SCHEDULE 14A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
(AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S) 240.14a-12
DRIL-QUIP, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[DRIL-QUIP LOGO]
Dril-Quip, Inc.
13550 Hempstead Highway
Houston, Texas 77040
April 3, 2003
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders to be
held at the Omni Houston Hotel Westside, 13210 Katy Freeway, Houston, Texas on
May 15, 2003 at 2:00 p.m. For those of you who cannot be present at this annual
meeting, we urge that you participate by indicating your choices on the
enclosed proxy and completing and returning it at your earliest convenience.
This booklet includes the notice of the meeting and the proxy statement,
which contains information about the Board of Directors and its committees and
personal information about the nominees for the Board. Other matters on which
action is expected to be taken during the meeting are also described.
It is important that your shares are represented at the meeting, whether or
not you are able to attend personally. Accordingly, please sign, date and mail
promptly the enclosed proxy in the envelope provided.
On behalf of the Board of Directors, thank you for your continued support.
/s/ Larry E. Reimert
Larry E. Reimert
Co-Chairman of the Board
/s/ Gary D. Smith
Gary D. Smith
Co-Chairman of the Board
/s/ J. Mike Walker
J. Mike Walker
Co-Chairman of the Board
DRIL-QUIP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 15, 2003
To the Stockholders of
Dril-Quip, Inc.:
The annual meeting of stockholders of Dril-Quip, Inc. (the "Company") will
be held at the Omni Houston Hotel Westside, 13210 Katy Freeway, Houston, Texas,
on Thursday, May 15, 2003 at 2:00 p.m., Houston time, for the following
purposes:
1. To elect two directors to serve for a three-year term.
2. To approve the appointment of Ernst & Young LLP as independent public
accountants of the Company for 2003.
3. To transact such other business as may properly come before the meeting
or any reconvened meeting after an adjournment thereof.
The Board of Directors has fixed March 26, 2003 as the record date for
determining stockholders of the Company entitled to notice of, and to vote at,
the meeting or any reconvened meeting after an adjournment thereof, and only
holders of Common Stock of the Company of record at the close of business on
that date will be entitled to notice of, and to vote at, the meeting or any
reconvened meeting after an adjournment.
You are cordially invited to attend the meeting in person. Even if you plan
to attend the meeting, however, you are requested to mark, sign, date and
return the accompanying proxy as soon as possible.
By Order of the Board of Directors
/s/ Gary D. Smith
Gary D. Smith
Co-Chairman of the Board and Secretary
April 3, 2003
13550 Hempstead Highway
Houston, Texas 77040
Dril-Quip, Inc.
13550 Hempstead Highway
Houston, Texas 77040
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PROXY STATEMENT
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INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Dril-Quip, Inc., a Delaware corporation (the "Company"),
of proxies from the holders of the Company's common stock, par value $.01 per
share ("Common Stock"), for use at the 2003 Annual Meeting of Stockholders (the
"Annual Meeting") to be held at the time and place and for the purposes set
forth in the accompanying notice. The approximate date on which this Proxy
Statement and the accompanying proxy will first be mailed to stockholders is
April 3, 2003. In addition to the solicitation of proxies by mail, proxies may
also be solicited by telephone or personal interview by regular employees of
the Company. The Company will pay all costs of soliciting proxies. The Company
will also reimburse brokers or other persons holding stock in their names or in
the names of their nominees for their reasonable expenses in forwarding proxy
material to beneficial owners of such stock.
All duly executed proxies received prior to the Annual Meeting will be voted
in accordance with the choices specified thereon and, in connection with any
other business that may properly come before the meeting, in the discretion of
the persons named in the proxy. As to any matter for which no choice has been
specified in a duly executed proxy, the shares represented thereby will be
voted FOR the election as directors of the nominees listed herein, FOR approval
of the appointment of Ernst & Young LLP as the Company's independent public
accountants, and in the discretion of the persons named in the proxy in
connection with any other business that may properly come before the Annual
Meeting. A stockholder giving a proxy may revoke it at any time before it is
voted at the Annual Meeting by filing with the Secretary at the Company's
executive offices a written instrument revoking it, by delivering a duly
executed proxy bearing a later date or by appearing at the Annual Meeting and
voting in person. The executive offices of the Company are located at 13550
Hempstead Highway, Houston, Texas 77040. For a period of ten days prior to the
Annual Meeting, a complete list of stockholders entitled to vote at the Annual
Meeting will be available for inspection by stockholders of record during
ordinary business hours for proper purposes at the Company's executive offices.
RECORD DATE AND VOTING SECURITIES
As of the close of business on March 26, 2003, the record date for
determining stockholders entitled to notice of and to vote at the Annual
Meeting, the Company had outstanding and entitled to vote 17,293,373 shares of
Common Stock. Each share entitles the holder to one vote on each matter
submitted to a vote of stockholders.
The requirement for a quorum at the Annual Meeting is the presence in person
or by proxy of holders of a majority of the outstanding shares of Common Stock.
Proxies indicating stockholder abstentions and shares represented by "broker
nonvotes" (i.e., shares held by brokers or nominees for which instructions have
not been received from the beneficial owners or persons entitled to vote and
for which the broker or nominee does not have discretionary power to vote on a
particular matter) will be counted for purposes of determining whether there is
a quorum at the Annual Meeting. Votes cast by proxy or in person at the Annual
Meeting will be counted by the persons appointed as election inspectors for the
Annual Meeting.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of the
Company beneficially owned directly or indirectly as of March 20, 2003 by (i)
each person who is known to the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Company's directors, director nominees and
executive officers and (iii) all executive officers, director nominees and
directors as a group.
