as a whole;
(b) Any material damage, destruction, or loss to the business or
properties of NOI and the NOI Subsidiaries, taken as a whole, not covered
by insurance;
(c) Any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of NOI, or any direct or
indirect redemption, purchase or any other acquisition by NOI of any such
stock;
(d) Any change in the capital stock or in the number of shares or
classes of NOI's authorized or outstanding capital stock as described in
Section 3.4 (other than as a result of exercises of options to purchase NOI
Common Stock and issuances under NOI's value appreciation plans of shares
of NOI Common Stock outstanding as of December 31, 1996);
(e) Any material labor dispute or charge of unfair labor practice
(other than routine individual grievances), any activity or proceeding by a
labor union or, to the knowledge of NOI, by representative thereof to
organize any employees of NOI or any NOI Subsidiary or any campaign being
conducted to solicit authorization from employees to be represented by such
labor union;
(f) Any other event or condition known to NOI particularly pertaining
to and adversely affecting the operations, assets or business of NOI or any
of the NOI Subsidiaries (other than events or conditions which are of a
general or industry-wide nature and of general public knowledge) which
would constitute a Material Adverse Effect on NOI; or
(g) Any material cancellation of backlog that has not been replaced by
new orders.
3.11 Additional NOI Information. The NOI Disclosure Letter contains true,
complete and correct lists of the following items with respect to NOI and each
of the NOI Subsidiaries, and NOI has furnished or made available to Dreco true,
complete and correct copies of all documents referred to in such lists:
(a) Each parcel of real property owned, or subject to a contract of
purchase and sale, with a fair market value in excess of $1,000,000, with a
description of the nature and amount of any Encumbrance thereon, and each
parcel of real property leased, or subject to a lease commitment, with
annual rental payments in excess of $250,000;
(b) All material insurance policies or bonds currently maintained,
including those covering properties, buildings, machinery, equipment,
fixtures, employees and operations, as well as a listing of any
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premiums, audit adjustments or retroactive adjustments due or pending on
such policies or any predecessor policies;
(c) All contracts which involve, or may involve, aggregate payments by
any party thereto of $1,000,000 or more, which are to be performed in whole
or in part after the Effective Time;
(d) All bonus, incentive compensation, deferred compensation,
profit-sharing, retirement, pension, welfare, group insurance, death
benefit, or other fringe benefit plans, arrangements or trust agreements;
(e) Any collective bargaining agreements with any labor union or other
representative of employees, including all amendments and supplements, and
all employment and consulting agreements;
(f) All material patents, trademarks, copyrights and other
intellectual property rights owned, licensed or used and all applications
therefor;
(g) All material trade names and fictitious names used or held,
whether and where such names are registered and where used;
(h) All material long-term and short-term promissory notes,
installment contracts, loan agreements, credit agreements, operating and
finance leases, and any other agreements relating thereto or with respect
to collateral securing the same; and
(i) All material indebtedness, liabilities and commitments of third
parties (other than NOI Subsidiaries) and as to which it is a guarantor,
endorser, co-maker, surety or accommodation maker, or is contingently
liable therefor (excluding liabilities as an endorser of checks and the
like in the ordinary course of business) or has otherwise provided any form
of financial assistance and all letters of credit, whether stand-by or
documentary, issued by any third party.
3.12 Certain Agreements. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (a)
result in any payment (including severance, unemployment compensation, parachute
payment, bonus or otherwise) becoming due to any director, employee or
independent contractor of NOI or any of the NOI Subsidiaries (as defined in
Section 3.13) under any NOI Plan (as hereinafter defined) or otherwise, (b)
materially increase any benefits otherwise payable under any NOI Plan or
otherwise or (c) result in the acceleration of the time of payment or vesting of
any such benefits.
3.13 Employee Benefit Plans. For purposes of Section 3.12 and this Section
3.13, NOI Subsidiaries shall include any enterprise which, with NOI, forms or
formed a controlled group of corporations, a group of trades or business under
common control or an affiliated service group, within the meaning of Section
414(b), (c) or (m) of the Code. All employee benefits plans covering active,
former or retired employees of NOI and the NOI Subsidiaries are listed in the
NOI Disclosure Letter (the "NOI Plans"). NOI has made available to Dreco true,
complete and correct copies of each NOI Plan, any related trust agreement,
annuity or insurance contract or other funding vehicle, if any, and summary plan
descriptions and other descriptive materials furnished to participants of the
plans, and each plan's most recent annual reports filed with the Internal
Revenue Service, including exhibits and related financial reports, if any, and:
(a) each NOI Plan has been maintained and administered in material compliance
with its terms and is, to the extent required by applicable law or contract,
fully funded without having any deficit or unfunded actuarial liability; (b) all
required employer contributions under any such plans have been made and the
applicable funds have been funded in accordance with the terms thereof and no
past service funding liabilities exist thereunder; (c) each NOI Plan that is
required or intended to be qualified under applicable law or registered or
approved by a governmental agency or authority has been so qualified, registered
or approved by the appropriate governmental agency or authority, and nothing has
occurred since the date of the last qualification, registration or approval to
adversely affect, or cause, the appropriate governmental agency or authority to
revoke such qualification, registration or approval; (d) to the extent
applicable, the NOI Plans comply, in all material respects, with the
requirements of ERISA, the Code and any other applicable tax act and other laws,
and any NOI Plan intended to be qualified under Section 401(a) of the Code has
been determined by the Internal Revenue Service to be so qualified and nothing
has occurred to cause the loss of such qualified status; (e) no NOI Plan is
covered by Title IV of ERISA or Section 412 of the Code; (f) there are no
pending or anticipated material claims against
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or otherwise involving any of the NOI Plans and no suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of NOI
Plan activities) has been brought against or with respect to any NOI Plan; (g)
all material contributions, reserves or premium payments, required to be made as
of the date hereof to the NOI Plans have been made or provided for; (h) neither
NOI nor any NOI Subsidiary has incurred or reasonably expects to incur any
liability under subtitle C or D of Title IV of ERISA with respect to any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by NOI, any NOI Subsidiary or any entity which
is considered one employer with NOI under Section 4001 of ERISA; (i) neither NOI
nor any NOI Subsidiary has incurred or reasonably expects to incur any
withdrawal liability under Subtitle E of Title IV of ERISA with respect to any
"multiemployer plan," within the meaning of Section 4001(a)(3) of ERISA; and (j)
neither NOI nor any NOI Subsidiary has any obligations for retiree health and
life benefits under any NOI Plan, except as set forth on the NOI Disclosure
Letter and there are no restrictions on the rights of NOI or any of the NOI
Subsidiaries to amend or terminate any such NOI Plan without incurring any
liability thereunder.
3.14 Intellectual Property. NOI or the NOI Subsidiaries own or possess
licenses to use all patents, patent applications, trademarks and service marks
(including registrations and applications therefor), trade names, copyrights and
written know-how, trade secrets and all other similar proprietary data and the
goodwill associated therewith (collectively, the "NOI Intellectual Property")
that are either material to the business of NOI or any NOI Subsidiary or that
are necessary for the manufacture, use, license or sale of any services or
products manufactured, used, licensed or sold by NOI and the NOI Subsidiaries.
The NOI Intellectual Property is owned or licensed by NOI or the NOI
Subsidiaries free and clear of any Encumbrance other than such Encumbrances as
are listed in the NOI Disclosure Letter. Except in the ordinary course of
business, neither NOI nor any of the NOI Subsidiaries has granted to any other
person any license to use any NOI Intellectual Property. Neither NOI nor any of
the NOI Subsidiaries has received any notice of infringement, misappropriation
or conflict with, the intellectual property rights of others in connection with
the use by NOI and the NOI Subsidiaries of the NOI Intellectual Property.
3.15 Title to Properties. Except for goods and other property sold, used
or otherwise disposed of since December 31, 1996 in the ordinary course of
business for fair value, NOI has good and indefeasible title to all its
properties, interests in properties and assets, real and personal, reflected in
its December 31, 1996 financial statements, free and clear of any Encumbrance,
except (a) Encumbrances reflected in the balance sheet of NOI as of December 31,
1996, (b) liens for current taxes not yet due and payable and (c) such
imperfections of title, easements and Encumbrances, if any, as are not
substantial in character, amount or extent and do not and will not materially
detract from the value, or interfere with the present use, of the property
subject thereto or affected thereby, or otherwise materially impair business
operations. All leases pursuant to which NOI or any NOI Subsidiary leases
(whether as lessee or lessor) any real or personal property are in good
standing, valid, and effective; and there is not, under any such leases, any
existing or prospective default or event of default or event which with notice
or lapse of time, or both, would constitute a default by NOI or any NOI
Subsidiary and in respect to which NOI or a NOI Subsidiary has not taken
adequate steps to prevent a default from occurring. The buildings and premises
of NOI and each of the NOI Subsidiaries that are used in its business are in
good operating condition and repair, subject only to ordinary wear and tear. All
major items of operating equipment of NOI and the NOI Subsidiaries are in good
operating condition and in a state of reasonable maintenance and repair,
ordinary wear and tear excepted, and are free from any known defects except as
may be repaired by routine maintenance and such minor defects as do not
substantially interfere with the continued use thereof in the conduct of normal
operations.
3.16 Environmental Matters. (a) There are no environmental conditions or
circumstances, such as the presence or release of any hazardous substance, on
any property presently or, to the knowledge of NOI, previously owned or leased
by NOI or any of the NOI Subsidiaries that could reasonably be expected to
result in a Material Adverse Effect on NOI;
(b) NOI and the NOI Subsidiaries have in full force and effect all material
environmental permits, licenses, approvals and other authorizations required to
conduct their operations and are operating in material compliance thereunder;
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(c) NOI's and the NOI Subsidiaries' operations and the use of their assets
do not violate any applicable United States or Canadian or other federal,
provincial, state or local law, statute, ordinance, rule, regulation, order or
notice requirement pertaining to (i) the condition or protection of air,
groundwater, surface water, soil, or other environmental media, (ii) the
environment, including natural resources or any activity which affects the
environment or (iii) the regulation of any pollutants, contaminants, waste or
other substances (whether or not hazardous or toxic), including the Applicable
Environmental Laws, except for violations which, either singly or in the
aggregate, would not result in a Material Adverse Effect on NOI;
(d) To the knowledge of NOI, none of the operations or assets of NOI or any
NOI Subsidiary has ever been conducted or used by NOI or any NOI Subsidiary in
such a manner as to constitute a violation of any of the Applicable
Environmental Laws, except for violations which, either singly or in the
aggregate, would not result in a Material Adverse Effect on NOI;
(e) No written notice has been served on NOI or any NOI Subsidiary from any
entity, governmental agency or individual regarding any existing, pending or
threatened investigation or inquiry related to alleged violations under any
Applicable Environmental Laws, or regarding any claims for remedial obligations
or contribution under any Applicable Environmental Laws, other than any of the
foregoing which, either singly or in the aggregate, would not result in a
Material Adverse Effect on NOI; and
(f) NOI does not know of any reason that would preclude it from renewing or
obtaining a reissuance of the permits, licenses, or other authorizations
required pursuant to any Applicable Environmental Laws to operate and use any of
NOI's or the NOI Subsidiaries' assets for their current purposes and uses.
3.17 Compliance With Other Laws. Neither NOI nor any NOI Subsidiary is in
violation of or in default with respect to, or in alleged violation of or
alleged default with respect to any other applicable law or any applicable rule
or regulation, or any writ or decree of any court or any governmental
commission, board, bureau, agency or instrumentality, or delinquent with respect
to any report required to be filed with any Governmental Entity, except for
violations and delinquencies which, either singly or in the aggregate, do not
and are not expected to result in a Material Adverse Effect on NOI.
3.18 Taxes. Except with respect to failures which, in the aggregate, would
not result in a Material Adverse Effect on NOI, proper and accurate federal,
provincial, state and local income, capital, withholding, value added, sales,
use, franchise, gross revenue, turnover, excise, payroll, property, employment,
customs duties and any and all other tax returns, reports, and estimates have
been filed with appropriate governmental agencies, domestic and foreign, by NOI
and each of the NOI Subsidiaries for each period for which any returns, reports,
or estimates were due (taking into account any extensions of time to file before
the date hereof); all taxes shown by such returns to be payable and any other
taxes due and payable have been paid other than those being contested in good
faith by NOI or a NOI Subsidiary; and the tax provision reflected in NOI's
financial statements is adequate, in accordance with United States generally
accepted accounting principles, to cover liabilities of NOI and the NOI
Subsidiaries for all taxes, including any interest, penalties and additions to
taxes of any character whatsoever applicable to NOI and the NOI Subsidiaries or
their assets or businesses. No waiver of any statute of limitations executed by
NOI or a NOI Subsidiary with respect to any tax is in effect for any period.
There are no tax liens on any assets of NOI or the NOI Subsidiaries except for
taxes not yet currently due and those which could not reasonably be expected to
result in a Material Adverse Effect on NOI.
3.19 Vote Required. At a stockholders meeting at which a quorum is
present, (a) the affirmative vote of the holders of a majority of the
outstanding shares of NOI Common Stock cast at the meeting is required to
approve the issuance of the NOI Common Stock pursuant to this Agreement upon
exchange of the Exchangeable Shares and (b) the affirmative vote of the holders
of a majority of the issued and outstanding shares of NOI Common Stock is
necessary to approve the NOI Restated Charter.
3.20 Pooling Matters. Neither NOI nor any of its affiliates has taken or
agreed to take any action that, without giving effect to any action taken or
agreed to be taken by Dreco or any of its affiliates, would prevent NOI from
accounting for the business combination to be effected by the Arrangement as a
pooling of interests.
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3.21 Brokers and Finders. Other than Merrill Lynch & Co. in accordance
with the terms of its engagement letter dated April 20, 1997, a copy of which
has previously been provided to Dreco, none of NOI or any of the NOI
Subsidiaries nor any of their respective directors, officers or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or similar payments in connection
with the transactions contemplated by this Agreement.
3.22 Disclosure. No representation or warranty made by NOI in this
Agreement or the NOI Disclosure Letter, nor any document, written information,
statement, financial statement, certificate or Exhibit prepared and furnished or
to be prepared and furnished by NOI or its representatives pursuant hereto or in
connection with the transactions contemplated hereby, when taken together,
contains or contained (as of the date made) any untrue statement of a material
fact when made, or omits or omitted (as the case may be) to state a material
fact necessary to make the statements or facts contained herein or therein not
misleading in light of the circumstances under which they were made.
3.23 Fairness and Pooling Opinions. NOI's board of directors has received
written opinions (a) from Merrill Lynch & Co. that the Exchange Ratio is fair to
NOI from a financial point of view (the "NOI Fairness Opinion") and (b) from
Ernst & Young LLP that, in accordance with United States generally accepted
accounting principles and applicable rules and regulations of the SEC, NOI is a
poolable entity and after May 1997 the Arrangement should be treated as a
"pooling of interests" for accounting purposes (the "NOI Pooling Opinion").
3.24 Restrictions on Business Activities. There is no material agreement,
judgment, injunction, order or court decree binding upon NOI or any NOI
Subsidiary that has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of NOI or any NOI
Subsidiary, any acquisition of property by NOI or any NOI Subsidiary or the
conduct of any business by NOI or any NOI Subsidiary.
ARTICLE IV
OBLIGATIONS PENDING EFFECTIVE DATE
4.1 Agreements of NOI and Dreco. NOI and Dreco agree to take the following
actions after the date hereof:
(a) Each party will promptly execute and file or join in the execution
and filing of any application or other document that may be necessary in
order to obtain the authorization, approval or consent of any Governmental
Entity which may be reasonably required, or which the other party may
reasonably request, in connection with the consummation of the transactions
contemplated by this Agreement. Each party will use its reasonable best
efforts to promptly obtain such authorizations, approvals and consents.
Without limiting the generality of the foregoing, as promptly as
practicable after the execution of this Agreement, each party shall make
all required filings under the HSR Act and shall make such filings as are
necessary under the Investment Canada Act and the Competition Act (Canada);
(b) Each party will allow the other and its agents reasonable access
to the files, books, records and offices of itself and its subsidiaries,
including any and all information relating to such party's tax matters,
contracts, leases, licenses and real, personal and intangible property and
financial condition. Each party will cause its accountants to cooperate
with the other in making available to the other party all financial
information reasonably requested, including the right to examine all
working papers pertaining to tax matters and financial statements prepared
or audited by such accountants;
(c) NOI and Dreco shall cooperate in the preparation and prompt filing
of the Joint Proxy Statement (and, if required, the Registration Statement)
with the SEC;
(d) Each of NOI and Dreco will promptly notify the other in writing
(i) of any event occurring subsequent to the date of this Agreement which
would render any representation and warranty of such party contained in
this Agreement untrue or inaccurate in any material respect, (ii) of any
Material
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Adverse Effect on such party and (iii) of any breach by such party of any
material covenant or agreement contained in this Agreement; and
(e) During the term of this Agreement, each of NOI and Dreco will use
its reasonable best efforts to satisfy or cause to be satisfied all the
conditions precedent that are set forth in Article V hereof, and each of
NOI and Dreco will use its reasonable best efforts to cause the Arrangement
and the other transactions contemplated by this Agreement to be
consummated.
4.2 Additional Agreements of Dreco. Dreco agrees that, except as expressly
contemplated by this Agreement or as otherwise agreed to in writing by NOI or as
set forth in the Dreco Disclosure Letter, from the date hereof to the Effective
Date it will, and will cause each of the Dreco Subsidiaries to:
(a) Other than as contemplated by this Agreement, operate its business
only in the usual, regular and ordinary manner so as to maintain the
goodwill it now enjoys and, to the extent consistent with such operation,
use all commercially reasonable efforts to preserve intact its present
business organization, keep available the services of its present officers
and employees, and preserve its relationships with customers, suppliers,
distributors and others having business dealings with it;
(b) Maintain all of its property and assets in customary repair,
order, and condition, reasonable wear and use and damage by fire or
unavoidable casualty excepted;
(c) Maintain its books of account and records in the usual, regular
and ordinary manner, in accordance with generally accepted accounting
principles applied on a consistent basis;
(d) Duly comply in all material respects with all laws applicable to
it and to the conduct of its business;
(e) Not (i) enter into any contracts of employment which (A) cannot be
terminated on notice of 14 days or less or (B) provide for any severance
payments or benefits covering a period beyond the termination date of such
employment contract, except as may be required by law or (ii) amend any
employee benefit plan or stock option plan, except as may be required for
compliance with this Agreement or applicable law;
(f) Not incur any borrowings except (i) the refinancing of
indebtedness now outstanding or additional borrowings under its existing
revolving credit facilities, (ii) the prepayment by customers of amounts
due or to become due for goods sold or services rendered or to be rendered
in the future, (iii) trade payables incurred in the ordinary course of
business or (iv) other borrowings incurred in the ordinary course of
business to finance normal operations;
(g) Not enter into commitments of a capital expenditure nature or
incur any contingent liability which would exceed $2,000,000, in the
aggregate, except (i) as may be necessary for the maintenance of existing
facilities, machinery and equipment in good operating condition and repair
in the ordinary course of business or (ii) as may be required by law;
(h) Not sell, dispose of, or encumber, any property or assets, except
(i) in the ordinary course of business or (ii) as may be reasonably
required in connection with borrowings under Section 4.2(f);
(i) Maintain insurance upon all its properties and with respect to the
conduct of its business of such kinds and in such amounts as is customary
in the type of business in which it is engaged, but not less than that
presently carried by it;
(j) Not amend its charter documents or bylaws or other organizational
documents or merge or consolidate with or into any other corporation or
change in any manner the rights of its capital stock or the character of
its business;
(k) Not issue or sell (except upon the exercise of outstanding
options), or issue options or rights to subscribe to, or enter into any
contract or commitment to issue or sell, any shares of its capital stock or
subdivide or in any way reclassify any shares of its capital stock, or
acquire, or agree to acquire, any shares of its capital stock;
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(l) Not declare or pay any dividend on shares of its capital stock or
make any other distribution of assets to the holders thereof;
(m) Deliver to NOI, within 45 days after the end of each fiscal
quarter of Dreco beginning May 31, 1997, and through the Effective Date,
unaudited consolidated balance sheets and related unaudited statements of
income, retained earnings and cash flows as of the end of each fiscal
quarter of Dreco, and as of the corresponding fiscal quarter of the
previous fiscal year. Dreco hereby represents and warrants that such
unaudited consolidated financial statements shall (i) be complete in all
material respects except for the omission of notes and schedules contained
in audited financial statements, (ii) present fairly in all material
respects the financial condition of Dreco as at the dates indicated and the
results of operations for the respective periods indicated, (iii) shall
have been prepared in accordance with Canadian generally accepted
accounting principles applied on a consistent basis, except as noted
therein and (iv) shall contain all adjustments which Dreco considers
necessary for a fair presentation of its results for each respective fiscal
period; and
(n) Without the prior written consent of NOI, from and after the date
hereof, Dreco and the Dreco Subsidiaries will not, and will not authorize
or permit any of their officers, directors, employees, financial advisors,
representatives and agents ("Representatives") to, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing information)
or take any other action to facilitate any inquiries or the making of any
proposal which constitutes or may reasonably be expected to lead to an
Acquisition Proposal (as defined herein) from any person, or engage in any
discussion or negotiations relating thereto or accept any Acquisition
Proposal; provided, however, that notwithstanding any other provision
hereof, Dreco may (i) at any time prior to the time Dreco's shareholders
shall have voted to approve the Plan of Arrangement and the other
transactions contemplated thereby, engage in discussions or negotiations
with a third party who (without any solicitation, initiation or
encouragement, directly or indirectly, by Dreco, any Dreco Subsidiary or
the Representatives after the date hereof) seeks to initiate such
discussions or negotiations and may furnish such third party information
concerning Dreco and its business, properties and assets if, and only to
the extent that, (A) the third party has first made an Acquisition Proposal
that is financially superior to the transactions contemplated by this
Agreement and has demonstrated that the funds or other consideration
necessary for the Acquisition Proposal are reasonably likely to be
available (as determined in good faith in each case by Dreco's board of
directors after receiving the written advice of its financial advisors) (a
"Superior Proposal") and Dreco's board of directors shall conclude in good
faith, after considering applicable law and receiving the written advice of
outside counsel that such action is necessary for the board of directors to
act in a manner consistent with its fiduciary duties under applicable law,
and (B) prior to furnishing such information to or entering into
discussions or negotiations with such person or entity, Dreco provides
prompt notice to NOI to the effect that it is furnishing information to or
entering into discussions or negotiations with such person or entity and
receives from such person or entity an executed confidentiality agreement
in reasonably customary form, (ii) comply with Rules 14d-9 and 14e-2
promulgated under the Exchange Act with regard to a tender or exchange
offer and similar rules under applicable Canadian securities laws relating
to the provision of directors' circulars, and make appropriate disclosure
with respect thereto to Dreco's shareholders and (iii) accept a Superior
Proposal from a third party, but only (in the case of this clause (iii)) if
prior to such acceptance Dreco terminates this Agreement in accordance with
Sections 6.1(i) and 6.4. Dreco shall immediately cease and terminate any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by Dreco, any Dreco
Subsidiary or their Representatives with respect to an Acquisition
Proposal. Dreco shall notify NOI orally and in writing of any inquiries,
offers or proposals with respect to an Acquisition Proposal (including
without limitation the terms and conditions of any such proposal, the
identity of the person making it and all other information reasonably
requested by NOI), within 24 hours of the receipt thereof, shall keep NOI
informed of the status and details of any such inquiry, offer or proposal
and answer NOI's questions with respect thereto, and shall give NOI five
days' advance notice of any agreement to be entered into with, or any
information to be supplied to, any person making such inquiry, offer or
proposal. As used herein, "Acquisition Proposal" shall mean a proposal or
offer (other than by NOI) to acquire beneficial ownership (as defined under
Rule 13(d) of the Exchange Act) of all or a material portion of the assets
of, or any material equity interest in, Dreco or
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its material Subsidiaries pursuant to a merger, consolidation or other
business combination, by means of a sale of shares of capital stock, sale
of assets, tender offer or exchange offer or similar transaction involving
Dreco or its material Subsidiaries including without limitation any single
or multi-step transaction or series of related transactions which is
structured to permit such third party to acquire beneficial ownership or
any material portion of the assets of, or any material portion of the
equity interest in, Dreco or its material Subsidiaries (other than the
transactions contemplated by this Agreement), provided however, in no event
shall an underwritten public or private sale of Dreco Common shares
(aggregating less than 50% of the currently issued and outstanding Dreco
Common Shares), which is not made in connection with a merger,
consolidation or other business combination, be deemed to be an Acquisition
Proposal.
4.3 Additional Agreements of NOI. NOI agrees that, except as expressly
contemplated by this Agreement or otherwise agreed to in writing by Dreco or as
set forth in the NOI Disclosure Letter, from the date hereof to the Effective
Date it will, and will cause each of the NOI Subsidiaries to:
(a) Other than as contemplated by this Agreement, operate its business
only in the usual, regular, and ordinary manner so as to maintain the
goodwill it now enjoys and, to the extent consistent with such operation,
use all commercially reasonable efforts to preserve intact its present
business organization, keep available the services of its present officers
and employees, and preserve its relationships with customers, suppliers,
distributors, and others having business dealings with it;
(b) Maintain all of its property and assets in customary repair,
order, and condition, reasonable wear and use and damage by fire or
unavoidable casualty excepted;
(c) Maintain its books of account and records in the usual, regular,
and ordinary manner, in accordance with generally accepted accounting
principles applied on a consistent basis;
(d) Duly comply in all material respects with all laws applicable to
it and to the conduct of its business;
(e) Not (i) enter into any contracts of employment which (A) cannot be
terminated on notice of 14 days or less or (B) provide for any severance
payments or benefits covering a period beyond the termination date of such
employment contract, except as may be required by law or (ii) amend any
employee benefit plan or stock option plan, except as may be required for
compliance with this Agreement or applicable law;
(f) Not incur any borrowings except (i) the refinancing of
indebtedness now outstanding or additional borrowings under its existing
revolving credit facilities, (ii) the prepayment by customers of amounts
due or to become due for goods sold or services rendered or to be rendered
in the future, (iii) trade payables incurred in the ordinary course of
business or (iv) other borrowings incurred in the ordinary course of
business to finance normal operations;
(g) Not enter into commitments of a capital expenditure nature or
incur any contingent liability which would exceed $2,000,000, in the
aggregate, except (i) as may be necessary for the maintenance of existing
facilities, machinery and equipment in good operating condition and repair
in the ordinary course of business or (ii) as may be required by law;
(h) Not sell, dispose of, or encumber, any property or assets, except
(i) in the ordinary course of business or (ii) as may be reasonably
required in connection with borrowings under Section 4.3(f);
(i) Maintain insurance upon all its properties and with respect to the
conduct of its business of such kinds and in such amounts as is customary
in the type of business in which it is engaged, but not less than that
presently carried by it;
(j) Not amend its charter documents or bylaws or other organizational
documents or merge or consolidate with or into any other corporation or
change in any manner the rights of its capital stock or the character of
its business;
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(k) Not issue or sell (except upon the exercise of outstanding options
or warrants), or issue options or rights to subscribe to, or enter into any
contract or commitment to issue or sell, any shares of its capital stock or
subdivide or in any way reclassify any shares of its capital stock, or
acquire, or agree to acquire, any shares of its capital stock;
(l) Not declare or pay any dividend on shares of its capital stock or
make any other distribution of assets to the holders thereof;
(m) Deliver to Dreco, within 45 days after the end of each fiscal
quarter of NOI beginning June 30, 1997, and through the Effective Date,
unaudited consolidated balance sheets and related unaudited statements of
income, retained earnings and cash flows as of the end of each fiscal
quarter of NOI, and as of the corresponding fiscal quarter of the previous
fiscal year. NOI hereby represents and warrants that such unaudited
consolidated financial statements shall (i) be complete in all material
respects except for the omission of notes and schedules contained in
audited financial statements, (ii) present fairly in all material respects
the financial condition of NOI as at the dates indicated and the results of
operations for the respective periods indicated, (iii) shall have been
prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis, except as noted therein and (iv)
shall contain all adjustments which NOI considers necessary for a fair
presentation of its results for each respective fiscal period;
(n) Use its reasonable best efforts to cause (i) the shares of NOI
Common Stock to be issued from time to time after the Effective Time upon
exchange of the Exchangeable Shares to be listed upon the Closing on the
NYSE and (ii) with the cooperation and assistance of Dreco, the
Exchangeable Shares to be listed on a mutually acceptable Canadian stock
exchange.
4.4 Public Announcements. Neither NOI nor Dreco, nor any of their
respective affiliates, shall issue or cause the publication of any press release
or other public announcement with respect to this Agreement, the Arrangement or
the other transactions contemplated hereby without the prior consent of the
other party, except as may be required by law or by any listing agreement with a
national securities exchange.
4.5 Comfort Letters. (a) Dreco shall use its reasonable best efforts to
cause to be delivered to NOI a letter (the "Dreco Comfort Letter") of Coopers &
Lybrand addressed to NOI and dated as of a date within five days before the
earlier of (i) the date the Joint Proxy Statement is first mailed to each
company's respective securityholders, and (ii) if a Registration Statement is
required, the date on which the Registration Statement shall become effective,
in form and substance reasonably satisfactory to NOI and customary in scope and
substance for "comfort" letters delivered by independent public accountants in
connection with proxy statements and registration statements similar to the
Joint Proxy Statement and, if required, the Registration Statement.
(b) NOI shall use its reasonable best efforts to cause to be delivered to
Dreco a letter (the "NOI Comfort Letter") of Ernst & Young LLP addressed to
Dreco and dated as of a date within five days before the earlier of (i) the date
the Joint Proxy Statement is first mailed to each company's respective
securityholders, and (ii) if a Registration Statement is required, the date on
which the Registration Statement shall become effective, in form and substance
reasonably satisfactory to Dreco and customary in scope and substance for
"comfort" letters delivered by independent public accountants in connection with
proxy statements and registration statements similar to the Joint Proxy
Statement and, if required, the Registration Statement.
4.6 Board of Directors. The board of directors of NOI will take action
prior to the Effective Time to cause the number of directors comprising the full
board of directors of NOI to be increased to nine persons, and two persons
designated by the Dreco board of directors (which designations shall be subject
to the approval of a majority of NOI's directors at that time) shall be elected
to the board of directors of NOI by the NOI board of directors effective at the
Effective Time, such increase in number and such election to be subject to the
consummation of the Closing. If prior to the Effective Time any Dreco designee
for director shall decline or be unable to serve as a director of NOI, Dreco's
board of directors shall designate another person to serve in such person's
stead, subject to the approval of a majority of NOI's directors at that time.