Amount of Beneficial
Ownership
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Number of Percent
Name of Beneficial Owner(1) Shares of Stock
--------------------------- ---------- --------
Larry E. Reimert (2)(3).................................... 3,158,112 18.3%
Gary D. Smith (3)(4)....................................... 3,624,112 21%
J. Mike Walker (3)(5)...................................... 3,624,112 21%
Gary W. Loveless (6)....................................... 653,802 3.8%
Jerry M. Brooks (7)........................................ 27,500 *
Alexander P. Shukis........................................ 0 0
Gary L. Stone.............................................. 2,000 *
All directors and executive officers as a group (7 persons) 11,089,638 64.1%
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 (8)..................................... 1,306,063 7.6%
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* Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. The address of each such person is 13550 Hempstead Highway, Houston,
Texas 77040.
(2) Includes 175,512 shares of Common Stock that may be acquired pursuant to
options that are currently exercisable or will become exercisable within 60
days of March 20, 2003 and 2,982,145 shares of Common Stock held by Reimert
Family Partners, Ltd., a limited partnership of which Mr. Reimert is the
Managing General Partner, and with respect to which he exercises voting and
investment power. Does not include 12,000 shares of Common Stock owned by
Mr. Reimert's spouse or the shares of Common Stock shown above as
beneficially owned by Mr. Smith and Mr. Walker, as to which Mr. Reimert
disclaims beneficial ownership.
(3) Mr. Reimert and Reimert Family Partners, Ltd., Mr. Smith and Four Smith's
Company, Ltd., and Mr. Walker have entered into a stockholders agreement
wherein each party has agreed to vote shares of Common Stock held by such
party for election of one nominee to the Board of Directors proposed by
each of (i) Larry E. Reimert and Reimert Family Partners, Ltd., (ii) Gary
D. Smith and Four Smith's Company, Ltd. and (iii) J. Mike Walker. The
parties to the stockholders agreement may be deemed to have formed a group
pursuant to Rule 13d-5(b)(1) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(4) Includes 175,512 shares of Common Stock that may be acquired pursuant to
options that are currently exercisable or will become exercisable within 60
days of March 20, 2003 and 3,448,045 shares of Common Stock held by Four
Smith's Company, Ltd., a limited partnership of which Mr. Smith and his
wife, Gloria Jean Smith, are the Managing General Partners, and with
respect to which they exercise voting and investment power. Mrs. Smith may
also be deemed to be the beneficial owner of such shares. Does not include
the shares of Common Stock shown above as beneficially owned by Mr. Reimert
and Mr. Walker, as to which Mr. Smith disclaims beneficial ownership.
(5) Includes 175,512 shares of Common Stock that may be acquired pursuant to
options that are currently exercisable or will become exercisable within 60
days of March 20, 2003. Does not include the shares of Common Stock shown
above as beneficially owned by Mr. Reimert and Mr. Smith, as to which Mr.
Walker disclaims beneficial ownership.
2
(6) Includes 653,550 shares of Common Stock held by Loveless Enterprises, Ltd.,
a limited partnership of which Loveless Interests, L.L.C. is the Managing
General Partner. Mr. Loveless is the sole manager of Loveless Interests,
L.L.C., and exercises voting and investment power with respect to such
shares.
(7) Consists entirely of shares of Common Stock that may be acquired pursuant
to options that are currently exercisable or will become exercisable within
60 days of March 20, 2003.
(8) Based on a Schedule 13G filed with the SEC on February 13, 2003.
3
PROPOSAL I
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes, Class I,
Class II and Class III, with staggered terms of office, ending in 2004, 2005
and 2003, respectively. The term for each class expires on the date of the
third annual stockholders' meeting for the election of directors following the
most recent election of directors for such class. Each director holds office
until the next annual meeting of stockholders for the election of directors of
his class and until his successor has been duly elected and qualified.
At the Annual Meeting, two Class III directors are to be elected to each
serve a three-year term expiring on the date of the annual meeting of
stockholders to be held in 2006 (or until his successor is duly elected and
qualified). In accordance with the Company's Bylaws, the affirmative vote of a
plurality of the votes cast by holders of Common Stock entitled to vote in the
election of directors at the Annual Meeting is required for the election of the
nominee as director. Accordingly, although abstentions and broker nonvotes are
considered shares present at the meeting for the purpose of determining a
quorum, they will have no effect on the election of directors. The Board of
Directors has nominated Mr. Larry E. Reimert and Mr. Gary D. Smith to serve as
the Class III Directors. Mr. Reimert and Mr. Smith are currently directors of
the Company.
The Board of Directors has no reason to believe that the nominees for
election as directors will not be candidates or will be unable to serve, but if
for any reason either nominee is unavailable as a candidate or unable to serve
when the election occurs, the persons designated as proxies in the enclosed
proxy card, in the absence of contrary instructions, will in their discretion
vote the proxies for the election of a substitute nominee selected by the Board
of Directors. Management is currently unaware of any circumstances likely to
render the nominees unavailable for election or unable to serve.
The Board of Directors recommends that you vote FOR the election of the
nominees listed below. Properly dated and signed proxies will be so voted
unless authority to vote in the election of directors is withheld.
Nominees for Class III Directors for Three-Year Terms to Expire in 2006
The following sets forth information concerning the nominees for election as
directors at the Annual Meeting, including each nominee's age as of March 20,
2003, position with the Company, and business experience during the past five
years.
Larry E. Reimert, age 55, is Co-Chairman of the Board and Co-Chief Executive
Officer with principal responsibility for engineering, product development and
finance. He has been the Director--Engineering, Product Development and
Finance, as well as a member of the Board of Directors, since the Company's
inception in 1981. Prior to that, he worked for Vetco Offshore, Inc. in various
capacities, including Vice President of Technical Operations, Vice President of
Engineering and Manager of Engineering. Mr. Reimert holds a BSME degree from
the University of Houston and an MBA degree from Pepperdine University. Mr.
Reimert's current term as a director of the Company expires at the 2003 annual
meeting.
Gary D. Smith, age 60, is Co-Chairman of the Board and Co-Chief Executive
Officer with principal responsibility for sales, service, training and
administration. He has been the Director--Sales, Service, Training and
Administration, as well as a member of the Board of Directors, since the
Company's inception in 1981. Prior to that, he worked for Vetco Offshore, Inc.
in various capacities, including General Manager and Vice President of Sales
and Services. Mr. Smith's current term as a director of the Company expires at
the 2003 annual meeting.
4
Information Concerning Class I and Class II Directors
The following sets forth information concerning the Class I and Class II
directors of the Company whose present terms of office will expire at the 2004
and 2005 annual meetings of stockholders, respectively, including each
director's age as of March 20, 2003, position with the Company, if any, and
business experience during the past five years.
Class I
Alexander P. Shukis, age 58, has been a Class I director of the Company
since February, 2003, when he was appointed to fill the vacancy created by the
resignation of Mr. James A. Alexander. He is a member of the Audit Committee
and the Compensation Committee of the Board of Directors. From July, 2001 to
the present, Mr. Shukis has been the Controller of Corporate Strategies, Inc.,
a merchant bank, and of Pro Squared, Inc., a software consulting company. From
1997 to July 2001, Mr. Shukis was self-employed, working as a business
consultant. From 1995 to 1997, he was Chief Financial Officer and Director of
Great Western Resources, Inc., an exploration and production company. He served
as Vice President and Controller of Great Western Resources, Inc. from 1986 to
1995. Mr. Shukis holds a BBA in accounting from the University of Houston. Mr.
Shukis' current term as a director of the Company expires at the 2004 annual
meeting.
Gary L. Stone, age 66, has been a Class I director of the Company since June
2001, and is a member of the Audit Committee and the Compensation Committee of
the Board of Directors. From January 1997 until his retirement in May 2000, he
served as a Senior Vice President/First Vice President with Bank One, Texas,
N.A. Mr. Stone's current term as a director of the Company expires at the 2004
annual meeting.
Class II
J. Mike Walker, age 59, is Co-Chairman of the Board and Co-Chief Executive
Officer with principal responsibility for manufacturing, purchasing and
facilities. He has been the Director--Manufacturing, Purchasing and Facilities,
as well as a member of the Board of Directors, since the Company's inception in
1981. Prior to that, he served as the Director of Engineering, Manager of
Engineering and Manager of Research and Development with Vetco Offshore, Inc.
Mr. Walker holds a BSME degree from Texas A&M University, an MSME degree from
the University of Texas at Austin and a Ph.D. in mechanical engineering from
Texas A&M University. Mr. Walker's current term as a director of the Company
expires at the 2005 annual meeting.
Gary W. Loveless, age 60, has been a Class II director since the Company's
inception in 1981, and is a member of the Audit Committee and the Compensation
Committee of the Board of Directors. From 1986 to 1997, he held various
positions with Great Western Resources Corporation, most recently as Chief
Executive Officer and Director. In 1997, Great Western Resources Corporation
was purchased by Forcenergy Inc., and Mr. Loveless served as Vice
President/Onshore Exploration and Production of Forcenergy Inc. until October
1997. Mr. Loveless served as President of Casey Kay Company, an oil and gas
exploration and production company, until December 1998. In December 1998, he
became Chairman and Chief Executive Officer of Square Mile Energy, L.L.C., an
oil and gas exploration and production company. He holds a BSME from Texas A&M
University and an MSME from the University of Texas at Austin. Mr. Loveless's
current term as a director of the Company expires at the 2005 annual meeting.
Board of Directors and Committees of the Board
The Board of Directors has established an Audit Committee and a Compensation
Committee as standing committees of the Board of Directors. The Board does not
have a standing nominating committee or other committee performing a similar
function. The members of the Audit Committee and the Compensation Committee of
the Board of Directors indicated in the above summaries are not employees of
the Company.
5
The Audit Committee of the Board of Directors recommends the appointment of
independent public accountants to conduct audits of the Company's financial
statements and reviews with the independent accountants the plan and results of
the auditing engagement. The Audit Committee assists the Board of Directors in
monitoring (i) the integrity of the financial statements of the Company, (ii)
the compliance by the Company with legal and regulatory requirements, and (iii)
the independence of the firm of independent public accountants hired to audit
the Company's financial statements. The Audit Committee also reviews the scope
and results of procedures for internal auditing of the Company and the adequacy
of the Company's system of internal accounting controls. The Board of Directors
has adopted a written charter for the Audit Committee which contains a detailed
description of the Audit Committee's duties and responsibilities. The Board of
Directors has determined that Mr. Shukis qualifies as an "audit committee
financial expert" as defined under applicable SEC rules.
The Compensation Committee approves remuneration arrangements and
compensation plans involving the Company's directors and executive officers,
including any revisions to the employment agreements of the Co-Chairmen of the
Board. The Compensation Committee also acts on the granting of stock options to
executive officers under the Company's 1997 Incentive Plan (the "Incentive
Plan") (except for formula grants pursuant to the employment agreements of the
Co-Chairmen of the Board) and with respect to certain matters arising under
each of the Co-Chairmen of the Board's employment agreements.