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ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 Conditions Precedent to Obligations of Each Party. The obligations of
each party to consummate and effect the transactions contemplated hereunder
shall be subject to the satisfaction or waiver before the Effective Date of the
following conditions:
(a) Consents of Certain Parties in Privity. NOI and Dreco shall have
received all written consents, assignments, waivers, authorizations or
other certificates necessary to provide for the continuation in full force
and effect of all their material contracts and leases and for them to
consummate the transactions contemplated hereby, except when the failure to
receive such consents or other certificates would not have a Material
Adverse Effect on NOI or Dreco;
(b) Securityholder Approval. This Agreement, the Arrangement and the
other transactions contemplated hereby shall have been approved and adopted
by the Dreco securityholders in accordance with applicable law and Dreco's
articles of amalgamation and bylaws, and Dreco shall not have received on
or prior to the Effective Time notice from the holders of more than 10% of
the issued and outstanding Dreco Common Shares of their intention to
exercise their rights of dissent under section 184 of the ABCA;
(c) No Legal Action. No order shall have been entered and remain in
effect in any action or proceeding before any Governmental Entity that
would prevent or make illegal the consummation of the Arrangement;
(d) Court Approval. The Court shall have issued its final order
approving the Arrangement in form and substance reasonably satisfactory to
NOI and Dreco and reflecting the terms hereof;
(e) Commissions, etc. All necessary orders shall have been obtained
from the Commissions and other relevant United States and Canadian
securities regulatory authorities in connection with the Arrangement. All
waiting periods required by HSR shall have expired with respect to the
transactions contemplated by this Agreement, or early termination with
respect thereto shall have been obtained, without the imposition of any
governmental request or order requiring the sale or disposition or holding
separate (through a trust or otherwise) of a material portion of the assets
or businesses of Dreco or NOI. NOI and Dreco shall each have filed all
notices and information (if any) required under Part IX of the Competition
Act (Canada) and the applicable waiting periods and any extensions thereof
shall have expired or the parties shall have received an Advance Ruling
Certificate pursuant to Section 102 of the Competition Act (Canada) setting
out that the Director under such Act is satisfied he would not have
sufficient grounds on which to apply for an order in respect of the
Arrangement. The Arrangement shall have received the allowance or approval
or deemed allowance or approval by the responsible Minister under the
Investment Canada Act in respect of the Arrangement, to the extent such
allowance or approval is required, on terms and conditions satisfactory to
the parties;
(f) SEC Matters. The Registration Statement, if required, shall have
been declared effective under the Securities Act on or before the mailing
to securityholders entitled to vote of NOI and Dreco of the Joint Proxy
Statement and, if a shelf Registration Statement is required by the SEC,
the shelf Registration Statement shall have been declared effective under
the Securities Act on or before the Effective Date, and in both cases at
their effective dates and on the Closing Date the Registration Statements
shall not be the subject of any stop-order or proceedings seeking a
stop-order, and the Joint Proxy Statement shall on the Closing Date not be
subject to any similar proceedings commenced or threatened by the SEC or
the Commissions. In addition, the No Action Request, as it relates to the
exemption from registration of the Exchangeable Shares to be issued to
Dreco's shareholders, shall have received a favorable response from the
SEC; and
(g) Listings. The NOI Common Stock to be issued from time to time
after the Effective Time upon exchange of the Exchangeable Shares shall
have been approved for listing on the NYSE, and the
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Exchangeable Shares shall be listed on a reasonably acceptable Canadian
stock exchange, in each case subject only to notice of issuance.
5.2 Conditions Precedent to Obligations of Dreco. The obligations of Dreco
to consummate and effect the transactions contemplated hereunder shall be
subject to the satisfaction or waiver on or before the Effective Date of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of NOI contained in this Agreement shall be true and correct on
the date hereof and (except to the extent such representations and
warranties speak as of a date earlier than the date hereof) shall also be
true and correct on and as of the Effective Date, with the same force and
effect as if made on and as of the Effective Date; provided, however, that
for purposes of this Section 5.2(a) only, such representations and
warranties shall be deemed to be true and correct as of the Effective Date
unless the failure or failures of such representations and warranties to be
so true and correct (without regard to materiality qualifiers contained
therein), individually or in the aggregate, results or would reasonably be
expected to result in a Material Adverse Effect on Dreco or NOI (only after
including its ownership of Dreco and the Dreco Subsidiaries after the
Arrangement);
(b) Covenants. NOI shall have performed and complied with all
covenants required by this Agreement to be performed or complied with, in
all material respects, by NOI on or before the Effective Date;
(c) Certificate. NOI shall have delivered to Dreco a certificate,
dated the Effective Date and signed by its chief executive officer and its
chief financial officer, to the effect set forth in Sections 5.2(a) and
(b);
(d) Opinion of NOI Counsel. Dreco shall have received opinions, dated
as of the Effective Date, from Morgan, Lewis & Bockius LLP, United States
counsel for NOI, and from Stikeman, Elliott, Canadian counsel for NOI, each
in form and substance reasonably satisfactory to Dreco;
(e) Tax Opinion. Dreco shall have received an opinion in form and
substance reasonably satisfactory to Dreco of Blake, Cassels & Graydon,
Canadian tax counsel for Dreco, to the effect that the Arrangement will be
generally treated for Canadian federal income tax purposes as a
reorganization of capital for those Dreco shareholders who hold their Dreco
Common Shares as capital property for purposes of the ITA;
(f) Fairness Opinion. The Dreco Fairness Opinion shall have been
confirmed by Credit Suisse First Boston Corporation in writing to Dreco's
board of directors as of the date the Joint Proxy Statement was first
mailed to the securityholders of Dreco and shall not have subsequently been
withdrawn;
(g) Pooling Matters. The Dreco Pooling Opinion shall have been
confirmed by Coopers & Lybrand in writing to Dreco's board of directors on
the Effective Date. In addition, no event shall have occurred which would
establish with reasonable certainty that the Arrangement would not be
treated as a "pooling of interests" for accounting purposes;
(h) Comfort Letter. Dreco shall have received the NOI Comfort Letter
and an additional letter from Ernst & Young LLP, dated the Effective Date,
in form and substance reasonably satisfactory to Dreco, stating that
nothing has come to their attention, as of a date no earlier than five days
prior to the Effective Date, which would require any change in the NOI
Comfort Letter if it were required to be dated and delivered on the
Effective Date;
(i) Affiliates Agreements. NOI shall have furnished copies to Dreco of
the NOI affiliates agreements referred to Section 7.6(b); and
(j) Certificates and Resolutions. Dreco shall have received such other
certificates and resolutions of NOI as may be reasonably required in
connection with the consummation of the transactions contemplated by this
Agreement.
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5.3 Conditions Precedent to Obligations of NOI. The obligations of NOI to
consummate and effect the transactions contemplated hereunder shall be subject
to the satisfaction or waiver on or before the Effective Date of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of Dreco contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak
as of a date earlier than the date hereof) shall also be true and correct
on and as of the Effective Date, with the same force and effect as if made
on and as of the Effective Date; provided, however, that for purposes of
this Section 5.3(a) only, such representations and warranties shall be
deemed to be true and correct as of the Effective Date unless the failure
or failures of such representations and warranties to be so true and
correct (without regard to materiality qualifiers contained therein),
individually or in the aggregate, results or would reasonably be expected
to result in a Material Adverse Effect on NOI (either with or without
including its ownership of Dreco and the Dreco Subsidiaries after the
Arrangement);
(b) Covenants. Dreco shall have performed and complied with all
covenants required by this Agreement to be performed or complied with, in
all material respects, by Dreco on or before the Effective Date;
(c) Certificate. Dreco shall have delivered to NOI a certificate,
dated the Effective Date and signed by its chief executive officer and its
chief financial officer, to the effect set forth in Sections 5.3 (a) and
(b);
(d) Opinion of Dreco Counsel. NOI shall have received opinions, dated as
of the Effective Date, from Fulbright & Jaworski L.L.P., United States
counsel for Dreco, and from Blake, Cassels & Graydon, Canadian counsel for
Dreco, each in form and substance reasonably satisfactory to Dreco;
(e) Fairness Opinion. The NOI Fairness Opinion shall have been
confirmed by Merrill Lynch & Co. in writing to NOI's board of directors as
of the date the Joint Proxy Statement was first mailed to the stockholders
of NOI and shall not have subsequently been withdrawn;
(f) Pooling Matters. The NOI Pooling Opinion shall have been confirmed
by Ernst & Young LLP in writing to NOI's board of directors on the
Effective Date. In addition, no event shall have occurred which would
establish with reasonable certainty that the Arrangement would not be
treated as a "pooling of interests" for accounting purposes;
(g) Redemption of Rights. Dreco shall have given a binding notice of
redemption or termination of the Rights (as therein defined) under the
Rights Agreement in accordance with Section 5.1 of the Rights Agreement,
and shall have taken any other action required under the Rights Agreement
and applicable law such that the only right at the Effective Time and
thereafter of the holders of Rights shall be to receive the Redemption
Price (as defined in the Rights Agreement) for each Right so held;
(h) Comfort Letter. NOI shall have received the Dreco Comfort Letter
and an additional letter from Coopers & Lybrand, dated the Effective Date,
in form and substance reasonably satisfactory to NOI, stating that nothing
has come to their attention, as of a date no earlier than five days prior
to the Effective Date, which would require any change in the Dreco Comfort
Letter if it were required to be dated and delivered on the Effective Date;
(i) Affiliates Agreements. Dreco shall have furnished copies to NOI of
the Dreco affiliates agreements referred to Section 7.6(a); and
(j) Certificates and Resolutions. NOI shall have received such other
certificates and resolutions of Dreco as may be reasonably required in
connection with the consummation of this Agreement.
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ARTICLE VI
TERMINATION
6.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the transactions
contemplated hereby by the securityholders entitled to vote of NOI or Dreco, as
follows:
(a) by mutual agreement of Dreco and NOI;
(b) by Dreco, if there has been a breach by NOI of any representation,
warranty, covenant or agreement set forth in this Agreement on the part of
NOI, or if any representation or warranty of NOI shall have become untrue,
in either case which has or can reasonably be expected to have a Material
Adverse Effect on NOI, and which NOI fails to cure within 15 business days
after written notice thereof from Dreco (except that no cure period shall
be provided for a breach by NOI which by its nature cannot be cured);
(c) by NOI, if there has been a breach by Dreco of any representation,
warranty, covenant or agreement set forth in this Agreement on the part of
Dreco, or if any representation or warranty of Dreco shall have become
untrue, in either case which has or can reasonably be expected to have a
Material Adverse Effect on Dreco, and which Dreco fails to cure within 15
business days after written notice thereof from NOI (except that no cure
period shall be provided for a breach by Dreco which by its nature cannot
be cured);
(d) by either party, if all the conditions for Closing the Arrangement
shall not have been satisfied or waived on or before 5:00 p.m., Houston,
Texas time on October 31, 1997, other than as a result of a breach of this
Agreement by the terminating party;
(e) by either party (i) if the securityholders of Dreco do not approve
the Arrangement (and the other matters to be approved at such meeting as
provided in Section 7.1 hereof) at the Dreco Shareholders Meeting, or (ii)
if the stockholders of NOI do not approve at the NOI Stockholders Meeting
the issuance of NOI Common Stock issuable upon the exchange of the
Exchangeable Shares (and the other matters to be approved at such meeting
as provided in Section 7.1 hereof);
(f) by either party if a final and non-appealable order shall have
been entered in any action or proceeding before any Governmental Entity
that prevents or makes illegal the consummation of the Arrangement;
(g) by NOI if the Dreco board of directors or any committee of the
Dreco board of directors (i) shall withdraw or modify in any adverse manner
its approval or recommendation of this Agreement, the Arrangement and the
other transactions contemplated hereby, (ii) within ten days after NOI's
request, shall fail to reaffirm such approval or recommendation, (iii)
shall approve or recommend any Acquisition Proposal, other than with NOI or
an affiliate thereof, or (iv) shall resolve to take any of the actions
specified in this Section 6.1(g);
(h) by Dreco if the NOI board of directors or any committee of the NOI
board of directors (i) shall withdraw or modify in any adverse manner its
approval or recommendation of this Agreement, the Arrangement and the other
transactions contemplated hereby, (ii) within ten days after Dreco's
request, shall fail to reaffirm such approval or recommendation or (iii)
shall resolve to take any of the actions specified in this Section 6.1(h);
(i) by Dreco, prior to the approval of this Agreement, the Arrangement
and the other transactions contemplated hereby by the securityholders of
Dreco, upon five days' prior notice to NOI, if, as a result of a Superior
Proposal by a party other than NOI or any of its affiliates, Dreco's board
of directors determines in good faith that their fiduciary obligations
under applicable law require that such Superior Proposal be accepted;
provided, however, that (i) Dreco's board of directors shall have concluded
in good faith, after considering provisions of applicable law and after
giving effect to all concessions which may be offered by NOI pursuant to
clause (ii) below, after receiving the written advice of outside counsel,
that
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such action is necessary for Dreco's board of directors to act in a manner
consistent with its fiduciary duties under applicable law and (iii) prior
to any such termination and prior to accepting, or entering into any
agreement regarding, the Superior Proposal Dreco shall provide NOI (for at
least five days) an opportunity to amend this Agreement to provide for
terms substantially similar to those included in the Superior Proposal, and
in addition Dreco shall, and shall cause its respective financial and legal
advisors to, negotiate in good faith with NOI to make such adjustments in
the terms and conditions of this Agreement as would enable Dreco to proceed
with the transactions contemplated hereby. In the event this Agreement is
amended as provided above (including without limitation if NOI and Dreco
agree to mutually acceptable adjustments as provided above), then Dreco
shall not enter into any agreement regarding the Superior Proposal;
(j) by either party, if NOI shall have approved, or agreed to or
announced any agreement to effect, any transaction that would result in any
person, who is not currently a NOI stockholder, acquiring beneficial
ownership of more than 50% of the issued and outstanding capital stock of
NOI; or
(k) by Dreco, in the circumstances contemplated by Section 1.2(b).
6.2 Notice of Termination. Any termination of this Agreement under Section
6.1 above will be effected by the delivery of written notice by the terminating
party to the other party hereto.
6.3 Effect of Termination. Subject to Section 6.4, in the event of
termination of this Agreement by either Dreco or NOI pursuant to Section 6.1,
this Agreement shall forthwith become void and have no effect, and there shall
be no liability or obligation on the part of NOI or Dreco or their respective
officers or directors, except that (i) the provisions of the Confidentiality
Agreement dated April 30, 1997 shall survive any such termination and
abandonment, and (ii) no party shall be released or relieved from any liability
arising from the willful breach by such party of any of its representations,
warranties, covenants or agreements as set forth in this Agreement.
6.4 Termination Fee. (a) If this Agreement is terminated (i) by Dreco
pursuant to Section 6.1(b), or (ii) by either party pursuant to Section
6.1(e)(ii), then NOI shall pay to Dreco a cash termination fee of $2,500,000 at
the time of such termination.
(b) If this Agreement is terminated (i) by NOI pursuant to Section 6.1(c),
or (ii) by either party pursuant to Section 6.1(e)(i), then Dreco shall pay to
NOI a cash termination fee of $2,500,000 at the time of such termination, and an
additional cash termination fee of $9,500,000 if within 12 months of such
termination Dreco enters into a definitive agreement with respect to an
Acquisition Proposal (other than with NOI or any of its affiliates), or
announces an Acquisition Proposal within such 12 month period and enters into a
definitive agreement in respect thereof within 18 months of such termination.
(c) If this Agreement is terminated by NOI pursuant to Section 6.1(g) or by
Dreco pursuant to Section 6.1(i), then Dreco shall pay to NOI upon such
termination a cash termination fee of $12,000,000 at the time of such
termination.
(d) If this Agreement is terminated by Dreco pursuant to Section 6.1(h) or
by NOI pursuant to Section 6.1(j), then NOI shall pay to Dreco upon such
termination a cash termination fee of $12,000,000 at the time of such
termination.
(e) NOI and Dreco each agree that the agreements contained in Sections
6.4(a) through 6.4(d) are an integral part of the transactions contemplated by
this Agreement. If either party fails to promptly pay the other party any fee
due under such Sections 6.4(a) through 6.4(d), it shall pay the other party's
costs and expenses (including legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action, taken to
collect payment, together with interest on the amount of any unpaid fee at the
publicly announced prime rate of Wells Fargo Bank, N.A. from the date such fee
was first due.
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ARTICLE VII
ADDITIONAL AGREEMENTS
NOI and Dreco each agree to take the following actions after the execution
of this Agreement.
7.1 Meetings. Dreco and NOI shall each duly call a meeting of its
securityholders entitled to vote to be held within 45 days after the SEC has
indicated that it has no further comments on the Joint Proxy Statement for the
purpose of (a) in the case of Dreco, voting upon (i) the Plan of Arrangement and
the transactions contemplated hereby and thereby, and (b) in the case of NOI,
voting upon (i) a proposal to approve the issuance of such number of shares of
NOI Common Stock as are necessary to consummate the Arrangement, (ii) a proposal
to adopt the NOI Restated Charter and (iii) such other matters relating to the
Arrangement, if any, as shall be legally required in the reasonable opinion of
NOI; and each shall, subject to Section 4.2(n) in the case of Dreco, through its
board of directors, recommend to its securityholders approval of such matters
and shall coordinate and cooperate with respect to the timing of such meetings.
7.2 The Closing. Subject to the termination of this Agreement as provided
in Article VI, the Closing
of the transactions contemplated by this Agreement (the "Closing") will take
place at the offices of
National-Oilwell, Inc., 5555 San Felipe, Houston, Texas 77210 on a date (the
"Closing Date") and at a time to be mutually agreed upon by the parties, which
date shall be no later than the first business day after all conditions to
Closing set forth herein shall have been satisfied or waived, unless another
place, time and date is mutually selected by Dreco and NOI. Concurrently with
the Closing, the Plan of Arrangement will be filed with the Registrar under the
ABCA.
7.3 Ancillary Documents/Reservation of Shares.
(a) Provided all other conditions of this Agreement have been satisfied or
waived, Dreco shall, on the Closing Date, file Articles of Arrangement pursuant
to Part 15 of the ABCA to give effect to the Plan of Arrangement, such Articles
of Arrangement to contain share conditions for Exchangeable Shares substantially
in the form of those contained in Exhibit A.
(b) On the Effective Date:
(i) NOI shall execute and deliver a Support Agreement containing the
terms and conditions set forth in Exhibit C, together with such other terms
and conditions as may be agreed to by the parties hereto acting reasonably;
(ii) NOI, Dreco and a Canadian trust company to be mutually agreeable
to NOI and Dreco, acting reasonably, shall execute and deliver a Voting and
Exchange Trust Agreement containing the terms and conditions set forth in
Exhibit D, together with such other terms and conditions as may be agreed
to by the parties hereto acting reasonably; and
(iii) NOI shall file with the Secretary of State of Delaware a
Restated Certificate of Incorporation which shall be in substantially the
form set forth in Exhibit B.
(c) On or before the Effective Date, NOI will reserve for issuance such
number of shares of NOI Common Stock as shall be necessary to give effect to the
exchanges and assumptions or exchanges of options contemplated hereby.
7.4 Conversion of Options. Promptly after the Effective Time, NOI will
notify in writing each holder of a Dreco Option of the conversion of such Dreco
Option for an option to purchase NOI Common Stock in accordance with Section
1.1(j) hereof.
7.5 Indemnification and Related Matters.
(a) NOI agrees that all rights to indemnification existing in favor of the
present or former directors and officers of Dreco (as such) or any of the Dreco
Subsidiaries or present or former directors and officers (as such) of Dreco or
any of the Dreco Subsidiaries serving or who served at Dreco's or any of the
Dreco Subsidiaries' request as a director, officer, employee, agent or
representative of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (each such present or former
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director or officer of Dreco or any of the Dreco Subsidiaries, an "Indemnified
Party"), as provided in Dreco's charter or bylaws or similar documents of any of
the Dreco Subsidiaries in effect as of the date hereof with respect to matters
occurring prior to the Effective Time, shall survive and shall continue in full
force and effect and without modification for a period of not less than the
statutes of limitations applicable to such matters.
(b) From and after the Effective Time, NOI and Dreco, jointly and
severally, shall and shall cause Dreco to indemnify and hold harmless to the
fullest extent permitted under the ABCA, each Indemnified Party against any
costs and expenses (including reasonable attorney's fees), judgments, fines,
losses, claims and damages and liabilities, and amounts paid in settlement
thereof with the consent of the indemnifying party, in connection with any
actual or threatened claim, action, suit, proceeding or investigation that is
based on, or arises out of, the fact that such person is or was a director or
officer of Dreco or any Dreco Subsidiary (including without limitation with
respect to any of the transactions contemplated hereby or the Arrangement) or
who is serving or who served at Dreco's or any of the Dreco Subsidiaries'
request as a director, officer, employee, agent or representative of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. In the event of any such claim, action, suit, proceeding or
investigation, NOI shall cause Dreco to pay the reasonable fees and expenses of
counsel in advance of the final disposition of any such claim, action, suit,
proceeding or investigation to the fullest extent permitted by law subject to
the limitations imposed by the ABCA. Without limiting the foregoing, in the
event any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Parties, (i) the Indemnified Parties may retain counsel
reasonably satisfactory to NOI and, subject to limitations imposed by the ABCA,
Dreco shall (or NOI shall cause Dreco to) pay all reasonable fees and expenses
of such counsel for the Indemnified Parties promptly as statements therefor are
received; and (ii) NOI will use all reasonable efforts to assist in the defense
of such matter; provided, however, that neither Dreco nor NOI shall be liable
for any settlement effected without its prior written consent which shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 7.5(b), upon learning of any such claim, action, suit,
proceeding or investigation, shall notify NOI (but the failure to so notify
shall not relieve a party from any liability which it may have under this
Section 7.5(b) except to the extent such failure prejudices such party). The
Indemnified Parties as a group may retain only one law firm in any jurisdiction
to represent them with respect to each such matter unless such counsel
determines that there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties, in which event such additional counsel may be required to
be retained by the Indemnified Parties.
(c) Subject to limitations imposed by the ABCA, Dreco shall (or NOI shall
cause Dreco to) pay all expenses, including reasonable attorney's fees, as the
same may be incurred by any Indemnified Parties in any action by any Indemnified
Party or parties seeking to enforce the indemnity or other obligations provided
for in this Section 7.5; provided, however, that Dreco will be entitled to
reimbursement for any advances made under this Section 7.5 to any Indemnified
Party who ultimately proves unsuccessful in enforcing the indemnity as finally
determined by a non-appealable judgment in a court of competent jurisdiction,
and payment of such expenses in advance of the final disposition of the action
shall be made only upon receipt of any undertaking by the Indemnified Party to
reimburse all amounts advanced if such action ultimately proves unsuccessful.
(d) For a period of six years after the Effective Date, NOI shall continue
in effect director and officer liability insurance for the benefit of the
Indemnified Parties in such amounts, and with such deductibles, retained
amounts, coverages and exclusions as NOI shall provide for its own directors and
officers during such period.
(e) This Section 7.5, which shall survive the consummation of this
Agreement and the Arrangement, is intended to benefit each person or entity
indemnified hereunder.
7.6 Affiliate Agreements.
(a) To ensure that the Arrangement will be accounted for as a "pooling of
interests" and to ensure compliance with Rule 145 of the rules and regulations
promulgated by the SEC and the Securities Act, on or before the date the Joint
Proxy Statement is first mailed to each company's respective securityholders
entitled to vote Dreco will use its reasonable best efforts to have its
Affiliates sign and deliver to NOI the Dreco
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affiliate agreements in the form of Exhibit E. For purposes of this Agreement,
an "Affiliate" shall have the meaning referred to in Rule 145 under the
Securities Act.
(b) To ensure that the Arrangement will be accounted for as a "pooling of
interests" on or before the date the Joint Proxy Statement is first mailed to
each company's respective securityholders entitled to vote NOI will use its
reasonable best efforts to have its Affiliates sign and deliver to NOI the NOI
Affiliate Agreements in the form of Exhibit F.
ARTICLE VIII
MISCELLANEOUS
8.1 No Survival of Representations and Warranties. All representations and
warranties of the parties contained in this Agreement will remain operative and
in full force and effect, regardless of any investigation made by or on behalf
of the parties to this Agreement, until the earlier of the valid termination of
this Agreement or the Closing Date, whereupon such representations and
warranties will expire and be of no further force or effect. All agreements and
covenants of the parties shall survive the Closing Date, except as otherwise set
forth in this Agreement.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by recognized
overnight courier, by facsimile (receipt confirmed) or mailed by certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to NOI to: National-Oilwell, Inc., 5555 San Felipe, P.O. Box
4638 (77210), Houston, Texas 77056, Attention: President, Facsimile No.
713/960-5212, with required copies to Morgan, Lewis & Bockius LLP, 2000 One
Logan Square, Philadelphia, PA 19103, Attention: David R. King, Esq.,
Facsimile No. 215/963-5299, and to Stikeman, Elliott, Suite 5300, P.O. Box
85, Commerce Court West, Toronto, Ontario, Canada M5L 1B9, Attention: Ian
Douglas, Esq., Facsimile No. 416/947-0866.
(b) if to Dreco to: Dreco Energy Services Ltd., #1340 Weber Centre,
5555 Calgary Trail South, Edmonton, Alberta, Canada T6H 5P9, Attention:
President, Facsimile No. 403/438-8256, with required copies to Fulbright &
Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, TX 77010, Attention:
Robert F. Gray, Jr., Esq. Facsimile No. 713/651-5246, and to Blake, Cassels
& Graydon, 3500 Bankers Hall East, 855-2nd Street S.W., Calgary, Alberta,
Canada T2P 4J8, Attention: Patrick C. Finnerty, Esq., Facsimile No.
403/260-9700.
8.3 Interpretation. When a reference is made in this Agreement to Sections
or Exhibits, such reference shall be to a Section or Exhibit to this Agreement
unless otherwise indicated. The words "include," "includes" and "including" when
used therein shall be deemed in each case to be followed by the words "without
limitation." The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
8.4 Severability. If any provision of this Agreement or the application
thereof to any person or circumstance is held invalid or unenforceable in any
jurisdiction, the remainder hereof, and the application of such provision to
such person or circumstance in any other jurisdiction or to other persons or
circumstances in any jurisdiction, shall not be affected thereby, and to this
end the provisions of this Agreement shall be severable.
8.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to each of the other parties, it being understood that
all parties need not sign the same counterpart.
8.6 Miscellaneous. This Agreement, which includes the Dreco Disclosure
Letter, the NOI Disclosure Letter and the Exhibits hereto, the Dreco
Stockholders Agreement, the NOI Stockholders Agreement, the Confidentiality
Agreement, dated April 30, 1997, between NOI and Dreco, and any other documents
referred
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to herein or contemplated hereby (a) constitute the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to confer upon any
other person any rights or remedies hereunder (except that Section 7.5 is for
the benefit of Dreco's directors and officers and is intended to confer rights
on such persons); and (c) shall not be assigned by operation of law or otherwise
except as otherwise specifically provided.
8.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (regardless of the laws that
might otherwise govern under applicable principles of conflicts of law) as to
all matters, including without limitation validity, construction, effect,
performance and remedies.
8.8 Amendment and Waivers. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound thereby. The waiver by a party
of any breach hereof or default in the performance hereof will not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
This Agreement may be amended by the parties hereto at any time before or after
approval of the Dreco securityholders or the NOI stockholders, but, after such
approval, no amendment will be made which by applicable law requires the further
approval of the Dreco securityholders or the NOI stockholders without obtaining
such further approval.
8.9 Expenses. Except as otherwise provided herein, each party will bear
its respective expenses and legal fees incurred with respect to this Agreement
and the transactions contemplated hereby.
IN WITNESS WHEREOF, NOI and Dreco have caused this Agreement to be signed
by their respective officers thereunder duly authorized, all as of the date
first written above.
NATIONAL-OILWELL, INC.
By /s/ JOEL V. STAFF
-----------------------------------
Joel V. Staff
President
DRECO ENERGY SERVICES LTD.
By /s/ ROBERT L. PHILLIPS
-----------------------------------
Robert L. Phillips
President
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ANNEX D
180
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONAL-OILWELL, INC.
FIRST: The name of the Corporation is National-Oilwell, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of the registered agent of the Corporation at such address
is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
by the Corporation is to engage in any lawful business, act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: CAPITAL STOCK.
I. AUTHORIZED SHARES
The total number of shares of stock that the Corporation shall have
authority to issue is, 50,013,289 shares of capital stock, consisting of (i)
75,000,000 shares of common stock, par value $.01 per share ("Common Stock");
(ii) 13,288 shares of Class A Common Stock, par value $.01 per share ("Class A
Common Stock"); (iii) one share of Special Voting Stock ("Special Voting Stock";
the Class A Common Stock and the Common Stock and the Special Voting Stock are
collectively referred to as the "Common Shares"); and (iv) 10,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock").
The Common Shares shall have the rights, preferences and limitations set
forth below. Capitalized terms used but not otherwise defined in Parts I or II
of this Article Fourth are defined in Part III of this Article Fourth.
II. COMMON SHARES
Except as otherwise provided in this Part II or as otherwise required by
applicable law, all shares of Special Voting Stock, Class A Common Stock and
Common Stock shall be identical in all respects and shall entitle the holders
thereof to the same rights and privileges, subject to the same qualifications,
limitations and restrictions.
SECTION 1. SPECIAL VOTING STOCK. Each outstanding share of Special Voting
Stock shall be entitled at any relevant date to the number of votes determined
in accordance with the "Plan of Arrangement" (as that term is defined in that
certain "Combination Agreement" dated as of May 14, 1997 (as amended), by and
between the Corporation and Dreco Energy Services Ltd.) on all matters presented
to the stockholders. No dividend or distribution of assets shall be paid to the
holders of Special Voting Stock. The Special Voting Stock is not convertible
into any other class or series of the capital stock of the Corporation or into
cash, property or other rights, and may not be redeemed. Any shares of Special
Voting Stock purchased or otherwise acquired by the Corporation shall be deemed
retired and shall be canceled and may not thereafter be reissued or otherwise
disposed of by the Corporation. At such time as the Special Voting Stock has no
votes attached to it because there are no "Exchangeable Shares" (as that terms
is defined in the Combination Agreement) outstanding, the Special Voting Stock
shall be canceled.
SECTION 2. VOTING RIGHTS. Except as otherwise provided in this Part II or
as otherwise required by applicable law, all holders of Class A Common Stock and
Common Stock shall be entitled to one vote per share on all matters to be voted
on by the Corporation's stockholders. In respect of all matters concerning the
voting of shares, the Class A Common Stock, the Common Stock and the Special
Voting Stock shall vote as a single class and such voting rights shall be
identical in all respects.
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SECTION 3. DISTRIBUTIONS. At the time of each Distribution, such
Distribution shall be made to the holders of Class A Common Stock and Common
Stock in the following priority:
(i) The holders of Class A Common Stock shall be entitled to receive
all or a portion of such Distribution (ratably among such holders based
upon the number of shares of Class A Common Stock held by each such holder
as of the time of such Distribution) equal to the aggregate Unreturned
Original Cost of the outstanding shares of Class A Common Stock as of the
time of such Distribution, and no Distribution or any portion thereof shall
be made under Section 2(ii) below until the entire amount of Unreturned
Original Cost of the outstanding shares of Class A Common Stock as of the
time of such Distribution has been paid in full. The Distributions made
pursuant to this paragraph 2(i) to holders of Class A Common Stock shall
constitute a return of Original Cost of Class A Common Stock.