During 2002, the Board of Directors held four meetings. The members of the
Audit Committee met one time and the Compensation Committee met three times.
During 2002, all directors attended at least 75% of the meetings of the Board
of Directors and the Committees thereof during the periods that they served as
members. James Alexander resigned from the Board of Directors and the Audit
Committee and Compensation Committee in February 2003.
Director Compensation
Each director who is not an employee of the Company receives an annual fee
of $50,000, plus a fee of $1,000 for attendance at each Board of Directors
meeting and $1,000 for each committee meeting, unless the committee meeting is
held on the same day as the Board of Directors meeting. All directors are
reimbursed for their out-of-pocket expenses and other expenses incurred in
attending meetings of the Board or committees thereof and for other expenses
incurred in their capacity as directors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Securities and Exchange
Commission (the "SEC") and the New York Stock Exchange initial reports of
ownership and reports of changes in ownership of Common Stock. Officers,
directors and greater than 10% stockholders are required by SEC regulation to
furnish the Company with copies of all such forms they file. Based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
all its directors and executive officers during 2002 complied on a timely basis
with all applicable filing requirements under Section 16(a) of the Exchange Act.
6
Executive Compensation
Summary Compensation Table. The following table sets forth information
regarding the compensation of each of the Company's three Co-Chairmen of the
Board and the other executive officer of the Company (together with the
Co-Chairmen, the "named officers") for services rendered in all capacities
during 2000, 2001 and 2002.
Summary Compensation Table
Long-Term
Annual Compensation
Compensation(1) Awards
----------------- ------------
Securities
Underlying
Options/SARs All Other
Name and Principal Position Year Salary Bonus (shares) Compensation(2)
--------------------------- ---- -------- -------- ------------ ---------------
Larry E. Reimert................ 2002 $433,308 $ 88,000 65,095 $4,000
Co-Chairman of the Board and 2001 413,846 112,000 71,665 3,400
Co-Chief Executive Officer 2000 397,885 340,000 38,288 3,400
Gary D. Smith................... 2002 $433,308 $ 88,000 65,095 $4,000
Co-Chairman of the Board and 2001 413,846 112,000 71,665 3,400
Co-Chief Executive Officer 2000 397,885 340,000 38,288 3,400
J. Mike Walker.................. 2002 $433,308 $ 88,000 65,095 $4,000
Co-Chairman of the Board and 2001 413,846 112,000 71,665 3,400
Co-Chief Executive Officer 2000 397,885 340,000 38,288 3,400
Jerry M. Brooks................. 2002 $162,192 $ 12,500 5,000 $3,244
Chief Financial Officer 2001 153,892 15,000 5,000 3,052
2000 143,346 20,000 5,000 2,867
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(1) Excludes perquisites and other benefits because the aggregate amounts
thereof do not exceed the lesser of $50,000 or 10% of the total of annual
salary and bonus reported for any named officer.
(2) Amounts shown under All Other Compensation consist of amounts contributed
or accrued under the Company's 401(k) Plan.
Option Grants. The following table sets forth certain information on grants
of stock options during 2002 to the named officers.
Stock Options Granted in 2002
Individual Grants
------------------------------------------------
Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Securities Total of Stock Price
Underlying Options Exercise Appreciation for Option
Options Granted to Price Term(3)
Granted in Employees (per Expiration --------------------------
2002 (shares)(1) in 2002 share)(2) Date 5% ($) 10% ($)
---------------- ---------- --------- ---------- -------- ----------
Larry E. Reimert 65,095 21.1% $20.61 10/27/12 $843,730 $2,138,178
Gary D. Smith... 65,095 21.1% 20.61 10/27/12 843,730 2,138,178
J. Mike Walker.. 65,095 21.1% 20.61 10/27/12 843,730 2,138,178
Jerry M. Brooks. 5,000 1.6% 20.61 10/27/12 64,808 164,235
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(1) All the above options were granted pursuant to the Incentive Plan on
October 28, 2002 and become exercisable in increments of 25% on each of the
first, second, third and fourth anniversaries of the date of grant.
7
(2) The exercise price of the options granted is equal to the closing price per
share of Common Stock on the New York Stock Exchange ("NYSE") on the date
of grant.
(3) The potential realizable value through the expiration date of options has
been determined on the basis of the per share market price at the time the
options were granted, compounded annually over 10 years, net of the
exercise price. These values have been determined based upon assumed rates
of appreciation and are not intended to forecast the possible future
appreciation, if any, of the price or value of the Company's Common Stock.
Option Exercises and 2002 Year-End Option Values. The following table sets
forth certain information with respect to unexercised options to purchase
Common Stock granted in 2002 to the named officers and held by them at December
31, 2002. None of the named officers exercised options in 2002.
Year-End 2002 Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options Held at In-the-Money Options at
December 31, 2002 December 31, 2002(1)
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Larry E. Reimert 175,512 150,628 $0 $0
Gary D. Smith... 175,512 150,628 0 0
J. Mike Walker.. 175,512 150,628 0 0
Jerry M. Brooks. 27,500 12,500 0 0
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(1) The excess, if any, of the closing price on the NYSE of Common Stock at
December 31, 2002 ($16.90) over the option exercise price.
Employment Agreements
The Company has entered into employment agreements with each of Messrs.
Reimert, Smith and Walker. The following summary of these agreements does not
purport to be complete and is qualified by reference to them. The Company has
filed the form of these agreements with the SEC. A copy of the form of these
agreements may be obtained from the Company's Corporate Secretary at the
address indicated on the first page of this Proxy Statement.