(ii) After the holders of Class A Common Stock have received
Distributions equal to the entire Original Cost thereof pursuant to
paragraph 2(i) above, holders of Common Shares as a group, shall be
entitled to receive the remaining portion of such Distribution (ratably
among such holders based upon the number of Common Shares held by each such
holder as of the time of such Distribution).
(iii) If the Corporation is a party to a merger or consolidation in
which the stockholders of the Corporation receive Merger Consideration, all
of the Merger Consideration shall be deemed to be a Distribution for
purposes of allocating all of such Merger Consideration between the holders
of Class A Common Stock and the holders of Common Stock under this Section
2.
SECTION 4. STOCK SPLITS AND STOCK DIVIDENDS. The Corporation shall not in
any manner subdivide (by stock split, stock dividend or otherwise) or combine
(by stock split, stock dividend or otherwise) the outstanding Common Shares of
one class unless the outstanding Common Shares of the other class shall be
proportionately subdivided or combined. All such subdivisions and combinations
shall be payable only in Class A Common Stock to the holders of Class A Common
Stock and in Common Stock to the holders of Common Stock. In no event shall a
stock split or stock dividend constitute a return of Original Cost.
SECTION 5. CONVERSION. Immediately prior to the Public Offering Time, each
share of Class A Common Stock outstanding immediately prior to the Public
Offering Time shall be, without further action by the Corporation or the holder
thereof, changed and converted into a number of shares of Common Stock equal to
the sum of the Unreturned Original Cost on each such share of Class A Common
Stock as of the Public Offering Time divided by the Net Public Offering Price.
Each certificate representing shares of Class A Common Stock shall automatically
represent from and after the Public Offering Time that number of shares of
Common Stock into which such shares of Class A Common Stock have been converted
pursuant to the preceding sentence. When shares of Class A Common Stock have
been converted pursuant to this Section 4, they shall be irrevocably canceled
and not reissued. Following conversion of all of the shares of Class A Common
Stock, no other shares of Class A Common Stock shall be issued, at any time, by
the Corporation.
SECTION 6. REGISTRATION OF TRANSFER. The Corporation shall keep at its
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of Common Shares. Upon the surrender of any
certificate representing shares of any class of Common Shares at such place, the
Corporation shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange therefor
representing in the aggregate the number of shares of such class represented by
the surrendered certificate, and the Corporation forthwith shall cancel such
surrendered certificate. Each such new certificate will be registered in such
name and will represent such number of shares of such class as is requested by
the holder of the surrendered certificate and shall be substantially identical
in form to the surrendered certificate. The issuance of new certificates shall
be made without charge to the holders of the surrendered certificates for any
issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such issuance.
SECTION 7. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to
the Corporation (an affidavit of the registered holder will be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of any class of Common Shares, and in the case of
any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation
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(provided that if the holder is a financial institution or other institutional
investor its own agreement will be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Corporation shall (at its
expense) execute and deliver in lieu of such certificate a new certificate of
like kind representing the number of shares of such class represented by such
lost, stolen, destroyed or mutilated certificate and dated the date of such
lost, stolen, destroyed or mutilated certificate.
SECTION 8. NOTICES. All notices referred to herein shall be in writing,
shall be delivered personally or by first class mail, postage prepaid, and shall
be deemed to have been given when so delivered or mailed to the Corporation at
its principal executive offices and to any stockholder at such holder's address
as it appears in the stock records of the Corporation (unless otherwise
specified in a written notice to the Corporation by such holder).
SECTION 9. AMENDMENT AND WAIVER. No amendment or waiver of any provision of
this Article Fourth shall be effective without the prior written consent of the
holders of a majority of the then outstanding Common Shares voting as a single
class; provided that no amendment as to any terms or provisions of, or for the
benefit of, any class of Common Shares that adversely affects the powers,
preferences or special rights of such class of Common Shares shall be effective
without the prior consent of the holders of a majority of the then outstanding
shares of such affected class of Common Shares, voting as a single class.
III. DEFINITIONS
"DISTRIBUTION" means each distribution made by the Corporation to holders
of Common Shares, whether in cash, property or securities of the Corporation or
any other entity and whether by dividend, liquidating distributions or
otherwise; provided that neither of the following shall be a Distribution: (a)
any redemption or repurchase by the Corporation of any Common Shares for any
reason or (b) any recapitalization or exchange of any Common Shares for other
securities of the Corporation, or any subdivision (by stock split, stock
dividend or otherwise) or any combination (by stock split, stock dividend or
otherwise) of any outstanding Common Shares.
"GENERAL CORPORATION LAW" means the General Corporation Law of the State of
Delaware, as amended from time to time.
"MERGER CONSIDERATION" means cash, property or securities of an entity
other than the Corporation received by the stockholders of the Corporation in
any merger or consolidation, valued at the fair market value thereof as
determined by the board of directors of the Corporation.
"NET PUBLIC OFFERING PRICE" means the initial public offering price per
share of Common Stock set forth on the front cover page of the final prospectus
included in the Registration Statement referenced in the definition of Public
Offering Time and in the form first used to confirm sales of the Common Stock,
after deduction for any underwriting discount or commissions, but without
deduction for any expenses, incurred by the Corporation in connection with the
initial public offering.
"ORIGINAL COST" of each share of Class A Common Stock shall be equal to the
amount originally paid for such share when it was issued by the Corporation (as
proportionally adjusted for all stock splits, stock dividends and other
recapitalizations affecting the Class A Common Stock), all such shares shall be
deemed to have an Original Cost equal to $24,900 per share (as proportionally
adjusted for all stock splits, stock dividends and other recapitalizations
affecting the Class A Common Stock).
"PUBLIC OFFERING TIME" means the time the Corporation's Registration
Statement on Form S-1 relating to the initial public offering of its Common
Stock is declared effective under Section 8(a) of the Securities Act of 1933, as
amended, by the Securities and Exchange Commission.
"UNRETURNED ORIGINAL COST" of any share of Class A Common Stock means an
amount equal to the excess, if any, of (a) the Original Cost of such share, over
(b) the aggregate amount of Distributions made by the Corporation that
constitute a return of Original Cost of such share.
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IV. PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more classes
or series, the shares of each class or series to have any designations and
powers, preferences, and rights, and qualifications, limitations, and
restrictions thereof as are stated and expressed in this Article IV and in the
resolution or resolutions providing for the issue of such class or series
adopted by the board of directors of the Corporation as hereafter prescribed.
Authority is hereby expressly granted to and vested in the board of
directors of the Corporation to authorize the issuance of the Preferred Stock
from time to time in one or more classes or series, and with respect to each
class or series of the Preferred Stock, to state by the resolution or
resolutions from time to time adopted providing for the issuance thereof the
following:
(i) whether or not the class or series is to have voting rights,
special, or limited, or is to be without voting rights, and whether or not
such class or series is to be entitled to vote as a separate class either
alone or together with the holders of one or more other classes or series
of stock;
(ii) the number of shares to constitute the class or series and the
designations thereof;
(iii) the preferences and relative, participating, optional, or other
special rights, if any, and the qualifications, limitations, or
restrictions thereof, if any, with respect to any class or series;
(iv) whether or not the shares of any class or series shall be
redeemable at the option of the Corporation or the holders thereof or upon
the happening of any specified event, and, if redeemable, the redemption
price or prices (which may be payable in the form of cash, notes,
securities, or other property), and the time or times at which, and the
terms and conditions upon which, such shares shall be redeemable and the
manner of redemption;
(v) whether or not the shares of a class or series shall be subject to
the operation of retirement or sinking funds to be applied to the purchase
or redemption of such shares for retirement, and, if such retirement or
sinking fund or funds are to be established, the periodic amount thereof,
and the terms and provisions relative to the operation thereof;
(vi) the dividend rate, whether dividends are payable in cash, stock
of the Corporation, or other property, the conditions upon which and the
times when such dividends are payable, the preference to or the relation to
the payment of dividends payable on any other class or classes or series of
stock, whether or not such dividends shall be cumulative or noncumulative,
and if cumulative, the date or dates from which such dividends shall
accumulate;
(vii) the preferences, if any, and the amounts thereof which the
holders of any class or series thereof shall be entitled to receive upon
the voluntary or involuntary dissolution of, or upon any distribution of
the assets of, the Corporation;
(viii) whether or not the shares of any class or series, at the option
of the Corporation or the holder thereof or upon the happening of any
specified event, shall be convertible into or exchangeable for the shares
of any other class or classes or of any other series of the same or any
other class or classes of stock, securities, or other property of the
Corporation and the conversion price or prices or ratio or ratios or the
rate or rates at which such conversion or exchange may be made, with such
adjustments, if any, as shall be stated and expressed or provided for in
such resolution or resolutions; and
(ix) any other special rights and protective provisions with respect
to any class or series as may to the board of directors of the Corporation
seem advisable.
The shares of each class or series of the Preferred Stock may vary from the
shares of any other class or series thereof in any or all of the foregoing
respects and in any other manner. The board of directors of the Corporation may
increase the number of shares of the Preferred Stock designated for any existing
class or series by a resolution adding to such class or series authorized and
unissued shares of the Preferred Stock not designated for any other class or
series. The board of directors of the Corporation may decrease the number of
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shares of the Preferred Stock designated for any existing class or series by a
resolution subtracting from such class or series authorized and unissued shares
of the Preferred Stock designated for such existing class or series, and the
shares so subtracted shall become authorized, unissued, and undesignated shares
of the Preferred Stock. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding Common Stock, without a vote of the holders of the Preferred Stock,
or of any series thereof, unless a vote of any such holder is required pursuant
to any Preferred Stock Series Resolution.
V. NO PREEMPTIVE RIGHTS
No holder of shares of stock of the Corporation shall have any preemptive
or other rights, except such rights as are expressly provided by contract, to
purchase or subscribe for or receive any shares of any class, or series thereof,
of stock of the Corporation, whether now or hereafter authorized, or any
warrants, options, bonds, debentures or other securities convertible into,
exchangeable for or carrying any right to purchase any shares of any class, or
series thereof, of stock; but such additional shares of stock and such warrants,
options, bonds, debentures or other securities convertible into, exchangeable
for or carrying any right to purchase any shares of any class, or series
thereof, of stock may be issued or disposed of by the board of directors to such
persons, and on such terms and for such lawful consideration, as in its
discretion it shall deem advisable or as to which the Corporation shall have by
binding contract agreed.
VI. REGISTERED OWNER
The Corporation shall be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes and shall
not be bound to recognize any equitable or other claim to, or interest in, such
share on the part of any other person, whether or not the Corporation shall have
notice thereof, except as expressly provided by applicable law.
VII. GENERAL
Subject to the foregoing provisions of this Amended and Restated
Certificate of Incorporation, the Corporation may issue shares of its Preferred
Stock and Common Stock from time to time for such consideration (not less than
the par value thereof) as may be fixed by the board of directors of the
Corporation, which is expressly authorized to fix the same in its absolute
discretion subject to the foregoing conditions. Shares so issued for which the
consideration shall have been paid or delivered to the Corporation shall be
deemed fully paid stock and shall not be liable to any further call or
assessment thereon, and the holders of such shares shall not be liable for any
further payments in respect of such shares.
The Corporation shall have authority to create and issue rights and options
entitling their holders to purchase shares of the Corporation's capital stock of
any class or series or other securities of the Corporation, and such rights and
options shall be evidenced by instrument(s) approved by the board of directors
of the Corporation. The board of directors of the Corporation shall be empowered
to set the exercise price, duration, times for exercise, and other terms of such
rights or options; provided, however, that the consideration to be received for
any shares of capital stock subject thereto shall not be less than the par value
thereof.
FIFTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
I. DIRECTORS
The number, classification, and terms of the board of directors of the
Corporation and the procedures to elect directors, to remove directors, and to
fill vacancies in the board of directors shall be as follows:
(a) The number of directors that shall constitute the whole board of
directors shall from time to time be fixed exclusively by the board of
directors by a resolution adopted by a majority of the whole board of
directors serving at the time of that vote. In no event shall the number of
directors that
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constitute the whole board of directors be fewer than three. No decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director. Directors of the Corporation need not be elected by
written ballot unless the by-laws of the Corporation otherwise provide.
(b) The board of directors of the Corporation shall be divided into
three classes designated Class I, Class II, and Class III, respectively,
all as nearly equal in number as possible, with each director then in
office receiving the classification that at least a majority of the board
of directors designates. The initial term of office of directors of Class I
shall expire at the annual meeting of stockholders of the Corporation in
1997, of Class II shall expire at the annual meeting of stockholders of the
Corporation in 1998, and of Class III shall expire at the annual meeting of
stockholders of the Corporation in 1999, and in all cases as to each
director until his successor is elected and qualified or until his earlier
death, resignation or removal. At each annual meeting of stockholders
beginning with the annual meeting of stockholders in 1997, each director
elected to succeed a director whose term is then expiring shall hold his
office until the third annual meeting of stockholders after his election
and until his successor is elected and qualified or until his earlier
death, resignation or removal. If the number of directors that constitutes
the whole board of directors is changed as permitted by this Article V, the
majority of the whole board of directors that adopts the change shall also
fix and determine the number of directors comprising each class; provided,
however, that any increase or decrease in the number of directors shall be
apportioned among the classes as equally as possible.
(c) Vacancies in the board of directors resulting from death,
resignation, retirement, disqualification, removal from office, or other
cause and newly-created directorships resulting from any increase in the
authorized number of directors may be filled by no less than a majority
vote of the remaining directors then in office, though less than a quorum,
who are designated to represent the same class or classes of stockholders
that the vacant position, when filled, is to represent or by the sole
remaining director (but not by the stockholders except as required by law),
and each director so chosen shall receive the classification of the vacant
directorship to which he has been appointed or, if it is a newly-created
directorship, shall receive the classification that at least a majority of
the board of directors designates and shall hold office until the first
meeting of stockholders held after his election for the purpose of electing
directors of that classification and until his successor is elected and
qualified or until his earlier death, resignation, or removal from office.
(d) A director of any class of directors of the Corporation may be
removed before the expiration date of that director's term of office, only
for cause, by an affirmative vote of the holders of not less than eighty
percent (80%) of the votes of the outstanding shares of the class or
classes or series of stock then entitled to be voted at an election of
directors of that class or series, voting together as a single class, cast
at the annual meeting of stockholders or at any special meeting of
stockholders called by a majority of the whole board of directors for this
purpose.
II. POWER TO AMEND BY-LAWS
The by-laws may be altered or repealed and new by-laws may be adopted (a)
at any annual or special meeting of stockholders if notice of the proposed
alteration, repeal or adoption of the new by-law or by-laws be contained in the
notice of such annual or special meeting by the affirmative vote of a majority
of the stock issued and outstanding and entitled to vote thereat, voting
together as a single class, or (b) by the affirmative vote of a majority of the
members present at any regular meeting of the board of directors, or at any
special meeting of the board of directors, without any action on the part of the
stockholders, if notice of the proposed alteration, repeal or adoption of the
new by-law or by-laws be contained in the notice of such regular or special
meeting.
III. STOCKHOLDERS' ACTION -- SPECIAL MEETINGS
After October 15, 1996, no action required to be taken or that may be taken
at any meeting of common stockholders of the Corporation may be taken without a
meeting, and, after such date, the power of common stockholders to consent in
writing, without a meeting, to the taking of any action is specifically denied.
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Special meetings of the stockholders of the Corporation, and any proposals
to be considered at such meetings, may be called and proposed exclusively by (i)
the Chairman of the Board, (ii) the President or (iii) the board of directors,
pursuant to a resolution approved by a majority of the members of the board of
directors at the time in office, and no stockholder of the Corporation shall
require the board of directors to call a special meeting of common stockholders
or to propose business at a special meeting of stockholders. Except as otherwise
required by law or regulation, no business proposed by a stockholder to be
considered at an annual meeting of the stockholders (including the nomination of
any person to be elected as a director of the Corporation) shall be considered
by the stockholders at that meeting unless, no later than ninety (90) days
before the annual meeting of stockholders or (if later) ten days after the first
public notice of that meeting is sent to stockholders, the Corporation receives
from the stockholder proposing that business a written notice that sets forth
(1) the nature of the proposed business with reasonable particularity, including
the exact text of any proposal to be presented for adoption, and the reasons for
conducting that business at the annual meeting; (2) with respect to each such
stockholder, that stockholder's name and address (as they appear on the records
of the Corporation), business address and telephone number, residence address
and telephone number, and the number of shares of each class of stock of the
Corporation beneficially owned by that stockholder; (3) any interest of the
stockholder in the proposed business; (4) the name or names of each person
nominated by the stockholder to be elected or re-elected as a director, if any;
and (5) with respect to each nominee, that nominee's name, business address and
telephone number, and residence address and telephone number, the number of
shares, if any, of each class of stock of the Corporation owned directly and
beneficially by that nominee, and all information relating to that nominee that
is required to be disclosed in solicitations of proxies for elections of
directors, or is otherwise required, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (or any
provision of law subsequently replacing Regulation 14A), together with a duly
acknowledged letter signed by the nominee stating his or her acceptance of the
nomination by that stockholder, stating his or her intention to serve as
director if elected, and consenting to being named as a nominee for director in
any proxy statement relating to such election. The person presiding at the
annual meeting shall determine whether business (including the nomination of any
person as a director) has been properly brought before the meeting and, if the
facts so warrant, shall not permit any business (or voting with respect to any
particular nominee) to be transacted that has not been properly brought before
the meeting. Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law that might otherwise permit
a lesser or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the capital stock of the Corporation required
by law or by this Amended and Restated Certificate of Incorporation, the
affirmative vote of the holders of not less than eighty percent (80%) of the
shares of the Corporation then entitled to be voted in an election of directors,
voting together as a single class, shall be required to amend or repeal, or to
adopt any provision inconsistent with, this Article Fifth.
SIXTH: ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS AND INDEMNIFICATION
I. ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty by such director
as a director, except for liability (a) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the General Corporation Law of the State of
Delaware, or (d) for any transaction from which the director derived an improper
personal benefit. Any amendment or repeal of this Part I of this Article Sixth
shall be prospective only, and neither the amendment nor repeal of this Part I
of this Article Sixth shall eliminate or reduce the effect of this Part I of
this Article Sixth in respect of any matter occurring, or any cause of action,
suit or claim that, but for this Part I of this Article Sixth would accrue or
arise, prior to such amendment or repeal. If the Delaware General Corporation
Law hereafter is amended to authorize corporate action further eliminating or
limiting the liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended from time to time.
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II. INDEMNIFICATION AND INSURANCE
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was or has agreed to become
a director or officer of the Corporation or is or was serving or has agreed to
serve at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director or officer, or in any other capacity while serving or having agreed to
serve as a director or officer, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said Law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including, without limitation, attorneys' fees, judgments, fines,
excise taxes pursuant to the Employee Retirement Income Security Act of 1974 or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to serve in the capacity which initially
entitled such person to indemnity hereunder and shall inure to the benefit of
his or her heirs, executors and administrators. The right to indemnification
conferred in this Part II of this Article Sixth shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a current, former or proposed director or officer in
his or her capacity as a director or officer or proposed director or officer
(and not in any other capacity in which service was or is or has been agreed to
be rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such indemnified person, to repay all
amounts so advanced if it shall ultimately be determined that such indemnified
person is not entitled to be indemnified under this Part II or otherwise. The
Corporation may, by action of its board of directors, provide indemnification to
employees and agents of the Corporation, individually or as a group, with the
same scope and effect as the foregoing indemnification of directors and
officers.
SECTION 2. RIGHT OF CLAIMANT TO BRING SUIT. If a written claim from or on
behalf of an indemnified party under Section 1 of this Part II is not paid in
full by the Corporation within thirty days after such written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standard of conduct which makes it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its board
of directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its board of
directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
SECTION 3. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
advancement and payment of expenses conferred in this Part II shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of this Amended and Restated Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
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SECTION 4. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any person who is or was serving as a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, against any expense, liability
or loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
SECTION 5. SAVINGS CLAUSE. If this Part II or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify and hold harmless each director and
officer of the Corporation, as to costs, charges and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative to the full extent permitted by any applicable portion of this
Part II that shall not have been invalidated and to the fullest extent permitted
by applicable law.
SECTION 6. DEFINITIONS. For purposes of this Part II, reference to the
"Corporation" shall include, in addition to the Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger prior to (or, in the case of an entity specifically
designated in a resolution of the board of directors, after) the adoption hereof
and which, if its separate existence had continued, would have had the power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Part II with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
SEVENTH: No contract or transaction between the Corporation and one or more
of its directors, officers, or stockholders or between the Corporation and any
person (as used herein "person" means any corporation, partnership, association,
firm, trust, joint venture, political subdivision, or instrumentality) or other
organization in which one or more of its directors, officers, or stockholders
are directors, officers, or stockholders, or have a financial interest, shall be
void or voidable solely for this reason, or solely because the director or
officer is present at or participates in the meeting of the board or any
committee thereof which authorizes the contract or transaction, or solely
because his, her, or their votes are counted for such purpose, if: (i) the
material facts as to his or her relationship or interest and as to the contract
or transaction are disclosed or are known to the board of directors or the
committee, and the board of directors or the committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by majority vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved, or ratified by the board of directors, a committee
thereof, or the stockholders. Interested directors may be counted in determining
the presence of a quorum at a meeting of the board of directors or of a
committee which authorizes the contract or transaction.
EIGHTH: The Corporation reserves the right to amend, change, or repeal any
provision contained in the Amended and Restated Certificate of Incorporation in
the manner now or hereafter prescribed by law, and all rights and powers
conferred herein on stockholders, directors, and officers are subject to this
reserved power.
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ANNEX E
190
PLAN OF ARRANGEMENT
AND
EXCHANGEABLE SHARE PROVISIONS
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PLAN OF ARRANGEMENT
UNDER SECTION 186
OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
INVOLVING AND AFFECTING DRECO ENERGY SERVICES LTD.
AND THE HOLDERS OF ITS CLASS "A" COMMON SHARES,
OPTIONS AND SHAREHOLDER RIGHTS
ARTICLE 1
INTERPRETATION
SECTION 1.1 DEFINITIONS. In this Plan of Arrangement unless there is something
in the subject matter or context inconsistent therewith, the following terms
shall have the respective meanings set out below and grammatical variations of
such terms shall have corresponding meanings:
"ABCA" means the Business Corporations Act (Alberta);
"ARRANGEMENT" means the arrangement under section 186 of the ABCA on the
terms and subject to the conditions set out in this Plan of Arrangement, subject
to any amendments thereto made (i) in accordance with Section 8.8 of the
Combination Agreement, (ii) in accordance with Section 6.1 hereof or (iii) at
the direction of the Court in the Final Order;
"ARRANGEMENT RESOLUTION" means the special resolution passed by the holders
of the Dreco Common Shares and the Optionholders at the Meeting;
"AUTOMATIC REDEMPTION DATE" has the meaning provided in the Exchangeable
Share Provisions;
"AVERAGE CLOSING PRICE" means the average closing price (computed and
rounded to the third decimal point) of shares of National-Oilwell Common Stock
on the NYSE during the 10 trading days ending on the last trading day prior to
the Effective Date;
"BUSINESS DAY" has the meaning provided in the Exchangeable Share
Provisions;
"CLASS A PREFERRED SHARE" means the one authorized Class A Preferred Share
of Dreco having the rights, privileges, restrictions and conditions set out in
Appendix A annexed hereto;
"COMBINATION AGREEMENT" means the agreement by and among National-Oilwell
and Dreco, dated as of May 14, 1997, as amended and restated from time to time,
providing for, among other things, this Plan of Arrangement and the Arrangement;
"COURT" means the Court of Queen's Bench of Alberta;
"DEPOSITARY" means Montreal Trust Company of Canada at its principal
transfer office in Calgary, Alberta;
"DISSENT PROCEDURES" has the meaning set out in Section 3.1;
"DRECO" means Dreco Energy Services Ltd., a corporation existing under the
ABCA;
"DRECO COMMON SHARES" means the Class "A" common shares in the capital of
Dreco;
"EFFECTIVE DATE" means the date shown on the certificate of arrangement
issued by the Registrar under the ABCA giving effect to the Arrangement;
"EFFECTIVE TIME" means 12:01 a.m. on the Effective Date;
"EXCHANGE PUT RIGHT" has the meaning provided in the Exchangeable Share
Provisions;
"EXCHANGE RATIO" means the ratio of exchange of Exchangeable Shares for
Dreco Common Shares, as determined under the Combination Agreement and subject
to adjustment as provided herein;
"EXCHANGEABLE SHARE CONSIDERATION" has the meaning provided in the
Exchangeable Share Provisions;
"EXCHANGEABLE SHARE PRICE" has the meaning provided in the Exchangeable
Share Provisions;
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"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares, which are set forth in
Appendix A hereto;
"EXCHANGEABLE SHARES" means the Exchangeable Shares in the capital of Dreco
provided for in this Plan of Arrangement;
"FINAL ORDER" means the final order of the Court approving the Arrangement;
"LIQUIDATION CALL RIGHT" has the meaning provided in Section 5.1;
"LIQUIDATION DATE" has the meaning provided in the Exchangeable Share
Provisions;
"MEETING" means the special meeting of the shareholders of Dreco and of the
Optionholders to be held to consider this Plan of Arrangement;
"NATIONAL-OILWELL" means National-Oilwell, Inc., a corporation under the
laws of Delaware;
"NATIONAL-OILWELL COMMON STOCK" has the meaning provided in the
Exchangeable Share Provisions;
"NYSE" means the New York Stock Exchange;
"OPTIONS" means all options to purchase Dreco Common Shares outstanding as
at the Effective Date under Dreco's Amended and Restated 1989 Employee Incentive
Stock Option Plan and under all private stock option agreements;
"OPTIONHOLDERS" means holders of Options;
"PROXY STATEMENT" means the Joint Management Information Circular and Proxy
Statement/Prospectus of National-Oilwell and Dreco prepared in connection with
the Arrangement;
"REDEMPTION CALL PURCHASE PRICE" has the meaning provided in Section 5.2;
"REDEMPTION CALL RIGHT" has the meaning provided in Section 5.2;
"SUBSIDIARY" has the meaning provided in the Exchangeable Share Provisions;
"TRANSFER AGENT" means the duly appointed transfer agent for the time being
of the Exchangeable Shares, and if there is more than one such agent then the
principal Canadian agent; and
"VOTING AND EXCHANGE TRUST AGREEMENT" means the agreement so entitled
between National-Oilwell, Dreco and the Trustee named therein to be dated as of
the Effective Date and provided for in the Combination Agreement, as amended
from time to time.
SECTION 1.2 SECTIONS, HEADINGS AND APPENDIXES. The division of this Plan of
Arrangement into sections and the insertion of headings are for reference
purposes only and shall not affect the interpretation of this Plan of
Arrangement. Unless otherwise indicated, any reference in this Plan of
Arrangement to a section or an Appendix refers to the specified section of or
Appendix to this Plan of Arrangement. The Appendixes are incorporated herein and
are part hereof.
SECTION 1.3 NUMBER, GENDER AND PERSONS. In this Plan of Arrangement, unless the
context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, bodies corporate, partnerships,
associations, trusts, unincorporated organizations, governmental bodies and
other legal or business entities of any kind.
SECTION 1.4 DATE FOR ANY ACTION. In the event that any date on or by which any
action is required or permitted to be taken hereunder is not a Business Day,
such action shall be required or permitted to be taken on or by the next
succeeding day which is a Business Day.
SECTION 1.5 CURRENCY. Unless otherwise expressly stated herein, all references
to currency and payments in cash or money in this Plan of Arrangement are to
United States dollars.
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SECTION 1.6 STATUTORY REFERENCES. Any reference in this Plan of Arrangement to
a statute includes such statute as amended, consolidated or re-enacted from time
to time, all regulations made thereunder, all amendments to such regulations
from time to time, and any statute or regulation which supersedes such statute
or regulations.
ARTICLE 2
ARRANGEMENT
SECTION 2.1 ARRANGEMENT. At the Effective Time on the Effective Date, the
following reorganization of capital and other transactions shall occur and shall
be deemed to occur in the following order without any further act or formality:
(a) The Articles of Amalgamation of Dreco shall be amended to (i)
create and authorize an unlimited number of Exchangeable Shares and one
Class A Preferred Share.
(b) Dreco shall issue to National-Oilwell one Class A Preferred Share
in consideration of the issuance to Dreco of one share of National-Oilwell
Common Stock. The stated capital of the Class A Preferred Share shall be
equal to the fair market value, as determined by the board of directors of
Dreco, of a share of National-Oilwell Common Stock. No certificate shall be
issued in respect of the Class A Preferred Share.
(c) Each Dreco Common Share (other than Dreco Common Shares held by
holders who have exercised their rights of dissent in accordance with
Section 3.1 hereof and who are ultimately entitled to be paid the fair
value for such shares and other than Dreco Common Shares held by
National-Oilwell or any Subsidiary thereof) will be exchanged at the
Exchange Ratio for a number of Exchangeable Shares, and each such holder
thereof will receive a whole number of Exchangeable Shares resulting
therefrom. In lieu of fractional Exchangeable Shares, each such holder who
otherwise would be entitled to receive a fraction of an Exchangeable Share
on the exchange shall be paid by Dreco an amount determined as set forth in
Section 4.3.
(d) Upon the exchange referred to in subsection (c) above, each such
holder of a Dreco Common Share shall cease to be such a holder, shall have
his name removed from the register of holders of Dreco Common Shares and
shall become a holder of the number of fully paid Exchangeable Shares to
which he is entitled as a result of the exchange referred to in subsection
(c), and such holder's name shall be added to the register of holders of
Exchangeable Shares accordingly.
(e) The aggregate stated capital of the Exchangeable Shares will be
equal to the aggregate stated capital immediately prior to the Effective
Date of the Dreco Common Shares which are exchanged pursuant to such
subsection 2.1(c) above, thereby excluding the stated capital attributable
to the fractional shares for which payment is made as contemplated in
subsection (c) above.
(f) The Articles of Amalgamation of Dreco shall be amended to reduce
the number of authorized Dreco Common Shares to one and the rights,
privileges, restrictions and conditions attaching to the Dreco Common
Shares shall be changed and restated as set forth in Appendix A.
(g) The one outstanding Class A Preferred Share will be exchanged for
one fully-paid and non-assessable Dreco Common Share and the holder thereof
shall cease to be a holder of the Class A Preferred Share, shall have its
name removed from the register of holders of Class A Preferred Shares and
shall become a holder of the Dreco Common Share to which it is entitled as
a result of the exchange referred to in this subsection (g), and such
holder's name shall be added to the register as holder of the Dreco Common
Share accordingly.
(h) The stated capital of the one Dreco Common Share shall be equal to
the stated capital of the one Class A Preferred Share immediately prior to
the exchange contemplated in subsection (g).
(i) The Articles of Amalgamation of Dreco shall be amended to delete
the Class A Preferred Share from the authorized share capital so that,
after giving effect to the foregoing provisions of this section 2.1,
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the authorized capital of Dreco shall consist of an unlimited number of
Exchangeable Shares having the rights, privileges, restrictions and
conditions set forth in Appendix A hereto and one Common Share having the
rights, privileges, restrictions and conditions set forth in Appendix A
hereto.
(j) Each of the then outstanding Options will, without any further
action on the part of any Optionholder, be converted into an option to
purchase the number of shares of National-Oilwell Common Stock equal to the
number of Exchangeable Shares determined by multiplying the number of Dreco
Common Shares subject to such Option at the Effective Time by the Exchange
Ratio, at an exercise price per share of National-Oilwell Common Stock
equal to the exercise price per share of such Option immediately prior to
the Effective Time divided by the Exchange Ratio. If the foregoing
calculation results in an exchanged Option being exercisable for a fraction
of a share of National-Oilwell Common Stock, then the number of shares of
National-Oilwell Common Stock subject to such Option will be rounded down
to the nearest whole number of shares, and the exercise price per whole
share of National-Oilwell Common Stock will be as determined above. The
Dreco Options as so converted will (without further action on the part of
the optionholders) be further modified as necessary to effect such
conversion; provided, however, the term, exercisability, vesting schedule,
and all other terms and conditions of the Options will otherwise be
unchanged by the provisions of this paragraph (j) and shall operate in
accordance with their terms. The obligations of Dreco under the Dreco
Options as so converted shall be assumed by NOI and NOI shall be
substituted for Dreco as the sponsor of the Dreco Option Plan.
(k) All rights outstanding under the Shareholder Rights Plan Agreement
between Dreco and Montreal Trust Company of Canada dated as of November 15,
1996 (the "Rights Plan") immediately prior to the Effective Date shall, on
the Effective Date, be redeemed and cancelled, all on the terms and with
the effects and results contained in the Rights Plan, and the Rights Plan
shall be terminated.
ARTICLE 3
RIGHTS OF DISSENT
SECTION 3.1 RIGHTS OF DISSENT. Holders of Dreco Common Shares or Options may
exercise rights of dissent with respect to such shares or Options pursuant to
and in the manner set forth in section 184 of the ABCA and this Section 3.1 (the
"Dissent Procedures") in connection with the Arrangement, and holders who duly
exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for the Dreco Common
Shares or Options shall be deemed to have transferred such Dreco Common
Shares or Options to Dreco for cancellation on the Effective Date; or
(b) are ultimately not entitled, for any reason, to be paid the fair
value for their Dreco Common Shares or Options shall be deemed to have
participated in the Arrangement on the same basis as any non-dissenting
holder of Dreco Common Shares or Options,
but in no case shall Dreco be required to recognize such holders as holders
of Dreco Common Shares or Options on and after the Effective Date, and the
names of such persons shall be deleted from the registers of holders of
Dreco Common Shares or Options on the Effective Date.
ARTICLE 4
CERTIFICATES AND FRACTIONAL SHARES
SECTION 4.1 ISSUANCE OF CERTIFICATES REPRESENTING EXCHANGEABLE SHARES. At or
promptly after the Effective Time, Dreco shall deposit with the Depositary, for
the benefit of the holders of Dreco Common Shares exchanged pursuant to
subsection 2.1(c), certificates representing the Exchangeable Shares issued
pursuant to subsection 2.1(c) upon the exchange. Upon surrender to the
Depositary of a certificate which immediately prior to the Effective Time
represented outstanding Dreco Common Shares together with such other
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documents and instruments as would have been required to effect the transfer of
the shares formerly represented by such certificate under the ABCA and the
by-laws of Dreco and such additional documents and instruments as the Depositary
may reasonably require, the holder of such surrendered certificate shall be
entitled to receive in exchange therefor, and the Depositary shall deliver to
such holder, a certificate representing that number (rounded down to the nearest
whole number) of Exchangeable Shares which such holder has the right to receive
(together with any dividends or distributions with respect thereto pursuant to
Section 4.2 and any cash in lieu of fractional Exchangeable Shares pursuant to
Section 4.3), and the certificate so surrendered shall forthwith be cancelled.
In the event of a transfer of ownership of Dreco Common Shares which is not
registered in the transfer records of Dreco, a certificate representing the
proper number of Exchangeable Shares may be issued to a transferee if the
certificate representing such Dreco Common Shares is presented to the
Depositary, accompanied by all documents required to evidence and effect such
transfer. Until surrendered as contemplated by this Section 4.1, each
certificate which immediately prior to the Effective Time represented
outstanding Dreco Common Shares, shall be deemed at any time after the Effective
Time, but subject to Section 4.5, to represent only the right to receive upon
such surrender (a) the certificate representing Exchangeable Shares as
contemplated by this Section 4.1, (b) a cash payment in lieu of any fractional
Exchangeable Shares as contemplated by Section 4.3 and (c) any dividends or
distributions with a record date after the Effective Time theretofore paid or
payable with respect to Exchangeable Shares as contemplated by Section 4.2.
SECTION 4.2 DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES. No
dividends or other distributions declared or made after the Effective Time with
respect to Exchangeable Shares with a record date after the Effective Time shall
be paid to the holder of any formerly outstanding Dreco Common Shares which were
exchanged pursuant to Section 2.1, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 4.3, unless and
until the certificate representing such shares shall be surrendered in
accordance with Section 4.1. Subject to applicable law and to Section 4.5, at
the time of such surrender of any such certificate (or, in the case of clause
(c) below, at the appropriate payment date), there shall be paid to the holder
of the Exchangeable Shares resulting from exchange, in all cases without
interest, (a) the amount of any cash payable in lieu of a fractional
Exchangeable Share to which such holder is entitled pursuant to Section 4.3, (b)
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such Exchangeable Shares, and
(c) the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such Exchangeable Shares.
SECTION 4.3 NO FRACTIONAL SHARES. No certificates or scrip representing
fractional Exchangeable Shares shall be issued upon the surrender for exchange
of certificates pursuant to Section 4.1, and such fractional interests shall not
entitle the owner thereof to vote or to possess or exercise any rights as a
security holder of Dreco. In lieu of any such fractional interests, each person
entitled thereto will receive an amount of cash (rounded to the nearest whole
cent), without interest, equal to the product of (a) such fractional interest,
multiplied by (b) the Average Closing Price, such amount to be provided to the
Depositary by Dreco upon request.
SECTION 4.4 LOST CERTIFICATES. If any certificate which immediately prior to
the Effective Time represented outstanding Dreco Common Shares which were
exchanged pursuant to Section 2.1 has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such certificate to
be lost, stolen or destroyed, the Depositary will issue in exchange for such
lost, stolen or destroyed certificate, certificates representing Exchangeable
Shares (and any dividends or distributions with respect thereto and any cash
pursuant to Section 4.3) deliverable in respect thereof as determined in
accordance with Section 2.1. When authorizing such payment in exchange for any
lost, stolen or destroyed certificate, the person to whom certificates
representing Exchangeable Shares are to be issued shall, as a condition
precedent to the issuance thereof, give a bond satisfactory to Dreco,
National-Oilwell and the Transfer Agent, as the case may be, in such sum as
Dreco may direct or otherwise indemnify Dreco or National-Oilwell in a manner
satisfactory to Dreco and the Transfer Agent against any claim that may be made
against Dreco, National-Oilwell or the Transfer Agent with respect to the
certificate alleged to have been lost, stolen or destroyed.
SECTION 4.5 EXTINGUISHMENT OF RIGHTS. Any certificate which immediately prior
to the Effective Time represented outstanding Dreco Common Shares which were
exchanged pursuant to Section 2.1 and has not
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been deposited, with all other instruments required by Section 4.1, on or prior
to the tenth anniversary of the Effective Date shall cease to represent a claim
or interest of any kind or nature as a shareholder of Dreco. On such date, the
Exchangeable Shares to which the former registered holder of the certificate
referred to in the preceding sentence was ultimately entitled shall be deemed to
have been surrendered to Dreco, together with all entitlements to dividends,
distributions and interest thereon held for such former registered holder, for
no consideration and shall thereupon be cancelled and the name of the former
registered holder shall be removed from the register of holders of such Shares.
ARTICLE 5
CERTAIN RIGHTS AND OBLIGATIONS OF
NATIONAL-OILWELL TO ACQUIRE EXCHANGEABLE SHARES
SECTION 5.1 NATIONAL-OILWELL LIQUIDATION CALL RIGHT.
(a) National-Oilwell shall have the overriding right (the "LIQUIDATION
CALL RIGHT"), in the event of and notwithstanding the proposed liquidation,
dissolution or winding-up of Dreco as referred to in Article 5 of the
Exchangeable Share Provisions, to purchase from all but not less than all
of the holders (other than National-Oilwell and any Subsidiary thereof) of
Exchangeable Shares on the Liquidation Date all but not less than all of
the Exchangeable Shares held by such holders on payment by National-Oilwell
to each holder of the Exchangeable Share Price applicable on the last
Business Day prior to the Liquidation Date (the "LIQUIDATION CALL PURCHASE
PRICE"). In the event of the exercise of the Liquidation Call Right by
National-Oilwell, each holder shall be obligated to sell all the
Exchangeable Shares held by the holder to National-Oilwell on the
Liquidation Date on payment by National-Oilwell to the holder of the
Liquidation Call Purchase Price for each such share.
(b) To exercise the Liquidation Call Right, National-Oilwell must
notify Dreco's Transfer Agent in writing, as agent for the holders of
Exchangeable Shares, and Dreco of National-Oilwell's intention to exercise
such right at least 55 days before the Liquidation Date in the case of a
voluntary liquidation, dissolution or winding-up of Dreco and at least five
Business Days before the Liquidation Date in the case of an involuntary
liquidation, dissolution or winding-up of Dreco. The Transfer Agent will
notify the holders of Exchangeable Shares as to whether or not
National-Oilwell has exercised the Liquidation Call Right forthwith after
the expiry of the date by which the same may be exercised by
National-Oilwell. If National-Oilwell exercises the Liquidation Call Right,
on the Liquidation Date National-Oilwell will purchase and the holders will
sell all of the Exchangeable Shares then outstanding for a price per share
equal to the Liquidation Call Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable
Shares pursuant to the Liquidation Call Right, National-Oilwell shall
deposit with the Transfer Agent, on or before the Liquidation Date, the
Exchangeable Share Consideration representing the total Liquidation Call
Purchase Price. Provided that such Exchangeable Share Consideration has
been so deposited with the Transfer Agent, on and after the Liquidation
Date the right of each holder of Exchangeable Shares will be limited to
receiving such holder's proportionate part of the total Liquidation Call
Purchase Price payable by National-Oilwell without interest upon
presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after
the Liquidation Date be considered and deemed for all purposes to be the
holder of the National-Oilwell Common Stock delivered to it. Upon surrender
to the Transfer Agent of a certificate or certificates representing
Exchangeable Shares, together with such other documents and instruments as
may be required to effect a transfer of Exchangeable Shares under the ABCA
and the by-laws of Dreco and such additional documents and instruments as
the Transfer Agent may reasonably require, the holder of such surrendered
certificate or certificates shall be entitled to receive in exchange
therefor, and the Transfer Agent on behalf of National-Oilwell shall
deliver to such holder, the Exchangeable Share Consideration to which the
holder is entitled. If National-Oilwell does not exercise the Liquidation
Call Right in the manner described above, on the Liquidation Date the
holders of the Exchangeable Shares will be entitled
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to receive in exchange therefor the liquidation price otherwise payable by
Dreco in connection with the liquidation, dissolution or winding-up of
Dreco pursuant to Article 5 of the Exchangeable Share Provisions.
Notwithstanding the foregoing, until such Exchangeable Share Consideration
is delivered to the holder, the holder shall be deemed to still be a holder
of Exchangeable Shares for purposes of all voting rights with respect
thereto under the Voting and Exchange Trust Agreement.
SECTION 5.2 NATIONAL-OILWELL REDEMPTION CALL RIGHT.
(a) National-Oilwell shall have the overriding right ( the "REDEMPTION
CALL RIGHT"), notwithstanding the proposed redemption of the Exchangeable
Shares by Dreco pursuant to Article 7 of the Exchangeable Share Provisions,
to purchase from all but not less than all of the holders (other than
National-Oilwell or any Subsidiary thereof) of Exchangeable Shares on the
Automatic Redemption Date all but not less than all of the Exchangeable
Shares held by each such holder on payment by National-Oilwell to the
holder of the Exchangeable Share Price applicable on the last Business Day
prior to the Automatic Redemption Date (the "REDEMPTION CALL PURCHASE
PRICE"). In the event of the exercise of the Redemption Call Right by
National-Oilwell, each holder shall be obligated to sell all the
Exchangeable Shares held by the holder to National-Oilwell on the Automatic
Redemption Date on payment by National-Oilwell to the holder of the
Redemption Call Purchase Price for each such share.
(b) To exercise the Redemption Call Right, National-Oilwell must
notify the Transfer Agent in writing, as agent for the holders of
Exchangeable Shares, and Dreco of National-Oilwell's intention to exercise
such right not later than the date by which Dreco is required to give
notice of the Automatic Redemption Date. If National-Oilwell exercises the
Redemption Call Right, on the Automatic Redemption Date National-Oilwell
will purchase and the holders will sell all of the Exchangeable Shares then
outstanding for a price per share equal to the Redemption Call Purchase
Price.
(c) For the purposes of completing the purchase of the Exchangeable
Shares pursuant to the Redemption Call Right, National-Oilwell shall
deposit with the Transfer Agent, on or before the Automatic Redemption
Date, the Exchangeable Share Consideration representing the total
Redemption Call Purchase Price. Provided that such Exchangeable Share
Consideration has been so deposited with the Transfer Agent, on and after
the Automatic Redemption Date the rights of each holder of Exchangeable
Shares will be limited to receiving such holder's proportionate part of the
total Redemption Call Purchase Price payable by National-Oilwell upon
presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after
the Automatic Redemption Date be considered and deemed for all purposes to
be the holder of the National-Oilwell Common Stock delivered to such
holder. Upon surrender to the Transfer Agent of a certificate or
certificates representing Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the ABCA and the by-laws of National-Oilwell and
such additional documents and instruments as the Transfer Agent may
reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the
Transfer Agent on behalf of National-Oilwell shall deliver to such holder,
the Exchangeable Share Consideration to which the holder is entitled. If
National-Oilwell does not exercise the Redemption Call Right in the manner
described above, on the Automatic Redemption Date the holders of the
Exchangeable Shares will be entitled to receive in exchange therefor the
redemption price otherwise payable by Dreco in connection with the
redemption of the Exchangeable Shares pursuant to Article 7 of the
Exchangeable Share Provisions. Notwithstanding the foregoing, until such
Exchangeable Share Consideration is delivered to the holder, the holder
shall be deemed to still be a holder of Exchangeable Shares for purposes of
all voting rights with respect thereto under the Voting and Exchange Trust
Agreement.
SECTION 5.3 EXCHANGE PUT RIGHT. Upon and subject to the terms and conditions
contained in the Exchangeable Share Provisions and the Voting and Exchange Trust
Agreement:
(a) a holder of Exchangeable Shares shall have the right (the
"Exchange Put Right") at any time to require National-Oilwell to purchase
all or any part of the Exchangeable Shares of the holder; and
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(b) upon the exercise by the holder of the Exchange Put Right, the
holder shall be required to sell to National-Oilwell, and National-Oilwell
shall be required to purchase from the holder, no later than the time or
times prescribed therefor herein or in the Exchangeable Share Provisions or
the Voting and Exchange Trust Agreement, that number of Exchangeable Shares
in respect of which the Exchange Put Right is exercised, in consideration
of the payment by National-Oilwell of the Exchangeable Share Price
applicable thereto and delivery by or on behalf of National-Oilwell of the
Exchangeable Share Consideration representing the total applicable
Exchangeable Share Price.
ARTICLE 6
AMENDMENT
SECTION 6.1 PLAN OF ARRANGEMENT AMENDMENT. Dreco reserves the right to amend,
modify and/or supplement this Plan of Arrangement at any time and from time to
time provided that any such amendment, modification, or supplement must be
contained in a written document that is (a) agreed to by National-Oilwell, (b)
filed with the Court and, if made following the Meeting, approved by the Court
and (c) communicated to holders of Dreco Common Shares and Options in the manner
required by the Court (if so required).
Any amendment, modification or supplement to this Plan of Arrangement may
be proposed by Dreco at any time prior to or at the Meeting (provided that
National-Oilwell shall have consented thereto) with or without any other prior
notice or communication, and if so proposed and accepted by the persons voting
at the Meeting (other than as may be required under the Court's interim order),
shall become part of this Plan of Arrangement for all purposes.
Any amendment, modification or supplement to this Plan of Arrangement which
is approved by the Court following the Meeting shall be effective only (a) if it
is consented to by Dreco, (b) if it is consented to by National-Oilwell and (c)
if required by the Court or applicable law, it is consented to by the holders of
the Dreco Common Shares or the Exchangeable Shares and Options as the case may
be.
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APPENDIX A TO THE PLAN
OF ARRANGEMENT OF DRECO
PROVISIONS ATTACHING TO THE CLASS A PREFERRED SHARE
The Class A Preferred Share in the capital of the Corporation shall have
attached thereto the following rights, privileges, restrictions and conditions:
DIVIDENDS
Subject to the prior rights of the holders of any shares ranking senior to
the Class A Preferred Share with respect to priority in the payment of
dividends, the holder of Class A Preferred Share shall be entitled to receive
dividends and the Corporation shall pay dividends thereon, as and when declared
by the board of directors of the Corporation as cumulative dividends in the
amount of $1.00 per share per annum payable annually on December 31 in each year
in arrears. Such dividends shall accrue from the date of issue to and including
the date to which the computation of dividends is to be made. A cheque for the
amount of the dividend less any required deduction shall be mailed by first
class mail to the address of the registered holder thereof.
DISSOLUTION
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding-up
its affairs, subject to the prior rights of the holders of any shares ranking
senior to the Class A Preferred Share with respect to priority in the
distribution of assets upon liquidation, dissolution or winding-up, the holder
of the Class A Preferred Share shall be entitled to receive an amount equal to
the stated capital in respect of the Class A Preferred Share and dividends
remaining unpaid, including all cumulative dividends, whether or not declared.
After payment to the holder of the Class A Preferred Share of such amounts, such
holder shall not be entitled to share in any further distribution of the assets
of the Corporation.
VOTING RIGHTS
Except where specifically provided by the Act, the holder of the Class A
Preferred Share shall not be entitled to receive notice of or to attend meetings
of the shareholders of the Corporation and shall not be entitled to vote at any
meeting of shareholders of the Corporation.
PROVISIONS ATTACHING TO EXCHANGEABLE SHARES
The Exchangeable Shares in the capital of the Corporation shall have the
following rights, privileges, restrictions and conditions:
ARTICLE 1
INTERPRETATION
For the purposes of these rights, privileges, restrictions and conditions:
1.1 "ACT" means the Business Corporations Act (Alberta), as amended,
consolidated or reenacted from time to time.
"AGGREGATE EQUIVALENT VOTE AMOUNT" means, with respect to any matter,
proposition or question on which holders of National-Oilwell Common Stock are
entitled to vote, consent or otherwise act, the product of (i) the number of
Exchangeable Shares then issued and outstanding and held by holders other than
National-Oilwell and its Subsidiaries multiplied by (ii) the number of votes to
which a holder of one share of National-Oilwell Common Stock is entitled with
respect to such matter, proposition or question.
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"AUTOMATIC REDEMPTION DATE" means the date for the automatic redemption by
the Corporation of Exchangeable Shares pursuant to Article 7 of these share
provisions, which date shall be the first to occur of (a) the fifth anniversary
of the Effective Date of the Arrangement, (b) the date selected by the Dreco
Board of Directors at a time when less than 15% of the Exchangeable Shares
issuable on the Effective Date (other than Exchangeable Shares held by
National-Oilwell and its Subsidiaries and as such number of shares may be
adjusted as deemed appropriate by the Board of Directors to give effect to any
subdivision or consolidation of or stock dividend on the Exchangeable Shares,
any issuance or distribution of rights to acquire Exchangeable Shares or
securities exchangeable for or convertible into or carrying rights to acquire
Exchangeable Shares, any issue or distribution of other securities or rights or
evidences of indebtedness or assets, or any other capital reorganization or
other transaction involving or affecting the Exchangeable Shares) are
outstanding, (c) the Business Day prior to the record date for any meeting or
vote of the shareholders of the Corporation to consider any matter on which the
holders of Exchangeable Shares would be entitled to vote as shareholders of the
Corporation, but excluding any meeting or vote as described in clause (d) below
or (d) the Business Day following the day on which the holders of Exchangeable
Shares fail to take the necessary action at a meeting or other vote of holders
of Exchangeable Shares, if and to the extent such action is required, to approve
or disapprove, as applicable, any change to, or in the rights of the holders of,
Exchangeable Shares, if the approval or disapproval, as applicable, of such
change would be required to maintain the economic and legal equivalence of the
Exchangeable Shares and the National-Oilwell Common Stock.
"BOARD OF DIRECTORS" means the Board of Directors of the Corporation and
any committee thereof acting within its authority.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day when
banks are not open for business in one or more of Houston, Texas, Toronto,
Ontario and Calgary, Alberta.
"CLASS A PREFERRED SHARE" means the Class A Preferred Share in the capital
of the Corporation.
"COMMON SHARES" means the common shares in the capital of the Corporation.
"CORPORATION" means Dreco Energy Services Ltd., a corporation under the
laws of the Province of Alberta and includes any successor corporation.
"CURRENT MARKET PRICE" means, in respect of a share of National-Oilwell
Common Stock on any date, the average of the closing bid and ask prices of
National-Oilwell Common Stock during the period of 20 consecutive trading days
ending not more than five trading days before such date on the New York Stock
Exchange, or, if National-Oilwell Common Stock is not then traded on the New
York Stock Exchange, on such other principal U.S. stock exchange or automated
quotation system on which the National-Oilwell Common Stock is listed or quoted,
as the case may be, as may be selected by the Board of Directors for such
purpose; provided, however, that if in the opinion of the Board of Directors the
public distribution or trading activity of National-Oilwell Common Stock during
such period does not create a market which reflects the fair market value of a
share of National-Oilwell Common Stock, then the Current Market Price of a share
of National-Oilwell Common Stock shall be determined by the Board of Directors
based upon the advice of such qualified independent financial advisors as the
Board of Directors may deem to be appropriate, and provided further than any
such selection, opinion or determination by the Board of Directors shall be
conclusive and binding.
"EXCHANGE PUT RIGHT" has the meaning provided in Article 8.
"EXCHANGEABLE SHARE CONSIDERATION" means, for any acquisition of or
redemption of or distribution of assets of the Corporation in respect of or
purchase pursuant to the Exchange Put Right of Exchangeable Shares pursuant to
these share provisions, the Plan of Arrangement, the Support Agreement or the
Voting and Exchange Trust Agreement:
(a) certificates representing the aggregate number of shares of
National-Oilwell Common Stock deliverable in connection with such action;
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(b) a cheque or cheques payable at par at any branch of the bankers of
the payor in the amount of all declared and unpaid and undeclared but
payable cash dividends deliverable in connection with such action; and
(c) such stock or property constituting any declared and unpaid
non-cash dividends deliverable in connection with such action;
provided that (i) that part of the consideration which is the Current
Market Price of a share of National-Oilwell Common Stock shall be fully
paid and satisfied by the delivery of one share of National-Oilwell Common
Stock, (ii) that part of the consideration which represents non-cash
dividends remaining unpaid shall be fully paid and satisfied by delivery of
such non-cash items, (iii) any such stock shall be duly issued as fully
paid and non-assessable and any such property shall be delivered free and
clear of any lien, claim, encumbrance, security interest or adverse claim
or interest and (iv) such consideration shall be paid less any tax required
to be deducted and withheld therefrom and without interest.
"EXCHANGEABLE SHARE PRICE" means, for each Exchangeable Share, an amount
equal to the aggregate of:
(a) the Current Market Price of a share of National-Oilwell Common
Stock; plus
(b) an additional amount equal to the full amount of all cash
dividends declared and unpaid on such Exchangeable Share; plus
(c) an additional amount equal to all dividends declared on
National-Oilwell Common Stock which have not been declared on Exchangeable
Shares in accordance herewith; plus
(d) an additional amount representing non-cash dividends declared and
unpaid on such Exchangeable Share.
"EXCHANGEABLE SHARES" means the Exchangeable Shares of the Corporation
having the rights, privileges, restrictions and conditions set forth herein.
"LIQUIDATION AMOUNT" has the meaning provided in Section 5.1.
"LIQUIDATION CALL RIGHT" has the meaning provided in the Plan of
Arrangement.
"LIQUIDATION DATE" has the meaning provided in Section 5.1.
"NATIONAL-OILWELL" means National-Oilwell, Inc., a corporation organized
and existing under the laws of the State of Delaware and includes any successor
corporation.
"NATIONAL-OILWELL CALL NOTICE" has the meaning provided in Section 6.3.
"NATIONAL-OILWELL COMMON STOCK" means the shares of common stock of
National-Oilwell, with a par value of U.S. $0.01 per share, having voting rights
of one vote per share, and any other securities resulting from the application
of section 2.7 of the Support Agreement.
"NATIONAL-OILWELL DIVIDEND DECLARATION DATE" means the date on which the
board of directors of National-Oilwell declares any dividend on the
National-Oilwell Common Stock.
"NATIONAL-OILWELL SPECIAL SHARE" means the one share of Special Voting
Stock of National-Oilwell with a par value of U.S. $0.01 and having voting
rights at meetings of holders of National-Oilwell Common Stock equal to the
Aggregate Equivalent Voting Amount.
"PLAN OF ARRANGEMENT" means the plan of arrangement involving and affecting
the Corporation and the holders of its Class "A" common shares, options and
shareholder rights under section 186 of the Act, to which plan of arrangement
these share provisions are an appendix.
"PURCHASE PRICE" has the meaning provided in Section 6.3.
"REDEMPTION CALL PURCHASE PRICE" has the meaning provided in the Plan of
Arrangement.
"REDEMPTION CALL RIGHT" has the meaning provided in the Plan of
Arrangement.
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"REDEMPTION PRICE" has the meaning provided in Section 7.1.
"RETRACTED SHARES" has the meaning provided in subsection 6.1(i).
"RETRACTION CALL RIGHT" has the meaning provided in subsection 6.1(iii).
"RETRACTION DATE" has the meaning provided in subsection 6.1(ii).
"RETRACTION PRICE" has the meaning provided in Section 6.1.
"RETRACTION REQUEST" has the meaning provided in Section 6.1.
"SUBSIDIARY", in relation to any person, means any body corporate
partnership, joint venture, association or other entity of which more than 50%
of the total voting power of shares of stock or units of ownership or beneficial
interest entitled to vote in the election of directors (or members of a
comparable governing body) is owned or controlled, directly or indirectly, by
such person.
"SUPPORT AGREEMENT" means the Support Agreement between National-Oilwell
and the Corporation made as of [Effective Date], 1997.
"TRANSFER AGENT" means the duly appointed transfer agent for the time being
of the Exchangeable Shares, and if there is more than one such agent then the
principal Canadian agent.
"TRUSTEE" means the Trustee appointed under the Voting and Exchange Trust
Agreement, and any successor trustee.
"VOTING AND EXCHANGE TRUST AGREEMENT" means the Voting and Exchange Trust
Agreement between the Corporation, National-Oilwell and the Trustee made as of
[Effective Date], 1997.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall rank junior to the Class A Preferred Share,
and shall be entitled to a preference over the Common Shares and any other
shares ranking junior to the Exchangeable Shares, with respect to the payment of
dividends and the distribution of assets in the event of the liquidation,
dissolution or winding-up of the Corporation, whether voluntary or involuntary,
or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding-up its affairs.
ARTICLE 3
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each National-Oilwell
Dividend Declaration Date, declare a dividend on each Exchangeable Share (a) in
the case of a cash dividend declared on the National-Oilwell Common Stock, in an
amount in cash for each Exchangeable Share equal to the cash dividend declared
on each share of National-Oilwell Common Stock or (b) in the case of a stock
dividend declared on the National-Oilwell Common Stock to be paid in
National-Oilwell Common Stock, in such number of Exchangeable Shares for each
Exchangeable Share as is equal to the number of shares of National-Oilwell
Common Stock to be paid on each share of National-Oilwell Common Stock or (c) in
the case of a dividend declared on the National-Oilwell Common Stock in property
other than cash or National-Oilwell Common Stock, in such type and amount of
property for each Exchangeable Share as is the same as the type and amount of
property declared as a dividend on each share of National-Oilwell Common Stock.
Such dividends shall be paid out of money, assets or property of the Corporation
properly applicable to the payment of dividends, or out of authorized but
unissued shares of the Corporation.
3.2 Cheques of the Corporation payable at par at any branch of the bankers of
the Corporation shall be issued in respect of any cash dividends contemplated by
subsection 3.1(a) hereof and the sending of such a
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cheque to each holder of an Exchangeable Share (less any tax required to be
deducted and withheld from such dividends paid or credited by the Corporation)
shall satisfy the cash dividends represented thereby unless the cheque is not
paid on presentation. Certificates registered in the name of the registered
holder of Exchangeable Shares shall be issued or transferred in respect of any
stock dividends contemplated by subsection 3.1(b) hereof and the sending of such
a certificate to each holder of an Exchangeable Share shall satisfy the stock
dividend represented thereby. Such other type and amount of property in respect
of any dividends contemplated by subsection 3.1(c) hereof shall be issued,
distributed or transferred by the Corporation in such manner as it shall
determine and the issuance, distribution or transfer thereof by the Corporation
to each holder of an Exchangeable Share shall satisfy the dividend represented
thereby. In all cases any such dividends shall be subject to any reduction or
adjustment for tax required to be deducted and withheld from such dividends paid
or credited by the Corporation. No holder of an Exchangeable Share shall be
entitled to recover by action or other legal process against the Corporation any
dividend which is represented by a cheque that has not been duly presented to
the Corporation's bankers for payment or which otherwise remains unclaimed for a
period of six years from the date on which such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable Shares
entitled to receive payment of, and the payment date for, any dividend declared
on the Exchangeable Shares under Section 3.1 hereof shall be the same dates as
the record date and payment date, respectively, for the corresponding dividend
declared on the National-Oilwell Common Stock.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under Section 3.1 hereof the dividends are not paid in full on all of the
Exchangeable Shares then outstanding, any such dividends which remain unpaid
shall be paid on a subsequent date or dates determined by the Board of Directors
on which the Corporation shall have sufficient moneys, assets or property
properly applicable to the payment of such dividends.