Each of these agreements provides for an annual base salary, as well as an
annual performance bonus for each 12-month period ending on September 30 equal
to up to 120% of the executive's annual base salary, with the precise amount of
the bonus determined based on specific Company performance goals. The
performance goals, which are equally weighted, are based on (i) the Company's
annual earnings before interest and taxes ("EBIT") measured against the
Company's annual budget or plan, and (ii) the Company's annual return on
capital (defined as EBIT divided by total assets less current liabilities)
compared to a peer group of companies. In addition, each agreement provides
that the employee will receive an annual grant of a number of options under the
Incentive Plan equal to the employee's base salary multiplied by three and
divided by the market price of the Common Stock on the grant date. Each
agreement provides that the employee's compensation, including his annual base
salary, annual performance bonus and annual grant of options, shall be reviewed
at least annually by the Compensation Committee and shall be subject to
increase at any time and from time to time on a basis determined by the
Compensation Committee, in the exercise of its sole discretion. Each agreement
also entitles the employee to participate in all of the Company's incentive,
savings, retirement and welfare benefit plans in which other executive officers
of the Company participate.
On October 27, 2002, each of the employment agreements had a remaining term
of four years. The term of each of the employment agreements is automatically
extended for one year on October 27 of every year, such that the remaining term
of each agreement will never be less than three years. Each agreement is
subject to the
8
right of the Company and the employee to terminate the employee's employment at
any time. Each agreement provides that, upon termination of employment because
of death or disability, or if employment is terminated by the Company for any
reason (except under certain limited circumstances defined as "for cause" in
the agreement), or if employment is terminated by the employee subsequent to a
change of control (as defined) or with good reason (as defined), the employee
will generally be entitled to (i) a lump sum cash payment equal to the
employee's base salary through the date of termination, together with any
deferred compensation previously awarded and any accrued vacation time, (ii) a
lump sum cash payment equal to the annual base salary that would have been paid
to the employee beginning on the date of termination and ending on the latest
possible date of termination of the employment in accordance with the
agreement, (iii) a lump sum cash payment equal to the annual bonus calculated
in accordance with the agreement for the remaining employment period (assuming
for such purpose that the annual bonus payable for each applicable period
during the remaining employment period would equal the highest annual bonus
paid during the last three years prior to the date of termination), (iv)
immediate vesting of any stock options or restricted stock previously granted
to such employee and outstanding as of the time immediately prior to the date
of his termination, or a cash payment in lieu thereof, and (v) continued
participation in medical, dental and life insurance coverage until the employee
receives equivalent coverage and benefits under other plans of a subsequent
employer or the later of the death of the employee, the death of the employee's
spouse and the youngest child of the employee reaching age 21. The Company will
also pay the employee any such amount as may be necessary to hold the employee
harmless from the consequences of any resulting excise or other similar purpose
tax relating to "parachute payments" under the Internal Revenue Code of 1986,
as amended.
Each agreement also provides that, during the term of the agreement and
after termination thereof, the employee shall not divulge any of the Company's
confidential information, knowledge or data. In addition, each agreement
requires the employee to disclose and assign to the Company any and all
conceptions and ideas for inventions, improvements and valuable discoveries
made by the employee which pertain primarily to the material business
activities of the Company. Each agreement also provides that, in the event that
the agreement is terminated for cause or the employee voluntarily resigns
(other than following a change of control or for good reason), for one year
thereafter the employee will not within any country with respect to which he
has devoted substantial attention to the material business interests of the
Company, (i) accept employment or render services to a competitor of the
Company or (ii) enter into or take part in business that would be competitive
with the Company.
Certain Transactions
Registration Rights Agreement
The Company has entered into a registration rights agreement among the
Company, Messrs. Reimert, Smith, Walker, and Loveless, Reimert Family Partners,
Ltd., Four Smith's Company, Ltd. and Loveless Enterprises, Ltd. (the
"Registration Rights Agreement"). The Registration Rights Agreement provides
for registration rights pursuant to which, upon the request of any of Messrs.
Reimert, Smith and Walker (the "Requesting Holders"), the Company will file a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), to register the Common Stock subject to the agreement
("Registrable Securities") held by such Requesting Holders and any other
stockholders who are parties to the Registration Rights Agreement and who
desire to sell Registrable Securities pursuant to such registration statement,
subject to a maximum of two requests by each of Messrs. Reimert, Smith and
Walker or their successors and assigns. In addition, subject to certain
conditions and limitations, the Registration Rights Agreement provides that
Messrs. Reimert, Smith, Walker and Loveless may participate in any registration
by the Company (including any registration resulting from any exercise of a
demand right under the Registration Rights Agreement) of any of its equity
securities in an underwritten offering. The registration rights covered by the
Registration Rights Agreement generally are transferable to transferees
(whether by assignment or by death of the holder) of the Registrable Securities
covered thereby. The Registration Rights Agreement generally terminates when
all Registrable Securities (i) have been distributed to the public pursuant to
a registration statement covering such securities that has been declared
effective under the Securities
9
Act, or (ii) may be distributed to the public in accordance with the provisions
of Rule 144(k) (or any similar provision then in force) under the Securities
Act.