3.5 Except as provided in this Article 3, the holders of Exchangeable Shares
shall not be entitled to receive dividends in respect thereof.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the Corporation
shall not at any time without, but may at any time with, the approval of the
holders of the Exchangeable Shares given as specified in Section 10.1 of these
share provisions:
(a) pay any dividends on the Common Shares, or any other shares
ranking junior to the Exchangeable Shares, other than stock dividends
payable in any such other shares ranking junior to the Exchangeable Shares;
(b) redeem or purchase or make any capital distribution in respect of
Common Shares or any other shares ranking junior to the Exchangeable Shares
with respect to the payment of dividends or on any liquidation
distribution;
(c) redeem or purchase any other shares of the Corporation ranking
equally with the Exchangeable Shares with respect of the payment of
dividends or on any liquidation distribution; or
(d) amend the articles or by-laws of the Corporation, in either case
in any manner that would affect the rights of the holders of the
Exchangeable Shares.
The restrictions in subsections 4.1(a), 4.1(b), and 4.1(c) above shall not
apply if all dividends on the outstanding Exchangeable Shares corresponding
to dividends declared with a record date on or following the effective date
of the Plan of Arrangement on the National-Oilwell Common Stock shall have
been declared on the Exchangeable Shares and paid in full.
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ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding-up its affairs, a holder of Exchangeable
Shares shall be entitled, subject to applicable law, to receive from the assets
of the Corporation in respect of each Exchangeable Share held by such holder on
the effective date of such liquidation, dissolution or winding-up (the
"LIQUIDATION DATE"), before any distribution of any part of the assets of the
Corporation to the holders of the Common Shares or any other shares ranking
junior to the Exchangeable Shares, an amount equal to the Exchangeable Share
Price applicable on the last Business Day prior to the Liquidation Date (the
"LIQUIDATION AMOUNT"). In connection with payment of the Liquidation Amount, the
Corporation shall be entitled to liquidate some of the National-Oilwell Common
Stock which would otherwise be deliverable to the particular holder of
Exchangeable Shares in order to fund any statutory withholding tax obligation.
5.2 On or promptly after the Liquidation Date, and subject to the exercise by
National-Oilwell of the Liquidation Call Right, the Corporation shall cause to
be delivered to the holders of the Exchangeable Shares the Liquidation Amount
for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent may reasonably
require, at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of the Exchangeable Shares. Payment of the total Liquidation Amount for such
Exchangeable Shares shall be made by delivery to each holder, at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or by holding for pick up by the holder at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation by notice to the holders of Exchangeable Shares, on
behalf of the Corporation of the Exchangeable Share Consideration representing
the total Liquidation Amount. On and after the Liquidation Date, the holders of
the Exchangeable Shares shall cease to be holders of such Exchangeable Shares
and shall not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive their proportionate part of the total
Liquidation Amount, unless payment of the total Liquidation Amount for such
Exchangeable Shares shall not be made upon presentation and surrender of share
certificates in accordance with the foregoing provisions, in which case the
rights of the holders shall remain unaffected until the total Liquidation Amount
has been paid in the manner hereinbefore provided. The Corporation shall have
the right at any time on or after the Liquidation Date to deposit or cause to be
deposited the Exchangeable Share Consideration in respect of the Exchangeable
Shares represented by certificates that have not at the Liquidation Date been
surrendered by the holders thereof in a custodial account or for safe keeping,
in the case of non-cash items, with any chartered bank or trust company in
Canada. Upon such deposit being made, the rights of the holders of Exchangeable
Shares after such deposit shall be limited to receiving their proportionate part
of the total Liquidation Amount for such Exchangeable Shares so deposited,
against presentation and surrender of the said certificates held by them,
respectively, in accordance with the foregoing provisions. Upon such payment or
deposit of such Exchangeable Share Consideration, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be the holders of the National-Oilwell Common Stock delivered to them.
Notwithstanding the foregoing, until such payment or deposit of such
Exchangeable Share Consideration, the holder shall be deemed to still be a
holder of Exchangeable Shares for purposes of all voting rights with respect
thereto under the Voting and Exchange Trust Agreement.
5.3 After the Corporation has satisfied its obligations to pay the holders of
the Exchangeable Shares the Liquidation Amount per Exchangeable Share, such
holders shall not be entitled to share in any further distribution of the assets
of the Corporation.
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ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time subject to
the exercise by National-Oilwell of the Retraction Call Right and otherwise upon
compliance with the provisions of this Article 6, to require the Corporation to
redeem any or all of the Exchangeable Shares registered in the name of such
holder for an amount equal to the Exchangeable Share Price applicable on the
last Business Day prior to the Retraction Date (the "RETRACTION PRICE"). In
connection with payment of the Retraction Price, the Corporation shall be
entitled to liquidate some of the National-Oilwell Common Stock that would
otherwise be deliverable to the particular holder of Exchangeable Shares in
order to fund any statutory withholding tax obligation. To effect such
redemption, the holder shall present and surrender at the registered office of
the Corporation or at any office of the Transfer Agent as may be specified by
the Corporation in Schedule A hereto or by notice to the holders of Exchangeable
Shares the certificate or certificates representing the Exchangeable Shares
which the holder desires to have the Corporation redeem, together with such
other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent may reasonably
require, and together with a duly executed statement (the "RETRACTION REQUEST")
in the form of Schedule A hereto or in such other form as may be acceptable to
the Corporation:
(i) specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "RETRACTED SHARES") redeemed by the
Corporation;
(ii) stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "RETRACTION DATE"), provided
that the Retraction Date shall be not less than five Business Days nor more
than 10 Business Days after the date on which the Retraction Request is
received by the Corporation and further provided that, in the event that no
such Business Day is specified by the holder in the Retraction Request, the
Retraction Date shall be deemed to be the tenth Business Day after the date
on which the Retraction Request is received by the Corporation; and
(iii) acknowledging the overriding right (the "RETRACTION CALL RIGHT")
of National-Oilwell to purchase all but not less than all the Retracted
Shares directly from the holder and that the Retraction Request shall be
deemed to be a revocable offer by the holder to sell the Retracted Shares
in accordance with the Retraction Call Right on the terms and conditions
set out in Section 6.3 below.
6.2 Subject to the exercise by National-Oilwell of the Retraction Call Right,
upon receipt by the Corporation or the Transfer Agent in the manner specified in
Section 6.1 hereof of a certificate or certificates representing the number of
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with a Retraction Request, and provided that the Retraction Request is
not revoked by the holder in the manner specified in Section 6.7, the
Corporation shall redeem the Retracted Shares effective at the close of business
on the Retraction Date and shall cause to be delivered to such holder the total
Retraction Price with respect to such shares in accordance with Section 6.4
hereof. If only a part of the Exchangeable Shares represented by any certificate
are redeemed or purchased by National-Oilwell pursuant to the Retraction Call
right, a new certificate for the balance of such Exchangeable Shares shall be
issued to the holder at the expense of the Corporation.
6.3 Upon receipt by the Corporation of a Retraction Request, the Corporation
shall immediately notify National-Oilwell thereof. In order to exercise the
Retraction Call Right, National-Oilwell must notify the Corporation in writing
of its determination to do so (the "NATIONAL-OILWELL CALL NOTICE") within two
Business Days of such notification. If National-Oilwell does not so notify the
Corporation within two Business Days, the Corporation will notify the holder as
soon as possible thereafter that National-Oilwell will not exercise the
Retraction Call Right. If National-Oilwell delivers the National-Oilwell Call
Notice within such two Business Days, and provided that the Retraction Request
is not revoked by the holder in the manner specified in Section 6.7, the
Retraction Request shall thereupon be considered only to be an offer by the
holder to sell the Retracted Shares to National-Oilwell in accordance with the
Retraction Call Right. In such event, the
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Corporation shall not redeem the Retracted Shares and National-Oilwell shall
purchase from such holder and such holder shall sell to National-Oilwell on the
Retraction Date the Retracted Shares for a purchase price (the "PURCHASE PRICE")
per share equal to the Retraction Price per share. For the purposes of
completing a purchase pursuant to the Retraction Call Right, National-Oilwell
shall deposit with the Transfer Agent, on or before the Retraction Date the
Exchangeable Share Consideration representing the total Purchase Price. Provided
that such Exchangeable Share Consideration has been so deposited with the
Transfer Agent, the closing of the purchase and sale of the Retracted Shares
pursuant to the Retraction Call Right shall be deemed to have occurred as at the
close of business on the Retraction Date and, for greater certainty, no
redemption by the Corporation of such Retracted Shares shall take place on the
Retraction Date. In the event that National-Oilwell does not deliver a
National-Oilwell Call Notice within two Business Days or otherwise comply with
these Exchangeable Share provisions in respect thereto, and provided that
Retraction Request is not revoked by the holder in the manner specified in
Section 6.7, the Corporation shall redeem the Retracted Shares on the Retraction
Date and in the manner otherwise contemplated in this Article 6.
6.4 The Corporation or National-Oilwell, as the case may be, shall deliver or
cause the Transfer Agent to deliver to the relevant holder, at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to the holders of Exchangeable Shares, the Exchangeable
Share Consideration representing the total Retraction Price or the total
Purchase Price, as the case may be, and such delivery of such Exchangeable Share
Consideration to the Transfer Agent shall be deemed to be payment of and shall
satisfy and discharge all liability for the total Retraction Price or total
Purchase Price, as the case may be, except as to any cheque included therein
which is not paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the holder of
the Retracted Shares shall not be entitled to exercise any of the rights of a
holder in respect thereof, other than the right to receive his proportionate
part of the total Retraction Price or total Purchase Price, as the case may be,
unless upon presentation and surrender of certificates in accordance with the
foregoing provisions, payment of the total Retraction Price or the total
Purchase Price, as the case may be, shall not be made, in which case the rights
of such holder shall remain unaffected until the Exchangeable Share
Consideration representing the total Retraction Price or the total Purchase
Price, as the case may be, has been paid in the manner hereinbefore provided. On
and after the close of business on the Retraction Date, provided that
presentation and surrender of certificates and payment of the Exchangeable Share
Consideration representing the total Retraction Price or the total Purchase
Price, as the case may be, has been made in accordance with the foregoing
provisions, the holder of the Retracted Shares so redeemed by the Corporation or
purchased by National-Oilwell shall thereafter be considered and deemed for all
purposes to be a holder of the National-Oilwell Common Stock delivered to it.
Notwithstanding the foregoing, until payment of such Exchangeable Share
Consideration to the holder, the holder shall be deemed to still be a holder of
Exchangeable Shares for purposes of all voting rights with respect thereto under
the Voting and Exchange Trust Agreement.
6.6 Notwithstanding any other provision of this Article 6, the Corporation
shall not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to liquidity or solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it would
not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and provided that National-Oilwell shall
not have exercised the Retraction Call Right with respect to the Retracted
Shares, the Corporation shall only be obligated to redeem Retracted Shares
specified by a holder in a Retraction Request to the extent of the maximum
number that may be so redeemed (rounded down to a whole number of shares) as
would not be contrary to such provisions and shall notify the holder at least
two Business Days prior to the Retraction Date as to the number of Retracted
Shares which will not be redeemed by the Corporation. In any case in which the
redemption by the Corporation of Retracted Shares would be contrary to liquidity
or solvency requirements or other provisions of applicable law, the Corporation
shall redeem Retracted Shares in accordance with Section 6.2 of these share
provisions on a pro rata basis and shall issue to each holder of Retracted
Shares a new certificate, at the expense of the Corporation, representing the
Retracted Shares not redeemed by the
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Corporation pursuant to Section 6.2 hereof. Provided that the Retraction Request
is not revoked by the holder in the manner specified in Section 6.7, the holder
of any such Retracted Shares not redeemed by the Corporation pursuant to Section
6.2 of these share provisions as a result of liquidity or solvency requirements
or applicable law shall be deemed by giving the Retraction Request to require
National-Oilwell to purchase such Retracted Shares from such holder on the
Retraction date or as soon as practicable thereafter on payment by
National-Oilwell to such holder of the Purchase Price for each such Retracted
Share, all as more specifically provided in the Voting and Exchange Trust
Agreement, and National-Oilwell shall make such purchase.
6.7 A holder of Retracted Shares may, by notice in writing given by the holder
to the Corporation before the close of business on the Business Day immediately
preceding the Retraction Date, withdraw its Retraction Request in which event
such Retraction Request shall be null and void and, for greater certainty, the
revocable offer constituted by the Retraction Request to sell the Retracted
Shares to National-Oilwell shall be deemed to have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY
THE CORPORATION
7.1 Subject to applicable law, and if National-Oilwell does not exercise the
Redemption Call Right, the Corporation shall on the Automatic Redemption Date
redeem the whole of the then outstanding Exchangeable Shares for an amount equal
to the Exchangeable Share Price applicable on the last Business Day prior to the
Automatic Redemption Date (the "REDEMPTION PRICE"). In connection with payment
of the Redemption Price, the Corporation shall be entitled to liquidate some of
the National-Oilwell Common Stock which would otherwise be deliverable to the
particular holder of Exchangeable Shares in order to fund any statutory
withholding tax obligation.
7.2 In any case of a redemption of Exchangeable Shares under this Article 7,
the Corporation, or the Transfer Agent on behalf of the Corporation, shall, at
least 45 days before an Automatic Redemption Date or before a possible Automatic
Redemption Date which may result from a failure of the holders of Exchangeable
Shares to take necessary action as described in clause (d) of the definition of
Automatic Redemption Date, send or cause to be sent to each holder of
Exchangeable Shares a notice in writing of the redemption or possible redemption
by the Corporation or the purchase by National-Oilwell under the Redemption Call
Right, as the case may be, of the Exchangeable Shares held by such holder. Such
notice shall set out the formula for determining the Redemption Price or the
Redemption Call Purchase Price, as the case may be, the Automatic Redemption
Date and, if applicable, particulars of the Redemption Call Right. In the case
of any notice given in connection with a possible Automatic Redemption Date,
such notice will be given contingently and will be withdrawn if the contingency
does not occur.
7.3 On or after the Automatic Redemption Date and subject to the exercise by
National-Oilwell of the Redemption Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares to be redeemed the
Redemption Price for each such Exchangeable Share upon presentation and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation in such notice of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent may reasonably
require. Payment of the total Redemption Price for such Exchangeable Shares
shall be made by delivery to each holder, at the address of the holder recorded
in the securities register or at any office of the Transfer Agent as may be
specified by the Corporation in such notice, on behalf of the Corporation of the
Exchangeable Share Consideration representing the total Redemption Price. On and
after the Automatic Redemption Date, the holders of the Exchangeable Shares
called for redemption shall cease to be holders of such Exchangeable Shares and
shall not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive their proportionate part of the total
Redemption Price, unless payment of the total Redemption Price for such
Exchangeable Shares shall not be made upon presentation and surrender of
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certificates in accordance with the foregoing provisions, in which case the
rights of the holders shall remain unaffected until the total Redemption Price
has been paid in the manner hereinbefore provided. The Corporation shall have
the right at any time after the sending of notice of its intention to redeem the
Exchangeable Shares as aforesaid to deposit or cause to be deposited the
Exchangeable Share Consideration with respect to the Exchangeable Shares so
called for redemption, or of such of the said Exchangeable Shares represented by
certificates that have not at the date of such deposit been surrendered by the
holders thereof in connection with such redemption, in a custodial account or
for safe keeping, in the case of non-cash items, with any chartered bank or
trust company in Canada named in such notice. Upon the later of such deposit
being made and the Automatic Redemption Date, the Exchangeable Shares in respect
whereof such deposit shall have been made shall be redeemed and the rights of
the holders thereof after such deposit or Automatic Redemption Date, as the case
may be, shall be limited to receiving their proportionate part of the total
Redemption Price for such Exchangeable Shares so deposited, against presentation
and surrender of the said certificates held by them, respectively, in accordance
with the foregoing provisions. Upon such payment or deposit of such Exchangeable
Share Consideration, the holders of the Exchangeable Shares shall thereafter be
considered and deemed for all purposes to be holders of the National-Oilwell
Common Stock delivered to them. Notwithstanding the foregoing, until such
payment or deposit of such Exchangeable Share Consideration is made, the holder
shall be deemed to still be a holder of Exchangeable Shares for purposes of all
voting rights with respect thereto under the Voting and Exchange Trust
Agreement.
ARTICLE 8
EXCHANGE PUT RIGHT
8.1 Upon and subject to the terms and conditions contained in the Exchangeable
Share Provisions and the Voting and Exchange Trust Agreement:
(a) a holder of Exchangeable Shares shall have the right (the
"Exchange Put Right") at any time to require National-Oilwell to purchase
all or any part of the Exchangeable Shares of the holder; and
(b) upon the exercise by the holder of the Exchange Put Right and
provided that, at the time of purchase, the Exchangeable Shares are listed
on a recognized Canadian stock exchange, the holder shall be required to
sell to National-Oilwell, and National-Oilwell shall be required to
purchase from the holder, that number of Exchangeable Shares in respect of
which the Exchange Put Right is exercised, in consideration of the payment
by National-Oilwell of the Exchangeable Share Price applicable thereto
(which shall be the Exchangeable Share Price applicable on the last
Business Day prior to receipt of notice required under section 8.2) and
delivery by or on behalf of National-Oilwell of the Exchangeable Share
Consideration representing the total applicable Exchangeable Share Price.
8.2 The Exchange Put Right provided in section 8.1 hereof and in Article V of
the Voting and Exchange Trust Agreement may be exercised at any time by notice
in writing given by the holder to and received by the Trustee (the date of such
receipt, the "Exchange Put Date") accompanied by presentation and surrender of
the certificates representing such Exchangeable Shares, together with such
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Trustee may reasonably require, at
the principal transfer offices in Calgary, Alberta and Toronto, Ontario of the
Trustee, or at such other office or offices of the Trustee or of other persons
designated by the Trustee for that purpose as may from time to time be
maintained by the Trustee for that purpose. Such notice may be (i) in the form
of the panel, if any, on the certificates representing Exchangeable Shares, (ii)
in the form of the notice and election contained in any letter of transmittal
distributed or made available by the Corporation for that purpose, or (iii) in
other form satisfactory to the Trustee (or such other persons aforesaid), shall
stipulate the number of Exchangeable Shares in respect of which the right is
exercised (which may not exceed the number of shares represented by certificates
surrendered to the Trustee), shall be irrevocable unless the exchange is not
completed in accordance herewith and with the Voting and Exchange Trust
Agreement and shall constitute the holder's authorization to the Trustee (and
such other persons aforesaid) to effect the exchange on behalf of the holder.
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8.3 The completion of the sale and purchase referred to in section 8.1 shall be
required to occur, and National-Oilwell shall be required to take all actions on
its part necessary to permit it to occur, not later than the close of business
on the third Business Day following the Exchange Put Date.
8.4 The surrender by the holder of Exchangeable Shares under section 8.2 shall
constitute the representation, warranty and covenant of the holder that the
Exchangeable Shares so purchased are sold free and clear of any lien,
encumbrance, security interest or adverse claim or interest.
8.5 If a part only of the Exchangeable Shares represented by any certificate
are to be sold and purchased pursuant to the exercise of the Exchange Put Right,
a new certificate for the balance of such Exchangeable Shares shall be issued to
the holder at the expense of the Corporation.
8.6 Upon receipt by the Trustee of the notice, certificates and other documents
or instruments required by section 8.2, the Trustee shall deliver or cause to be
delivered, on behalf of National-Oilwell and subject to receipt by the Trustee
from National-Oilwell of the applicable Exchangeable Share Consideration, to the
relevant holder at the address of the holder specified in the notice or by
holding for pick-up by the holder at the registered office of the Corporation or
at any office of the Trustee (or other persons aforesaid) maintained for that
purpose, the Exchangeable Share Consideration representing the total applicable
Exchangeable Share Price, within the time stipulated in section 8.3. Delivery by
National-Oilwell to the Trustee of such Exchangeable Share Consideration shall
be deemed to be payment of and shall satisfy and discharge all liability for the
total applicable Exchangeable Share Price, except as to any cheque included
therein which is not paid on due presentation.
8.7 On and after the close of business on the Exchange Put Date, the holder of
the Exchangeable Shares in respect of which the Exchange Put Right is exercised
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive the total applicable Exchangeable Share
Price, unless upon presentation and surrender of certificates in accordance with
the foregoing provisions, payment of the Exchangeable Share Consideration shall
not be made, in which case the rights of such holder shall remain unaffected
until such payment has been made. On and after the close of business on the
Exchange Put Date provided that presentation and surrender of certificates and
payment of the Exchangeable Share Consideration has been made in accordance with
the foregoing provisions, the holder of the Exchangeable Shares so purchased by
National-Oilwell shall thereafter be considered and deemed for all purposes to
be a holder of the National-Oilwell Common Stock delivered to it.
Notwithstanding the foregoing, until payment of the Exchangeable Share
Consideration to the holder, the holder shall be deemed to still be a holder of
Exchangeable Shares for purposes of all voting rights with respect thereto under
the Voting and Exchange Trust Agreement.
ARTICLE 9
VOTING RIGHTS
9.1 Except as required by applicable law and the provisions hereof, the holders
of the Exchangeable Shares shall not be entitled as such to receive notice of or
to attend any meeting of the shareholders of the Corporation or to vote at any
such meeting.
ARTICLE 10
AMENDMENT AND APPROVAL
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but, except as
hereinafter provided, only with the approval of the holders of the Exchangeable
Shares given as hereinafter specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of the
holders of the Exchangeable Shares shall be deemed to have been sufficiently
given
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if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than 66 2/3% of the votes cast on such resolution by persons represented in
person or by proxy at a meeting of holders of Exchangeable Shares duly called
and held at which the holders of at least 50% of the outstanding Exchangeable
Shares at that time are present or represented by proxy (excluding Exchangeable
Shares beneficially owned by National-Oilwell or its Subsidiaries). If at any
such meeting the holders of at least 50% of the outstanding Exchangeable Shares
at that time are not present or represented by proxy within one-half hour after
the time appointed for such meeting then the meeting shall be adjourned to such
date not less than 10 days thereafter and to such time and place as may be
designated by the Chairman of such meeting. At such adjourned meeting the
holders of Exchangeable Shares present or represented by proxy thereat may
transact the business for which the meeting was originally called and a
resolution passed thereat by the affirmative vote of not less than 66 2/3% of
the votes cast on such resolution by persons represented in person or by proxy
at such meeting shall constitute the approval or consent of the holders of the
Exchangeable Shares. For the purposes of this section, any spoiled votes,
illegible votes, defective votes and abstinences shall be deemed to be votes not
cast.
ARTICLE 11
RECIPROCAL CHANGES, ETC. IN RESPECT OF
NATIONAL-OILWELL COMMON STOCK
11.1 (a) Each holder of an Exchangeable Share acknowledges that the Support
Agreement provides, in part, that National-Oilwell will not:
(i) issue or distribute National-Oilwell Common Stock (or securities
exchangeable for or convertible into or carry rights to acquire shares of
National-Oilwell Common Stock) to the holders of all or substantially all
of the then outstanding National-Oilwell Common Stock by way of stock
dividend or other distribution; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding National-Oilwell Common
Stock entitling them to subscribe for or to purchase shares of
National-Oilwell Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire shares of National-Oilwell
Common Stock); or
(iii) issue or distribute to the holders of all or substantially all
of the then outstanding shares of National-Oilwell Common Stock (A) shares
or securities of National-Oilwell of any class other than National-Oilwell
Common Stock (other than shares convertible into or exchangeable for or
carrying rights to acquire National-Oilwell Common Stock), (B) rights,
options or warrants other than those referred to in subsection 11.1(a)(ii)
above, (C) evidences of indebtedness of National-Oilwell or (D) assets of
National-Oilwell;
unless one or both of the Corporation and National-Oilwell is permitted
under applicable law to issue and distribute the economic equivalent on a
per share basis of such rights, options, warrants, securities, shares,
evidences of indebtedness or assets and the items referred to in clauses
(i), (ii) and (iii) above, as applicable, are issued or distributed
simultaneously to holders of Exchangeable Shares.
(b) Each holder of an Exchangeable Share acknowledges that the Support
Agreement further provides, in part, that National-Oilwell will not:
(i) subdivide, redivide or change the then outstanding shares of
National-Oilwell Common Stock into a greater number of shares of
National-Oilwell Common Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of National-Oilwell Common Stock into a lesser number of shares of
National-Oilwell Common Stock; or
(iii) reclassify or otherwise change the shares of National-Oilwell
Common Stock or effect an amalgamation, merger, reorganization or other
transaction involving or affecting the shares of National-Oilwell Common
Stock;
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unless the Corporation is permitted under applicable law to simultaneously
make the same or an economically equivalent change to, or in the rights of
the holders of, the Exchangeable Shares and the same or an economically
equivalent change is simultaneously made to, or in the rights of the
holders of, the Exchangeable Shares.
The Support Agreement further provides, in part, that, with the exception of
certain ministerial amendments, the aforesaid provisions of the Support
Agreement shall not be changed without the approval of the holders of the
Exchangeable Shares given in accordance with Section 10.1 of these share
provisions.
ARTICLE 12
ACTIONS BY THE CORPORATION UNDER
SUPPORT AGREEMENT
12.1 The Corporation will take all such actions and do all such things as shall
be necessary or advisable to perform and comply with and to ensure performance
and compliance by National-Oilwell with all provisions of the Support Agreement,
the Voting Trust and Exchange Agreement and National-Oilwell's Amended and
Restated Certificate of Incorporation applicable to the Corporation and
National-Oilwell, respectively, in accordance with the terms thereof including,
without limitation, taking all such actions and doing all such things as shall
be necessary or advisable to enforce to the fullest extent possible for the
direct benefit of the Corporation all rights and benefits in favour of the
Corporation under or pursuant thereto.
12.2 The Corporation shall not propose, agree to or otherwise give effect to
any amendment to, or waiver or forgiveness of its rights or obligations under,
the Support Agreement, the Voting Trust and Exchange Agreement or
National-Oilwell's Amended and Restated Certificate of Incorporation without the
approval of the holders of the Exchangeable Shares given in accordance with
Section 10.1 of these share provisions other than such amendments, waivers
and/or forgiveness as may be necessary or advisable for the purpose of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares; or
(b) making such provisions or modifications not inconsistent with such
agreement or certificate as may be necessary or desirable with respect to
matters or questions arising thereunder which, in the opinion of the Board
of Directors, it may be expedient to make, provided that the Board of
Directors shall be of the opinion, after consultation with counsel, that
such provisions and modifications will not be prejudicial to the interests
of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement or
certificate which, on the advice of counsel to the Corporation, are
required for the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or manifest error
contained therein, provided that the Board of Directors shall be of the
opinion, after consultation with counsel, that such changes or corrections
will not be prejudicial to the interests of the holders of the Exchangeable
Shares.
ARTICLE 13
LEGEND
13.1 The certificates evidencing the Exchangeable Shares shall contain or have
affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the provisions of the Plan of
Arrangement relating to the Liquidation Call Right, the Retraction Call Right
and the Redemption Call Right, and the Voting and Exchange Trust Agreement
(including the provisions with respect to the voting rights and exchange
provisions thereunder).
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ARTICLE 14
MISCELLANEOUS
14.1 Any notice, request or other communication to be given to the Corporation
by a holder of Exchangeable Shares shall be in writing and shall be valid and
effective if given by mail (postage prepaid) or by telecopy or by delivery to
the registered office of the Corporation and addressed to the attention of the
President. Any such notice, request or other communication, if given by mail,
telecopy or delivery, shall only be deemed to have been given and received upon
actual receipt thereof by the Corporation.
14.2 Any presentation and surrender by a holder of Exchangeable Shares to the
Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of the
Corporation or the retraction, redemption or exchange of Exchangeable Shares
shall be made by registered mail (postage prepaid) or by delivery to the
registered office of the Corporation or to such office of the Transfer Agent as
may be specified by the Corporation, in each case addressed to the attention of
the President of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation or the Transfer Agent, as the case may
be, and the method of any such presentation and surrender of certificates shall
be at the sole risk of the holder.
14.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last known address of such holder. Any such notice,
request or other communication, if given by mail, shall be deemed to have been
given and received on the fifth Business Day following the date of mailing and,
if given by delivery, shall be deemed to have been given and received on the
date of delivery. Accidental failure or omission to give any notice, request or
other communication to one or more holders of Exchangeable Shares shall not
invalidate or otherwise alter or affect any action or proceeding to be or
intended to be taken by the Corporation.
14.4 For greater certainty, the Corporation shall not be required for any
purpose under these share provisions to recognize or take account of persons who
are not so recorded in such securities register.
14.5 All Exchangeable Shares acquired by the Corporation upon the redemption or
retraction thereof shall be cancelled.
PROVISIONS ATTACHING TO THE CLASS "A" COMMON SHARE
The Class "A" common share ("Common Share") in the capital of the
Corporation shall have attached thereto the following rights, privileges,
restrictions and conditions:
DIVIDENDS
Subject to the prior rights of the Exchangeable Shares and any other shares
ranking prior to the Common Share, the holder of the Common Share shall be
entitled to receive such dividends as may be declared by the Board of Directors
out of property of the Corporation legally available therefor.
LIQUIDATION
Subject to the prior rights of the Exchangeable Shares and any other shares
ranking prior to the Common Share, the holder of the Common Share shall, upon
any liquidation, dissolution or winding-up of the Corporation, whether voluntary
or involuntary, or other distribution of the assets of the Corporation for the
purpose of winding-up its affairs, be entitled to receive the remaining property
and assets of the Corporation.
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VOTING
The holder of the Common Share shall be entitled to receive notice of and
to attend all meetings of shareholders (other than separate meetings of other
classes or series of shares), and the Common Share shall be entitled to one
vote.
RESTRICTIONS
So long as any of the Exchangeable Shares of the Corporation are
outstanding, the Corporation shall not at any time without, but may at any time
with, the approval of the board of directors and of the holder of the Common
Share issue any further Exchangeable Shares of the Corporation, except as
specifically required in accordance with the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares of the Corporation.
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SCHEDULE "A"
NOTICE OF RETRACTION
To the Corporation and National-Oilwell, Inc. ("National-Oilwell")
This notice is given pursuant to Article 6 of the provisions (the "SHARE
PROVISIONS") attaching to the Exchangeable Shares of the Corporation and all
capitalized words and expressions used in this notice which are defined in the
Share Provisions have the meaning attributed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem in accordance with Article 6 of the Share Provisions:
[ ] all share(s) represented by the accompanying certificate; or
[ ] __________ share(s) only.
The undersigned hereby notifies the Corporation that the Retraction Date
shall be __________ .
NOTE: The Retraction Date must be a Business Day and must not be less than
five Business Days nor more than 10 Business Days after the date upon
which this notice and the accompanying shares are received by the
Corporation. In the event that no such business day is correctly
specified above, the Retraction Date shall be deemed to be the tenth
Business Day after the date on which this notice is received by the
Corporation.