Stockholders Agreement
Messrs. Reimert, Smith and Walker, Reimert Family Partners, Ltd. and Four
Smith's Company, Ltd. are parties to a stockholders agreement (the
"Stockholders Agreement") pursuant to which each party has agreed to vote the
shares of Common Stock held by such party to elect to the Company's Board of
Directors one designee of Mr. Reimert and Reimert Family Partners, Ltd. (the
"Reimert Stockholders"), one designee of Mr. Smith and Four Smith's Company,
Ltd. (the "Smith Stockholders") and one designee of Mr. Walker. The rights
under the Stockholders Agreement are transferable to any heir or legal
representative of Messrs. Reimert, Smith or Walker who acquires Common Stock
upon the death of such stockholder and who agrees to be bound by the provisions
of such Agreement. In the event the Reimert Stockholders, collectively, the
Smith Stockholders, collectively, or Mr. Walker (or their permitted transferees
as described in the preceding sentence), own less than 10% of the total number
of issued and outstanding shares of Common Stock of the Company, the rights and
obligations of such person under the Stockholders Agreement are terminated.
Under the terms of the Stockholders Agreement, each of Mr. Reimert and Mr.
Smith has designated himself to be elected to the Company's Board of Directors
at the Annual Meeting.
Report of Compensation Committee on Executive Compensation
The Compensation Committee approves remuneration arrangements and
compensation plans involving the Company's directors and executive officers,
including any revisions to the employment agreements of the Co-Chairmen of the
Board. The Compensation Committee acts on the granting of stock options to
executive officers under the Incentive Plan (except for formula grants pursuant
to the employment agreements of the Co-Chairmen of the Board), and reviews
annually and approves certain matters relating to each of the Co-Chairmen of
the Board's employment agreements.
There are three basic components to the compensation of the Company's
executives: base pay; annual incentive compensation in the form of a cash
bonus; and long-term equity-based compensation. Factors taken into account in
determining compensation are the executive's responsibilities, experience,
leadership, potential future contributions and demonstrated individual
performance. Long-term equity-based compensation is generally provided in the
form of stock options, which are tied directly to stockholder return. Stock
options align the interests of the Company's executives with those of its
stockholders by encouraging executives to enhance the value of the Company, and
hence, the price of the Common Stock and each stockholder's return.
Long-term equity-based compensation is provided through the Incentive Plan,
the objectives of which are to (i) attract and retain key employees, (ii)
encourage a sense of proprietorship of these persons in the Company and (iii)
stimulate the active interest of these persons in the development and financial
success of the Company. Awards to employees under the Incentive Plan may be
made in the form of (i) stock options, (ii) rights to receive a payment, in
cash or Common Stock, equal to the excess of the fair market value or other
specified value of a number of shares of Common Stock on the date the right is
exercised over a specified strike price, (iii) grants of restricted or
unrestricted Common Stock or units denominated in Common Stock, (iv) grants
denominated in cash and (v) grants denominated in cash, Common Stock or units
denominated in Common Stock or any other property which are made subject to the
attainment of one or more performance goals ("Performance Awards"). Performance
Awards may include more than one performance goal, and a performance goal may
be based on one or more business criteria applicable to the grantee, the
Company as a whole or one or more of the Company's business units and may
include one or more of the following: increased revenues, net income, stock
price, market share, earnings per share, return on equity or assets, or
decrease in costs.
10
In 2002, the Company granted options to purchase an aggregate of 200,285
shares of Common Stock to executive officers of the Company, including grants
made to the Co-Chairmen of the Board pursuant to their employment agreements.
The Company may periodically grant new options or other long-term
equity-based incentives to provide continuing incentive for future performance.
In making the decision to grant additional options, the Compensation Committee
would expect to consider factors such as the size of previous grants and the
number of options held. In addition, the Compensation Committee may consider
factors including the executive's current ownership stake in the Company, the
degree to which increasing that ownership stake would provide the executive
with additional incentives for future performance, the likelihood that the
grant of those options would encourage the executive to remain with the Company
and the value of the executive's service to the Company.
Each of the Company's Co-Chairmen of the Board is compensated pursuant to an
employment agreement which was entered into prior to the closing of the
Company's initial public offering and therefore prior to the formation of the
Compensation Committee. Such employment agreements were approved by the Board
of Directors as a whole, at a time when the Company's Board consisted of the
Co-Chairmen of the Board and Mr. Loveless. See "--Employment Agreements" for a
description of such agreements. Each of the agreements includes compensation in
the form of base salary, annual bonus and annual option grants. The annual
bonus and option grants payable pursuant to such agreements are determined by
formulas that are tied to the Company's performance and stockholder return.
Under the employment agreements, the amount of the executive's annual bonus is
determined by reference to (i) the Company's performance (measured in terms of
EBIT) compared to the Company's annual budget and (ii) the Company's annual
return on capital compared to that of an industry peer group.
In accordance with the employment agreements, at the beginning of 2002, the
Compensation Committee approved the Company's 2002 budget and the industry peer
group for the purposes of calculating the bonuses for the 2002 bonus year for
the Co-Chairmen of the Board. In calculating the bonuses for the 2002 bonus
year, in accordance with the employment agreements, the Compensation Committee
reviewed the Company's EBIT and return on capital for the year ended December
31, 2002, as calculated by the Company's independent public accountants, and
calculated the return on capital for the Company's peer group for the same
period. The two performance factors were equally weighted as required by the
employment agreements. In addition to an annual bonus, each such executive
received an annual grant of options that is based upon a formula tied to the
Company's stock price. The Compensation Committee reviews annually the amount
of the base salary, annual bonus and annual option grants for each of the
Co-Chairmen of the Board, and may increase (but not decrease) such amounts on a
basis determined by the Compensation Committee in its sole discretion. In 2002,
the Compensation Committee increased the base salary under the employment
agreements to $447,200, effective October 15, 2002, based on the performance of
the Co-Chairmen of the Board and the Company during 2002. In addition to their
annual compensation, each of the Co-Chairmen of the Board is a significant
stockholder of the Company, which provides effective long-term performance
incentive tied directly to stockholder return.
The Compensation Committee
Gary W. Loveless
Gary L. Stone
Alexander P. Shukis
Report of the Audit Committee
Gary W. Loveless, Gary L. Stone and Alexander P. Shukis are the members of
the Audit Committee. Each of these members is independent, as defined in
Sections 303.01(B)(2)(a) and (3) of the New York Stock Exchange's listing
standards. While an "audit committee financial expert" is not currently
required to be on the
11
Audit Committee, the Board has determined that Mr. Shukis satisfies the
requirements for an "audit committee financial expert" as defined by the
Securities and Exchange Commission. The Board of Directors has adopted a
written charter for the Audit Committee.
The Audit Committee has reviewed and discussed the Company's audited
financial statements for the fiscal year ended December 31, 2002 with
management and has discussed with Ernst & Young LLP, the independent auditors
and accountants for the Company, the matters required to be discussed by
Statement of Auditing Standards No. 61, Communication with Audit Committees, as
amended, with respect to those audited financial statements.
The Audit Committee has received the written disclosures and the letter from
Ernst & Young LLP required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as amended, and has reviewed,
evaluated and discussed with Ernst & Young LLP its independence in connection
with its audit of the Company's most recent financial statements.
Based on its review of the audited financial statements and the various
discussions noted above, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
Audit Committee
Gary W. Loveless
Alexander P. Shukis
Gary L. Stone
Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally limits (to $1 million annually per covered executive) the
deductibility for federal income tax purposes of non-performance based
compensation paid to a company's chief executive officer and each of its other
four most highly compensated executive officers. All options granted under the
Incentive Plan in fiscal year 2002 will qualify as performance based for an
exemption from the application of Section 162(m) of the Code.
Equity Compensation Plan Information
The following table sets forth information about the Company's Common Stock
that may be issued under its existing equity compensation plans as of December
31, 2002:
(a) (b) (c)
----------------------- ----------------------------- -------------------------
Number of securities
remaining available for
Number of securities to future issuance under
be issued upon exercise Weighted-average exercise equity compensation plans
of outstanding options, price of outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ----------------------- ----------------------------- -------------------------
Equity compensation plans approved
by security holders (1)......... 1,720,497 $22.60 679,503
Equity compensation plans not
approved by security holders.... -- -- --
--------- ------ -------
Total.......................... 1,720,497 $22.60 679,503
========= ====== =======
--------
(1) Consists of the Dril-Quip, Inc. 1997 Incentive Plan, as amended.
12
Performance Graph
The following performance graph compares the cumulative total stockholder
return on the Common Stock to the cumulative total return on the Standard &
Poor's 500 Stock Index and the PHLX Oil Service Sector Index over the period
from December 31, 1997 to December 31, 2002. In the past the Company has
provided a comparison to the Standard & Poor's Oil and Gas Drilling and
Equipment Index, and the following performance graph compares the cumulative
total stockholder return on the Common Stock to the cumulative total
stockholder return on that index over the period from December 31, 1997 to
December 31, 2001. However, the Standard & Poor's Oil and Gas Drilling and
Equipment Index was discontinued in 2002. As a result, the Company cannot
provide a comparison of the Common Stock to the Standard & Poor's Oil and Gas
Drilling and Equipment Index over the period from December 31, 2001 to December
31, 2002. The graph assumes that $100 was invested on December 31, 1997 in the
Common Stock and in each of the other indices and the reinvestment of all
dividends, if any.
[PERFORMANCE CHART APPEARS HERE]
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
Dril-Quip, Inc. 100.00 50.53 86.48 97.34 68.62 48.12
S&P 500 100.00 126.67 151.40 136.05 118.30 90.66
S&P Oil and Gas Drilling
and Equipment Index 100.00 55.79 75.97 102.28 68.74 N/A
PHLX Oil Service Sector Index 100.00 45.06 75.17 109.12 76.20 75.82
13
PROPOSAL II
APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of its Audit Committee, has
approved and recommends the approval of the appointment of Ernst & Young LLP as
independent public accountants to conduct an audit of the Company's financial
statements for the year 2003. This firm has acted as independent public
accountants for the Company for many years.
Aggregate fees for professional services rendered for the Company by Ernst &
Young LLP as of or for the years ended December 31, 2002 and 2001, were as
follows:
2002 2001
-------- --------
1. Audit........ $216,220 $180,808
2. Audit Related 0 0
3. Tax.......... 104,432 69,987
4. All Other.... 38,488 0
-------- --------
Total:....... $359,140 $250,795
======== ========
The Audit fees for 2002 and 2001 were for professional services rendered for
the audits of the Company's consolidated financial statements and the review of
those financial statements included in the Company's quarterly reports on Forms
10-Q.
There were no Audit Related fees billed during 2002 and 2001.
Tax fees billed during 2002 and 2001 were for services related to tax
compliance, tax advice and expatriate tax services.
All Other fees billed during 2002 and 2001 were for consulting services
related to international operations.
The Audit Committee reviewed the non-audit services provided to the Company
and determined that they did not impair the independence of Ernst & Young LLP.
Representatives of Ernst & Young LLP will attend the Annual Meeting and will
be available to respond to questions which may be asked by stockholders. Such
representatives will also have an opportunity to make a statement at the
meeting if they desire to do so.