The undersigned acknowledges the Retraction Call Right of National-Oilwell
to purchase all but not less than all the Retracted Shares from the undersigned
and that his notice shall be deemed to be a recoverable offer by the undersigned
to sell the Retracted Shares to National-Oilwell in accordance with the
Retraction Call Right on the Retraction Date for the Retraction Price and on the
other terms and conditions set out in Section 6.3 of the Share Provisions. If
National-Oilwell determines not to exercise the Retraction Call Right, the
Corporation will notify the undersigned of such fact as soon as possible. This
notice of retraction, and offer to sell the Retracted Shares to
National-Oilwell, may be revoked and withdrawn by the undersigned by notice in
writing given to the Corporation at any time before the close of business on the
Business Date immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of liquidity or solvency
provisions of applicable law, the Corporation is unable to redeem all Retracted
Shares, the undersigned will be deemed to have exercised the Exchange Right (as
defined in the Voting and Exchange Trust Agreement) so as to require
National-Oilwell to purchase the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation and
National-Oilwell that the undersigned has good title to, and owns, the share(s)
represented by the accompanying certificate free and clear of all liens, claims,
encumbrances, security interests and adverse claims or interests.
- ----------------------------- ----------------------------- -----------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check box if the legal or beneficial owner of the Retracted Shares is
a non-resident of Canada.
[ ] Please check box if the securities and any cheque(s) or other non-cash
assets resulting from the retraction of the Retracted Shares are to be held
for pick-up by the shareholder at the principal transfer office of Montreal
Trust Company of Canada (the "TRANSFER AGENT") in Toronto, Ontario, failing
which the securities and any cheque(s) or other non-cash assets will be
delivered to the shareholder in accordance with the share provisions.
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NOTE: This panel must be completed and the accompanying certificate,
together with such additional documents as the Transfer Agent may
require, must be deposited with the Transfer Agent at its principal
transfer office in Toronto, Ontario. The securities and any cheque(s)
or other non-cash assets resulting from the retraction or purchase of
the Retracted Shares will be issued and registered in, and made
payable to, or transferred into, respectively, the name of the
shareholder as it appears on the register of the Corporation and the
securities, cheque(s) and other non-cash assets resulting from such
retraction or purchase will be delivered to the shareholder in
accordance with the Share Provisions.
- ----------------------------------------------------- -----------------------------------------------------
Name of Person in Whose Name Securities or Cheque(s) Date
or Other Non-cash Assets Are To Be Registered,
Issued or Delivered (please print)
- ----------------------------------------------------- -----------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
- ----------------------------------------------------- -----------------------------------------------------
City, Province Signature Guaranteed by
NOTE: If the notice of retraction is for less than all of the share(s)
represented by the accompanying certificate, a certificate
representing the remaining shares of the Corporation will be issued
and registered in the name of the shareholder as it appears on the
register of the Corporation or its lawful transferee.
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ANNEX F
217
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT is entered into as of , 1997, between
National-Oilwell, Inc., a Delaware corporation ("NOI"), and Dreco Energy
Services Ltd., an Alberta corporation ("Dreco").
RECITALS
WHEREAS, pursuant to a Combination Agreement dated as of May 14, 1997, by
and between NOI and Dreco (such agreement as it may be amended or restated is
hereinafter referred to as the "Combination Agreement") the parties agreed that
on the Effective Date (as defined in the Combination Agreement), NOI and Dreco
would execute and deliver a Support Agreement containing the terms and
conditions set forth in Exhibit C to the Combination Agreement together with
such other terms and conditions as may be agreed to by the parties to the
Combination Agreement acting reasonably.
WHEREAS, pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated , 1997 filed pursuant to the Business
Corporations Act (Alberta) (or any successor or other corporate statute by which
Dreco may in the future be governed) (the "Act") each issued and outstanding
class "A" common share of Dreco (a "Dreco Common Share") was exchanged for
issued and outstanding Exchangeable Shares of Dreco (the "Exchangeable Shares"),
and thereafter, Dreco's sole issued and outstanding Preferred Share was
exchanged by the holder thereof for one issued and outstanding Dreco Common
Share.
WHEREAS, the above-mentioned Articles of Arrangement set forth the rights,
privileges, restrictions and conditions (collectively the "Exchangeable Share
Provisions") attaching to the Exchangeable Shares.
WHEREAS, the parties hereto desire to make appropriate provision and to
establish a procedure whereby NOI will take certain actions and make certain
payments and deliveries necessary to ensure that Dreco will be able to make
certain payments and to deliver or cause to be delivered shares of NOI Common
Stock in satisfaction of the obligations of Dreco under the Exchangeable Share
Provisions with respect to the payment and satisfaction of dividends,
Liquidation Amounts, Retraction Prices and Redemption Prices, all in accordance
with the Exchangeable Share Provisions.
NOW, THEREFORE, in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1 Defined Terms. Each term denoted herein by initial capital letters and
not otherwise defined herein shall have the meaning attributed thereto in the
Exchangeable Share Provisions, unless the context requires otherwise.
1.2 Interpretation Not Affected by Headings, Etc. The division of this
agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this agreement.
1.3 Number, Gender, Etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for Any Action. If any date on which any action is required to be
taken under this agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day.
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ARTICLE II
Covenants of NOI and Dreco
2.1 Covenants of NOI Regarding Exchangeable Shares. So long as any
Exchangeable Shares are outstanding, NOI will:
(a) not declare or pay any dividend on NOI Common Stock unless (A)
Dreco will have sufficient assets, funds and other property available to
enable the due declaration and the due and punctual payment in accordance
with applicable law of an equivalent dividend on the Exchangeable Shares
and (B) subsection 2.1(b) shall be complied with in connection with such
dividend;
(b) cause Dreco to declare simultaneously with the declaration of any
dividend on NOI Common Stock an equivalent dividend on the Exchangeable
Shares and, when such dividend is paid on NOI Common Stock, cause Dreco to
pay simultaneously therewith such equivalent dividend on the Exchangeable
Shares, in each case in accordance with the Exchangeable Share Provisions;
(c) advise Dreco sufficiently in advance of the declaration by NOI of
any dividend on NOI Common Stock and take all such other actions as are
necessary, in cooperation with Dreco, to ensure that the respective
declaration date, record date and payment date for a dividend on the
Exchangeable Shares shall be the same as the record date, declaration date
and payment date for the corresponding dividend on NOI Common Stock and
that such dividend on the Exchangeable Shares will correspond with any
requirement of the principal stock exchange on which the Exchangeable
Shares are listed;
(d) ensure that the record date for any dividend declared on NOI
Common Stock is not less than ten Business Days after the declaration date
for such dividend;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit Dreco, in accordance with applicable law, to
pay and otherwise perform its obligations with respect to the satisfaction
of the Liquidation Amount in respect of each issued and outstanding
Exchangeable Share upon the liquidation, dissolution or winding-up of Dreco
or any other distribution of the assets of Dreco for the purpose of winding
up its affairs, including without limitation all such actions and all such
things as are necessary or desirable to enable and permit Dreco to cause to
be delivered shares of NOI Common Stock to the holders of Exchangeable
Shares in accordance with the provisions of Article 5 of the Exchangeable
Share Provisions; and
(f) take all such actions and do all such things as are necessary or
desirable to enable and permit Dreco, in accordance with applicable law, to
pay and otherwise perform its obligations with respect to the satisfaction
of the Retraction Price and the Redemption Price, including without
limitation all such actions and all such things as are necessary or
desirable to enable and permit Dreco to cause to be delivered shares of NOI
Common Stock to the holders of Exchangeable Shares, upon the retraction or
redemption of the Exchangeable Shares in accordance with the provisions of
Article 6 or Article 7 of the Exchangeable Share Provisions, as the case
may be.
2.2 Segregation of Funds. NOI will cause Dreco to deposit a sufficient
amount of funds in a separate account and segregate a sufficient amount of such
assets and other property as is necessary to enable Dreco to pay or otherwise
satisfy the applicable dividends, Liquidation Amount, Retraction Price or
Redemption Price, in each case for the benefit of holders from time to time of
the Exchangeable Shares, and Dreco will use such funds, assets and other
property so segregated exclusively for the payment of dividends and the payment
or other satisfaction of the Liquidation Amount, the Retraction Price or the
Redemption Price, as applicable, net of any corresponding withholding tax
obligations and for the remittance of such withholding tax obligations.
2.3 Reservation of Shares of NOI Common Stock. NOI hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will at
all times keep available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of shares of NOI Common Stock
(or other shares or securities into which NOI Common Stock may be reclassified
or changed as contemplated by section 2.7 hereof) (a) as is equal to the sum of
(i) the number of Exchangeable Shares issued and outstanding from time to time
and (ii) the number of Exchangeable Shares issuable upon the exercise of all
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rights to acquire Exchangeable Shares outstanding from time to time and (b) as
are now and may hereafter be required to enable and permit Dreco to meet its
obligations hereunder, under the Voting and Exchange Trust Agreement, under the
Exchangeable Share Provisions and under any other security or commitment
pursuant to the Arrangement with respect to which NOI may now or hereafter be
required to issue shares of NOI Common Stock.
2.4 Notification of Certain Events. In order to assist NOI to comply with
its obligations hereunder, Dreco will give NOI notice of each of the following
events at the time set forth below:
(a) immediately, in the event of any determination by the Board of
Directors of Dreco to take any action which would require a vote of the
holders of Exchangeable Shares for approval;
(b) immediately, upon the earlier of (A) receipt by Dreco of notice
of, and (B) Dreco otherwise becoming aware of, any threatened or instituted
claim, suit, petition or other proceedings with respect to the involuntary
liquidation, dissolution or winding-up of Dreco or to effect any other
distribution of the assets of Dreco among its shareholders for the purpose
of winding-up its affairs;
(c) immediately, upon receipt by Dreco of a Retraction Request (as
defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any Automatic Redemption Date
determined by the Board of Directors of Dreco in accordance with clause (b)
of the definition of Automatic Redemption Date in the Exchangeable Share
Provisions; and
(e) as soon as practicable upon the issuance by Dreco of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
2.5 Delivery of Shares of NOI Common Stock. In furtherance of its
obligations hereunder, upon notice of any event which requires Dreco to cause to
be delivered shares of NOI Common Stock to any holder of Exchangeable Shares,
NOI shall forthwith issue and deliver the requisite shares of NOI Common Stock
to or to the order of the former holder of the surrendered Exchangeable Shares,
as Dreco shall direct. All such shares of NOI Common Stock shall be duly issued
as fully paid and non-assessable and shall be free and clear of any lien, claim,
encumbrance, security interest or adverse claim or interest.
2.6 Qualification of Shares of NOI Common Stock. NOI covenants that if any
shares of NOI Common Stock to be issued and delivered hereunder (including for
greater certainty, pursuant to the Exchangeable Share Provisions, or pursuant to
the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights (all
as defined in the Voting and Exchange Trust Agreement)) require registration or
qualification with or approval of or the filing of any document including any
prospectus or similar document, the taking of any proceeding with or the
obtaining of any order, ruling or consent from any governmental or regulatory
authority under any Canadian or United States federal, provincial or state law
or regulation or pursuant to the rules and regulations of any regulatory
authority, or the fulfillment of any other legal requirement (collectively, the
"Applicable Laws") before such shares may be issued and delivered by NOI to the
initial holder thereof (other than Dreco) or in order that such shares may be
freely traded thereafter (other than any restrictions on transfer by reason of a
holder being a "control person" of NOI for purposes of Canadian federal or
provincial securities law or an "affiliate" of NOI for purposes of United States
federal or state securities law), NOI will in good faith expeditiously take all
such actions and do all such things as are necessary to cause such shares of NOI
Common Stock to be and remain duly registered, qualified or approved. NOI
represents and warrants that it has in good faith taken all actions and done all
things as are necessary under Applicable Laws as they exist on the date hereof
to cause the shares of NOI Common Stock to be issued and delivered hereunder
(including, for greater certainty, pursuant to the Exchangeable Share Provisions
or pursuant to the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights) to be freely tradeable thereafter (other than restrictions on
transfer by reason of a holder being a "control person" of NOI for the purposes
of Canadian federal and provincial securities law or an "affiliate" of NOI for
purposes of United States federal or state securities law). NOI will in good
faith expeditiously take all such actions and do all such things as are
necessary to cause all shares of NOI Common Stock to be delivered hereunder
(including, for greater certainty, pursuant to Exchangeable Share Provisions or
pursuant to the Exchange Put Right, the Exchange
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Right or the Automatic Exchange Rights) to be listed, quoted or posted for
trading on all stock exchanges and quotation systems on which such shares are
listed, quoted or posted for trading at such time. NOI will in good faith
expeditiously take all such action and do all such things as are necessary to
cause all Exchangeable Shares to be and to continue to be listed and posted for
trading on a stock exchange in Canada.
2.7 Equivalence.
(a) NOI will not:
(i) issue or distribute shares of NOI Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire shares
of NOI Common Stock) to the holders of all or substantially all of the then
outstanding shares of NOI Common Stock by way of stock dividend or other
distribution; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding shares of NOI Common Stock
entitling them to subscribe for or to purchase shares of NOI Common Stock
(or securities exchangeable for or convertible into or carrying rights to
acquire shares of NOI Common Stock); or
(iii) issue or distribute to the holders of all or substantially all
of the then outstanding shares of NOI Common Stock (A) shares or securities
of NOI of any class other than NOI Common Stock (other than shares
convertible into or exchangeable for or carrying rights to acquire shares
of NOI Common Stock), (B) rights, options or warrants other than those
referred to in subsection 2.7(a)(ii) above, (C) evidences of indebtedness
of NOI or (D) assets of NOI;
unless
(iv) one or both of NOI and Dreco is permitted under applicable law to
issue or distribute the economic equivalent on a per share basis of such
rights, options, warrants, securities, shares, evidences of indebtedness or
other assets to holders of the Exchangeable Shares; and
(v) one or both of NOI and Dreco shall issue or distribute such
rights, options, warrants, securities, shares, evidences of indebtedness or
other assets simultaneously to holders of the Exchangeable Shares.
(b) NOI will not:
(i) subdivide, redivide or change the then outstanding shares of NOI
Common Stock into a greater number of shares of NOI Common Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of NOI Common Stock into a lesser number of shares of NOI Common
Stock; or
(iii) reclassify or otherwise change the shares of NOI Common Stock or
effect an amalgamation, merger, reorganization or other transaction
affecting the shares of NOI Common Stock;
unless
(iv) Dreco is permitted under applicable law to simultaneously make
the same or an economically equivalent change to, or in the rights of
holders of, the Exchangeable Shares and
(v) the same or an economically equivalent change is made to, or in
the rights of the holders of, the Exchangeable Shares.
(c) NOI will ensure that the record date for any event referred to in
section 2.7(a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business Days
after the date on which such event is declared or announced by NOI (with
simultaneous notice thereof to be given by NOI to Dreco).
2.8 Tender Offers, Etc. In the event that a tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to NOI
Common Stock (an "Offer") is proposed by NOI or is proposed to NOI or its
shareholders and is recommended by the Board of Directors of NOI, or is
otherwise effected or to be effected with the consent or approval of the Board
of Directors of NOI, NOI shall, in good faith, take all
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such actions and do all such things as are necessary or desirable to enable and
permit holders of Exchangeable Shares to participate in such Offer to the same
extent and on an equivalent basis as the holders of shares of NOI Common Stock,
without discrimination, including, without limiting the generality of the
foregoing, NOI will use its good faith efforts expeditiously to (and shall, in
the case of a transaction proposed by NOI or where NOI is a participant in the
negotiation thereof) ensure that holders of Exchangeable Shares may participate
in all such Offers without being required to retract Exchangeable Shares as
against Dreco (or, if so required, to ensure that any such retraction shall be
effective only upon, and shall be conditional upon, the closing of the Offer and
only to the extent necessary to tender or deposit to the Offer).
2.9 Ownership of Outstanding Shares. Without the prior approval of Dreco
and the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 10.1 of the Exchangeable Share Provisions, NOI covenants
and agrees in favor of Dreco that, as long as any outstanding Exchangeable
Shares are owned by any person or entity other than NOI or any of its
Subsidiaries, NOI will be and remain the direct or indirect beneficial owner of
all issued and outstanding Dreco Common Shares and of at least 50.1% of all
other securities of Dreco carrying or entitled to voting rights in any
circumstances generally for the election of directors, in each case other than
the Exchangeable Shares.
2.10 NOI Not to Vote Exchangeable Shares. NOI covenants and agrees that it
will appoint and cause to be appointed proxy holders with respect to all
Exchangeable Shares held by NOI and its Subsidiaries for the sole purpose of
attending each meeting of holders of Exchangeable Shares in order to be counted
as part of the quorum for each such meeting. NOI further covenants and agrees
that it will not, and will cause its Subsidiaries not to, exercise any voting
rights which may be exercisable by holders of Exchangeable Shares from time to
time pursuant to the Exchangeable Share Provisions or pursuant to the provisions
of the Act with respect to any Exchangeable Shares held by it or by its
Subsidiaries in respect of any matter considered at any meeting of holders of
Exchangeable Shares.
2.11 Due Performance. On and after the Effective Date, NOI shall duly and
timely perform all of its obligations provided for in the Plan of Arrangement,
including any obligations that may arise upon the exercise of NOI's rights under
the Exchangeable Share Provisions.
ARTICLE III
GENERAL
3.1 Term. This agreement shall come into force and be effective as of the
date hereof and shall terminate and be of no further force and effect at such
time as no Exchangeable Shares (or securities or rights convertible into or
exchangeable for or carrying rights to acquire Exchangeable Shares) are held by
any party other than NOI and any of its Subsidiaries.
3.2 Changes in Capital of NOI and Dreco. Notwithstanding the provisions of
section 3.4 hereof, at all times after the occurrence of any event effected
pursuant to section 2.7 or 2.8 hereof, as a result of which either NOI Common
Stock or the Exchangeable Shares or both are in any way changed, this agreement
shall forthwith be amended and modified as necessary in order that it shall
apply with full force and effect, mutatis mutandis, to all new securities into
which NOI Common Stock or the Exchangeable Shares or both are so changed, and
the parties hereto shall execute and deliver an agreement in writing giving
effect to and evidencing such necessary amendments and modifications.
3.3 Severability. If any provision of this agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this agreement shall not in any way be affected or impaired
thereby and this agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions.
3.4 Amendments, Modifications, Etc. This agreement may not be amended,
modified or waived except by an agreement in writing executed by Dreco and NOI
and approved by the holders of the Exchangeable Shares in accordance with
Section 10.1 of the Exchangeable Share Provisions.
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3.5 Ministerial Amendments. Notwithstanding the provisions of section 3.4,
the parties to this agreement may in writing, at any time and from time to time,
without the approval of the holders of the Exchangeable Shares, amend or modify
this agreement for the purposes of:
(a) adding to the covenants of either or both parties for the
protection of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of Dreco
and NOI, it may be expedient to make, provided that each such board of
directors shall be of the opinion that such amendments or modifications
will not be prejudicial to the interests of the holders of the Exchangeable
Shares; or
(c) making such changes or corrections which, on the advice of counsel
to Dreco and NOI, are required for the purpose of curing or correcting any
ambiguity or defect or inconsistent provision or clerical omission or
mistake or manifest error; provided that the boards of directors of each of
Dreco and NOI shall be of the opinion that such changes or corrections will
not be prejudicial to the interests of the holders of the Exchangeable
Shares.
3.6 Meeting to Consider Amendments. Dreco, at the request of NOI, shall
call a meeting or meetings of the holders of the Exchangeable Shares for the
purpose of considering any proposed amendment or modification requiring approval
of such shareholders. Any such meeting or meetings shall be called and held in
accordance with the by-laws of Dreco, the Exchangeable Share Provisions and all
applicable laws.
3.7 Amendments Only in Writing. No amendment to or modification or waiver
of any of the provisions of this agreement otherwise permitted hereunder shall
be effective unless made in writing and signed by both of the parties hereto.
3.8 Inurement. This agreement shall be binding upon and inure to the
benefit of the parties hereto and the holders, from time to time, of
Exchangeable Shares and each of their respective heirs, successors and assigns.
3.9 Notices to Parties. All notices and other communications between the
parties shall be in writing and shall be deemed to have been given if delivered
personally or by confirmed telecopy to the parties at the following addresses
(or at such other address for either such party as shall be specified in like
notice):
(a) if to NOI to: National-Oilwell, Inc., 5555 San Felipe, P.O. Box
4368 (77210), Houston, TX 77210, Attention: President, Facsimile No.
713/960-5212, with required copies to Morgan, Lewis & Bockius LLP, 2000 One
Logan Square, Philadelphia, PA 19103, Attention: David R. King, Esq.,
Facsimile No. 215/963-5299, and to Stikeman, Elliott, Suite 5300, P.O. Box
85, Commerce Court West, Toronto, Ontario, Canada M5L 1B9, Attention: Ian
Douglas, Esq., Facsimile No. 416/947-0866.
(b) if to Dreco to: Dreco Energy Services Ltd., #1340 Weber Centre,
555 Calgary Trail, Edmonton, Canada T6H 5P9, Attention: President,
Facsimile No. 403/438-8256, with required copies to Fulbright & Jaworski
L.L.P., 1301 McKinney, Suite 5100, Houston, TX 77010, Attention: Robert F.
Gray, Jr., Facsimile No. 713/651-5246, and to Blake, Cassels & Graydon,
3500 Bankers Hall East, 855-2nd Street S.W., Calgary, Alberta, Canada T2P
4J8, Attention: Patrick C. Finnerty, Esq., Facsimile No. 403/260-9700.
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof,
unless such day is not a Business Day, in which case it shall be deemed to have
been given and received upon the immediately following Business Day.
3.10 Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.11 Jurisdiction. This agreement shall be construed and enforced in
accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein.
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3.12 Attornment. NOI agrees that any action or proceeding arising out of
or relating to this agreement may be instituted in the courts of Alberta, waives
any objection which it may have now or hereafter to the venue of any such action
or proceeding, irrevocably submits to the jurisdiction of such courts in any
such action or proceeding, agrees to be bound by any judgment of such courts and
not to seek, and hereby waives, any review of the merits of any such judgment by
the courts of any other jurisdiction and hereby appoints Dreco at its registered
office in the Province of Alberta as NOI's attorney for service of process.
IN WITNESS WHEREOF, NOI and Dreco have caused this agreement to be signed
by their respective officers thereunder duly authorized, all as of the date
first written above.
NATIONAL-OILWELL, INC.
By:
----------------------------------
Joel V. Staff
President
DRECO ENERGY SERVICES LTD.
By:
----------------------------------
Robert L. Phillips
President
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ANNEX G
225
VOTING AND EXCHANGE TRUST AGREEMENT
THIS VOTING AND EXCHANGE TRUST AGREEMENT is entered into as of
, 1997, by and between National-Oilwell, Inc., a Delaware corporation ("NOI"),
Dreco Energy Services Ltd., an Alberta corporation ("Dreco"), and
Trust Company, a Canadian trust company ("Trustee").
WHEREAS, pursuant to a Combination Agreement dated as of May 14, 1997, by
and between NOI and Dreco (such agreement as it may be amended or restated is
hereinafter referred to as the "Combination Agreement") the parties agreed that
on the Effective Date (as defined in the Combination Agreement), NOI and Dreco
would execute and deliver a Voting and Exchange Trust Agreement containing the
terms and conditions set forth in Exhibit D to the Combination Agreement
together with such other terms and conditions as may be agreed to by the parties
to the Combination Agreement acting reasonably.
WHEREAS, pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated , 1997 filed pursuant to the Business
Corporations Act (Alberta) (or any successor or other corporate statute by which
Dreco may in the future be governed) (the "Act"), each issued and outstanding
class "A" common share of Dreco (a "Dreco Common Share") was exchanged for
issued and outstanding Exchangeable Shares of Dreco (the "Exchangeable Shares"),
and thereafter, Dreco's sole issued and outstanding Class A Preferred Share was
exchanged by the holder thereof for one issued and outstanding Dreco Common
Share.
WHEREAS, the above-mentioned Articles of Arrangement set forth the rights,
privileges, restrictions and conditions attaching to the Exchangeable Shares
(collectively, the "Exchangeable Share Provisions").
WHEREAS, NOI is to provide voting rights in NOI to each holder (other than
NOI and its Subsidiaries) from time to time of Exchangeable Shares, such voting
rights per Exchangeable Share to be equivalent to the voting rights per share of
NOI Common Stock.
WHEREAS, NOI is to grant to and in favor of the holders (other than NOI and
its Subsidiaries) from time to time of Exchangeable Shares the right, in the
circumstances set forth herein, to require NOI to purchase from each such holder
all or any part of the Exchangeable Shares held by the holder.
WHEREAS, the parties desire to make appropriate provision and to establish
a procedure whereby voting rights in NOI shall be exercisable by holders (other
than NOI and its Subsidiaries) from time to time of Exchangeable Shares by and
through the Trustee, which will hold legal title to one share of NOI Special
Voting Stock (the "NOI Special Voting Stock") to which voting rights attach for
the benefit of such holders and whereby the rights to require NOI to purchase
Exchangeable Shares from the holders thereof (other than NOI and its
Subsidiaries) shall be exercisable by such holders from time to time of
Exchangeable Shares by and through the Trustee, which will hold legal title to
such rights for the benefit of such holders.
WHEREAS, these recitals and any statements of fact in this agreement are
made by NOI and Dreco and not by the Trustee.
NOW, THEREFORE, in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1 Definitions. In this agreement, the following terms shall have the
following meanings:
"AGGREGATE EQUIVALENT VOTE AMOUNT" means, with respect to any matter,
proposition or question on which holders of NOI Common Stock are entitled to
vote, consent or otherwise act, the product of (i) the
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number of shares of Exchangeable Shares issued and outstanding and held by
Holders multiplied by (ii) the number of votes to which a holder of one share of
NOI Common Stock is entitled with respect to such matter, proposition or
question.
"ARRANGEMENT" has the meaning provided in the recitals hereto.
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of NOI to
effect the automatic exchange of shares of NOI Common Stock for Exchangeable
Shares pursuant to Section 5.12 hereof.
"BOARD OF DIRECTORS" means the Board of Directors of Dreco.
"BUSINESS DAY" has the meaning provided in the Exchangeable Share
Provisions;
"DRECO COMMON SHARES" has the meaning provided in the recitals hereto.
"EQUIVALENT VOTE AMOUNT" means, with respect any matter, proposition or
question on which holders of NOI Common Stock are entitled to vote, consent or
otherwise act, the number of votes to which a holder of one share of NOI Common
Stock is entitled with respect to such matter, proposition or question.
"EXCHANGE PUT RIGHT" has the meaning provided in the Exchangeable Share
Provisions.
"EXCHANGE RIGHT" has the meaning provided in Article V hereof.
"EXCHANGEABLE SHARE CONSIDERATION" has the meaning provided in the
Exchangeable Share Provisions.
"EXCHANGEABLE SHARE PRICE" has the meaning provided in the Exchangeable
Share Provisions.
"EXCHANGEABLE SHARE PROVISIONS" has the meaning provided in the recitals
hereto.
"EXCHANGEABLE SHARES" has the meaning provided in the recitals hereto.
"HOLDER VOTES" has the meaning provided in Section 4.2 hereof.
"HOLDERS" means the registered holders from time to time of Exchangeable
Shares, other than NOI and its Subsidiaries.
"INSOLVENCY EVENT" means the institution by Dreco of any proceeding to be
adjudicated a bankrupt or insolvent or to be dissolved or wound-up, or the
consent of Dreco to the institution of bankruptcy, insolvency, dissolution or
winding-up proceedings against it, or the filing of a petition, answer or
consent seeking dissolution or winding-up under any bankruptcy, insolvency or
analogous laws, including without limitation the Companies Creditors'
Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the
failure by Dreco to contest in good faith any such proceedings commenced in
respect of Dreco within 15 days of becoming aware thereof, or the consent by
Dreco to the filing of any such petition or to the appointment of a receiver, or
the making by Dreco of a general assignment for the benefit of creditors, or the
admission in writing by Dreco of its inability to pay its debts generally as
they become due, or Dreco's not being permitted, pursuant to liquidity or
solvency requirements of applicable law, to redeem any Retracted Shares pursuant
to Section 6.6 of the Exchangeable Share Provisions.
"LIQUIDATION CALL RIGHT" has the meaning provided in the Exchangeable Share
Provisions.
"LIQUIDATION EVENT" has the meaning provided in subsection 5.12(b) hereof.
"LIQUIDATION EVENT EFFECTIVE TIME" has the meaning provided in subsection
5.12(c) hereof.
"LIST" has the meaning provided in Section 4.6 hereof.
"NOI COMMON STOCK" has the meaning provided in the Exchangeable Share
Provisions.
"NOI CONSENT" has the meaning provided in Section 4.2 hereof.
"NOI MEETING" has the meaning provided in Section 4.2 hereof.
"NOI SPECIAL VOTING STOCK" has the meaning provided in the recitals hereto.
"NOI SUCCESSOR" has the meaning provided in subsection 11.1(a) hereof.
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"OFFICER'S CERTIFICATE" means, with respect to NOI or Dreco, as the case
may be, a certificate signed by any one of the Chairman of the Board, the
Vice-Chairman of the Board (if there be one), the President or any
Vice-President of NOI or Dreco, as the case may be.
"PERSON" includes an individual, body corporate, partnership, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"PLAN OF ARRANGEMENT" has the meaning provided in the Exchangeable Share
Provisions.
"REDEMPTION CALL RIGHT" has the meaning provided in the Exchangeable Share
Provisions.
"RETRACTED SHARES" has the meaning provided in Section 5.7 hereof.
"RETRACTION CALL RIGHT" has the meaning provided in the Exchangeable Share
Provisions.
"SUBSIDIARY" has the meaning provided in the Exchangeable Share Provisions.
"SUPPORT AGREEMENT" means that certain support agreement made as of even
date hereof by and between NOI and Dreco.
"TRUST" means the trust created by this agreement.
"TRUST ESTATE" means the Voting Share, any other securities, the Exchange
Put Right, the Exchange Right, the Automatic Exchange Rights and any money or
other property which may be held by the Trustee from time to time pursuant to
this agreement.
"TRUSTEE" means Trust Company and, subject to the provisions of
Article X hereof, includes any successor trustee or permitted assigns.
"VOTING RIGHTS" means the voting rights attached to the Voting Share.
"VOTING SHARE" means the one share of NOI Special Voting Stock, U.S. $0.01
par value, issued by NOI to and deposited with the Trustee, which entitles the
holder of record to a number of votes at meetings of holders of NOI Common Stock
equal to the Aggregate Equivalent Vote Amount.
1.2 Interpretation Not Affected by Headings, Etc. The division of this
agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this agreement.
1.3 Number, Gender, Etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for Any Action. If any date on which any action is required to be
taken under this agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day.
ARTICLE II
PURPOSE OF AGREEMENT
The purpose of this agreement is to create the Trust for the benefit of the
Holders, as herein provided. The Trustee will hold the Voting Share in order to
enable the Trustee to exercise the Voting Rights and will hold the Exchange Put
Right, the Exchange Right and the Automatic Exchange Rights in order to enable
the Trustee to exercise such rights, in each case as trustee for and on behalf
of the Holders as provided in this agreement.
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ARTICLE III
VOTING SHARE
3.1 Issuance and Ownership of the Voting Share. NOI hereby issues to and
deposits with the Trustee the Voting Share to be hereafter held of record by the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Holders and in accordance with the provisions of this agreement. NOI hereby
acknowledges receipt from the Trustee as trustee for and on behalf of the
Holders of good and valuable consideration (and the adequacy thereof) for the
issuance of the Voting Share by NOI to the Trustee. During the term of the Trust
and subject to the terms and conditions of this agreement, the Trustee shall
possess and be vested with full legal ownership of the Voting Share and shall be
entitled to exercise all of the rights and powers of an owner with respect to
the Voting Share, provided that the Trustee shall:
(a) hold the Voting Share and the legal title thereto as trustee
solely for the use and benefit of the Holders in accordance with the
provisions of this agreement; and
(b) except as specifically authorized by this agreement, have no power
or authority to sell, transfer, vote or otherwise deal in or with the
Voting Share, and the Voting Share shall not be used or disposed of by the
Trustee for any purpose other than the purposes for which this Trust is
created pursuant to this agreement.
3.2 Legended Share Certificates. Dreco will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Holders of their right to instruct the Trustee with respect to the exercise of
the Voting Rights with respect to the Exchangeable Shares held by a Holder.
3.3 Safe Keeping of Certificate. The certificate representing the Voting
Share shall at all times be held in safe keeping by the Trustee or its agent.
ARTICLE IV
EXERCISE OF VOTING RIGHTS
4.1 Voting Rights. The Trustee, as the holder of record of the Voting
Share, shall be entitled to all of the Voting Rights, including the right to
consent to or to vote in person or by proxy the Voting Share, on any matter,
question or proposition whatsoever that may properly come before the
stockholders of NOI at a NOI Meeting or in connection with a NOI Consent (in
each case, as hereinafter defined). The Voting Rights shall be and remain vested
in and exercised by the Trustee. Subject to Section 7.15 hereof, the Trustee
shall exercise the Voting Rights only on the basis of instructions received
pursuant to this Article IV from Holders entitled to instruct the Trustee as to
the voting thereof at the time at which a NOI Consent is sought or a NOI Meeting
is held. To the extent that no instructions are received from a Holder with
respect to the Voting Rights to which such Holder is entitled, the Trustee shall
not exercise or permit the exercise of such Holder's Voting Rights.
4.2 Number of Votes. With respect to all meetings of stockholders of NOI
at which holders of shares of NOI Common Stock are entitled to vote (a "NOI
Meeting") and with respect to all written consents sought by NOI from its
stockholders including the holders of shares of NOI Common Stock (a "NOI
Consent"), each Holder shall be entitled to instruct the Trustee to cast and
exercise, in the manner instructed, a number of votes equal to the Equivalent
Vote Amount for each Exchangeable Share owned of record by such Holder on the
record date established by NOI or by applicable law for such NOI Meeting or NOI
Consent, as the case may be, (the "Holder Votes") in respect of each matter,
question or proposition to be voted on at such NOI Meeting or to be consented to
in connection with such NOI Consent.
4.3 Mailings to Shareholders. With respect to each NOI Meeting and NOI
Consent, the Trustee will mail or cause to be mailed (or otherwise communicate
in the same manner as NOI utilizes in communications to holders of NOI Common
Stock, subject to the Trustee's ability to provide this method of communication
and upon being advised in writing of such method) to each of the Holders named
in the List
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on the same day as the initial mailing or notice (or other communication) with
respect thereto is given by NOI to its stockholders:
(a) a copy of such notice, together with any proxy or information
statement and related materials to be provided to stockholders of NOI;
(b) a statement that such Holder is entitled to instruct the Trustee
as to the exercise of the Holder Votes with respect to such NOI Meeting or
NOI Consent, as the case may be, or, pursuant to Section 4.7 hereof, to
attend such NOI Meeting and to exercise personally the Holder Votes
thereat;
(c) a statement as to the manner in which such instructions may be
given to the Trustee, including an express indication that instructions may
be given to the Trustee to give:
(i) a proxy to such Holder or his designee to exercise personally
the Holder Votes; or
(ii) a proxy to a designated agent or other representative of the
management of NOI to exercise such Holder Votes;
(d) a statement that if no such instructions are received from the
Holder, the Holder Votes to which such Holder is entitled will not be
exercised;
(e) a form of direction whereby the Holder may so direct and instruct
the Trustee as contemplated herein; and
(f) a statement of (i) the time and date by which such instructions
must be received by the Trustee in order to be binding upon it, which in
the case of a NOI Meeting shall not be earlier than the close of business
on the Business Day prior to such meeting, and (ii) the method for revoking
or amending such instructions.
The materials referred to above are to be provided by NOI to the Trustee,
but shall be subject to review and comment by the Trustee.
For the purpose of determining Holder Votes to which a Holder is entitled
in respect of any such NOI Meeting or NOI Consent, the number of Exchangeable
Shares owned of record by the Holder shall be determined at the close of
business on the record date established by NOI or by applicable law for purposes
of determining stockholders entitled to vote at such NOI Meeting or to give
written consent in connection with such NOI Consent. NOI will notify the Trustee
in writing of any decision of the board of directors of NOI with respect to the
calling of any such NOI Meeting or the seeking of any such NOI Consent and shall
provide all necessary information and materials to the Trustee in each case
promptly and in any event in sufficient time to enable the Trustee to perform
its obligations contemplated by this Section 4.3.
4.4 Copies of Stockholder Information. NOI will deliver to the Trustee
copies of all proxy materials, (including notices of NOI Meetings, but excluding
proxies to vote shares of NOI Common Stock), information statements, reports
(including without limitation all interim and annual financial statements) and
other written communications that are to be distributed from time to time to
holders of NOI Common Stock in sufficient quantities and in sufficient time so
as to enable the Trustee to send those materials to each Holder at the same time
as such materials are first sent to holders of NOI Common Stock. The Trustee
will mail or otherwise send to each Holder, at the expense of NOI, copies of all
such materials (and all materials specifically directed to the Holders or to the
Trustee for the benefit of the Holders by NOI) received by the Trustee from NOI
at the same time as such materials are first sent to holders of NOI Common
Stock. The Trustee will make copies of all such materials available for
inspection by any Holder at the Trustee's principal transfer office in the
cities of Calgary and Toronto.
4.5 Other Materials. Immediately after receipt by NOI or any stockholder
of NOI of any material sent or given generally to the holders of NOI Common
Stock by or on behalf of a third party, including without limitation dissident
proxy and information circulars (and related information and material) and
tender and exchange offer circulars (and related information and material), NOI
shall use its best efforts to obtain and deliver to the Trustee copies thereof
in sufficient quantities so as to enable the Trustee to forward such material
(unless the same has been provided directly to Holders by such third party) to
each Holder as soon as
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possible thereafter. As soon as practicable after receipt thereof, the Trustee
will mail or otherwise send to each Holder, at the expense of NOI, copies of all
such materials received by the Trustee from NOI. The Trustee will also make
copies of all such materials available for inspection by any Holder at the
Trustee's principal transfer office in the cities of Calgary and Toronto.
4.6 List of Persons Entitled to Vote. Dreco shall, (i) prior to each
annual, general and special NOI Meeting or the seeking of any NOI Consent and
(ii) forthwith upon each request made at any time by the Trustee in writing,
prepare or cause to be prepared a list (a "List") of the names and addresses of
the Holders arranged in alphabetical order and showing the number of
Exchangeable Shares held of record by each such Holder, in each case at the
close of business on the date specified by the Trustee in such request or, in
the case of a List prepared in connection with a NOI Meeting or a NOI Consent,
at the close of business on the record date established by NOI or pursuant to
applicable law for determining the holders of NOI Common Stock entitled to
receive notice of and/or to vote at such NOI Meeting or to give consent in
connection with such NOI Consent. Each such List shall be delivered to the
Trustee promptly after receipt by Dreco of such request or the record date for
such meeting or seeking of consent, as the case may be, and in any event within
sufficient time as to enable the Trustee to perform its obligations under this
agreement. NOI agrees to give Dreco written notice (with a copy to the Trustee)
of the calling of any NOI Meeting or the seeking of any NOI Consent, together
with the record dates therefor, sufficiently prior to the date of the calling of
such meeting or seeking of such consent so as to enable Dreco to perform its
obligations under this Section 4.6.
4.7 Entitlement to Direct Votes. Any Holder named in a List prepared in
connection with any NOI Meeting or any NOI Consent will be entitled (i) to
instruct the Trustee in the manner described in Section 4.3 hereof with respect
to the exercise of the Holder Votes to which such Holder is entitled or (ii) to
attend such meeting and personally to exercise thereat (or to exercise with
respect to any written consent), as the proxy of the Trustee, the Holder Votes
to which such Holder is entitled.
4.8 Voting by Trustee, and Attendance of Trustee Representative, at
Meeting.
(a) In connection with each NOI Meeting and NOI Consent, the Trustee shall
exercise, either in person or by proxy, in accordance with the instructions
received from a Holder pursuant to Section 4.3 hereof, the Holder Votes as to
which such Holder is entitled to direct the vote (or any lesser number thereof
as may be set forth in the instructions); provided, however, that such written
instructions are received by the Trustee from the Holder prior to the time and
date fixed by it for receipt of such instructions in the notice given by the
Trustee to the Holder pursuant to Section 4.3 hereof.
(b) The Trustee shall cause such representatives as are empowered by it to
sign and deliver, on behalf of the Trustee, proxies for Voting Rights to attend
each NOI Meeting. Upon submission by a Holder (or its designee) of
identification satisfactory to the Trustee's representatives, and at the
Holder's request, such representatives shall sign and deliver to such Holder (or
its designee) a proxy to exercise personally the Holder Votes as to which such
Holder is otherwise entitled hereunder to direct the vote, if such Holder
either:
(i) has not previously given the Trustee instructions pursuant to
Section 4.3 hereof in respect of such meeting, or
(ii) submits to the Trustee's representatives written revocation of
any such previous instructions.
At such meeting, the Holder exercising such Holder Votes shall have the
same rights as the Trustee to speak at the meeting in respect of any matter,
question or proposition, to vote by way of ballot at the meeting in respect of
any matter, question or proposition and to vote at such meeting by way of a show
of hands in respect of any matter, question or proposition.
4.9 Distribution of Written Materials. Any written materials to be
distributed by the Trustee to the Holders pursuant to this agreement shall be
delivered or sent by mail (or otherwise communicated in the same manner as NOI
utilizes in communications to holders of NOI Common Stock) to each Holder at its
address
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as shown on the books of Dreco. Dreco shall provide or cause to be provided to
the Trustee for this purpose, on a timely basis and without charge or other
expense:
(a) current lists of the Holders; and
(b) on the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this agreement.
The materials referred to above are to be provided by Dreco to the Trustee,
but shall be subject to review and comment by the Trustee.
4.10 Termination of Voting Rights. Except as otherwise provided herein or
in the Exchangeable Share Provisions, all of the rights of a Holder with respect
to the Holder Votes exercisable in respect of the Exchangeable Shares held by
such Holder, including the right to instruct the Trustee as to the voting of or
to vote personally such Holder Votes, shall be deemed to be surrendered by the
Holder to NOI, and such Holder Votes and the Voting Rights represented thereby
shall cease immediately, upon the delivery by such Holder to the Trustee of the
certificates representing such Exchangeable Shares in connection with the
exercise by the Holder of the Exchange Put Right or the Exchange Right or the
occurrence of the automatic exchange of Exchangeable Shares for shares of NOI
Common Stock, as specified in Article V hereof (unless in any case NOI shall not
have delivered the Exchangeable Share Consideration deliverable in exchange
therefor to the Trustee for delivery to the Holders), or upon the redemption of
Exchangeable Shares pursuant to Article 6 or Article 7 of the Exchangeable Share
Provisions, or upon the effective date of the liquidation, dissolution or
winding-up of Dreco or any other distribution of the assets of Dreco among its
shareholders for the purpose of winding up its affairs pursuant to Article 5 of
the Exchangeable Share Provisions, or upon the purchase of Exchangeable Shares
from the holder thereof by NOI pursuant to the exercise by NOI of the Retraction
Call Right, the Redemption Call Right or the Liquidation Call Right.
ARTICLE V
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
5.1 Grant and Ownership of the Exchange Right. NOI hereby grants to the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Holders:
(a) the Exchange Put Right,
(b) the right (the "Exchange Right"), upon the occurrence and during
the continuance of an Insolvency Event, to require NOI to purchase from
each or any Holder all or any part of the Exchangeable Shares held by the
Holders, and
(c) the Automatic Exchange Rights,
all in accordance with the provisions of this agreement and the
Exchangeable Share Provisions, as the case may be. NOI hereby acknowledges
receipt from the Trustee as trustee for and on behalf of the Holders of
good and valuable consideration (and the adequacy thereof) for the grant of
the Exchange Put Right, the Exchange Right and the Automatic Exchange
Rights by NOI to the Trustee. During the term of the Trust and subject to
the terms and conditions of this agreement, the Trustee shall possess and
be vested with full legal ownership of the Exchange Put Right, the Exchange
Right and the Automatic Exchange Rights and shall be entitled to exercise
all of the rights and powers of an owner with respect to the Exchange Put
Right, the Exchange Right and the Automatic Exchange Rights, provided that
the Trustee shall:
(d) hold the Exchange Put Right, the Exchange Right and the Automatic
Exchange Rights and the legal title thereto as trustee solely for the use
and benefit of the Holders in accordance with the provisions of this
agreement; and
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(e) except as specifically authorized by this agreement, have no power
or authority to exercise or otherwise deal in or with the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights,
and the Trustee shall not exercise any such rights for any purpose other
than the purposes for which this Trust is created pursuant to this
agreement.
5.2 Legended Share Certificates. Dreco will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Holders of:
(a) their right to instruct the Trustee with respect to the exercise
of the Exchange Put Right and the Exchange Right in respect of the
Exchangeable Shares held by a Holder; and
(b) the Automatic Exchange Rights.
5.3 General Exercise of Exchange Put Right and Exchange Right. The
Exchange Put Right and the Exchange Right shall be and remain vested in and
exercised by the Trustee. Subject to Section 7.15 hereof, the Trustee shall
exercise the Exchange Put Right and the Exchange Right only on the basis of
instructions received pursuant to this Article V from Holders entitled to
instruct the Trustee as to the exercise thereof. To the extent that no
instructions are received from a Holder with respect to the Exchange Put Right
and the Exchange Right, the Trustee shall not exercise or permit the exercise of
the Exchange Put Right and the Exchange Right.
5.4 Purchase Price. The purchase price payable by NOI for each
Exchangeable Share to be purchased by NOI (a) under the Exchange Put Right shall
be the amount determined under the Exchangeable Share Provisions, and (b) under
the Exchange Right shall be an amount equal to the Exchangeable Share Price on
the last Business Day prior to the day of closing of the purchase and sale of
such Exchangeable Share under the Exchange Right. In connection with each
exercise of the Exchange Right, NOI will provide to the Trustee an Officer's
Certificate setting forth the calculation of the applicable Exchangeable Share
Price for each Exchangeable Share. The applicable Exchangeable Share Price for
each such Exchangeable Share so purchased may be satisfied only by NOI's issuing
and delivering or causing to be delivered to the Trustee, on behalf of the
relevant Holder, the applicable Exchangeable Share Consideration representing
the total applicable Exchangeable Share Price.
5.5 Exercise Instructions. Subject to the terms and conditions herein set
forth, a Holder shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event, to instruct the Trustee to exercise the
Exchange Right with respect to all or any part of the Exchangeable Shares
registered in the name of such Holder on the books of Dreco. To cause the
exercise of the Exchange Right by the Trustee, the Holder shall deliver to the
Trustee, in person or by certified or registered mail, at its principal transfer
offices in Calgary, Alberta and Toronto, Ontario or at such other places in
Canada as the Trustee may from time to time designate by written notice to the
Holders, the certificates representing the Exchangeable Shares which such Holder
desires NOI to purchase, duly endorsed in blank, and accompanied by such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of Dreco and such additional
documents and instruments as the Trustee may reasonably require, together with:
(a) a duly completed form of notice of exercise of the Exchange Right,
contained on the reverse of or attached to the Exchangeable Share
certificates, stating:
(i) that the Holder thereby instructs the Trustee to exercise the
Exchange Right so as to require NOI to purchase from the Holder the
number of Exchangeable Shares specified therein,
(ii) that such Holder has good title to and owns all such
Exchangeable Shares to be acquired by NOI free and clear of all liens,
claims, encumbrances, security interests and adverse claims or
interests,
(iii) the names in which the certificates representing NOI Common
Stock issuable in connection with the exercise of the Exchange Right are
to be issued, and
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(iv) the names and addresses of the persons to whom the
Exchangeable Share Consideration should be delivered; and
(b) payment (or evidence satisfactory to the Trustee, Dreco and NOI of
payment) of the taxes (if any) payable as contemplated by Section 5.8 of
this agreement.
If only a part of the Exchangeable Shares represented by any certificate or
certificates delivered to the Trustee are to be purchased by NOI under the
Exchange Right, a new certificate for the balance of such Exchangeable Shares
shall be issued to the Holder at the expense of Dreco.
5.6 Delivery of Exchangeable Share Consideration; Effect of
Exercise. Promptly after receipt of the certificates representing the
Exchangeable Shares which the Holder desires NOI to purchase under the Exchange
Put Right or the Exchange Right (together with such documents and instruments of
transfer and a duly completed form of notice of exercise of the Exchange Put
Right or the Exchange Right), duly endorsed for transfer to NOI, the Trustee
shall notify NOI and Dreco of its receipt of the same, which notice to NOI and
Dreco shall constitute exercise of the Exchange Put Right or the Exchange Right
by the Trustee on behalf of the Holder of such Exchangeable Shares, and NOI
shall immediately thereafter deliver or cause to be delivered to the Trustee,
for delivery to the Holder of such Exchangeable Shares (or to such other
persons, if any, properly designated by such Holder), the Exchangeable Share
Consideration deliverable in connection with the exercise of the Exchange Put
Right or the Exchange Right; provided, however, that no such delivery shall be
made unless and until the Holder requesting the same shall have paid (or
provided evidence satisfactory to the Trustee, Dreco and NOI of the payment of)
the taxes (if any) payable as contemplated by Section 5.8 of this agreement.
Immediately upon the giving of notice by the Trustee to NOI and Dreco of the
exercise of the Exchange Put Right or the Exchange Right, as provided in this
Section 5.6, (a) the closing of the transaction of purchase and sale
contemplated by the Exchange Put Right or the Exchange Right shall be deemed to
have occurred, (b) NOI shall be required to take all action necessary to permit
it to occur, including delivery to the Trustee of the relevant Exchangeable
Share Consideration, no later than the close of business on the third Business
Day following the receipt by the Trustee of notice, certificates and other
documents as aforesaid and (c) the Holder of such Exchangeable Shares shall be
deemed to have transferred to NOI all of its right, title and interest in and to
such Exchangeable Shares and the related interest in the Trust Estate, shall
cease to be a holder of such Exchangeable Shares and shall not be entitled to
exercise any of the rights of a holder in respect thereof, other than the right
to receive his proportionate part of the total purchase price therefor, unless
such Exchangeable Share Consideration is not delivered by NOI to the Trustee by
the date specified above, in which case the rights of the Holder shall remain
unaffected until such Exchangeable Share Consideration is delivered by NOI and
any check included therein is paid. Concurrently with such Holder ceasing to be
a holder of Exchangeable Shares, the Holder shall be considered and deemed for
all purposes to be the holder of the shares of NOI Common Stock delivered to it
pursuant to the Exchange Put Right or the Exchange Right. Notwithstanding the
foregoing until the Exchangeable Share Consideration is delivered to the Holder,
the Holder shall be deemed to still be a holder of the sold Exchangeable Shares
for purposes of voting rights with respect thereto under this agreement.
5.7 Exercise of Exchange Right Subsequent to Retraction. In the event that
a Holder has exercised its right under Article 6 of the Exchangeable Share
Provisions to require Dreco to redeem any or all of the Exchangeable Shares held
by the Holder (the "Retracted Shares") and is notified by Dreco pursuant to
Section 6.6 of the Exchangeable Share Provisions that Dreco will not be
permitted as a result of liquidity or solvency requirements of applicable law to
redeem all such Retracted Shares, subject to receipt by the Trustee of written
notice to that effect from Dreco and provided that NOI shall not have exercised
the Retraction Call Right with respect to the Retracted Shares and that the
Holder has not revoked the retraction request delivered by the Holder to Dreco
pursuant to Section 6.1 of the Exchangeable Share Provisions, the retraction
request will constitute and will be deemed to constitute notice from the Holder
to the Trustee instructing the Trustee to exercise the Exchange Right with
respect to those Retracted Shares which Dreco is unable to redeem. In any such
event, Dreco hereby agrees with the Trustee and in favor of the Holder
immediately to notify the Trustee of such prohibition against Dreco's redeeming
all of the Retracted Shares and immediately to forward or cause to be forwarded
to the Trustee all relevant materials delivered by the Holder to Dreco or to
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the transfer agent of the Exchangeable Shares (including without limitation a
copy of the retraction request delivered pursuant to Section 6.1 of the
Exchangeable Share Provisions) in connection with such proposed redemption of
the Retracted Shares, and the Trustee will thereupon exercise the Exchange Right
with respect to the Retracted Shares which Dreco is not permitted to redeem and
will require NOI to purchase such shares in accordance with the provisions of
this Article V.
5.8 Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares to
NOI pursuant to the Exchange Put Right, the Exchange Right or the Automatic
Exchange Rights, the share certificate or certificates representing NOI Common
Stock to be delivered in connection with the payment of the total purchase price
therefor shall be issued in the name of the Holder of the Exchangeable Shares so
sold or in such names as such Holder may otherwise direct in writing without
charge to the holder of the Exchangeable Shares so sold, provided, however, that
such Holder:
(a) shall pay (and neither NOI, Dreco nor the Trustee shall be
required to pay) any documentary, stamp, transfer or other similar taxes
that may be payable in respect of any transfer involved in the issuance or
delivery of such shares to a person other than such Holder; or
(b) shall have established to the satisfaction of the Trustee, NOI and
Dreco that such taxes, if any, have been paid.
5.9 Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event which with the giving of notice or the passage of
time or both would be an Insolvency Event, Dreco and NOI shall give written
notice thereof to the Trustee. As soon as practicable after receiving notice
from Dreco or NOI of the occurrence of an Insolvency Event, the Trustee will
mail to each Holder, at the expense of NOI, a notice of such Insolvency Event in
the form provided by NOI, which notice shall contain a brief statement of the
right of the Holders with respect to the Exchange Right.
5.10 Qualification of NOI Common Stock. NOI covenants that if any shares
of NOI Common Stock to be issued and delivered pursuant to the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights require registration
or qualification with or approval of or the filing of any document including any
prospectus or similar document, the taking of any proceeding with or the
obtaining of any order, ruling or consent from any governmental or regulatory
authority under any Canadian or United States federal, provincial or state law
or regulation or pursuant to the rules and regulations of any regulatory
authority, or the fulfillment of any other legal requirement (collectively, the
"Applicable Laws") before such shares may be issued and delivered by NOI to the
initial holder thereof (other than Dreco) or in order that such shares may be
freely traded thereafter (other than any restrictions on transfer by reason of a
holder being a "control person" of NOI for purposes of Canadian federal or
provincial securities law or an "affiliate" of NOI for purposes of United States
federal or state securities law), NOI will in good faith expeditiously take all
such actions and do all such things as are necessary to cause such shares of NOI
Common Stock to be and remain duly registered, qualified or approved. NOI
represents and warrants that it has in good faith taken all actions and done all
things as are necessary under Applicable Laws as they exist on the date hereof
to cause the shares of NOI Common Stock to be issued and delivered pursuant to
the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights and
to be freely tradeable thereafter (other than restrictions on transfer by reason
of a holder being a "control person" of NOI for the purposes of Canadian federal
and provincial securities law or an "affiliate" of NOI for the purposes of
United States federal or state securities law). NOI will in good faith
expeditiously take all such actions and do all such things as are necessary to
cause all shares of NOI Common Stock to be delivered pursuant to the Exchange
Put Right, the Exchange Right or the Automatic Exchange Rights to be listed,
quoted or posted for trading on all stock exchanges and quotation systems on
which such shares are listed, quoted or posted for trading at such time.
5.11 Reservation of Shares of NOI Common Stock. NOI hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will at
all times keep available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of shares of NOI Common Stock:
(a) as is equal to the sum of
(i) the number of Exchangeable Shares issued and outstanding from
time to time and
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(ii) the number of Exchangeable Shares issuable upon the exercise
of all rights to acquire Exchangeable Shares outstanding from time to
time and
(b) as are now and may hereafter be required to enable and permit
Dreco to meet its obligations hereunder, under the Amended and Restated
Certificate of Incorporation of NOI, under the Support Agreement, under the
Exchangeable Share Provisions and under any other security or commitment
pursuant to the Arrangement with respect to which NOI may now or hereafter
be required to issue shares of NOI Common Stock.
5.12 Automatic Exchange on Liquidation of NOI.
(a) NOI will give the Trustee written notice of each of the following
events at the time set forth below:
(i) in the event of any determination by the board of directors of the
NOI to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to NOI or to effect any other distribution of
assets of NOI among its stockholders for the purpose of winding up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of
(A) receipt by NOI of notice of and
(B) NOI's otherwise becoming aware of any threatened or instituted
claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of NOI or to effect
any other distribution of assets of NOI among its stockholders for the
purpose of winding up its affairs.
(b) Immediately following receipt by the Trustee from NOI of notice of any
event (a "Liquidation Event") contemplated by Section 5.12(a) above, the Trustee
will give notice thereof to the Holders. Such notice will be provided by NOI to
the Trustee and shall include a brief description of the automatic exchange of
Exchangeable Shares for shares of NOI Common Stock provided for in Section
5.12(c) below.
(c) In order that the Holders will be able to participate on a pro rata
basis with the holders of NOI Common Stock in the distribution of assets of NOI
in connection with a Liquidation Event, immediately prior to the effective time
(the "Liquidation Event Effective Time") of a Liquidation Event, all of the then
outstanding Exchangeable Shares shall be automatically exchanged for shares of
NOI Common Stock. To effect such automatic exchange, NOI shall be deemed to have
purchased each Exchangeable Share outstanding immediately prior to the
Liquidation Event Effective Time and held by Holders, and each Holder shall be
deemed to have sold the Exchangeable Shares held by it at such time, for a
purchase price per share equal to the Exchangeable Share Price applicable at
such time. In connection with such automatic exchange, NOI will provide to the
Trustee an Officer's Certificate setting forth the calculation of the purchase
price for each Exchangeable Share.
(d) The closing of the transaction of purchase and sale contemplated by
Section 5.12(c) above shall be deemed to have occurred immediately prior to the
Liquidation Event Effective Time, and each Holder of Exchangeable Shares shall
be deemed to have transferred to NOI all of the Holder's right, title and
interest in and to such Exchangeable Shares and the related interest in the
Trust Estate and shall cease to be a holder of such Exchangeable Shares, and NOI
shall deliver to the Holder the Exchangeable Share Consideration deliverable
upon the automatic exchange of Exchangeable Shares. Concurrently with such
Holder's ceasing to be a holder of Exchangeable Shares, the Holder shall be
considered and deemed for all purposes to be the holder of the shares of NOI
Common Stock issued to it pursuant to the automatic exchange of Exchangeable
Shares for NOI Common Stock, and the certificates held by the Holder previously
representing the Exchangeable Shares exchanged by the Holder with NOI pursuant
to such automatic exchange shall thereafter be deemed to represent the shares of
NOI Common Stock issued to the Holder by NOI pursuant to such automatic
exchange. Upon the request of a Holder and the surrender by the Holder of
Exchangeable Share certificates deemed to represent shares of NOI Common Stock,
duly endorsed in blank and accompanied by such instruments of transfer as NOI
may reasonably require, NOI shall deliver or cause to be delivered to the Holder
certificates representing the shares of NOI Common Stock of which the Holder is
the
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holder. Notwithstanding the foregoing, until each Holder is actually entered on
the register of holders of NOI Common Stock, such Holder shall be deemed to
still be a holder of the transferred Exchangeable Shares for purposes of all
voting rights with respect thereto under this agreement.
ARTICLE VI
RESTRICTIONS ON ISSUANCE OF NOI SPECIAL VOTING STOCK
During the term of this agreement, NOI will not issue any shares of NOI
Special Voting Stock in addition to the Voting Share.
ARTICLE VII
CONCERNING THE TRUSTEE
7.1 Powers and Duties of the Trustee. The rights, powers and authorities
of the Trustee under this agreement, in its capacity as trustee of the Trust,
shall include:
(a) receipt and deposit of the Voting Share from NOI as trustee for
and on behalf of the Holders in accordance with the provisions of this
agreement;
(b) granting proxies and distributing materials to Holders as provided
in this agreement;
(c) voting the Holder Votes in accordance with the provisions of this
agreement;
(d) receiving the grant of the Exchange Put Right, the Exchange Right
and the Automatic Exchange Rights from NOI as trustee for and on behalf of
the Holders in accordance with the provisions of this agreement;
(e) exercising the Exchange Put Right and the Exchange Right and
enforcing the benefit of the Automatic Exchange Rights, in each case in
accordance with the provisions of this agreement, and in connection
therewith receiving from Holders Exchangeable Shares and other requisite
documents and distributing to such Holders the shares of NOI Common Stock
and checks, if any, to which such Holders are entitled upon the exercise of
the Exchange Put Right and the Exchange Right or pursuant to the Automatic
Exchange Rights, as the case may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the
Trust Estate as provided in this agreement;
(h) taking action at the direction of a Holder or Holders to enforce
the obligations of NOI under this agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this agreement.
In the exercise of such rights, powers and authorities the Trustee shall
have (and is granted) such incidental and additional rights, powers and
authority not in conflict with any of the provisions of this agreement as the
Trustee, acting in good faith and in the reasonable exercise of its discretion,
may deem necessary, appropriate or desirable to effect the purpose of the Trust.
Any exercise of such discretionary rights, powers and authorities by the Trustee
shall be final, conclusive and binding upon all persons. For greater certainty,
the Trustee shall have only those duties as are set out specifically in this
agreement. The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith with a view to the best interests
of the Holders and shall exercise the care, diligence and skill that a
reasonably prudent trustee would exercise in comparable circumstances. The
Trustee shall not be bound to give any notice or do or take any act, action or
proceeding by virtue of the powers conferred on it hereby unless and until it
shall be specifically required to do so under the terms hereof; nor shall the
Trustee be required to take any notice of, or to do or to take any act, action
or proceeding as a result of any default or breach of any provision hereunder,
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unless and until notified in writing of such default or breach, which notices
shall distinctly specify the default or breach desired to be brought to the
attention of the Trustee and in the absence of such notice the Trustee may for
all purposes of this agreement conclusively assume that no default or breach has
been made in the observance or performance of any of the representations,
warranties, covenants, agreements or conditions contained herein.