The Board of Directors recommends that you vote FOR the approval of the
appointment of Ernst & Young LLP as the Company's independent public
accountants. In accordance with the Company's Bylaws, approval of the
appointment of independent public accountants will require the affirmative vote
of a majority of the shares of Common Stock voted on the proposal. Accordingly,
abstentions and broker nonvotes applicable to shares present at the meeting
will not be included in the tabulation of votes cast on this matter.
OTHER BUSINESS
Management does not intend to bring any business before the meeting other
than the matters referred to in the accompanying notice. If, however, any other
matters properly come before the meeting, it is intended that the persons named
in the accompanying proxy will vote pursuant to discretionary authority granted
in the proxy in accordance with their best judgment on such matters. The
discretionary authority includes matters that the Board of Directors does not
know are to be presented at the meeting by others.
14
ADDITIONAL INFORMATION
Stockholder Proposals for 2004 Meeting
In order to be included in the Company's proxy material for its annual
meeting of stockholders in 2004, eligible proposals of stockholders intended to
be presented at the annual meeting must be received by the Company on or before
December 2, 2003 (directed to the Secretary of the Company at the address
indicated on the first page of this Proxy Statement).
Advance Notice Required for Stockholder Nominations and Proposals
The Bylaws of the Company require timely advance written notice of
stockholder nominations of director candidates and of any other proposals to be
presented at an annual meeting of stockholders. Notice will be considered
timely for the Annual Meeting to be held in 2004 if it is received by February
16, 2004. In the case of director nominations by stockholders, the Bylaws
require that 90 days' advance written notice be delivered to the Company's
Secretary at the Company's executive offices and set forth for each person whom
the stockholder proposes to nominate for election or re-election as a director,
(a) the name, age, business address and residence address of such person, (b)
the principal occupation or employment of such person, (c) the number of shares
of each class of capital stock of the Company beneficially owned by such person
and (d) the written consent of such person to having such person's name placed
in nomination at the meeting and to serve as of a director if elected. The
stockholder giving the notice must also include the name and address, as they
appear on the Company's books, of such stockholder and the number of shares of
each class of voting stock of the Company that are then beneficially owned by
such stockholder.
In the case of other proposals by stockholders at an annual meeting, the
Bylaws require that 90 days advance written notice be delivered to the
Company's Secretary at the Company's executive offices and set forth (a) a
description of each proposal desired to be brought before the annual meeting
and the reasons for conducting such business at the annual meeting, (b) the
name and address, as they appear on the Company's books, of the stockholder
proposing such business and any other stockholders known by such stockholder to
be supporting such proposal, (c) the class and number of shares of the
Company's stock that are beneficially owned by the stockholder on the date of
such notice, (d) any financial interest of the stockholder in such proposal and
(e) a representation that the stockholder intends to appear in person or by
proxy at the meeting to bring the proposed business before the annual meeting.
A copy of the Bylaws of the Company setting forth the requirements for the
nomination of director candidates by stockholders and the requirements for
proposals by stockholders may be obtained from the Company's Corporate
Secretary at the address indicated on the first page of this Proxy Statement.
In order for director nominations and stockholder proposals to have been
properly submitted for presentation at this annual meeting, notice must have
been received by the Company's Secretary on or before February 14, 2003. The
Company received no such notice and no stockholder director nominations or
proposals will be presented at the annual meeting.
15
Annual Report
The Annual Report to Stockholders, which includes financial statements of
the Company for the year ended December 31, 2002, has been mailed to all
stockholders. The Annual Report is not a part of the proxy solicitation
material.
By Order of the Board of Directors
/s/ Gary D. Smith
Gary D. Smith
Co-Chairman of the Board and Secretary
April 3, 2003
16
DRIL-QUIP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
May 15, 2003
The undersigned hereby appoints J. Mike Walker and Gary W. Loveless,
jointly and severally, proxies, with full power of substitution and with
discretionary authority, to vote all shares of Common Stock which the
undersigned is entitled to vote at the Annual Meeting of Stockholders of
Dril-Quip, Inc. (the "Company") to be held on Thursday, May 15, 2003, at the
Omni Houston Hotel Westside, 13210 Katy Freeway, Houston, Texas, at 2:00 p.m.,
or at any adjournment thereof, hereby revoking any proxy heretofore given.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IN THE ABSENCE OF SPECIFIC DIRECTIONS TO THE CONTRARY, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE DIRECTORS NAMED BELOW AND FOR APPROVAL OF ERNST
& YOUNG LLP AS THE COMPANY'S ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31,
2003.
See Reverse Side
Address Change/Comments (Mark the corresponding box on the reverse side)
_______________________________________________________
_______________________________________________________
_______________________________________________________
________________________________________________________________________________
FOLD AND DETACH HERE
Please mark
your votes as
indicated in [X]
this example
1. ELECTION OF DIRECTORS, NOMINEES:
01 Larry E. Reimert
02 Gary D. Smith
FOR
all nominees
listed (except as
indicated below) WITHHELD FOR ALL
[_] [_]
Withheld for the nominees you list below: (Write
that nominee's name in the space provided below.)
--------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of the appointment of Ernst & Young LLP [_] [_] [_]
as the company's independent public accountants
for the fiscal year ending December 31, 2003
3. With discretionary authority as to such other matters as may properly come
before the meeting.
Dated:________________________________________________, 2003
____________________________________________________________
(Signature)
____________________________________________________________
(Signature)
Sign exactly as name appears hereon.
(Joint owners should each sign. When signing as attorney,
executor, officer, administrator, trustee, or guardian,
please give full title as such.)
Please sign, date and return the Proxy Card promptly,
using the enclosed envelope.
________________________________________________________________________________
FOLD AND DETACH HERE