7.2 No Conflict of Interest. The Trustee represents to Dreco and NOI that
at the date of execution and delivery of this agreement there exists no material
conflict of interest in the role of the Trustee as a fiduciary hereunder and the
role of the Trustee in any other capacity. The Trustee shall, within 90 days
after it becomes aware that such a material conflict of interest exists, either
eliminate such material conflict of interest or resign in the manner and with
the effect specified in Article X hereof. If, notwithstanding the foregoing
provisions of this Section 7.2, the Trustee has such a material conflict of
interest, the validity and enforceability of this agreement shall not be
affected in any manner whatsoever by reason only of the existence of such
material conflict of interest. If the Trustee contravenes the foregoing
provisions of this Section 7.2, any interested party may apply to the superior
court of the province in which Dreco has its registered office for an order that
the Trustee be replaced as trustee hereunder.
7.3 Dealings with Transfer Agents, Registrars, Etc. Dreco and NOI
irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and NOI Common Stock; and
(b) requisition, from time to time,
(i) from any such registrar or transfer agent any information
readily available from the records maintained by it which the Trustee
may reasonably require for the discharge of its duties and
responsibilities under this agreement and
(ii) from the transfer agent of NOI Common Stock, and any
subsequent transfer agent of such shares, to complete the exercise from
time to time of the Exchange Put Right, the Exchange Right and the
Automatic Exchange Rights in the manner specified in Article V hereof,
the share certificates issuable upon such exercise.
Dreco and NOI irrevocably authorize their respective registrars and
transfer agents to comply with all such requests. NOI covenants that it will
supply its transfer agent with duly executed share certificates for the purpose
of completing the exercise from time to time of the Exchange Put Right, the
Exchange Right and the Automatic Exchange Rights, in each case pursuant to
Article V hereof.
7.4 Books and Records. The Trustee shall keep available for inspection by
NOI and Dreco, at the Trustee's principal transfer office in Calgary, Alberta,
correct and complete books and records of account relating to the Trustee's
actions under this agreement, including without limitation all information
relating to mailings and instructions to and from Holders and all transactions
pursuant to the Voting Rights, the Exchange Put Right, the Exchange Right and
the Automatic Exchange Rights for the term of this agreement. On or before March
31, 1998, and on or before March 31 in every year thereafter, so long as the
Voting Share is on deposit with the Trustee, the Trustee shall transmit to NOI
and Dreco a brief report, dated as of the preceding December 31, with respect
to:
(a) property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Put Right and the Exchange
Right, if any, and the aggregate number of Exchangeable Shares received by
the Trustee on behalf of Holders in consideration of the issue and delivery
by NOI of shares of NOI Common Stock in connection with the Exchange Put
Right and the Exchange Right, during the calendar year ended on such date;
and
(c) all other actions taken by the Trustee in the performance of its
duties under this agreement which it had not previously reported.
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7.5 Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States and
Canadian income tax returns and any other returns or reports as may be required
by applicable law or pursuant to the rules and regulations of any securities
exchange or other trading system through which the Exchangeable Shares are
traded and, in connection therewith, may obtain the advice and assistance of
such experts as the Trustee may consider necessary or advisable. If requested by
the Trustee, NOI shall retain such experts for purposes of providing such advice
and assistance.
7.6 Indemnification Prior to Certain Actions by Trustee. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it by
this agreement at the request, order or direction of any Holder upon such
Holder's furnishing to the Trustee reasonable funding, security and indemnity
against the costs, expenses and liabilities which may be incurred by the Trustee
therein or thereby; provided that no Holder shall be obligated to furnish to the
Trustee any such funding, security or indemnity in connection with the exercise
by the Trustee of any of its rights, duties, powers and authorities with respect
to the Voting Share pursuant to Article IV hereof, subject to Section 7.15
hereof, and with respect to the Exchange Put Right and the Exchange Right
pursuant to Article V hereof, subject to Section 7.15 hereof, and with respect
to the Automatic Exchange Rights pursuant to Article V hereof. None of the
provisions contained in this agreement shall require the Trustee to expend or
risk its own funds or otherwise incur financial liability in the exercise of any
of its rights, powers, duties or authorities unless funded, given funds,
security and indemnified as aforesaid.
7.7 Actions by Holders. No Holder shall have the right to institute any
action, suit or proceeding or to exercise any other remedy authorized by this
agreement for the purpose of enforcing any of its rights or for the execution of
any trust or power hereunder unless the Holder has requested the Trustee to take
or institute such action, suit or proceeding and furnished the Trustee with the
funding, security and indemnity referred to in Section 7.6 hereof and the
Trustee shall have failed to act within a reasonable time thereafter. In such
case, but not otherwise, the Holder shall be entitled to take proceedings in any
court of competent jurisdiction such as the Trustee might have taken; it being
understood and intended that no one or more Holders shall have any right in any
manner whatsoever to affect, disturb or prejudice the rights hereby created by
any such action, or to enforce any right hereunder or under the Voting Rights,
the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights,
except subject to the conditions and in the manner herein provided, and that all
powers and trusts hereunder shall be exercised and all proceedings at law shall
be instituted, had and maintained by the Trustee, except only as herein
provided, and in any event for the equal benefit of all Holders.
7.8 Reliance upon Declarations. The Trustee shall not be considered to be
in contravention of any of its rights, powers, duties and authorities hereunder
if, when required, it acts and relies in good faith upon lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other papers
or documents furnished pursuant to the provisions hereof or required by the
Trustee to be furnished to it in the exercise of its rights, powers, duties and
authorities hereunder, and such lists, mailing labels, notices, statutory
declarations, certificates, opinions, reports or other papers or documents
comply with the provisions of Section 7.9 hereof, if applicable, and with any
other applicable provisions of this agreement.
7.9 Evidence and Authority to Trustee. Dreco and/or NOI shall furnish to
the Trustee evidence of compliance with the conditions provided for in this
agreement relating to any action or step required or permitted to be taken by
Dreco and/or NOI or the Trustee under this agreement or as a result of any
obligation imposed under this agreement, including, without limitation, in
respect of the Voting Rights or the Exchange Put Right, the Exchange Right or
the Automatic Exchange Rights and the taking of any other action to be taken by
the Trustee at the request of or on the application of Dreco and/or NOI
forthwith if and when:
(a) such evidence is required by any other section of this agreement
to be furnished to the Trustee in accordance with the terms of this Section
7.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this agreement, gives Dreco and/or NOI written notice
requiring it to furnish such evidence in relation to any particular action
or obligation specified in such notice.
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Such evidence shall consist of an Officer's Certificate of Dreco and/or NOI
or a statutory declaration or a certificate made by persons entitled to sign an
Officer's Certificate stating that any such condition has been complied with in
accordance with the terms of this agreement.
Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, and
except as otherwise specifically provided herein, such evidence may consist of a
report or opinion of any solicitor, auditor, accountant, appraiser, valuer,
engineer or other expert or any other person whose qualifications give authority
to a statement made by him, provided that if such report or opinion is furnished
by a director, officer or employee of Dreco and/or NOI it shall be in the form
of an Officer's Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this
agreement shall include a statement by the person giving the evidence:
(i) declaring that he has read and understands the provisions of this
agreement relating to the condition in question;
(ii) describing the nature and scope of the examination or
investigation upon which he based the statutory declaration, certificate,
statement or opinion; and
(iii) declaring that he has made such examination or investigation as
he believes is necessary to enable him to make the statements or give the
opinions contained or expressed therein.
7.10 Experts, Advisers and Agents. The Trustee may:
(a) in relation to these presents act and rely on the opinion or
advice of or information obtained from or prepared by any solicitor,
auditor, accountant, appraiser, valuer, engineer or other expert, whether
retained by the Trustee or by Dreco and/or NOI or otherwise, and may employ
such assistants as may be necessary to the proper determination and
discharge of its powers and duties and determination of its rights
hereunder and may pay proper and reasonable compensation for all such legal
and other advice or assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably
require for the proper determination and discharge of its powers and duties
hereunder, and may pay reasonable remuneration for all services performed
for it (and shall be entitled to receive reasonable remuneration for all
services performed by it) in the discharge of the trusts hereof and
compensation for all disbursements, costs and expenses made or incurred by
it in the determination and discharge of its duties hereunder and in the
management of the Trust.
7.11 Investment of Moneys Held by Trustee. Unless otherwise provided in
this agreement, any moneys held by or on behalf of the Trustee which under the
terms of this agreement may or ought to be invested or which may be on deposit
with the Trustee or which may be in the hands of the Trustee, may be invested
and reinvested in the name or under the control of the Trustee in securities in
which, under the laws of the Province of Alberta, trustees are authorized to
invest trust moneys; provided that such securities are stated to mature within
two years after their purchase by the Trustee, and the Trustee shall so invest
such moneys on the written direction of Dreco. Pending the investment of any
moneys as hereinbefore provided, such moneys may be deposited in the name of the
Trustee in any chartered bank in Canada or, with the consent of Dreco, in the
deposit department of the Trustee or any other loan or trust company authorized
to accept deposits under the laws of Canada or any province thereof at the rate
of interest then current on similar deposits.
7.12 Trustee Not Required to Give Security. The Trustee shall not be
required to give any bond or security in respect of the execution of the trusts,
rights, duties, powers and authorities of this agreement or otherwise in respect
of the premises.
7.13 Trustee Not Bound to Act on Request. Except as in this agreement
otherwise specifically provided, the Trustee shall not be bound to act in
accordance with any direction or request of Dreco and/or NOI or of the directors
thereof until a duly authenticated copy of the instrument or resolution
containing such direction
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or request shall have been delivered to the Trustee, and the Trustee shall be
empowered to act and rely upon any such copy purporting to be authenticated and
believed by the Trustee to be genuine.
7.14 Authority to Carry on Business. The Trustee represents to Dreco and
NOI that at the date of execution and delivery by it of this agreement it is
authorized to carry on the business of a trust company in the Province of
Alberta but if, notwithstanding the provisions of this Section 7.14, it ceases
to be so authorized to carry on business, the validity and enforceability of
this agreement and the Voting Rights, the Exchange Put Right, the Exchange Right
and the Automatic Exchange Rights shall not be affected in any manner whatsoever
by reason only of such event; provided, however, the Trustee shall, within 90
days after ceasing to be authorized to carry on the business of a trust company
in the Province of Alberta, either become so authorized or resign in the manner
and with the effect specified in Article X hereof.
7.15 Conflicting Claims. If conflicting claims or demands are made or
asserted with respect to any interest of any Holder in any Exchangeable Shares,
including any disagreement between the heirs, representatives, successors or
assigns succeeding to all or any part of the interest of any Holder in any
Exchangeable Shares resulting in conflicting claims or demands being made in
connection with such interest, then the Trustee shall be entitled, at its sole
discretion, to refuse to recognize or to comply with any such claim or demand.
In so refusing, the Trustee may elect not to exercise any Voting Rights,
Exchange Put Right, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands and, in so doing, the Trustee shall not be or
become liable to any person on account of such election or its failure or
refusal to comply with any such conflicting claims or demands. The Trustee shall
be entitled to continue to refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Put Right, Exchange Right or Automatic Exchange Rights
subject to such conflicting claims or demands have been adjudicated by a
final judgment of a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Put
Right, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands have been conclusively settled by a valid
written agreement binding on all such adverse claimants, and the Trustee
shall have been furnished with an executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made
by any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
7.16 Acceptance of Trust. The Trustee hereby accepts the Trust created and
provided for by and in this agreement and agrees to perform the same upon the
terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who shall
from time to time be Holders, subject to all the terms and conditions herein set
forth.
ARTICLE VIII
COMPENSATION
NOI and Dreco jointly and severally agree to pay to the Trustee reasonable
compensation for all of the services rendered by it under this agreement and
will reimburse the Trustee for all reasonable expenses (including but not
limited to taxes, compensation paid to experts, agents and advisors and travel
expenses) and disbursements, including the cost and expense of any suit or
litigation of any character and any proceedings before any governmental agency,
reasonably incurred by the Trustee in connection with its rights and duties
under this agreement; provided that NOI and Dreco shall have no obligation to
reimburse the Trustee for any expenses or disbursements paid, incurred or
suffered by the Trustee in any suit or litigation in which the Trustee is
determined to have acted in bad faith or with negligence or willful misconduct.
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ARTICLE IX
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 Indemnification of the Trustee. NOI and Dreco jointly and severally
agree to indemnify and hold harmless the Trustee and each of its directors,
officers, employees and agents appointed and acting in accordance with this
agreement (collectively, the "Indemnified Parties") against all claims, losses,
damages, costs, penalties, fines and reasonable expenses (including reasonable
expenses of the Trustee's legal counsel) which, without fraud, negligence,
willful misconduct or bad faith on the part of such Indemnified Party, may be
paid, incurred or suffered by the Indemnified Party by reason of or as a result
of the Trustee's acceptance or administration of the Trust, its compliance with
its duties set forth in this agreement, or any written or oral instructions
delivered to the Trustee by NOI or Dreco pursuant hereto. In no case shall NOI
or Dreco be liable under this indemnity for any claim against any of the
Indemnified Parties unless NOI and Dreco shall be notified by the Trustee of the
written assertion of a claim or of any action commenced against the Indemnified
Parties, promptly after any of the Indemnified Parties shall have received any
such written assertion of a claim or shall have been served with a summons or
other first legal process giving information as to the nature and basis of the
claim. Subject to (i) below, NOI and Dreco shall be entitled to participate at
their own expense in the defense and, if NOI or Dreco so elect at any time after
receipt of such notice, either of them may assume the defense of any suit
brought to enforce any such claim. The Trustee shall have the right to employ
separate counsel in any such suit and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the Trustee
unless: (i) the employment of such counsel has been authorized by NOI or Dreco,
such authorization not to be unreasonably withheld; or (ii) the named parties to
any such suit include both the Trustee and NOI or Dreco and the Trustee shall
have been advised by counsel acceptable to NOI or Dreco that there may be one or
more legal defenses available to the Trustee that are different from or in
addition to those available to NOI or Dreco and that an actual or potential
conflict of interest exists (in which case NOI and Dreco shall not have the
right to assume the defense of such suit on behalf of the Trustee, but shall be
liable to pay the reasonable fees and expenses of counsel for the Trustee).
9.2 Limitation of Liability. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
agreement, except to the extent that such loss is attributable to the fraud,
negligence, willful misconduct or bad faith on the part of the Trustee.
ARTICLE X
CHANGE OF TRUSTEE
10.1 Resignation. The Trustee, or any trustee hereafter appointed, may at
any time resign by giving written notice of such resignation to NOI and Dreco
specifying the date on which it desires to resign, provided that such notice
shall never be given less than 60 days before such desired resignation date
unless NOI and Dreco otherwise agree and provided further that such resignation
shall not take effect until the date of the appointment of a successor trustee
and the acceptance of such appointment by the successor trustee. Upon receiving
such notice of resignation, NOI and Dreco shall promptly appoint a successor
trustee by written instrument in duplicate, one copy of which shall be delivered
to the resigning trustee and one copy to the successor trustee. Failing
acceptance by a successor trustee, a successor trustee may be appointed by an
order of the superior court of the province in which Dreco has its registered
office upon application of one or more of the parties hereto.
10.2 Removal. The Trustee, or any trustee hereafter appointed, may be
removed with or without cause, at any time on 60 days' prior notice by written
instrument executed by NOI and Dreco, in duplicate, one copy of which shall be
delivered to the trustee so removed and one copy to the successor trustee,
provided that, in connection with such removal, provision is made for a
replacement trustee similar to that contemplated in Section 10.1.
10.3 Successor Trustee. Any successor trustee appointed as provided under
this agreement shall execute, acknowledge and deliver to NOI and Dreco and to
its predecessor trustee an instrument accepting
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such appointment. Thereupon the resignation or removal of the predecessor
trustee shall become effective and such successor trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, duties
and obligations of its predecessor under this agreement, with like effect as if
originally named as trustee in this agreement. However, on the written request
of NOI and Dreco or of the successor trustee, the trustee ceasing to act shall,
upon payment of any amounts then due it pursuant to the provisions of this
agreement, execute and deliver an instrument transferring to such successor
trustee all the rights and powers of the trustee so ceasing to act. Upon the
request of any such successor trustee, NOI, Dreco and such predecessor trustee
shall execute any and all instruments in writing for more fully and certainly
vesting in and confirming to such successor trustee all such rights and powers.
10.4 Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, NOI and Dreco shall cause to be mailed
notice of the succession of such trustee hereunder to each Holder specified in a
List. If NOI or Dreco shall fail to cause such notice to be mailed within 10
days after acceptance of appointment by the successor trustee, the successor
trustee shall cause such notice to be mailed at the expense of NOI and Dreco.
ARTICLE XI
NOI SUCCESSORS
11.1 Certain Requirements in Respect of Combination, Etc. NOI shall not
enter into any transaction (whether by way of reconstruction, reorganization,
consolidation, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other Person or, in the case of a merger, of the continuing
corporation resulting therefrom, but may do so if:
(a) such other Person or continuing corporation (the "NOI Successor"),
by operation of law, becomes, without more, bound by the terms and
provisions of this agreement or, if not so bound, executes, prior to or
contemporaneously with the consummation of such transaction an agreement
supplemental hereto and such other instruments (if any) as are satisfactory
to the Trustee and in the opinion of legal counsel to the Trustee are
necessary or advisable to evidence the assumption by the NOI Successor of
liability for all moneys payable and property deliverable hereunder, the
covenant of such NOI Successor to pay and deliver or cause to be delivered
the same and its agreement to observe and perform all the covenants and
obligations of NOI under this agreement; and
(b) such transaction shall, to the satisfaction of the Trustee and in
the opinion of legal counsel to the Trustee, be upon such terms which
substantially preserve and do not impair in any material respect any of the
rights, duties, powers and authorities of the Trustee or of the Holders
hereunder.
11.2 Vesting of Powers in Successor. Whenever the conditions of Section
11.1 hereof have been duly observed and performed, the Trustee, if required by
Section 11.1 hereof, the NOI Successor and Dreco shall execute and deliver the
supplemental agreement provided for in Article XII hereof, and thereupon the NOI
Successor shall possess and from time to time may exercise each and every right
and power of NOI under this agreement in the name of NOI or otherwise and any
act or proceeding by any provision of this agreement required to be done or
performed by the board of directors of NOI or any officers of NOI may be done
and performed with like force and effect by the directors or officers of such
NOI Successor.
11.3 Wholly-owned Subsidiaries. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of NOI with
or into NOI or the winding-up, liquidation or dissolution of any wholly-owned
subsidiary of NOI provided that all of the assets of such subsidiary are
transferred to NOI or another wholly-owned subsidiary of NOI, and any such
transactions are expressly permitted by this Article XI.
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ARTICLE XII
AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
12.1 Amendments, Modifications, Etc. Subject to Section 12.4, this
agreement may not be amended, modified or waived except by an agreement in
writing executed by Dreco, NOI and the Trustee and approved by the Holders in
accordance with Section 10.1 of the Exchangeable Share Provisions. No amendment
to or modification or waiver of any of the provisions of this agreement
otherwise permitted hereunder shall be effective unless made in writing and
signed by all of the parties hereto.
12.2 Ministerial Amendments. Notwithstanding the provisions of Section
12.1 hereof, the parties to this agreement may in writing, at any time and from
time to time, without the approval of the Holders, amend or modify this
agreement for the purposes of:
(a) adding to the covenants of any or all of the parties hereto for
the protection of the Holders hereunder;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of NOI
and Dreco and in the opinion of the Trustee and its counsel, having in mind
the best interests of the Holders as a whole, it may be expedient to make,
provided that such boards of directors and the Trustee and its counsel
shall be of the opinion that such amendments and modifications will not be
prejudicial to the interests of the Holders as a whole; or
(c) making such changes or corrections which, on the advice of counsel
to Dreco, NOI and the Trustee, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error; provided that the Trustee and its
counsel and the board of directors of each of Dreco and NOI shall be of the
opinion that such changes or corrections will not be prejudicial to the
interests of the Holders as a whole.
12.3 Meeting to Consider Amendments. Dreco, at the request of NOI, shall
call a meeting or meetings of the Holders for the purpose of considering any
proposed amendment or modification requiring approval pursuant hereto. Any such
meeting or meetings shall be called and held in accordance with the by-laws of
Dreco, the Exchangeable Share Provisions and all applicable laws.
12.4 Changes in Capital of NOI and Dreco. At all times after the
occurrence of any event effected pursuant to Section 2.7 or Section 2.8 of the
Support Agreement, as a result of which either NOI Common Stock or the
Exchangeable Shares or both are in any way changed, this agreement shall
forthwith be amended and modified as necessary in order that it shall apply with
full force and effect, mutatis mutandis, to all new securities into which NOI
Common Stock or the Exchangeable Shares or both are so changed, and the parties
hereto shall execute and deliver a supplemental agreement giving effect to and
evidencing such necessary amendments and modifications.
12.5 Execution of Supplemental Agreements. From time to time Dreco (when
authorized by a resolution of its Board of Directors), NOI (when authorized by a
resolution of its board of directors) and the Trustee may, subject to the
provisions of these presents, and they shall, when so directed by these
presents, execute and deliver by their proper officers, agreements or other
instruments supplemental hereto, which thereafter shall form part hereof, for
any one or more of the following purposes:
(a) evidencing the succession of any NOI Successors to NOI and the
covenants of and obligations assumed by each such NOI Successor in
accordance with the provisions of Article XI and the successor of any
successor trustee in accordance with the provisions of Article X;
(b) making any additions to, deletions from or alterations of the
provisions of this agreement or the Voting Rights, the Exchange Put Right,
the Exchange Right or the Automatic Exchange Rights which, in the opinion
of the Trustee and its counsel, will not be prejudicial to the interests of
the Holders as a whole or are in the opinion of counsel to the Trustee
necessary or advisable in order to incorporate, reflect
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or comply with any legislation the provisions of which apply to NOI, Dreco,
the Trustee or this agreement; and
(c) for any other purposes not inconsistent with the provisions of
this agreement, including without limitation to make or evidence any
amendment or modification to this agreement as contemplated hereby,
provided that, in the opinion of the Trustee and its counsel, the rights of
the Trustee and the Holders as a whole will not be prejudiced thereby.
ARTICLE XIII
TERMINATION
13.1 Term. The Trust created by this agreement shall continue until the
earliest to occur of the following events:
(a) no outstanding Exchangeable Shares are held by a Holder;
(b) each of Dreco and NOI elects in writing to terminate the Trust and
such termination is approved by the Holders of the Exchangeable Shares in
accordance with Section 10.1 of the Exchangeable Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants
of His Majesty King George VI of the United Kingdom of Great Britain and
Northern Ireland living on the date of the creation of the Trust.
13.2 Survival of Agreement. This agreement shall survive any termination
of the Trust and shall continue until there are no Exchangeable Shares
outstanding held by a Holder; provided, however, that the provisions of Articles
VIII and IX hereof shall survive any such termination of this agreement.
ARTICLE XIV
GENERAL
14.1 Severability. If any provision of this agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this agreement shall not in any way be affected or impaired
thereby, and the agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions.
14.2 Inurement. This agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Holders.
14.3 Notices to Parties. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in like
notice):
(a) if to NOI to: National-Oilwell, Inc., 5555 San Felipe, P.O. Box
4638 (77210), Houston, Texas 77210, Attention: President, Facsimile No.
713/960-5212, with required copies to Morgan, Lewis & Bockius LLP, 2000 One
Logan Square, Philadelphia, PA 19103, Attention: David R. King, Esq.,
Facsimile No. 215/963-5299, and to Stikeman, Elliott, Suite 5300, P.O. Box
85, Commerce Court West, Toronto, Ontario, Canada M5L 1B9, Attention: Ian
Douglas, Esq., Facsimile No. 416/947-0866.
(b) if to Dreco to: Dreco Energy Services Ltd., #1340 Weber Centre,
5555 Calgary Trail South, Edmonton, Alberta, Canada T6H 5P9, Attention:
President, Facsimile No. 403/438-8256, with required copies to Fulbright &
Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, TX 77010, Attention:
Robert F. Gray, Jr., Facsimile No. 713/651-5246, and to Blake, Cassels &
Graydon, 3500 Bankers Hill East, 855-2nd Street S.W., Calgary, Alberta,
Canada T2P 4J8, Attention: Patrick C. Finnerty, Esq., Facsimile No.
403/260-9700.
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(c) if to the Trustee to:
Any notice or other communication given personally shall be deemed
to have been given and received upon delivery thereof, and if given by
telecopy shall be deemed to have been given and received on the date of
receipt thereof unless such day is not a Business Day in which case it
shall be deemed to have been given and received upon the immediately
following Business Day.
14.4 Notice to Holders. Any and all notices to be given and any documents
to be sent to any Holders may be given or sent to the address of such Holder
shown on the register of Holders of Exchangeable Shares in any manner permitted
by the Exchangeable Share Provisions and shall be deemed to be received (if
given or sent in such manner) at the time specified in such Exchangeable Share
Provisions, the provisions of which Exchangeable Share Provisions shall apply
mutatis mutandis to notices or documents as aforesaid sent to such Holders.
14.5 Risk of Payments by Post. Whenever payments are to be made or
documents are to be sent to any Holder by the Trustee, by Dreco or by NOI or by
such Holder to the Trustee or to NOI or Dreco, the making of such payment or
sending of such document sent through the post shall be at the risk of Dreco or
NOI, in the case of payments made or documents sent by the Trustee or Dreco or
NOI, and the Holder, in the case of payments made or documents sent by the
Holder.
14.6 Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
14.7 Jurisdiction. This agreement shall be construed and enforced in
accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein.
14.8 Attornment. NOI agrees that any action or proceeding arising out of
or relating to this agreement may be instituted in the courts of Alberta, waives
any objection which it may have now or hereafter to the venue of any such action
or proceeding, irrevocably submits to the jurisdiction of such courts in any
such action or proceeding, agrees to be bound by any judgment of such courts and
agrees not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and hereby appoints Dreco at
its registered office in the Province of Alberta as NOI's attorney for service
of process.
G-21
246
IN WITNESS WHEREOF, the parties hereby have caused this agreement to be
duly executed as of the date first above written.
NATIONAL-OILWELL, INC.
By:
----------------------------------
Joel V. Staff
President
DRECO ENERGY SERVICES LTD.
By:
----------------------------------
Robert L. Phillips
President
TRUST COMPANY
By:
----------------------------------
[name]
[title]
G-22
247
ANNEX H
248
CORPORATE AND
INSTITUTIONAL
CLIENT GROUP
INVESTMENT BANKING
ONE HOUSTON CENTER
1221 MCKINNEY
SUITE 2700
[MERRILL LYNCH LOGO] HOUSTON, TEXAS 77010
May 13, 1997
Board of Directors
National-Oilwell, Inc.
5555 San Felipe
Houston, Texas 77056
Gentlemen:
National-Oilwell, Inc. (the "Company") and Dreco Energy Services Ltd.
("Dreco") propose to enter into a combination agreement (the "Combination
Agreement") and various ancillary agreements related thereto (collectively, the
"Agreements"), pursuant to which Dreco will combine with the Company (the
"Combination"), and holders of Dreco common stock, no par value per share
("Dreco Common Stock") will become entitled to receive either (i) shares of the
Company common stock, par value $.01 per share ("Company Common Stock"), or (ii)
shares of Dreco capital stock exchangeable into shares of Company Common Stock
in accordance with the terms of such exchangeable shares (the "Exchangeable
Shares"), in each case in amounts equal to the Exchange Ratio (as set forth in
the Combination Agreement).
You have asked us whether, in our opinion, the Exchange Ratio proposed to
be paid by the Company in the Combination is fair to the Company from a
financial point of view.
In arriving at the opinion set forth below, we have, among other things:
1) Reviewed certain publicly available business and financial information
relating to the Company and Dreco, which we deemed to be relevant;
2) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
the Company and Dreco furnished to us by the Company's and Dreco's
managements, as well as the amount and timing of the cost savings and
related expenses and synergies expected to result from the Combination
furnished to us by the management of the Company (the "Expected
Synergies");
3) Conducted discussions with members of senior management and
representatives of the Company and Dreco concerning their respective
businesses and prospects before and after giving effect to the
Combination;
4) Reviewed the historical market prices and valuation multiples for the
Company Common Stock and Dreco Common Stock and compared them with those
of certain publicly traded companies which we deemed to be relevant;
5) Reviewed the results of operations of the Company and Dreco and compared
them with those of certain companies which we deemed to be relevant;
6) Compared the proposed financial terms of the Combination with the
financial terms of certain other transactions which we deemed to be
relevant;
7) Reviewed the potential pro forma impact of the Combination on the
capitalization, earnings and cash flow of the Company;
8) Reviewed drafts dated May 12, 1997 of the Agreements; and
9) Reviewed such other financial studies and analyses and took into account
such other matters as we deemed necessary.
H-1
249
In preparing our opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of all information that
was publicly available or was supplied or otherwise made available to us by
Dreco and the Company, or otherwise reviewed by us, and we have not assumed any
responsibility or liability therefor. We have not conducted any valuation or
appraisal of any assets or liabilities of Dreco or the Company, nor have any
such valuations or appraisals been provided to us. In addition, we have not made
any physical inspections of the properties or assets of Dreco or the Company in
connection with this engagement. With respect to the financial forecasts
furnished by Dreco and the Company we have assumed that they have been
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by Dreco's and the Company's managements, respectively,
as to the expected future prospects of Dreco and the Company to which such
forecasts relate. We have further assumed that the estimates of Expected
Synergies furnished to us by management of the Company have been reasonably
prepared and reflect the best currently available estimates and judgments of the
Company's management. We have also assumed that the Combination will constitute
a reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended, and qualify for accounting treatment as a pooling of
interests.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. We are not expressing any opinion herein as to the price at which the
Company's Common Stock will trade following the announcement or consummation of
the Combination.
We have acted as financial advisor to the Company with respect to the
Combination and will receive a fee from the Company for our services, a
significant portion of which is contingent upon the consummation of the
Combination. We have, in the past, provided financing services to the Company
and financial advisory services to one of its principal stockholders, and may
continue to do so, and have received, and may receive, fees for such services.
In particular, we acted as the lead managing underwriter in the Company's
initial public offering of shares of common stock in October 1996. In connection
with that offering, we made certain investigations of the Company and became
generally familiar with its business at such time. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of our engagement. In
the ordinary course of our business, we or our affiliates may actively trade the
equity and debt securities of the Company and Dreco (including the Company
Common Stock and the Dreco Common Stock) for our or our affiliates' own account
and for the account of customers and, accordingly, may at any time hold a long
or short position in such securities.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Combination. This
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote with respect to the Combination. Except
as provided below, this opinion may not be reproduced, summarized, described or
referred to without Merrill Lynch's prior written consent. If this opinion is
included in the proxy statement to be mailed to the stockholders of the Company
in connection with the Combination, such opinion will be reproduced in such
proxy statement in full, and any description of or reference to Merrill Lynch or
summary of the opinion in such proxy statement will be in a form reasonably
acceptable to Merrill Lynch and its counsel.
On the basis of, and subject to the foregoing, we are of the opinion that
the Exchange Ratio proposed to be paid by the Company in the Combination is fair
to the Company from a financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ WILLIAM C. MONTGOMERY
--------------------------------
William C. Montgomery
Director
Investment Banking Group
H-2
250
ANNEX I
251
